Good day, and welcome to the Carpenter Technology Corporation First Quarter 2020 Fiscal Year Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would like to now turn the conference over to Mr. Brad Edwards, Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology earnings conference call for the fiscal first quarter ended September 30, 2019. This call is also being broadcast over the Internet along with presentation slides. Please note, for those of you listening by phone, you may experience a time delay in slide movement. Speakers on the call today are Tony Thene, President and Chief Executive Officer; and Tim Lain, Vice President and Chief Financial Officer. Statements made by management during this earnings presentation that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from those forward-looking statements can be found in Carpenter Technology's most recent SEC filings, including the company's report on Form 10-K for the year ended June 30, 2019, and the exhibits attached to that filings. Please also note that in the following discussion, unless otherwise noted, when management discusses sales or revenue that reference excludes surcharge. When referring to operating margins that is based on operating income and sales, excluding surcharge. I will now turn the call over to Tony.

Thank you, Brad, and good morning to everyone on the call today. Let's begin on Slide 4, and a review of our safety performance. Our total case incident rate or TCIR was 1.4 in the first quarter of fiscal year 2020, which is slightly above the performance of fiscal year 2019. Over the last four years, we have made significant strides to improve the safety performance across our facilities. However, we've hit a point where our recordable rate has remained flat without improvement and we are disappointed with the results. Our focus remains on accelerating proactive engagement with our employees and continued investment in the development of our leadership team. We are encouraged that as a result of our effort to redefine the safety culture over the last several years, our employees feel empowered to stop any process or equipment or action that is unsafe. Our employees are the face of our safety program. They are the most knowledgeable about the workplace and how to make it better. In addition, we are putting all of our supervisors through a refresher course, focusing on the principles of human performance. We are investing heavily in our safety programs, hand safe, ergonomics, human performance and the stop program to name a few. That will lead to sustainable and lasting improvement across our business. Through employee engagement, system improvement and leadership commitment, we will continue toward our goal of a zero injury workplace. Now, let's turn to Slide 5, and a review of our first quarter performance. In our first quarter, once again, we delivered impressive operating performance. Let me highlight a couple of noteworthy points. First, we delivered our 11th consecutive quarter of year-over-year sales growth and earnings growth. Second, we generated record first quarter operating income at SAO. And third, SAO adjusted…

Thank you, Tony. Good morning everyone. I'll start on Slide 8, the income statement summary. As Tony covered in his comments, the current quarter's results marked the best first quarter operating income since fiscal year 2014. In fact, for our SAO segment this quarter marked the best first quarter operating income performance on record, which I will comment on shortly. Our strong financial performance in the first quarter as further evidenced that our consistent execution coupled with our solutions focus strategy is generating positive momentum in our business. We continue to drive market share gains, expand customer relationships, unlock critical capacity through operational process improvements, while also obtaining the necessary qualifications for our Athens facility. Net sales in the first quarter were $585 million and sales excluding surcharge were $487 million. Sales excluding surcharge grew 7% year-over-year on 5% lower volume driven by double-digit growth in our aerospace and defense and medical end use markets. Demand levels remain strong as total backlog grew by 26% year-over-year. The growth is clearly evident in our key end use markets where aerospace and defense backlog grew 40% year-over-year and medical backlog grew 15% compared to the previous year. SG&A expenses were $52.8 million in the current first quarter up $6.1 million versus the same period a year ago. This increase is primarily due to investments in additive manufacturing. It's worth noting that we acquired LPW Technology in the second quarter of fiscal year 2019 and as such those costs were not in our cost base in last year's first quarter. Going forward, we expect SG&A expenses to be in the range of $55 million to $60 million per quarter for the balance of the year. Operating margin was 12.3% in the quarter representing 2.4 points of margin expansion versus Q1 of fiscal year…

Thanks Tim. As I've said before, we know that consistent and profitable revenue growth is the most critical driver of total shareholder return. Our core business continues to perform at a high level evidenced by our 11th consecutive quarter of year-over-year earnings growth. We are also confident that our core business has more upside potential with the continued implementation of the Carpenter operating model and our solutions focus. But, our vision is to go beyond what our growing core business can accomplish. In order to fulfill that aggressive vision, we must make the necessary investments in disruptive technologies to position ourselves for sustainable long-term growth. These investments are critical as we are committed to remain a key solutions provider to our customers for decades to come. The fact said, there is no doubt that additive manufacturing is going to meaningfully impact our industry, the markets we serve and material needs of our customers. We have built a leading end to end additive manufacturing platform and today are collaborating with customers in each stage of the AEM process from power development to effective part design, while utilizing power life cycle management solutions throughout the entire process. The construction of our emerging technology center on our Athens, Alabama campus will be completed over the coming months. This state-of-the-art facility will serve as a critical customer collaboration center and adds multiple world-class capabilities to our overall additive manufacturing footprint. The investment we have made in building our additive manufacturing business is not insignificant as we are currently absorbing approximately $5 million to $6 million per quarter of operating losses associated with the additive investments. As I said, additive manufacturing is a critical component of our long-term vision. The investments we are making today at a time when our core business is strong are…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Gautam Khanna with Cowen & Company. Please go ahead.

Hi. Thank you. Good morning, Tim. Tony. This is Jeff Molinari on for Gautam. Thanks for taking my question. So on SAO, great quarter there, was there anything unusual or beneficial in the margins that was driving that or what were the kind of big, or is it mostly just kind of product mix and more additional production moving to Athens?

Yes. Good morning, Jeff. This is Tony. There were no special items in the quarter from a negative standpoint or from a positive standpoint. And it's us continuing to drive productivity, a richer mix, trying to open up capacity and also really the impact of Athens is becoming more and more positive for us each quarter.

Okay. That makes sense. And so this business is performing exceptionally well. Where is the new margin bar -- can we -- is above 20% now a new norm?

Jeff, it didn't take you and Gautam long to move on from the 20% target. So, we fit that two quarters in a row. Without giving you a specific number, I said in my opening comments. I really believe we're scratching the surface in SAO as we visit the plants and work there, there's so much more we can do on productivity and flow to increase capacity and make it a more efficient plant still. I think we're just getting started as far as what we can accomplish in SAO.

Okay. That's fair enough. And if I can just ask one more here on Athens. First off, congratulations on another qualification. I know I wouldn't think that each one is the same size and volume. If that's true, have most of the larger volume of quals been completed already or are there some big ones still in the pipeline to come? Any color you can provide there would be helpful.

Yes. You're absolutely right, Jeff. I mean, not all of the qualifications are created equal. With that said, this one that we received this quarter was important. But to the second part of your question is no, there are still some significant qualifications that are out there that we're working on. And the number of qualifications in a quarter aren't necessarily indicative of whether that was a successful quarter or not. What's really important to us is that we're moving along, some of these larger qualifications with major OEMs and we had great progress this quarter. And I would suspect that over the next quarter or two you'll be seeing more official qualifications.

Okay. That's helpful. Last follow-up for me. Is there like a total qualification that you target or is there any other way we can kind of frame the potential there?

We don't really target a specific number. We're looking at, obviously, the primary grades and the primary customers trying to open up as much capability as possible at Athens that's how we look at it.

Okay. Thank you.

Thank you.

The next question comes from Chris Olin with Longbow Research. Please go ahead.

Hey, good morning. Can you guys talk a little bit about your exposure to the 787 program? I assume that Dynamet does some business there on the titanium side. Do you have any content or can you talk a little bit about maybe your exposure on the Rolls Royce Trent engine or the GE alternative?

Well, Chris, we have content across all of those platforms. The strength of Carpenter is that we're not overly weighted to any of them. So there's always going to be pluses and minuses in the market. And with the way the strength in the market today is, we just don't see those types of negative dips. So we have content on it. If it goes down a bit, it's not an issue for us, because we have much more, many areas to go.

Okay. Would the same go for the 777X and the 9X engine? Like you consider that kind of [indiscernible]?

Like I said, we're across all of those, the strength of Carpenter is that we are across all of the platforms, across all of the applications. And as you all know, you've been around long enough, there's always going to be pluses and minuses in some specific program. And right now, we're in the middle of a peak cycle. And also I'd say, keep in mind from a Dynamet standpoint, Dynamet is not just an aerospace facility that's a major medical facility from a titanium standpoint and that market is thriving for us.

And just to be clear on Dynamet, in the beginning you said fasteners was pretty good during the quarter, but it underperformed versus expectations. It wasn't a clear to me like why exactly did it underperform, does have to do with bottlenecks?

Well, when we set the guidance last quarter, I mean I really pushed that business to take it to the next level. Keep in mind we're in the middle of expansion projects at both of those locations, that adds an extra bit of complexity. So, with some of the challenges with that, they didn't quite hit where we guided for in the quarter. But there's really no structural problems with Dynamet, we just need to get through -- you're trying to produce at the highest level ever at the same time, bringing on two expansion projects can be a little tough at times. So that was really the drives.

Okay. That make sense. That's all I have. Thanks.

Thank you.

Next question comes from Josh Sullivan with Seaport Global. Please go ahead.

Good morning, Tony and Tim. You mentioned, there's still a lot of room to grow on the Carpenter operating model. Can you highlight what some of those actions might be and what might drive that?

It was really -- good morning by the way. It's really the same thing across the board, when we implement the Carpenter operating model we don't go across all of our work centers at the same time. We really target the high valued work centers that will benefit us the most. So for us, it's really spreading that philosophy across all of our businesses. And in a lean manufacturing environment with a market that wants more than you can produce, there's always going to be a bottleneck. So, as we increase one area, make it more efficient that pushes the bottleneck somewhere else, and then we go tackle that one. So, the point is we focus really on a relatively limited number of work centers and there's much more opportunity for us out there. So that's what I mean when I say there's much more opportunity. There's a lot of areas that we just quite frankly haven't touched yet.

And then, just within the medical market, you mentioned, you're gaining some share here. What do you think that share opportunity could grow to? And maybe where do you think your share is right now?

It depends on the application. In some areas we are -- for all practical purposes sole sourced. And in others we have less share. So it's not one number that I can give you. It depends on the customer and it depends on the application.

And then just lastly on the consumer electronics growth you mentioned in the prepared remarks, is that related to the soft magnetics market currently? And then, as you think about the capacity that's coming online with the new mill here, what portion of that do you think will be consumer versus auto versus aero going forward?

Yes. So, I'll take the first one, the last one first. The majority of the volume coming off of that new mill will be aero and transportation just because those are much larger markets. I mean, consumer is probably a 3% or 4% of total revenue for Carpenter albeit very high, very high margins. So in this case here, the answer to the first part of your question is yes, that the growth in consumer electronics is around soft magnetics, think iPhones, think those types of electronics.

Thank you.

[Operator Instructions] The next question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Thanks. Good morning, Tony, Tim and team. How are you?

Good morning, Phil.

Just my typical question here, just on the engine sales. Can you give us just an idea how much engines, revenues grew on a year-on-year basis within aerospace?

Well, year-on-year engines were relatively flat. But, I'd say from a total aerospace standpoint, which engines is 50% roughly. We had the highest sales ever for first quarter. So, flat from a year-over-year, but the highest sales rate ever.

So then, there'd be other sub-markets performed better I guess is the implication. So, is that defense or avionics or sort of all of the above?

I would say all of the above.

Tony, when we're looking at, just trying to think about the electronics color that you provided, it was a little bit refreshing because you see a lot of kind of downtrodden commentary around the electronic supply chain and semiconductor supply chain. But, you said you're picking up some orders, you're seeing some green shoots in electronics. Any more perspective there?

Well, that's an area that we really want to grow. I don't have any real specifics there. And like I said in the previous question, a relatively small part of our overall portfolio, but we see that as one of our -- quite frankly fastest growing sub-markets going forward.

Is that more so in the hands-up piece?

Say again Phil?

In the handsets, smartphones?

That's a big part of it. But there's other areas as well in all of the electronics, we see an opportunity for us.

And then, on the maintenance side of things, I know you typically have some maintenance and Tim you alluded to it in Q1. Any sense of the magnitude of the outages in Q1 and whether or not you're going to have any continuing in the second quarter?

I can just say this, Phil, from an overall standpoint, we're trying to get better and better the way we perform preventive maintenance. Obviously, it is critical and necessary and we've just developed a more rolling program as opposed to taking that one big large shutdown heads, we've done for decades here at Carpenter. So, you didn't have the same type of outage in the first quarter that you had compared to the past, but you'll see some, other preventive maintenance spread across the quarters to come.

Some more so level, I guess, if I'm hearing you correctly level loaded across the year versus just the beginning of the fiscal year is that you've done historically, so the practices are changing a little bit?

Correct.

Okay. Thanks so much.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Brad Edwards for any closing remarks.

Thanks Jake. Thanks everyone for joining us today on our first quarter call. We look forward to speaking with you on our second quarter call in the New Year. Have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.