Good day, and welcome to the Carpenter Technology Corporation Third Quarter Fiscal 2020 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask question. [Operator Instructions] Please note that this event is being recorded.I would now like to turn the conference over to Brad Edwards, Investor Relations. Please go ahead sir.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the fiscal third quarter ended March 31, 2020. 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, Form 10-Q for the quarters ended September 30, 2019 and December 31, 2019 and the exhibits attached to those 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. I hope you and your families are well and safe. Let's begin on slide 4, a review of our safety performance. Our total case incident rate or TCIR dropped to 1.1 in the third quarter of fiscal year 2020. We've worked extremely hard over the last five years to make safety a cornerstone of our company culture. The goal of a zero injury workplace is embedded across all of our locations. With that clean mindset, we were able to quickly respond to the COVID-19 pandemic, with an immediate focus on protecting our employees their families and our facilities.Let's turn to the next slide we talk more about our actions. Carpenter Technology especially molybdenum, iron and in some cases the sole source with proven material solutions in critical applications, making more viable and continued production of essential manufacture products. We fully understand our role as an essential business and know whether it is important for us to continue to operate during this challenging period.We took immediate actions such as remote working, enhanced personal hygiene, social distancing and limiting access to our facilities. But our total pandemic response is much deeper and complex. We have focused on four pillars, which are game changers in terms of safely operating and manufacturing facilities during the pandemic.The first is the rapid response team made up of employees in multiple disciplines to spend 100% of their time, focused on safely operating our facilities during the COVID-19 crisis. The second is a robust self-reporting and self-isolation program. We require all employees to self report to our medical team if they meet any of the detailed criteria, if deemed necessary, they are placed on a paid 21-day self isolation.The third is a modularized pod working zone…

Thanks, Tony. Good morning, everyone. I'll start on slide 9, the income statement summary. Net sales in the third quarter were $585.4 million and sales excluding surcharge totaled $495 million. Sales excluding surcharge increased 5% sequentially on 5% higher volume. Compared to the third quarter a year ago, sales decreased 2% on 9% lower volumes.As Tony covered in his review of the markets, the year-over-year results reflected strong growth in aerospace sales offset by weakening demand in the Energy and Transportation end-use markets. The performance is significant given the challenges that we faced late in the quarter related to COVID-19. This impacted our ability to get shipments out of our mills both due to enhanced safety measures implemented in our facilities as well as the impact on certain customers who were unable to accept deliveries as they were forced to shut down their operations, particularly, in Europe as a result of the pandemic.Our production teams have adjusted extremely well for the additional safety measures, but the transition to this new way of working clearly impacted productivity. The teams also had to deal with certain self-isolation measures that affected staffing levels at key work centers. I'll talk more about the impacts on our results shortly in the segment details.SG&A expenses were $50.8 million in the third quarter up, roughly $1 million from the same period a year ago and down $4.5 million sequentially. The sequential change reflects the timing of certain expenses from quarter-to-quarter. Operating income was $58.7 million in the quarter compared to $73.2 million in the prior year period.As Tony mentioned the current quarter's results include about $5.5 million of COVID-19 related impacts. Last year's third quarter included an $11.4 million insurance recovery benefit related to our Dynamet facility that was included in our PEP segment's operating income results.Adjusted…

Thanks, Tim. Let's move to slide 15 in a more detailed market outlook. Let me give you a bit more color on how we see our markets for the coming quarter and into our fiscal year 2021. In our Aerospace and Defense end-use market, we see the next quarter as we pause and a reset quarter. Clearly the near and mid-term demand profile has changed and no one yet understands what the final demand profile will be.We're going to use this time to strengthen our relationship with our customers to maximize our share and work directly with them as they were processing large updates to the COVID regions almost daily. We believe we will show more resilience than our competitors as we are seeing a few struggle with COVID-related operating disruptions.Assuming we have some macro return to normalcy in our fiscal year 2021 first quarter and some are now projecting, the industry could begin firming up its ramp up and needs. That in turn could allow us and our customers higher confidence and visibility into the future.Turning to our Medical end-use market, although states are currently beginning to reduce restrictions on elective surgery, we do expect destocking efforts to continue in the fourth quarter at both end user OEM customers as well as distributors supporting the medical device market as the market adjusts to the change in demand initiated in the third quarter. These destocking efforts are expected to continue to affect our orthopedic and dental markets.We expect the return of elective surgeries to continue to the first quarter of our fiscal year 2021 mostly in orthopedic markets. We expect end user OEMs and distributors will replan from the previous stocking levels and begin to attract new customers. Although, they represent a small percentage of our total sales, we have…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Gautam Khanna of Cowen. Please go ahead.

Hi. Good morning, guys.

Good morning, Gautam.

Wanted to just explore on the, decision to exit Amega West and to shut the two powder facilities down what -- are there any cash costs associated that are onetime in nature?

There are some cash costs, Gautam that's primarily around the shipments that we will pay on receiving, so the majority of the charge would be non-cash. It will be the property and asset write-downs. And in lease obligations we have in the portfolio.

Okay. Any sense for how much that is in aggregate, the cash related costs?

The majority is on the non-cash side, I can say that.

Okay. And then, the 50% decline anticipated at SAO sequentially is this, -- I'm just curious, what is sort of the visibility around that. Have you already received orders that reflect in the new announced build rates, at Airbus and Boeing you mentioned? And I'm wondering if, it shouldn't get worse sequentially as we move into the back half of the calendar year.Normally there's seasonality that's down sequentially second half versus first half. But then we're also transitioning to lower rates. I wonder how long does it take to actually get those orders to Carpenter to reflect the -- what is actually going to be the ongoing OEM production rates? So do you see like a much bigger step down than a normal deal, in the second half of the calendar year, on top of what you're expecting in calendar Q2?

It's the number one question, right Gautam. And I think maybe our old models that we've used in the past, as far as seasonality or cyclicality in the Aerospace business and industry it might not be very useful anymore, because we see such major shifts. So, as opposed to seeing a downturn maybe in the first half, you could see some -- little change in the OEM ordering pattern just because you have such a low level now.So I don't know if we can use the same method, as we've done in the past. To answer your first question, certainly it's a moving target. We feel comfortable with -- let's get comfortable as you can get with the guidance, it is moving around every day as our market leads are talking to our customers.The other piece of that, guidance is we really made the decision to take out more inventory than we normally would. I mean we had a strong balance sheet, we will carry some inventory. We're going to take a step back on that and say now is not the time to do that. So we're really sacrificing some operating income next quarter, to pick up a substantial amount of cash.And we think that's the right decision to make. It's probably not the best time to be reducing inventory just because raw material prices are lower. But again, I think, the focus here should be on the cash side. And we'll look at a bit on the operating income side to do that. I hope that answers your question.

Yeah. No. I guess, I'm trying to frame out maybe this year's, almost over for Carpenter at this fiscal year. I'm trying to frame out the following year and perhaps the year after. I mean, we've had announcements now from Boeing and Airbus wide-body rates somewhere near down 50%, slightly less and single aisles at Airbus down a 1/3 and probably ramping much more slow than we had hoped for just three months ago.So, in that kind of environment, do you think the operating income at SAO stays -- does it sort of follow that production down, kind of 40% blended, in terms of operating profit relative to what maybe calendar 2019 arrives? Is that sort of the right -- is that, how you're thinking about where things...

Listen, it's an absolutely right answer. But as you know, I mean, the vision that we have going forward is where needed. And it's tough to take very high level assumptions, because every customer is different. And honestly they are changing from day-to-day.Now this quarter, for us the first one will be a bit more subdued than normal, because we're going very aggressively on it, we think that's the right thing to do. So if we would have taken a step back and be more conservative on the income reduction, so you know what. Let's just kind of manage the way we usually, do you'd see a quarter that would be materially better.The flip -- the effect of inventory is valued significantly in this quarter. So it's going to be a little bit difficult, Gautam for us to kind of go quarter-to-quarter because we're really making some significant changes in the way we do business. I think we'll all going to have to be -- work together and kind of do the same for the economy.

And then, just one last one for me, Tony, in these downturns in the past, how have competitors responded with pricing to capture emerging demand or just get more share on existing contracts, where there may be some flexibility with the customers as to what the share is if it's in a band?And have customers -- do you think customers are going to be coming back to Carpenter and asking for those, kind of, price concessions? What do you anticipate happens just based on like normal cyclical downturns?

It's a good question and we have seen that in limited areas inside of our industry. That's why I took a little extra time early on in my presentation to talk about the really detailed actions we took to keep our plants running safely. And often that there's a lot of operations out there across many industries that have had to shutdown not necessarily because the demand wasn't there. It's because they could not safely put their employees to work. They might have had an outbreak that they had to shut them.That's really important for our customers. And I would say more importantly than a temporary price decrease that they know they're working with the company that values the safety of their workers number one, we're going to take those productivities that we did in the third quarter it still had record SAO results. And that's the company that they want to go with long-term as opposed to shaping a price for a short period of time.In fact, we've had customers come to us just because of that and want to increase the business they do with us or increase their share just because of our ability to operate in this environment. So there are some trade-offs that can, which thoroughly did not price. If you're in a market that you think had long-term positive macro demand is going to be there, which will pass, and you want to be partnered with a company that's always going to be resilient and reliable one to supply.

Thanks for the time. I appreciate it and be healthy, and good luck

Thank you, Gautam.

Our next question will come from Josh Sullivan with Benchmark. Please go ahead.

Hi, good morning.

Good morning.

If we just think about the Carpenter operating model, you put in place the last couple of years, is there any way to quantify how it would have helped in previous downturns just maybe what's operationally different versus 2014 or 2008 overall? Just trying to understand from a comparison perspective how Carpenter has evolved as that's been put in place over the last couple of years.

Good question. Hard to quantify because there's so many moving parts right now. But I think as a company and as a workforce we're blessed to have this Carpenter operating model, because it become -- even though I have said many times Josh, I think we're still in early innings. I still believe there's a lot more we can do with this operating model. It's not always easy or everyone would do it.So I do believe there's still a lot more left in the tank. But as we moved in as the pandemic became worse and worse, having that DNA in Carpenter my most site leaders have been absolute superstars to have that type of grounding in the way they move so quickly to go to this modularized pod systems that is massive. And I can tell you there's a lot of operating locations not doing that.To be able to put that in so quickly, they leaned on their Carpenter operating model in space they're still new to leader standard work, flow, communication. And I would tell you having that, we have practiced back in the last five years is critical to us to be able to provide the quarter that we did this time. Comparing to the past, it is tough to give you an exact number, but I would tell you that it's significant our ability to respond quickly because we have that DNA baked in right now. It's a great question.

And then just thinking about the balance of work that you can shift between Athens and the legacy facilities, I know you want to talk about it as one operating system, but at one point Reading was almost redlined on certain areas that heavily qualified with Aerospace. But just given the overall reduced demand, is there a way to balance more of the work in Athens, which may have a lower cost structure just because it's a newer facility?

I believe as we go through with the press moment, we're going to need Reading and Athens. We're are very -- I'm very happy to come to the workforce that we have in those locations, and I think it's a great time for me to say we understand we have lower volume. We understand we need to flex our labor.What we're doing is some rolling furloughs that can shorten workweeks as opposed to having permanent layoffs, because we want to keep those employees we've invested in them, they care about Carpenter Technology. So we'll have individuals go off on a furlough for two to three weeks. We'll help them work on whatever benefits they have available to them. We continue to supply them medical benefits. We're not going to take away that when they're on this rolling furlough. And in two, three weeks we can bring them back and we'll have another set of employees go off.So we keep everybody working, we keep everyone insured. And in some plants, it might be more beneficial for us if this is rolling furloughs to go from a 40-hour a week to a 32-hour week. And that's just a better way to keep everybody involved in various tough time. Everybody has an opportunity to support their family. So that's our approach. It's not about, let's go 100% dark and move it all down to Athens. We want to have a balanced approach to keep as many employees viable as a team.

Got it. And kind of related to that just keeping the structure in place for an eventual recovery. What do you think the red herring is going to be for a recovery for you? Are we going to see it in the distribution side auto? What vertical do you think we'll see first as eventual recovery takes hold?

That's a good question. I mean from our standpoint is that you heard a couple of times now, 60% is Aerospace and Defense. And then you add in Defense – I mean you add in Medical and then on our industrial consumers by adding semiconductor and the high-end consumer electronics, it's up in 80-plus percent of our business.So that's really our focus. And now from a – when you talk about other verticals like energy that we're going to be less than 3% in the energy market that volatility in the energy market is not going to impact Carpenter Technology going forward.And in Transportation we have great customers and we've done a good job of really going after and gaining share in high level but again it's 5% or 6% of our markets. So when you look at market you have to focus, while shift forward in Aerospace, Defense, Medical, those are our primary verticals.

All right. Thanks for the time.

Thank you.

[Operator Instructions] Our next question will come from Phil Gibbs with KeyBanc. Please go ahead.

Good morning, Tony and Tim.

Good morning, Phil.

First question just on the powder side, where from an end market standpoint or application standpoint is a lot of that going? And I guess why did you feel that you need to idle some of that – some of those facilities given some of that may be going into your future growth plans in additives?

Yes. Great. I'll start with Rhode Island. Rhode Island is a small facility for us. It's a little itemizer. These primarily things not our private – no objection, no new market like an uneven market for us. We get a very large order and then not to be able to utilize it is not a money-making facility for us.And as we go through this period of time looking at a focus on interest it just gives us space for us to stay in that market. It's very applicable to having offshore producers because they are definitely low cost. And that's just not our strategy. So at this point we've been thinking about it and at the same time trying to move the market [Indiscernible].So what to do with the facility is a little different. That is a titanium powder facility. So we still believe the titanium powder is going to be extremely strategic for the additive market going forward. Unfortunately when we brought online our West Virginia facility there were many others that brought on titanium powder capacity, so that is in an oversupply position right now.So we'll idle that. I would assume that would be – that will come back in that facility in a period of time. And we can still offer a full portfolio to customers on the active side titanium powder we can source that from some areas. So hopefully that's something that going in the future that we would bring back if the market continue to mature.And because of this I think what's very important, when we have a critical event like this happen some of our associated – to cut cost, cut R&D, cut innovative ideas but the companies that will emerge better and stronger are the ones that are measured in what they cut.They still look at their R&D and they spend money on critical projects, additive and soft magnetic I think there is going to be two of those. So we still have very forward-thinking companies that now is the time we're looking at a couple of those areas and saying we want to go faster than what we did before because we see huge numbers within that. Hope that answers your question.

Yes. And just from a capital allocation standpoint and liquidity I just wanted to clarify Tim, did you say that you drew out of the revolver out of caution? And then secondarily, do you have every intention right now as a company to maintain the dividend?

Okay. So I'll take the first two things – second two things, and then I'll turn it over to Tim. That's a good question from the dividend. We at Carpenter Technology is very fortunate. We have a very experienced Board, and we have a very detail-oriented Board. So, at our last Board meeting, we spent the majority of the time with our Board going through all of the different key areas, 20% down, 30% down, 50% down. What does that mean? What are all the cost levers we have, right? We have things that are really higher as we deal with -- of course, there's so many other things we can do. And after looking at that detailed analysis the Board was very comfortable to saying – to approve this dividend payout.With regards to the pandemic, the dividend is approved on a quarterly basis. So the Board looks at our position every quarter. They will continue to do that. But I think it just speaks very positively that the Board did a lot of homework looked at all the scenarios and felt very sensible to pay dividend this time. And I don't want to go out and take a look at that every quarter that we have laid out a pretty strong plan that based on extreme downturn, we just stay cash positive without being active with none of those cost inputs. Tim, I'll turn it over to you to discuss the first two question.

Yeah. Phil in my comments, I mentioned, we drew down to the level of about $50 million in the quarter. So when you see our balance sheet, we've got a little bit more cash on the balance sheet than we typically have. That was purely a precaution given in the early days of this as it unfolded just at a really preventative measure, but we're generally comfortable with our banking group, and I don't believe we'll have any issues accessing to that credit facility.

That $50 million is that in the March quarter, or are you saying you went after the quarter I'm sorry?

Yeah in the March quarter.

Okay. Got it. And then lastly, from me is just on the jet engine business. Tony, you typically give us a read in terms of what that business did? Any thoughts on what that was year-on-year from a growth standpoint? Thank you.

Yeah. Aero was up 11% year-over-year and 9% sequentially. So, still a pretty good quarter there even though you have some of this obviously building of demand, we have a very long – very strong backlog. So we're working very hard putting some of that backlog in and there's still customers that would like to do to pull that order up. That was for the first time, I think in about 13 quarters you saw our backlog decrease 6% to 7%. But it's still a historic record. So we are able to put some product in and the decrease the demand.

Appreciate it.

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

Thank you, operator, and thanks everyone for joining us today for our third quarter conference call. And we look forward to speaking with all of you on our year-end call during the summer. Take care and have a great rest of your day.

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