Good morning, and welcome to the Carpenter Technology Corporation Second Quarter 2021 Fiscal Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I’d like to 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 2021 second quarter ended December 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, Senior 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 these 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, 2020, Form 10-Q for the quarter ended September 30, 2020, and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when management discusses the 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. Let’s start on Slide 4 and a review of our safety performance. Through the first half of our fiscal year, our total case incident rate was 0.5. During this time, we have achieved the lowest incident rate in Carpenter Technology’s history and a 60% improvement year-over-year. This marks another key step forward in our mission to achieve a zero injury workplace. It is also noteworthy to point out that our PEP segment worked injury-free during the first half of the fiscal year. We continue to emphasize key initiatives as we look to secure our next safety milestone. Our safety results to date are especially impressive given the challenges related to COVID-19. Importantly, every one of our operating facilities has remained open, which is an achievement that I know resonates with our customers and shows a clear resiliency and commitment. Now let’s turn to Slide 5 and a review of the second quarter. Our second quarter results finished largely in line with our expectations. Our performance was impacted by ongoing inventory reductions as well as the continued market headwinds. Despite conditions being challenging, we are actively managing our business and have placed consistent emphasis on three key strategic priorities. First, ensure the safety of our employees. Second, drive cash flow generation and strengthen our liquidity profile. We have made further progress against this initiative in the second quarter and delivered $51 million of free cash flow. Fiscal year-to-date, we have generated almost $114 million in free cash flow. If you look at the last three quarters, we have generated $214 million of free cash flow. We ended the second quarter with total liquidity of $665 million, including $271 million of cash and no near-term financial obligations. Third, focus on the long-term relationships with…

Thanks, Tony. Good morning, everyone. I’ll start on Slide 9, the income statement summary. Net sales in the second quarter were $348.8 million, and sales excluding surcharge totaled $299.4 million. Sales excluding surcharge decreased 3% sequentially on a 11% lower volume. Compared to the second quarter a year ago, sales decreased 36% on 33% lower volume. As Tony covered in his review of the end-use markets, the year-over-year decline is attributable to the ongoing demand headwinds in our key end-use markets of aerospace and defense and medical as a result of the global pandemic. As expected, the demand was similar to our recent Q1 levels. Given the current demand environment, we continue to actively manage our production schedules and focus on executing against our targeted inventory reduction program. As we said on prior calls, while the reduction in inventory drives near-term cash flow generation as evidenced by our growing liquidity, it negatively impacts our operating income performance. SG&A expenses were $42.2 million in the second quarter, down $13 million from the same period a year ago and flat sequentially. The lower year-over-year SG&A expenses primarily reflect the actions we took to reduce costs, including the elimination of about 20% of our salary positions, managing discretionary spend closely, as well as the impact of remote working conditions that reduce certain administrative costs, such as travel and entertainment. The current quarter’s operating results include a $52.8 million goodwill impairment charge associated with our additive reporting unit that is in our PEP segment. In addition, our results for the quarter include $3.9 million in COVID-19 related costs. Included in this amount are direct incremental operating costs, including outside services to execute enhanced cleaning protocols, isolation pay for employees potentially exposed to COVID-19 and additional personal protective equipment and other operating supplies necessary to…

Thanks, Tim. On last quarter’s earnings call, I announced the launch of the Carpenter Electrification brand. Interest has been extremely high, and I want to take some time to give you more insights into our vision. Carpenter Technology has spent decades, perfecting the processing of soft magnet materials with the highest induction, permeability and lowest core losses. Historically, our materials have supported our leading position as a solutions provider for generator and auxiliary power unit, APU, applications, and this business has grown consistently with the aerospace market. Our Hiperco alloy motor technology is well-known in the aerospace market, where our Hiperco stator cores are used in over two-three of the APUs, which generate the power to kick off the main engine in aircraft. To support our existing business and further capitalize on the growing trend in electrification, we are in the final stages of commissioning our new hot strip mill on Reading campus. The new strip mill is another critical component of our electrification strategy. The bulk of the construction is complete, and the team is working diligently on the commissioning process. In early December, we hit an important milestone when the first hot metal was rolled on the new mill. Although there is still work to be done to ensure the facility is up and running, it is fair to say we are all excited about the potential for this facility. I thought I would highlight some of the technical details of the mill. The mill is designed to roll slabs from 5 inches thick down to coils with a minimum size of 0.08 inches, with width ranging from 8 inches to 19 inches. It is designed to run iron, nickel and cobalt materials. And it’s also capable of rolling copper, manganese and titanium. The mill includes automated surface…

Now we’ll begin the question-and-answer session. [Operator Instructions] First question comes from Gautam Khanna of Cowen. Please go ahead.

Yes, good morning. Guys, I was wondering if you could elaborate on what you’re seeing in the aerospace submarkets, fasteners, engines, structural components, and maybe how if at all, things have changed with the 787 production reductions. Thank you.

Yes. Gautam, this is Tony. From the last time we spoke three months ago at the first quarter earnings call, things are relatively the same. You have a little bit of movement here and there. Obviously, this quarter, on the engine side, that was a little bit better than what we had expected. But on some other areas, primarily fasteners may be a little bit worse. So as many people have said, if you look over the next couple of quarters, I think you’re going to see us bounce around this level of activity. It’s going to be choppy. You could see a couple of spikes here and there. I believe I said last quarter that we think our second half is going to be better. We still believe that. It’s not going to be substantial, maybe see a couple of points better. But I think that’s the environment that we’re in over the next couple of quarters.

Thank you.

Thank you. Next question is from Josh Sullivan, The Benchmark Company. Please go ahead.

Hey, good morning. Just to probe Gautam’s question there a little bit. I know you said things haven’t changed much, but can you talk about lead times, just with airlines pushing out an aircraft recovery almost three months here from early summer to Q3. Curious if your lead times mirror that? Or it sounds like maybe they haven’t.

Maybe you can clarify. When you say lead times, lead times for us supplying aerospace billet to our customers?

Yes, yes.

Yes. Okay, Josh. So I just wanted to make sure, if you look back at a year ago and if you’re speaking specifically on aerospace billet, those lead times were approaching one year. As we said right now, those lead times are in a range from 8 to 12 weeks, depending on the specific product.

Got it. Got it. And then just one on the medical business. I mean, what does the rebound look like when elective surgeries returned? I mean, is there any break on the number of elective surgeries that you can supply into the hospital? Or do you think that the restocking can be pretty quick for the suppliers, just with regard to the medical restocking cycle?

I believe that the recovery in medical can be pretty swift. So I think you can see a nice rebound. Now to be fair, we thought that, that rebound would come sooner. We really thought we’d see it in this quarter. However, with the resurgence of the virus and the ensuing capacity in hospitals inch higher, that didn’t happen. So that’s been a bit delayed, so that’s going to go into the third quarter. It’s going to rely on those hospital capacities getting under control, seeing the vaccine continue to rollout and see that comfort level. But there’s no doubt, once we get that into that setting that you’ll see those procedures I think come back pretty quickly.

Got it. And then just one last one on the hot strip mill, with the change in administration here and some of the efforts in clean energy, have you seen any uptick in demand or interest in the capacity from the hot strip mill from automotive customers or aerospace or elsewhere, just since the administration change?

Yes. I think that the momentum behind electric vehicles, our electrification in total is extremely strong, and it was strong before any administration change. So that specific event, I don’t think change the dynamic much at all. The point is that in totality that is a trend that is going to accelerate, I think, going forward regardless of the current administration. Certainly, as we push to become more and more in tune with the environmental impacts, that’s going to be a big – that will be a positive factor.

Got it. Thank you for the time again.

[Operator Instructions] Next question is from Michael Leshock from KeyBanc Capital Markets. Please go ahead.

Hey, good morning. So you mentioned opportunities within the land-based gas turbine replacement cycle. Could you talk about what you’re expecting there and where we’re at in the current replacement cycle?

You know Michael it’s an area that’s quite frankly, very low percentage of our sales right now. We do see some improvement. But in the whole scheme of things, it’s not overly material to us. So there’s not a lot more color I can give you on that one.

Okay. And how much more do you see in terms of net working capital benefits? Inventory has gone down in the past four quarters or so. So I’m wondering if we’re near a low point there, but any color you could provide on how you’re thinking on net working capital going-forward.

Yes. There’s still opportunity, as I said. It won’t be at the same magnitude of the first half. So it will be less than the first half. When I say less, the second half will be less than the first half, but still material. And we still have some opportunities out there. So we’ll keep pushing them.

And then lastly, could you provide jet engine sales in the quarter?

I will tell you this on the engine sales. Sequentially, they were up almost 20%. Now I wouldn’t read too much into that to think that there’s some type of recovery. As we’ve said in all these sub-segments, it can be a bit choppy. So you’d see some things pull in, some things push out, but they were almost 20% sequentially for aerospace engines.

Got it. Thank you.

You’re welcome.

This concludes our question-and-answer session. Now I’d like to turn the conference back over to Mr. Brad Edwards for closing remarks.

Thanks, Nick, and thanks, everyone, for joining us today for our fiscal 2021 second quarter conference call. We look forward to speaking to all of you on our next earnings call. Take care and stay healthy.

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