Good morning, and welcome to the Carpenter Technology Corporation Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Brad Edwards. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology earnings conference call for the fiscal 2021 third quarter ended March 31, 2021. 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 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 quarters ended September 30, 2020 and December 31, 2020, 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. Let’s begin on Slide 4 a review of our safety performance. Our fiscal year-to-date total case incident rate, or TCIR, is 0.6. We have now demonstrated three consecutive quarters of sub-1.0 TCIR performance as an organization, which is exceptional safety performance. However, we do not take these accomplishments for granted and continue to enhance the fundamentals of our program in areas such as hand safety, human performance, leadership development, ergonomics, employee engagement activities and at-home safety programs. I look forward to achieving our next safety performance milestone as we pursue safety excellence on our path to zero. Now let’s turn to Slide 5 and a review of the third quarter. Our third quarter results were largely in line with our expectations as near-term volume headwinds related to COVID-19 continue to pressure our financial performance. Both our SAO and PEP segments delivered results that were consistent with the guidance we provided on our second quarter earnings call. We have maintained a focus on our key strategic priorities during this challenging period. First, ensure the safety of our employees. Second, drive cash flow generation and strengthen our liquidity profile. Over the last four quarters, we have generated $189 million in free cash flow and ended the third quarter with total liquidity of $539 million, including $244 million of cash and no near-term financial obligations. And third, focus on the long-term relationships with our customers. During the quarter, we continued to expand our relationships across our customer base and then cover additional areas of value creation. As evidenced, we completed several contract extensions, primarily in our medical, transportation and aerospace and defense end-use markets. In the aerospace market, customers fully understand that capacity was limited prior to the pandemic and supply of…

Thanks, Tony. Good morning, everyone. I’ll start on Slide 8, the income statement summary. Net sales in the third quarter were $351.9 million and sales, excluding surcharge, totaled $298.1 million. Sales, excluding surcharge, were effectively flat sequentially on 5% lower volume. Compared to the third quarter a year ago, sales decreased 40% on 39% 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 Q2 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 have said on prior calls, while the reduction in inventory drives near-term cash flow generation, as evidenced by our liquidity position, it negatively impacts our operating income performance. SG&A expenses were $47.8 million in the third quarter, down $3 million from the same period a year ago, reflecting the actions we took to reduce costs, including the elimination of about 20% of our global salaried positions late last fiscal year, managing discretionary spend closely as well as the impacts of remote working conditions that reduced certain administrative costs such as travel and entertainment. Sequentially, SG&A costs were higher by $5.6 million, reflecting incremental costs in the quarter associated with going live with our new ERP implementation as well as the incremental depreciation costs associated with the ERP system. The current quarter’s operating results include $7.6 million of restructuring and asset impairment charges, including inventory writedowns, associated with our ongoing actions to reduce cost and narrow focus in our additive business unit within our PEP segment. In addition, our results for…

Thanks, Tim. As we all know, different demand recovery time lines and customer ordering patterns will continue to influence our shorter-term quarter-to-quarter mix. I want to share a bit more on our enthusiasm related to mid-term and longer-term outlooks in the end-use markets we serve. Let’s start with aerospace. During the downturn, we continue to improve our already strong position. Most market participants and experts believe that demand will rebound to and through pre-COVID-19 levels which, if you recall, was already exhibiting constrained dynamics. Longer term, the industry will continue to need improved fuel efficiency and emissions, driving the need for better engine materials where we are strongly positioned. Defense will continue to experience market resiliency on key platforms that require increases in strength, customers and fatigue performance. Longer term, we are monitoring funding patterns as governments reassess their budgets after significant COVID-19-related spending. In medical, as orthopedics and dental follow the cardiology recovery, we continue to secure additional share and identify more upside, largely due to the breadth of the high-value material solutions we offer in support of the industry innovation in this space. Longer term, we see this continuing as quicker patient recoveries and improved patient outcomes will be the key drivers. In transportation, with the recovery well under way in North America and China, regulations drive the near-term movement to higher efficiency powertrains, which is a positive for our portfolio of high-temperature materials. Longer term, as electric vehicle adoption grows, it is natural they will take more and more share away from the large internal combustion engine base. We have a good view of the life cycle decline of those products and are balancing our focus accordingly. As I mentioned earlier, our new hot strip mill brings capability and capacity to support significant future electric vehicle volume…

[Operator Instructions] The first question is from Phil Gibbs from KeyBanc Capital Markets. Please go ahead.

Hi. Good morning.

Good morning, Phil.

Tony, can you give us an idea of what the overall backlog looked like this quarter versus last and then also what your jet engine sales did either year-over-year or quarter-over-quarter, please?

Yes. So I’ll start with the last one first. Remember, you asked me that question last quarter as well, and engine sales were up 19% sequential quarter. And I said not to get too excited about that just from a timing standpoint. So this quarter, they were down about 18%. So over the last two quarters, you’ve seen it relatively flat on the engine sales, maybe a little bit of an increase. So that’s in line with what we expected. From a backlog standpoint, overall, our backlog was up about 6% sequential quarter.

Thank you. And then on the LIFO liquidation piece in Q4, any sense you got in terms of what we should model in terms of an impact from that?

Yes. So I’ll take that one. Just a couple of comments there. One is, most of SAO’s inventory is on LIFO, Dynamet as well as in PEP, so there’s a bit in both segments. As we’ve taken inventory down, we’re going to eat into – I mentioned in my comments, eat into some higher cost inventory. So we expect that it’s – certainly, it’s an estimate that’s very sensitive to where we wind up in ending inventory, but we’d expect that to be somewhere in the neighborhood of $40 million to $45 million, and most of that being in SAO with maybe $1 million or $2 million in PEP.

Now is that, in your mind, a one-time thing, meaning we – meaning is there any recurrence or bleed into fiscal 2022?

No, we wouldn’t expect it to bleed into 2022. It’s – I don’t want to say one time but non-recurring non-cash special item in Q4.

Okay. And then last one for me. The COVID cost of $2.7 million, did you say that, that was – there was about $2 million in SAO and the rest in PEP?

Yes, it’s $2.1 million in SAO and $600,000 in PEP.

And then your inventory writedown and restructuring impairment that you called out in your releases, where did those flow through?

That shows up in corporate costs, in the corporate cost number when you’re looking at the breakdown.

Thanks. I appreciate it, guys.

[Operator Instructions] The next question is from Gautam Khanna from Cowen.

Yes. Thanks. Good morning. Following up on Phil’s question, I wanted to ask what the visibility – as you’ve mentioned on the engine side, how far out can you see in terms of delivery requirements of customers since they are asking about lead times? Or do you have visibility into calendar Q4 at this point? And if you could also talk about the other aerospace subsegments and how they fared sequentially in the March quarter, so fasteners and other structures.

Hi. Good morning, Gautam. We can see into our fiscal fourth quarter on aerospace. In fact, on a bookings standpoint, our bookings for aerospace were up 60% this past quarter, and we see that trend continuing. So pretty good visibility there in close contact with our customers. From a sales standpoint, overall aerospace, as you could see on the slide, was down 8%. Fasteners were up a couple of percentage points. Structural was up about 7%. Distribution was up three or four percentage points as well. So all of the segments were up quarter-over-quarter. Engine is the only one that was down, and that’s just because you had the balancing with the quarter before. And as I said, in the second quarter, we were up 19%; and this quarter, 18%. So if you balance that out, maybe a point or two improvement. So all the segments were up quarter-over-quarter. I should say that’s on the aerospace side. Defense was down just a little bit, just to be fair, quarter-over-quarter.

Got it. And then I was more curious about the engine visibility beyond fiscal Q4 into the end of the calendar year, so just so what we can expect. Normally, we have a big seasonal dip in the second half of the year versus the first half. I’m talking of the calendar year. Do you expect that we’ll see – I mean do you have visibility into the second half of the calendar year right now on the engine supply chain – on the engine demand environment?

Yes, we do. And as I said, we’re very close to our customers and trying to capture that in my remarks that the discussions are really around lead times and availability and where we see it through this calendar year and maybe a bit into calendar year 2022 as we start to stack those orders up, a lot more discussion around Athens. You saw we had one provisional approval, so wanting to understand and get those qualifications complete. So from an overall standpoint, of course, I’d like for the visibility to be sharper. But I think right at this point in time, we have a pretty good idea of where our customers are at and, as I said in the comments, very bullish going forward. We do believe that we hit the bottom. Much like many of the other companies that have reported so far have had the same type of message, and now we’re looking forward to coming out of this.

And could you speak to the seasonality we should expect in the second half of the calendar year? Should we see still expect there’ll be some decline?

I’m not so sure – yes, sorry for interrupting. I’m not so sure about that. I mean that’s been a bit muted the last couple of quarters and in the last couple of years as well as we come in. There’s always summer shutdowns maybe in the transportation side, but I think you’re going to see a lot of those manufacturers shorten those summer shutdowns just because of some of the shortages they’ve had with chips that they’ll run maybe stronger than what they had in the past. So at this time, I don’t see a material impact because of seasonality.

Okay. Thank you very much.

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

Thanks, operator, and thanks, everyone, for joining us today for our fiscal third quarter 2021 earnings call. We look forward to speaking with all of you in the near future. Thanks again, and enjoy the rest of your day.

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