Good morning, and welcome to the Carpenter Technology Corporation's First Quarter Fiscal 2023 Conference Call. All participants will be in a listen-only mode today. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded today. I would now like to turn the conference over to 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 2023 first quarter ended September 30, 2022. 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, 2022 and the exhibits attached to that filing. 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 adjusted operating income excluding special items 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. For first quarter of fiscal year 2023, our total case incident rate was 1.7. While this is less than half of the metal manufacturing industry average rate, this performance is not up to the standards to which we hold ourselves. Fortunately, despite the increasing rate, the severity of injuries continues to decline. The rate increase is largely due to the increased employees undertaking new tasks, either as new hires or transfers into new roles. To address this, we have enhanced and expanded training procedures for any employee new to a job or task with frequent monitoring and follow up. Further, we continue to drive our STOP program, which enables employees to stop work whenever there is a potential issue or concern. Our ultimate goal continues to be a zero injury workplace. We believe it is possible and we will continue to work towards that goal. Now let's turn to Slide 5, and a review of the first quarter. We continue to see strong demand conditions in each of our end-use markets. Most notably, we see the aerospace and defense end-use market ramp accelerating. As a result of a strong demand environment across our end-use market, we continue to realize price gains in contract negotiations and see our backlogs increase. Notably, our backlog increased 10% sequentially and 155% year-over-year. This marks the seventh consecutive quarter of backlog growth. In order to satisfy this aggressive demand, we are focused on increasing productivity across our operations. And we are working closely with our customers as most are requesting additional volume with accelerated delivery dates. For the quarter, the SAO segment performed at the upper end of our expectations driven…

Thanks, Tony. Good morning, everyone. I'll start on Slide 8, the income statement summary. Net sales in the first quarter were 522.9 million and sales excluding surcharge totaled 375.7 million. Sales, excluding surcharge, increased 20% from the same period a year ago on 3% higher volume. Sequentially, sales were down 7% on 13% lower volume. Gross profit was 54.8 million in the current quarter compared to 25.2 million in the same quarter of last year, and 72 million in the fourth quarter of fiscal year 2022. As we pointed out on last quarter's call, the fourth quarter of fiscal year 2022 gross profit results included a benefit of 11.9 million related to employee retention credits that were recorded and called out as a special item during that quarter. Sequentially, adjusting for the roughly 12 million of nonrecurring benefits, gross profit is down slightly due to the lower sales from Q4 to Q1. The significant improvement in gross profit year-over-year is primarily driven by the higher sales and improving product mix and increased selling prices to offset inflationary cost increases. SG&A expenses were 46.5 million in the first quarter, up about 2 million from the same period a year ago. When adjusting for the special items that we called out in the fourth quarter of fiscal year 2022, SG&A expenses were up roughly 1 million sequentially. Note that the SG&A line includes corporate costs, which totaled 17.1 million in the recent first quarter. The reported corporate costs increased about 3 million from the same quarter last year and about 4 million sequentially when considering the special items included in the fourth quarter. As we look ahead to the balance of fiscal year 2023, we continue to expect corporate costs to run between 18 million to 20 million per quarter. Operating income…

Thanks, Tim. Now to recap our first quarter of fiscal year 2023. We are well positioned to achieve our target of delivering operating income at the fiscal year 2019 run rate by the fourth quarter of fiscal year 2023. We are operating in a strong demand environment with a positive outlook in each of our end-use markets. Notably, the aerospace and medical markets continue to accelerate the recovery. As a result, our backlog continues to grow, and we expect it to remain strong for the foreseeable future. We continue to ramp our operations with an ongoing focus on maximizing throughput and productivity in key flow paths. Through a raw material surcharge mechanism and our ability to increase prices on our contractual and transactional business, we've been able to mitigate a large percentage of the recent inflationary pressures. We continue to work closely with key customers, navigating the recovery and supply chain challenges and partnering to solve their critical needs. As a result of these efforts, we believe we will continue to maintain a healthy liquidity position. Now let's take a closer look at our full fiscal year 2023 outlook. Last quarter, I spoke about a projection that by the fourth quarter of fiscal year 2023, we could achieve an operating income run rate equal to our fiscal year 2019 performance. To be specific, this means that we expect to reach quarterly operating income of at least $60 million by the fourth quarter of fiscal year 2023. Our current view of productivity, throughput, inflation, supply chain constraints and labor availability are built into this projection. I will spend a few minutes now to provide more detail on how we plan to get there. First, we project sales, excluding surcharge, to grow at a 13% to 15% compound growth rate over the…

We will now begin the question-and-answer session. [Operator Instructions]. And our first question here will come from Gautam Khanna with Cowen. Please go ahead. Gautam Khanna, your line is open. All righty. We will take our next question from Michael Leshock with KeyBanc Capital Markets. Please go ahead.

Hi. Good morning, guys. I wanted to ask on scrap availability. It seems like that's improving. And do you see that as an enabler to margin upside as the year progresses within SAO?

Well, it's a good question. And that's something that can be cyclical as far as availability. Right now, that's not an issue for us. And we're being selective about what we do out in the market. So not an issue for us right now. And as you well know, scrap usage is very high percentage for us in our process.

And then just looking at the guidance you gave for the balance of the year, what kind of contribution are we seeing from soft mag? And is there any view on just what we should be thinking within that business?

Soft mag is material over the next couple of quarters. In fact, we're finalizing a very attractive contract for us with a major customer at very nice margins, good contract for both of us. So over the next couple of quarters, it will be material. And then as you get into FY '24 and beyond, it becomes even a bigger part of our business.

And then just lastly for me on inventory levels here, you talked about the increase quarter-over-quarter to kind of meet the ramp needs. Are you comfortable with the levels here? Or as the ramp progresses, do you see the need to increase further?

We'll build inventory again in the second quarter. By the end of the year, our plan is to flush that out. So you'll probably be about the same year-over-year. You'll end -- what I'm saying is in you will be in FY '23 about the same place you are in FY '22. But right now, when you've got a market situation like we have where the demand is significantly above the supply levels, we're trying to do all we can to maximize our output. And what that means right now is building some of that inventory, because our production rates across key centers aren't 100% aligned. So we'll build that inventory when we get the chance, for the most part in the upstream, and be able to ship that out to our customers in the second part of the year.

Great, thank you.

Thank you.

[Operator Instructions]. Our next question here will come from Josh Sullivan from The Benchmark Company. Please go ahead.

Hi. Good morning.

Good morning.

The dynamic you mentioned in the prepared remarks and markets outside of aerospace were dislocated by the strong aerospace demand. Just given aerospace is going to be growing but it's a more complex purified product, is there any timing gap where it takes more time to manufacture the aerospace grade materials to the various furnaces than the lower grade materials that we're replacing?

Yes, I alluded to that, that at times based on the products we're running, that the aerospace materials could have a longer production cycle. Again, I want to make sure I'm clear on this. I think this is short term. We're always moving our production schedule around. But in the first quarter, that was a bit more extreme as we're trying to meet the demand from our aerospace customers. I think over the next couple of quarters, that'll even out a little bit.

Got it. And I know it's hard to measure aerospace aftermarket demand, but if you look at the number of engines delivered by Pratt, GE, Rolls, Williams versus material you delivered by Carpenter, does it suggest aftermarket needs are accelerating faster than passenger traffic? Or do you think OEMs are stocking inventory just to PEP production risks, given some of the issues with the broader supply chain?

When we talk to customers, every one of them say they don't have enough inventory right now. And they all want it faster than what the current lead times are. So I don't see a mismatch there. And I think, maybe, Josh, it's a good time, that question kind of leads to a bigger piece. And I think it's really important to note that from an aerospace standpoint, or really for an overall market standpoint, there's not a market demand problem. In fact, our demand, it's there, it's strong, it's accelerating. And you always hear this news, like you've mentioned about aftermarket inventory levels, build rates for the airplane framers, whether they're decreasing or pushing out. And I can tell you the bottom line is that no, that's going to have a negative impact for the rest of this fiscal year and into the next year and beyond. And the main issue is that right now, demand significantly outpaces current supply. And that's not going to change anytime soon. So it's why we're very confident in our fourth quarter target, and then saying we're going to double that by FY '26. Those types of news items in the industry it's just not going to change, because we have more than enough demand right now.

Got it. And then the Russian titanium supply chain realignment, did you see any quantifiable moves this quarter?

Josh, I didn't hear the last piece of that.

Russian titanium supply chain realignment, did Carpenter see any meaningful new relationships as a result of that?

Yes, I think it's a good -- that's come up a couple of times. And maybe I can give you just a couple of pieces where we would play and maybe make it more clear for everyone. In aerospace, of course, the U.S. entities that provides the large titanium forgings, they could pick up some share because of this, and in turn we could participate via conversion services that we have for those companies. On the medical side, we compete with the SAO through Dynamet. And there are some points there where we're working with customers, we’re there assessing their risk, still making some sourcing decisions there. In terms of how this stacks up for Carpenter Technology, it's really not going to be a major game changer compared to what we have going for us in this massive demand on aerospace, medical, electrification. So there'll be some opportunities for us. But not as big maybe for some of the companies that actually melt titanium. As you know, we're not a melter of titanium. So hopefully that gives you a little bit more insight to what we do in that area.

Thank you for the time.

Thank you.

Our next question will come from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Hi. Thanks very much. Question was just on net working capital. You mentioned the seasonality of the build and obviously you've got very strong volume aspirations as the year progresses. How should we think about net working capital this quarter and then over the balance of the year?

Yes, I'll let Tim take that one.

Yes, Phil, good morning. Tony covered the detail on inventory. That's obviously our biggest component. The rest will follow. Payables will follow inventory to a certain extent. It's all based on timing. And then receivables, obviously a sales ramp assuming we maintain the relatively consistent DSO, we should see some increase in AR as sales ramp. And the rest of the net working capital should be fairly in line to those movements.

Okay. And then regarding aerospace specifically, are you guys seeing any material differentiation between engine and non-engine, which for you I know includes structural and landing gear, avionics and whatnot? Is there a difference between where the polls are stronger?

Phil, this is Tony. All of our submarkets across aerospace are strong right now. There could be a quarter that you see a little dip maybe in distribution, or one of the smaller ones. But when it comes to engines, and even more so now fasteners, that demand is extremely strong. And again, every one of our customers are asking for more and sooner. There is no deviation from that. We need more and we need it sooner. And that's across all of our aero submarkets.

And then last question for me, and I appreciate it, is just on labor and labor productivity, obviously a big talking point for the OEMs and the suppliers alike. Where do you all find you are on that labor and productivity curve? Do you need more headcount and/or where do you think you are on the productivity curve as the cycle progresses? Thanks.

Yes, it's a good question, Phil. Thanks for asking that. Across our locations, there's still a couple of locations where we're still actively hiring, usually because we're bringing on another line or we know that we've got demand coming in the future. For our larger locations, we're in pretty good shape as far as the number. The real key for us is on the training piece, because during the last couple of years, as you stated, we've had -- the industry have had a pretty good turnover of the workforce, whether that be through retirements or other actions. And we need to train that workforce. As you know, we have a very complex, complicated manufacturing system. We have never failed products. We have to maintain that quality. So from a rate standpoint, we're running full, but we're not running at the rate that we ran in 2019. And that's why you see it's coming up over the next couple of quarters. We need to do that in a very structured, very planned process to make sure all of our employees are trained properly, and they can operate that equipment at the very highest quality standards.

Thank you.

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

Thanks, Joe. Thanks everyone for joining us today for our fiscal first quarter 2023 earnings call. We appreciate you spending the time, and have a great rest of your day. Take care.

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