Good day and welcome to Carpenter Technology Corporation Third Quarter 2023 Conference Call. All participants are in 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 now to hand the conference over to John Huyette, Vice President of Investor Relations. Please go ahead sir at this time. Thank you.

Thank you, Operator. Good morning everyone and welcome to the Carpenter Technology Earnings Conference Call for the Fiscal 2023 Third Quarter ended March 31, 2023. 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. Risks 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, Forms 10-Q for the quarters ended September 30, 2022 and December 31, 2022, 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 margin, 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, John and good morning to everyone on the call today. I'll begin on slide four and a review of our safety performance. Through the third quarter of fiscal year 2023, our total case incident rate was 1.4. We saw improved performance in the third quarter, lowering the year-to-date rate. As we have discussed in recent quarters, the year-over-year rate increase is largely due to the increased employees undertaking new tasks, either as new hires or transfers into new roles. We continue to invest in additional training for any employee new to a job or task, with frequent monitoring and follow-up. Although a 1.4 injury rate would rank us as one of the safest metal manufacturing companies, our goal continues to be a zero injury workplace. Now, let's turn to slide five and a review of the third quarter. The third quarter performance was driven by higher productivity at our operating facilities and increasing demand in each of our end-use markets. Most notably, we see the Aerospace and defense end-use market ramp excel. With a strong demand environment, our backlog increased 10% sequentially and 70% year-over-year. This marks the ninth consecutive quarter of backlog growth. And with the strong demand environment across our end-use markets, we continue to realize price gains, which expands our operating margins. In fact, this week, we announced another price increase of 7% to 12% on our transactional business. We continue to improve the productivity of our labor force, across our facilities by safely onboarding new employees across all of our production centers and investing in the training required to accelerate learning. We are starting to realize the benefits of these productivity efforts and the performance of our business segments. For the quarter, the SAO segment delivered operating income of $49 million, exceeding our expectations.…

Thanks Tony. Good morning everyone. I'll start on slide 8 the income statement summary. Net sales in the third quarter were $690.1 million and sales excluding surcharge totaled $491.5 million. Sales excluding surcharge increased 33% from the same period a year ago on 15% higher volume. Sequentially sales were up 17% on 13% higher volume. The higher volumes are driven by our improving productivity and throughput across our operations. I would also note that the sales growth outpaced the volume growth both sequentially and year-over-year, driven by an improving product mix and increased base prices. Gross profit was $93.5 million in the current quarter, compared to $39.5 million in the same quarter of last year and $70 million in the second quarter of fiscal year 2023. Gross profit is up 137% compared to the same quarter last year and up 34% sequentially. The improvement in gross profit is primarily driven by higher sales and improving product mix and increased selling prices partially offset by inflationary cost increases. SG&A expenses were $54.2 million in the third quarter, up about $16 million from the same period a year ago and roughly $7 million higher sequentially. When adjusting for the special item in last year's third quarter, SG&A expenses were up roughly $11 million year-over-year. The increase in SG&A expenses largely reflects higher variable compensation accruals, higher travel costs and the timing of certain other expenses. The SG&A line includes corporate costs, which totaled $19.6 million in the recent third quarter. As we look ahead to the upcoming fourth quarter of fiscal year 2023, we expect corporate cost to be about $21 million. Operating income was $39.3 million in the current quarter. When excluding the impact of special items in the prior year quarter, adjusted operating loss was $1.6 million and in our…

Thanks, Tim. Now, to recap our third quarter of fiscal year 2023. Demand continues to increase, with positive near-term and long-term outlooks in each of our end-use markets. Notably, the aerospace submarkets continue to accelerate their recovery. As a result, our backlog continues to grow and we expect it to remain strong for the foreseeable future. To meet the demand, we are continuing to increase production rates at all of our manufacturing facilities. To do that, we are focused on safely onboarding and training new employees across work centers to improve productivity. By increasing volumes, improving mix, increasing prices and improving productivity, we will continue to see margin expansion. Notably, we expect margins to continue to improve in the SAO segment. We will continue to offset inflationary pressures through our raw material surcharge mechanism and our ability to increase prices on both our contractual and transactional business. As evident, we just announced our latest round of transactional price increases of 7% to 12% this week. It is important to note that inventory levels decreased during the quarter and we expect inventory to further decrease through the remainder of the fiscal year. And most importantly, looking ahead, we are positioned to achieve our goal of delivering operating income at the fiscal year 2019 run rate range in the fourth quarter of fiscal year 2023. Let's turn to the next slide and take a closer look at our full fiscal year 2023 outlook. On our last earnings call, I reviewed the path to achieving the fiscal year 2019 operating income run rate by the fourth quarter of this fiscal year. As you can see in the chart on the right, we have finished the third quarter ahead of our expectations. Our recent third quarter performance was primarily driven by the increased productivity,…

Thank you. We will now begin the question-and-answer session [Operator Instructions] First question will be from Joshua Sullivan of The Benchmark Company. Please go ahead.

Hi, good morning.

Good morning, Josh

Just how do you think of system-wide SAO capacity relative to 2019? You've implemented the Carpenter operating model during COVID . Athens has more qualifications. How much more can you sweat the asset, given you have aerospace demand coupled with strength across other segments now?

I can give you at a high level, Josh. You mentioned a couple of them. One, our productivity is higher or projected to be higher than what it was in FY 2019 and FY 2019 Athens, effectively was at 0% utilization. So now you have them coming on. And we changed the mix of our products as well, where we've cut off the tail, on some of the products and focus more on higher-margin products such as aerospace and defense. So those three combined you should see a significant or meaningful, I should say, increase in our capacity versus FY 2019.

And then just with regards to the new hire component there. Can you give us some color maybe on, what does the learning curve look like recently retention rates? Any particular skill sets that still need some focus?

Well, the big difference this year and I think most companies are experiencing this is that the workforce or the new employees that we bring in, have less manufacturing experience than they did maybe four or five six years ago. So the learning curve is steeper for us. We're making great progress. You could see it in the numbers, for the third quarter here. That was a big step up. So you're seeing that we're being successful in that area. There's still some areas that we need to hire a couple more people, reading and our Dynamet facility. We want to bring on more capacity so there'll be more hiring there as well. But we're on a good place right now, and looking forward to take it to the next level in the fourth quarter as well.

Got it. And then maybe just one -- last one on PEP. What does the aerospace fastener cycle look like? Are you having big build rates ahead of these build rate jumps at the OEMs or customers building inventory to avoid disruptions, little more hand about.

Yes, nobody is building inventory right now, right? But Dynamet from a supply-demand standpoint is just like SAO. It is Dynamet, 60-40 medical aerospace and both of those markets are extremely tight. So think of Dynamet just like you think about SAO from a supply-demand standpoint.

Thank you for the time.

Thank you.

Next question will be from Michael Leshock, KeyBanc Capital Markets. Please go ahead.

Good morning. I wanted to start out asking how to 1Q how are you expecting that to fare versus three months ago and maybe what platforms are driving the growth for you sequentially just given some of the seasonal downtime that you typically experience in that quarter are you seeing stronger mix contributions, or is that more of an ongoing volume ramp despite the seasonality.

Yeah. Thanks for the question. Maybe take a little bit of time on that, because certainly since you asked the question you know how impactful that would be. So as you said, I mean, given – productivity improvements continued strong demand, we don't expect the same level of seasonality in our fiscal fourth quarter -- go into our fiscal first quarter that we've seen in previous years. So we don't see that same type of seasonality. Now as you know over the past 8 to 10 years that dip in the first quarter versus the fourth has probably averaged around 30% and it's been as high as 60%. So that's a significant. So for us to tell you that we're not going to see that is a real meaningful comment. I think in the last earnings call in fact I said we'd see another meaningful increase in the fourth quarter or another step up. Now, we'll give you some more color for the first quarter as we get to the next earnings call but I think it's safe to say that even if the first quarter is sequentially flat to the fourth quarter that would be major positive earnings growth inflection versus the past fiscal year first quarters. Now, you talked about the normal seasonality we usually do our planned maintenance preventive maintenance outage during that time. And as you know we'd love to run the equipment 24/7 right now and the demand is there but we need to continue to be good operators and we needed to perform that essential preventive maintenance. And we're going through those schedules as we speak to try to understand how we can minimize that type of preventive maintenance. But even with all that factored in you've got at least essentially flat first quarter to the fourth. And as I said earlier that would be extremely -- that would be an extremely major positive earnings growth inflection point for us.

And then I wanted to ask on the price increase on the transactional business. What percent of your business does that apply to you today? And I know you wouldn't be repricing your backlog. But if you look at orders that are out maybe over a year does it apply to that business as well?

Yeah it's a good question. At any point in time we're roughly 40% to 50% of our business is under some type of longer-term contract whether that be NLTA or one-year pricing agreements. And presently, when we're a 52- to 60-week lead times these price increases that we just noted would be on that business. Now remember, we've communicated several price increases over the last year that is hitting now. But this specific one would be on that transactional business then that's coming to us approximately 52 weeks from now one year.

Got it. That makes sense. And then on your aerospace business do you have visibility into the breakout? What is MRO versus OEM business that you're supplying into?

Yeah. It's -- we're on all platforms. And I get that question a lot just like I get is it wide body or single aisle, or is it Boeing or Airbus? I mean, at this point right now it doesn't matter. We're sold out. We can't make enough and I don't see that changing any time in the near future.

Great. And then -- and lastly for me did you provide Jet Engine sales for the quarter either sequentially or year-over-year?

I can do that for you. I didn't do that in my prepared remarks. Aerospace engine sales were up about 50% year-over-year. They were roughly flat sequentially. But really that sequential is primarily a matter of mix of product being run as our total aerospace sales were up 59% year-over-year and 21% sequentially. And I can also note just as a point of reference our aerospace engine backlog was up 24% sequentially and the Aero engine bookings in the quarter were at record levels. So full speed ahead on aerospace engines.

Great. Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question will be from Gautam Khanna, of Cowen. Please go ahead.

Hi. Good morning.

Hello, Gautam.

Tony, I was wondering if you could talk a little bit about the December quarter just based on your backlog visibility. Is that -- are you guys going to maybe work through holidays or what have you so that we actually do better than normal seasonality in that quarter as well?

Yes. So you're talking about our second quarter fiscal right?

Yes, correct.

Yes. Well, yes. I think we're in a period now -- not think, I know we're in a period now but we're trying to minimize our downtime we're getting -- trying to get smarter in the way we do preventive maintenance. And because throughout FY 2024 the next year, we're going to be able to sell everything we make. And that's going to be extended through the next three or four years. So, yes, Gautam, as I said you look at the first quarter at least flat, and you'll continue to see improvement over the next quarters of FY 2024. It's a little early for me to tell you exactly what those would be, but I don't anticipate any significant sequential pullback as we work through FY 2024.

Okay. And you commented on -- some of the non-spot business having better pricing. When do we start to see that flow through your results? Is it already flowing through, or is it going to pick up as we move through the second half of this calendar year on your long-term agreements?

Long-term agreements. Yes. So we've seen that today. That price is coming through. We still have a couple -- there's still a couple of major contracts that will expire this calendar year. So there'll be more negotiation there. I wish 100% of that price would hit the bottom line. But as you know there has been some input cost inflation as well. Now our pricing is offsetting that, but we don't get 100% of the pricing to hit the bottom line. So I guess a high level to your question, we've seen that over the last several quarters and we'll continue to see some price improvement over the next year.

And just one last one. On the backlog -- when we look back historically Carpenter's backlog represents I don't know 30% to 40% of one-year forward sales. Today it's a very elevated level. And I'm just curious is it -- do the customers want the backlog as quickly as you can ship it? Is there -- like what is the constraint on maybe applying that similar ratio call it 40% of forward sales in backlog today. Is it just production constraints? Is it or is it the customers want it later on? I'm just curious like what prevents you guys from doing even better?

Yes. For right now, it's just ramping up the operations. We're not at 100% yet and that's primarily driven by onboarding new employees just like as you will know other companies in this industry have stated the same thing we have. So that's the main gating factor right now. I could sell significantly more material right now if my production rates were higher. Obviously, they were higher in the third quarter. They're going to have to take another step up in the fourth quarter and into FY 2024 and that's the plans. But there's really nobody placing orders now that if I went to them and said, I can increase deliveries to you by 25%, 30% that they would say, no, they would take it.

Okay. Thanks a lot.

And that wouldn't be to build inventory, right? That would be -- they would take that material right now.

Understood. Thank you.

You’re welcome.

This concludes our question-and-answer session. I'll now turn the call back over to Mr. John Huyette for closing remarks.

Thank you operator, and thank you everyone for joining us today for our fiscal 2023 third quarter conference call. Have a great rest of your day.

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