Carpenter Technology Corporation

Good day and welcome to the Carpenter Technology Corporation first quarter 2020 fiscal year financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would like to now 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 first quarter of ended September 30th, 2019. 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 Tain, President and Chief Executive Officer, and Tim Lane, 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 Technologies' most recent SEC filings, including the company's report on Form 10-K for the year ended June 30, 2019, 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 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. Let's begin on slide four in a review of our safety performance. Our total case incident rate, or TCIR, was 1.4 in the first quarter of fiscal year 2020, which is slightly above the performance of fiscal year 2019. Over the last four years, we have made significant strides to improve the safety performance across our facilities. However, we have hit a point where our recordable rate has remained flat without improvement, and we are disappointed with the results. Our focus remains on accelerating proactive engagement with our employees and continued investment in the development of our leadership team. We are encouraged that as a result of our effort to redefine the safety culture over the last several years, our employees feel empowered to stop any process or equipment or action that is unsafe. Our employees are the face of our safety program. They are the most knowledgeable about the workplace and how to make it better. In addition, we are putting all of our supervisors through a refresher course, focusing on the principles of human performance. We are investing heavily in our safety programs, HandSafe, ergonomics, human performance, and the STOP program, to name a few. That will lead to sustainable and lasting improvement across our business. Through employee engagement, system improvement, and leadership commitment, we will continue toward our goal of a zero-injury workplace. Now let's turn to slide five. and a review of our first quarter performance. In our first quarter, once again, we delivered impressive operating performance. Let me highlight a couple of noteworthy points. First, we delivered our 11th consecutive quarter of year-over-year sales growth and earnings growth. Second, we generated record first quarter operating income at SAO. And third, SAO adjusted operating margin was 20.6% during the first quarter. This marked our second consecutive quarter of 20-plus percent adjusted operating margin at SAO. In addition, commercial execution remained strong as we continued to drive a richer product mix and delivered our 11th consecutive quarter of year-over-year backlog growth, up 26%. This backlog growth includes strong gains in our key in-use markets. Aerospace and defense backlog was up 40 percent compared to last year, and medical backlog was up 15 percent over last year. In the aerospace and defense in-use market, sales were up 19 percent compared to last year, with gains across almost all of our sub-markets as we continue to benefit from our broad industry participation and sub-market diversity. We are also uniquely positioned with our Athens facility to provide incremental capacity during this aerospace peak cycle. Overall, customer engagement levels at Athens remain high, and we received an additional VAP qualification during the quarter. Customers continue to work aggressively to secure capacity with us via long-term agreements. In fact, we recently finalized two long-term agreements with major OEMs where we are able to gain incremental market share with favorable pricing. Another important and rapidly growing in-use market for us is medical, where sales increased 11% compared to last year, and forward demand for our solutions remained strong. Sales into the medical market have consistently outpaced the broader industry, which is a clear indication of the value of our solutions and our ability to consistently gain market share. Given our elevated supply chain position in the medical market, we are expanding our production capabilities and capacity at our Dynamex facilities to capitalize on the attractive high margin growth opportunities we see in the years ahead. Finally, we continue to support our consistent quarter-over-quarter earnings growth and strong sales execution with strategic investments in the long-term future of our industry. A company of the future must explore next-generation sales and earnings growth drivers to remain successful. In recent years, an area where we have focused is additive manufacturing, where we have built a leading end-to-end additive manufacturing platform. We are currently generating operating losses in our carpenter additive business, which is part of the PEP segment. It's important to note that those losses are the equivalent of research and development costs as we drive to create a business that will generate accelerated long-term growth for carpenter technology and enhanced value for our shareholders. I'll talk more about our capabilities and key emerging technologies, including additive manufacturing and soft magnetics, later in my comments. Now let's move to slide six and the end-use market updates. Looking first at aerospace and defense, sales were up 19 percent over last year. On a sequential basis, sales were down, but the overall strength in the market muted the typical seasonal decline compared to prior years. Demand patterns across our submarkets remain strong, and our leadership in multiple attractive application areas is driving growth. Demand in the engine submarket remains at high levels, and we saw strong demand in the fastener submarket during the quarter. Certainly, the 737 MAX situation is a significant issue for the industry. We continue to monitor the situation and are in regular contact with our customers. Current reports suggest it will be resolved in the near future. While we are seeing some adjustments in order patterns and inventory planning, primarily in distribution, we are also still seeing requests for expedited delivery and increased orders for materials used for spares. Accordingly, we have not reduced production rates and have no current plans to reduce production rates, as these are longer lead time products, we have significant backlog, and our solutions are utilized across multiple aircraft applications and platforms. Overall, we continue to see strong demand for aerospace-grade materials, and the medium to long-term industry demand is expected to remain robust. Current backlog is close to 13,000 aircraft. which represents seven to eight years of production. Moving on to the medical in-use market, where sales were up 11% compared to last year, reflecting continued market share growth. The sequential decline in sales was largely driven by normal seasonality. Looking ahead, the outlook for the medical market points to solid demand patterns. Our key sub-markets orthopedics, cardiology, and dental all expect consistent growth in the coming years. We continue to generate year-over-year sales growth well above market growth rates, which demonstrates our ability to gain share and develop strategic inroads with major industry OEMs. In addition, collaboration on additive manufacturing with customers is accelerating, and AM products continue to penetrate the medical market given their potential to improve patient outcomes. In just a few years, we have transitioned from being primarily a supplier to distributors to now being a strategic OEM partner whose portfolio of material solutions is increasingly recognized in the development of new medical devices and applications. In the transportation end-use market, sales were up 5% compared to last year and up 2% sequentially. The increases were driven primarily by a richer product mix as we look to emphasize solutions that have been specifically engineered for high-temp and high-wear applications. While international markets continue to struggle with macro-related headwinds and new emission regulations, the demand in North America remains relatively stable. Terrace has impacted the automotive supply chain. but we are working hard to offset those challenges by expanding market growth in countries not impacted by the tariffs. Now moving to the energy end-use market and our oil and gas and power generation submarkets. Total energy sales were down 12% compared to last year. Overall, the oil and gas submarket is facing notable headwinds in North America as operators have steadily moved from growing production to managing for cash flows. The North America rig count declined 3 percent on a sequential basis following a 10 percent sequential decline last quarter. On a year-over-year basis, the rig count is down 16 percent. The market slowdown has been accelerated due to operators reaching budget exhaustion earlier than normal in North America. The decline in drilling activity and contraction in the number of running rigs has created increasing pricing pressure as operators move to capture market share. The declining market activity and growing pricing pressures continue to negatively impact the overall tool rental and service market, which in turn has affected Omega West's operating performance. In the industrial and consumer end-use market, revenues were down 19 percent both year-over-year and sequentially. Sales in the industrial market were negatively impacted by reduced global manufacturing and a related decline in demand for select applications. Our performance was also impacted by our ongoing portfolio prioritization as we continue shifting our overall production towards higher value applications. Lastly, sales into the consumer market increased year over year as we experienced solid demand in consumer electronics. In fact, we enjoyed one of the strongest quarters in terms of bookings in the last four years. We expect to see continued healthy demand for our high-end electronic products given the increasing need for our critical applications. Now I'll turn it over to Tim for the financial review.