Carpenter Technology Corporation

Good morning and welcome to the Carpenter Technology Corporation first quarter fiscal 2021 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. Please note, this event is being recorded. I would now like to turn the conference over to Brad Edwards with Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology earnings conference call for the fiscal 2021 first quarter ended September 30th, 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 Tain, President and Chief Executive Officer, and Tim Wayne, 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 those forward-looking statements can be found in Carpenter Technologies' most recent FCC filings, including the company's report on Form 10-K for the year ended June 30, 2020, 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. As we always do, let's start with a review of our safety performance on slide number four. Our total case incident rate, or TCIR, was 0.4 in the first quarter. This marked our lowest quarterly PCIR rate ever recorded. In addition, we achieved our first official injury-free month in the company's 131-year history during the month of September. A zero-injury workplace is possible, and we look forward to achieving our next milestone on our way to zero. Before moving on, I want to take a minute to recognize and thank all of our employees for their ongoing hard work and commitment during these unprecedented times. All of our facilities remain open and operating safely, which is a tremendous accomplishment. Our team has done a remarkable job of building on our core safety value and protecting each other and the communities we operate in, while at the same time staying focused on serving our customers. Now let's turn to slide five and review the first quarter. Our first quarter operating performance was in line with our previous guidance as demand headwinds across our in-use markets continue to be the driving factor. Given the current environment, the demand weakness is difficult to offset. However, as I stated before, our primary focus is staying cash flow positive. We have taken significant actions which enabled us to continue our strong cash generation performance in Q1. In the first quarter, we generated 63 million of free cash flow and ended the first quarter with over 600 million in total liquidity, including 219 million of cash. In addition, we completed a bond offering that extended our maturities profile and provides us additional financial flexibility as we navigate the current environment. We have ample liquidity to continue managing through the COVID-19 pandemic. In the first quarter, we completed the divestiture of our Omega West oil and gas business and took additional restructuring actions in our additive business unit to streamline operations and reduce costs. At the same time, we are pushing forward with our long-term growth initiatives and balancing our actions to ensure that we emerge in an even stronger market position with our customers. This includes our Athens facility, which remains a key long-term growth driver and differentiator for carpenter technology. We continue to collaborate with customers and make progress on achieving key additional qualifications for the facility. In addition, we have further strengthened our capabilities in critical emerging technologies, most recently through the launch of our carpenter electrification brand. Electrification is a rapidly growing area of focus across our in-use market. and we believe our material solutions can help customers drive enhanced performance for their products. Our new hot strip mill installation is nearing completion, which will enable us to further excel in our capabilities in this emerging area. Now let's move to slide number six in the end-use market update. Let me spend a little more time than usual on this slide as I anticipate most of the questions will be focused on market dynamics especially in the aerospace and defense in-use market. Starting with the aerospace and defense in-use market, and specifically the aerospace sub-market, the supply chain continued to adjust to revised forward build rates and a lowered demand environment. Most supply chains continued to be over inventory, and OEMs continued the process of adjusting inventory levels across the supply chain during the quarter. Individual customers reported ongoing destocking at various rates. Many customers continued to report refusals of obligations throughout the supply chain, and several customers, especially in Europe, had longer-than-normal extended shutdowns. We continued to work closely with all of our customers and finalized commercial discussions with many regarding forward sales arrangements. Though at depressed levels, we continued to secure and support areas of real demand. Cancellation and deferral requests, while not altogether behind us, did decline in the quarter. Direct bookings were relatively flat, though stock shipment activity declined as customers had lowered consumption requirements versus stock contracts. In our fiscal second quarter, we expect customers to continue to work through these stocking requirements. While we are seeing an uptick of demand activity in some limited areas, most customers continue to report significant amounts of inventory. At the extreme, some customers report over 12 months of inventory at the current shipment levels for certain parts. On the other end, some customers are beginning to discuss restocking, though at very limited levels. During our second quarter, we are continuing to support near-term customer needs and are also in negotiation with key customers developing mutually beneficial outcomes in both the mid and long term. As credit has become an increasing concern with some of our customer base, we are also closely monitoring and adjusting to customer financial situations as necessary. Concerning our defense submarket, we continue to see steady activity standing in contrast to commercial aerospace. Many of our customers involved in commercial aerospace are also involved in defense, and some customer locations report defense work as the main activity that is currently sustaining their operations. Some of the defense programs we support are seeing increased activity, and we are working to support these accordingly. We continue to be involved in new platform design and prototyping and remain excited about our long-term growth. Let's turn to our medical in-use market. From a macro perspective, as it relates to trends in elective procedures, hospitals reported a gradual recovery of procedures beginning in fiscal Q1, with recovery expected to continue. Medical device companies acknowledged this gradual return of elective surgeries during fiscal Q1, but are continuing to manage inventory levels downwards and only reordering necessary materials to replace critical needs. We expect the stocking efforts to level off within our fiscal Q2 at both OEMs and distributors that support the medical device market. In the transportation end use market, sales increased 42% sequentially, but we're down on a year over year basis. Global light duty vehicle production rebounded across most global markets. In North America, we believe the light vehicle market is currently on track to recover. and come close to reaching pre-pandemic levels in calendar year 2021. Overall, confidence is returning to the supply chain, and we believe we can benefit given the unique value our high-temperature solutions deliver. In the heavy-duty truck sub-market, we began to see signs of recovery off historical low levels due in part to cyclical timing, but also increased freight demand. Now moving to the energy and use market. where conditions in North America remain challenged, and drilling activity is at severely depressed levels. International markets have held up better due to longer project cycle lead times, but current activity levels are low. In the power generation sub-market within energy, we are seeing some signs of increased activity related to a delayed maintenance cycle, and a potential uptick remains in the early stages. Lastly, for the industrial and consumer-induced market, Sales were up both year over year and sequentially. Industrial sales were driven by continued strong demand for our semiconductor and control applications. Now I'll turn it over to Tim for the financial review.