Carpenter Technology Corporation

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 telephone keypad. To withdraw your question, please press star, then two. Please note that this event has been recorded. I would now like to turn the conference over to Brett 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 and in 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 movements. Speakers on the call today are Tony Tain, President and Chief Executive Officer, and Tim Lane, 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 Technologies' most recent SEC filings, including the company's report on Form 10-K for the year ended June 30, 2020, Form 10Q 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 four and 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 five and 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 continue to expand our relationships across our customer base and uncover additional areas of value creation, As evidence, we completed several contract extensions, primarily in our medical, transportation, and aerospace and defense in-use markets. In the aerospace market, customers fully understand that capacity was limited prior to the pandemic, and supply of aerospace materials will be constrained again when build rates return to normalized levels. As you know, Corporate Technology is the only company in our space that has invested in capacity. namely the Athens facility. Qualification efforts have continued through the pandemic as we received a meaningful provisional approval during the quarter. Lastly, the investment made in our hot strip mill on our Reading campus is currently in its final commissioning stages. This advanced mill is a significant addition to our soft magnetic solutions and capabilities portfolio and positions us to benefit from the growing trend of electrification. Now let's move to slide six and the end-use market update. Our customers and markets have been heavily impacted by COVID-19, particularly aerospace and defense, our largest market. We have been successful in mitigating a portion of the near-term impacts of the aerospace downturn by capitalizing on growing demand for our solutions in transportation and industrial and consumer end-use markets, namely our semi-con business. Recently, All of our end-use markets have experienced positive inflections and have moved past their pandemic decline trajectories. All of our end-use markets are in demand recovery, albeit at different rates. We believe the worst is behind us, and we expect to see improving conditions over the coming quarters. Let's get into some more detail, starting with the aerospace and defense end-use market, where sales were down both year over year and sequentially. In the third quarter, customer inventories continued to decrease and we saw some initial replenishment activity. As a reminder, in our recent second quarter, we talked about a variety of one-time customer contract related items, which represented positives. When you remove the impact of those items, aerospace results would be relatively flat sequentially. While visibility remains limited, overall sentiment points to incremental improvement through the balance of calendar year 2021 and accelerated activity in calendar year 2022 and beyond. In addition, future industry capacity and lead time continues to be a focus during conversations with customers, as most recall the situation the supply chain was in prior to COVID-19, where lead times were significantly extended. Activity in a defense submarket remains solid, and we continue to see increased demand on select programs. In the medical in-use market, sales were up 7% sequentially. Elective procedure volumes increased compared to the second quarter as patient sentiment and hospital capacity improved. Recovery of elective surgery volume is expected to continue into the second half of calendar year 2021 as vaccination levels rise to support increased confidence. Based on current conditions, we expect activity levels in the medical in-use market to show further improvement in the fourth quarter as our customers look to support an increase in elective surgeries. As many of you recall, the medical-in-use market was one of our fastest-growing markets prior to the pandemic. Today, we remain well-positioned to continue supporting the medical-in-use market, given our expanded OEM relationships, leading advanced materials portfolio, and ability to develop new materials solutions that address complex and unmet market needs. In the transportation and use market, sales were up both sequentially and year-over-year. On a sequential basis, sales increased across all of our sub-markets. Demand in the light vehicle market remained solid, driven by North America and China, while the heavy-duty truck market has largely recovered and is expected to grow through calendar year 2022. Overall, we are winning shares in both the light vehicle and heavy-duty truck sub-markets, due to the value of our high-temp, high-resistance turbocharger and valve exhaust solutions. Now moving to the energy and use market. Conditions in the oil and gas sub-market remain challenged, and activity levels remain low in the U.S., while international markets have shown some improvement. Keep in mind that prior year third quarter results included our Omega West business that was divested during the first quarter of this fiscal year. In the power generation sub-market, we continue to work with customers as the current maintenance upgrade cycle continues. Lastly, for the industrial and consumer end-use market, sales were down year over year and sequentially. The slight sequential decline was a function of order flow between the last two quarters as we continue to experience demand pickup consistent with the general manufacturing recovery. Now I will turn it over to Tim for the financial review.