Carpenter Technology Corporation

Hello, and welcome to the Carpenter Technologies Corporation first quarter fiscal 2022 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for 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, Today's event is being recorded. I now would like to turn the conference over to Brad Edwards, Investor Relations. Mr. Edwards, please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference call for the fiscal 2022 first quarter ended September 30, 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 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, 2021, 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.

Thanks, Brad, and good morning to everyone. Let's begin on slide four and a review of our safety performance. Through the first quarter, our total case incident rate of 1.1 is tracking above our fiscal year 2021 performance of 0.6, which was our best fiscal year safety performance on record. Our ultimate goal continues to be a zero injury workplace. To that end, our safety teams are placing emphasis on key initiatives, including hand safety, leadership development, and employee engagement. You can read more about our safety programs in our 2021 sustainability report, which we released earlier this month. In addition to highlighting our commitment to health and safety of our employees, the report details our environmental stewardship and social programs to engage employees and local communities. I hope you will take some time to read the report and learn more about our environmental, social, and governance programs. Now let's turn to slide five and a review of the first quarter. We continue to see demand patterns improve across our customer base, though the pace varies by end-use market. Notably, we saw demand improve via backlog growth in our key aerospace and defense and medical end-use markets, which together accounted for approximately 55% of our revenue this quarter. A key indicator of improving market conditions is backlog growth, where we generated increases of 25% sequentially and 49% year-over-year. While the PEP segment finished ahead of our expectations, performance in the SAO segment was impacted by operational delays, most notably workforce shortages driven by COVID-19 isolation at certain key work centers due to the Delta variant and hiring difficulties in the current labor environment. Looking ahead, we don't expect any long-term impact from these challenges and expect SAO performance will accelerate as market conditions continue to improve. Importantly, our liquidity remains healthy, as we finish the quarter with over $500 million in total liquidity, including $213 million in cash. We also continue to provide direct returns to our shareholders through our quarterly dividend program. Collaboration with our customers has been critical during the downturn, and we remain focused on working with them to align our production with their evolving material requirements. It is also important to note that customer engagement on Athens qualifications remains high as we continue to broaden our capabilities. As we shared on our last earnings call, we recently commissioned a new hot strip mill at our Reading campus. The mill significantly strengthens our soft magnetic capability and production capacity at a time when electrification is increasingly disrupting our major in-use markets. The productivity, quality, and consistency of our new hot strip mill is a competitive advantage for us, which has already resulted in increased demand from customers. Now let's move to slide six in the end-use market update. Our aerospace and defense end-use market sales were down 18% sequentially and 9% year over year. This decrease was not driven by weaker demand. The sequential decrease was driven primarily by customer arrangements which required them to take material before the close of our fiscal year as stocking agreements expired. It is noted the majority of those agreements were in the aerospace and defense in-use market. If you remember, I mentioned this point on our fourth quarter call. Year-over-year sales results were impacted by higher prior-year shipments as we were then continuing to process and ship orders placed prior to the pandemic. A year ago, demand backlog was falling as customers reacted to bill rate reduction. Today, it is growing. Our aerospace and defense backlog is up 25% sequentially and 17% year over year as customers anticipate ongoing improvement. Industry consensus is still anticipating a dramatically improved calendar year 2022 compared to 2021. And we are already seeing some customers preparing for increased production plans. For example, the faster and distribution sub markets are beginning to lean in to replenish the supply chain. In calendar year 2022, Replenishment planning continues for our engine customers. In the medical in-use market, sales were down 3% sequentially and up 24% compared to last year. Results reflect demand that has improved since this time last year while working through COVID-19 headwinds. While there are some geographical concerns about the ongoing impact of COVID-19, the overall outlook is positive as medical procedures are expected to increase next quarter and into calendar year 2022 as the market approaches pre-pandemic levels. As a result, we expect booking rates, backlog, and shipment to show further improvement in the coming quarters. In the transportation end-use market, sales were down 14% sequentially and up 28% compared to last year. The results reflect the supply chain challenges and chip shortages that are impacting the end-use markets. As widely reported, uncertainty in the supply chain for parts is driving reductions in production at most manufacturers. However, we see solid demand over the mid and long term. Fundamentals in the light-duty sub-market remain strong as consumers continue to spend, even as inventories are low. And we still see market share opportunities in both the light vehicle and heavy-duty truck sub-market, while continuing to further penetrate key market adjacencies, including off-road, marine, and aftermarket. In the energy and use market, sales were up 21% sequentially and down 24% compared to last year. In the oil and gas submarket, we are seeing signs of recovery in North America. This is evident as the North America rig count is up 100% compared to last year. The international markets have largely stabilized and the outlook is becoming more positive. And we saw sequential growth in the power generation submarket as we continue to work closely with customers on a maintenance upgrade cycle. In the industrial and consumer end-use market, sales were down 2% on a sequential basis and up 5% on a year-over-year basis. We continue to see historically high demand for our semi-con solutions and expect demand to remain strong throughout the fiscal year. In addition, we continue to see healthy demand in the electronics sub-market. Now we'll turn it over to Tim for the financial summary.