Carpenter Technology Corporation

Good day and welcome to the Carpenter Technology Corporation second quarter fiscal year 2022 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. If you'd like to ask a question, you may press star, then one on a touch-tone phone to join the queue. To withdraw your question, please press star, then two.

please note this event is being recorded i would now like to turn the conference over to 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 2022 second quarter ended december 31st 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 movement. 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, Form 10-Q for the quarter ended September 30, 2021, 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 operating income and sales excluding surcharge. I will now turn the call over to Tony.

Thank you, Brad. Good morning to everyone. Let's begin on slide four and a review of our safety performance. In the second quarter, our total case incident rate was 1.0, which is a slight improvement from the first quarter. It remains above our fiscal year 2021 performance of 0.6. which was our best fiscal year safety performance on record. Safety continues to be our number one core value, and we continue to push towards an ultimate goal to be a zero injury workplace. Our safety teams continue to emphasize key initiatives at work centers, including hand safety, leadership development, and employee engagement. And we are expanding our safety engagement outside of work, emphasizing safety always, and encouraging employee families to get involved. You can read more about our safety programs in our 2021 sustainability report, which we released in October. In addition to highlighting our commitment to the health and safety of our employees, the report details our environmental stewardship and social programs to engage employees and local communities. Now let's turn to slide five and a review of the second quarter. We continue to see demand improve across each of our end-use markets. so the pace of recovery varies by end-use market. In particular, we see signs of a broad-based recovery taking hold across the supply chain in aerospace markets, and the medical end-use market continues to demonstrate strong growth. One key indicator of demand is backlog growth, which is accelerating. Our backlog increased 35% sequentially and 106% year-over-year, surpassing last quarter's growth. The backlog growth is being driven by the bookings rate, which increased 31% sequentially and 55% year-over-year. We have continued to work with our customers, preparing for the recovery across that market. As a result, we completed long-term contract renewals with key aerospace and defense customers in the second quarter, locking in share and pricing gains. We also received three additional Athens qualifications in the second quarter. The PEP segment finished ahead of our expectations, largely driven by higher-than-anticipated demand in the medical in-use market. However, performance in the SAO segment was impacted by operational challenges, including labor shortages due to both COVID-19 isolation and hiring challenges in the current labor environment. Additionally, as previously announced, we had an unplanned outage at the Reading 4,500-ton press. As you may know, This press is an important piece of equipment, serving customers across multiple in-use markets. Repair efforts are underway and on track. We currently expect to be fully operational during the third quarter of fiscal year 2022. As a part of the repair process, we are able to pull forward planned maintenance, reducing any additional downtime through the remainder of the fiscal year. 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. Finally, our liquidity remains healthy as we finish the quarter with $392 million in total liquidity. We also continue to provide direct returns to our shareholders through our quarterly dividend program. Now let's move to slide six in the in-use market update. Our aerospace and defense in-use market sales were down 1% sequentially and 10% year-over-year. As a reminder, in the second quarter of fiscal year 2021, we had a variety of one-time customer contract-related items that boosted our quarterly performance and contributed to the year-on-year decline. Sequentially, demand improvements were offset by operational challenges, including the unplanned outage of the 4,500-ton press. Looking ahead, the market continues to recover despite any near-term supply challenges related to the Omicron variant. Industry consensus is still anticipating an improved calendar year 2022, and we see evidence of this with increased bookings and extended lead times across applications. And as a result, our backlog continues to rise as customers plan for ongoing improvement. Specifically, our aerospace and defense in-use market backlog is up 35% sequentially and 72% year over year. In the medical in-use market, sales were up 9% sequentially and up 39% compared to last year. The results reflect ongoing improvement in the medical device sub-market. While there are some concerns about the near-term impact of the Omicron variant on hospital staffing levels in certain geographical locations, the overall outlook is positive, as medical procedures are expected to rise to pre-pandemic levels in calendar year 2022. We are seeing replenishment in the supply chain to support the expected growth, as our medical in-use market backlog is up 39% sequentially and 163% year-over-year. We expect this trend to continue, with booking rates and backlogs showing further improvement in the coming quarters. Medical's performance is a key driver of the improvements in Dynamet's titanium business. The strong recovery helped the PEP segment beat expectations in the second quarter. In the transportation end-use market, sales were down 9% sequentially and up 10% compared to last year. The sequential results reflect the supply chain challenges and chip shortages that are impacting the end-use market activity levels. However, the global light duty vehicle outlook shows renewed optimism that the semiconductor-related shortages will ease. With consumers continuing to spend, even as inventories are at historic lows, we expect strong demand to continue into calendar year 2022. And we see strong demand and market share growth opportunities in the heavy-duty truck, off-road, watercraft, and aftermarket submarkets. In the energy and use market, sales were down 1% sequentially and down 10% to last year. Notably, the year-over-year comparison is impacted by the cyclical power generation business, which is down 44% after a strong Q2 in fiscal year 2021. The oil and gas business, on the other hand, is up 25% year-over-year. The outlook for the oil and gas sub-market is solid. The North America oil and gas sub-market continues its steady recovery, with the rig count up 100% compared to last year and capital expenditures growing. International markets are showing signs of their own recovery, with a 100% increase in new projects and a 23% increase in rigs compared to last year. In the industrial and consumer end-use market, sales were flat on a sequential basis and up 18% on a year-over-year basis. We continue to see historically high demand for a semi-com solution and expect demand to remain strong throughout the fiscal year. In addition, we continue to see healthy demand in the electronics sub-market, evidenced by growing backlog. Further, we have strong engagement from our customers in the electronic cell market on our recently commissioned Hodgkin Mill inwriting. Now, we'll turn it over to Tim for the financial summary.