Carpenter Technology Corporation

Good morning, and welcome to the Carpenter Technology Fiscal 2022 Third Quarter Earnings 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 telephone keypad. 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 of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference call for the fiscal 2022 third quarter ended March 31, 2022. 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, Form 10Q for the quarters ended September 30th, 2021 and December 31st, 2021, and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when the 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 and a review of our safety performance. Through the third quarter, our total case incident rate was 1.0, holding at the same level from the prior quarter. It remains above our fiscal year 2021 performance of 0.6, which was our best fiscal year safety performance on record. Safety is our number one core value, and we continue to push towards our ultimate goal to be a zero-injury workplace. Our path to zero includes benchmark safety systems, leadership, and employee engagement. We continue to invest in training to drive high levels of employee empowerment, further enabling our workforce as the first line of defense to injury prevention. One example of our employee engagement and safety systems in action has led to over 200 ladders being removed from our facilities, reducing a source of injury risk from our operations. Now let's turn to slide five and a review of the third quarter. We see strong demand in each of our in-use markets as we emerge from the pandemic. Notably, the aerospace ramp is accelerating. Although the aerospace in-use market, measured by global passenger traffic, is not yet fully recovered, our shipments continue to ramp, and our order backlogs have now exceeded pre-COVID levels. The medical in-use market conditions continue to improve, as the industry recovers from the impact of the Omicron variant. And in-use markets like transportation and industrial and consumer have returned to pre-COVID levels. I would like to share three indicators of the demand environment. First, our backlog increased 34% sequentially and 164% year-over-year, continuing the growth we saw in the second quarter. Second, the backlog growth is driven by the bookings rate. which increased 21% sequentially and 119% year-over-year. This was a record quarter in terms of bookings for the company. And third, we continued to realize price gains on both our contractual and transactional business. We worked with our customers throughout the pandemic, preparing for the recovery across our market. You will recall that during this time, we continued to negotiate price increases. And in this last quarter, we increased base prices on our transactional business by at least 12% to 15%. This marks the third price increase in the last 10 months. I will cover the demand environment for each of our end-use markets in more detail later in this call. The SAO segment finished ahead of our expectations, driven by the strong demand environment and our ability to navigate short-term operational challenges. As we reported in March, we have completed the repair of the Reading Press on time, and it is fully operational. The Omicron variant has subsided after a challenging January with significant COVID-19 isolations at key work centers. And we have addressed the majority of our hiring challenges we had in the first half of fiscal year 2022. PEP's performance aligned with expectations, building on a strong second quarter. Growth in operating income was largely driven by the ongoing recovery in the medical end-use market. Finally, our liquidity remains healthy, as we finished the quarter with $388 million in total liquidity. And in March, we completed the refinancing of senior notes, extending our debt maturity profile. Now let's move to slide six in the end-use market update. As you can see on the slide, each of our end-use markets was up sequentially and year-over-year, reflecting the recovering demand environment. Our aerospace and defense in-use market sales were up 14% sequentially and 11% year-over-year. Demand for our materials is increasing substantially as customers prepare for strong future activity. Although our shipments in the aerospace and defense in-use market were approximately 50% of pre-pandemic levels, when comparing the 12 months ending March 2022 to the 12-month ending March 2020, we see demand continue to accelerate across all the aerospace submarkets as the supply chain ramps to meet steadily increasing travel demand. And despite challenges in the overall supply chain, OEMs maintain positive outlooks on further build rate increases. As a result, lead times across the industry have extended, and our backlog continues to rise as customers plan for ongoing improvements. Specifically, our aerospace and defense in-use market backlog is up 42% sequentially and 157% year-over-year, which is 17% higher than our pre-pandemic peak. In the medical in-use market, sales were up 14% sequentially and up 48% compared to last year. The results reflect ongoing recovery in elective surgeries after the Omicron variant. with customers focused on increasing stock levels to meet growing demand. The overall outlook continues to be positive, as medical procedures are expected to rise to pre-pandemic levels in the second half of 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 51% sequentially and 227% year over year. We also see an opportunity to increase share in our titanium business as customers look to de-risk their supply of titanium from Russia. In the transportation end-use market, sales were up 14% sequentially and up 11% compared to last year. Light duty demand remains very high with consumers continuing to buy even if inventories are at historic lows. The industry continues to deal with the supply chain challenges and chip shortages that are impacting the end-use market's activity levels. With strong demand and low inventories, we expect continued improvement. And we continue to see growth opportunities in the heavy-duty truck, off-road, watercraft, and aftermarket sub-markets. In the energy end-use market, sales were up 44% sequentially and up 28% compared to last year. In the oil and gas sub-market, a demand and supply imbalance is driving growth in investment. As the world recovers from the pandemic requiring more energy, global supply has not kept up. The supply shortage has been further challenged by recent geopolitical disruptions. As a result, global investment and capital expenditures are expected to increase. In the industrial and consumer end-use market, sales were up 23% on a sequential basis and up 47% on a year-over-year basis. We continue to see historically high demand for our semiconductor solutions and expect demand to remain strong throughout the calendar year. In addition, we continue to see healthy demand in the electronics submarket, evidenced by increased sales and growing backlog. Further, we have strong engagement from our customers in the consumer electronics submarket and our recently commissioned hot strip mill in Redding. I will review the long-term outlook for each of these markets later in the presentation. Now we'll turn it over to Tim for the financial summary.