Carpenter Technology Corporation

Good morning and welcome to the Carpenter Technology Corporation second quarter 2023 conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists 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 of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the fiscal 2023 second quarter and to December 31st, 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 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, 2022, and Form 10-Q for the quarter ended September 30th, 2022, and the exhibits attached to those files. Please also note that in the following discussion, unless otherwise noted, when a management discuss sales or revenue, that reference excludes surcharge. When referring to operating margin, that is based on adjusted operating income excluding special items and sales excluding surcharge. I will now turn the call over to Tony.

Thanks, 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 second quarter of fiscal year 2023, our total case incident rate was 1.5. We did see improved performance in the second quarter, lowering the year-to-date rate. The year-over-year rate increase is largely due to the increase of employees undertaking new tasks, either as new hires or transfers into new roles. To address this, we have enhanced and expanded training procedures for any employee new to a job or task with frequent monitoring and follow-up. Our ultimate goal continues to be a zero-injury workplace. We believe it is possible, and we will continue to work towards that goal. Now let's turn to slide five and a review of the second quarter. The second quarter performance was driven by the strong demand environment in each of our in-use markets and the increase in productivity across our operating facilities. We continue to see solid demand conditions in each of our in-use markets with our backlog up 9% sequentially and 107% year-over-year. This marks the eighth consecutive quarter of backlog growth. Most notably, we see the aerospace and defense in-use market ramp accelerating. As a result of the strong demand environment across our in-use markets, we continue to realize price gains. We announced another price increase on our transactional business in November and continue to raise prices through our regular contract negotiations. In order to satisfy demand, we are focused on accelerating the productivity of our labor force across our facilities, most notably by safely onboarding new employees across all our production centers. And we are working closely with our customers to deliver more material sooner. For the quarter, the SAO segment delivered operating income of $30.3 million, in line with our expectations. The improved performance was driven by the growing market demand in the aerospace and defense and medical in-use markets, and continued operational improvements. The PEP segment turned in another strong performance, with $9.3 million in operating income for the recent quarter. In particular, we saw strong demand for titanium products for the medical end-use market. Finally, our liquidity remains healthy, as we finished the quarter with $237 million in total liquidity. Now let's move to slide six and the end-use market update. All of our end-use markets were up sequentially, and with the exception of transportation, all were up year over year, reflecting the strong demand environment. Our near-term and long-term outlook for each of our end-use markets remains positive. and record backlog levels provide strong evidence for this bullish market outlook. Our aerospace and defense end-use market sales were up 9% sequentially and 50% year-over-year. Global aerospace traffic continues its recovery, pushing the supply chain to continue to ramp production for new planes. As a result, we saw strong demand in each of the commercial aerospace submarkets, in particular the aerospace engine submarkets. The defense sub market is down sequentially and year over year, primarily driven by the uncertain government budget horizons and extended lead times. We see this as a short term issue as there is continued interest in our advanced alloys for next generation platforms. Excluding defense, aerospace sales were up 12% sequentially and 57% year over year. More specifically, Sales in the aerospace engine sub-market were up 19% sequentially and up 78% year-over-year. As a result of the continued increases in demand, lead times across the industry have extended and our backlog continues to rise. Specifically, our aerospace and defense in-use market backlog is up 10% sequentially and 136% year-over-year. Notably, our backlog value remains at record levels, reflecting price increases and customer urgency to secure material. In the medical in-use market, sales were up 26% sequentially and 55% year over year. The higher results reflect ongoing growth in elective surgeries. Customers are increasing manufacturing activity and required stocking levels to meet demand. The overall outlook continues to be positive as medical procedures are expected to rise throughout calendar year 2023. We are seeing evidence of this replenishment in the supply chain as our medical end use market backlog is up 11% sequentially and 150% year over year. In the transportation end use market, sales were up 15% sequentially and down 4% compared to last year. Light duty vehicle demand remains high, even with the industry supply chain issues limiting inventories. With strong demand and low inventories, build rates are expected to increase throughout calendar year 2023. In addition, we expect to see heavy-duty vehicle build rates rise in calendar year 2023, primarily driven by the increasing demand in China. In the energy end-use market, sales were up 23% sequentially and up 41% compared to last year. In the oil and gas sub-market, demand continues to outpace supply, driving growth in capital investment. In addition, we are seeing growing demand for advanced premium alloy solutions for drilling and completions activities in harsh environments. In the industrial and consumer end-use market, sales were up 15% sequentially and up 18% year-over-year. Sales growth was driven by demand for our alloys used in semiconductor fabrication and in our electronics sub-market. Specifically in the electronic submarket, we continue to see growing demand in new applications for materials from our hot strip mill in Redding. Now I'll turn it over to Tim for the financial summary.