Carpenter Technology Corporation

Technology Corporation Third Quarter 2023 Conference Call. All participants will be in listening mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be opportunity to ask questions. Please note that this event is being recorded. I would like to turn the conference over to Mr. John Hewitt, Vice President and Ambassador of Relations. Please go ahead and serve at this time. Thank you.

Thank you, operator. Good morning, everyone, and welcome to the Carbon Technology Earnings Conference Call for the fiscal 2023 third quarter, ended March 31, 2023. This call is also being broadcast over the internet along the 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, Forms 10Q for the quarters ended September 30, 2022 and December 31, 2022, and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when management discusses the sales or revenue, that reference excludes surcharge. When referring to operating margins, that is based on adjusted operating income, excluding special items, and sales excluding surcharge. I will now turn the call over to Tony.

Thank you, John, and good morning to everyone on the call today. I'll begin on slide four and review our safety performance. Through the third quarter of fiscal year 2023, our total case incident rate was 1.4. We saw improved performance in the third quarter, lowering the year-to-date rate. As we have discussed in recent quarters, The year-over-year rate increase is largely due to the increased employees undertaking new tasks, either as new hires or transfers into new roles. We continue to invest in additional training for any employee new to a job or task with frequent monitoring and follow-up. Although a 1.4 injury rate would rank us as one of the safest metal manufacturing companies, our goal continues to be a zero injury workplace. Now let's turn to slide five and a review of the third quarter. The third quarter performance was driven by higher productivity at our operating facilities and increasing demand in each of our in-use markets. Most notably, we see the aerospace and defense in-use market ramp accelerating. With a strong demand environment, our backlog increased 10% substantially and 70% year over year. This marks the ninth consecutive quarter of backlog growth. And with the strong demand environment across our in-use markets, we continue to realize price gains, which expands our operating margins. In fact, this week we announced another price increase of 7% to 12% on our transactional business. We continue to improve the productivity of our labor force across our facilities by safely onboarding new employees across all of our production centers and investing in the training required to accelerate learning. We are starting to realize the benefits of these productivity efforts in the performance of our business segments. For the quarter, the SAO segment delivered operating income of $49 million, exceeding our expectations. With the improvements in productivity, we were able to shift additional material to our customers, particularly in the aerospace and defense and medical in-use markets. The PEP segment turned in another strong performance with $10.2 million in operating income for the recent quarter. In particular, we saw strong demand for titanium products for the aerospace and defense and medical in-use markets. Finally, our liquidity remains healthy as we finish the quarter with $212 million in total liquidity. Now let's move to slide six and the in-use market update. All of our end-use markets were up year-over-year and sequentially, except the medical end-use market, which was essentially flat sequentially. Our near-term and long-term outlook for each of our end-use markets remains positive, and our record backlog levels support this outlook. Our airspace and defense end-use market, accounting for 49% of sales, continues to ramp and was up 21% sequentially and 59% year-over-year. Customers across our aerospace submarkets continue to urgently request material and seek higher delivery levels. Global aerospace traffic continues to grow, pushing the supply chain to ramp production for new planes to meet the growing demand. As a result of the continued increases in demand, lead times across the industry have extended, and our backlog continues to rise. Notably, our aerospace and defense in-use market backlog is up 17% sequentially and 93% year over year. Our record backlog levels reflect price increases and customer urgency to secure material. The medical in-use market, accounting for 13% of sales, is essentially flat sequentially and up 35% year over year. The higher year over year results were driven primarily by ongoing growth in elective surgery. And to meet growing demand for elective surgery, customers are increasing their manufacturing activity. 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 in-use market backlog is up 9% sequentially and 80% year-over-year. The transportation end-use market, accounting for 7% of sales, was up 25% sequentially and up 5% compared to last year. With strong demand and low inventory of both light-duty and heavy-duty vehicles, build rates are expected to increase throughout calendar year 2023. The energy end-use market, accounting for 6% of sales, was up 27% sequentially and up 24% compared to last year. Demand for energy continues to outpace supply, driving growth in capital investment and demand for our material solutions. In many cases, the materials we are supplying into the energy and use market are now reaching margins similar to our aerospace and defense business due to the unique solutions and overall demand environment. The industrial and consumer end use market, accounting for 19% of sales, was up 22% sequentially and up 17% year over year. We remain focused on high margin, high growth business, like a material solution used in semiconductor fabrication. Now, I will turn it over to Tim for the financial summary.