Carpenter Technology Corporation

Good day and welcome to the Carpenter Technology Corporation first quarter 2024 fiscal year financial results 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 touch-tone phone. 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 Mr. John Hewitt, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference call for the fiscal 2024 first quarter ended September 30th, 2023. 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, 2023, and the exhibits attached to that filing. Please note that in the following discussion, unless otherwise noted, when management discussed 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 will begin on slide four with a review of our safety performance. For the first quarter of fiscal year 2024, our total case incident rate was 2.1. This rate has been elevated over the last several quarters as we integrate a large number of new employees into our operations. We are focused on specific actions to maintain the lower severity and identify potential risks. Our target remains a zero-injury workplace, and we will continue to work tirelessly to achieve that target. Now let's turn to slide five and a review of the first quarter. On our last earnings call, we provided an outlook for the first quarter of fiscal year 2024 and signaled operating income was expected to be flat or slightly up sequentially, even though we outperformed the fourth quarter expectations. That first quarter guidance represented a meaningful improvement compared to the historical trend of a sequential decline in profits in the first quarter of a fiscal year. Building on our operating momentum, we exceeded that guidance and reported first quarter operating income of $69 million, a 10% increase sequentially. Most notably, the SAO segment exceeded expectations for the quarter, delivering $80.8 million in operating income above the outlook we provided of $72 to $77 million. SAO realized an adjusted operating margin of 19.4%, growing from 16.8% in the previous quarter. This impressive margin expansion came as a result of targeted improvement in product mix, higher realized prices, and continued focus on productivity. We continue to realize price gains on both contractual and transactional businesses. As evidence, at the beginning of October, we announced another price increase of 7 to 12 percent on our SAO transactional business. We also generated $7.4 million of cash from operations during the quarter, maintaining a healthy liquidity of $366.4 million. Finally, we are positioned in a strong demand environment across our in-use markets, where our material solutions are valued by our customers. Now let's take a closer look at our demand outlook on slide six. Corporate technology produces specialized, highly engineered products that are essential to the function of critical applications across aerospace, defense, medical, and other in-use markets. Our unique collection of assets and capabilities to produce these products are not easily replicated. and it requires decades of experience to generate the high quality needed to meet stringent industry standards. Demand for our difficult to manufacture products is exceeding industry supply, and we see tangible evidence of this. Our backlog continues to grow, setting new records every quarter. In the first quarter of fiscal year 2024, our backlog was up 5% sequentially and 32% year over year. We continue to raise prices with our most recent announcement earlier this month of a 7 to 12 percent increase on our FAO transactional business. Lead times remain at record levels and could be even longer as we are actively managing incoming orders. And customers continue to tell us their primary concern is surety of supply, asking when they can book more with us. We expect this demand environment to remain strong. In aerospace, OEMs continue to work to increase build rates, targeting levels exceeding pre-pandemic highs. Defense demand, already growing, is projected to accelerate due to geopolitical events. Medical demand continues on a steady climb due to strong trends, such as aging population and focus on patient outcomes. And demand for our premium products in our other markets is also projected to remain high due to ongoing energy investment needs, light-duty vehicle builds, and semiconductor capacity expansion. As always, there's active discussion in the general marketplace about near-term demand. For example, even most recently this week, some aerospace OEMs discussing build rate target adjustments and ongoing delivery challenges within the supply chain, or the impact of disruption to vehicle manufacturing associated with worker strikes. What we can affirm is that these issues are not affecting our general demand levels. We remain oversubscribed in terms of demand, with customers generally wanting more than we can produce. We have a substantial backlog of orders with material wanted sooner. Even as we work to increase output, we also see unexpected emergency demand from areas like medical and defense associated with current world events or from aerospace associated with spares need. What you are hearing from the marketplace is an affirmation of the strong demand in the near term and the long term. Beyond the near term, our customers also continue to partner with us on their strategic growth efforts. Medical innovations, next generation defense platforms, and electrification are examples of areas where customers are partnering with us to develop their next generation products. In this demand environment, we are well positioned to continue to drive top line growth while expanding our margins through productivity improvements, product mix optimization, and higher prices. Now let's review first quarter sales performance. In the first quarter of fiscal year 2024, sales decreased sequentially and increased significantly year over year. The year over year performance reflects our significant productivity gains. As anticipated, volumes decreased sequentially due to fewer operating days, planned preventive maintenance activity, and most importantly, targeted mix management. Importantly, profitability improved in the quarter. resulting in a sequential increase in our operating income on lower sales. Notably, SAO's adjusted operating margin was 19.4% in the quarter, up from 16.8% in the fourth quarter of fiscal year 2023. The profit margin expanded through a combination of productivity efforts, price increases, and strategic mix management. This means we are actively allocating capacity to the areas where we add the most value. We serve critical applications across all of our end-use markets and apply ongoing strategic mix management in how we serve them to capitalize on the higher margin products. Our profitability has been increasing over the previous quarters and will continue to improve with higher pricing, product mix optimization, and continued productivity improvements. Now I will turn it over to Tim for the financial summary.