Good day, and welcome to the Carpenter Technology Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note that 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 Carpenter's earnings conference call for the third quarter ended March 31, 2017. 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 Thene, President and Chief Executive Officer; and Damon Audia, 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 those forward-looking statements can be found in Carpenter's most recent SEC filings, including the Company's December 31, 2016 10-Q and the exhibits attached to that filing. Please also note that in the following discussion, unless otherwise noted, when management discusses sales or revenue, that reference excludes surcharge. When discussing operating income, that reference excludes pension, earnings, interest and deferrals, or EID, and special items. When referring to operating margins, that is based on sales excluding surcharge, and operating income excluding pension, EID and special items. I will now turn the call over to Tony.

Thank you, Brad, and good morning to everyone. As always, I will start with a safety update on Slide #4. Year-to-date in fiscal year 2017, our total case incident rate, or TCIR, remains at the 2.0 level. Our focus on safety includes many initiatives, the three most significant being hand safety programs, our leadership development program and human performance training. Our facilities continue to focus on leadership, systems and employee engagement. We have ramped up our employee engagement efforts, launched enhanced safe teams at all of our operating facility. Employees are working to develop tools and methods to reduce hand and finger injuries, which account for about 40% of all reportable injuries. Furthermore plant leadership is conducting one-on-one safety discussions with every employee to ensure they understand their role and accountability to work safely in collaboration with their colleagues to create an injury-free workplace. We started the deployment of our Human Performance initiative, which is focused on improving our capabilities to recognize air traps and minimize the potential for deviation from standards that lead to injuries. We continue to transition from a knowledge-based to a rules-based approach, and in time in interdependent state where employees work every day with the mindset of being responsible for their own safety as well as that of others. Our ultimate goal is clear and will never change, that is to become a zero injury workplace. It's not a stretch target or an unattainable dream. We truly believe it is possible. In fact we have examples inside of company today. Earlier this week, our Athens, Alabama facility achieved a milestone of three years without a recordable injury, and our Hartsville, South Carolina facility has operated for more than 310 days without recordable injury. Congratulations to both facilities. Turning to Slide #5, and a summary of…

Thank you, Tony. Good morning, everyone. Turning to Slide 8, and the income statement summary. We delivered a notable improvement in our financial results during our fiscal third quarter, highlighted by healthy sequential revenue gains across all our end-use markets, as Tony mentioned. Overall net sales in the third quarter were $474 million, or $413 million excluding surcharge. Sales excluding surcharge increased 13% sequentially, reflecting the 8% revenue gain in our Aerospace and Defense market, as well as the strong top line performance across all four remaining end-use markets, with three of the four delivering double-digit sequential revenue increases. On a year-over-year basis, net sales excluding surcharge, increased $11 million, or 3%, on 3% higher volume. This is the first quarterly year-over-year increase since the second quarter of fiscal year 2015, which is reflective of improving market conditions or diversified end-use markets and our actions of our commercial team to capture new market opportunities. SG&A expenses were essentially flat at $47 million on a sequential basis. This was slightly above our expected run rate as we did recognize a couple of non-recurring charges in the quarter. Within the $47 million SG&A expense was a non-cash write-off of $1.3 million for the preliminary work associated with the preparation for the titanium powder investment we have been planning for our Athens, Alabama campus. With the completion of our titanium powder acquisition, we no longer plan to proceed with the construction of that facility. In addition, we incurred some acquisition-related costs in the quarter, which in total kept SG&A flat sequentially. Operating income as a percentage of sales when excluding pension, EID and special items, was 10% for the third quarter, up substantially from the 5.7% reported in the second quarter and the 8.7% reported in the third quarter of last year. Our…

Thank you, Damon. Moving to Slide #14. When I think about Carpenter and our future and why I'm excited about it, I start thinking about places where we are solving key problems because that is where our expertise shines through. That is where we can deliver value, and frankly, that is where we are rewarded the most by our customers. The aerospace engine submarket is very strategic to Carpenter, as it represents approximately 24% of our year-to-date total sales. We participate on all the major new engine platforms and our content is greater on the new platforms versus the legacy platforms. More importantly, we have increased our capacity through our investment in our Athens facility to support this growing market and we are working at the request of our customers on introducing higher temperature alloy and helping them explore and bring to scale production additive manufactured parts. It is important to note that we are much more than a supplier to aerospace jet engine manufacturers. We have leading positions aerospace fasteners, avionics and structural applications. For example, in aerospace structural, customers are increasingly asking us to help them lightweight their parts and figure out how to make parts which can't be made with old materials due to changing regulations. We see more and more designs exploring and adopting our advanced structural alloys, like our AerMet portfolio to solve these problems. And outside of the aerospace market, we see the same trend. Our customers are facing more complex problems, prompting them to pursue Carpenter for more advanced solutions. In medical, implants like hips and shoulders are getting more advanced to provide patients greater longevity and freedom of movement. New designs require more complicated and finer construction, and the instruments to support the surgery for these designs are also becoming more advanced.…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. At this time, we will pause for a moment to assemble our roster. Our first question comes from Gautam Khanna with Cowen & Company. Please go ahead.

Thanks. Good morning.

Good morning.

I was wondering, Tony, if you could expand on your comment about an engine order slipping. Did that get caught up, and perhaps if you could quantify how large it was?

Okay, Gautam, thanks for the question. Let me - as I said in my comments, this was due to timing of orders from a key customer. If you exclude this customer, this might be helpful. Aero engine sales were up double-digits sequentially as they were in the previous quarter. I don't think this is especially unusual. The aerospace market doesn't always conform perfectly the quarterly reporting requirements. What I think is important is that we expect the fourth quarter to be sequentially up both for total aerospace and the aero engine submarkets. I can also say that our aerospace defense market bookings were up sequentially more than 35% and our Aerospace and Defense market backlog increased 18% sequentially. So I still see that continue strengthen arrow engine, evidenced by lead times extending right now in the industry and the expectations of forward delivery. So for me, this was a large order or a tiny, doesn't impact what we see going forward.

Okay. What does actually caught up subsequent to the quarter and/or are you still waiting for that one, so that it could benefit fiscal Q1 of next year?

It's just that we had the larger uptick in the previous quarter.

Okay. So it's more just the purpose [ph] of base comparison.

Yes.

Okay. And you mentioned normal seasonality typically allows for the first half of each fiscal year to be below that of the second half but we do have some ramping engine programs. I just wondered if you could comment on what you think might happen to SAO in the third calendar quarter, in the fourth calendar quarter, given those program dynamics overlaid on those seasonal dynamic?

Well, you're going out two or three quarters. Listen, I believe over the next three to four quarters, the aerospace as the last time you and I talked, I think aerospace can be in the high-single digits. That's where I would expect. I would expect the Carpenter operating model to continue to deliver results. I would expect that the work we are doing on the commercial group as far as cultivating new sales and new applications, specifically in the consumer market and the medical market will continue, and I also would continue to expect that the improvement in PEP will continue. So if you add all of that in, it's not necessarily going to be linear quarter-over-quarter. We normally have the seasonality but if you take a longer term, I think we are really starting to hit our stride and gain some momentum in what we can drive to the bottom line.

I hear you. I guess what I'm trying to ask is will we have more muted seasonality, if you will, because of the ramping…

I think that's - yes. Sorry, I think that's fair. Yes.

Okay. So the year-over-year increase in the first half of fiscal '18 could actually be more substantial than what otherwise be the case if it were just a normal seasonal year without [indiscernible] because you have energy coming back. You got a lot of things that are not...

Clearly that's fair, yes.

Okay. That's helpful. And then just wanted to ask again on the fastener side, so what are lead times right now and how have they changed over the last three to six months? Maybe if you can talk about the various products that you make and whether it be nickel alloys, bar, coil, wire, and then titanium as well. Just what's happened with lead times in that market?

Well, as you know, on the fastener market, on nickel and titanium, I would say the lead times are, for the most part, stable, going down a bit on titanium only because that's been a specific focus for us and the reason they are going down is because we've made improvement specifically in our Dynamet production flow. So those lead times were unacceptably high. We've cut those in half over the last couple of months with an effort to drive them even further. I would tell you that the nickel side, the lead times have probably increased slightly over the last quarter.

Okay, thanks. I'll turn it over. Appreciate it.

Thank you.

Our next question comes from Josh Sullivan with Seaport Global. Please go ahead.

Good morning.

Good morning, Josh.

Good morning, Josh.

Can you give us an update on Athens, and maybe where you are in qualifications and what utilization currently looks like?

Okay, Josh, I can take that one. Utilization in Athens is approximately 30% right now. That is not changed over the last couple of quarters. I will remind you that that is not all incremental to Carpenter, so we are moving products to Athens that benefit from that production flow. From a qualification standpoint, I won't change much from what I said last quarter. As you know, we started this process about two years ago. Our goal really is to lock in the most efficient and reliable process. I would say that we've made good progress and we are basically on track. Again, as I said last quarter, we plan - our expectation is to submit the desired VAP qualifications by the end of calendar year 2017. I will remind you that that timing and pacing of the actual qualification will be dictated by our customers but I can say that we are actively involved with them, and I can also say that I'm pleased with the increase of customer connection and customer intensity over the last quarter.

Okay, great. And then just with the lead time questions, what do lead times look like at SAO? I think you said aerospace lead times are extending. What about energy verticals and maybe just give us what lead times look like last quarter versus this quarter?

Yes, on aerospace, the lead times are extending. I think that's across the industry, especially on the most advanced alloys, the high-temp alloys. I see - we see that extending and we think that's probably going to continue in the near-term. Energy, I think now those are just coming into play for us. I don't see a specific issue for us right now but depending on where the market goes over the next couple of quarters, you could see that.

Okay. Thank you.

[Operator Instructions]. Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Thanks very much. Good morning.

Good morning, Phil.

Had a question on the jet engine side. Just curious if that business was up for you on a year-on-year basis?

Yes, it is.

Any sense of a magnitude there, Tony?

On the engine side, let me take a look at my notes right here. If you take away the one order, we're, I would say, in the high-teens 20% year-over-year increase.

Okay.

It's actually down slightly just because of the timing of that one order.

Okay. So it was lumpy in terms of that, so that would be imply that we saw a pretty solid pickup year-over-year and either bought distribution or defense - is it more on the defense side?

We had a nice pickup in defense, also structural and on fasteners as well.

Okay. What's the sense of the supply chain in terms of the mood with inventory positioning at this point? I think the conversation six to 12 months ago was the aerospace supply chain is in good shape. Momentum is continuing there. We've had some pockets of excess inventory and the structural supply chain. What's that generic thought right now in terms of those buckets?

I would say that from an overall standpoint, you see some increased restocking. We know our distributors are restocking their inventories. I would use the word that there is more tightness in the market what we are hearing from the customers as far as them getting in queue. Fasteners is a bit different. Certainly today the signs are positive for us, more positive than negative but we are cautious, right, because we know how the fastener market can be and I think over the next couple of quarters you could see some inconsistencies there. But on all the other submarkets, I think you're going to see continued growth over the next three or four quarters.

Okay, that's helpful. And can you give us a sense on your energy business on the oil and gas side, how much of that is driven by onshore versus offshore historically and how much of your business there, roughly speaking, is North American versus international because obviously there is a lot of different dynamics going on right now?

I can say the major is onshore and the majority is North America.

Okay. And then just last question I have is just on the inventory side. You brought up your target for the year in terms of building some inventory this year. Just trying to understand really what changed there given that, I think, sales were at least in line with what we were expecting for the third quarter, so no big changes in terms of the momentum that we are anticipating and I know this is a longer term strategic imperative for you guys. So I'm just trying to square up the market dynamics and the inventory positioning versus the long-term view of maybe some structural reduction. Thanks.

Okay. Thanks, Phil. It's a good question. Let me elaborate just a bit on that. You're right, inventory did increase about 2.5% sequentially, about 14% since the beginning of our fiscal year. We increased this inventory by design for specific product types. And the inventory that we have is staged at the proper location in the production cycle, and from my viewpoint, the market is getting stronger, the Aerospace, Energy, Consumer, Medical. As I said, lead times are extending across the industry, especially on the aerospace side. And I think just as importantly, our new commercial organization is out there gaining share. We are developing new customers. So we have a strong balance sheet. It gives me the flexibility to bill that inventory so I can maximize my revenue. And my focus now is I believe the market is coming to us. I'm going to run my equipment. I'm going to put that strategic inventory in place. I'm going to go grow my base and I'm going to serve the customers. So I'm in a position where I'm not going to try to hit an inventory number that's going to sacrifice a growing market presence that I have over the next two or three quarters.

Thank you.

Thank you.

We now have a follow-up question from Josh Sullivan. Please go ahead.

Yes, just had one. You had mentioned the medical market is taking an interest in the new powder facility. How large of an opportunity is that for your medical verticals? Do you think we could see a substantial increase in the contribution from medical over time?

Absolutely, I think medical is a really a growth area for us, not only through the traditional means but through additive manufacturing and I think we play a great role there. We now have the titanium powder facility, also through our Dynamet facility and our titanium wire. That is another feedstock method into additive manufacturing. All of the large medical OEMs are concentrated there. We have connections with all of them. And I think that is a meaningful growth opportunity for us going forward.

Okay. Thank you.

Thank you.

Thank you. This concludes our question-and-answer session. I would like to now turn the conference back over to Brad Edwards for any closing remarks.

Thanks Daniel. Thanks everyone for joining us today. We look forward to speaking with you again shortly. Thank you.