Good morning, and welcome to the Carpenter Technology Fiscal 2022 Third Quarter Earnings Conference Call. [Operator Instructions]. 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 movement. Speakers on the call today are Tony Thene, President and Chief Executive Officer; and Tim Lain, 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 could differ materially from these forward-looking statements can be found in Carpenter Technology's most recent SEC filings, including the company's report on Form 10-K for the year ended June 30, 2021, Form 10-Q for the quarters ended September 30, 2021 and December 31, 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 4 and 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 #1 core value, and we continue to push towards our ultimate goal to be a 0-injury workplace. Our path to 0 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 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 facility, reducing a source of injury risk from our operations. Now let's turn to Slide 5 and a review of the third quarter. We see strong demand in each of our end-use markets as we emerge from the pandemic. Notably, the aerospace ramp is accelerating. Although the aerospace end 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 end-use market conditions continued to improve as the industry recovers from the impact of the Omicron variant. And end-use markets like transportation and industrial and consumer have returned to pre-COVID levels. I would like to share 3 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…

Thanks, Tony. Good morning, everyone. I'll start on Slide 8, the income statement summary. Net sales in the third quarter were $489 million, and sales, excluding surcharge, totaled $369 million. Sales excluding surcharge increased 24% from the same period a year ago on 32% higher volume. Sequentially, sales were up 17% on 15% higher volumes. Gross profit was $39.5 million in the current quarter compared to $12.8 million in the third quarter of last year and $13.1 million in the second quarter of fiscal year 2022. The improvement in gross profit is primarily due to the higher sales. The tailwind from higher sales both sequentially and year-over-year was partially offset by operational challenges that we worked through early in the quarter related to the press outage in SAO's Reading facility as well as the ongoing inflationary pressures on operating costs, related to critical production supplies, freight and labor. SG&A expenses were $38.4 million in the third quarter, down $9.4 million from the same period a year ago, and down $6.2 million sequentially. The current quarter's SG&A expenses include a $4.7 million noncash benefit associated with the reversal of a contingent liability from a historical acquisition for which the time period expired. We have included this benefit as a special item for the quarter. When normalizing for this benefit, SG&A expenses are down $4.7 million from a year ago, largely due to additional costs in last year's third quarter associated with implementing our new ERP system. Sequentially, again, normalizing for the special item, SG&A costs were down $1.5 million due to the timing of certain expenses and certain legal reserve adjustments. Operating income was $1.1 million in the current quarter. When excluding the impact of special items, adjusted operating loss was $1.6 million in the current quarter compared to a loss…

Thanks, Tim. I'd like to spend some time reviewing the long-term demand outlook of our end-use markets. First, rarely do we see demand is strong in both the near term and long term across all of our end-use markets. The combination of the recovery from the pandemic and emerging macro trends have positioned our material solutions for both near-term and long-term growth. In Aerospace, we see demand accelerating across the submarkets. With global travel demand growing, narrow-body build rates are expected to increase in calendar year 2023. Material demand is also expected to continue to increase. And as you will recall, before the pandemic, industry capacity was constrained, especially in aerospace engine submarket. Over the last decade, Carpenter Technology was the only specialty metals provider to add capacity with our Athens facility, which positions us to capture additional growth. In defense, we are partnering with customers on the development of the next-generation programs and platforms that require our material solutions. And given the geopolitical environment, investment is expected to continue well into the future. Medical market was our fastest-growing market for the pandemic, and we anticipate similar growth as the industry recovers from the pandemic. With the focus on improved patient outcomes, impact on more device industry continues to innovate, requiring high-value material solutions. And the aging population and growth in expected procedures should drive demand well into the future. The transportation industry has led the recovery from the pandemic with high demand for light and heavy-duty vehicles. Energy market demand has already exceeded pre-COVID level with supply not keeping up with the rapid growth in demand. To readjust the supply imbalance, the industry is expecting growth in oil and gas investment in the near term, which will drive demand for our materials. In the industrial and consumer markets, we…

[Operator Instructions]. The first question comes from Josh Sullivan with The Benchmark Company.

On the aerospace backlog and dynamics, how much of the acceleration in your estimate is restocking versus just aligning with the current build rates?

Josh, this is Tony. I think it's a combination of both, right? I mean when you take a look at where the backlog growth has been over the last couple of quarters, it's extremely strong. So both of those take into account. I think the biggest driver, though, is on the build rate side. When you take a look at what's going on with the 737 MAX, the A320, very strong demand from our customers there and we see it in the backlog growth.

And have you seen any reaction in the market, titanium fastener or otherwise just on the 787 and 777X time lines?

It's a good question. If you think about the news that just came out on the 777, I mean, from a shareholder of Carpenter Technology, that's really not meaningful in the short term and maybe even in the long term. I mean, it's a lower rate production plane. They already said they wasn't going to deliver until 2024, so they just pushed it out 1 year. And our order book is already full going forward. So the biggest news for us coming out of the news -- calls like that is what they said about the 737 MAX and that they're still on pace to hit the rates that they want to there. And from what we see is we see customers now inquiries and orders for 737 MAX. So that's extremely positive news. And I think that's the focus point for Carpenter Technology versus what may or may not happen in the 777.

Got it. And then just one last one. As far as customers looking to derisk from Russian supplies, can you just outline Carpenter's titanium feedstock? You've heard a lot about Russian forging and casting tough to replace. But where and why is Carpenter a derisking element for anybody exposed to Russian supplies?

Yes, I'll let Tim take that one since the procurement reports are here.

Yes, Josh. So the conversations we're having with our customers is more about their supply chain. So we source nickel billet for the most part. Our sourcing is not through Russia. The bulk of our material comes through domestic producers of that nickel billet and they're sourcing their material from Japan. So as our customers are looking at their supply chain, they do have supply chains that do some similar activity that our Dynamet business does with titanium, but they're looking to move away from their Russian-based supply chain into more stable supply chains, which are the conversations we're having today.

Our next question comes from Michael Leshock with KeyBanc Capital Markets.

I just wanted to ask on the base price increases of 12% to 15% on your transactional business. Is there some element of stickiness there to those increases if we see some easing of inflation or even deflation? What have you seen historically? And what can we expect?

You shouldn't expect that we will decrease prices.

Okay. And then on labor, how much more headcount do you expect to need to meet the recovery as we get back to some pre-pandemic levels? And when do you expect to get there given the cadence of hiring thus far?

Yes, good question, Michael. So it's a mixed answer now. If you look at some of the more specialized skills, there are some areas that are very tight right now. If you look at operations on our shop floor, some of our geographic locations have some -- still have some hiring difficulties. However, in our larger plants, specifically Reading, we are in good shape, and we're at the headcount level we want to be at. So that's the good news, and that's the most impactful piece.

Great. And then following up on the nickel question. I think you generally sourced nickel supply from Canada, but I wanted to get an update on how you navigated the LME market issues and any impacts you saw there on the transactional business as well as contracts if there were any impacts there?

Yes. I'll take that question. Certainly, when you have such a drastic change in the nickel price, you have some discussions with your customers. we are able to work through all of that. And then just on the transactional standpoint, we paused taking orders for a period of time to let that settle out.

Okay. And then did you give Jet Engine revenues for the quarter?

I did not give Jet Engine revenues for the quarter. I can tell you that they are up 16% sequentially and 13% year-over-year.

[Operator Instructions]. Our next question comes from Gautam Khanna with Cowen.

Just wanted to ask, at one point, you thought that fiscal '23 could be somewhere close to fiscal '19 and earnings per share. Can you give us an updated view on that?

Yes. So I did say that the last time I said on a run rate basis, so maybe not the full 4 quarters, but I said we could be at a run rate equivalent to FY '19. If you take a look then at FY '23, what it would take to get there, all of our markets are at -- could be exceeding FY '19 levels, but the big market is aerospace, as you all know, Gautam, that's 50% of our market. If you look at this quarter, we were about 50% of what it was pre-pandemic sales. If you get into FY '23, maybe you're at 60% to 65%. So there's still a point there that, that could be an issue of course, and you have the impact of inflation that has hit us pretty strongly here in the last quarter or 2. Now we'll offset a big chunk of that through the pricing that we've done over the last couple of years, which has been significant and some other items we have. So I've not changed my view on that, Gautam, only to remind you that I said for FY '23 on a run rate basis, we could get there. And I think quite frankly, to talk a little bit more about the upcoming year FY '23, you've got -- we've given guidance on Q4, you look at Q1, you probably look at those 2 quarters in tandem and say as your recovery, but then you get into our second, third and fourth quarter, obviously, we have to execute. But from a market standpoint, I think you will -- you could see significant growth on the sales side.

Okay. And then could you tell us what's going on in the fastener business? So across all alloy types, titanium, stainless, nickel, et cetera, on the aero side. And to follow up on your comment -- sorry, go ahead, please.

Yes, I'll go ahead, and answer the fastener one, and I'll give you a couple of numbers on fastener. On a sequential basis, sales were up 18%. Backlog was a big driver as well sequentially up 42%, 182% year-over-year. That's fasteners only. And then the real key one on the bookings sequentially faster is up 43%. That's probably the one and almost 200% year-over-year. The year-over-year comparisons, as you know, aren't as meaningful sense. A year ago, we were right in the middle of the pandemic. But I know the point of your question, the big driver there is probably the bookings one and sequentially, that was up 43%.

Okay. Well. And then I remember VSMPO has a facility in PA that does medical fasteners as well. And I was curious so is that what you were referring to earlier in your remarks about opportunities from Russia? And if so, kind of I mean, to displace the Russian supplier. And if so, how big of an opportunity would you describe it as?

I wasn't really specifically calling out any plant specifically. What I would say, as you all know, we don't -- we purchase titanium and then convert that into different shapes and products, applications. And that conversion is the area that we're working with some customers who would say could we do some work for them and there's been a couple -- several that we've had discussions with. How meaningful is it? As part of our overall Dynamet growth strategy where we think that, that can be significantly higher than it and it is right now, even prior to the pandemic and one of the growth rates could be in that conversion because if we pick some of that up our plan obviously would be to lock that in.

Right. But on the medical side, you're not seeing increased inquiries from like the Baxters or whatever the big OEMs that are currently buying from VSMPO? Have they come across your desk yet asking for...

Yes. I don't -- you know my style, I won't talk about any specific customers, I would just say that we have had inquiries and activity because of that situation.

Tony, I wanted to also get your opinion on -- there's been RTX, Raytheon talked about casting delays and others have complained about forgings and castings broadly as a bottleneck where some suppliers or maybe it's one supplier is behind. Are you seeing anything in your order book that skews to any particular OEMs over another? I mean, are you seeing evidence of this in the types of order flows you're getting for nickel billet on -- from your various forging customers that would simplify if someone is behind and there's an opportunity for to catch up. Yes.

Yes. I think listen, overall, the supply chain or I should say, the demand is coming back accelerating maybe quicker than people thought, at least that's what we see. And we've heard from several people in the industry worried about can the supply chain ramp back up quickly. So we've heard that. And certainly, our customers take that into consideration and are laying in more orders, not insurance, for insurance, I mean, these are real demand orders. Certainly, our press outage for us personally hurt us, now that we've got that behind us. But I would say, Gautam, overall, we are seeing that type of -- if I can use word urgency in terms of the bookings. And I will say they are 100% related to real demand as we look out over the next several quarters, couple of years.

Okay. And then just one last one. On the long-term contracts that you have in the aerospace business, do you guys have full protection on element costs, energy costs, labor inflation, et cetera? And if not, sort of how -- what's the mechanism? How quickly do you -- the linkages to the indices as we said that is quarterly, is it annually, do you get -- are we going to get to with the lag at some point where margins get caught, or we just should be aware of that?

What across all of our long-term contracts, the primary past-due element is materials, nickel, specifically, you're talking about it, and that's 50% of our cost. So right there, you've got -- you're protected against 50% of your any inflation cost. That can be different on every long-term contract, but the majority of takeout a 3-month lag. So if you buy something this quarter, it's the pricing last quarter and going forward. Certainly, when you're in an increasing nickel price, that has an impact to the customer, but it goes the other way when you're in a decreasing nickel price. If you look over a longer period of time, several years, that all balances out pretty close, could be some lag impacts quarter-to-quarter. As you all know, Gautam, we very rarely talk about that because it's usually not material to us. Now here lately, if there was a time we could have talked about it, maybe now because you've got such a significant increase in the nickel price. Another piece on energy, we do some natural gas hedging, energy is 5% of our overall cost. So not insignificant, but doesn't compare to the materials. So we do protect ourselves by rolling in different tranches of energy hedges.

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

Thank you, and thanks to everyone for joining us today for our third quarter conference call. We look forward to speaking with all of you again on our year-end call. Thanks again, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.