Good day, and welcome to the Carpenter Technology Corporation First Quarter 2024 Fiscal Year Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. John Huyette, 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 30, 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 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 to 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, 2023 and the exhibits attached to that filing. Please note, that in the following discussion, unless otherwise noted, when management discuss 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 4 with a review of our safety performance. For the first quarter 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 identified 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 5, 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. At 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 million to $77 million. Further, 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 business. As evidenced at the beginning of October, we announced another price increase of 7% to 12% on our SAO transactional business. We also generated $7.4 million of cash from…

Thanks, Tony. Good morning, everyone. I'll start on Slide 9, the income statement summary. Net sales in the first quarter were $651.9 million net sales excluding surcharge totaling $492.8 million. Sales excluding surcharge increased 31% from the same period a year ago on 12% higher volume. Sequentially, sales were down 12% on 18% lower volume. The year-over-year increase was driven by significant productivity gains to meet growing demand. As Tony mentioned earlier, the lower sales and volumes sequentially were primarily the result of fewer operating days and planned preventative maintenance activities, necessary to ensure our equipment continues to perform at high levels. Gross profit was $124.1 million in the current quarter compared to $54.8 million in the same quarter of last year and $119 million in the fourth quarter of fiscal year 2023. Gross profit in the current quarter is up 126% compared to the same quarter last year and up 4% sequentially. SG&A expenses were $55.1 million in the first quarter, up about $9 million from the same period a year ago, and roughly $1 million lower sequentially. The increase in SG&A expenses versus the same quarter last year is primarily driven by headcount and higher variable compensation accruals. The SG&A line includes corporate costs, which totaled $20.9 million in the recent first quarter. As we look ahead to the upcoming second quarter of fiscal year 2024, we expect corporate costs to be similar to the first quarter at about $21 million. Operating income was $69 million in the current quarter compared to $8.3 million in the same quarter a year ago and $62.9 million in our recent fourth quarter of fiscal year 2023. The sequential improvement in operating income, up 10% was driven by our productivity efforts, actions we took to manage product mix, as well as the…

Thanks, Tim. Now let's review the key takeaways from today's call. We realized 10% sequential growth in operating income in the first quarter of fiscal year 2024. This was a meaningful improvement compared to the historical trend of a sequential decline in profits, in the first quarter as a fiscal year. And we outperformed our previous guidance. The strong quarterly performance is indicative of the demand environment and our ongoing operating momentum. The SAO segment exceeded expectations with operating income of $80.8 million and adjusted operating margin of 19.4% in the first quarter. SAO continues to build momentum with increased productivity, higher prices and improved product mix. We are operating in a strong demand environment for our material solutions with positive near and long-term outlooks in our end use markets. This is demonstrated in our record backlogs. Long lead times and customer focus on a security of supply. Our strong first quarter financial performance combined with the second quarter guidance would result in one of the two highest first half financial results in the history of the company. Building on that first half momentum, we project second half fiscal year 2024 operating income to be 28% to 35% higher in the first half. Let's take a closer look at the second half outlook on the next slide. As evidenced by our recent performance, we've seen meaningful increases in our productivity over the last several quarters, especially in SAO. However, we still have plenty of runway, as we have yet to return to our pre-COVID operating rates in some of our key work centers. We continue to invest in training and mentoring programs for our shop-floor employees to safely drive productivity gains, while maintaining our high quality standards. But most importantly, we have certain key work centers, which have not been…

[Operator Instructions] The first question comes from Gautam Khanna with TD Cowen. Please go ahead.

Good morning. This is Liz Huseynov on for Gotham. And I was just wondering if you can provide any detail about order trends in the quarter by aero end market for instance fasteners versus engine versus other structures?

Yes. Good morning. I'll take that question. Aerospace engine sales were up 43% year-over-year, down 8% sequentially. So, even though down 8% sequentially due to the items that we noted in our prepared remarks, the quarterly shipments are about 90% of pre-pandemic engine ship rate. So, bottom line is that engine sales remain strong and were oversubscribed and the ramp pushed -- as the ramp pushes demand even higher, well beyond pre-pandemic levels. On fasteners, sales up 7.7% year-over-year and down sequentially about 13% same story there as engines. So, hopefully that's helpful.

Yes, thank you. And then, is there any incremental weakness to demand in non-aero markets given the macro?

Well, certainly, you've heard, you know, commentary out there in the market around the general industrial market and I can comment on that. That is a, that's a limited portion of our sales. That's used to support that general industrial activity. Those trends are not material meaningful to our bottom line as our focus is really on high value difficult to manufacture products, where demand is currently outstripping supply by quite a bit. So, as you know our portfolio consists of premium high value products and you know any type of weakness in those submarkets will not impact our bottom line materially in the short-term or the near term.

Okay. Thank you. And then just one more. Can you give any color on which work centers have the most opportunity for productivity gains?

Yes, it's a good question. It's a really good question. The biggest driver certainly is on the front end of our, our process, which is the primary melting areas, there's a lot more productivity and output we can get from those. So, that's the major driver, but also on the back end and finishing, if you think outside of that sale and look at Dynamet, for example, their biggest increase in productivity is on the back end, and some of the finishing pieces. And in fact, we've got a couple of pieces of equipment that will be installed here in the near-term that could see Dynamet's profitability, our operating income much like SAO, will go up as close to 50% higher quarterly in the second half versus the first half. So, there's a lot of areas that we're working on. I think the good news is, that we're able to achieve these very high levels of operating income knowing that our business is still not operating at 100%. So, from a shareholder standpoint, there's a lot more that we can do to drive profits even higher.

Okay. Great. Thank you.

Thank you.

The next question comes from Josh Sullivan with The Benchmark Company. Please go ahead.

Hi, good morning, Tony, John.

Good morning, Josh.

Congratulations on the quarter here. Just on the base price increase on the non-contract alloys. Is there a way to think of percentage your capacity that's available for that transactional business at this point? And then, in previous cycles, where aerospace was consuming more capacity, what does that mix shift look like for the non-aerospace markets? And I'm just curious to hear how those non-aerospace markets are responding in this cycle versus historical cycles?

Let me see if I can tackle that question for you. Certainly, in this cycle here, aerospace and medical are the ones, driving the quickest for us and that makes up, you know, well over 75% of our revenue. Some of the other markets, for example, like energy is single digits for us in terms of percent of revenue. But again for them to get time on the mill, we're seeing prices move up significantly in the energy side where they challenge aerospace type prices and that's what it takes for us to be really interested in those types of products. So obviously, our main focus is on the aerospace and medical, Josh. And I would say if you compare, you asked to prior cycles, the amplitude of this ramp is significantly greater than in prior cycles.

Got it. And then, Tony, you spent some time there, just talking about the fiscal '27 targets and the front-end loaded nature of how the guidance is put together. But as far as the back-end of those targets, you know, is there any reason we would think to plateau there or is it just conservatism on your nature?

Well, we've heard that as that was, I thought, I did a question on this, Josh. And if you let me kind of go on for a little bit to kind of put all that in context and then come back to your question. I spent some time, last night, and I was thinking about what we've really said over the last couple of quarters, and as you well know, you were there, this all started in May of 2023 when we had our Investor Day, right where we said we were going to double operating income FY '19 versus FY '27, which is one of our most profitable years by the way, 40% CAGR from '23 to '27. As you mentioned, we said it wasn't going to be back-end loaded. It was going to have a meaningful cash generation and we didn't need to make any large scale capital expenditures for capacity or M&A to get there. We come out with the fourth quarter, and we actually exceed our target of getting into FY '19 run rate profitability. So, that's a big, that's a big checkmarks. During that fourth quarter so, about three months ago, we said that this first quarter was going to be slightly down to flat and it was going to, you know bust through the normal seasonality where you see the first quarter being sequentially down. And as you all know, we had a lot of people doubt us and say that you couldn't do that. Well, we actually exceeded that number. And now we come in and say that the second quarter is going to be another impressive quarter, just like Q1 even though we'll continue to do our planned maintenance even though its got two major holidays in there, we're still going to operate at that level. And then, what you're getting to the new piece of information that we came out with today. We said that even after those two quarters, put those together and we're going to do another 28% to 35% on top of that, it's, it's very impressive growth and that's why we took the time Josh to talk to you about that some of these work centers are still not running at the rates that we know they can run at. That's how we have line of sight to that second half. Again, we said, it wasn't going to be back-end loaded, but we never said that we were going to get 50% in year one or four. And I think your question is that, that's an awfully strong comment, we've heard -- now does that mean that years two, three and four could be even more and is there some conservatism put in there. You might have a point, maybe there probably, there probably is a little conservatism in there and we have the ability to even push that higher.

That's right. Good. No. Thank you. Thank you for that. And just one on the productivity side of that, you think Carpenter is doing anything different on the labor side and those works centers or do you think it's just a natural factor of timing experienced that they're getting better?

I don't know if we do anything differently. I mean we have to be very, I'll use the word cautious right, because we are producing products that can never fail. A very high quality standards. So, we just don't take chances, if an operator is not ready, they're not ready. And we don't push them to put them in a situation where we could sacrifice the quality of our product that's just, that's just unacceptable. I'll give you a couple of numbers that are interesting. If you think about a new employee that's been with us two years or less. And if you look at our SAO operation. Our plants range anywhere from 30% to 60% of our shop floor workers have been there two years or less. And our Dynamet facility, we have one facility that's 50% are new in the last two years. The other is almost 30%. That is a big influx of new employees highly qualified. I mean, the level of employee that we're, that we're attracting is very high, but it's a complex, very sophisticated equipment that we're going to make sure that they can operate it, number one, safely and always within the quality standards that we hold ourselves, doing that the industry requires. So, you've seen some nice improvement over the last couple of quarters. The good news is there's still, there's still more improvement to come. Hopefully that answers your question.

Yes. Yes. Great, thank you. Congrats on the quarter. And thank you for the time.

Thank you.

[Operator Instructions] The next question comes from Chris Olin with Northcoast Research. Please go ahead.

Hi, good morning and congrats on the quarter, guys.

Hi, Chris. Good morning.

I was just wondering on the near term. Has there been any type of negative volume impact associated with the drop in the commodity nickel market? Just wondering, if some customers will delay orders. Are you seeing any of that because of the surcharges visibility or are we at a point where like the long-term behavior has kind of changed when your customers are worried about supply?

I think, the ladder right and I think, I know we're not having any customers delay orders because of where the nickel prices or where they think it's going to go. I mean we have, we have all of our customers, trying to get into the order book earlier. Right? As you know we've closed the order book, a couple times. So, that comment that you just made in this type of environment does not, it's never made, it's never, it's never discussed, that's not a factor.

Okay. I may have missed it, I apologize if I had, but I was just thinking about the pricing dynamics and your comments about the increases. I was just wondering if there are contract renewals on the horizon, yet? I can't recall from the last quarter.

Yes, there are. I mean over the last couple of years, obviously, by our results, you can tell that we've had contracts that have renewed and now you're seeing that, that higher price come through and there are a couple more that are in the works as well. So, it seems like at any point in time, we have one or two that we're, that we're working through. And there's a couple significant ones that we're working through, as we speak.

Is it safe to assume something like, you know, 20%, 30% renews price each year for the model?

Let me make sure I understand your question. Are you saying that 20% or 30% of contracts renew every year?

Yes. Will you renew at a higher price. So, I could put that in my--

Well, all contracts renewing at a higher price, that's something that's significant, that's consistent across the industry, you can, you can take, you can take that with a high level of confidence that all contract renewals, will be at a much higher price.

Okay. Just last one of the shift quickly back to at Dynamet and guess, I'm thinking a bit about the Boeing 707 and the A350 build rate increases kind of the peak outlook and I can't recall if Dynamet is levered to one platform more than the other. And you know, would you benefit kind of significantly from a doubling of the production targets? And I just lastly, do you have enough capacity to satisfy that if you do?

Well, to answer your last piece of your question first. No, there's not enough capacity in the system across multiple sub-markets. For us, we sell to every one of the fastener company. So, whether it's Boeing or Airbus it's on top of demand environment when demand is so much higher than supply. That's just not, that's just not a factor. We're oversubscribed and we anticipate that being like that for several years to come regardless of the split between widebody and single-aisle and Boeing or Airbus.

Would a, would a capital investment be on the horizon for that to address?

Possibly, I mean Dynamet, just like SAO is working to get up to rate as well. We're not running in Dynamet at the level we need to run at. And I want to, previous question from Cowen. I said that in fact we have a couple of pieces of equipment that are coming in here in the near term into Dynamet that will increase our finishing capacity. So, that will help as well.

Okay. Great, thanks so much.

Yes. Thank you, sir.

The next question comes from Michael Leshock with KeyBanc Capital Markets. Please go ahead.

Hi, good morning. I just wanted to ask here on volumes that we saw a decline in the quarter given the less shipping days. But looking forward, how do you see volumes increasing relative to price and mix? So, if your long-term guidance incorporates a 15% to 20% increase in volumes above fiscal '19, do you expect that volume uptick to be largely in fiscal '24 or is the big step up this year more so, a function of price and the volume piece is more linear over the course of your long-term guidance?

Well, the volume is going to follow our productivity for the most part, I mean, as you've seen now in this quarter into next, a big part of our strategic mix management is, is moving that volume around, because some of the products as we moved to different types of products, they take longer to process through the system. Right? Especially, like in a primary mill product, it could be noted three times that just takes longer to go through the system much higher margins on that, but it takes longer. But as you see our productivity continue to increase as we've talked about as some of these other pieces come online certainly volume will be higher in the second half than the first half.

And then, on maintenance, were you able to get all your normal seasonal maintenance spending done just given the lower CapEx spend sequentially and maybe running your assets above normal seasonal utilization levels? Or do you see any spilling into the second quarter?

Well, we're in perpetual preventive maintenance. The days of shutting your plant down for three weeks and turning everything off and sending everyone home and doing all your preventive maintenance all over, right, that just doesn't, that's not the most efficient way. We are always in a cycle of preventative maintenance. And you know, what, I think, I've been asked why do I talk about this and you know, when you're in a situation where supply can meet demand, you know certainly no one really talks about preventive maintenance but when you're in a sold-out environment, where any amount of downtime, any amount of downtime will translate to customer impact. As a matter of product you could ship within that, that's why it makes it important. That's why it's important to say at any point in time, we're going to be doing that. Secondly, I would say it's really important to remember Mike, we have really exclusive highly sought after assets and it's our job as skilled operators to protect that equipment, obviously, over the long term. So, we're aiming for a 40% CAGR, annual CAGR over the next four years. That's our goal. Our goal is not to run, you know, run the equipment to failure simply to earn a couple more million dollars on top of already a record quarter. Right? So, I mean that that would be unprofessional. So, it's not about trying to -- let's run it more to try to get out another couple of million. We're in for the long haul. We're going to, you know, double operating income versus FY '19 over four years. So, we got to protect our equipment and treat it the right way.

Got it. Appreciate all the detail.

Thank you.

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

Thank you, operator. And thank you everyone for joining us today for our fiscal year 2024 first quarter conference call. Have a great rest of your day.

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