Good morning, and welcome to the Carpenter Technology Corporation Second Quarter 2024 Fiscal 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 this event is being recorded. I would now like to turn the conference over to John Huyette, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology earnings conference call for the fiscal 2024 second quarter ended December 31, 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, Form 10-Q for the quarter ended September 30, 2023, and the exhibits attached to those filings. Please also 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 half of fiscal year 2024, our total case incident rate was 1.9. This marks an improvement over the last quarter, as we continue to integrate less experienced employees into our operations. We are targeting specific areas with employee engagement programs to identify and eliminate potential issues. 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 review of the second quarter. For the second quarter of fiscal year 2024, Carpenter Technology continues to deliver on its targets with reported operating income of $69.8 million. In this most recent quarter, we continue to build momentum, resulting in another strong quarter and the second most profitable first half of the fiscal year in the company’s history. Most notably, the SAO segment exceeded expectations for the quarter, delivering $83.3 million in operating income above the outlook we provided of $78 million to $82 million. Further, SAO realized an adjusted operating margin of 20%, up from 19.4% in the previous quarter. Impressive performance, but we have line of sight to further improvement. We expect additional margin expansion with an ongoing focus on product mix optimization and targeted continuous improvement in operational productivity in the second half of fiscal year 2024. Beyond profitability, we generated $14.6 million of cash from operations during the quarter, maintaining a healthy liquidity of $350.1 million. In addition, during the quarter, we completed multiple accretive long-term agreements with key customers across our aerospace and medical end use markets. Our customers continue to affirm our extreme importance to their supply chains and we remain focused on strategic engagement…

Thanks, Tony. Good morning, everyone. I’ll start on Slide 8, the income statement summary. Net sales in the second quarter were $624.2 million with sales excluding surcharge totaling $485.3 million. Sales excluding surcharge increased 15% from the same period a year ago on 3% lower volume. Sequentially, sales were down 2% on 2% lower volume. The year-over-year increase was driven by the ongoing shift in product mix as we continue to focus our capacity on more complex, higher value materials, as evidenced by the growth in sales despite lower volumes. As Tony covered in his remarks, our focus remains on unlocking incremental capacity by improving throughput rates to drive further volume and sales growth in the second half of fiscal year 2024. Gross profit was $122.6 million in the current quarter, compared to $70 million in the same quarter of last year and $124.1 million in our recent first quarter. SG&A expenses were $52.8 million in the second quarter, up about $5 million from the same period a year ago and roughly $2 million lower sequentially. The increase in SG&A expenses versus the same quarter last year is primarily driven by increasing headcount and higher variable compensation accruals. The SG&A line includes corporate costs, which totaled $20.7 million in the recent second quarter. As we look ahead to the upcoming third quarter of fiscal year 2024, we expect corporate costs to be about $22 million. Operating income was $69.8 million in the current quarter compared to $22.6 million in the same quarter a year ago and $69 million in our recent first quarter of fiscal year 2024. We continued to see profit margin improve with total company adjusted operating margin reaching 14.4%, up slightly from 14% in the previous quarter and up significantly from the 5.4% in the same period…

Thanks, Tim. Now let’s take a look at our fiscal year 2024 and longer term outlooks. On our last call, I communicated our expectations for fiscal year 2024, most notably, the significant step up in profitability anticipated in the second half of fiscal year 2024. Having just completed a strong second quarter, setting one of our best first halves on record, we are reaffirming our previous guidance for a strong second half of the fiscal year. We continue to build operating momentum, unlocking additional capacity and increasing productivity rates as we work to return to and ultimately surpass our pre-COVID production levels. Notably, we have certain key work centers that have additional upside potential as our mix continues to shift to more difficult to manufacture products. In the second quarter, we saw these work centers take significant steps towards collectively reaching this potential and we expect continued progress through the second half of this fiscal year. Specifically, in SAO, we drove increases in output at our primary melt work centers late in the second quarter. That output will begin to ship during the third quarter and is expected to have meaningful impact in the upcoming fourth quarter as well. As a result of the expanding margins and increasing output, we are anticipating total company operating income of $74 million to $79 million in the third quarter of fiscal year 2024. And with the additional capacity flowing through the system, we anticipate taking another significant step up in productivity and shipments in the fourth quarter of fiscal year 2024, generating $97 million to $112 million in total company operating income. In total, we currently expect $171 million to $191 million in total company operating income in the second half of fiscal year 2024. Combined with our strong first half, we are…

Thank you very much. And we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gautam Khanna from TD Cowen. Gautam, please go ahead.

Hi, good morning. Thanks, guys.

Yes. Good morning, Gautam.

Good morning.

I had a couple of questions. First, perhaps I missed it, but what was the backlog growth sequentially in the quarter?

Sequentially, the backlog was relatively flat year-over-year, it was up about 20%.

Okay.

But remember, Gautam, we’re moderating that as we manage our order book. So it could definitely been higher if we wouldn’t have done that.

Understood. And so where are lead times today in terms of number of weeks?

I assume you’re speaking about aerospace billet, and in that case, they’re 65-plus weeks.

Great. Could you talk about, are there any long-term agreements with customers that are coming up for renewal over the next 6 to 12 months? And how significant might those price resets be?

The answer is, yes. And to the first part of your question, and secondly, also yes, they will be significant to the overall structure.

Okay. And can you quantify, like, maybe what that – how much of the aerospace business those contracts might represent?

Well, there’s always, at any time, multiple contracts that we are renewing. We had several in this last quarter. As you know, on the aerospace side, those are primarily a handful of large customers, and there’s still a couple of those that will renew over the next year or two.

Any way to comment on how much the ones that were renewed repriced at relative to the legacy contracts?

Well, they were…

Like [indiscernible]

Yes, they were significant price increases. I think it’s known in the industry that you’re looking at sometimes 40% price increases in some of these products that certainly it varies. As you know, there’s a lot of different alloys, but these are a significant reset to prices. Knowing that some of these contracts were – that are renewing not just with us, but I’m sure with others, sometimes five or ten years long. So you’re seeing a pretty long period of time there before contracts reset in a market today that is extremely strong. So it’s not surprising that you see that type of movement.

Last one for me, just on the non-aero markets where you mentioned there were some sensitivity, again, just outside of the aero business, does that only relate to that distribution piece or are you seeing weakness in the order book for other end markets, whether it be transportation or some of the other ones?

Yes, that comment – it just relates to that distribution business. I mean, that was – that’s a small business that we acquired as part of a larger acquisition 10-plus years ago. So it buys and resales material that is not Carpenter Technology. So it really is a standalone entity. So we were referring to weakness only in that market and not in our other markets that SAO or Dynamet serves.

Thanks a lot, guys.

Thank you, sir.

Thank you. And our next question comes from Josh Sullivan from The Benchmark Company. Josh, you may proceed.

Hey, good morning.

Good morning, Josh.

As far as the current kind of 3Q to 4Q cadence assumed here in guidance, what are the major differences now, if any, from kind of the initial perspective or this perspective last quarter.

Really no difference for us. Our third and fourth quarter internal forecast have remained relatively the same. So I’d ask you to maybe phrase it a little bit different. There’s something I’m missing there.

No, I just wanted to get kind of your perspective, if anything had really changed there. And it doesn’t same like there.

Yes. No, I mean, you remember last quarter, sorry for that. You remember the last quarter, we gave guidance for the second half in total, which was roughly 28% to 35%. They gave you roughly that $310 million to $330 million. So we’re reaffirming that guidance. Now what we did this time was give you specifically Q3, right, which we didn’t last quarter that allows you to back into Q4. Now that Q4 has a pretty healthy increase. But we’re comfortable with that only because if you recall from my comments that we saw some really improved productivity in our primary mill assets towards the end of this past quarter. So in the December time frame, because of the lead times that it takes to get through the plant, we’ll see some of that benefit in the third quarter, but significant benefit in the fourth. So that’s really what you’re seeing. You’re seeing those improvements in productivity that really show themselves four to six months later in shipments and that’s what you’re seeing in that fourth quarter number. So we have very clear line of sight to that.

And then just as far as the 737 MAX issues and production rates as those are digested, how quickly can you change your aerospace spot demand to move into the aftermarket or other programs or just within the spot market? What do you expect as far as the fungibility of demand, and do you expect a big impact from the MAX near-term?

Let me take a step back just as I had a couple of notes, and maybe answer it this way, Josh, and see if I hit your point and please follow up. Because I think it is an important point. That was big news that came out, obviously late last night, and I can say we see no material impact to our second half of FY2024, obviously, just because of the lead times, the financial projections that we put out there today. If you move more to the long-term, I think it is important to recognize, because it does get very, very hot topic, that there’s really no changes to the underlying demand for air travel or the significant increases that are projected going forward, right. So airlines need more airplanes delivered to them. That’s why you see record Airbus orders last year. And that point has been reaffirmed, I think, over and over by airline operators who continue to push for more planes to be delivered. Obviously, you talked about MRO, the industry needs new planes as we get older planes flying, and that increases MRO needs. So in this case here, if you would see any type of movement on the OEM side, that MRO demand would go up even further. And certainly Carpenter Technology were central part in delivering that demand, whether it be OEM or MRO, because as you know, where we’re at in the supply chain, our product can branch out into many different ways. So I think really what we’re discussing here with this specific news is how and over what period of time the supply chain is going to be able to meet that demand. But make no mistake, that demand is going to be there. And if I could say one more thing, meeting that demand in a safe, responsible, and quality way is what Carpenter Technology is already focused on. You’ve heard us talk about that all the time. We’re not going to push rates up. That’s going to sacrifice safety or quality. So we totally agree with the approach being taken in the wider industry. That should be the focus. And as you bring that type of discipline to the entire supply chain, you’ll see those build rates push out, obviously, and I believe you’ll see this super cycle extend, which is really good news for suppliers like Carpenter Technology. Hopefully that answered your question, Josh, but happy to take any follow-up.

Yes. No, it does, just kind of on the follow-up, though just taking that together in your comments during the call, just about the upside pressure to the 2027 targets. I imagine that all incorporates into that. And so I think you did cover that, but yes, thank you for the time.

Yes. Thank you, sir.

[Operator Instructions] And now we have a question from Chris Olin from Northcoast Research. Chris, please go ahead.

Hey, good morning, guys.

Good morning.

Good morning.

Wanted to just ask a question on Dynamet, I realize that business uses surcharges to pass through the higher costs like titanium, but I’m wondering if there is any risk to margins given the upward movement that we’re seeing in the titanium sponge market now. I guess, in other words, does Dynamet have any exposure to fixed pricing on the aerospace side, or is there a point where we start thinking about elasticity of demand or like some of the customers halting purchases because the price points get too high?

Well, as you well know, Chris, that can be a pretty complicated question. As you said, we have surcharge mechanisms that protect Dynamet. Certainly, there can be movements between quarter and quarter if any of those are material and they haven’t been in the past – certainly call those out, but no issues there. And our surcharge moves from time to time based on the current market. So we have that in place. I think the bigger story with Dynamet is the potential that it has to move even generate more earnings. They’re very similar to SAO in that standpoint with the markets they serve 95%-plus aerospace and medical demand is very strong, and we’re looking for ways to increase our supply out of Dynamet. So as we look forward, Dynamet is a big growth driver for us, and I don’t anticipate any risks around the titanium sourcing.

Okay. Commodity nickel pricing has been falling. I’m just wondering if that had any negative impacts on the business at all, even when you think about some of the distribution markets.

We just announced a record quarter and said that we’re going to increase it significantly over the next two quarters and have the highest profitability year in the history of the company. So, no, we do not see any negatives in terms of nickel billet pricing.

Thanks.

And we will follow with a question from Samuel McKinney from KeyBanc Capital. Samuel, please go ahead.

Hey, good morning, guys. First, speaking to your energy end market sales, you had a big sequential and year-over-year sales improvement. Within that, what are you seeing from power generation to we assume that’s a bigger piece of the energy pie than oil and gas.

That’s a fair comment. These orders are placed sometime out, so as they come into the queue, that’s how it laid out in our second quarter. And certainly, power generation is a small market for us, but as you can tell a profitable one. And you saw some of that spike in demand come through in the second quarter. So that’s good news for us. As we’re more than happy to take that type of business and prices in that market are obviously moving in step with current aerospace pricing.

Okay. And then any way to quantify or discuss the power gen versus oil and gas split within energy?

Well, energy is a small part of our overall portfolio. So you could say that it’s roughly 50/50, but that moves – that can move from quarter-to-quarter based on the market. And in this case, in the quarter, we just completed that was primarily power gen.

Okay. Thank you. That’s helpful. And then next for me, can you just outline the jet engine revenues quarter-over-quarter for us?

Our jet engine, I can say it this way, from a volume standpoint, we talked about overall aerospace being down 5% sequentially. Again, that’s really due to the timing and the mix of shipments. There’s no issue from a demand standpoint. We stated that the aerospace sales for us would be approximately 25% higher in the second half versus the first half. So engines and fasteners followed that same range. We had aero engine down approximately 10, and I think fastener was down sequentially approximately five or six. You’ll see large increases in that – in second half versus first half.

All right. That’s helpful. Thank you, guys.

And this concludes our question-and-answer session. So I would like to turn the conference back over to John Huyette for any closing remarks. Please go ahead.

Thank you, Marlis [ph], and thank you, everyone for joining us today for our fiscal year 2024 second 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. Have a good day.