Michael A. Hajost - Vice President of Treasury and Investor Relations Gregory A. Pratt - Chairman, President and Chief Executive Officer Tony R. Thene - Chief Financial Officer and Senior Vice President Andrew T. Ziolkowski - Senior Vice President of Operations Gary E. Heasley - Senior Vice President of Performance Engineered Products David L.

Strobel - Senior Vice President of Global Operations.

Julie A. Yates-Stewart - Credit Suisse Securities (USA) LLC Gautam Khanna - Cowen and Company, LLC Stephen E. Levenson - Stifel, Nicolaus & Company Philip Gibbs - KeyBanc Capital Markets Inc. Sohail Tharani - Goldman Sachs Group Inc..

Good morning, and welcome to Carpenter Technology’s Second Quarter Earnings Conference Call. My name is Allison and I’m your coordinator for today. At this time, all participants will be in a listen-only mode. After the speakers’ remarks you will be invited to participate in the question-and-answer session towards the end of the presentation.

I would now like to turn the call over to your host for today, Mr. Mike Hajost, Vice President of Investor Relations and Treasurer. Please proceed, sir..

Thank you, Allison. Good morning, everyone, and welcome to Carpenter’s earnings conference call for the second quarter ended December 31, 2014. 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 Greg Pratt, Chairman, President and Chief Executive Officer; Tony Thene, Senior Vice President and Chief Financial Officer; Andy Ziolkowski, Senior Vice President, Commercial for Specialty Alloys Operations or SAO, as we call it; Gary Heasley, Senior Vice President, Performance Engineered Products or PEP, as we call it; and also in the room is Dave Strobel, Senior Vice President of Global Operations.

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’s most recent SEC filings, including the Company’s June 30, 2014 10-K, September 30, 2014 10-Q and the exhibits attached to those filings.

Please also note 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.

When referring to operating margin, that is based on sales excluding surcharge and operating income excluding pension EID. I will now turn the call over to Greg..

Thank you, Mike and good morning everyone. It’s good to be with you today. As I turn to Slide 4 of our presentation you will note that this is a new slide showing our safety performance trend. Safety is one of our key principles and we take our responsibility to protect our employees very seriously.

We are very proud of the improvements we have made in the safety area over the last six years and are committed to getting even better. Turing to Slide 5, I want to provide some highlights on our recently completed second quarter and provide some perspective and how we see the business positioned going forward.

We certainly had an operationally smoother quarter down the first fiscal quarter, so explaining the significant sequential improvement and earnings is not necessarily that meaningful.

We drove SAO revenues up year-over-year in all end markets and achieved a portion of the richer sales mix that we previously described was building in a backlog as we exited the first quarter.

Having said that we are not able to show improved margins year-over-year, the sales growth and richer mix were more than offset by higher SAO cost in the current quarter as we work through the integration of our mill operating system.

We expect to see SAO cost performance improved as we further increased Athens, production capabilities, and qualifications. I will speak more about our progress on Athens, qualifications later on this call. We are pleased to see the substantial gains in our PEP segment. PEP increased sales by 18% and turn this into a 47% increase in operating income.

They did this through yield improvement and productivity gains. As we look forward there is both uncertainty and excitement. With respect to uncertainty we began to experience cancellations and deferrals for oil and gas materials as drilling and completion activity slows with falling oil prices.

I will let Andy and Gary provide a full our assessment of this risk on the businesses during their segment discussions. With respect to excitement our overall view of our end markets, our order book or backlog all point to higher sales volume with a stronger mix.

To realize higher profitability on this growth, we remain focused on driving down our operating costs. We are also excited about transitioning to era a positive free cash flow generation. With the majority of our annual CapEx plan spent in the first half of the year and a continued commitment to reduce inventory from current levels.

We expect to drive positive free cash flow in the second half of fiscal 2015. Now let me turn to Slide 6 and discuss some highlights in our end use markets. During our first quarter earnings call this slide had more red arrows than green. This is a much better picture today and demonstrates the strength that is returning to our end use markets.

Overall, sales excluding surcharge were up 8% year-over-year on flat volumes reflecting a stronger mix of products sold and/or strategically important aerospace and defense end market we drove both higher year-over-year and sequential sales.

We experience stronger engine and fastener material activity and saw higher demand with improving mix for products sold into the aerospace distribution market, often a leading indicator of overall aerospace growth. Our defense business is showing increased activity, but remains below prior year levels.

Defense product helps us improve our margins as many of these products are ultra-premium materials sold into very demanding applications.

Our energy end market and we also saw strong year-over-year as well as sequential growth, this was led by increased sales and rentals for oil and gas and drilling products at Amega West as well as oil and gas completions product sold through SAO. We do expect that falling oil prices will have a negative impact on our energy business.

We had strong year-over-year growth in medical market sales as demand improved for materials using orthopedic procedures and surgical instruments. We believe the market has reset off lower prior year levels and remains extremely competitive with new entrance creating pricing pressures.

In transportation we continue to achieve strong year-over-year sales growth and an improving mix with materials aimed at higher value engine components. With lower gas prices we are also seeing a trend towards bigger vehicles with larger engines which utilize more of our materials.

And lastly, our industrial and consumer business serves as a good example of how our mix management efforts are more and more successful. We were able to grow sales by 9% year-over-year on 8% lower volume. We did this by driving sales to high value customer electronics and industrial goods applications.

Again the net result was an 8% increase in sales year-over-year on flat shipments demonstrating a stronger mix of products. Let me now turn the call over to Tony, who will walk you through the financial summary..

Thank you, Greg and good morning to everyone, this is Tony Thene. Let’s start on Slide 8 with income statement summary. Net sales in the quarter were $548 million or $446 million excluding surcharge, with aerospace and energy accounting for 58% of the total.

In the quarter, SG&A expense was down $7 million sequentially driven primarily by lower variable compensation expense as well as lower amortization expense.

As we move through the balance of the fiscal year, we expect the quarterly SG&A expense will return to a more normalized level similar to what we reported in our first quarter of fiscal year 2015. Operating income was $45 million in the quarter and $47.4 million, excluding pension EID.

Operating margins increased sequentially by 500 basis points to 10.6% driven by a stronger mix in SAO offset somewhat by lower volumes and in an improved performance impact. Operating margins decreased year-over-year by 180 basis points. Although, SAO mix and PEP performance were much improved, SAO operating costs were higher year-over-year.

Interest expense was higher year-over-year due to the Athens assets coming online, and therefore, the less capitalized interest. Net income for the quarter was $24.1 million or $0.45 per share, excluding the $1.6 million discrete tax items, earning per share would have been $0.48.

Now let me turn to Slide 9 to discuss the effective tax rate and discrete tax item in more detail. Our second quarter tax expense includes $1.6 million or $0.03 per share of additional tax expense associated with the tax extenders legislation that was enacted in December 2014.

This legislation provision includes a retroactive extension of the research and development tax credit to calendar year 2014. This resulted in a positive change to income tax expense and the effective tax rate.

However, the legislation also include a retroactive extension of bonus deprecation for calendar year 2014, which reduced our taxable profits for the fiscal year 2014 tax return and accordingly reduced our domestic manufacturing deduction. This resulted in a negative change to income tax expense and the effective tax rate.

In total, there was a net negative impact on the tax expense of $1.6 million resulting in an effective tax rate of 36.9% for the quarter. Both the R&D tax credit and the bonus depreciation impacts are primarily a result of the startup of our Athens operation in 2014.

It’s important to note that although this legislation negatively impacted our tax expense this quarter, we expect to see a significant benefit in our cash taxes in the second half of our fiscal year as we finalize and file the 2014 tax return. We expect the cash tax benefit to be in the range of $55 million to $60 million.

For quarters three and four we expect the effective tax rate to be in the range of 33% to 34%. Now let me turn to Slide 10, and the free cash flow summary. Free cash flow was a negative $66 million for the quarter driven primarily by two items.

The first a $31 million increase in inventory as we have told you in the past historically we do build inventory in the first half of our fiscal year to prepare for the higher shipment in the second half of the year.

That said, we continue to work initiatives and reducing working capital levels which of course would be heavily focused on reducing inventory levels across the organization in the second half of this fiscal year.

The second item I wanted to highlight is the $68 million capital expenditures in the quarter, including $35 million of Athens capital spending. Year-to-date through December we spend $67 million related to our Athens facility.

As the bulk of our plan capital spending is now behind this we remain committed to our plans to generate positive free cash flow in the second half of this fiscal year. Our guidance on capital expenditures remains at $160 million to $175 million for the year. Our total liquidity stands at $484 million, which includes $29 million of cash on hand.

Another important item to add even though this not part of our free cash flow calculation, is that during the quarter we use $10 million of cash to repurchase approximately 200,000 shares under the share purchase program that we announced in October 2014.

In addition, we use $20 million of cash to repurchase approximately 465,000 shares during the month of January. In total, we have used approximately 30 million to repurchase shares to-date. With that, let me turn it over to Andy..

Thank you, Tony. I’ll now cover the SAO segment depicted on Slide 12. Compared to a year ago, revenues grew by 5% and 2% lower volume showing a strengthening in our sales mix particularly for our transportation and industrial and consumer applications. We experienced growth in all end use markets.

And as we indicated in last quarter call, our mix is also richer on a sequential basis. And we expect this trend to continue as we look forward into our third quarter.

Operating margins lagged last year, and were strong grown in a sequential basis as we outpaced a higher operating costs caused by sort of issues after annual maintenance shutdown compared to last year, operating costs were higher due to higher Athens depreciation and or previously communicated reading press outage.

In addition, overall operating costs were higher as we work through the early stages of integrating our combined mill operating system. Looking forward and as previously stated based on the sales of our backlog we believe our margins will continue to improve into the third quarter.

The full impact of the recent and dramatic decline in crude oil prices is too early to tell. To date we have seen an increase in the order cancellation rate and request for deferrals for oil and gas materials. Due to our current lead times we will realize some negative impact in this current fiscal year.

While the Athens customer qualification process continues to progress and the early indications are that the technical and operational benefits appear to be consistent with our expectations we believe that the start up and associated in efficiencies will continue as we work through the integration of our combined mill operating system.

I’11 now turn the discussion over to Gary Heasley to cover the PEP segment..

Thank you, Andy and good morning everyone. On a year-over-year basis PEP reported revenue growth of 18% and operating income increased by 47% compared to the second quarter of fiscal 2014 and strong performances by all PEP business units.

Revenue growth was driven by higher shipments of our powder metal and titanium bar and wire products and increased sales and rentals of downhole tools.

PEP’s results for the quarter improved as a result of the volume increases and productivity gains in our titanium powder and machining operations and improved profitability in our distribution business resulting from cost management on essentially flat sales.

Looking forward to the fiscal third quarter we expect the steep decline in oil and gas prices to cause a reduction in drilling activity. This will affect our downhole tool business, our distribution business and to a lesser extend our powder metal business.

Although, we did not see an impact in the second quarter, our backlog for downhole drilling tools is declined and we anticipate a reduction in demand for rentals that will affect our fiscal third quarter.

We are already taking actions to align our cost structure with lower demand in our oil and gas-focused businesses and we will continue to manage our costs aggressively as market conditions change. Overall, we expect PEP’s earnings to be down between 25% and 30% in the fiscal third quarter as a result of the anticipated pullback in drilling activity.

On the positive side we expect overall demand for powder metals to remain steady, also we expect continued strength in demand for our titanium products in both the aerospace and medical markets and we’ve installed an additional titanium wire finishing line to better serve our customers in those markets.

Our new line will be fully ramped up by the end of our fiscal third quarter. PEP had a solid quarter due to the impact of productivity gains and yield improvements, but the third quarter will present challenges to our PEP segment.

We will continue to proactively adapt our operations as market conditions and customer needs change in order to minimize the impact of the energy market decline on our businesses. Thank you and now I will turn the call back to Greg..

Thanks you, Gary. Turning to Slide 16, I want to provide an update on the Athens qualification process. As you know this is a very important part of our near-term growth opportunity. I want to use a simple framework to help you better understand where we are today and the next steps and timing to progress us further.

First of all as we grade ourselves we do believe our qualification process is on track. We are currently operational at Athens and we are already providing capacity relief to our Reading and Latrobe operations. At Athens, today we are supporting aerospace applications that require what we call base industry specifications.

We have improved production for some large diameter aerospace nickel products and we are experiencing excellent quality performance. We are producing stainless directional drilling products for the oil and gas market; we are also providing some corrosion resistance materials for the chemical processing segment.

If I look forward over the next six months to 12 months we will continue to achieve qualifications and believe we will be able to fully support the oil and gas nickel superalloy demand. We will also continue to achieve more stringent qualifications for the aerospace segment.

If you look out over the next 12 months to 36 months that’s where we think will be complete with the most stringent aerospace engine parts approval from the primes and other supply chain partners. This will complete the full integration of our key SAO operations and we will achieve our maximum manufacturing capability and flexibility.

The end result will result in improved yields and lower costs. The expansion of the Athens production capabilities and added qualification we will provide the overall system with even more flexibility to respond to increase collective demand from all of our end markets.

But before we take your questions, I would like to provide some brief final comments and you will see that on Slide 17. As we’ve stated earlier, we believe we will see sequential higher volumes and stronger sales mix in our third fiscal quarter.

In fact, our average selling price in our backlog as we exited the second quarter was 9% higher then at the end of the first quarter. Our ability to translate more of that the growth to the bottom line will be dependent on our ability to reduce our costs on which we are laser focused.

We are also carefully monitoring and managing the impact of lower oil prices on our business. We have seen some initial impact from this development, but the longer-term full impact is currently unknown. It is important to note however, that we serve a diverse group of attractive high growth end markets.

Oil and gas represents about 14% of our total sales. It is rare that all of our end markets consistently move in the same direction.

And finally, with our Athens product nearly complete, we will experience a large reduction in CapEx spend, coupled with our targeted inventory reduction, we are now transitioning to positive free cash flow in the second half of fiscal 2015.

And as we discussed on our last call, we have prioritize cash deployment towards our recently initiated share repurchase program. And with that, let me turn back to the operator, so that we can open the line for your questions. Operator, go ahead..

Thank you very much. [Operator Instructions] First question comes from Julie Yates from Credit Suisse. Please proceed..

Good morning, thanks for taking my question..

Good morning, Julie..

Good morning, Julie.

Question on jet engine sales, so one of your competitors and customers referenced to continuation of destocking and it seems like you guys saw nice year-on-year and sequential increase, are you seeing a similar dynamic or shipments starting to align more with production rate?.

Julie, this is Andy, I will take that one. So as we said last call we are not seeing the same destocking phenomenon that you referenced.

We think we’re pretty much more in line with the engine rates I would tell you that there are still seems to be some lag in the supply chain as you work through specifically to the build rates that you see published by the OEMs, but we’re not seeing the dramatic shifts that you mentioned..

Okay.

And then just a question back to balancing and attractive share price with the timing of free cash flow, $10 million in the quarter seems a little light and I understand that you guys have been active in January, but given the two year time horizon on the $500 million should we expect the cadence of the buyback to be rather backend weighted over that time period given the timing of cash inflows?.

Hi, Julie this is Tony. I wouldn’t necessarily say that is going to be backend weighted remember the program was really put in place late in the quarter. So we really just add about 30-days to 40-days in the quarter and then obviously as I said we were active in January. So if a run rate is $60 million we did $30 million in less than a four quarter.

So we can take that towards work, but I wouldn’t say that we have any predetermined plan on how much we are going to repurchase in any quarter..

Okay, great. Thank you very much..

Thank you, Julie..

Thank you. The next question comes from Gautam Khanna from Cowen. Please proceed, sir..

Hi, thanks, good morning..

Good morning, Gautam..

Good morning..

Can you talk about how your views of Athens ramping is now different if at all given the slowdown in the oil and gas end market?.

Let me start by, this is Dave Strobel. Good morning, everybody. Let me start by talking a little bit about Athens, it’s kind of help us into what we had described as far as the overall integrated mill operating system. As I think most of you know most Reading and Latrobe operations by where we do our arc windmill.

So we’ve been working through product between our facilities, melt shops, and help us grow our capability and capacity Latrobe and some of the alloys needed to serve our markets and customers going forward as we experienced market growth.

While we have been continuing that development work at Latrobe on the melt side, we’ve also been moving products to Athens and working through the qualifications through the course of developments there. And with those qualifications there is always additional processing and testing that’s what the process requires from us.

And so we are working through some of those details in Latrobe as well as working through the entire process from inspection at Athens.

Let me also say this, this is - with this movement qualification process it’s not an unusual issue or working through as far as startup of a new plant that we have not been calling out the startup related costs and special items because it’s part of what we do and frankly our dependencies of the facilities really difficult to justify or itemize anyway.

We do expect that to improve over time, it’s been qualifications style in on our best pass to make the products with the greatest efficiency across the capabilities of the entire system.

So with that said as far as - as we are moving products between the various facilities, it’s something that we’ll have the ability to continue to adjust and really dial-in as far as what makes the most sense to make where, and so even with the slowdown, we are picking up business with [indiscernible] and some other aspects of business that will help keep Athens going..

This is Andy, I would amplify these comments, we are starting to progress on a pretty good run rate in drilling and exploration materials were part of that and we saw a fair amount of that in production activity and like any other capacity when things get softer we’ll look at capacity, but there will undoubtedly be some sort of impacts as we shift and replace..

Okay, to follow-up on that presumably with oil and gas the weaker I would imagine it may exacerbate the supply demand imbalanced in nickel alloys and I just wondered if you could comment on this backlog trend you are seeing with richer pricing or richer mix, do you anticipate that will continue as we move out over the next four quarters or do you expect it at any point to take a step back given the dynamic of a big end market getting softer may exacerbate in over supply condition..

Yes, Gautam this is Andy again I will take one, as I mentioned, as we look out of our backlog, our backlog remains consistent and the margins continue to grow. So we expect that trend as far as we can see now will continue.

Having said that we are seeing some downward pricing pressure specifically from the oil and gas OEMs, but that has not been the case in the other markets and we will look to separate that activity through those other markets..

Okay and then if you could just give us some color Andy on when you anticipate SAO margin getting back close to that 20% level ex surcharge that you had just not so long ago. Do you anticipate that this fiscal year or if you could just walk us through some of the puts and takes and perhaps the timing..

Gautam we’ll probably tag to you in this between Dave and I, but certainly from the – you just kind of bifurcate that equation and look at the contribution of the products that we sell, we’re seeing the contribution of the products we sell increase and our expectation is that they will continue to get better as we move forward.

Again, given the early uncertainty from oil and gas.

What we are working through and the challenges we see is putting together the mill operating system and that will have a lot to do with and be coupled to the qualifications that we see at Athens as we continue to work through that process things will align into their more normal supply chains at which time we can optimize the efficiencies and the structure behind that.

So we will be pretty closely aligned with some of the guidance that Greg gave as we work through the asset qualification..

Okay so are we looking out 18 months before we’re there, I’m just trying to get a sense for timing, so I don’t over estimate my estimates, you know..

Yes Gautam this is Greg. I believe that you will see steady progress as we improve our mill operating system; it seems to us that the market side that is the commercial side is pretty much in place.

I think much of what you are seeing now is noise associated with the normal startup of the facility, it is somewhat complicated by the fact that we have to go through our qualification process which is not 100% within our control as we work with our partners. So it will be gradual and it will I believe improve with each sequential quarter.

We’re laser focused on controlling our costs and by doing that we think that that will be a major contributor to our operating margin percentage..

Okay. Thank you..

Thanks Gautam..

Thank you. The next question comes from the line of Steve Levenson from Stifel. Please proceed sir..

Thanks. Good morning everybody..

Good morning..

Good morning..

Is the comment that you made about shipping some large diameter nickel products an indication that the open board report is at least to some extent qualified now?.

This is Dave, the radio press down in Athens, say we have been very successful in developing some of the initial products down there, so that was below a 41 780 products, we’re working our way through those and have been very happy with some of the results, again it just takes some time and we got the qualification programs with each departments that we need to work our way through..

Okay. Thank you. And second on the additional titanium wire capacity, do you see the increase in demand and your initial use of it related more to the A350 or is it other programs.

At what point do you think it will be at full capacity utilizations?.

We don’t have great visibility through our customers to the end platforms that our titanium wire goes into, but I can tell you that we have struggled now for well a long time to product enough material to support our customers needs.

So we believe this will ramp up very quickly, we should be fully ramped by the end of the quarter and we will be glad to have this capacity so we could better serve our customers. I don’t think we are at this point - well we are not at this point anticipating any trouble still in the line ground..

Got it. Thank you very much..

Thanks Steve..

This is Greg again, if I could just add a quick comment. We anticipate increasing our capacity even further with another line in order to meet our customer’s requirements. So we will continue to build out in order to meet the demand. Next question please..

Thank you sir. The next question comes from the line of Phil Gibbs. Please proceed sir..

Hey it’s Philip Gibbs at KeyBanc. Good morning..

Good morning..

I had a question just on kind of the cadence as we move into the 3Q from 2Q on the earnings side, obviously some puts and takes, I think Gary talked about a 30% decline in profitability in the PEP segment. I thought that was quarter-on-quarter and then I think you are talking about stronger margins and stronger volumes in SAO.

So I was just trying to think about how to balance that relative to where we were in the second quarter and if there is anything else we should be thinking about..

Hey Phil, this is Tony. I think what we try to do with those two segments is split them apart for you, so you can really work your models on each one of those individually.

So on the guidance that 30% down on PEP, you should apply that to PEP only, so that’s the PEP results, the primary impact to that is oil and gas, obviously they are looking at counter measures to offset that but that should be specifically associated with PEP.

On the SAO side when Andy speaks, he is obviously speaking specially on SAO and that we do going forward see continued improvement on the mix in margin piece..

Is that largely due to the pickup in aero on the engine business on the fastener side?.

Yes Phil this is Andy. I wouldn’t say only fastener, I mean it’s pretty much a balanced improvement across the more premium applications that Greg kind of went down on that markets wide, will be consistent as it follows its way through the backlog, but certainly aero engine and aero fastener plays a role again..

Okay and then just a strategic question, how will the inventory reductions that you are expecting maybe the back half of this year and into next year. How does that play into sort of margins and overhead absorptions, I mean how do you balance that with trying to grow your margin piece of the equation. Thanks..

Yes this is Tony. Obviously that will have an impact on fixed cost absorption, but that’s one of the things that we will manage as we go through.

Is it going to be a negative? Yes and we will do our best to manage that to be as small as possible, but I think the important thing is that what drives is reducing the inventory and driving that cash to the bottom-line..

Thanks. Thanks Tony..

Thank you. The next question comes from Sal Tharani from Goldman Sachs. Please proceed sir..

Good morning, a couple of questions.

On the energy side, if I look at your 14%, 15% revenue exposure, would it be more impactful in PEPs and SAO going forward?.

Sal, I’ll take it. This is Andy. If you look at the whole segment in energy, you got to take about 2% off that for powergen, so getting down to the 14%-ish that is almost roughly split, SAO has about 60% and PEP has about 40% as it relates to oil and gas..

Okay great and Gary you mentioned pressure in pricing in titanium products in aerospace and medical.

Can you give us a little more color which one specifically or is it on both places and what’s the reason for that?.

Well there are multiple reasons Sal and we’ve got competitive dynamics sort of changing, new entrance into the marketplace and of course we are meeting head on and then we’ve also got in the aerospace side and the medical side OEMs that are pushing for comp reductions. So we’re dealing with that as well.

Now we are offsetting that with productivity gains and getting more throughput in our existing platform as well as adding some volumes, so I think if we manage this properly we will mitigate much of that impact on our business over the course of the next year or so..

Are this guidance of 25% to 30% decline in strictly coming from the energy side, while the titanium is already sort of reflect flattish margin for you?.

It’s actually more than just oil and gas, but oil and gas is the vast majority of the impact and that’s where we anticipate this rather dramatic change coming. So there are other factors in there, but it’s really predominately oil and gas..

Okay. Great, thank you very much..

Thanks Sal..

Thanks Sal. End of Q&A.

That concludes the question-and-answer portion on today’s call. Let me now turn it over to Mr. Mike Hajost for closing remarks. Please go ahead sir..

Thank you again for participating on today’s call. We look forward to speaking with you again next quarter. Thank you and good-bye..

Thank you, ladies and gentlemen. That concludes your conference call for today. You many now disconnect. Good day..