Hello and welcome to the Carpenter Technology Corporation Fourth Quarter Fiscal 2021 Conference Call. All participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. Please note, today's event is being recorded. I will now turn the conference over to Brad Edwards, Investor Relations. Mr.

Edwards, please go ahead..

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology earnings conference call for the fiscal 2021 fourth quarter and full year ended June 30, 2021. This call is also being broadcast over the Internet along with presentation slides..

Thank you, Brad, and good morning to everyone on the call this morning. Let's begin on Slide 4, a review of our safety performance. For fiscal year 2021, our total case incident rate was 0.6, marking the best fiscal year safety performance on record. Today, Carpenter Technology is one of the safest manufacturing companies in the United States.

However, our ultimate goal is a zero-injury workplace. The continued progress we made in fiscal year 2021 was due to our focus on fundamental safety programs, including hand safety, human performance, leadership development and employee engagement activities.

In fiscal year 2022, we plan to build upon the momentum and take our next step towards a zero-injury workplace. Now, let's turn to Slide 5 and a review of the fourth quarter. Our fourth quarter results finished ahead of our expectations.

The results reflect our efforts to position ourselves to capitalize on the emerging recovery and market opportunities. While the recovery remains in the early stages and varies by end-use market, we are encouraged by the market signals we are seeing.

We saw demand conditions improve sequentially across our major end-use markets, including Aerospace and Defense and Medical. During the quarter, we continued to execute a strategy focused on driving liquidity, strengthening key customer relationships and advancing our manufacturing capabilities.

We generated free cash flow of $43 million and for the full-year delivered free cash flow of $132 million, quite an accomplishment when many in the industry burn through cash during the market downturn..

Thanks, Tony. Good morning, everyone. I'll start on Slide 8, the income statement summary. Net sales in the fourth quarter were $421.6 million, and sales excluding surcharge totaled $348.1 million. Sales excluding surcharge increased 17% sequentially on 27% higher volume. Compared to the fourth quarter a year ago, sales decreased 7% on flat volume.

As Tony covered in his review of the end-use markets, we continue to see signals of improving demand conditions across most of our end-use markets..

Thanks, Tim. Let's turn to Slide 14 in my closing remarks. The last year has been a challenging, but successful year for Carpenter Technology. In navigating the pandemic, we have strengthened our company to best capitalize on the coming recovery.

With respect to our facilities and employees, fiscal year 2021 was the safest in the history of the company, despite operating in unprecedented conditions.

In terms of managing our business, we moved quickly to execute various portfolio initiatives and cost reduction programs, which will deliver between $60 million and $70 million in annualized cost savings.

In addition, we have been relentlessly implementing the Carpenter operating model across key work centers and have secured notable productivity gains. We also focused on driving liquidity and finished the fiscal year 2021 with total liquidity of $582 million including $287 million in cash.

Our enhanced operations and strong financial position will provide us with increased flexibility as we look to best capitalize on market opportunities and the overall recovery as it continues to take shape.

We also expect to benefit from our Athens facility, as the incremental capacity it offers the aerospace market as production levels rise and industry capacity begins to tighten. We have meaningfully expanded and strengthened key customer relationships during the downturn.

We have worked closely with our customers to address their changing material needs and production schedules, and demonstrated that Carpenter Technology is both a critical solutions provider as well as a valued business partner.

We remain a market leader in our core business, where we have provided mission-critical solutions to the world's largest industries for more than 130 years. In addition, we have invested in emerging areas like our soft magnetic portfolio, as electrification is a major trend moving forward.

As I said last quarter, the worst is behind us and the recovery has started. And while different recovery timelines across our end-market will continue to influence our shorter-term quarter-to-quarter performance, we are excited about the mid-term and longer-term outlook. Thank you for your time.

And now, I will turn it over to the operator to take your questions..

Yes, thank you. At this time, we will begin the question-and-answer session. And the first question comes from Gautam Khanna with Cowen..

Yeah, so thanks. Good morning, guys..

Yeah, good morning..

I was wondering, at SAO there was mention of some closeouts in the quarter, benefiting sales and profits.

Any way you can quantify that?.

Not to the exact number, Gautam. But we just wanted to mention that there was some of that a year ago when we work with our customers to delay some shipments. We trued that up in this quarter here. So not overall significantly material, but it was one of the drivers to higher sales in the quarter..

Okay. And the commentary around the fiscal Q1 SAO being similar to Q4.

I was curious, what are you seeing in the aerospace like backlogs, where are you seeing demand picking up? Is it engines, is it fasteners, is it structures? How can you characterize sort of what's been going on in that channel?.

Well, I can say, if you look forward and why we're confident is a couple of data points. Overall, our total backlog is up 20% sequentially. And that's across all of our end-use markets, different percentages, but all of our end-use markets, the backlog is increasing. Bookings sequentially were up 14%. Some markets higher than that.

For example, in medical that had very strong bookings in the quarter and lead times are extending across the board as well. So, as you look at all those things start to come together, it gives you a very positive outlook. Now, it's fair to say that not all customers are at the same point.

We have some customers that are ordering right now for immediate needs. We have other customers that are telling us, “Hey, I have got another 30, 60, 90 days of inventory I need to burn through.” So they're all at different points in time.

But as I said, overall, when you take a look at lead times, bookings and backlogs and orders, it points to a pretty clear signal that we're moving forward..

And any meaningful differences between engines, fasteners and structural components?.

In terms of sales, sales backlog?.

In terms of demand or orders, demand lead times?.

Yeah, sales, on the sales side, engines were strong, they were up 26% sequentially. Fasteners were down a bit. But as you all know, that can be up and down. But if you look at it from a backlog standpoint, all of the submarkets in aerospace was up except structural, which was flat quarter-over-quarter.

And then, if you look at bookings, we had bookings were up slightly in aerospace and some mixing differences inside the submarkets..

Okay.

And lead-times in general, I imagine the fastener lead-times are short, but how are they trending in engines?.

I would, if I remember correctly, yeah, if I remember correctly, last quarter I said that engines for us were about 10 to 12 weeks. We track pretty closely with the others in the industry, maybe a couple of weeks here or there difference. And if you look at this quarter, lead times roughly are extended 50%, 60%.

So several weeks push out on the lead times. And I've said this, Gautam, every quarter. That's going to continue. Prior to the pandemic, we were at roughly 52 weeks. And here we are, I say 10 to 12, last quarter, you're in the high teens, maybe this quarter.

That's going to continue to increase as more and more customers start placing those increased orders..

Yes, thank you very much. I appreciate it..

Yeah, thanks, Gautam. Have a good day..

Thank you..

Thank you. Thank you. And the next question comes from Michael Leshock with KeyBanc Capital Markets..

Hey guys, good morning..

Yeah, good morning..

So, first, I just wanted to ask about your current inventory levels.

Do you feel comfortable with where they're at now? Or should we expect further destocking in the first quarter? Or do you see any benefit from inventory absorption going forward?.

Yeah, it's a good question. Thanks for asking. I think that we spent the last year really diving deeper into the Carpenter operating model, to get our inventories at a lower rate overall. So when you look at days on hand overall, we want that number to be lower going forward.

Prior to the pandemic, we consciously moved our inventories up, because again we were at 52 week lead-times. We wanted to supply our customers. We were melting non-stop, right? And we invested in our customers and put that into inventory. We were allowed to balance that more during this pandemic.

So as we go forward, I do not see us going back to those higher inventory levels, because we've taken some corrective actions. Now, will every quarter be a step down? No. You could see quarters over the next year or two, where we build a little bit of inventory, because of some specialized situation.

But overall, going forward, our inventories will stay flat, and we believe that we still have some opportunity to take them down over a longer period with - hopefully, that helps out..

Yeah, that's helpful. And then, on different platforms, do you see some platforms that are destocking more or less than others within aerospace, whether that be by platform or by product.

But I just want to know what opportunities do you see are there to ship more upon the recovery, given some of the supply chain inventory levels?.

Well, as you know, we're on all of the platforms. So whichever ones are coming back quicker or slower for us, the demand is still there. So like I said, if you just take a look at the lead times in the backlog and the bookings across the entire aerospace industry right now, that's pretty compelling data that says we're moving forward in this recovery.

I do think it's important to note that over the next couple of quarters, even when I say that you have the positive trend moving forward, it could be lumpy in the aerospace market. You could see a quarter where engines are down a couple of points going forward. And that's nothing to be alarmed about.

I think if you look at it year-over-year though, you're going to see positive increases going forward. And what we are saying on the call today lines up spot on to what you're hearing from other manufacturers in the industry that have released earnings recently or talked external recently.

So I think we're right in line with what you're hearing other people in the industry saying..

Got it. Appreciate the color. Thanks, guys..

Thank you. And this concludes the question-and-answer session. I now like to turn the conference back over to Brad Edwards for any closing comments..

Thanks, Keith. Thank you, everyone, for joining us today for our earnings conference call. We look forward to speaking with all of you again in the near future. Enjoy the rest of your day and have a great summer..

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