Carpenter Technology Corp (CRS) 2026 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Desiree and I will be your conference operator today. At this time, I would like to welcome everyone to the Carpenter Technology's second-quarter fiscal year earnings call. (Operator Instructions) I would now like to turn the conference over to John Huyette. You may begin.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology earnings conference call for the fiscal 2026 second quarter ended December 31, 2025. This call is also being broadcast over the Internet along with presentation slides. For those of you listening by phone, you may experience a time delay in slide movement.

Speakers on the call today are Tony Thene, Chairman 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, 2025; Form 10-Q for the quarter ended September 30, 2025; 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 in sales excluding surcharge.

I will now turn the call over to Tony.

Thank you, John. Good morning to everyone. I will begin on slide 4 with a review of our safety performance. We ended the second quarter of fiscal year 2026 with a total case incident rate of 1.4. We saw improvement over the last quarter. And as a result of the actions in this area, I expect to see continued progress going forward. As always, we remain committed to our ultimate goal, a zero injury workplace.

Let's turn to slide 5 for an overview of our second quarter performance. Second quarter performance continued our earnings momentum and sets us up for a strong second half to fiscal year 2026. Let me highlight the four major takeaways for you.

One, record earnings. In the second quarter, we generated $155 million in operating income, exceeding our previous record set in the prior quarter. And it is a 31% increase over our second quarter of fiscal year 2025. Another meaningful step-up year over year. Our consistent earnings growth continues to be the result of our solid execution, strong market position, and unique capacity and capabilities.

Two, expanding operating margins The SAO segment continued to expand margins, reaching an adjusted operating margin of 33.1% in the quarter. This margin compares to 28.3% a year ago and 32% in the prior quarter.

Keep in mind that there are lots of factors that impact what our operating margins can be in any given quarter. Most notably, the mix of our products. So going forward, we may see some quarters that are flat or slightly lower, but their overall trajectory is anticipated to continue upwards.

With that being said, our current outlook calls for increasing SAO margins over the next two quarters of fiscal year 2026. As in the past, the positive trend will continue to be driven by increased productivity, product mix optimization, and pricing actions. As a result of the expanding margins, the SAO segment recorded $174.6 million in operating income, an increase of 29% year over year and another all-time record for the segment.

Three, strengthening market demand. Especially in the aerospcae and defense end-use market as we continue to see strengthening demand signals in terms of OEM production and order intake rates. Our customers are keenly aware of these demand signals and are positioning themselves accordingly.

In the quarter, booking for the aerospace and defense end-use market increased 8% sequentially. However, it is important to note that defense sub-market orders were down materially in the quarter due to the government's shutdown and uncertainty in terms of the defense budget.

Most importantly, commercial airspace bookings were up 23% sequentially. This is the fourth consecutive quarter of sequential order intake increases for the aerospace and defense end-use market. Seeing such strong bookings in a quarter that's usually quieter due to the holidays is a good indication of the accelerating demand for our materials.

And four, pricing continues to be a tailwind. Given the strong demand outlook, our customers continue to be focused on securing their supply and our pricing continues to increase. As evidence of this, we completed three additional long-term agreements with aerospace customers with significant price increases during the quarter. These long-term agreements represent good value for us and our customers as they look to secure their material needs going forward.

Let's turn to slide 6 and have a closer look at second quarter sales and market dynamics. In the second quarter of fiscal year 2026, our total sales, excluding raw materials surcharge, were up 8% over the second quarter of fiscal year 2025 and down 2% sequentially.

Net sales were as we expected and a result of multiple factors, including the available operating days and customer closure schedules, items which we see at every calendar year in and which I noted in last quarter's earnings call. As we enter our third quarter, these factors are not in play, and we expect a sequential increase in net sales.

Let me briefly review some of the key markets starting with aerospace and defense. Sales in the aerospace and defense end-use market were down 1% sequentially and up 15% year over year. While down modestly on a sequential basis, the aerospace and defense end-use market net sales represented our second best quarter on record, and activity with our aerospace and defense customers continues to increase.

I will mention two important data points from the aerospace engine and structural sub-markets. Order intake in the quarter for our aerospace engine materials was up 30% sequentially, signaling continued growing strength and demand. And very importantly, our aerospace structural customers are moving off the sidelines and ramping up order placement. Many of them recently placed their first large orders with us in several quarters, and are already preparing their next round of orders which they anticipate being larger and even more urgent.

Moving on to the medical end-use market. Our sales were down 7% sequentially and 22% compared to the prior year's second quarter. The decrease is isolated to certain titanium products for a specific set of medical distribution customers, and all within our PEP segment. (inaudible) this has impacted the earnings of the much smaller PEP segment, but the impact is not material to total Carpenter Technology results and not material to our overall earnings outlook or our ability to deliver on such outlook.

Outside of these distribution customers for titanium, we do see bright spots in other areas of the medical end-use market. (inaudible) to our orthopedic and dental sub-markets remain strong, both near and all-time record. Our advanced solutions, which are ultimately used to support improved patient outcomes and are critical to trends like minimally invasive surgeries, metal sensitivity, and robotics, remain highly valued by our customers.

Shifting to the energy end-use market. Sales were down 10% sequentially and up 19% year over year. As I've said many times, sales in the power generation sub-market will fluctuate quarter to quarter due to the frequency of orders and our practice of strategically sliding them into our production process.

Power generation demand continues to accelerate driven primarily by the immense energy needs of data centers. We remain in close coordination with the power generation customers across multiple platform types and OEMs to plan for their future material needs.

Altogether, we are operating in a strengthening demand environment across the high-value end-use markets that we believe will drive meaningful growth in both the near-term and long-term.

Now, I will turn it over to Tim for the financial summary.

Thanks, Tony. Good morning, everyone. I'll start in the income statement summary. Starting at the top, sales excluding surcharge increased 8% year over year on 5% higher volume. Sequentially, sales were down 2% on 4% higher volume. The improving productivity, product mix, and pricing are evident in our gross profit, which increased to $218.3 million in the current quarter, up slightly sequentially and up 23% from the same quarter last year.

Selling, general, and administrative or SG&A expenses were $63.1 million in the second quarter. Flat sequentially and up $4.5 million from the same quarter last year. The SG&A line includes corporate costs, which were $26.2 million. This is flat sequentially and up $2.6 million from the second quarter of fiscal year 2025. For the upcoming third quarter of fiscal year 2026, we expect corporate costs to be about $25 million.

Operating income was $155.2 million in the current quarter which is 31% higher than our second quarter of fiscal year 2025 and up slightly from our recent first quarter. As Tony mentioned earlier, this represents another record quarterly operating income result. Breaking the previous record that last quarter.

Moving on to our effective tax rate, which was 19% in the current quarter. This quarter's effective tax rate was lower than anticipated, primarily due to discrete tax benefits associated with the exercise of certain equity awards in the current quarter.

For the balance of the fiscal year, we expect the effective tax rate to be between 22% to 23%. For the full fiscal year 2026, the effective tax rate is expected to be on the low end of the full-year guidance we previously provided of 21% to 23%.

Finally, the adjusted earnings per diluted share was $2.33 for the quarter. The adjusted earnings per share excludes the impact of the debt refinancing we completed in the quarter. I'll talk about that shortly.

Now turning to more detail on each of the segments, starting with our SAO results. Net sales excluding surcharge for the second quarter were $527.3 million. Compared to the same quarter last year, sales were up 10% on 5% higher volume, reflecting the impact of product mix optimization and pricing actions.

Sequentially, sales were down 1% on 5% higher volume. We recognize there is a significant focus externally on our reported sales and volume each quarter and ultimately, the selling price per pound of our products particularly in our SAO segment as an indicator of pricing changes.

As we've stated before, the selling price per pound in any given quarter is highly dependent on the mix of products that we ship in any one quarter. As we saw this quarter, our product mix was influenced by the planned maintenance activities and holidays. As a result and as expected given these dynamics, our reported net sales excluding surcharge per pound were down slightly sequentially and up year over year.

Most importantly, SAO's adjusted operating margin continued to increase and in fact hit record levels, reaching 33.1% in adjusted operating margin. This marks the 16th consecutive quarter of margin expansion. As a result, SAO reported operating income of $174.6 million in the second quarter, a new all-time high for the segment.

In addition to max and price benefits, the record performance reflects the SAO team's ability to actively manage our production schedules, increase productivity at key work centers, manage cost and execute thoughtful plan maintenance activities.

Looking ahead to our third quarter of fiscal year 2026, we anticipate SAO will generate operating income in the range of $195 million to $200 million. This implies a healthy 12% to 15% increase from SAO's second quarter record results.

Now turning to slide 10 on our PEP segment results. Net sales excluding surcharge in the second quarter of fiscal year 2026 were $77.2 million, down 11% sequentially and down 10% from the same quarter a year ago. As Tony mentioned earlier, the decline was primarily driven by titanium sales which were heavily impacted by lower demand from specific medical customers. As a result, PEP reported an operating income of $6.9 million in the current quarter. Compared with $9.4 million in the first quarter of fiscal year 2026 and $7 million in the same quarter a year ago.

The year-over-year improvement in operating margin reflects increasing sales in our additive business driven by demand as well as the cost benefits of actions we took last year to reduce structural costs in this business. We currently anticipate the PEP segment's operating income for the upcoming third quarter to be in line with the second quarter of fiscal year 2026.

Before we move to cash flow, I just wanted to pull together the pieces that make up our outlook for operating income for the third quarter of fiscal year 2026. We anticipate total operating income of $177 million to $182 million. This includes SAO at $195 million to $200 million, PEP at roughly $7 million, and corporate costs of $25 million.

Now turning to the next slide to talk about our cash generation and capital allocation priorities. In the current quarter, we generated $132.2 million of cash from operating activities and spent $46.3 million on capital expenditures which resulted in adjusted free cash flow of $85.9 million. As I mentioned last quarter, we expect capital spending will accelerate in the second half of the fiscal year 2026 as construction activities related to the brownfield capacity expansion project broaden and equipment delivery and installation begins in earnest.

As we look ahead, we expect to generate at least $280 million of adjusted free cash flow in fiscal year 2026. Our free cash flow generation is important as it enables us to deploy a balanced capital allocation. As we've discussed before, our primary focus areas for capital deployment are investing cash in attractive and accretive growth projects, and returning cash to shareholders.

In that regard, we continue to execute against our share repurchase authorization and repurchased 32.1 million of shares in the current quarter. This brings the total to $183.1 million spent to-date against the $400 million authorization that we announced in July of 2024.

In addition to the buyback program, we also continued to fund a recurring and long-standing quarterly dividend. That brings us to investing in growth As noted, the brownfield expansion project construction activities are ongoing and rapidly progressing. The project is currently on budget and on schedule.

Finally, our ability to deploy capital is also supported by our healthy liquidity and strong balance sheet. In the current quarter, we took actions to strengthen both our balance sheet and liquidity. Namely, we completed a refinancing of our long-term debt to extend the maturity of our notes to 2034, while reducing the interest rate.

In addition, we amended and restated our revolving credit facility, primarily to increase our credit facility from $350 million to $500 million and extended the term to 2030. As is the most recent quarter end, our total liquidity was $730.8 million, including $231.9 million of cash and $498.9 million of available borrowings under our credit facility. Our credit metrics remain very strong. With our net debt to EBITDA ratio remaining well below 1 times.

Altogether, we believe our strong balance sheet and outlook for significant cash generation position us well to fund continued growth and deliver significant shareholder returns.

With that, I will turn the call back to Tony.

Thanks, Tim. Each quarter, important things emerge that become the focus of attention in the investment community. As I did last quarter, I will address them in detail to make sure Carpenter Technology's position is clear.

First, the ongoing discussion concerning the strength and acceleration of the aerospace demand environment where they focus on current and anticipated build rates. On last quarter's earnings call, I spent a lot of time providing details of positive momentum in the aerospace demand environment. Without repeating everything, I will just state again that the aerospace market is in the midst of one of the largest build grants ever to meet the unprecedented demand projections.

Let me provide a couple new positive data points that have appeared over the last quarter. Notably, Boeing achieved the milestone of building 42 737s in the month of December. On their earnings call earlier this week, Boeing reaffirmed their intention to increase build rates in calendar year 2026.

And most notably, they emphasized their builds would be increasing much higher than deliveries given that finished plain inventory has now been depleted and their intent to build some 737s ahead of delivery in 2027. While citing an expected 10% increase in deliveries, Boeing noted that build activity would have to increase much more to account for the factors I just mentioned.

In light of this, our aerospace customers continue to report increasing demand in the supply chain to support the build rate ramp. This in turn is accelerating confidence in the aerospace outlook across each of our sub-markets.

Our airspace engine customers are full steam ahead. The engine OEMs are asking us whether the supply chain has ordered enough material to support part builds. And our direct customers are focused on getting orders placed against in many cases recently signed long-term agreements. Importantly, and as I mentioned previously, we continue to see meaningful sequential increases in order intake for our aerospace engine materials, up 30% sequentially.

I will also repeat my statement from earlier that our aerospace structural customers are moving off the sidelines and ramping up order placement. This is an aerospace sub-market that has been lagging to others, and the recent placement of their first large orders with us in several quarters is an encouraging sign of strengthening confidence in the aerospace ramp.

We are also working closely with our aerospace fastener customers to ensure they get the materials needed as they are projecting big increases for calendar year 2026.

Altogether, we are clearly in the midst of an acceleration of aerospace demand. Our sophisticated customers understand the accelerating demand dynamics, and we continue to work with them to ensure they have their orders in place, so they are not last in line.

Our customers also understand that nickel-based super alloys will be in short supply with only a few qualified producers globally. That point leads to the second topic to discuss, nickel-based super alloy industry supply. This could be a difficult topic to understand and to quantify as there are numerous complex nickel-based super alloys that are supplied into aerospace engines and other critical areas of the aircraft such as landing gear, avionics, and structural.

Before I address supply, it is important to understand the demand projections for nickel-based super alloys into the aerospace supply chain. As we have detailed in our investor event about a year ago, the aerospace industry is targeting build rates of 2,100-plus airplanes per year. To put that into perspective, that is at least 30% higher than the pre-COVID high calender year 2019 when the industtry was effectively sold out of nickel-bas super alloys.

But aerospace OEM demand is not the only area that competes for scarce nickel-based super alloys. As the installed fleet of planes continues to grow and age, MRO demand is projected to be at significantly higher levels going forward versus today.

Defense demand is increasing rapidly driven by the increased number of platforms and by the need of even more advanced capabilities, both of which mean higher demand for specialty material solutions. Demand for special materials used in space has also been increasing, with one driver being that the number of commercial satellite launches continues to increase as the space economy grows.

And lastly, power generation demand is increasing substantially. This has been widely discussed, with news articles on this topic nearly weekly. And it is driven by the need for power to support their growing data center build out as well as increasing needs from developing economies. It's important to include the power generation demand in this discussion, because in many cases, it can (inaudible) for time on the same assets used to produce aerospace nickel-based super alloys. Taking into consideration increased demand from several areas, it becomes clear that macro trends support an accelerating explosion of demand for nickel-based super alloys.

Now let's address the supply of these alloys. Since the pre-COVID year of 2019, there has been no meaningful increases in overall qualified nickel-based super alloy supply other than from internal productivity improvements from the current suppliers. Since that time, Carpenter Technology has been the only company to formally announce any investment in capacity expansion in this specific area, as we did recently at our February 2025 investor update.

For those who are unfamiliar, we are investing in a brownfield capacity expansion focused on primary melt, specifically, a new vacuum induction melting furnace which is a critical piece of equipment in the manufacturing process of high-purity specialty alloys.

In total, this project plans to add 9,000 additional tonnes, roughly a 7% increase over our 2019 shipments. While this is meaningful to the financials of Carpenter Technology, it is not a meaningful increase for the industry. Remember, Carpenter Technology is one of three players participating in the high-end nickel-based alloy market. And we are only adding a modest 7% additional capacity versus our 2019 shipment levels only.

Taking into consideration the significant projected increase in aerospace OEM builds, combined with the projected demand increases for aerospace MRO, defense, space, and power generation applications, our capacity increase may account for only a small single-digit percentage of the total projected supply/demand deficit.

Of course, there could be other incremental capacity announcements on the horizon given the delay and environment. But they, too, will likely be minimal in terms of their impact on closing the projected gap in supply.

Keep in mind this type of capacity is highly specialized, difficult to operate, costly, and take significant time to build, install, develop, qualify. It is this persistent supply/demand gap that is driving the current pricing environment, particularly in the nickel-based super alloy market, and we don't see that changing materially.

This leads to the third topic, nickel-based super alloy pricing. Similar to the aerospace demand topic, I also spent a lot of time providing details of our pricing and cost contractual arrangements on the last quarter's earnings call. Again, all of that commentary still holds true.

I will note again to support our view of the pricing dynamics for our materials that in the quarter we completed negotiations on three long-term agreements with aerospace customers with significant price increases. It is also important to note that in turn, our customers also benefit greatly as they are getting surety of supply of our products w hich is highly valuable to them in an extraordinarily high-demand environment.

Final point on this topic. We have communicated publicly many times and states again today that we believe pricing actions will continue to be a positive tailwind into the future, due to the supply demand imbalance that exists today, and as expected to intensify in the future for nickel-based super alloys.

Lastly, we continue to receive questions about our confidence in our earnings guidance. As you have come to understand, our earnings guidance philosophy is very structured and well thought out. We believe in establishing challenging targets that we have line of sight to achieving. With disciplined action plans in place, we have earned the reputation of achieving and exceeding our targets.

At the start of fiscal year 2026, we projected operating income for the current fiscal year of $660 million to $700 million. Given the supply/demand dynamics I just covered and the visibility we have for the second half of the fiscal year 2026, we are raising our guidance to $680 million to $700 million. This range for fiscal year 2026 represents a 30% to 33% increase over our record fiscal year 2025 earnings.

As you recall, we established fiscal year 2027 guidance of $765 million to $800 million almost a year ago in February of 2025. At that time, we stated our belief that the targets for fiscal year 2026 and 2027 were the highest earnings growth trajectory among our industry peers, and we still believe that to be true.

However, let me be clear, as this aerospace market continues to accelerate, our focus is not on achieving the fiscal year 2027 guidance. The focus is on exceeding that target. As we continue to fine tune our outlook, I would expect in the next few quarters we will be updating the fiscal year 2027 guidance, as well as adding longer-term annual guidance.

Now let's turn to the final slide to summarize this great story. Let me close as I did last quarter with why I think Carpenter Technology is a compelling story for existing and potential shareholders. Let's take a look at the three major areas most important to shareholders.

One, we have an enviable market position in the industry. We're in the midst of a significant acceleration of demand, especially in the aerospace and defense end-use market. With accelerating build rates driving high demand for our materials, a fundamental supply/demand imbalance, and nickel-based super alloys will tighten even further.

Our world-class collection of unique manufacturing assets and related capabilities are difficult, if not impossible to replicate. Our leading capacity and capabilities are further differentiated by stringent qualifications necessary to supply advanced materials for aerospace and defense and other key end-use market applications.

Two, we are committed to a balanced capital allocation approach. We have a healthy liquidity position and a strong balance sheet, combined with an impressive free cash flow generation outlook. We are focused on returning cash to shareholders via a long-standing dividend and a robust share repurchase plan.

In addition, our strong performance enables us to invest in highly accretive growth projects, like our recently announced brownfield expansion that accelerates earnings growth but will not materially impact the nickel-based supply/demand imbalance.

And three, we have delivered impressive financial results with a strong earnings outlook. We have just completed another record quarter of profitability driven by significant margin expansion in our SAO segment.

Our increased guidance for fiscal year 2026 implies a 30% to 33% increase over a record fiscal year 2025. And we are well on our way to achieving and even surpassing the earnings target for fiscal year 2027. I don't know if anyone in our industry who can say they have a stronger earnings outlook than Carpenter Technology.

Of course, fiscal year 2027 is not expected to be our peak. We have plans in line of sight to further earnings growth beyond 2027.

In summary, we believe Carpenter Technology checks every important shareholder criteria box. We have created significant shareholder value to-date, but we are only at the beginning of this growth journey. The best is still to come. As always, we remain focused on supporting our customer needs, operational execution, and living our values as we drive to exceptional near-term and long-term performance.

Thank you for your attention. I will now turn the call back to the operator.

(Operator Instructions)

Gautam Khanna, TD Cowen.

Thanks. Good morning, guys. I was wondering, Tony, if you could elaborate on how broad-based you're starting to see the airframe customers participate in ordering. And is this kind of Boeing-specific stuff where you previously experienced a bit of a de-stock post the strike over at Boeing?

Good morning, Gautam. I hope you're doing well. Yes, I think two really important points that I made in the prepared remarks, I will say, at a high level across all of our aerospace sub-markets, whether that be engine, fastener, structural, we're seeing increased activity with increasing forward demand.

Specifically though, in this quarter, the two things that stood out the most are that you had engine orders continued to increase sequentially, 30% this quarter. That's significant. Maybe you could argue even more significant is what our structural customers did in the quarter. And you rightly said, Gautam, the impact of Boeing really put them on the sidelines. Prior to those issues, they had been probably the top sub-market in terms of ordering quantity. So they had a lot of inventory.

To see them now come off the sidelines, and two things, not only one place some significant orders but then immediately come back to us and say, there's more coming and they're going to be bigger and more urgent. That's a big positive sign. And I would agree with you that at least on the structural side that that was primarily driven by the confidence in Boeing, not just in what they believe they can do, but what they've actually achieved in this last month.

Okay. That's very helpful. And you mentioned that the defense sub-market saw a bit of a government shutdown impact. Do you have any visibility from customers in that sub-market as to how they expect to put in orders over the next couple quarters?

Yeah. We've already seen that come back. I mean, quite frankly, they would have liked to have been placing orders during that time but weren't able to do so or weren't allowed to do so because of the government shutdown so you've got some pent-up order demand there. We see that coming back very rapidly.

Okay. And last one for me just on, you mentioned the mix and the quarter itself, the basic message I think is that overall, pricing saw no reduction. This is purely a mixed dynamic. Pricing is still trending, as you've said for the last couple of years, higher for longer. Is that right?

Well, that's 100% right. Maybe if you allow me to speak more about this. This is something that we've talked about a lot. In fact, we signaled this on the last call where we said, based on some of the planned maintenance that we're going to do specifically in some of the testing equipment at the back end, that a lot of the higher-priced aerospace needs to go through, that that would impact that. All right?

So I've talked about that quite a bit. And I think that if there's some belief that a small sequential price decline, which we've said could happen multiple times, it's somehow a red flag, I don't think it could be any more wrong than that.

I mean, we just talked about it, Gautam. Aerospace-only bookings up 23%. Aerospace engine bookings up 30%. Just completed three aerospace engine LTAs at substantial price increases. I can tell you very clearly, we are not or we did not discount premium airspace products in the quarter. There's absolutely no reason to do so.

And I've repeated this many, many times and we said it probably several times over the last year that we see pricing actions continuing to be a positive tailwind for us going forward. And I would just say quite frankly, this should be obvious due to the supply demand imbalance that exists today. And that's only expected to intensify.

So there's no issue with what happened in this quarter in terms of a slight price per pound decrease. And you'll see that continuing to go up over the next several course. Hopefully that's helpful.

Very much so. Thank you, Tony.

Scott Deuschle, Deutsche Bank.

Good morning, Tony, and I'm going to take a shot at a question. I'm not sure if you'll be able to answer. But for the aerospace LTAs that have renewed over the last six months, can you say whether the average price increase is more or less than 30%?

Scott, I think you already know the answer to that. I mean, these are substantial price increases going forward. 30% is not substantial.

And these are post-COVID LTAs?

There have been one or two that are longer, that works fine prior to COVID. But primarily, these are ones that have come due again since that time, yes.

Okay. And 30% is not substantial for those?

I agree with you.

Okay. Tony, you just delivered this strong SAO guide for the third quarter. Should we expect volume, price per pound, and EBITDA per pound to all move up sequentially?

Yeah. Scott, I would say yes to that. I don't manage at that level of detail. I know I am sitting on a gold mine here, right, doing something that very few people in the world can do. So I'm going to supply all of those costs to the best of our ability to maximize the profitability.

If one quarter, my margin goes down 0.5 percentage point, Scott, that's not an issue, right? The overall trajectory is going forward. And I think we get very hung up with this fact of quarter over quarter, you have some of these small movements. Basically, because you've got a complex production system that's making a thousand different types of alloys in any one quarter, right?

So I wouldn't get so hung up on slight movements to that quarter over quarter. I will say, year over year, absolutely, you will see increases In price per pound and earnings per pound. There is no doubt. It's impossible for us not to deliver that based on the overall market dynamics going forward. Does that make sense?

Okay. Thank you. Absolutely. And just last question, the medical distribution channel, is there any real sizable revenue left in that channel that you're shipping this past quarter or -- I'm just trying to think, is there still downward pressure potential there or is it basically completely bottomed out and near zero?

Well, I can tell you that the good news in January, from a booking standpoint, that we saw that specific area come back and have the highest order intake than it had of any month in 2025. So that would suggest that yes, you're right, that it's probably hit the bottom.

And I think the big piece here is that's very impactful to the PEP segment, as you all know, Scott, you cover us very closely. It's not material to overall Carpenter and it doesn't impact what I say about my guidance whatsoever. I want to see that bounce up, and I think when it does here in the next couple quarters, it'll be a tailwind for us. But it's not something I rely on to hit my guidance numbers.

Thank you.

Josh Sullivan, Jonestrading.

Good morning. Tony, you made an interesting comment there. You said jet engine OEMs are asking you if their own supply chains have ordered enough materials to meet projected build rates. But you kind of left us on a cliffhanger there. What was your answer and I guess, how are those conversations translating to the expectations of their suppliers?

Well, I mean, it's going to be different depending on the customer. I would say that in many cases, our answer to that is no, they're not ordering quick enough. There needs to be more orders in the system based on the build rate that you want to achieve. So I would say -- and that's a positive thing for me to say, is that there needs to be more orders to hit this build rate projection that's out there.

We just talked about specifically on the structural side, there'n hesitation to place orders and wanting to see more and more evidence of prolonged performance from the air framers, specifically Boeing. You're starting to see that. No you see them now coming off the sidelines, I said that phrase several times now, and placing large orders.

So I've talked about this, Josh, more than once about there is not going to be a gradual increase in orders. You're seeing it now and then you're going to see a significant hockey stick. That's the way it's happened in the past. I believe that's the way it'll happen again this time. And I think the structural customers, with the activity they had in this last quarter, is one of the leading indicators to that.

And actually, that dovetails nicely to just the conversation on the long-term agreements you highlighted. What's your calculus or your mindset on committing to those versus leaving spot capacity open? As you've talked about in the past, you've got the golden goose. Just curious on your thoughts there.

Well, I don't -- I mean, that's another -- you know this, I mean, the words matter to me. I don't have spot pricing, right? I don't have a generic alloy sitting on the shelf waiting for the highest bidder to come get, right? My LTAs are based on a mutual beneficial relationship with my customers. You have a lot of volume, I'm going to give you a (inaudible) of supply.

So I'm not here trying to be the riverboat gambler trying to say, let's keep it all speculative. That's not what I'm trying to do. But I do understand the value of my product, as do my customers. So when there's that beneficial relationship to say, let's enter into an LTA with increasing prices, that's good for both of us.

I think, Josh, you know this. I'm not sitting on the sidelines waiting for somebody to bid on my products. I'm pretty sure that's not what you were trying to allude to anyway.

No. I was just curious in the long-term. And then I guess relatedly, just outside of aerospace, are you seeing more interest in those types of relationships? As you talk about IGT and some of those other markets, are you seeing similar levels of interest in the capacity that may not be there?

Absolutely. Primarily on the power generation side because as you all know, in many, cases, they use the same assets. But we also see some of that on the medical side as well primarily on the SAO business because there's times that there can be overlap on some of the production assets between some of those alloys. So you see more interest in those specific alloys for medical customers. Because in many cases, we're the sole supplier and have a proprietary alloy there. So in both non-distribution medical and especially in power generation, we see some of the same dynamics as far as the openness or the willingness or wanting to have LTA with us in those areas.

Great. Thank you for the time.

Bennett Moore, J.P. Morgan.

Good morning, Tony and Tim. Congrats on yet another impressive quarter. Quickly, I wanted to thank you for all the color and commentary on the bookings. But could you also comment on how engine and fastener sales trended during the quarter and year over year? And also, what lead times look like for structural products relative to engine alloys?

Yeah. It's a good question. Our overall aerospace (inaudible) sales were relatively flat quarter over quarter basically because of the number of operating days, you've written about this, as well as the holidays. So aerospace engine sales are relatively flat, down a couple percent. Engine fasteners was flat, I think, up 1%. So all of the sub-markets inside of aerospace were plus or minus 1 or 2 on a sequential basis. Certainly, on a year-over-year basis, all of them up quite substantially as you would expect.

The second part of your question was on lead times. You're also very well aware that lead times is a universal indicator of demand increasing just because we limit with cap lead times. But I can say that in that area, you have seen them extend across all the areas inside of aerospace. And I think, we'll be pushing right back up to that same level that we were before in very short order. But yes, we did see expansion of lead times.

And I guess in the context of your positive commentary on structural customers moving off the sidelines, is it just fair to assume that lead times generally for the structural alloys are shorter than the engine alloys so we could see that benefit sooner?

Yes. I think in general, that is a true statement.

Great. And then real quick, I just wanted to ask about the additive business. You showed strong growth during the quarter. Is this lumpy or are you seeing improved adoption in the space? And can you remind us how the margin profile compares for these products? And if this is a space Carpenter would look to grow into into the future?

Yeah. I think the second part of your question is the right way to look at it. We see it as something that could be a tailwind for us in the future. We've been inside the additive business for quite some time. This is the higher adoption rate and some increased activity with some very large customers that we bring proprietary alloy in that area.

So it's still relatively small in the whole scheme of things, Bennett. But yes, I think It's something we want to stay in and I think going forward, we'll see continued growth in that area. So I'm very happy, quite frankly, with the performance of additive. Again, relatively small from an earnings standpoint, but very happy with the way they've been performing over the last couple of quarters.

Great. Tony, team, thank you for all the comments. Best of luck.

Andre Madrid, BTIG.

Good morning. As as we look at the LTA sign in the quarter, are any of these first time customers on an LTA basis? And how should we expect the mix of LTAs to trend in the quarters and years to come?

Well, it's going to be -- there's not a trend. They're all at different times. It seems like we're always working on some type of LTA, and to the first part of your question, these are longer-term customers, so not new.

Got it. And then we've been hearing a lot of chatter from recent conversations with customers about potentially exploring capacity expansion that they help fund. I mean, is that something that you guys would ever look into?

Maybe if something became more than just chatter, I could comment on that. We have already made our position known. We have gone out there and announced capacity expansion in a very professional manner. We told you exactly what the pounds will be. We've told you exactly when it will come online. We've told you exactly what the equipment will be. And we've told you exactly what the impact will be, not only to Carpenter Technology's financials, but the overall supply/demand dynamic. So we've been very, very clear and professional on what that would be. So we've told you already how we would react, and we were able and willing to fund that 100% ourselves.

Got it. That's clear. And then if I could sneak one more in, can you just maybe break down a little more clearly where the orders are exactly coming from? Jet engine versus airframe, OEM versus MRO? Is there a split that you can provide?

Well, I mean, orders are up across the board. I'll give you a couple of examples. Engines were up 30%. That's significant, right? We have order intake increasing across all of the sub-markets. The one I called out, from a sales standpoint, you obviously saw a bit of a dip in defense from a sales standpoint. But now you see orders, I think, will start picking back up again. So we have order intake increase across all of the markets.

And again, Andre, that shouldn't be a surprise. Loow what you have out there. Look what Boeing and Airbus and MRO and what all that is doing that's increasing significantly. Of course, orders are going to have to increase also.

Yeah. I agree completely and I see it. I appreciate the color, Tony. I'll hop back in. Thanks.

Phil Gibbs, Keybank Capital Markets.

Good morning. Tim, can you give us a review of the CapEx this year again just in terms of how much you expect to spend overall and how much of that is going to the new project and how much carries over into the fiscal '27?

Yeah. I'll break that into pieces and then you can follow-up if you want to. The full-year guidance for total CapEx was $300 million to $315 million. That includes the $175 million to $185 million for the brownfield capacity expansion.

I also said that given where we are, we spend about a little over $80 million through the first half. We said that we expect our brownfield capacity expansion spending to increase pretty rapidly in the second half as activity ramps up.

There's a fair amount of assumptions there. Look at the big capital project complex, the timing of those capital expenditures may vary, and they were making assumptions about progress payments, when the equipment gets delivered payment terms. So we'll provide an update in the next quarter. But the guidance out there still holds true for now. And that's incorporated into our free cash flow guidance.

Thank you. And Tony, any of the LTAs that you signed, have they been with power gen manufacturers at all?

Well, the three that I mentioned on the call here were all aerospace.

But none of the prior five, for example, that you mentioned last quarter?

Traditionally, that's not been an area that's been LTAs for us, but it's an area -- I think it was to Josh's question earlier, it's an area that we're now exploring that the customers in that sub-market would like to enter into an LTA and that could be something that we're interested in as well. But traditionally, that has not been for us because of the size that's been relatively small. To the rest of the business, it's becoming obviously much bigger now.

And then lastly, I know it's a small business for you all relative to SAO and PEP, but what surprised you just relative to the outcome because I know you expected to do better. I know you mentioned outright medical, but usually, you have pretty good visibility within a given quarter --

You're speaking speaking specifically of that sub-market inside of medical?

Oh, I'm just saying in general for the segment, I know you expected to do better a few months ago and you usually have a very good inter-quarter visibility. So I'm just saying kind of what surprised you?

Yeah. In the PEP segment, correct?

Yeah.

Yeah. Listen, I think that's a fair question. I think we do usually have pretty good visibility. This one on medical distribution has been a little elusive for us to get a handle around that, quite frankly. I think that's a fair comment. But a good point is that the order intake for that specific sub-market was the highest in January than had been in any month in 2025. So I'm hoping for the PEP segment that's hit the bottom. But as you can see with our guidance, we're still remaining fairly cautious in that area.

And as you said, again, it doesn't impact our overall guidance. But it's important to us to do the best we can as far as forecasting what we think PEP can do as well. So a little bit of conservatism maybe or a little bit of let's wait and see to make sure we can get it.

Thank you so much.

That concludes the question-and-answer session. I would like to turn the call back over to John Huyette for closing remarks.

Thank you, operator. Thank you, everyone, for joining us today for our fiscal-year 2026 second-quarter conference call. Have a great rest of your day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.