Carpenter Technology Corporation (CRS) Earnings

Management highlights

- Leadership Update - Following the sudden passing of newly appointed CEO Brian Malloy, Tony Thene was reappointed as permanent CEO by the board; no external search will be conducted. - The company remains committed to zero workplace injuries as its top priority, ending FY26 with a total case incident rate of 1.4. - Market Demand Overview - Aerospace and defense: Q4 sales up 3% sequentially and 17% year-over-year (all-time highest quarterly sales on record). OEM Boeing and Airbus are increasing production against a 16,000 aircraft backlog; engine manufacturers face capacity constraints meeting strong demand, fastener customers are ramping significantly, and structural customers are beginning to accelerate ordering after a period of cautious below-demand ordering. Defense demand remains strong across multiple platforms. - Medical: Q4 sales up 5% sequentially (first sequential increase in FY26) and down 30% year-over-year, with solid underlying fundamentals and improving demand across orthopedics, dental, and cardiology. - Energy: Q4 sales down 22% sequentially and 12% year-over-year, but IGT demand driven by data center energy needs remains strong; quarterly fluctuations are attributed to order timing. - Industrial and consumer: Q4 sales up 19% sequentially and 22% year-over-year, driven by strong growing demand from the semiconductor industry, where Carpenter's materials are used in critical production components. - Operational and Capital Updates - Full year FY26 generated $605 million in cash from operating activities (a 37% increase over FY25), and $362.3 million in adjusted free cash flow (ahead of expectations). - The Brownfield Capacity Expansion Project remains on budget and on schedule for completion by the start of FY28, with construction underway and equipment installation progressing. Full year FY26 capital spending totaled $242.7 million, with $85.1 million spent in Q4 as activity accelerated. - The company returned $179.1 million to shareholders via share repurchases in FY26 (with $281 million spent to date against the $400 million authorization announced in 2024), in addition to maintaining its regular quarterly dividend ($40.3 million in dividends paid in FY26). - As of Q4 end, total liquidity was $892.4 million, with a net debt to EBITDA ratio well below 1x, indicating a very strong balance sheet. - SAO segment average price per pound declines in Q4 are attributed to product mix shifts (higher volume of lower-priced products with comparable margins) not broad-based price declines.

Guidance

- Q1 FY27 guidance: - Total company operating income expected in the range of $195 million to $200 million, representing 27% to 30% year-over-year growth from Q1 FY26. - SAO segment operating income expected between $218 million and $222 million (28-30% year-over-year growth), factoring in elevated planned preventative maintenance typical for the first fiscal quarter. - PEP segment operating income expected between $6 million and $7 million, with corporate costs projected at ~$29 million. - Full year FY27 guidance: - Total operating income expected between $850 million and $880 million, representing 21% to 25% year-over-year growth from the record FY26 result. Management notes this guidance is conservative and can be considered a floor for results. - Adjusted free cash flow expected between $400 million and $430 million, which includes remaining capital investment for the Brownfield expansion project. - 85% to 90% free cash flow conversion (excluding growth investments) is expected to remain attainable. - Long-term guidance: - FY29 total operating income targeted at $1.2 billion to $1.3 billion, representing a more than 20% 3-year compound annual growth rate from FY26. Management does not expect FY29 to represent the peak of the company's earnings power, as the Brownfield project will still be ramping and demand is expected to continue strengthening after 2029. - The Brownfield project is expected to be incremental to operating income starting in FY28, and will contribute ~$150 million of incremental operating income by 2030, with the FY29 contribution already baked into the long-term target. The 2030 $150 million target remains unchanged, though management is increasingly confident it could be exceeded. - Capital allocation guidance: - The balanced capital allocation philosophy of prioritizing investment in profitable organic growth while returning cash to shareholders via dividends and share repurchases remains unchanged.

Segment performance

1. SAO (Specialty Alloys Operation) Segment: - Net sales excluding surcharge: $607.4 million in Q4 FY26, up 11% year-over-year (on 23% higher volume) and up 4% sequentially (on 11% higher volume). This segment contributed 86% of total net sales excluding surcharge. - Adjusted operating margin: 37.8% (new record high, 18th consecutive quarter of expansion). - Operating income: $229.7 million (new all-time high, up 10% sequentially). 2. PEP Segment: - Net sales excluding surcharge: $98.2 million in Q4 FY26, up 1% year-over-year and up 8% sequentially. This segment contributed 14% of total net sales excluding surcharge. - Operating income: $7.1 million in Q4 FY26, compared to $6.7 million in Q3 FY26 and $11.7 million in Q4 FY25. Full year FY26 total adjusted operating income for the company reached $702 million, a 34% increase over FY2025.

Risks & headwinds

- Aerospace demand growth is dependent on Boeing and Airbus successfully executing planned production rate increases; delays in ramp up could impact expected revenue and earnings growth. - The Brownfield capacity expansion is a complex project; unforeseen construction or startup delays could impact the timing of incremental earnings contributions. - Cautious ordering behavior from structural aerospace customers could extend slower-than-expected growth in that high-potential submarket if customer confidence does not improve as expected. - Product mix fluctuations can impact quarterly average selling prices and operating margins, creating short-term volatility in reported results.

Analyst Q&A

• Q: What contribution from the Brownfield expansion is baked into the FY29 operating income target, and is the 2030 $150 million incremental operating income target still accurate? /

  A: The project comes online in early FY28, with production ramping through the year. It will be incremental to operating income in FY28, and the FY29 contribution is already included in the target. The 2030 $150 million incremental target remains unchanged, though management is more confident in the number than when it was announced, and it could ultimately come in higher than $150 million. The target is maintained at $150 million to retain confidence in the guidance given ongoing uncertainty over the final product mix for the new capacity.

• Q: With accelerating demand and strong recent EBIT growth, why does FY27 guidance imply moderating EBIT growth, and what are the top drivers of expected FY27 growth? /

  A: Carpenter provides guidance based on targets management has high confidence in hitting, and consistently works to exceed those targets. Management explicitly states FY27 guidance can be considered a floor for results, not a ceiling. The top driver of FY26 growth is expected production rate increases at Boeing and Airbus, followed by volume growth in non-aerospace markets, pricing improvements, and ongoing productivity gains that have consistently driven margin expansion for the company. Several structural aerospace customers are still ordering below expected demand levels, so any uptick in their ordering will add further upside to results.

• Q: What is driving cautious ordering from structural aerospace customers, and when will they return to demand-aligned ordering? /

  A: The primary driver of caution is waiting for clarity on Boeing's production ramp progress. Some customers have also maintained cautious ordering after being burned by demand volatility in past cycles. Management expects when Boeing continues its ramp over the next one to two quarters, ordering will not increase gradually, but will see a significant, abrupt uptick that will drive strong volume growth.

• Q: What is the outlook for incremental margins in the SAO segment after very strong margin expansion in FY26? /

  A: Management confirms SAO margins can still move higher from the current 37.8% record level. While incremental margin expansion becomes more difficult at higher margin levels, ongoing productivity improvements create continued upside. Management declined to provide a specific long-term margin target, but expects ongoing strong margin performance as volumes grow.