CARPENTER TECHNOLOGY CORP Q2 FY2025 earnings call

• Safety: Total case incident rate was 1.1 in the second quarter of fiscal year 2025, with continued improvements but work left to achieve a zero-injury workplace.
• Quarterly Performance: Record second quarter and second most profitable quarter, with operating income of $119 million (70% increase y-o-y). SAO adjusted operating margin reached 28.3%. Adjusted free cash flow was $38.6 million. Full-year 2025 operating income guidance raised to $500 million to $520 million.
• Sales and Market: Q2 sales up 13% y-o-y, down 5% q-o-q; Q3 expected to have healthy net sales increase driven by higher volumes and productivity.
• SAO Outlook: Q3 operating income expected $140 million to $145 million, driven by productivity, product mix, and pricing.
• PEP Outlook: Q3 operating income expected $10 million to $12 million, with Dynamet fundamentals strong and additive business improving.
• Cash Flow: Generated $67.9 million from operating activities, spent $29 million on capital expenditures, repurchased $8.2 million in shares, and liquidity remained healthy.

SAO Segment: Net sales excluding surcharge in the second quarter of fiscal year 2025 were $479.6 million, up 15% year-over-year on 11% lower volume. Operating income was $135.6 million, with an adjusted operating margin of 28.3% in the quarter, a significant expansion from 20% a year ago. PEP Segment: Net sales excluding surcharge in the second quarter were $86.2 million, down 2% year-over-year and 7% sequentially. Operating income was $7 million. Dynamet is a key driver, and the additive business, though not material overall, had order deferrals in prior quarters but is expected to improve in the third quarter.

• Raised full-year 2025 operating income guidance to the range of $500 million to $520 million.
• SAO segment expects operating income of $140 million to $145 million in the third quarter of fiscal year 2025.
• PEP segment expects operating income of $10 million to $12 million in the third quarter of fiscal year 2025.
• Confidence in continued robust earnings growth ahead, with an investor event scheduled for February 18.

• Potential impact of tariffs on inputs, but company positioned to pass through costs to customers.
• Lead times and order activity affected by Boeing strike and related customer delays.
• Additive business order deferrals in prior quarters, though improving.

Q: Hi, good morning guys. I was wondering if you could comment on lead times in the engine channel if they've changed? And just I know you talked a little bit about some of the customer perturbations in terms of when they want stuff. Was there any kind of impact from destocking on the Boeing side that manifested this quarter relative to last quarter?

A: Yes, will do. Thanks for the question. First on lead times. This is a good news story for us in terms of lead times, specifically for the Aerospace material, which you are referring to. We've actually been able to pull in our lead times slightly, not significantly, but by a couple of weeks. And that's 100% due to the great productivity improvements we've had, primarily on the primary melt operations. So as you know, those higher production rates translate into higher shipments, and that's going to allow us to get critical product to our customers quicker. So that's a good news story. I might take this time to, Gautam, just to kind of give a couple of other points that you might ask about in terms of orders and sales, and maybe this will answer your question. Without getting into too specific figures, we did see orders this quarter be slightly down from what they were the quarter before. Now interestingly, the submarket aero engines, orders were slightly up sequentially. But that is really not a surprise when you think Boeing, for example was on strike from, what was it, mid-September until early November and probably didn't really start producing even at low levels until December. So we knew that impacted the order activity of our customers, especially those that are very tied to Boeing. I think it's also important to note, Gautam, as you know, we also limit our order intake. So if that were not the case, our backlog and certainly, orders could be higher. But it's clear that we have seen some pause from customers that are specifically connected to Boeing.

Q: What's your perspective on the potential for the tempo of global conflicts to abate? Any indication, poll on defense-related materials is reflecting any customer expectation that things might change either in the near or medium-term?

A: I don't think so, Josh. I think that is going to stay strong in the coming years regardless of what goes on in the conflicts, and I hope they are resolved as soon as possible. But I think we have a rebuilding of the military to get to a different level. And so I sense that, that will be strong for us over the coming years. That's the feedback that we are getting from people in that space.

Q: Tony, unfortunately, I missed the first couple of minutes of the call. But I was wondering if you could comment on lead times in the engine channel if they've changed? And just I know you talked a little bit about some of the customer perturbations in terms of when they want stuff. Was there any kind of impact from destocking on the Boeing side that manifested this quarter relative to last quarter?

A: Yes, will do. Thanks for the question. First on lead times. This is a good news story for us in terms of lead times, specifically for the Aerospace material, which you are referring to. We've actually been able to pull in our lead times slightly, not significantly, but by a couple of weeks. And that's 100% due to the great productivity improvements we've had, primarily on the primary melt operations. So as you know, those higher production rates translate into higher shipments, and that's going to allow us to get critical product to our customers quicker. So that's a good news story. I might take this time to, Gautam, just to kind of give a couple of other points that you might ask about in terms of orders and sales, and maybe this will answer your question. Without getting into too specific figures, we did see orders this quarter be slightly down from what they were the quarter before. Now interestingly, the submarket aero engines, orders were slightly up sequentially. But that is really not a surprise when you think Boeing, for example was on strike from, what was it, mid-September until early November and probably didn't really start producing even at low levels until December. So we knew that impacted the order activity of our customers, especially those that are very tied to Boeing. I think it's also important to note, Gautam, as you know, we also limit our order intake. So if that were not the case, our backlog and certainly, orders could be higher. But it's clear that we have seen some pause from customers that are specifically connected to Boeing