CARPENTER TECHNOLOGY CORP Q3 FY2025 earnings call

Safety Performance

• Total case incident rate was 1.4 through the third quarter of fiscal year 2025. Leaders are modeling safety-first behaviors and emphasizing hands-on scenario-based training, with reinvigorated daily safety routines to drive awareness.

Third Quarter Performance

• Generated $138 million in operating income, a 53% increase over third quarter of fiscal year 2024 and 10% higher than previous record. SAO segment adjusted operating margin reached 29.1% in the quarter, up from 21.4% a year ago, driven by productivity improvement, product mix optimization, and pricing actions. Generated $34 million in adjusted free cash flow, with $37.5 million spent on share repurchases in the quarter.

Sales and Market Dynamics

• Sales increased 8% year over year and 9% sequentially in third quarter of fiscal year 2025, driven by aerospace and defense end-use market (sales up 12% sequentially on 6% higher volumes, including engine sales up 16% sequentially). Medical end-use market sales were essentially flat sequentially and down 14% year over year, but underlying demand remains positive. Energy end-use market sales up 9% sequentially and 26% year over year, driven by power generation.

Tariff Situation

• Closely monitoring tariff news, with mechanisms in place to pass through raw material price impacts to customers. Nickel, the largest raw material input, is sourced primarily from Canada which is currently exempt from tariffs. Anticipate limited impact on demand in near to medium term due to product specialization and few sourcing options.

Company Highlights

• Strong market position, broad solutions portfolio with unique capabilities, focus on manufacturing execution. Not tied to one single platform or alloy, serves multiple applications. Navigated supply chain disruptions and set new financial performance records.

The SAO segment had net sales excluding surcharge of $519.4 million in the third quarter of fiscal year 2025. On a year-over-year basis, sales were up 8% on 12% lower volume, and sequentially, sales were up 8% on similar volume. Operating income for the SAO segment was $151.4 million in the third quarter, with an adjusted operating margin of 29.1%, a significant increase from 21.4% a year ago. The PEP segment had net sales excluding surcharge of $96.8 million in the third quarter, up 2% from the same quarter a year ago and up 12% sequentially. Operating income for the PEP segment in the third quarter was $10.9 million. Dynamet, a part of the PEP segment, drives its performance with strong market demand in medical and aerospace end-use markets, accounting for approximately 95% of its sales.

• Raised full fiscal year 2025 operating income guidance to $520 million to $527 million, representing nearly 50% increase in earnings over fiscal year 2024.
• Anticipates adjusted free cash flow for fiscal year 2025 in range of $250 million to $300 million.
• Long-term outlook: expects operating income to reach $765 million to $800 million in fiscal year 2027, representing 25% CAGR over next two years. Projects fiscal year 2026 to be materially higher than fiscal year 2025, with significant free cash flow generation of $1 billion from fiscal year 2025 through fiscal year 2027 with 90% conversion rate.
• Brownfield expansion project planned, with expected attractive return on capital greater than 20%.

• Tariffs on raw materials and equipment could impact costs, though mechanisms in place to pass through most raw material price impacts. However, uncertainty in global trade dynamics and tariff negotiations could affect demand in near to medium term.
• Supply chain disruptions, such as those experienced in past years, could impact operations if not managed effectively.

Q: Can you further characterize the order trends you saw in the quarter? And then are you seeing any emergency orders coming in yet on the aerospace side as Boeing's build rates gain some momentum here?

A: Without getting into specific figures on orders, they were up just a bit over 20% sequentially. Emergency orders: still continue to have customers pushing to get their deliveries earlier than planned.

Q: Can you give some updated color on leading-edge pricing? Obviously, we see it in the results in a big way, but there's some lag there. I think investors are a bit in the dark on what the current pricing environment looks like for what's going in the backlog today. So some clarity there, I think, would be helpful?

A: I'm not gonna talk specifically about pricing. Closed two LTAs in the quarter which were of significant benefit. Continue to see pricing actions continue to improve based on supply and demand imbalance getting significantly tighter going forward.

Q: Did you get much of the benefit from the LTA price increase in the quarter you just reported, or is that still to come?

A: We're not for this LTA that we just signed. Those will be in the future. But in the quarter, because the calendar quarter, some of those new LTAs that we negotiated nine ten months ago then became effective on January 1.

Q: Last question, just high level, Tony. Like, a lot's happened since your February investor event. I guess, are you now more or less confident in the 2027 EBIT guide relative to your mindset two months ago?

A: I'm more confident because things are in better shape than they were two months ago. We're in a much better spot now than we were two months ago.

Q: Can you just update us on the lead times? And then is there any churn in that book, or what does that look like? Any notable differences within end markets or products at this point?

A: On lead times, still at up to sixty weeks for aerospace engine. No change. We cap our order book, so effectively capping lead times.

Q: On the LTA discussions, and you mentioned the remarks there, compared to last year or even earlier this year, how is the current environment leaked into those conversations? Or maybe it hasn't just curious if the short-term dynamics are influencing those LPA parameters at all?

A: They don't impact them at all. We're talking about long-term supply agreements over the next three, five plus years that's going to facilitate customers making their product. Any disruptions in this near term actually have 0% impact on current LTA discussions or negotiations.

Q: Maybe just on TAP, you know, any impact from the SPS fire at this point? Or any dynamics there we should be thinking about medium-term?

A: No. We didn't have any impact on our business of the SPS fire.

Q: Despite the greater shipping days, SAO volumes were flat on a similar AMD and medical mix. Can you provide any additional color on the moving parts here and what we might expect to see those volumes trend consistently higher?

A: We're trying to optimize our business for profitability, not volume. We use our assets where there's fungibility on higher price products, so volume may go down but revenue up. Over the next several quarters, volumes are going to go up as one of the large OEMs starts producing again, making supply-demand picture tighter.

Q: Given the broader macro backdrop, I'm wondering if you're seeing any order deferrals or pockets forming for some of your more lower margin GDP-levered markets?

A: Some of our more lower margin products aren't material to the whole scheme of things. Aerospace and medical make up 75% of revenue, and adding IGT and semiconductor business, close to 80%, driving the story.

Q: Looking at the medical business, I know you said the backdrop remains strong, but down 14% year over year. I've heard some commentary from my industry contact as well implying that this was a little bit weaker as of late. Could you maybe explain what's driving some of that a little bit further?

A: Maybe a little bit of destocking in the medical end-use market. Last third quarter was second-highest medical sales quarter ever, so tough comparison. Forecast supports pretty sizable increase in Q4, with any destocking largely behind us.

Q: Going back to your comments around raw materials, I mean, you mentioned that most of the nickel you get is from Canada. I mean, maybe just overall, if you're looking at, like, all of your feedstock, how much is domestic versus international?

A: Biggest input is nickel from Canada and Norway. Did deep analysis on costs impacted by tariffs, very small percentage of overall spend, and plans to pass 100% through to customers.

Q: You said, though, you can't control how that might impact demand further downstream. Could you share some more thoughts there?

A: Don't see that as a big impact for us. Our unique products have few sourcing options, so not a major issue going forward.

Q: Could you provide some color on how fast fasteners and jet engines orders and sales were in the quarter?

A: Sales up 16% sequentially. Fasteners up 25% sequentially.

Q: Do you have any view on maybe the upper limit of margins at SAO? I mean, they've been so strong.

A: We just achieved 29% adjusted operating margin. 30% is not the limit, see opportunities to push past that number. Factors impact margins, but from our point of view, 30% is not the upper limit.

Q: If either you've received or you've given any of your customers any force majeure letters, just what's the status of some of that and, within your own business and or what you've seen or heard?

A: We have not done that. Don't see any need to issue force majeure letter due to tariffs. Have mechanisms to pass through nickel price and other costs. Nickel from Canada not being tariffed right now. Backlog is still healthy, well over two times pre-COVID levels.

Q: I was wondering if you could provide some color on how fast fasteners and jet engines orders and sales were in the quarter?

A: Sales up 16% sequentially. Fasteners up 25% sequentially.

Q: I was wondering if do you have any view on maybe the upper limit of margins at SAO? I mean, they've been so strong.

A: We just achieved 29% adjusted operating margin. 30% is not the limit, see opportunities to push past that number. Factors impact margins, but from our point of view, 30% is not the upper limit.

Q: Hey, good morning. So, Tony, I'm curious just from reading some of the tea leaves and being at a recent aerospace conference. If either you've received or you've given any of your customers any force majeure letters, just what's the status of some of that and, within your own business and or what you've seen or heard?

A: We have not done that. Don't see any need to issue force majeure letter due to tariffs. Nickel from Canada not being tariffed right now. Backlog is still healthy, well over two times pre-COVID levels.

Q: I just wanted to ask real quick on the brownfield investment specifically the equipment. What if any of this will face tariffs and is that baked into the CapEx guidance?

A: The equipment we need is highly specialized, with limited companies that can make it, some in Europe. Expect tariffs associated with it, but it's a small piece of overall spend as there are other pieces to the investment like construction and installation. Tariffs would come into play when equipment gets delivered, which is some time away.