Carpenter Technology Corporation Q2 FY2026 earnings call

Management Statement and Operational Highlights

• Safety Performance: Ended 2026 with a total case incident rate of 1.4, showing improvement over the last quarter, with a commitment to a zero injury workplace.
• Q2 Performance Highlights:
  • Record earnings: Generated $155 million in operating income, a 31% increase over 2025.
  • Expanding operating margins: SAO segment had an adjusted operating margin of 33.1%, up from 28.3% year ago and 32% prior quarter, with operating income of $174.6 million, a 29% year-over-year increase.
  • Strengthening market demand: Aerospace and defense end-use market bookings increased 8% sequentially, with commercial aerospace bookings up 23% sequentially (fourth consecutive quarter of sequential order intake increases).
  • Pricing as tailwind: Completed three additional long-term agreements with aerospace customers with significant price increases.
• Sales and Market Dynamics: Total sales excluding raw material surcharge up 8% y/y, down 2% q/q. Aerospace and defense sales down 1% q/q, up 15% y/y; medical sales down, but orthopedic and dental submarkets strong; energy sales down 10% q/q, up 19% y/y.
• Cash Generation and Capital Allocation: Generated $132.2 million of cash from operating activities, spent $46.3 million on capital expenditures, resulting in adjusted free cash flow $85.9 million. Expect at least $280 million of adjusted free cash flow in FY2026. Repurchased $32.1 million of shares. Brownfield capacity expansion project ongoing, on budget and schedule.

Segment Performance

• SAO Segment: Net sales excluding surcharge in the 2026 second quarter were $527.3 million, up 10% year over year on 5% higher volume and down 1% sequentially on 5% higher volume. The adjusted operating margin reached 33.1%, a record, and operating income was $174.6 million, a new all-time high. Revenue contribution: Net sales excluding surcharge for SAO were $527.3 million, which is a significant portion of the total sales.
• PEP Segment: Net sales excluding surcharge were $77.2 million, down 11% sequentially and 10% year over year. Operating income was $900,000 in the current quarter, compared to $9.4 million in the prior year and $7 million in the same quarter last year. Revenue contribution: Net sales excluding surcharge for PEP were $77.2 million, a smaller portion of total sales.

Guidance

• Raised FY2026 operating income guidance to $680 million to $700 million, a 30%-33% increase over FY2025's record earnings.
• Expect FY2026 effective tax rate to be on the low end of 21% to 23%.
• SAO segment expected to generate operating income in the range of $195 million to $200 million.
• PEP segment expected to have operating income roughly $7 million.
• Total operating income anticipated to be $177 million to $182 million, including SAO, PEP, and corporate costs.

Risks

• Defense Submarket: Impact from government shutdown led to material decline in defense submarket orders, but expected to pick back up.
• Nickel-Based Superalloys: Persistent supply-demand imbalance, with Carpenter's capacity increase accounting for only a small percentage of projected deficit.
• Medical Distribution: Elusive visibility in the medical distribution submarket, impacting PEP segment performance.

Question and Answer

• Q: Gautam Khanna on airframe customer participation, defense submarket orders, and pricing A: Tony Thene said airframe customers are increasingly active, defense orders will pick up, and pricing continues to be a tailwind with no reductions.
• Q: Scott Deuschle on aerospace LTAs, SAO guidance, and medical channel A: Tony Thene said aerospace LTAs have substantial price increases, SAO guidance will see sequential improvements, and medical channel hit bottom with order intake picking up.
• Q: Joshua Sullivan on engine/fastener sales, lead times, and additive business A: Tony Thene said engine and fastener sales trended positively, lead times expanded but will rebound, and additive business is a future tailwind.
• Q: Bennett Moore on engine/fastener sales, lead times, and structural vs engine A: Tony Thene said aerospace sales were flat q/q but up y/y, lead times expanded, and structural alloys generally have shorter lead times than engine alloys.
• Q: Andre Madrid on orders from different sources, capacity expansion A: Tony Thene said orders are up across all submarkets, and Carpenter's capacity expansion is ongoing and on budget.
• Q: Philip Gibbs on CapEx, LTAs in power gen, and medical visibility A: Tony Thene said CapEx guidance holds, LTAs in power gen are explored, and medical distribution submarket was elusive in visibility but order intake picked up in January.