Carpenter Technology Corp 2027 Q1 Earnings Call

Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the fiscal 2027 first quarter, ended September 30th, 2026. 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 30th, 2026, and the exhibits attached to that filing.

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 and sales, excluding surcharge. I will now turn the call over to Tony.

Thank you, John, and good morning to everyone. I will start on slide four with a review of our safety performance. We ended the first quarter with a total case incident rate of 1.7. We continue to invest in programs for employees with a focus on identifying potential risks and minimizing the severity of injuries. With our focus on leading indicators, we expect to see continued progress on our ultimate goal, a zero injury workplace. Let's turn to slide five for an overview of our first quarter performance. Our first quarter performance was a solid start to fiscal year 2027. The quarter's primary talking points fit into a tight, simple narrative. One, record first quarter operating income, up 28% over the first quarter of last year. The record results were driven by productivity improvement, disciplined mix management, and continued realization of pricing actions.

Two, SAO segment adjusted operating margin matched the record from last quarter at 37.7%. This is an impressive feat with fewer operating days and increased preventive maintenance activity versus last quarter. To be clear, we do not view this margin level as the peak, as we expect strengthening demand, productivity, and pricing actions to drive us to higher levels. Three, bookings continue to increase. Specifically, our bookings for customers in the commercial aerospace supply chain were up again sequentially and up 25% year-over-year. Importantly, the most talked about aerospace sub-markets, distribution and structural, were up 23% sequentially and 49% year-over-year. Aerospace engine bookings continue to increase sequentially. It is important to note that we and many others believe the industry is just at the beginning of this super cycle, with even stronger demand anticipated in the coming quarters of fiscal year 2027 and beyond.

As an extra data point, we have numerous customers who have confirmed that they are ordering at a level that does not even support current aerospace OEM build rates, let alone the projected future build rate increases the industry is planning for. This is an important point because it supports the fact that bookings will need to continue to increase significantly in the near future to support demand. Four, pricing continues to be a tailwind. With strengthening demand and an expanding supply-demand gap for nickel superalloys, our pricing for both LTA and non-LTA business remains elevated and consistently increasing. Five, strong financial targets for fiscal year 2027 and 2029 that we are focused on overachieving. More on that on my closing slide. That is the summary of the quarter's performance and current state of the business.

All five primary areas of interest for our shareholders are currently flashing green and exhibit clear positive signals. Consistent record operating income performance, strong operating margins with leverage to expand further, accelerating demand across key end-use markets, continuing benefit from pricing actions, and an industry-leading financial outlook with opportunity to overachieve. Let me turn to slide 6 and a closer look at first quarter sales and market conditions. In the first quarter of fiscal year 2027, our total sales, excluding raw material surcharge, were down 7% sequentially and up 5% year-over-year. As expected, the sequential sales decline was driven by the planned maintenance outages we discussed on the last earnings call.

I will focus my comments today on the aerospace and defense end-use market as it accounts for the majority of our sales. Sales in the aerospace and defense end-use market were down 5% sequentially and up 10% year-over-year. Again, this sequential decline was expected and reflects the impact of our planned maintenance outages. For more sub-market sales detail, I will share the following. Aero engine sales sequential change was a bit better than the overall aerospace and defense average. Aerospace fasteners was a bit worse, although it was the second-highest sales quarter on record, second only to the previous quarter. Aerospace structural and distribution sub-markets was roughly flat to a strong previous quarter, and the defense sub-market was down sequentially due primarily to lack of clear funding. I will talk more about this a bit later.

It is important to note that at a time when the aerospace market is still only in the early stages of a large ramp, and during a quarter when we had significant planned outages, we posted our second-highest quarter of commercial aerospace sales on record and delivered a record first quarter operating income. As we build on this strong quarterly performance, let me provide you with some color on how we see the near-term future unfolding, how current bookings are taking shape, and what our customers are telling us right now. Some have worried that macro events like the Iran conflict, increasing jet fuel prices, and rising ticket prices will dampen travel demand and thus the overall aerospace industry. But to date, the industry has been resilient as airlines are still reporting strong demand and air traffic is up 14% quarter-over-quarter.

MRO activity is expected to continue to grow due to the overall demand environment, along with the large number of engines approaching their first shop visits. Airbus and Boeing continue to ramp production, with backlogs now over 16,000 planes. That is more than 10 years of production. The industry is projecting approximately 1,400 to 1,500 new airplane builds in calendar year 2026, and they want to go higher with target rates above 2,100. That is a 50% increase above the current year rate. Repeat, a 50% increase above the current year rate. Clearly, we are still in the early stages of this ramp with significant growth ahead of us. We do not have any customers talking to us about slowing down or about concerns over aerospace market growth in the future. Discussions are only about what pace of growth they will realize.

A key development this week was the FAA approving the Boeing 737 MAX 10. This model is strategically important since it is the largest 737 variant and roughly 30% of Boeing's backlog. This provides another positive accelerant to the demand signal for the aerospace supply chain as production of this model ramps. Our quarterly bookings or order intake rate is an important indicator of the expanding growth. As I mentioned earlier, the aerospace distribution and structural sub-market bookings were up 23% sequentially and 49% year-over-year. Our aerospace distribution customers in general are reporting that their backlogs are growing, with incoming bookings exceeding billings. Their confidence is growing, and they see solid double-digit growth in calendar year 2027 and even higher growth rates in calendar year 2028. Our aerospace engine bookings continue to increase, up 10% sequentially and 22% year-over-year.

Our aerospace engine customers remain very busy, and their demand outlooks for calendar years 2027 and 2028 continue to strengthen as OEMs increase ordering activity. In addition, we are receiving emergency orders in this sub-market, and we expect those to increase as the supply chain ramps and the need for reliable material supply becomes even more critical. Aerospace fastener bookings were down sequentially as it is normal for quarterly bookings to be inconsistent in this sub-market. Our aerospace fastener customers continue to tell us that their activity has not yet fully caught up to current aircraft build rates, supporting further growth as ordering catches up with underlying demand. Turning last to the defense sub-market, where we see a stark contrast between end demand and our direct customer behavior. Bookings were down on a sequential and year-over-year basis.

The disconnect between demand and supply chain activity is driven by funding challenges, as our direct customers are not seeing the flow of funds required to place orders aligned with the Department of Defense needs. Given our position as a critical supplier across multiple defense programs, such as the next generation fixed wing, rotary craft, and missiles and munitions platforms, we have seen a significant uptick in direct engagement from the Department of Defense and OEMs as customers prepare for future needs. As an example, over the last quarter, the Navy selected Boeing to build its next generation F/A-XX fighter. We are already engaged with the supply chain on the design of critical elements for this fighter, and Carpenter Technology will support critical applications and have meaningful material content on this platform. Overall, the message is crystal clear. The defense industry will need significantly more material to support their goals.

We, along with the industry, anticipate greater clarity post the midterm elections. Once budgets can be clarified, we anticipate a rush for material with significant emergency orders, driving significant growth in this sub-market. It is clear from my comments that the key demand indicators, including higher bookings, growing customer backlogs, and increasing urgency for material, all point toward continued demand acceleration across our highest value end-use markets. In this accelerating demand environment, we remain focused on execution to realize the high margin, high growth profit opportunity ahead of us. I will take a closer look at our outlook on the last slide. First, I will turn it over to Tim for a review of the financials.