Carpenter Technology Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2024

There are 9 speakers on the call.

Operator

Good day, and welcome to the Carpenter Technology Fiscal First Quarter 2025 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mr.

Operator

John Hewitt. Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology earnings conference call for the fiscal 2025 Q1 ended September 30, 2024. 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 Taine, President and Chief Executive Officer and Tim Lane, Senior Vice President and Chief Financial Officer.

Speaker 1

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 ks for the year ended June 30, 2024 and the exhibits attached to those filings. 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.

Speaker 2

Thank you, John, and good morning to everyone on the call today. I will begin on Slide 4 with a review of our safety performance. For the Q1 of fiscal year 2025, our total case incident rate was 1.2. This improvement represents a step in the right direction. Our rate has been elevated over the last couple of years as we integrated a large number of new employees into our operations, many of them with little or no experience with an engaged safety culture.

Speaker 2

During this time, we have invested in training programs for our employees with a focus on identifying potential risks and minimizing the severity of injuries. As our employees gain experience and develop in our safety focused culture, we are seeing an improvement in our safety performance, but we still have more to do. Our goal is to be a 0 injury workplace and we will continue to invest and work to achieve that goal. Let's turn to Slide 5 for an overview of our Q1 performance. Obviously, a great start to fiscal year 2025 with record Q1 earnings and a positive step up to our full fiscal year 2025 earnings guidance.

Speaker 2

Specifically, in the Q1 of fiscal year 2025, we generated $117,000,000 in adjusted operating income, the most profitable first quarter on record. This 70% increase over our then record Q1 of fiscal year 2024 is the result of continued improvement in productivity, product mix optimization and pricing actions. It is a testament to our solid execution, strong market position and unique capacity and capabilities that we are able to achieve these record earnings during a time of near term uncertainty in the aerospace supply chain. This is a strong indicator of our ability to produce continued earnings growth acceleration as the aerospace supply chain not only stabilizes, but embarks on an aggressive build rate ramp in the near term. Notably, the SAO segment continues to exceed expectations, delivering $134,500,000 in operating income with an adjusted operating margin of 26.3%.

Speaker 2

This is a meaningful step up from the 19.4% in the Q1 of the previous year. The focused productivity efforts are evident within the SEO results as we were able to increase adjusted operating margin even with lower sequential shipments. Further, we generated $13,300,000 of adjusted free cash flow during the quarter with $40,200,000 of cash from operations. In addition, we repurchased $32,000,000 in shares during the Q1 as a part of our $400,000,000 share repurchase program, which was announced on the last earnings call. Altogether, our Q1 performance sets a strong foundation for our fiscal year 2025 financial goals, which I will discuss in more detail later in the presentation.

Speaker 2

Now let's turn to Slide 6 and take a closer look at our Q1 sales and market dynamics. In the Q1 of fiscal year 2025, sales decreased 9% sequentially and increased 17% year over year. Sales were roughly as expected with the majority of the sequential sales decline driven by our planned maintenance outages as we discussed on the last earnings call. In the Aerospace and Defense end use market, sales were down 7% sequentially and up 34% year over year. Aerospace and Defense 1st quarter sales represented our best first quarter on record, beating our next best first quarter by over 20%.

Speaker 2

Within Aerospace and Defense, engine sales were roughly flat sequentially. Engine sales continue to see strong MRO demand and customers continue to work to get caught up on past due demand. Defense sales were up sequentially as defense demand remains robust due to ongoing world events and strong pull for advanced critical solutions. The other aerospace submarkets were down sequentially, largely reflecting available manufacturing capacity in the quarter, as I mentioned earlier. Altogether, our aerospace and defense shipments ended in line with our expectations and represent another very strong quarter.

Speaker 2

Moving to our medical end use market, sales were down 20% sequentially and up 10% year over year. Together with aerospace and defense, the 2 end use markets continue to grow in share of overall revenue at approximately 74% of our total sales. Patient demand and patient backlogs continue to grow and the overall outlook for market demand remains positive. And we have realized very strong growth in medical, well above market rates as indicated by our year over year growth. The sequential decrease in sales is partly driven by lower shipments due to fewer operating days in the quarter.

Speaker 2

We also had some delayed shipments in our Dynamet facility due to the hurricane in Florida, and we are coming off a record sequential quarter for comparison. We are reminded daily of how critical our solutions are in the medical end use market as our customers continue to emphasize the desire to grow further with us in a variety of new applications that require our unique material solutions. Looking at the energy end use market, sales were up 8% sequentially and up 35% year over year, driven by ongoing high demand and positive long term fundamentals. Notably in power generation, we have seen increasing urgent demand for our materials, giving us the ability to opportunistically shift production to support the demand. The alloys that go into these applications are similar to our aerospace materials and carry similar margins.

Speaker 2

We are working with our power generation customers to continue to identify opportunities to slot the demand into our production schedules. Altogether, underlying demand in our key end use markets remains robust and our long term outlook continues to be strong. Now, I will turn it over to Tim for the financial summary.

Speaker 3

Thanks, Tony. Good morning, everyone. I'll start on Slide 8, the income statement summary. Starting at the top, sales excluding surcharge increased 17% year over year on 3% higher volume. Sequentially, sales were down 9% with a similar reduction in volume.

Speaker 3

The year over year growth in net sales was driven by our improving productivity combined with the ongoing shift in product mix as we continue to focus our capacity on our most profitable products as well as the realization of higher prices. The improving productivity and product mix is evident in our gross profit, which increased to $176,300,000 in the current quarter, up 42% from the same quarter last year. SG and A expenses were $59,100,000 in the Q1, up $4,000,000 from the same quarter last year and down roughly $6,000,000 sequentially. Note the SG and A line includes corporate costs, which totaled $24,400,000 in the recent Q1 when excluding the special item. As we said last quarter, we expect corporate costs to be approximately $23,000,000 to $24,000,000 per quarter for the balance of fiscal year 2025.

Speaker 3

Operating income was $113,600,000 in the current quarter or $117,200,000 of adjusted operating income, which is 70% higher than the $69,000,000 in our Q1 of fiscal year 2024. As Tony mentioned earlier, this represents a record Q1 operating income result. We continue to build operating momentum and expand margins delivering total company adjusted operating margin of 20.3% in the current quarter. Moving on to our effective tax rate excluding special items, which was 16.4% in the current quarter. The effective tax rate was comparable to the same quarter last year due to benefits associated with vesting of certain equity awards in both quarters.

Speaker 3

For fiscal year 2025, we continue to expect the effective tax rate to be in the range of 21% to 23%. Adjusted earnings per diluted share was $1.73 per share for the quarter. The adjusted earnings per diluted share results exclude the impact of restructuring and asset impairment charges associated with actions to streamline our additive operations. In summary, the adjusted earnings per diluted share results for the quarter of $1.73 demonstrate solid execution in a challenging near term operating environment given the supply chain uncertainty in the Aerospace industry. Now turning to Slide 9 and our SAO segment results.

Speaker 3

Net sales excluding surcharge for the Q1 were $510,900,000 On a year over year basis, sales were up 22% on flat volume. The year over year comparison reflects the impacts of higher realized prices and an improving product mix as we actively managed our portfolio to focus on using our capacity for the highest margin solutions. As we had anticipated, sales were down 9% sequentially on 12% lower volume, reflecting the impacts of equipment availability across the operations due to planned maintenance activities and fewer working days offset by realization of higher prices. Moving to operating results. SAO reported operating income of $134,500,000 in the Q1 of fiscal year 2025.

Speaker 3

As Tony mentioned, the operating results exceeded our expectations and represent a record Q1 for SAO. The improvements we have made in areas of productivity, product mix and pricing are evident in the adjusted operating margin, which has increased to 26.3 percent in the current period. Some additional context for the current quarter's results. On a sequential basis, operating income was down $6,400,000 despite a $48,600,000 reduction in sales. This is meaningful and demonstrates the team's efforts to realize further price increases and closely manage costs while enhancing productivity.

Speaker 3

The SEO team remains focused on executing actions to further increase and maintain consistent production levels and to actively manage the product mix to maximize capacity for our most profitable products. The SEOs team focus remains unchanged from the last several quarters. In the current environment, the focus is even more relevant as we actively manage our production schedules to adjust to changing customer priorities. Looking ahead to our upcoming Q2 of fiscal year 2025, we anticipate SAO will generate operating income in the range of $134,000,000 to $139,000,000 Now turning to Slide 10 and our PEP segment results. Net sales excluding surcharge in the Q1 of fiscal year 2025 were $92,400,000 roughly flat from the same quarter a year ago and down 10% sequentially.

Speaker 3

In the current quarter, PEP reported operating income of $7,300,000 compared to $9,100,000 in the same quarter a year ago and $10,600,000 in the Q4 of fiscal year 2024. As we said in the past, Dynamet is the driver of the PEP segment as Dynamet represents a significant portion of PEP sales and an even greater percentage of PEP's profitability. Dynamet's fundamentals are very comparable to SAO, including a strong market demand backdrop in the medical and aerospace end use markets, which accounts for approximately 95% of their sales. The focus at Dynamet has been and will continue to be working to improve productivity and expand capacity to increase our output. Those efforts have driven improved results in Dynamet, which has increased profitability by 50% in our recent Q1 compared to the same period last year.

Speaker 3

With that said, Dynamet is not the only business in PEP. Our additive business, although not material to overall Carpenter Technology, has recently seen a push out of demand from certain key strategic customers. With that in mind, we currently anticipate that in the upcoming Q2 of fiscal year 2025, the PEP segment will deliver operating income in the range of $6,000,000 to $7,500,000 Now turning to Slide 11 and a review of cash flow. In the current quarter, we generated $40,200,000 of cash from operating activities compared to $7,400,000 in the same quarter last year. The results were driven by improving profitability and disciplined working capital management.

Speaker 3

The cash generation in the current quarter is an important step towards delivering our full fiscal year adjusted free cash flow target. For the current quarter, we spent just under $27,000,000 on capital expenditures. Our target for capital spending in fiscal year 2025 remains at $125,000,000 With those details in mind, we reported adjusted free cash flow of $13,300,000 in the Q1 of fiscal year 2025. Beyond the cash flow we generated, we began executing against the recently authorized share repurchase program. In the Q1 of fiscal year 2025, we purchased $32,000,000 of shares against the $400,000,000 authorization.

Speaker 3

The share repurchase program reflects our balanced approach to capital allocation and complements the long standing quarterly dividend. Finally, our liquidity remains healthy. We ended the Q1 of fiscal year 2025 with $499,100,000 of total liquidity. That includes $150,200,000 of cash $348,900,000 of available borrowings on our credit facility. With that, I'll turn the call back to Tony.

Speaker 2

Thanks, Tim. Now let's turn to the fiscal year 2025 outlook. We have been on a remarkable journey over the last 2 years. At our Investor Day in May 2023, we laid out a path to double our fiscal year 2019 operating income by fiscal year 2027. That 4 year goal represented a 40% compounded annual growth rate for operating income from our expected fiscal year 2023 performance.

Speaker 2

Even with such impressive growth, there were opportunities to exceed expectations by improving productivity, optimizing product mix and realizing pricing actions. As many of you follow along, we did just that, accelerating our earnings growth through fiscal year 2024. This led us to pull in our goal twice. First, during our April 2024 earnings call, we pulled our goal ahead at least 1 year into fiscal year 2026. This increased operating income compounded annual growth rate to approximately 55% over a 3 year period.

Speaker 2

Then in our July 2024 earnings call, we pulled our goal in another full year following a record year of profitability. The goal pulled in 2 full years now represents an operating income compounded annual growth rate of over 90% from FY2023 to FY2025. After a strong start to fiscal year 2025, we are now increasing our guidance again to the high end of the $460,000,000 to $500,000,000 range. We believe we can achieve this despite the current uncertainties in the aerospace supply chain because of our continued execution, strong market position and unique capacity and capabilities. And the team is not satisfied with just meeting targets.

Speaker 2

Our team is focused on exceeding expectations. To that end, we have line of sight to activities that could push operating income for fiscal year 2025 even higher, above the $500,000,000 mark. They include improving productivity to unlock incremental capacity and working with customers to pull in high value orders. And as we look ahead, what is now our fiscal year 2025 target will not be the peak of our earnings growth based on our current projections. The same dynamics that are driving our current performance are expected to only get stronger into the future.

Speaker 2

The fundamentals of the aerospace industry remain strong with more people wanting to fly than ever before. And macro trends are pushing our customers across our end use markets to our highly specialized material solutions as we've seen in the medical end use market. As a result, our customers remain focused on the surety of supply to meet their long term growth needs. We believe that through solid execution, our strong market position and our unique capabilities, we are well positioned to continue our earnings growth momentum. Now let's turn to the next slide for my closing comments.

Speaker 2

To close, let me summarize our Q1 performance and outlook. Carpenter Technology just delivered a record Q1, a 70% increase over the Q1 a year ago, which was then a record for the company. We increased margins in our SAO segment again, reaching 26.3%, a new all time high. We generated positive adjusted free cash flow in the quarter. We began executing against our $400,000,000 share repurchase program, returning cash to our shareholders.

Speaker 2

And after pulling a 4 year target in by 2 years, today we've increased our guidance again to the top end of the $460,000,000 to $500,000,000 range for fiscal year 2025 with a drive to go beyond the $500,000,000 mark. All of this despite the current near term uncertainties in the aerospace supply chain. Further, we see our long term growth outlook strengthening. Demand across end use markets continues to grow as we expand relationship with our customers to address their challenges and capture growth opportunities. And we remain focused on improving our execution as demonstrated by our accelerating performance over the last several quarters.

Speaker 2

We believe we are in the early stages of our growth journey and we will continue to deliver values as we drive to exceptional near term and long term performance. Thank you for your attention. And now I will turn the call back to the operator.

Operator

Thank you. We will now begin the question and answer session. We have the first question from the line of Gautam Khanna with TD Cowen. Please go ahead.

Speaker 4

Hi, good morning guys.

Speaker 2

Hey, good morning Gautam.

Speaker 4

Tony, I wanted to get your some color from you on what's going on with respect to the aerospace customers. Are you seeing any destocking or deferral requests? And if so, kind of in which product areas? And then you've mentioned backlogs remain at near record highs. I'm just curious like did incoming orders slow down?

Speaker 4

Just given the strike and everything else, wanted to get your perspectives on that. Thanks.

Speaker 2

Yes. Thanks, Gautam. Good questions. There's a couple in there. So let me kind of take them 1 by 1.

Speaker 2

First, orders for the quarter. I don't want to get into specific figures, but I can't say the incoming orders were down sequentially, although they accelerated towards the end of the quarter. Obviously, we're coming off a record booking quarter last quarter. So it's a we're comparing to a very high point. I can also add that we obviously with what's going on in the market today, you have some of the aerospace customers that are taking a bit of a wait and see approach, especially those that are very heavily weighted towards Boeing.

Speaker 2

But that's been offset with strengthening orders in other end use markets, specifically power generation, when you see the big demand from AI data centers. So that's been a positive offset. I mean, overall, the backlog still is above $2,000,000,000 lead times and key products still remain extended. So certainly, there's some uncertainty in the aerospace market today, but we have a very healthy order backlog and the orders intakes coming in seems strong as well. So that covers your backlog and your order intake question.

Speaker 2

I think the other question you had was really about how customers are reacting right now and do we see any type of deferrals or I think you said inventory build in the system. And I can address that one by saying, obviously, we don't have perfect visibility into the inventory throughout such an extensive supply chain. And certainly, the supply chain doesn't always operate smoothly, as you well know. So there's always been this tendency of building and then deep building. What I can say though with a high level of confidence is first as it relates to MRO demand, we continue to see emergency requests from customers for more material.

Speaker 2

So that remains very strong as an offset to what you see maybe more so on the OEM side. And I can give you an example. It just happened a couple of days ago, we're on the phone with a particular OEM discussing a likely line down for them, a production line being down for them and how could we adjust our manufacturing plants to support that urgent need. So our strong sense demand in this area is that more is needed and the majority of people are still behind. So certainly we've got to work through this period of uncertainty right now, but overall, I mean, for Carpenter Technology.

Speaker 2

And again, I will say it's going to be different for everybody in the supply chain, Gautam, as you well know, right? I mean, people that are much more concentrated with a specific customer are going to have a different outcome. For us, because of our breadth of services and capabilities, we believe we're able to navigate that very strongly over the next over the near term.

Speaker 4

And as a follow-up, do you feel like you guys are you mentioned the backlogs are still extended, but do you feel like you're kind of caught up with underlying demand? Or because in prior quarters, you've mentioned, hey, if we could ship more, if we had more throughput, we would have customers willing to take more product. Has that cushion kind of evaporated or is that still the case? No, I'm not. That's a

Speaker 2

good question. Thanks for asking. Again, it's customer specific. I mean, if we have customers that have a very high percent of their portfolio dedicated to one specific customer. Are they taking a more wait and see approach?

Speaker 2

Absolutely. But we have other customers kind of referencing the example I gave you earlier that are still trying to catch up, that have exposure to other areas in aerospace supply chain, to other customers and they're moving forward. That's really an advantage that Carpenter Technology has with this large backlog. Obviously, we know exactly what's in that backlog and we're able to pull those forward to inside our production schedule now because not everybody is in the same situation. And certainly, we have people that are still trying to move forward in the supply chain, I mean, the production schedule.

Speaker 2

And some of this uncertainty with Boeing is giving them the opportunity to do so.

Speaker 4

Great. Thanks, Tony. I appreciate it.

Speaker 2

Yes. Thank you, sir.

Operator

Thank you. The next question comes from Josh Sullivan with The Benchmark Company. Please go ahead.

Speaker 3

Hey, good morning.

Speaker 2

Hey, good morning, Josh.

Speaker 5

I just wanted to touch on, how do we think of seasonality at this point? Historically, there's a reason you report Q1 this quarter, you're up, what, 70% year over year. But how do we think of that historical seasonality and some of the changes versus the current underlying market conditions, particularly when we're looking at some of the metrics, incremental margins or others?

Speaker 2

Well, it makes it tough, doesn't it, Josh? It makes it tough to model when you can't rely on some of those historical norms anymore. I mean, we are effectively in a sold out situation, even with this uncertainty that we have in the market today that we hope is behind us in the near term. So really when you think about quarter over quarter or sequential quarter, the only real difference between the quarters are the number of days that you operate, right. And that's why you've heard us talk about solid proactive planned maintenance to keep this earnings engine moving.

Speaker 2

So the bottom line is the timing and the duration of those planned preventive maintenance events is really the determining factor between quarters. Obviously, another determining factor is we continue to increase our productivity, new contracts continue to roll in that pushes that higher. But we're in a period now where you talk to folks inside of our plants, we're trying to maximize the output and optimize the product mix. So I mean every quarter is going to be a significant quarter and just because you have maybe a slight decrease in a sequential quarter certainly is no reason for a red flag. It's just because we had less operating days in that quarter or we took more planned maintenance in that quarter and that's really the only distinction between them right now.

Speaker 2

It's a

Speaker 4

good place to be.

Speaker 5

Yes. And then just given some of the crosscurrents in the industry and there's still a need for long term capacity growth. I mean, what are your thoughts or what are the conversations around increasing capacity at this point?

Speaker 2

Well, we're always looking at that. I mean, if you see again, one of the reasons why we have been able to continue to drive earnings growth, right. There's 3 big areas and one of those areas is productivity. So we believe, I mean, our belief is there's always hidden capacity in our factory. There's always ability for us to get better.

Speaker 2

A prime example and I think Josh, we've talked about in the past and obviously you visited our facilities, so you're very aware. If you look at primary mill team and if you can find ways to safely and at a high quality increase that daily production, that's a massive impact on profitability. I mean, it's a massive impact. So that is a area that our folks out on the shop floor are keenly focused on and making great strides. And that's what you've seen over the last 3 or 4 quarters.

Speaker 2

And they're very motivated to keep moving forward. So that ability to continue to increase capacity through productivity is a big deal, right? Now secondly is what can we do internally organically to increase the capacity? And I think I've said this more than once externally is we're looking at those. It's our job to look at those.

Speaker 2

As shareholders, you want us to look at ways that we can add capacity organically, spend some capital, get a higher rate of return project to push that to the next level. We said this many, many times, any capacity like that we add is not going to upset the supply demand situation we're in. I mean, we have demand far outstripping supply and that's not going to change by what we may do. But it certainly can increase our profitability even as an accelerator to the next level. So we're looking at those as we speak to try to see what we can do in that area

Speaker 4

as well. Hopefully that answers the question.

Speaker 5

Yes. And I just sneak one last one just to that point on productivity. I mean, is there anything you can provide us on scrap rates or throughput or how we're measuring that productivity externally?

Speaker 2

Well, all of those areas certainly, I mean, as you know, in productivity and running a product through the plant. There's multiple areas that drive into that overall productivity number, certainly scrap rate or if you would say, 1st pass recovery. Do we have to bring that product back for any rework? That's massive. So that is where we're really focused.

Speaker 2

I mean, I could probably tell you our primary focus outside of getting those rates up and some of those primary work centers is reducing the amount of that rework. Every pound, every ton that you can reduce that doesn't go back and get a little extra grinding or whatever it might be, it's massive impact again on the productivity. So those are two areas that are really a forefront for us on a daily basis.

Speaker 5

Great. Thank you for the time.

Speaker 2

Thank you.

Operator

Thank you. The next question is from Scott Deuchler with Deutsche Bank. Please go ahead.

Speaker 6

Hey, good morning.

Speaker 2

Hey, good morning, Scott.

Speaker 6

Tony, was the average price of what moved into the backlog for new orders this quarter higher than the average price of what was already in the backlog at the start of the quarter?

Speaker 2

Yes, you're going to probably see that from now on going forward. There could be, I should say, yes, I mean, there could be some times where maybe that's a bit off, but I think certainly going forward, you're going to see that at least the trend line of that, Scott, going up. Okay.

Speaker 6

And if it didn't go up, it would just be because of the mix probably

Speaker 4

of what went into the Correct.

Speaker 2

Yes. And that's why I hesitate a little bit there to say the trend line. I mean, I guess there could be a situation where that mix of orders were very high in one area that could do that. But in totality going forward, you're going to see that rise with based on the as the contracts continue to renew.

Speaker 6

Thank you. And then was the 35% growth in energy revenue this quarter, was that entirely driven by IGT? And were the non IGT pieces of revenue actually down?

Speaker 2

It's 100% driven by IGT. That's a great question. I mean inside that market as you know we've got the IGT piece and then the oil and gas. Oil and gas was down in fact a little bit sequentially and year over year. I'll give you a number that's really interesting.

Speaker 2

The IGT piece up 200% year over year. So that's another area. Yes, when somebody says, wait a minute, how can Carpenter Technology produce these numbers with all of this noise in the aerospace industry and we say, well, listen, we have the ability, we have optionality. We have a market here that we've been in for a long time that now is exploding and we're able to take advantage of that. And we have these customers coming to us wanting to jump into the production line, willing to pay aerospace margins.

Speaker 2

And now with some of the uncertainty in the aerospace chain, supply

Speaker 4

chain,

Speaker 2

they have the ability to do that and looking to further extend that relationship. So that's a big advantage for Carpenter Technology that I think sometimes Scott maybe goes unnoticed and certainly not everybody enjoys it.

Speaker 4

And then

Speaker 6

can you remind us where your alloys are found on typical industrial gas turbines and who you would be shipping to?

Speaker 2

Well, think about anybody without naming names, think about anybody that's making the large IGT turbines. I mean, it's a jet engine on land, right? So you have some of the same type of products. I mean, now what we ship into that market is a little bit it's a different alloy then that goes into aerospace engines in this case, but it has similar production process at least on the front end of the melting cycle. The finishing part is a little bit different.

Speaker 2

So it's a very attractive product for us.

Speaker 6

Okay. And I'll sneak one last question. Tim, are the push outs at Dynamet, are those just aerospace or is that medical or is that another end market? Thanks.

Speaker 3

Yes, Scott. The push outs are actually in additive, not in Dynamit. And yes, I think you can characterize those as more aerospace type materials in our additive business.

Speaker 6

Okay, got it. Thanks.

Operator

Thank you. We have the next question from Andre Madrid with BTIG. Please go ahead.

Speaker 7

Hey, everyone. Thanks for taking my question.

Speaker 2

Good morning.

Speaker 7

I guess looking forward, I see power generation, obviously, we just talked about that doing a lot to fill in the gap in the interim or the immediate term. But looking long term, I mean, maybe beyond 25, are these markets enough to offset any potential weakness at Aero?

Speaker 2

Well, Andre, I think most of us don't believe that any weakness in Aero is going to be long term, right? I mean, the macro demand is just too strong. We all believe that in this case here, Boeing will find a way to reach an agreement that's good for both sides. And I believe that's going to happen, right? So I don't have any fear that in the long term you're going to have aerospace weakness.

Speaker 2

This is a near term phenomenon right now that we'll get through. And when that happens, I mean, you just you go into a whole different level of demand outstripping supply. So you could see forward going forward, you're going to have fire gen competing to get on to the assets, not being a replacement. And I think that's the mindset you need to have as we get leading through this kind of choppy period for aerospace right now.

Speaker 7

Got it. Got it. And then I guess just I know you mentioned in the slides and on the call, growth beyond 25% definitely expected and obviously your comments just now kind of further confirm that that's the expectation. But I mean how should we think about the cadence? Like obviously, $26,000,000 is going to be a really tough comp coming off this year.

Speaker 7

Could it be exacerbated if issues continue any further? I mean I know you say they won't, but what if?

Speaker 2

Well, I mean, we can play a lot of what ifs, right? And I can just tell you from my experience in the industry talking to other major players in the industry, this is going to get resolved, right? It's too big not to get resolved. So this gets resolved. And I'll push back on you saying that 2026 or fiscal 2026 will be a tough comp to 2025.

Speaker 2

I mean, we see it as being bigger than 2025 even when we're running a wide range of different build rate scenarios. I mean, with what we're doing on the productivity side, product optimization, the repricing of contracts, from our viewpoint, we see 2026 as another meaningful step up versus 2025. And I think that's what everybody's kind of got to get aligned with. I mean, this is not a doom and gloom situation. This is a particular point in time where we have some significant uncertainty, certainly with a large player in the industry.

Speaker 2

There's no doubt. But companies like Carpenter Technology and others, I think the strength and the attractiveness of people that want to own our stock is the fact that we can pivot. It's the fact that we have optionality. It's the fact that we have the ability to move and support MRO, to support other customers that are using this as an opportunity to grow and move up in line in the production line. So to me, this is a very, very exciting time.

Speaker 2

It's actually a very positive time that you can see somebody like Carpenter Technology can perform like they do in this type of environment. And when we get back to more normalcy, if you will, and then an aggressive ramp, I mean, sky's the limit.

Speaker 7

Got it. Got it. And if I could just sneak one more more additive charges this quarter. Is this just overflow from last quarter's facility closure?

Speaker 2

Yes. So it's just to be really transparent, that was just a little bit of inventory that was left over that arguably we probably should have taken in the prior quarter and just got to the point and said that's not going to work and just go ahead and move on and get that behind us.

Speaker 5

So we're probably through the full event.

Speaker 2

Yes. But Andre, let's just say that there's not to me. We're this it's not even material. Why you're talking about $1,000,000 on $135,000,000 in SAO. So it's not a

Speaker 4

high Yes.

Speaker 7

No, definitely. No, just housekeeping. But no, I really appreciate the color and all the answers. I'll jump back in. Thanks.

Speaker 2

Yes. Thank you.

Operator

Thank you. The next question is from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Speaker 8

Hey, good morning. Good call so far. Thank you.

Speaker 2

Yes, good morning.

Speaker 8

Tony, on the SAO bridge for Q2 looks to be flat to a little bit up in terms of profitability. Is that more driven by volume or more driven by price mix? Because I can't remember if this quarter typically is seasonally a little bit stronger or weaker relative to the one you just you took the preventative maintenance and in Q1?

Speaker 2

Yes. Thanks, Phil. This is really the same answer that Josh asked earlier about quarter over quarter, right? I mean, listen, you're going to take preventive maintenance, some type of planned maintenance activity in every quarter. If you're not, you're not running your facility the right way.

Speaker 2

You're going to be doing planned maintenance every quarter. Our people that have visited our plant realize how our plants, how big they are. So you're doing planned maintenance every quarter. So if you look at Q1 to Q2, relatively, I think about the same amount of production days comparing the 2 quarters together. Certainly, you've got 2 big holidays in there.

Speaker 2

It's the end of the calendar year for some other people, some most other customers. So that's a little bit of noise. So I think the fact that we can guide to higher in the Q2 even with those types of issues is pretty not pretty, it's a very strong quarter. We're operating with some really big numbers. Phil, you've been around for a while and knowing what they were even in 2018, 2019 when we thought that was a great aerospace time.

Speaker 2

I mean, we're 2 times and 3 times higher than that right now.

Speaker 8

Thank you so much. And then on your full year guidance toward the higher end and you made some comments on there's opportunities perhaps to exceed that guidance. Is that in your mind more volume or more volume, obviously, excluding seasonality, which is stronger in the back half or more pricing dependent?

Speaker 2

Well, all three of them, right? I mean, anytime we talk about how we're going to move forward, it's going to be all three of those major legs to the stool, right? It's going to be what happens from contract pricing, product mix optimization and certainly productivity. So we're looking at that all the time. I mean, certainly, we were very methodical with our guidance updates and then we achieve them.

Speaker 2

So we've earned that reputation and we took a step here by moving to the high end of the guidance. And as we speak, the folks out in the plant are working on how they can move past that. And stay tuned as we have as we go forward to our next couple of calls and seeing updates with that.

Speaker 8

Last one for me, this acceleration comment you made toward the tail end of the quarter, was that more so on the MRO side essentially, because as you said that some expedites again and some emergency work there. Where was the where would you have seen the acceleration, I guess, relative to early in the quarter? Thank you. Yes.

Speaker 2

I would just say in general in the aerospace side, whether it's for MRO or OEM, depending on the customer. But the acceleration towards the end of the quarter was primarily on the aerospace side, although I mean other areas as well, certainly power generation and others, but primarily aerospace was where we saw that pick back up towards the end of the quarter.

Operator

Thank you. We have a follow-up question from Scott Deyschner with Deutsche Bank. Please go ahead.

Speaker 6

Yes. Tony, do you see much demand in the space market for alloys from companies like SpaceX? And if you do, has that demand reached a point where it's at all material yet?

Speaker 2

Yes. I mean, specifically with the customer that you talked about, I don't want to go too far. I mean, that's an additive customer, right? So, and they're a major player. So that's some of the choppiness that you see in order.

Speaker 2

So yes, strong. Yes, still small, but it's not consistent. So for a very small business like additive, that's what you see the swings in their profitability from quarter to quarter depending on how those orders come in, right. I mean, if you look at the additive market, not to spend too much time on additive, since it really doesn't drive the bus, but you have a couple of big players in that market and then you have a very long tail of smaller players. So if you have some movement in those big ones, it can really move the profitability in a quarter to quarter basis.

Speaker 6

Okay, thanks. That's all I had. Appreciate it.

Operator

Yes, thank you. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. John Hewitt for any closing remarks.

Operator

Over to you.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us today for our fiscal year 2025 Q1 conference call. Have a great rest of your day.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Carpenter Technology Q1 2025
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