Carpenter Technology Q2 2025 Earnings Call Transcript

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Provided by Quartr
January 30, 2025
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Operator

Good day, and welcome to the Carpenter Technologies Corporation Second Quarter twenty twenty five 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 that this event is being recorded. I would now like to turn the conference over to John Hewitt, Vice President, Investor Relations.

Operator

Please go ahead.

John Huyette
John Huyette
VP of Corporate Development & Investor Relations at Carpenter Technology

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology earnings conference call for the ended Dec. 31, 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.

John Huyette
John Huyette
VP of Corporate Development & Investor Relations at Carpenter Technology

Speakers on the call today are Tony Tink, President and Chief Executive Officer and Tim Lane, 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 ks for the year ended June 30, 2024, Form 10 Q for the fiscal quarter ended Sept. 30, 2024 and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when management discussed the sales or revenue that reference excludes surcharge.

John Huyette
John Huyette
VP of Corporate Development & Investor Relations at Carpenter Technology

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 Doug.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Thank you, John, and good morning to everyone. I will begin on Slide 4 with a review of our safety performance. Through the second quarter of fiscal year twenty twenty five, our total case incident rate was 1.1. We continue to see improvement as our newer employees gain experience and develop in our safety first culture. But we still have more to do to achieve our goal of a 0 injury workplace.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

We continue to invest in training for all employees with a focus on proactively identifying risks and hazards. Let's turn to Slide 5 for an overview of our performance. Building on our strong start to we continued our earnings momentum with a record and our second most profitable quarter on record. Specifically, in the we generated $119,000,000 in operating income, a 70% increase over our Notably, the FAO segment continues to expand adjusted operating margins, reaching 28.3% in the quarter compared to 20% a year ago and 26.3% in the prior quarter. The impressive margin expansion is a result of continued improvements in productivity, product mix optimization and pricing actions.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Further, we generated $3,860,000,0.0 in adjusted free cash flow during the quarter, and we continue to return cash to shareholders through our repurchase program, a part of our balanced approach to capital allocation. Our strong performance was driven by our continued ability to execute and our strong market position. Further, our strong performance gives us confidence to again increase our guidance for the full fiscal year 2025. For those of you that have been following us, you know that we have demonstrated remarkable growth over the last two years. This has resulted in regular increases to our financial outlook each of the last several quarters.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

In the last earnings call, after pulling in our target two full years into we raised our guidance to approximately 500000000 in operating income. On that call, we said we had line of sight to activity that could push operating income even higher. Well, we've continued to execute, improving productivity and working with customers to optimize our production plan. As a result, we are raising our guidance for the full again to the range of $500,000,000 to $5.20,000,000 dollars And we have confidence that fiscal year twenty twenty five isn't the peak of our earnings as we have line of sight to continued robust earnings growth in the years ahead. The same market forces that are driving our current performance are expected to only get stronger in the future.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Customers remain focused on surety of supply of our highly specialized material solutions to meet their long term growth needs. And we remain focused on continuing to improve our operational performance to meet that demand. While today's discussion is focused on our performance and the outlook, we are excited to share our outlook beyond at an upcoming investor event. At that time, we will also provide a business update, including our view of the end use markets and our operations. That event is scheduled for Tuesday, February and will be held virtually.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Now, let's turn to Slide 6 and take a closer look at our sales and market dynamics. In the sales increased 13% year over year and decreased 5% sequentially. The modest sequential sales decline was driven by conscious actions we took at the end of the quarter. First, some customers closed operations earlier than usual for their end of year, and we agreed to hold that material for them. Secondly, as you know, we operate 20 fourseven every day of the year.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

This year, we decided to stop operations on Christmas Eve, Christmas Day and New Year's Eve to give our employees the opportunity to enjoy more time with their families. I will also note that the sequential change in our energy market, where we're coming off a strong quarter, was related to the timing of certain shipments to power generation customers. Also keep in mind that power generation only accounts for approximately 2% to 3% of our total net sales. Most importantly, looking forward to the we expect a healthy increase in total net sales. This will be primarily driven by higher volumes with more operating gains in the quarter as well as continued productivity gains, product mix optimization and higher realized pricing.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Let me take a couple of minutes to zoom out a bit and talk generally about what we are seeing in terms of demand signals and what we are hearing from our customers. As this is approximately 60% of our net sales, I will start with the aerospace and defense in these market. For the commercial aerospace market, it is important to keep in mind that we are a key supplier with broad exposure to aerospace platforms. This includes Boeing and Airbus, narrow body and wide body, MRO and OE activity. This broad exposure gives us visibility across the supply chain and positions us to support the supply chain wherever the activity is focused.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Across the board, our aerospace customers continue to expect significant ramps in output from the OEMs. However, some customers with direct exposure to specific platforms, particularly the seven thirty seven, are still in a wait and see mode in terms of their specific plans for the next few quarters as they assess how quickly Boeing can ramp production and provide confidence to the supply chain that they are on the path to an incredible and stable increase in build rates. With this in mind, we continue to work with those customers where we can to manage our priorities for orders as we plan our production schedules. Even though those customers are more cautious today, they are actively talking to us about securing additional material from us as the demand conditions accelerate. Conversely, for platforms where the customer has greater clarity and confidence, they continue to push ahead.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

And correspondingly, we continue to see strong demand in those areas. In addition, many of our customers have shifted focus to satisfy extremely high MRO demand, where our material solutions are critical. We also have a strong portfolio of program specific defense applications, where demand remains strong as we are currently receiving urgent requests for more material faster. In our other end use markets, such as medical, which accounts for roughly 13% of net sales, we continue to see strong demand as our material solutions play an important role in solving their complex needs. Looking at our total order backlog, we continue to see improvements in the mix and pricing, which supports our expectations for ongoing sales increases.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

From our connected vantage point, we see clear signs that demand will continue to strengthen into the future. Now, I will turn it over to Tim for the financial summary.

Timothy Lain
Timothy Lain
Senior VP & CFO at Carpenter Technology

Thanks, Tony. Good morning, everyone. I'll start on Slide 8, income statement summary. Starting at the top, sales excluding surcharge increased 13% year over year on 6% lower volume. Sequentially, sales were down 5% on 10% lower volume.

Timothy Lain
Timothy Lain
Senior VP & CFO at Carpenter Technology

The year over year growth in net sales was driven by increasing productivity necessary to drive a stronger product mix as we focus our capacity on our most profitable products and the realization of higher prices. The improving productivity, product mix and pricing are evident in our gross profit, which increased to $17,750,000,0.0 in the current quarter, up 45% from the same quarter last year. SG and A expenses were $5,860,000,0.0 in the which includes $2,360,000,0.0 of corporate costs. 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 Operating income was $11,890,000,0.0 in the current quarter, which is 70 percent higher than the $6,980,000,0.0 in our As Tony mentioned earlier, this represents our second best quarterly operating income result on record. Moving on to our effective tax rate, which was 20% in the current quarter.

Timothy Lain
Timothy Lain
Senior VP & CFO at Carpenter Technology

This quarter's effective tax rate was lower than our normalized tax rate due to certain discrete tax benefits recorded in the current quarter. For the upcoming quarters of with no further discrete benefits anticipated, we expect the effective tax rate to be more in line with our normalized rate of 23% each quarter. In summary, the earnings per diluted share results for the quarter of $1,.66 demonstrates solid execution against the goal we laid out for this quarter. Now turning to Slide 9 and our FAO segment results. Net sales excluding surcharge for the were $47,960,000,0.0 On a year over year basis, sales were up 15% on 11% lower volume.

Timothy Lain
Timothy Lain
Senior VP & CFO at Carpenter Technology

The increase in sales on lower volume reflects the impacts of higher realized prices and improving product mix relative to a year ago. Sequentially, sales were down 6% on 11% lower volume. As Tony mentioned, the shipments were influenced by the actions we took at the end of the quarter associated with customer year end shutdowns and reducing our operations on holidays. Moving to operating results, SAO reported operating income of $13,560,000,0.0 in the As Tony mentioned, the adjusted operating margin of 28.3% in the is a significant achievement. The continued margin expansion is a result of our FAO's team's focus on executing actions to further increase and maintain consistent production levels, to closely manage operating costs and to optimize the product mix to maximize capacity for our most profitable products.

Timothy Lain
Timothy Lain
Senior VP & CFO at Carpenter Technology

These areas are as relevant as ever as we actively manage our production schedules to adjust to changing customer priorities and seek to increase our overall output. Looking ahead to our upcoming we anticipate SAO will generate operating income in the range of $140,000,000 to $145,000,000 which represents another step up in profitability. Now turning to Slide 10 and our PEP segment results. Net sales excluding surcharge in the were $8,620,000,0.0 down 2% from the same quarter a year ago and down 7% sequentially. In the current quarter, Pept reported operating income of $7,000,000 compared with $710,000,0.0 in the same quarter a year ago and $730,000,0.0 in the As we have said previously, DynaMed is the driver of the PEP segment, representing a significant portion of PEP sales and an even greater percentage of PEP's profitability.

Timothy Lain
Timothy Lain
Senior VP & CFO at Carpenter Technology

DynaMed's fundamentals are very comparable at SAO, including a strong market demand backdrop in the medical and aerospace end use markets, which together accounts for approximately 95% of DynaMed sales. Like SAO, the focus at Dynamat remains on improving productivity and expanding capacity to increase our output, which has driven improved results. With that said, Dynamat is not the only business in PEP. Our additive business, although not material to overall Carpenter Technology, has seen a deferral of orders over the last two quarters from certain key strategic customers. Given the size and cost structure of the additive business, such deferrals can be impactful on the business and the segment, even if it does not have a material impact on the overall company.

Timothy Lain
Timothy Lain
Senior VP & CFO at Carpenter Technology

The additive demand outlook and customer order visibility is improving. We anticipate that the additive results will improve beginning in our upcoming With that in mind, we currently anticipate that in the upcoming the Pep segment will deliver operating income in the range of $10,000,000 to $12,000,000 Now turning to Slide 11 and a review of cash flow. In the current quarter, we generated $6,790,000,0.0 of cash from operating activities. The results were driven by improving profitability and disciplined working capital management. Although we increased inventory in our recent we view that growth as temporary and tied to our strong order backlog.

Timothy Lain
Timothy Lain
Senior VP & CFO at Carpenter Technology

The increase is also well below the amount of inventory we built at this time last year, which reflects the impact of our efforts to improve productivity. The cash generation in the current quarter is an important step towards delivering our full fiscal year 2025 adjusted free cash flow target of $2.50,000,000 dollars to $300,000,000 dollars For the current quarter, we spent just over $29,000,000 on capital expenditures. With those details in mind, we reported adjusted free cash flow of $3,860,000,0.0 in the We also continued executing against the share repurchase program. In the we purchased $820,000,0.0 of shares against the $400,000,000 authorization. The share repurchase program reflects our balanced approach to capital allocation and complements the long standing quarterly dividend.

Timothy Lain
Timothy Lain
Senior VP & CFO at Carpenter Technology

Finally, our liquidity remains healthy. We ended the with total liquidity of $5.11,000,000 dollars which includes $16,210,000,0.0 of cash and $34,890,000,0.0 of available borrowings on our credit facility. With that, I will turn the call back to Tony.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Thanks, Tim. What an exciting time to be part of Carpenter Technology as we are delivering record profits while projecting a future of even higher earnings growth potential. Carpenter Technology just delivered a record and our second most profitable quarter in the history of the company. We increased adjusted operating margins in our SAO segment again, reaching 28.3%, a new all time high. We continue to execute against our share repurchase program that complements our long standing quarterly dividend, demonstrating our commitment to return cash to our shareholders.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

And we've increased our operating income guidance again to the range of $500,000,000 to $5.20,000,000 dollars for We are delivering strong record results even after the aerospace supply chain is transitioning and only at the beginning of its aggressive build rate ramp. This is a very important point because it means demand for our material will only get stronger and our earnings growth potential will continue to expand. We continue to believe we are in the early stages of our growth journey and we look forward to updating our long term outlook at our virtual investor event on February. Thank you for your attention. And I will now turn the call back to the operator.

Operator

Thank you. We will now begin the question and answer session. And your first question today will come from Gautam Khanna with TD

Gautam Khanna
Managing Director at TD Cowen

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? If you could just talk about what you're seeing in that Boeing channel as well?

Gautam Khanna
Managing Director at TD Cowen

Thank you.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Yes, I will do. Thanks for the question. First on lead times, this is a good news story for us in terms of lead times as specifically for the aerospace material, which you're 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 operation.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

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 other points that you might ask about in terms of orders and sales and maybe this will answer your question. Without getting into 2 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.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

But that's really not a surprise when you think Boeing, for example, was on strike from what was it to and probably didn't really start producing even at low levels until Dec. 0. 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, Doctor, as you know, we also limit our order intake. So if that were not the case, our backlog in certain orders could be higher.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

But it's clear that we have seen some pause from customers that are specifically connected to Boeing.

Gautam Khanna
Managing Director at TD Cowen

Okay. That's interesting. And just to follow-up on that, In your point, it sounds like that's outside of the engine business, so that's more on structural and fasteners. Is that what you're saying?

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Yes. Mostly on the structural side, I mean, it's always interesting to note what fasteners do quarter to quarter. I believe you asked me this question last quarter, if I remember right, fasteners were down sequentially 12%. They, our net sales for fasteners were actually up about 2.5% this quarter. So that whipsaws back and forth from quarter to quarter, but actually had a little bit of an increase in fastener net sales.

Gautam Khanna
Managing Director at TD Cowen

And then naturally, that's going to lead people to wonder about the pricing environment because it has been a supply constrained environment for a number of years. I'm just curious, have you seen any slack in kind of spot pricing activity or has that remained Well, I'm sure in

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

the spot market, if there's somebody out there that has capacity, maybe some of these alloys that somebody can get some discount, if you will. But that's not long term, right? I mean, you got to remember, you're in an environment where 1 of your top airframers wasn't making any planes effectively, right? And we're still delivering these type of record profits. So, you're going to come very quickly to a point where I think this market comes back really quickly and you're going to be right back into this really tight demand and a lot of emergency phone calls.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

I can tell you this, Gautam, every discussion we had with customers is always long term. It's long term focused. It's about surety and supply. And we're just we're going to stay focused on that.

Operator

Your next question today will come from Josh Sullivan with Benchmark. Please go ahead.

Josh Sullivan
Managing Director at The Benchmark Company LLC

What's your perspective on the potential for tempo of global conflicts to abate. Any indication, Paul, on defense related materials is reflecting any customer expectation that things might change either in the near or medium term? I think you noted defense was still strong in your comments, but just curious if there's any change in the forward look?

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

I don't think so, Josh. I think that's going to stay strong in the coming years regardless of what goes on in the conflicts. And I hope they're 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.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

That's the feedback that we're getting from people in that space.

Josh Sullivan
Managing Director at The Benchmark Company LLC

And then I know answering Gosin's question there, you talked about the long term perspective of customers. And obviously, Boeing suppliers are judiciously kind of eyeing the ramp here. But longer term, there still does seem to be some tightness in the industry. And how is that conversation versus maybe what they're going to need in two or three years versus what they necessarily need to pull today? And I imagine you're having an investor event here coming up, but a question on capacity longer term, how are you addressing those and what are those conversations like right now?

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Well, there's been no change for us. I mean, this isn't something that happened last week. I mean, certainly, Boeing has had some challenges now for quite some time. And those companies that are very closely tied to them are looking for some type of push out in those orders. And we're willing to accommodate them as much as we can because we have other optionality, Josh.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

I mean, we've got a backlog that's at $2,000,000,000 half of that is aerospace. I would say that the majority of that is wanted sooner. So we're able to pull that in and still, we've had some increases in power gen where we've able to pull those in. So that broad exposure we have, we've been able to run at very high levels. So this has not impacted us.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

And now I really believe I think you could go through the next couple of quarters where we're waiting through the implications of Boeing and what type of progress they're going to make under their build rates. And I think we'll be right back into these daily emergency requests for materials. I think that's going to come sooner than what you think. So from us, we're still running at 100%. There is no plans to change that.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

And I think that's a really important point to make that there is no weakness from that standpoint. And we're much better now than we were at our last earnings call, Josh, when Boeing was on strike. I mean, Boeing is back and looks like to me making good credible sound improvements going forward. So, I think we're going to get right back into a big snap up and there's going to be a lot of urgent demand as well.

Operator

Your next question today will come from Scott Duchyal with Deutsche Bank. Please go ahead.

Scott Deuschle
Scott Deuschle
Director - Aerospace & Defense Equity Research at Deutsche Bank

Hey, good morning. Tony, it looks like the price per pound at SAO is up about 29% this quarter. I guess, can you roughly characterize how much of that was just straight price on like for like alloys versus how much of that was mix as you presumably tilted more of the capacity to the high price engine

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Tough question, Scott. A good 1, but a tough 1. So I'm going to respectively punt a little bit on saying how much is priced and how is this mix because it is a very fluid concept as we're running our production process. I will say this, you are 100% correct. We are not a commodity supplier.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

So, I am not trying to maximize tons. I'm trying to maximize profit, right? So, we are always looking at how we can make more of the higher valued material. As you well know, almost 100% of the time, the higher priced the material, the longer it takes to go through the production process. So, that's why you see the difference and say, wow, why aren't volumes going up?

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Well, because we're not a commodity player, that's why, and we're going to maximize profit. So, I mean, you're spot on with the price increases. Certainly, we've seen new contracts come on place that were effective in our You'll see more that will become effective in our But don't underestimate the impact of us actively manage that mix optimization as well.

Scott Deuschle
Scott Deuschle
Director - Aerospace & Defense Equity Research at Deutsche Bank

Okay. Thank you. And then consensus is projecting about 16% EBIT growth in 2026, versus the 45% you're guiding to for this year. I'm not trying to get ahead of Investor Day or maybe I am, but I guess does that type of deceleration in your EBIT growth make sense to you, particularly Boeing does get to rate 38?

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Well, I'm going to make you wait till February, right? I mean, certainly, as you look out over the next couple of years, it might be difficult. The rate of growth that we've had over the last couple of years has been off the charts, right? You've probably not had any company that you've covered that's had that type of increase, right? So, but we think there's still a lot more in the tank going forward for us and we look forward to February to give you more insight there.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

I would be surprised if you're disappointed.

Scott Deuschle
Scott Deuschle
Director - Aerospace & Defense Equity Research at Deutsche Bank

Okay. And then, sorry, last question. And I may have missed this, but it seems like medical has seen some destocking over the last few quarters. Do you have a sense for when that ends?

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Yes. I think you're always going to be in a constant state of some type of destocking in the medical market, right? I mean, there's always going to be some ups and downs. Let me give you a couple examples for medical what makes us stay very positive about it. As we talk to those customers, they still feel like they have a very positive demand outlook related to patient surgical rates.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

And that's where we play, right, in orthopedic and cardiology. So that's positive for us. Also, we've seen several of our customers proactively coming to us asking to shift even more of their business to us. And Scott, what's interesting is not just more of the business that we do, but asking us to get involved in products that historically we have not made. And can we get into those types of areas and make it for them?

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

And the last thing I'll say in medical that gives us a lot of confidence is that net level customer in the supply chain is now working even more closely with us and talking about potential long term contracts, long term agreements, and that's a bit of a new development as well and very positive. So, I mean, medical is roughly 15% of our business. You've got aerospace type margins and in some cases higher. So, we remain very confident, very positive in that market.

Operator

And your next question today will come from Andre Madrid with BTIG. Please go ahead.

Andre Madrid
Equity Research Analyst at BTIG

Tony, Tim, John, thanks for taking the question. I want to start first, given the new administration coming in this month and a lot of talks around tariffs, especially on the material front. I know a lot of what you guys use is recycled from your own plants. But I mean, if we were to see any pressure, where might it materialize?

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Good question. We as always, we're closely monitoring that transition. We believe, as always, we're well positioned regardless of the direction that the administration might go. As you said, if you remember, wasn't too long ago, we had the last tariff regime and that had little impact on our business. We anticipate the same.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

And even if there are any types of tariffs that would be applied in addition to maybe what they were in the past to any of our inputs that correspondingly could increase our cost, we would pass those through to the customer.

Andre Madrid
Equity Research Analyst at BTIG

Yes. That makes a lot of sense. And if I could follow-up there, looking at SAO volumes, in our previous conversations, I know you guys say you're still below pre COVID levels on SAO volumes. Is there any expectation to get back above that? Or will most of it just be driven on pricing and mix moving forward?

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

No, I think you'll see increases in volume for sure when you've got this type of build rate expectation or build rate plan for the Boeing's and Airbus is to get to. There'll be more volume coming. That's going to be a big player for us over the next several years as far as we continue to increase our profitability, volume, price and mix.

Andre Madrid
Equity Research Analyst at BTIG

Got it. And I just need just 1 more. And I know you said lead times were coming down in some regard. But last I heard in some exotics, there's still lead times extending out over one hundred weeks. I mean, this was a conversation I had probably last month.

Andre Madrid
Equity Research Analyst at BTIG

Is that the case? Or are you seeing those coming down as well?

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Well, it is dependent on the product. When I gave that answer to that question earlier, I was talking mainly on engine materials where you've seen some type of pull in that we've been able to, maybe not the entire industry, whether that be on engine structural, some of those other aerospace materials, we're able to pull those in because we're performing so well out in the plant, right, both our ready facility and our Latrobe facility doing a very good job on the primary milking rates. And that allows us to make more material and that allows us to push more through. So, that was, that is the driver of why we've been able to pull those in and not drastically, I mean, they're not cut in half. They were at sixty five plus weeks, maybe you're in the low 60s now.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

So, but two or three weeks is a big deal.

Andre Madrid
Equity Research Analyst at BTIG

Yes, definitely. Tony, thanks so much for the color. I'll leave it there. Thanks.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Thank you.

Operator

Your next question today will come from Bennett Moore with JPMorgan. Please go ahead.

Bennett Moore
Bennett Moore
Vice President, Equity Research at JPMorgan Chase

Good morning, Tony and Tim. Thank you for taking my questions. Based on the worker backlog and the growing A and D and medical mix, is there a level at which you look to cap this? And I guess given these products require more time on the assets, could we see shipments remain somewhat flat to down this year as was the case last year? I know you're expecting growth in volume longer term, but thinking more just this year.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Well, it's a tough paradigm to break, right, because I know that everybody wants to look at volumes and say that is the driver of this company and it's just not, right? I mean, some of those products on submarkets like transportation, some of the industrial products, very, very high tons, but low margin. And those are the ones that you see us moving away from. If we can use any of the assets within that production process flow for other higher end materials. So, you can see big changes in volume because we've moved away some products and see a corresponding large increase in profit because we've chosen to use parts of those assets in that production process to increase our profitability.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

We're going to keep doing that because we think that's a reason people buy our shares is to increase profitability, not to increase volume.

Bennett Moore
Bennett Moore
Vice President, Equity Research at JPMorgan Chase

And if I could turn to Energy, I realize the comps were tough sequentially, but could you shed any additional color on the puts and takes with decline entirely IGT driven? And I appreciate it thoroughly, but given all the recent noise around AI potentially being less power intensive, has this come up at all in customer conversations?

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Yes, good question. It is Energy, especially the power generation submarket inside of energy, is an interesting submarket for us. It's a little confusing because on 1 hand, we'll say, well, it's only 2% or 3% of our total revenue, which is true. But on the other hand, that's an alloy that we like to make, right? That's an alloy that we can pull into our system.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

We get aerospace like margins and we use that at times when, for example, when I was talking earlier, a customer that's very dependent on Boeing wants to take a bit of a pause. Well, we're able to move those products in and run them across the same primary mill assets. So, we like that product and we like that business for that point. We have customers inside that business that say, whenever you have a gap in production, just make material for us, we'll take it. I mean, so that's the type of demand that we have in that area.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Certainly, it got a lot of attention when you heard about AI in these data centers. We couldn't make enough material for them before that. So that was just a whole another level. So I believe over the next several years, this submarket, although small for us, will be a very nice market for us and to be able to pick up very nice margins.

Operator

Your next question today will come from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Phil Gibbs
Phil Gibbs
Director, Metals Equity Research Analyst at KeyBanc Capital Markets

Tony, first question is just on the jet engine sales as I typically ask. Any color on what those did specifically either sequentially or year over year?

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

They engines were down sequentially because really the production plan in our was focused more on some other markets. So, we kind of move things back and forth based on what's going on specifically with Boeing. But as we look to our I don't want to start getting into the business of forecasting what sales are going to be by market going forward, but we see a pretty meaningful increase in aero engines going into our I can say that.

Phil Gibbs
Phil Gibbs
Director, Metals Equity Research Analyst at KeyBanc Capital Markets

Okay. Any specificity for the model, just down 5% and down 10% relative to

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Relative to our they were down. Get Tim to give the exact number. I think it was about 10% or 11%. But I think that was I can't remember the exact number, but I think it was about that.

Timothy Lain
Timothy Lain
Senior VP & CFO at Carpenter Technology

Yes. So, exactly down 14%, but up 29%.

Phil Gibbs
Phil Gibbs
Director, Metals Equity Research Analyst at KeyBanc Capital Markets

Perfect. Thank you so much. And then just on the backlog, Tony, I think you said you had a $2,000,000,000 backlog. Is that kind of the approximate number right now? I know it's been running a little over $220,000,000,0.0 So, it's

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

been I think it's about I think it's $190,000,000,0.0 Remember, even at $190,000,000,0.0 I believe it's like 2.5 times what it was prior to COVID. And I said this, this is an important point. I mean, that backlog is a significant advantage for us because it allows us to pull material in. And that's 1 of the things that, I mean, how can Carpenter Technology make this kind of profit if Boeing is not building planes? Well, there's other people that are building planes.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

There's other people that are making products. We talked about Power Gen and we're able to pull that backlog in because the majority of that backlog, 2 thirds of it, 3 quarters of it are material that's wanted earlier. So, we're able to pull that in and manage that. So, that is a very strategic source for us.

Phil Gibbs
Phil Gibbs
Director, Metals Equity Research Analyst at KeyBanc Capital Markets

And then, lastly, from me on the defense side, can you kind of elaborate on what you're seeing there just in terms of the maybe the customer conversations, if there's positive benefits from this administration on 1 hand, but then you have potential de escalation of war on the other hopefully. So, just we're trying to think about that as we look ahead and curious what you think.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

Obviously, our conversations on with the DoD is something we keep confidential, but I would say urgent demand. And I don't that's not going to change with this administration. I hope all these conflicts are solved. I don't think that urgent demand will change. This is a repositioning of, I think, the U.

Tony Thene
Tony Thene
President and Chief Executive Officer at Carpenter Technology

S. Military that that demand is going to stay there. But conversations right now in that area, I would use the word urgent. Thank you so much. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to John Hewitt, Vice President, Investor Relations for any closing remarks.

John Huyette
John Huyette
VP of Corporate Development & Investor Relations at Carpenter Technology

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

Operator

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

Executives
    • John Huyette
      John Huyette
      VP of Corporate Development & Investor Relations
    • Tony Thene
      Tony Thene
      President and Chief Executive Officer
    • Timothy Lain
      Timothy Lain
      Senior VP & CFO
Analysts
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Carpenter Technology Q2 2025
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