Carpenter Technology Corporation Aktie

Hello, everyone. Thank you for joining us, and welcome to the Carpenter Technologies First Quarter Full Year '27 Earnings Call. [Operator Instructions]. I will now hand the conference over to John Hewitt, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the fiscal 2027 First Quarter ended September 30, 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 30, 2026, and the exhibits attached to that filing.

Please also note that in the following discussion, unless otherwise noted, when management discusses 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 4 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 0 injury workplace. Let's turn to Slide 5 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. And 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 submarkets, distribution and structural were up 23% sequentially and 49% year-over-year. and 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 doesn't 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 lead 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 super alloys, our pricing for both LTA and non-LTA business remains elevated and consistently increasing.

And 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 5 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 levers 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 submarket 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 submarkets was roughly flat to a strong previous quarter.

And the defense submarket 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 any time in the aerospace market is still only in the early stages of a large ramp. And during a quarter where we had significant plant 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 the 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 IRAM 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 a large number of engines approaching their first shop visits.

Airbus and Boeing continue to ramp production with backlogs now over 16,000 planes. That's 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's a 50% increase above the current year rate, repeat a 50% increase above the current year rate.

So 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 submarket 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 in their demand outlook for calendar years 2027 and 2028 continue to strengthen as OEMs increase ordering activity. In addition, we are receiving emergency orders in this submarket 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 submarket. 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 submarket, where we see a stark contrast between in 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 War 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 War and OEMs as customers prepare for future needs.

As an example, over the last quarter, the Navy selected Boeing to build its next-generation FA-XX fire. We are already engaged with the supply chain on the design of critical elements for this fighter and corporate 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 submarket. 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.

And 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.

But first, I will turn it over to Tim for a review of the financials.

Thanks, Tony. Good morning, everyone. Starting with the income statement summary on Slide 8. Net sales, excluding surcharge, increased 5% year-over-year and declined 7% sequentially. The sequential decline primarily reflected planned first quarter downtime for preventative maintenance as we discussed last quarter. Improved productivity, product mix optimization efforts and pricing actions partially offset the impact of reduced operating time.

Gross profit was $256.3 million up 18% year-over-year and down 5% sequentially. Selling, general and administrative or SG&A expenses were $59.9 million, down $3.2 million year-over-year and down 2.1% sequentially and primarily due to lower variable compensation accruals. SG&A includes corporate costs of $26.1 million compared with $28.5 million in the fourth quarter of fiscal year 2026 and and $26.6 million in the first quarter of fiscal year 2026.

We expect second quarter fiscal year 2027 corporate costs of approximately $28 million to $29 million. Operating income was $196.4 million, up 28% year-over-year and down 5% sequentially. As Tony noted, this was a first quarter record and provides a strong foundation for the rest of fiscal year 2027.

Our effective tax rate was 15.5%, similar to the first quarter of fiscal 2026, reflecting tax benefits associated with the vesting of certain equity awards. For fiscal year 2027, we expect the effective tax rate will be near the low end of our previously provided range of 20% to 22%. Diluted earnings per share for the first quarter were $3.25.

Turning to our segment results, starting with SAO on Slide 9. First quarter net sales, excluding surcharge, were $573.5 million. Sales increased 7% year-over-year and declined 6% sequentially. The sequential decline reflected planned preventative maintenance downtime across our facilities, partially offset by mix management and pricing benefits. SAO's adjusted operating margin was 37.7%, consistent with the prior quarter's record. This is an impressive result given the lower available operating time that we typically see in our first fiscal quarter as a result of maintenance activities.

From a trend perspective, we expect further margin expansion from productivity, mix and pricing. That said, margin may vary quarter-by-quarter depending on the mix of products that we ship in any given quarter. SAO reported first quarter operating income of $216.3 million. For the second quarter of fiscal 2027, we expect SAO operating income of $214 million to $218 million, in line with the first quarter.

Our outlook reflects reduced production time during the holidays. As in prior years, we expect improved productivity and product mix optimization to partially offset the reduction in operating time.

Turning to PEP on Slide 10. First quarter fiscal year 2027 net sales, excluding surcharge, were $83 million, down 5% year-over-year and 15% sequentially. Operating income was $7.3 million, slightly above our guidance compared with $7.1 million in the fourth quarter of fiscal year 2026 and $9.4 million a year ago.

The year-over-year decline primarily reflected lower titanium sales into the medical end-use market, offset by strength in our additive business. We expect second quarter PEP operating income to be similar to the first quarter.

Before turning to cash flow, let me summarize our second quarter fiscal year 2027 operating income outlook. We expect total operating income of $192 million to $197 million, which is largely in line with our strong first quarter results and implies growth of 24% to 27% compared to last year's second fiscal quarter.

The total operating income estimate is comprised of SAO operating income of $214 million to $218 million, PEP operating income of approximately $7 million and corporate costs of approximately $28 million to $29 million.

Turning to Slide 11 and our cash generation and capital allocation priorities. In the first quarter of fiscal year 2027, we generated $52.8 million of cash from operations. and spent $77.7 million in capital expenditures that resulted in negative free cash flow for the quarter of $24.8 million. Significant cash generation is an important element of our ongoing growth story.

We continue to focus our efforts on ensuring cash generation from increasing profitability as well as focused discipline on working capital management. As expected, capital spending remains elevated as we continue to fund our brownfield capacity expansion project. A brief update on our brownfield project. The expansion project remains on budget and on schedule for completion by the start of fiscal year 2028.

Site activities are progressing well with major equipment installation underway. The project team remains focused on safely completing construction and equipment installation while preparing for a successful operational start-up. As we move through this year, we continue to anticipate generating between $400 million and $430 million of free cash flow in fiscal year 2027. And which is an impressive outlook given that includes the elevated capital spending related to our capacity expansion investments.

The cash generation enables our balanced capital allocation approach that combines investing in attractive accretive growth projects including the brownfield capacity expansion with returning cash to shareholders. That is demonstrated by the $133.9 million of share repurchases during the quarter. As announced in August, these repurchases completed the prior $400 million authorization as well as purchases under the newly authorized additional $1 billion program.

We also continue paying our long-standing quarterly dividend. Our strong balance sheet and liquidity support our capital allocation priorities. At quarter end, total liquidity was $658.6 million. comprised of $159.5 million in cash and $499.1 million in available borrowings under our credit facility.

Our credit metrics remain very strong with net debt-to-EBITDA of 0.6x. And our capital structure is well positioned to allow significant flexibility with no debt maturities until 2034. Again, we believe our strong balance sheet, solid capital structure and outlook for significant cash generation positions us well to continue to invest in future growth as well as return significant cash to shareholders.

With that, I'll turn the call back to Tony.

Thanks, Tim. As I mentioned in my earlier comments, the quarterly performance can be summarized into a tight positive narrative. Consistent record operating income performance, strong operating margins with levers to expand further, accelerating demand across key end-use markets and continuing benefit from pricing actions.

I also noted an industry-leading financial outlook. For fiscal year 2027, we communicated strong financial targets just last quarter, but we are clearly focused on overachieving and are developing action plans to make that a reality. In fiscal year 2028, our brownfield capacity expansion project comes online, providing an additional accelerator to our earnings growth profile.

And by fiscal year 2029, we expect operating income to reach approximately $1.2 billion to $1.3 billion. That's a 20%-plus CAGR over 3 years, a rate that we believe exceeds most in the industry. But again, our goal is to overachieve and we do not view fiscal year 2029 as the peak of our earnings power. Altogether, we believe Carpenter Technology offers a uniquely attractive long-term investment opportunity.

We are operating in an accelerated demand environment across many of the most attractive end-use markets in the world. And not only is demand accelerating, but the platforms that serve that demand. airplanes, medical implants, power generation, semiconductor fabrication, none of them can be built without carpenter technology.

As a result, we have a clear path to significant earnings growth in the years ahead. Our strong and growing margin profile reflects the fact that our portfolio consists of highly specialized solutions, serving critical applications where performance matters. Qualification cycles are long and the barriers to entry are significant.

And our strong balance sheet and growing cash flow generation provide us with the flexibility to maintain a balanced and disciplined approach to capital allocation. investing in profitable growth opportunities and returning cash to shareholders.

We remain committed to creating a meaningful long-term value for shareholders through disciplined execution, continuous improvement and profitable growth.

Thank you for your time and continued confidence in Carpenter Technology.

[Operator Instructions]. Your first question from Andre Madrid with U.S. Bancorp BTIG.

Looking at -- you mentioned maintenance as being maybe one of the reasons that is a little weaker, but it seemed like some of that was already contemplated in your 1Q outlook. So I'm just trying to better understand maybe what are some of the other puts and takes that might have driven the mist.

Well, I think there are no other puts and takes. I mean the result was about 98% to 99% of the guidance that we gave. So you're only talking about a couple of million dollars, Andre, and that could come down to one customer unable to arrange a truck to be shipped in the last day of the quarter. That's how small this is what you're talking about. So I don't have a long list of items. We effectively came in at our guidance.

Your next question from Gautam Khanna with Cowen.

And I apologize, I missed the front of the call is the earnings day. But Tony, I just -- it sounded like nothing has changed in the demand environment. Nothing has changed in the pricing environment and that your conviction in the '27 through '29 outlook is unchanged, right? I just want to make sure that. That was...

It has changed. I mean it's stronger. My outlook on demand. Is stronger than it was a quarter ago. My outlook on pricing is stronger than it was a quarter ago. And my confidence in 2027 and 2029 is stronger than it was a quarter ago. So it has changed to the positive.

Okay. And can you talk a little bit about productivity and kind of -- I know we don't have the tonnage disclosures, which is fine. I just I'm curious like anything directionally on capacity unlock the ability to drive more throughput in the first quarter and then as we move through the year, like what you guys are expecting in terms of the ability to unlock because you're 24/7 all out at this point. I'm just curious what on that....

That's a good question. It's probably one of the most important questions. It's across the board. So there's not 1 item. I can't just work on 1 item. We're working on multiple areas of the plant. And as you well know, when you unlock bottleneck by definition, that creates another one, that you go work, right, and you start to link them all together.

So it was across the board. I mean, for SAO to do 1/10 percentage point less than the record last quarter. With less operating days and significantly more maintenance activity, you have to have that increased productivity to be able to maintain that. I mean that's actually an unbelievable level to be at that 37.7% in a month like we had.

So very happy with what's going on on the shop floor, but not satisfied. Of course, there's a next level and a level after that we can get to.

And I would just say this, as you look and you get into Q3 and Q4, the demand signals that are out there, that's going to be even more tailwinds to push this margin percentage up. You're going to have significantly more volume coming across the assets. and the price is going to continue to increase quarter-over-quarter.

That's very helpful, Tony. Also, just if you could remind us on seasonal maintenance. You guys have been very proactive on doing -- pulling in maintenance throughout. But obviously, the September quarter has just a heavier load on that front. Is that unique to the quarter? And then just as we move forward, is there any pertubation you can call out now that we should be aware of, whether it's maintenance or the...

Yes. The key is it's nothing special about the first quarter. That's just when we usually set up our maintenance schedules. And it usually Gautham isn't one large piece of equipment out for a long period of time. You just can't afford that in today's demand environment. So what you have are a lot of smaller maintenance projects all hooked together. And that's what you saw in the first quarter. You're going to continue to see that type of preventative maintenance throughout the year. My guess right now is none of those events will be as large as the one you saw in Q1.

That makes sense. And just given the stock is acting kind of odd as many aerospace stocks these days. How do you prioritize capital allocation from here? Obviously, you guys have been doing buybacks. Just how do you think the Board will respond to those.

Well, without being too exact, I agree with you. I think right now, there's a major negative sentiment that's emerged over the last couple of months in the aerospace market. I can't really speak to that, Gautam, because I've not found 1 person that can explain exactly to me what they're negative on. And my guess is you probably wouldn't be able to explain that to me either. But I think my prepared remarks set out a pretty strong near-term future, let alone FY '27 near term, positive future. With that said, to specifically answer your question, we're going to continue to fund the brownfield. And certainly, at these levels, we'll remain active in the repurchase program.

Your next question from Scott Deuschle with Deutsche Bank.

Tony, can you provide an update on where the backlog stands today relative to the start of the calendar year?

Without giving a specific number, Scott, it is continuing to increase. Across all our end use markets.

And then have you placed much of the brownfield capacity on contract at this point? Or are you still waiting to contract that out?

Well, we don't contract out specific pieces of equipment. So if you look at the demand profile going forward, that volume will be absorbed immediately as it comes online.

Okay. And then.

It will be absorbed by our current -- sorry, will be absorbed by our current LTAs, right? All of our LTAs, they'll be wanting more material. So -- that's not -- I don't contract out specific equipment to specific customers.

Right. Okay. And then I guess maybe on that point, can you comment on the share position that you've been securing on new aerospace LTAs and how that share position is or is not changing relative to the contracts that they are replacing and renewing.

Well, I can tell you this, all of them are higher. Every 1 of the customers that we're dealing with, and we just completed 2 aerospace, significant aerospace LTAs this past quarter, the first quarter, and every customer to achieve once more material.

Is the share percentage higher? Or is the volume commitment is higher?

Well, I don't know which 1 comes first, right? I mean the volume is higher, right? There's only a couple of players in the market, and they're going to need all that material. So I mean the volume is significantly higher. The shares are probably going to remain pretty well the same. There's not a share gain battle going on.

Your next question from the line of Josh Sullivan with Jones Trading.

The structural distribution market, what's your sense of their inventory levels? Are there any metrics you can share with us relative to current or projected build rates? Just trying to get a sense of as you see this order flow, what their restocking cycle kind of looks like from your perspective here.

Well, Josh, I would tell you this that the majority, if not all of the customers in that submarket are reporting decreasing inventories and that aligns then very -- now all of them will be at different points in time. I'm not suggesting that every customer is the same. But they're, for the most part, all reporting decreasing inventories, and that is the direct correlation to seeing the increased bookings.

I think the good news is that those bookings are going to have to continue to increase significantly, as I said in my remarks. There is no choice when it comes to that. So I think going forward over the next couple of quarters are very positive outlook when it comes to those 2 submarkets.

And I guess on another set mark on the defense market, just given the impetus to restock various inventories. And I think you had talked a little bit about immersion demand. But what does that more urgent order flow look like near term?

Well, I was not being I was not exaggerating when I said that I thought there would be a rush of material orders, once there's some type of clarity around the budget. And I say that because of the discussions that we have with the Department of War, whether that be with the Navy, the Air Force, Army, that demand is significant.

The real issue is that the Department of Ward doesn't place orders. There's multiple companies in the supply chain that placed those orders and they don't have that funds flow to be able to do it. There's not one person in the defense supply chain that doesn't believe they should be placing orders right now. but the way that the budget works, that's just not possible for them to do right now.

Once that clears up, I think saying that there will be a rush on orders will be an understatement.

Your next question from the line of Bennett Moore with JPMorgan.

I wanted to -- it's great to see the bookings continue to move in the right direction. I appreciate your comment around incremental confidence in the '27 guide, but I'm just hoping you could frame looking specifically at structural activity and some of the dislocation on the defense side how do these compare relative to the assumptions you have in that '27 guide?

Yes, Ben, I will say it this way. based on that FY '27 guide, I believe that there is upside in volume, productivity and pricing versus the assumptions that we used when we gave that guidance 3 months ago.

All right. Understood. And then a quick housekeeping, if I could. Just on the working capital, the use was a bit bigger than we expected. I see the guide for free cash flow was maintained. So just wondering if this is largely a function of the planned outage or if there's anything else we should consider looking ahead?

Ben, this is Tim Lain. I think it's more of a function of timing. So we did build some inventory as we progress through the year, we've got more available days in the back half of the year. It's a historical trend. We'll burn that inventory off. So as we progress through the year, we should see cash flow continue to accelerate CapEx might be a little bit higher in the second half as we ramp up and trying to finish the project later this year.

But in general, based on the guidance we gave, the cash has to accelerate here in Q2 and then even more in the second half.

Your next question from the line of David Strauss with Wells Fargo.

Tony, any comment kind of the volume versus price algorithm that came through in the Q1 revenue kind of in total and more specifically on the aero side?

Well, I can tell you that price continues to increase quarter-over-quarter, the LTAs that we just signed, higher price -- we've got one that sits right now agreement in principle, higher price. We're working on a couple of other major ones as we speak. Both will be higher priced than before.

I think it's -- David, it's illogical to think that the price would be lower. I mean, demand is accelerating, not declining and there's no more capacity coming online other than our brownfield a couple of others that there's no way that we'll keep up with that. So the pricing story seems pretty straightforward to me.

Okay. Yes. I mean I was just looking, if you kind of took the overall kind of revenue growth ex surcharge, was it 2/3 volume, 1/3 price, or any -- in terms of the upside year-over-year there? Any sort of color there?

No, no. I see what you're saying. I mean obviously, we stopped giving volume this quarter. So I'm not going to then start giving it on the Q&A. But also, you think that you got a Q1 with less operating days, right? versus Q4, which is usually your biggest one.

But I don't have a volume problem or a volume challenge. I mean, we're running, in many cases, the majority of our equipment as full as we can. So I don't have a volume problem. Now the issue that you have, David, is that volume isn't generic, and it's not 100% fungible, right? So there are different products that use different pieces of the plant capacity, having defense be a bit light, maybe the word a bit light isn't the right word, being light, that causes some challenges for us because we have to move some things around. That's some -- that's volume from the defense side that we would have run. Now we're not, right?

So we moved some things around. So that could be some give and take, based on what we decide to run there. But in totality, the volume is going to could be there. And it's even going to be stronger as we get out over the next couple of quarters.

Okay. And maybe any comments on medical and energy. Those end markets, I think you had talked the last call, it seemed like you were a bit optimistic that we'll start to see improvement kind of in the those categories? What's the -- kind of what did you see in Q1? And how are you thinking about those to end markets from here?

Yes. I mean, thanks for the question. Sometimes we forget about that. Medical is going to continue to perform for us. I mean I should say, not continue to perform, continue to increase, it's really one specific subset inside of medical that has lagged a bit. Procedures are up.

We make products that provide our customers a solution that they can't get anywhere else. So I think that's -- we'll see that continue to increase over the next couple of quarters. I'm not overly worried with medical, and it's not driving down my overall performance. Energy interesting, small piece of my overall revenue, but certainly on the IGT side has been very strong.

And I would anticipate that to remain strong going forward. We have a very small oil and gas business even, David, that's been relatively weak, I would say, that we see coming back a little bit here now in this quarter and the next couple of quarters.

So overall, for those 2 markets in total, again, much smaller than aerospace, but both, I would say, with some positive tailwinds.

[Operator Instructions]. Your next question from the line of Andre Madrid with U.S. Bancorp, BTIG. Please go ahead.

I don't know what happened there, but I appreciate the response to the first question. I guess I want to follow up on that by maybe asking a bit more about LTA mix. I know it seems like you guys might have resigned some new ones recently. Just should we be expecting the LTA mix to kind of start trending upward again, locking in some favorable pricing? Or how should we be thinking about that?

Let me make sure I understand your question. What do you mean by when you say the LTA trend entering...

Like the mix of business that's driven through LTAs, do you expect that to continue to grow through the end of the decade? Or are you guys like starting to kind of lock in some more favorable pricing? Or is it going to kind of stay where it's at for the time being?

Yes. So a couple of questions in there. Of course, the pricing is going to be higher, Andre. As I said earlier, it would be illogical for it not to be in the current environment. But from a total percent of our total portfolio, I would say it's going to be relatively the same, right? The volume is increasing. And the LTAs that we are renewing are primarily with existing customers. The majority of our aerospace business is under LTA now.

Yes, yes. No, that's clear. No, I appreciate that. And then I guess if I could just squeeze one more in. I mean looking specifically at the engine aftermarket, I know you talked about it already a little bit, but there has been some concern, broadly speaking, across commercial aero, on the effect of maybe higher fuel prices. It doesn't seem like some of your peers and downstream customers have been seeing it affecting demand yet. -- to be the same case for you. But I guess, just what specifically are you seeing in engine aftermarket that might inspire some more confidence that demand will persist.

Well, we've never seen a drop off of it. So I understand some of that negative sentiment out there. We have not seen it, and we have not heard that from any of our customers.

Your next question from Chuck Minervino with Susquehanna.

I was wondering if you could elaborate a little bit on your comments that you have some actions and projects you're working on that could exceed the operating income targets for fiscal '27 and 2029. So I was just wondering if you could provide a little bit more detail on some of the levers you could pull there to maybe unlock some of that.

Welcome, Chuck. I think about the 3 big buckets. Number one, volume, I think, has the opportunity to be higher than what we thought it would be a quarter ago, just because of the ordering patterns. We just talked about the pent-up demand in defense, that is a balloon that is ready to bust, right? I mean the demand is increasing and increasing and the orders aren't there. So I think that's going to be a significant or could be a significant tailwind from a volume standpoint and then across the rest of the aerospace supply chain, we know customers have told us, they are ordering today at a rate that doesn't even support the current build rates for Boeing and Airbus.

So we know that's going to have to come back and we sense that, that will be in the near term. So I think volume can be an upside. What we've seen with our current work now in LTAs, the pricing potentially can be an upside as well. And then on productivity, yes, there's multiple areas that we continue to drive productivity into our use of AI in many cases, and we've been able to unlock faster and, I would say, a greater quantity than we had originally planned.

So all 3 of those buckets, Chuck, are going to contribute to us potentially beating that FY '27 guidance. And remember, I mean, it doesn't take a huge percentage increase, for example, in price or in volume to exceed that guidance. So it's all -- it's not easy, but it's all doable.

Got it. And if I could just ask one more. Could you talk a little bit about your kind of outlook on margins in SAO, maybe this year, but also kind of beyond this year and where some of the levers may be to expand margins in that segment.

Yes, it's a good question. And it's almost -- I can give you the same answer as I gave to you about how do you increase overachieve on FY '27, right? The margins are going to be driven by increased volume, pricing, we believe, is a tailwind and then also productivity. So we'll be working all 3 of those, right, as you're able to run your plant at higher and higher utilization levels and find more and more output available to you, that's a direct uplift to the margin. So -- we have to be careful. -- everybody.

Obviously, a lot of concern over going down 0.1 percentage point in SAO in a quarter that they have significant preventive maintenance and less operating days. I'll have a hard time understanding that one. So you will have some of that variability quarter-to-quarter. But if you look over the long term, certainly, the opportunity for us to continue to increase SAO margins is clearly there.

This concludes our Q&A session. I will now turn the call back to John Hewitt for closing remarks.

Thank you, operator, and thank you, everyone, for joining us today for our fiscal year 2027 first quarter conference call. Have a great rest of your day.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone, and thank you for joining us, and welcome to the Carpenter Technology Corp's Q4 FY '26 Earnings Presentation. [Operator Instructions]

I will now hand the conference over to John Huyette, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the Fiscal 2026 Fourth Quarter ended June 30, 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, President 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 30, 2025, Forms 10-Q for the quarters ended September 30, 2025, December 31, 2025, and March 31, 2026, and the exhibits attached to those filings.

Please also note that in the following discussion, unless otherwise noted, when management discusses 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. Before I begin this morning, I want to take a moment to share my condolences on behalf of the Carpenter Technology family to Brian Malloy's family. His sudden passing last week was a tragic loss and a shock to all of us. Brian joined the company in 2015 and through various leadership roles was instrumental in advancing Carpenter Technology's strategic priorities over the last decade. And on July 1, Brian became CEO, a role he was truly excited to take on. Brian will be forever remember here as a trusted and respected leader for his commitment to our values, employees and the company's long-term success. Brian was a friend and he will be sorely missed.

As you know from our press release, I was reappointed by the Board of Directors to the role of CEO. To be clear, this is not an interim assignment, and we are not launching an external search for a new CEO. The plan is for me to remain as a CEO for an indefinite period of time. Now onto the business of the earnings call.

Let's turn to Slide 4 and a review of our safety performance. We start every quarterly earnings presentation with our safety slide, reinforcing that a 0 injury workplace is our #1 value and our ultimate goal. We believe that superior sustainable operational performance is only possible in a company culture that places the safety of their employees as an unquestionable #1 priority. We ended fiscal year 2026 with a total case incident rate of 1.4. We believe we are one of the safest manufacturing companies in the world, but we will only be satisfied with a 0 injury workplace, a target that we firmly believe is possible.

Let's turn to Slide 5 for an overview of our fourth quarter performance. Carpenter Technology just delivered another record quarter, reflecting the continued strong operational execution and accelerating demand across our high-value markets. In the fourth quarter, we generated $206.9 million in operating income, exceeding our previous record set in the third quarter by 11%. The profitability was driven by the SAO segment, which delivered an adjusted operating margin of 37.8% in the quarter, another new record for the business. This margin compares to 35.6% in the prior quarter and 30.5% a year ago.

As a result of the expanding margins, the SAO segment reported $229.7 million in operating income, an increase of 10% sequentially and another all-time record for this segment and above the expectations we had set for the segment. Importantly, these record earnings translated directly into another strong cash flow generation quarter.

In the fourth quarter, we generated $240.1 million in cash from operating activities and $155 million of adjusted free cash flow, and we continued returning cash to shareholders through our dividend and repurchase programs, executing $45.2 million of repurchases in the quarter, raising the total to $179.1 million for all of fiscal year 2026.

Turning to Slide 6 and a closer look at fourth quarter sales and market conditions. In the fourth quarter of fiscal year 2026, sales increased in a strengthening demand environment year-over-year and sequentially. Starting with the Aerospace and Defense end-use market, sales were up 3% sequentially and up 17% year-over-year. Our sales growth reflects accelerating activity across the aerospace supply chain as OEMs continue to push towards higher build rates. Boeing and Airbus continue to increase production against a backlog of approximately 16,000 aircraft, while engine manufacturers remain focused on securing supply to support both increasing production rates and elevated MRO demand.

On their earnings call, Tuesday, Boeing stated that they expect to achieve rate 47 per month for the 737 this summer and they discussed their plans to increase to rate 52 per month in the near term. We see this reflected in the sequential increase in bookings for the Aerospace and Defense end-use market, and we heard this confidence from customers at the Farnborough International Airshow just last week.

Our engine customers report strong demand with many commenting that demand is less of a concern than the capacity needed to meet that demand. Our fastener customers are ramping significantly and discussing with us areas where they need more material sooner. Across the board, our structural customers are expecting demand to accelerate in the coming quarters. For an increasing number of structural customers, we are already experiencing accelerated ordering with extending lead times. At the same time, some structural customers remain cautious in their ordering patterns, but at the same time, acknowledging that they are ordering below expected demand rates. We agree. And as that caution phase and ordering aligns with expected production rates, we expect demand to accelerate even further.

In the defense submarket, we continue to see strong demand and urgent requests for material across multiple platforms.

Moving on to the Medical end-use market. Our sales were up 5% sequentially and down 30% compared to the prior year fourth quarter. This is the first quarter in this fiscal year that Medical end-use market sales were up sequentially. Our Medical end-use market continues to have solid fundamentals, and we see ongoing improvement in demand across orthopedics, dental and cardiology.

This quarter, Energy end-use market sales slipped versus the large sequential increase last quarter, down 22% sequentially and 12% year-over-year. The demand from our IGT customers primarily driven by the growing energy needs of data centers remain strong. As we have said many times, quarterly sales for IGT material will fluctuate due to order timing and production scheduling.

Finally, we saw a significant uptick in the sales for industrial and consumer end-use market, up 19% sequentially and 22% year-over-year. This was primarily driven by increasing demand from the semiconductor industry, where our materials are used in critical components in the semiconductor production process. We continue to see strong investment in fabrication facilities, semiconductor equipment and supporting infrastructure. Customer confidence has improved, demand remains robust, and our position is strengthening in this market.

In summary, we continue to operate in an accelerating demand environment across our high-value end-use markets. We believe that rate of growth will increase in the near term, specifically in the aerospace and defense end-use markets as airframers continue to increase build rates. Combined with our differentiated capabilities and capacity, this positions Carpenter Technology for meaningful growth, both in the near term and over the long term.

Now I will turn it over to Tim for the financial summary.

Thanks, Tony. Good morning, everyone. I'll start on the income statement summary on Slide 8. Starting at the top, sales excluding surcharge increased 9% year-over-year on 22% higher volume. Sequentially, sales were up 4% on 11% higher volume. The improving productivity, product mix and pricing are evident in our gross profit, which increased to $268.9 million in the current quarter, up 26% from the same quarter last year and up 7% sequentially.

Selling, general and administrative or SG&A expenses were $62 million in the fourth quarter, roughly flat year-over-year and down $3.3 million sequentially. The SG&A line includes corporate costs, which were $28.6 million. This is up $1.3 million sequentially and up $1.7 million from the fourth quarter of fiscal year 2025. For the upcoming first quarter of fiscal year 2027, we expect corporate cost to be roughly in line with our recent fourth quarter.

Operating income was $206.9 million in the current quarter, which is 37% higher than our fourth quarter of fiscal year 2025 and up 11% from our recent third quarter. As Tony mentioned earlier, this represents another record quarterly operating income result breaking the previous record set just last quarter.

Moving on to our effective tax rate, which was 20.7% in the current quarter. This quarter's effective tax rate was lower than anticipated primarily due to discrete tax benefits associated with certain equity awards. Finally, the earnings per diluted share was $3.23 for the quarter.

Now turning to more detail on each of the segments, starting with our SAO segment. Net sales, excluding surcharge for the fourth quarter were $607.4 million. Compared to the same quarter last year, sales were up 11% on 23% higher volume. Sequentially, sales were up 4% on 11% higher volume. The net sales increase that is outpaced by the volume increase translates to a lower reported ratio of net sales excluding surcharge per pound. In other words, a lower average base price per pound both sequentially and year-over-year.

In the past, some have mistakenly interpreted a lower aggregated average base price as an indication of declining prices in the portfolio. For those of you newer to the story, it's important to remember that the average base price per pound for the SAO segment in any given quarter is highly dependent on the mix of products. As in previous quarters, the decline in average selling price in the recent quarter is due to the higher proportion of lower-priced products in the mix of materials that we shipped in the quarter.

Importantly, the lower-priced products often come with comparable average profit margins. That is clearly evident in SAO's adjusted operating margin for the fourth quarter, which increased for the 18th consecutive quarter to a new record level of 37.8%. The continued margin expansion reflects the SAO team's ability to actively manage our production schedules, increase productivity at key work centers, manage costs and execute thoughtful planned maintenance activities.

As we have said many times before, quarterly operating margins may be impacted by a number of short-term factors, most notably product mix. That said, clearly, operating margins remain on an upward trajectory, supported by our core drivers, including productivity, mix and pricing.

As a result of the higher sales and expanding margin, SAO reported operating income of $229.7 million in the fourth quarter, a new all-time high for the segment. As we look ahead to our first quarter of fiscal year 2027, we anticipate SAO will generate operating income in the range of $218 million to $222 million. This implies an impressive 28% to 30% increase from SAO's first quarter of fiscal year 2026.

The outlook considers the elevated preventive maintenance levels that traditionally occur in our first fiscal quarter. The preventative maintenance, while reducing the amount of operating time in the quarter is required to keep our assets healthy and running effectively over the long term. As in previous years, we will offset a portion of the loss in operating time with improved productivity and portfolio optimization.

Now turning to Slide 10 and our PEP segment results. Net sales, excluding surcharge in the fourth quarter of fiscal year 2026 were $98.2 million, up 1% year-over-year and 8% sequentially. We saw sales increase across most of our end-use markets sequentially, most notably our titanium products in the medical end-use market. As Tony mentioned earlier, our Medical end-use market continues to have solid fundamentals, and we are continuing to see improving demand.

In addition, our additive business continues to deliver year-on-year and sequential sales growth driven by aerospace and defense demand. PEP reported operating income of $7.1 million in the current quarter compared with $6.7 million in the third quarter of fiscal year 2026 and $11.7 million in the same quarter a year ago. We currently anticipate the PEP segment's operating income for the upcoming first quarter to be between $6 million and $7 million.

Before we move to cash flow, I want to pull together the pieces that make up our outlook for operating income for the first quarter of fiscal year 2027. We anticipate total operating income of $195 million to $200 million. This includes SAO $218 million to $222 million, PEP at $6 million to $7 million and Corporate costs of approximately $29 million.

Our guidance for the first quarter of fiscal year 2027 implies delivering operating income that would be 27% to 30% higher than last year's first fiscal quarter, which was then a record best first quarter.

Now turning to the next slide to talk about our cash generation and capital allocation priorities. In addition to the strong earnings performance, we've generated meaningful cash flows driven by higher earnings and ongoing efforts to manage working capital closely, particularly inventory. In fiscal year 2026, we generated $605 million of cash from operating activities, a 37% increase over fiscal year 2025. The cash generated from operations more than supports the $242.7 million in capital spending in fiscal year 2026. The capital spend includes the brownfield capacity expansion project. As anticipated, capital spending ramped up in our recent fourth quarter totaling $85.1 million, as activities around the capacity expansion project accelerated.

A brief update on this project. The brownfield capacity expansion remains on budget and on schedule to be completed by the start of fiscal year 2028. The construction phase is well underway with key equipment being delivered and on-site assembly and installation progressing. And the project remains focused on not only completing construction and installation of equipment, but also preparing for a smooth start-up of operations. With those details in mind, we generated $362.3 million in adjusted free cash flow in fiscal year 2026, ahead of what we had anticipated.

We continue to execute our balanced capital philosophy that includes investing cash in attractive and accretive growth projects like the brownfield capacity expansion and returning cash to shareholders. To that end, we continue to execute against our repurchase authorization and repurchased $179.1 million of shares in fiscal year 2026. This brings the total to $281 million spent to date against the $400 million authorization that we announced in July of 2024. And in addition to the buyback program, we also continued to fund a recurring and long-standing quarterly dividend.

Finally, our ability to deploy capital is also supported by our healthy liquidity and strong balance sheet. As of the most recent quarter end, our total liquidity was $892.4 million, including $393.3 million of cash and $499.1 million of available borrowings under our credit facility. Our credit metrics remain very strong with our net debt-to-EBITDA ratio remaining well below 1x.

Altogether, we believe our strong balance sheet and outlook for significant cash generation positions us well to fund continued growth and deliver significant shareholder returns.

Before I turn the call back to Tony, I want to highlight that as we have done in the past, we have included a slide in the appendix of this presentation that includes selected guidance to help model our anticipated fiscal year 2027 results. With that, I will turn the call to Tony.

Carpenter Technology just delivered another significant record-breaking year profitability. For fiscal year 2026, we generated $702 million in adjusted operating income, a 34% increase over fiscal year 2025 and more than 5x fiscal year 2023. It is clearly a testament to our focus on execution backed by a strong market position, broad solutions portfolio and unique capabilities that we were able to deliver another record-breaking year.

In addition, with the record earnings and disciplined working capital management, we generated $362.3 million in adjusted free cash flow, including investment in the brownfield expansion project, and we continue to return cash to shareholders. Over the course of the fiscal year, we executed $179.1 million in share repurchases in addition to $40.3 million in dividends. And we believe our current record results are far from our peak. The same dynamics that drove our success in fiscal year 2026 are only strengthening as we look ahead over the next several years. With that, let's turn to the next slide for our outlook.

At the offset, I want to emphasize that our approach to target setting remains the same. We believe in setting targets that we have a high level of confidence we can achieve based on what we can see today. At the same time, our team always focuses on identifying opportunities to exceed the commitments we make. With that in mind, let's start with the near term.

As Tim detailed, we are projecting a strong start to fiscal year 2027, with operating income projected between $195 million and $200 million. For the full fiscal year 2027, we expect between $850 million and $880 million of operating income. That represents approximately 21% to 25% growth over our record fiscal year 2026 performance and continues what we believe is one of the strongest earnings growth trajectory within our industry.

Importantly, this outlook is supported by anticipated strengthening demand across our most important end-use markets. Looking beyond fiscal year 2027, we expect our strong growth momentum to continue. Our fiscal year 2029 operating income target of approximately $1.2 billion to $1.3 billion reflects both the continued strength of the projected underlying demand environment and the contribution from our brownfield expansion project. Notably, the fiscal year 2029 target represents more than a 20% 3-year CAGR on our record fiscal year 2026 operating income, a number that we believe sets us apart from our industry peers. And we do not believe fiscal year 2029 represents the peak of our earnings power, as the brownfield project will still be ramping production of the underlying demand environment continues to strengthen.

Now let's talk about cash generation. Over the last several years, we have demonstrated the ability to convert earnings into cash. For fiscal year 2027, we anticipate between $400 million and $430 million of adjusted free cash flow. Note that level of cash generation includes the remaining investment in our brownfield expansion project that we expect to be completed in early fiscal year 2028. Looking beyond fiscal year 2027, we expect cash generation to continue increasing as earnings expand and the brownfield project contributes to profitability. That brings me to capital allocation.

I think it's important to clearly state that our balanced capital allocation philosophy remains unchanged. That is, we are focused on maintaining a balance between investing for growth and returning cash to shareholders. First, we will continue investing in the business. Second, we remain committed to returning capital directly to shareholders. We have a long-standing dividend that reflects the strength and consistency of our cash generation. In addition, to complement the quarterly dividend, we continue to execute against our share repurchase program. The strength of our earnings growth, cash generation and balance sheet gives us the ability to invest for future growth while simultaneously returning meaningful capital to shareholders.

When you step back and look at the outlook we've provided today, we believe it represents one of the strongest growth profiles in our industry. And as we have done in the past, we will work not only to meet these impressive targets, but exceed them.

Now let's take a step back and summarize this great story. Fiscal year 2026 was another year of record financial performance and demonstrates the strength of our strategy, a strong market position and our team's ability to execute. We delivered record quarterly profits with fourth quarter operating income increasing 37% year-over-year and driving operating income to a record $702 million for the full fiscal year.

Within our Specialty Alloys Operations segment, adjusted operating margins continued to expand and reached 37.8%, highlighting the power of our business and the benefit of disciplined execution. We also converted those earnings into meaningful cash generation, producing more than $360 million of adjusted free cash flow during the year, including funding our brownfield capacity expansion. And importantly, we continued returning capital to shareholders, executing approximately $179 million in share repurchases while maintaining our long-standing dividend.

As I just detailed, our earnings outlook continues to strengthen, supported by the same drivers that have fueled our success over the last several years. Productivity improvements, product mix optimization and favorable pricing actions. For fiscal year 2027, we expect operating income to be substantially higher than our record fiscal year 2026 performance while continuing to generate significant cash flow.

Looking beyond fiscal year 2027, our brownfield capacity expansion project will begin contributing in fiscal year 2028, providing an additional accelerator to our earnings growth profile. And by fiscal year 2029, we expect operating income to reach approximately $1.2 billion to $1.3 billion. That's a 20%-plus CAGR over 3 years, a rate that we believe exceeds most in the industry. Just as importantly, we do not view fiscal year 2029 as the peak of our earnings power. The market dynamics we've discussed today are expected to continue to strengthen and the brownfield expansion will still be in the early stages of its contribution.

Finally, we believe Carpenter Technology offers an attractive long-term investment opportunity. We are operating in an accelerating demand environment across many of the most attractive end-use markets in the world. Our portfolio consists of highly specialized solutions serving critical applications where performance matters, qualification cycles are long and the barriers to entry are significant.

We have built a unique collection of manufacturing assets, process technologies, metallurgical expertise and customer relationships that we believe are extraordinarily difficult to replicate. In addition, our strong balance sheet and growing cash flow generation provide us with the flexibility to maintain a balanced and disciplined approach to capital allocation. We will continue investing in profitable growth opportunities, including our brownfield expansion project. We will continue supporting our long-standing dividend and we will continue returning excess capital to shareholders through our share repurchase program.

When you put all those elements together, the investment proposition is straightforward. We are delivering record results today. We have a clear path to significant earnings growth in the years ahead, and we remain committed to creating meaningful long-term value for shareholders through disciplined execution, continuous improvement and profitable growth.

Thank you for your time, your interest and your continued confidence in Carpenter Technology.

[Operator Instructions] Your first question from the line of Scott Deuschle of Deutsche Bank.

Tim, can you share what the FY '29 EBIT guide assumes with respect to the brownfield contribution to earnings?

Yes, Scott. So let me talk a little bit about just reaffirm some of the stuff we've already said about the Brownfield project. In our prepared remarks, we said it's on track, on schedule, on budget. It comes online early fiscal '28. And then through '28, we expect to ramp up production of that new -- of those newer assets. And in '28, we expect it to be incremental. So that's a big deal for a project like that.

And then the next milestone we set when we announced the project was in 2030, it would contribute roughly $150 million of incremental OI. So 29%, you referenced the EBIT guide, we gave a 29%. It won't quite be linear between that first year and the $150 million in 2030. We'd expect it probably actually to be a little bit more weighted towards the 30% number, but that's all baked into the current guide.

Okay. Is the $150 million in 2030 still the right number? Or is it biased higher given how pricing has trended since you introduced that guide?

I mean, since we announced, Scott, I would say it's fair to say that we are more confident in those numbers, and we would expect could drive higher. But I think for now, we're going to keep the $150 million out there for 2030.

Okay. And then Tony or Tim, can you parse out the 23% SAO volume growth in the quarter by end market?

Yes, Scott. I mean you can see that there was a lot of growth from a volume perspective in our industrial and consumer business sequentially. That leads to -- okay, what I talked about on the call, this average price per pound, that's not necessarily a negative. That just means we ship more volume of some of the lower price materials, but it carries an overall attractive margin profile. So that's why we saw the margin growth in SAO in the quarter.

Okay. And my last question is for Tony. And the thing I'm just a bit confused by is the business has been accelerating EBIT growth in each of the last few quarters. But the guide for the first quarter and for 2027 as a whole implies that this EBIT growth begins to moderate a bit, still very strong, but moderates. And I'm a bit confused with that because it seems like the A&D demand presumably still very strong, -- and volume growth should still be very strong. And the pricing backdrop seems to me is only getting better. And so why would the EBIT growth moderate from here as opposed to accelerate in that backdrop?

Scott, I appreciate your question. I don't necessarily disagree with you on that. I think from our standpoint, our goal is always to have guidance is right out in front of us. I'll say this, if you want to take that guide and say that's the floor for FY '27, you wouldn't get a pushback from me.

Your next question from the line of Gautam Khanna of TD Cowen.

And my condolences to all of the people connected to Brian, that's a real tragedy, so.

And thank you very much, Gautam.

Of course. And we're very lucky to have you back in the seat, Tony. So thanks for doing that. I wanted to ask a couple of questions on the comment of OI accretive in '28 and not being linear, just to be clear, Tim, were you trying to say that it will be closer to the $150 million, not closer to the barely breakeven. Is that what you meant to say?

Yes. I mean so...

North [indiscernible] or something...

Yes, not quite the midpoint between those two, but more towards the $150 million, yes.

Okay. Cool...

If I can say it gets difficult on that projection, right? Because you heard Scott earlier talk about, well, it's the $150 million now a bit dated. And of course, the pricing is higher. But as we run through qualifications as well, we're not 100% sure of the exact mix of those products. So that's why we're a bit hesitant to just put on some type of higher price on those products. We don't believe I should put a target out there that we hope to hit. We think we should put 1 out there that we have confidence in.

So that's why you see us maintaining that $150 million because at this point in time, we just don't know 100% what the exact mix of products will be running across those assets.

That's very helpful. And maybe, Tony, just as you thought about guidance for '27 and also for '29, but '27 more immediately, what do you anticipate in terms of the contributors to that operating income growth may be in order of rank. So price, volume, productivity, mix, I guess, productivity and volume are very related. But how would you rank order those? Is price the biggest driver is, I'll let...

Yes. No, it's a good question, Gautam. I'll give you the direct answer and maybe a little commentary just on guidance in general. But we talk about price/mix volume, probably the most significant input to FY '27 is the build rate that Boeing and Airbus is going to hit, right? I mean that's -- that's the biggest input that all of us have. Now we've made assumptions to that, but that's the biggest input. And then if you take a step back, certainly, price is going to be a big driver for us.

But also volume, as Tim talked about, volume in some of the non-aerospace markets, volume is going to come and be a significant tailwind as well. It has to be. You're still at build rates that are much less to where they want to be. And the comments I made in my prepared remarks, you still have some structural customers gotten that are still not ordering at the levels that they acknowledge they should be ordering at. I'll let that sink in for a minute. So I think it just magnifies any type of significant uptick in ordering and volume when that does hit, and that will be in this fiscal year for us, of course.

So I think that's -- all those are going to be major drivers and you know us well enough, you've covered us a long time, productivity is always a big factor for us. We are never satisfied where we're at today. And as you look at our plans for this fiscal year, there is a healthy dose of productivity actions that we have in there.

That's helpful. And last one for me before I turn it over. Just if you could walk through kind of some of the submarket order rates and maybe sales growth rates, engine fastener, structural...

Yes, I'll do that. And maybe I just want to take a step back because I do want to come back to this guidance piece and what it should be, what it shouldn't be. Gautam, I think it's important to understand myself and my team, we all understand that everybody has a model and everybody has corresponding expectations. And of course, I would say the reaction to earnings guidance, you must consider the personality of the company that's giving that guidance.

And I mean what do I mean by that? I mean corporate technology provides guidance not that we hope we can achieve and we believe in setting targets that we have a high level of confidence in and what we can see today. And then immediately starting to say, what I have as far as planned in place and then what I can do to overachieve them. And again, you've covered us long enough to know that we are very disciplined from an operational standpoint and a commercial standpoint. And we've proven quarter-over-quarter. The proof is in the numbers.

So I would argue those are the 2 factors are the reason that we've consistently overachieved what we put out there as a target. So as I said to Scott, if you want to consider FY '27 to floor, you won't get any push back for me because we're already focused on overachieving that. And I think before we get too far out and have ourselves and Gautam, I think you have mentioned this, let's just keep in mind what the guidance we just gave, right? I mean that guidance we just gave is 25% higher than our record fiscal year 2026. And as you noted in your note probably the strongest earnings growth trajectories in the industry.

So through all this noise, I'm proud to say, we've got a team that's going to put their head down and we're going to deliver quarter after quarter. We're going to do it the right way. We're going to do it in a sustainable way. And I think that operational discipline paired with an aerospace demand environment, it appears to be poised to expand significantly over the next couple of years that should yield substantial shareholder value. So I guess that was a long-winded way of saying up in the bottom line for me is I wouldn't bet against us.

Understood. Yes, and the submarkets color, if you have it?

I do. Just as a highlight, I'd say, hey, listen, from an overall aerospace standpoint, as you saw on our slide, up 3% sequentially, 17% year-over-year. That was the highest quarter all-time for aerospace for us. So that's an important point to make. And if you look at FY '26 in total, that was an all-time high. You did that while Boeing was working to regain its footing and Airbus wasn't where it wasn't to be. So it kind of pairs to what I just said from a volume standpoint, there's still a lot more to come there.

Now to your specific question, you've waited long enough, the submarket details. Aero engines were up almost 30% year-over-year. It was down a bit sequentially, low single digits, just that was on a sequential quarter before was a very strong one. But even with that, it was the second highest in history. So very -- another strong Aeroengine sales quarter. I know you always ask about aerospace fasteners. They were up 10% sequentially, 12% year-over-year.

If you take that bucket where it's almost got the non-fastener nonengine, so that structural distribution bucket that we've talked specifically about those customers, that was up again significantly this quarter, up 25% quarter-over-quarter, 8% year-over-year. And I know there was some maybe confusion last quarter about how does that all balance out. You've got -- aero engine was down slightly. Defense was also down sequentially about 10%, and that's normal. That's related to the specific nature of this submarket and how it's built on very program-specific. Hopefully, that helps you out.

Your next question from the line of David Strauss with Wells Fargo.

My condolences as well on Brian's unfortunate passing. So your aero and defense for you guys grew 15% ex surcharge in '26, you mentioned 17% in Q4. What do you -- does that growth rate you think accelerate in '27 relative to '26?

Yes, that's a good question. I mean, of course, we see aerospace being meaningfully higher in FY '27. I mean, as you all know, you've been around moment. You know it has to be higher with the build rates that Boeing and Airbus wants to hit. Is it exactly that same growth rate. I think you could argue that, that would be the case. The reason I'm hesitating a bit, obviously, it depends on the success primarily of Boeing and when they can get to that next level and then the level after that.

Okay. And would you think within that, that structures would -- structural would outgrow engine, just given -- it sounds -- based on your prior comments, it sounds like you're a bit just kind of capacity constraint on the engine side until the brownfield comes online?

Yes. I don't -- I mean, there's still -- we still got some room that we can work with primarily from a productivity standpoint, the accomplishments we're making quarter-over-quarter. But I think you could see a situation where the growth in structural will lead the pack only because it's been so depressed here recently, right? So there is a big recovery that's needed. We've seen this many, many times, right? We saw it just a couple of years ago when Boeing had the issue with the Alaskan Airlines. You had to strike -- you saw the same thing happen. So I think you're going to see structural when that does turn the corner and you see that ordering pattern pick up, it's going to be significant.

Okay. And then last one, rather than focus on kind of the EBIT number for SAO, what's the right way to think about kind of the incremental margins from here or margin improvement? I mean last year, margins improve 600, something like 600 basis points, incrementals were close to 100%. I mean, I know [indiscernible] you made it clear the guidance is very conservative for this year. But I mean it would imply, I think, that incrementals closer to like 50%. I'm just trying to kind of think about given all the moving pieces here in terms of the per pound that we calculate all these various different things like what do you think about kind of the incremental margin level for specialty alloy? What -- that business, what it should look like from here?

No, it's a good question. And I can tell you now, this isn't a [indiscernible] for us. I mean, we do believe that we've got opportunities to move higher. Now it certainly gets tougher and tougher, the higher you get, obviously. And as you stated before, I'm really not going to start forecasting our quarterly operating margins are, but we believe there's a lot more growth for us to have going forward, especially some of the work we're doing around productivity is pretty significant. So I think as we get a couple of quarters into FY '27, we'll see how that lays out. But we still expect very good performance from that standpoint.

Your next question from the line of Bennett Moore with JPMorgan.

[indiscernible] the team and Brian's family. I wanted to start with some of your commentary on the cautious ordering from the structural customers. And I guess based on your conversations with those customers, what do you feel is really contributing to this? Or said another way, what are these customers looking for to move off the sidelines? Is it really just the next big higher and Boeing's ramp? Or is there other things in the market they're looking for?

No, I think that's the main thing. And by the way, and thank you for your comments. That's a primary driver. They've had a history of maybe being burned in the past. A lot of it depends on the individual metrics of that company and what they grade themselves on that they might be a little bit more cautious. So there's not just one answer to that. But yes, I think as you see, Boeing continue to improve as they are. I don't think that ordering pattern will be gradual. I think it will be -- when that time hits here in the next quarter or 2, I think you'll see a significant uptick. If history is any indication of what's going to happen, you'll see a significant uptick.

Understood. And then space has become a growing area of interest. I'm interested in your latest thoughts on the opportunity there. And if you could remind us how your exposure is split between SAO, PEP and I guess with the SAO, to what extent do these products compete for time on the asset with engine alloys?

Yes, it's a good question because we do have both SAO and PEP sell into the space market. On the PEP side, it's primarily our additive business. And that's quite strong right now. On the SAO side, yes, that space could potentially compete with aero engine alloys. There's some similarities there, not 100%. And again, that tonnage right now is very low compared to engines, but that could compete on similar assets.

And then my last one real quick is in the past, you guys guided to, I believe, a 90% free cash flow conversion for the prior year FY '27 free cash flow guide. I'm wondering if this is still applicable? And also, Jim, how we should think about CapEx cadence for the year?

Yes, Bennett. We -- in '26 and the number we provided for '27, there are growth investments in the reported adjusted free cash flow. But when you look at those and say, take the growth investments out, we've demonstrated that we can hit that 85% to 90% type conversion ratio, both in '26. So we demonstrated that and then what we've projected for '27 and the guidance we provided. And then going forward, as the large growth project right now wraps up and we bring that online in '28 on a go-forward basis, we'd expect those kinds of conversion rates still continue to maintain our balanced capital allocation. But given the growth in profitability that we've laid out and our focus on managing working capital, we think that's more than attainable in the future, too.

And the CapEx cadence, please?

Oh yes, sorry, CapEx cadence. I mean given the project -- the brownfield project is pretty much in full swing, a lot of activity there, a lot going on. I would expect that it would be fairly ratable throughout the year.

Your next question comes from the line of Josh Sullivan with JonesTrading.

I want to extend thoughts to Brian's family and Carpenter's great asset and importantly, a good guy. Tony, just -- just wanted to clarify a point on the guide for '29. Does that guidance assume those cautious customers have come back and are pulling at anticipated build growth at that point? I know it's up in '29. But just curious what contribution you're thinking about from those more cautious players?

Yes, I think it's going to be -- they'll get more aggressive quite a bit earlier than FY '29. So the answer is yes.

Okay. And then just on Dynamet, as Aerostructures picks up and Medical looking a little bit better, what is the cadence of the Dynamet margin profile look like between now and '29?

Well, that's a good question. I mean, obviously, Dynamet, we see it as a strategic asset, but at the same time, it's a very small portion of our overall operating income. I mean SAO is 95% plus of our segment operating income. So it is -- again, we see it as very strategic, but it's very, very small. At the same time, I see Dynamet over the next 2 to 5 years being a bigger contribution to overall operating income. We flipped Dynamet. It used to be probably 60% aerospace. It's probably flipped and become more of a medical business than aerospace. That 60-40 has split.

So again, relatively small now and not a big driver to our overall guidance for FY '27, to be honest, really not that much of a driver to FY '29, although we have tick that up going forward. I think there's a lot of opportunity there, Josh, to take that into the next level.

Okay. And any update on Athens to your point on the call, Carpenter's always created overachieving and efficiency and productivity. Are you finding any potentially upside production opportunities or ancillary expansion opportunities as you put Athens together with brownfield?

I -- well, as Tony said this earlier, I mean, I think we think there's always opportunity. But I also say this project that we're working on the brownfield project is a pretty complex project. So -- and we're managing that project. And within that project, we're always finding, hey, there's pluses or minuses we could potentially change some design here or there. But given the complexity of it, Josh, it's not necessarily -- those aren't necessarily big opportunities. But as we finalize and get were, call it, 12 months away now from bringing that online, I think there's going to be some things that we'll find along the way, and we'll talk about that as we go, but it's such a complex project and it's such a big deal for us that we don't really want to be too far off from getting that project down. If that makes sense.

No, that's fair. [indiscernible] good.

Your next question from the line of Andre Madrid with BTIG.

Condolences to everyone.

Yes. Thank you, Andre.

Could you maybe just talk a bit more about what's implied in your FY '29 outlook at a submarket level, just looking at engines, fasteners, medical, and then maybe even further to the extent that you can aftermarket and OE, I know that is a little bit -- it gets a little greater at that point, but just really trying to understand the moving pieces to the '29 numbers, especially given that concerns these days are mounting around accelerating retirements and whatnot?

Well, I don't have any concerns at all about the mix between OEM and MRO or aftermarket in FY '29. We've talked about that extensively. There's been other people in the industry, very experts talk about that in the industry. So there is no concern about that. And I think it's premature for me to talk about in detail what's in the FY '29 number. You should assume that we see all of our markets increasing going forward in FY '29 because we have all of these we're in the right markets, the high-value end markets, all the macro demand signals are pointing very positive. So all of our markets, we expect to be higher in FY '29.

Remember, with aerospace and medical IGT, you're well over 80% of our revenue and all of those are projected to be very strong going into FY '29 and beyond, and we have the same viewpoint.

Got it. And then I guess looking again, still FY '29, you've said it's at the peak of earnings. I mean, is that on a margin or a nominal earning basis or both? And -- and maybe additionally, if it is on margin, what do you truly view as maybe the high watermark for margins?

You thought you might get me at a weak moment, and I tell you what the margin is in our model. But I would say to the first part of your question, it's both, right? As we look past FY '29, we usually go out 5 years for us internally. And we see growth. That's why we're able to say we see -- we're confident we see growth beyond FY '29.

Got it. Got it. And then I guess just longer-term capital deployment. I mean, you're almost at $900 million total liquidity now. I can only imagine [indiscernible] I'm not going to ask specifics, but like it -- obviously, the cash on hand will continue to grow as well. I'm curious, is M&A on the table at all? And if so, what does the process look like? I'm just curious to see if maybe beyond organic investments and growth you guys are looking inorganically?

Well, of course, I mean, you would guess that a company like us, we get all of the notices whenever something is available. And we do our research on all of those. So I'll never say no. But when you have such attractive organic projects or possible projects in front of you, it's hard to rank an M&A opportunity higher than that. I mean it just gets -- when I can control my own destiny and do what I'm doing internally, I mean the risk profile is much better for me. That's not a no. But it's just a tough one to make that work.

I don't want to just -- I don't want to buy M&A or buy something just to buy something. And I think the important point here is what you said earlier, you see a significant amount of cash generation going forward, right, for FY '29. If you look at that $1.2 billion to $1.3 billion, that's 3 years out. Someone would ask, do you think that number could be higher? Of course, it could. It very easily could be higher based on what the build rates are. And then you put that type of cash conversion number on that, that's a significant amount of cash. And that's the reason why we repeated 3 or 4 times in this call that we're going to have a balanced capital allocation process.

So there are still growth investments we can make in our core markets, maybe some of our smaller markets as well at a much lower level. That doesn't disrupt the supply demand balance that we can work on. And it tells you that we're going to be committed to returning cash to shareholders. You should expect that at any given time, we'll probably have some type of share repurchase program in place. We're always going to have the dividend.

So it's a good situation to be in to have that amount of cash that you believe you're going to be able to generate and then have a very strong philosophy to be very balanced in how you take care of that cash.

[Operator Instructions] Your next question comes from the line of Gautam Khanna of TD Cowen.

Just a quick couple of follow-ups. One, I wanted to ask if lead times have changed much at all on engine or other products...

Yes, lead times are relatively consistent quarter-over-quarter. There's some specific products that you see that pushing out. Again, we cap that, as you know, like we're not taking orders 2 years out, but I would see that, that's going to accelerate quite a bit here over the next quarter, for sure, over the rest of this calendar year.

Okay. Great. And then, Tony, I know in the past, sometimes, you've given color on long-term agreements that come up for renewal and kind of the magnitude of price hikes associated with those. I was wondering over the next year or 2, are there a number of LTAs that come up for renewal again? Any way to kind of frame that for us percentage of business that kind of on the LTA side that gets repriced again between now and 2029?

It's an excellent question, Gautam. I won't give you -- I will disappoint you to say I won't give you the exact percent of what comes up, but I will say there are a couple very significant contracts that will come up for renewal over the next 2 years, and I will go as far as saying there's one that we're a large one that we're currently working on now. So yes, there's still opportunity there.

And just -- I mean, one more point on that, too, Gautam, in addition to those bigger contracts, there's always -- we talked about this before, always a bit of a churn. So there's always contracts coming out of renewal. There's no magical, they all roll over on this date. So there is a constant refresh.

I guess one of the things I was curious about as a follow-up to that is way back in the day, I remember Carpenter sometimes entered into 10-year contracts. Are any of those still in the book of business or are these that are coming up, stuff that has been already renewed since COVID. So you wouldn't see this massive kind of reprice due to inflation that has to get caught up? Or do you still have any of those tenure ones on the books that were pre-COVID that are...

I'll give one more answer, yes. And we always have some that are turning over as well because of the shorter duration. We have some that we're working on now the second time. If you start the clock in 2021 or 2022, let's say, 2022, Gautam, we have some that we're doing the second turn of that one.

Is there any -- I'm sorry, I'm asking too many questions. But I am curious, like in the LTA book, is there any way to dimensionalize the percentage of those that are coming up for renewal -- that are pre-COVID terms, if you will, that are still to be renewed versus ones that are coming around for their second renewal?

I would say it's not significant, right? It's not significant. We've moved most of those out. But the reason I say I don't want to answer, yes because I didn't -- I was hoping you wouldn't ask for more follow-up. I should have expected that from you. Yes, there's still 1 maybe 2 that's pre-Covid.

Your next question is from the line of Scott Deuschle of Deutsche Bank.

Yes. Just a follow-up on that, Tony, can you share how your share position has changed or not changed on new LTAs, particularly with the large engine manufacturers. Not asking on any specific customer, but just on balance across the recent LTAs you've signed. How has trended -- and to what extent does it even matter if you're sold out?

Well, what you just said at the end is the most important comment. But I will tell you this, that every contract in the aerospace side that we're working on, they ask for more and more material, not less.

Okay. And your share of that material is generally holding in?

Well, that's what I'm talking about our share, right? So I'm saying whatever the past -- usually the contract or some percent of their needs, they are wanting more that percentage to be higher and higher with each contract.

This concludes our Q&A session. I will now turn the call back to John Huyette for closing remarks.

Thank you, operator, and thank you, everyone, for joining us today for our fiscal year 2026 fourth quarter conference call. Have a great rest of your day.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, and welcome. My name is Ellie, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Carpenter Technology CRS Third Quarter Fiscal Year 2026 Earnings Presentation Call. Please note that this call is being recorded. [Operator Instructions] I would now like to hand the call over to John Huyette, Vice President of Investor Relations. You may now go ahead, please.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the Fiscal 2026 Third Quarter ended March 31, 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; Tim Lain, Senior Vice President and Chief Financial Officer; and Brian Malloy, President and Chief Operating 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 30, 2025, forms 10-Q for the quarters ended September 30, 2025, and December 31, 2025, and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when management discusses 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 begin on Slide 4 with a review of our safety performance. We ended the third quarter of fiscal year 2026 with a total case incident rate of 1.3. We continue to make progress as a result of targeted actions we've implemented across the organization centered on standardized work and disciplined safety practices. As always, we remain committed to our ultimate goal of a zero injury workplace.

Let's turn to Slide 5 for an overview of our third quarter performance. Carpenter Technology just delivered another record quarter, reflecting the accelerating demand across our high-value markets and our continued strong operational execution. This record performance is best understood through 4 key takeaways that highlight the strength, durability and trajectory of the business: one, record earnings. In the third quarter, we generated $187 million in operating income, exceeding our previous record set in the second quarter by 20%. Certainly, we have earned a reputation of setting meaningful financial targets and then exceeding them, and we did it again in this quarter. But it must be noted the ability to increase earnings by 20% sequentially over what was a record quarter and in a market that is still accelerating, must be recognized as superior performance. We are extremely proud of the Carpenter Technology team for their commitment to performance and their focus on continuous improvement. Importantly, these record earnings translated directly into another step change in cash flow generation.

In the third quarter, we generated $193.5 million in cash from operating activities and $124.8 million of adjusted free cash flow. Two, expanding operating margins. The SAO segment delivered an adjusted operating margin of 35.6% in the quarter, another new record for the business. This margin compares to 33.1% in the prior quarter and 29.1% a year ago. This meaningful margin expansion clearly demonstrates the impact of ongoing productivity gains, product mix optimization and pricing actions. As a result of the expanding margins, the SAO segment recorded $208 million in operating income, an increase of 19% sequentially and another all-time record for this segment. Three, strengthening market demand. We see clear and accelerating demand signals across the aerospace and defense in each market, reflected in both OEM production plans and order intake. Notably, bookings for aerospace structural materials continued to increase, up substantially this quarter. Remember, the submarket for aerospace structural material has been the most impacted by the OEM build rates. Therefore, increasing orders from our Aerospace structural customers is a clear signal that the supply chain is accelerating the ramp to support the expected OEM build rates going forward.

And fourth, pricing continues to be a tailwind. As I've said many times, pricing has been and will continue to be a tailwind for the business. Against a backdrop of strong demand, customers are prioritizing security of supply, and we are continuing to realize pricing that reflects the value we deliver. While no long-term agreements were completed in the quarter, several are currently in negotiation. These long-term agreements support attractive economics for us while providing our customers with the supply chain certainty they need, making them strategically beneficial for both sides.

Now let's turn to Slide 6 and have a closer look at our third quarter sales and market dynamics. In the third quarter of fiscal year 2026, we delivered strong top line growth, with total sales, excluding raw material surcharge up 10% year-over-year and up 11% sequentially, reflecting higher volumes and continued pricing strength. The higher volumes were the result of increased operating time, improved productivity and increasing demand for aerospace materials primarily in the aerospace structural submarket. Looking ahead, we expect continued productivity improvements and healthy demand across our core end-use markets to support further sales growth.

Now let me review our key end-use markets, starting with Aerospace and Defense. Sales in the Aerospace and Defense end-use market were up 13% sequentially and up 17% year-over-year. Our sales growth reflects accelerating activity across the aerospace supply chain as OEMs continue to push towards higher build rates. Let me give some color on what we see happening in the aerospace market.

With backlogs of new plane orders reaching new records every quarter, Boeing and Airbus are ramping production. Notably, Boeing is now consistently producing 42 737s per month. As reported on their recent earnings call, they are poised to go to 47 per month this summer and have their sights set on 52 and beyond due to the growing demand. As a result, the supply chain is building confidence and our customer order intake has been increasing. Even with the increasing orders, OEMs are still concerned that the supply chain is not ordering material fast enough. We agree as we have seen order intake increase significantly, but we know from experience that it is still not enough to support the desired ramp.

Over the last 3 months, we've had customers reach out requesting urgent deliveries to avoid line shutdowns for specific applications. We also continue to have customers across engine programs telling us our material is needed sooner. The Boeing comment inventories that had been helping with recent output are now coming down is significant, and it will drive urgency to yet another level. We expect this urgency will continue to spread throughout the supply chain as inventories run short, further tightening the market for our materials.

Moving on to the Medical end-use market, our sales were down 9% sequentially and 29% compared to the prior year third quarter. On a positive note, bookings were up significantly in the quarter. supporting our expectation the Medical end-use market will begin to recover and return to growth in the near term.

In the Energy end-use market, sales increased 32% sequentially and 44% year-over-year, driven by higher volumes supporting industrial gas turbine builds. The demand from our IGT customers, primarily driven by the growing energy needs of data centers, remains strong across multiple platform types and OEMs. Keep in mind that the production flow for the IGT material goes across similar flow path as aerospace materials. As a result, quarterly sales for IGT material can fluctuate due to order timing and production scheduling.

Taking a step back, we are clearly operating in an accelerated demand environment across our highest value end use markets. Combined with our differentiated capabilities and capacity, this positions Carpenter Technology for meaningful growth, both in the near term and over the long term.

Now I will turn it over to Tim for the financial summary.

Thanks, Tony. Good morning, everyone. I'll start on the income statement summary on Slide 8. Starting at the top, sales excluding surcharge increased 10% year-over-year on 15% higher volume. Sequentially, sales were up 11% on 10% higher volume. The improving productivity, product mix and pricing are evident in our gross profit, which increased to $251.8 million in the current quarter, up 25% from the same quarter last year and up 15% sequentially.

Selling, general and administrative or SG&A expenses were $65.3 million in the third quarter, up roughly $2 million both sequentially and versus the same quarter last year. The SG&A line includes corporate costs, which were $27.3 million. This is up $1.1 million sequentially and up $2.9 million from the third quarter of fiscal year 2025. For the upcoming fourth quarter of fiscal year 2026, we expect corporate cost to be between $25 million to $26 million.

Operating income was $186.5 million in the current quarter, which is 35% higher than our third quarter of fiscal year 2025 and up 20% from our recent second quarter. As Tony mentioned earlier, this represents another record quarterly operating income result, breaking the previous record set last quarter.

Moving on to our effective tax rate, which was 21% in the current quarter. This quarter's effective tax rate was lower than anticipated, primarily due to discrete tax benefits associated with changes to the estimates for certain tax positions taken in the prior year. For the upcoming fourth quarter of fiscal year 2026, we expect the effective tax rate, excluding discrete items, to be about 23%.

Finally, the earnings per diluted share was $2.77 per share for the quarter.

Now turning to the next slide to talk about our cash generation and capital allocation priorities. In addition to the strong earnings performance, we've generated meaningful cash flows, driven by higher earnings and ongoing efforts to manage working capital closely, particularly inventory. To date, in fiscal year 2026, we generated $364.9 million of cash from operating activities. This is roughly 2x the operating cash flows when compared to the same period last year. The cash generated from operations more than supports the capital spending in fiscal year 2026. To date, we have spent $157.6 million in fiscal year 2026. This includes the annual targeted capital expenditures of $125 million as well as the brownfield capacity expansion project. As anticipated, capital spending ramped in our recent third quarter, totaling $68.7 million as activities around the capacity expansion project accelerated.

A brief update on this project. The brownfield capacity expansion project remains on budget and on schedule. The construction phase is well underway and key equipment deliveries have begun. The project team remains focused on not only completing construction and installation of equipment, but also preparing for activities to ensure a smooth startup of operations. As we look to the balance of the year, we expect capital expenditures for fiscal year 2026 to finish at about $260 million. This is below the expectation we set at the beginning of the year based solely on changes in the estimates we made for the timing of cash spending related to the project. This doesn't change our outlook for the full project that we set out when we announced the expansion.

With those details in mind, to date in fiscal year 2026, we have generated $207.3 million in adjusted free cash flow. We are increasing our outlook for free cash flow and currently expect to generate at least $350 million of adjusted free cash flow in fiscal year 2026.

As we have said many times before, our adjusted free cash flow generation is important as it enables us to deploy a balanced capital allocation approach. That includes investing cash in attractive and accretive growth projects like the brownfield capacity expansion and returning cash to shareholders. To that end, we continue to execute against our repurchase authorization and repurchased $133.9 million of shares in fiscal year 2026. This brings the total to $235.8 million spent to date against the $400 million authorization that we announced in July of 2024. And in addition to the buyback program, we also continue to fund a recurring and long-standing quarterly dividend.

Finally, our ability to deploy capital is also supported by our healthy liquidity and strong balance sheet. Last quarter, we talked about the refinancing actions we took to strengthen both our balance sheet and liquidity. As of the most recent quarter end, our total liquidity was $793.8 million including $294.8 million of cash and $499 million of available borrowings under our credit facility. Our credit metrics remain very strong with our net debt-to-EBITDA ratio remaining well below 1x.

Altogether, we believe our strong balance sheet and outlook for significant cash generation positions us well to fund continued growth and deliver significant shareholder returns.

With that, I'll turn the call to Brian.

Thanks, Tim, and good morning, everyone. I'll provide some commentary on each of our segments for the quarter, starting on Slide 11 with our Specialty Alloys Operations segment. SAO delivered an exceptional third quarter, marked by strong top line growth, record margins and another step change in operating income performance. SAO's performance was supported by continued improvements in productivity across our facilities, pricing realization, product mix optimization and higher available uptime versus the prior quarter.

Net sales, excluding surcharge, were $585 million in the quarter, up 13% year-over-year and 11% sequentially, with both comparisons driven by higher volumes. The growth was led by improving demand in the Aerospace and Defense market as well as continued strength in Energy, especially from IGT customers.

Adjusted operating margin increased to a record 35.6% in the quarter, marking the 17th consecutive quarter of margin expansion and exceeding the prior record set just last quarter. Keep in mind, there are short-term factors that could impact what operating margins can be in any given quarter, most notably the mix of products.

While quarterly margins can vary based on product mix, the underlying trajectory remains clearly upward, supported by our core structural drivers, productivity, mix and pricing. As a result of top line growth and expanding margins, SAO delivered operating income of $208 million in the third quarter, the highest quarterly result in the segment's history and a significant sequential increase.

The SAO team has clearly risen to meet the challenge and is operating at a high level across the organization. From the commercial team working with customers to provide solutions to our production planning team optimizing our manufacturing system to ensure that the highest margin materials are prioritized across Flow path and to the manufacturing team, the backbone of our operations, improving productivity at each shift to ensure we consistently produce at high levels to meet the growing demand. But the SAO team is not content with our current success. We believe we can do better and are looking forward to continuing to demonstrate record-breaking performance.

Looking ahead to the fourth quarter, SAO remains focused on sustaining this momentum by optimizing product mix for margin, closely managing production planning and capacity and continuing to drive productivity and cost discipline. Based on current visibility, we expect SAO to generate operating income in the range of $224 million to $228 million in the fourth quarter, representing yet another strong step forward for the segment.

Now turning to Slide 12 and our PEP segment results. Net sales, excluding surcharge in the third quarter of fiscal year 2026 were $90.6 million, up 17% sequentially and down 6% from the same quarter a year ago. The sequential improvement in sales was driven by increasing sales in Aerospace and Defense. Year-over-year, Aerospace and Defense sales were also higher, but were more than offset by a year-over-year decline in Medical sales in our titanium business. The softness in the medical market continues to be in certain titanium products for a specific set of medical distribution customers, which has had an outsized impact on our titanium business.

As Tony mentioned in his comments, we are seeing an increase in bookings and are optimistic about a return to a growth trajectory in the medical market. Our teams in Dynamet continue to focus on what they can control like productivity, equipment reliability and overall consistency, very similar to the dynamics in SAO.

More recently, although a smaller piece of PEP, a bright spot has been our additive business where our material solutions continue to benefit from strong demand. The growing demand in additive is driven primarily by the Aerospace and Defense end-use market, where our value proposition for highly specialized products and capabilities support our customers' needs.

PEP reported an operating income of $6.7 million in the current quarter, which is as we expected, largely in line with our recent second quarter. We currently anticipate the PEP segment's operating income for the upcoming fourth quarter to be in line with the third quarter of fiscal year 2026.

With that, I'll turn the call back to Tony.

Let me close as I have the last couple of quarters with why Carpenter Technology is a compelling story for existing and potential shareholders. One, we have an [indiscernible] market position in the industry. We're at the beginning of a major growth cycle, especially in the Aerospace and Defense end-use market. With the accelerating aerospace build rates driving higher demand for our materials, a fundamental supply-demand imbalance in nickel-based super alloys will continue to tighten. Our leading capabilities are differentiated by stringent qualifications necessary to supply advanced materials for Aerospace and Defense and other key end-use market applications. And our world-class collection of unique manufacturing assets are difficult, if not impossible, to replicate. Two, we have demonstrated a commitment to a balanced capital allocation approach. As Tim noted, we have a healthy liquidity position and a strong balance sheet, combined with an impressive cash flow generation outlook, with a long-standing dividend and a robust share repurchase plan.

In addition, our strong performance enables us to invest in highly accretive growth projects that accelerate earnings growth, but do not materially impact the nickel-based supply-demand imbalance. And three, we continue to deliver record financial results with a strong earnings outlook. We just completed another record quarter of profitability driven by significant margin expansion in our SAO segment. As I mentioned earlier, it is important to keep in mind that we are delivering record earnings even at a time when the aerospace and defense market is at the beginning of this growth cycle. And today, we increased our operating income guidance for fiscal year 2026 that implies at least a 33% increase over a record fiscal year 2025. I don't know if anyone in our industry who can say they have a stronger earnings outlook than Carpenter Technology.

Looking forward, our current fiscal year 2027 earnings target is outdated and does not reflect our current earnings momentum. Further, with the demand environment accelerating, especially in aerospace and defense, we are confident our financial outlook will continue to improve beyond fiscal year 2027. We will provide an updated view, including fiscal year 2027 guidance on our next quarter's earnings call.

Carpenter Technology checks every important shareholder criteria box. To date, we have created significant shareholder value, but we are only at the beginning of this growth journey. The best is still to come. Thank you for your attention, and I will now turn the call back to the operator.

[Operator Instructions] Your first question comes from the line of Gautam Khanna of TD Cowen.

Just wanted to ask if you could comment on like lead times if they changed at all, broadly, engines and other key submarkets? Also wanted to get a sense for what do you think is possible with respect to increasing output? I know you guys are kind of 24/7 full out, but just as we think about '27 and '28 outside of pricing, how much tonnage could grow over those couple of years?

Yes, sure. On lead times, they remain fairly consistent quarter-over-quarter, but I do anticipate those starting to push out here in the near term. As you well know, we kind of cap lead times anyway based on our order activity, but I see those pushing out as we go over the next couple of quarters even higher than they are right now.

Your second question is a really good one. And that's one of the reasons I kind of alluded to the fact that we're producing record earnings when the aerospace market specifically is still accelerating. And it's also the reason why we've noted a couple of times the order intake acceleration of aerospace structural materials. Because although you say we're operating 24/7, which is correct on specific process or production flow path, particularly on the engine side, but on some of the other aerospace submarkets, we are not. We have pockets of opportunity there. And because the structural market was not ordering. So we have a very nice opportunity from a volume standpoint in some of those submarkets over the next couple of quarters, over the next couple of years as you stated.

And I think Brian mentioned in his prepared remarks, you're still -- we've done a tremendous amount of work on productivity. I mean that just jumps off the page, but there's still a lot more to do there. So from a volume standpoint, Gautam, I guess, to summarize my answer, there's still a lot left in the tank there for us.

Your next question comes from the line of Scott Deuschle of Deutsche Bank.

Tony, for the transactional price increases that you referenced in the press release, is that mostly referring to favorable transactional pricing for aerospace structural alloys? Or are you seeing those transactional prices create a lot more broadly across the portfolio?

Yes, Scott, remind me, I'm not sure I specifically mentioned price in my prepared remarks. I talked about order intake increasing on that specific submarket, but I will say that we continue to see pricing as a tailwind force. Again, you know this very well, but you see our price per pound potentially being flat. That's a good news for our overall earnings because you see structural business being a bigger ratio of our total volume. That's good. It does have a relatively lower price point than, for example, engines. But if you look at aerospace, in total, you'll still see a positive trend there. So I'll come back with a follow-up there if I didn't quite answered your question.

Okay. Yes, that's fine. And then has the frequency of expedite requests has been increasing pretty steadily each month this year? Or is that -- have those expedite requests been pretty erratic each month?

Yes, that's an interesting question. I guess there is a feel of a little bit that they're a little bit unpredictable from that standpoint. But if I can't say they've been consistently unpredict like we're getting those on a pretty regular basis. I think those are going to increase if history is any indication. As I said in the prepared remarks, we share the same sentiment as the OEMs where they do not believe that the order intake, although increasing, is not enough yet. There is concern on the OEMs that suppliers are not ordering enough material fast enough. We agree with that. And I think as that continues to step up, you'll get more and more emergency orders. I mean also, as you all know, I really don't want to be in the emergency order business. I'd like for all the customers to order at a nice consistent pace so we can plan our facilities the best possibly can. But I do see that, that's going to increase for us over the next couple of quarters. I think that's pretty well in absolute.

Okay. And then last question, Tim, can you say how much IGT revenue specifically was up in the quarter? I think can you give us an updated sense as to how much of the energy mix is now IGT at this point as opposed to oil and gas?

Yes. Yes, you see on that one slide, you said the total energy, that was almost 100% driven by IGT. And right now, IGT is, I would say that dominating that space. Oil and gas is rather subdued from quarter-to-quarter. So IGT was the big driver this quarter. Now keep in mind also big increase in IGT. Remember, last quarter, I believe you had it, it was a pretty material decrease, and that's just the order patterns of IGT. So I don't get too excited if I see a plus 36% because you had a big order come in, you could be minus 20% the next quarter. But over a long period of several quarters' time, we've seen significant and consistent increase on the IGT business.

Your next question comes from the line of Josh Sullivan of Jones Trading.

Just want to say congratulations, Tony, to the next phase here. Great job done starting Carpenter to these heights; and to Brian, congratulations on the next leg here.

Thank you.

But I guess just a follow-up on the Aerostructures question. Boeing made some comments. I think above what was it, 47%, it would take a bigger investment on the supplier inventory side versus some of the previous jumps. And so when you talk about supply chain under ordering, would you expect that, or is it your sense that we're going to -- the supply chain is going to see that and tighten up in the near term? Or do you think we need to be at above 47% as Boeing is kind of talking about to really see the supply chain react?

Well, Josh, that's a really good question. In many ways, that's the million-dollar question, right? What is that last piece of information that drives that increased behavior. I can say we speak regularly to our customers about that. I would say, every month, you see more and more activity. I don't necessarily think that it needs to be at 47% before you see a big jump in activity, particularly on the structural side, only because we've already seen a nice jump up. No, that's not enough.

I think another really important point that I made there too, Josh, is where Boeing stated that they have basically exhausted their inventory. That's a key piece of information. So let's see how it plays out, but I don't necessarily think we have to wait for the 47% to see that next push up in orders. Let's see how it goes over the next 30, 60 days.

Got it. And then I guess just kind of relatedly on the cash flow profile for Carpenter, whenever that does happen, you start to see that order intake, I mean, is there any working capital builds? I know you guys you're out so far in your lead times, maybe not. Just curious when that bow wave does finally hit. I mean, is there any sort of thought process on the cash flow profile or should be pretty consistent?

I'll leave that one to Tim.

Yes, I'd say it's pretty consistent, Josh, over time. I mean we still think inventory is an opportunity for us. That would be the biggest impact, I mean sales increasing in AR and days and things like that. But we view all the work that's being done on productivity, we view inventory as an opportunity. So I don't see us investing heavily in inventory just to meet demand.

And then just one last one, just on more of the jet engine aftermarket bookings characteristics for the quarter, just on that, and then I'll jump back in the queue.

And what's the question, just the bookings on engines? is that what you said?

Yes, forging jet engine side, more aftermarket kind of related activity as just some questions around obviously the broader air traffic environment and maintenance market. Just any comments you might have there?

Yes, sure. You usually Gautam asks me this question on what sales are -- engines are up sequentially -- so I'll tell you that we're -- engines sequentially were up 24% sales year-over-year 44%. So still see very strong sales on the engine side. Fasteners were up 9% or 10% sequentially, 20% year-over-year. So do you see good movement there. Orders were pretty much in line. We had a big quarter last quarter, had another big quarter this quarter in orders. And as I've said before, I think you'll continue to see that increase over the next couple of quarters.

Your next question comes from the line of Bennett Moore of JPMorgan.

Congrats on the quarter. I wanted to come to defense. And I'm wondering if you've seen any uptick in defense-related orders since the onset of the conflict. And maybe if you could provide any color on where you might have more exposure within those submarkets, for instance, munitions versus jets, et cetera?

Yes, it's a great question. We saw increased activity even in advance of the Middle East conflict just because with the Department of War wanting to revitalize and restock, if you will. So we have seen that in the past already. And just as a reminder, just as you start talking about different submarkets there. I mean we're a supplier, I think we have been on many platforms, fixed wing, rotorcraft, naval missile armored vehicles. So we're across multiple submarkets, if you will, that are all very program-specific. So again, it is a it is more of a lumpy order pattern depending on the program. But we see this as a submarket that's going to continue to increase.

In many ways, the impact of the conflict has not been felt yet. I mean, there could potentially be another push upward on orders just to do that replenishment. So that's not always immediate signal that we see through the supply chain. So I think there's probably more to come on the order intake from a defense standpoint, which was already elevated, I think it goes to the next level.

Thanks for that context. And then I think this quarter's buybacks were the strongest since the program started and despite the Athens CapEx, the free cash flow outlook is improving. So I'm wondering how this might impact any capital allocation decisions? Could we expect to see a relatively higher quarterly buyback run rate moving forward?

Well, it's possible. I mean it's a good position to be in, right? I think it's very important, and I said it in my prepared remarks because I think it's critical to our shareholders is that we're going to stay balanced. We're going to have a repurchase program. We're working on our current brownfield. That's our focus. And that type of relationship, if you will, you should anticipate that being pretty close to the same going forward. That's how we're going to run the company. And I've got Brian sitting here right next to me. He's shaking his head. That's obviously exactly the way he feels as well.

Your next question comes from the line of Andre Madrid of BTIG.

I kind of wanted to dig into LTAs a little bit further. I think in the release you had talked about and in your comments as well, a willingness to kind of further advance some of those LTAs. There's some that are in the works right now, really pushing for volume visibility and pricing consistency. Is that an indication that you think LTA mix might increase through the coming quarters and years? I guess I'm trying to figure out how that mix might evolve with where we are in the demand environment?

Yes, Andre, that's a good question. Total Carpenter, I mean, our percent LTA is in the 40%. Now if you look at Aerospace only, it jumps up quite a bit. You're in the low 60%. So 60% -- 60% to 65% of Aerospace revenue is under some type of LTA. Honestly, I don't see that changing a lot going forward. Mutually, there are some customers that don't operate under an LTA based on their preference. I would say what's changing is the customers that historically have been doing business with us under LTA would like for those to be longer. Of course, and that's another data point to suggest that they also believe in the tightness of the market and it's only going to get tighter. That's why they'd like to have it longer. We work with each of our customers individually on what's best for both of us. So I guess, gave you a little bit more than what you asked for. But at a high level, I don't see that percentage changing drastically going forward.

Got it. Got it. That's all helpful color. I think pivoting back not to beat the dead horse here, but aerostructure orders. What kind of quantifiable color can you give there? I remember last quarter, you guys had said like January month-to-date orders were higher than any month in '25. Like is there a similar metric that you can give us right now to kind of show just where demand is for Aerostructures?

Well, we had a -- I'll say it this way, without getting into specifics on all the submarkets, you had a continued strong order demand for structural last quarter and you saw a similar type of increase this quarter. So no pullback on the structural side. And Andre, to be honest, I think that's going to continue. And that's why we made the point about, I don't think the order rate that's coming in to us, although it's increasing significantly, I'm speaking on the structural side, those more distribution value-add customers, even though it's increased significantly, I think there's still a lot more to go there.

Your next question comes from the line of Samuel McKinney of KeyBanc Capital Markets.

It seems -- it sounds like some of that fiscal year '26 CapEx has been pushed into next year. Could you give us a little more color on the reasons behind the delayed cash spend at the brownfield expansion?

Yes, Sam, this is Tim Lain. So you're right. We did defer about $40 million of the expected. We set a number for CapEx has started the year around $300 million, we're down -- and that includes the annual $125 million of targeted CapEx in addition to the brownfield capacity. It's a pretty complex project. You make a set of assumptions on the activities that are going to happen, and then on top of that, you've also got to project what you think cash payments are going to be relative to different milestones and payment terms and again, a lot of variability. So throughout the year, we're looking relatively positive. We just finished Q3, we have a good handle on what's going to happen in the next 90 days. So it isn't an indication -- it's an indication of the cash, not necessarily an indication of the progress on the project, the project is still on track from a timing and budget perspective, it's really just the timing of cash payments. So that's why we reduced the estimate to $260 million for the year for CapEx.

Okay. Then I asked this because I know we all get questions about it on our end. And I know you said you touched on it next call, but the release generally talked about continued momentum into next year. Did you guys give any thought to updating that existing EBIT guidance range for next year given the commercial aerospace production momentum has clearly improved meaningfully since you gave that outlook last year?

Is the question, Sam, did we give any thought to given that update this quarter?

Yes. That's the question.

Yes. Well, we have a very detailed process, right? And I could tell you right now at what '27, '28, '29 and '30 [indiscernible]. I've got a number for each 1 of those. But I want to drive and Brian wants to drive ownership down throughout the entire organization. So we have a process that -- we do our first cut in the fall. We come back in the spring, and we do a bottoms-up cut of that again, right, where the commercial team does customer by customer, product by product, operations folks come in, piece of equipment by piece of equipment, what the productivity rates are going to be, and we're in the process of doing that right now.

Now Brian and I both know what that number in '27 needs to be, but I want the ownership of the people out on the shop floor that they're not only going to hit that number, but exceed that number. So I don't want to interrupt a process that has worked very, very well for us over the last several years and we'll be wrapping that up here shortly. And then the next time we speak publicly will be the fourth quarter, so that's why you'll get it in the fourth quarter. And that's why we did it the last couple of years. Sam, that work for us, and that gets a buy-in from our entire organization. But as I said in my notes, I mean, it's clear that the 2027 number, as it stands now, is outdated, and we'll be doing much better than that.

[Operator Instructions] Your next question comes from the line of Scott Deuschle of Deutsche Bank.

Tony, did I hear you right that jet engine revenue was up 44% year-over-year? And then was there any submarket within A&D that moved against you in a meaningful way to offset that?

I did say that. I think total A&D was up 17%. I think some of the other ones, you'll have different pockets that were plus and minus a little bit faster, so it was up as well. You had a really, really big structural sales month -- sorry, not month, quarter -- last quarter. So this quarter, the structural distribution was actually down from a sales standpoint a little bit, but the orders are high. So you know how that works, Scott. It doesn't always match up in that tight 90-day window.

Your next question comes from the line of David Strauss of Wells Fargo.

The incremental margins that you've been putting up ex surcharge at SAO have been extraordinary. I think this past quarter, 80-some-percent looks like you're forecasting or baking in kind of something similar in Q4. But how do we think about what might be more normal incremental margins for that business as the structural piece kind of becomes a bigger portion, I would assume, going forward?

Yes, David, number one, welcome to the call. We appreciate you picking up coverage. I think I'm going to get Brian involved on the call here and let him give a comment, at least from a high level from operating margins and maybe I can fill back in afterwards.

Yes. Yes. So as you've seen, we've delivered steady increase in SAO margins, and we're very happy with the efforts of the commercial and operating teams to achieve the 35.6% this quarter, but we've got a strong performance mindset. We obviously have action plans in place to continue to grow from here. Just remind you that quarter-by-quarter, the margin expansion isn't going to be linear. So there are a lot of factors we mentioned in our prepared comments that operating margins can be in any given quarter different. But overall, we see a positive trend upwards I'm not going to start forecasting quarterly operating margins, but I will say that my expectation is that 35.6% is not the ceiling. We expect the dynamics that are driving margins today to only get stronger in the coming years.

And I would just add on to that because you mentioned structural specifically, and that's a very good point. Certainly, as the market grows and we want it all to grow, and you see that structural business get higher, that could have an impact. Now just because something that's at a lower price doesn't necessarily mean it's a lower margin, right, because it has a different process flow. But we've been able to offset any of those type of mix movements with some of our other levers. So Hopefully, that was -- that answered your question.

Yes. Yes. And then -- I appreciate that. That's helpful. And then on the price per pound discussion with regard to SAO, how do we kind of reconcile flattish price with, I think, relatively slight year-over-year with engine up so much year-over-year? I thought you were kind of implying or my understanding is engine price per pound would be higher than kind of structural and fasteners. So just asking kind of how do we reconcile that?

Yes. I'll tell you this, David, I don't want to get into a habit of giving price movement by every submarket. But it is a good question. And I will say, remember, we're about 65% aerospace. So that number you saw was total CRS. You saw some improvement, some higher sales in some of our non-aerospace markets that have traditionally a lower price. I will give you this that if you look at aero only year-over-year, price is up almost 10%. So that's the real driver. It is so mix dependent. But from an aero only standpoint, you see that continue to go up.

As you see other non-aero businesses or submarkets increase in volume, that's a good thing for overall earnings that could have a more of a lowering the impact on the overall Carpenter total price per pound.

I would now like to hand the call back to John Huyette for closing remarks.

Thank you, operator, and thank you, everyone, for joining us today for our fiscal year 2026 third quarter conference call. Have a great rest of your day.

Thank you for attending today's call. You may now disconnect. Goodbye.

Ladies and gentlemen, thank you for standing by. My name is [indiscernible], and I will be your conference operator today. At this time, I would like to welcome everyone to the Carpenter Technologies second quarter fiscal year earnings call. [Operator Instructions]

I would now like to turn the conference over to John Huyette. You may begin.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the Fiscal 2026 Second Quarter ended December 31, 2025. 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 Tan, Chairman 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 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 Carter Technology's most recent SEC filings, including the company's report on Form 10-K for the year ended June 30, 2025, Form 10-Q for the quarter ended September 30, 2025, and the exhibits attached to those filings.

Please also note that in the following discussion, unless otherwise noted, when management discusses 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 begin on Slide 4 with a review of our safety performance. We ended the second quarter of fiscal year 2026 with a total case incident rate of 1.4 and -- we saw improvement over the last quarter. And as a result of the actions in this area, I expect to see continued progress going forward. As always, we remain committed to our ultimate goal, a 0 injury workplace.

Let's turn to Slide 5 for an overview of our second quarter performance. Second quarter performance continued our earnings momentum and sets us up for a strong second half to fiscal year 2026. Let me highlight the 4 major takeaways for you. One, record earnings. In the second quarter, we generated $155 million in operating income exceeding our previous record set in the prior quarter. And it is a 31% increase over our second quarter of fiscal year 2025, another meaningful step up year-over-year.

Our consistent earnings growth continues to be the result of our solid execution, strong market position and unique capacity and capabilities; two, expanding operating margins -- the SAO segment continued to expand margins, reaching an adjusted operating margin of 33.1% in the quarter. This margin compares to 28.3% a year ago and 32% in the prior quarter. Keep in mind that there are lots of factors that impact what our operating margins can be in any given quarter, most notably the mix of our products.

So going forward, we may see some quarters that are flat or slightly lower, but the overall trajectory is anticipated to continue upwards. With that being said, our current outlook calls for increasing SAO margins over the next 2 quarters of fiscal year 2026. As in the past, the positive trend will continue to be driven by increased productivity, product mix optimization and pricing actions. As a result of the expanding margins, the SAO segment recorded $174.6 million in operating income, an increase of 29% year-over-year and another all-time record for the segment.

Three, strengthening market demand, especially in the aerospace and defense end-use market, as we continue to see strengthening demand signals in terms of OEM production and order intake rates. Our customers are keenly aware of these demand signals and are positioning themselves accordingly. In the quarter, booking for the aerospace and defense end-use market increased 8% sequentially. However, it is important to note that defense submarket orders were down materially in the quarter due to the government shutdown and uncertainty in terms of the defense budget.

Most importantly, commercial aerospace bookings were up 23% sequentially. This is the fourth consecutive quarter of sequential order intake increases for the aerospace and defense end-use market. Seeing such strong bookings in a quarter that's usually quieter due to the holidays is a good indication of the accelerating demand for our materials.

And four, pricing continues to be a tailwind. Given the strong demand outlook, our customers continue to be focused on securing their supply and our pricing continues to increase. As evidence of this, we completed 3 additional long-term agreements with aerospace customers with significant price increases during the quarter. These long-term agreements represent good value for us and our customers as they look to secure their material needs going forward.

Let's turn to Slide 6 and have a closer look at second quarter sales and market dynamics. In the second quarter of fiscal year 2026, our total sales, excluding raw material surcharge were up 8% over the second quarter of fiscal year 2025 and down 2% sequentially. The Net sales were as we expected and the result of multiple factors, including available operating days and customer closure schedules, items which we see at every calendar year end and which I noted in last quarter's earnings call. As we enter our third quarter, these factors are not in play, and we expect a sequential increase in net sales.

Let me briefly review some of the key markets, starting with aerospace and defense. Sales in the Aerospace and Defense end-use market were down 1% sequentially and up 15% year-over-year. While down modestly on a sequential basis, the aerospace and defense end-use market net sales represented our second best quarter on record, and activity with our aerospace and defense customers continues to increase.

I will mention 2 important data points from the aerospace engine and structural submarkets. Order intake in the quarter for our aerospace engine materials was up 30% sequentially, signaling continued growing strength in demand. And very importantly, our aerospace structural customers are moving off the sidelines and ramping up order placement. Many of them recently placed their first launch orders with us in several quarters and are already preparing the next round of orders, which they anticipate being larger and even more urgent.

Moving on to the Medical end-use market. Our sales were down 7% sequentially and 22% compared to the prior year second quarter. The decrease is isolated to certain titanium products for a specific set of medical distribution customers and all within our PEP segment. Clearly, this has impacted the earnings of the much smaller PEP segment, but the impact is not material to total Carpenter Technology results and not material to our overall earnings outlook or our ability to deliver on such outlook.

Outside of these distribution customers for [indiscernible] we do see bright spots in other areas of the medical end-use market. Sales to our orthopedic and dental submarkets remain strong, both near an all-time record. Our advanced solutions, which are ultimately used to support improved patient outcomes and are critical to translate minimally invasive surgery, metal sensitivities and robotics remain highly valued by our customers.

Shifting to the energy end-use market, sales were down 10% sequentially and up 19% year-over-year. As I've said many times, sales in the power generation submarket will fluctuate quarter-to-quarter due to the frequency of orders and our practice of strategically sliding them into our production process. Power generation demand continues to accelerate driven primarily by the immense energy needs of data centers. We remain in close coordination with the power generation customers across multiple platform types and OEMs to plan for their future material needs.

Altogether, we are operating in a strengthening demand environment across the high-value end-use markets that we believe will drive meaningful growth in both the near term and long term.

Now I will turn it over to Tim for the financial summary.

Thanks, Tony. Good morning, everyone. I'll start on the income statement summary. Starting at the top, sales excluding surcharge increased 8% year-over-year on 5% higher volume. Sequentially, sales were down 2% on 4% higher volume. The improving productivity, product mix and pricing are evident in our gross profit, which increased to $218.3 million in the current quarter, up slightly sequentially and up 23% from the same quarter last year. .

Selling, general and administrative or SG&A expenses were $63.1 million in the second quarter, flat sequentially and up $4.5 million from the same quarter last year. The SG&A line includes corporate costs, which were $26.2 million. This is flat sequentially and up $2.6 million from the second quarter of fiscal year 2025. For the upcoming third quarter of fiscal year 2026, we expect corporate costs to be about $25 million. Operating income was $155.2 million in the current quarter, which is 31% higher than our second quarter of fiscal year 2025. And and up slightly from our recent first quarter.

As Tony mentioned earlier, this represents another record quarterly operating income result, breaking the previous record set last quarter. Moving on to our effective tax rate, which was 19% in the current quarter. This quarter's effective tax rate was lower than anticipated, primarily due to discrete tax benefits associated with the exercise of certain equity awards in the current quarter. For the balance of the fiscal year, we expect the effective tax rate to be between 22% to 23%. For the full fiscal year 2026, the effective tax rate is expected to be on the low end of the full year guidance we previously provided of 21% to 23%.

Finally, the adjusted earnings per diluted share was $2.33 for the quarter. The adjusted earnings per share excludes the impact of the debt refinancing we completed in the quarter, I'll talk about that shortly. Now turning to more detail on each of the segments, starting with our SAO results. Net sales excluding surcharge for the second quarter were $527.3 million. Compared to the same quarter last year, sales were up 10% on 5% higher volume reflecting the impact of product mix optimization and pricing actions.

Sequentially, sales were down 1% on 5% higher volume. We recognize there is a significant focus externally on our reported sales and volume each quarter and ultimately, the selling price per pound of our products, particularly in our SAO segment as an indicator of pricing changes. As we've stated before, the selling price per pound in any given quarter is highly dependent on the mix of products that we ship in any one quarter. As we saw this quarter, our product mix was influenced by the planned maintenance activities and holidays. As a result and as expected, given these dynamics, our reported net sales excluding surcharge per pound were down slightly sequentially and up year-over-year.

Mostly, SAO's adjusted operating margin continued to increase and in fact, hit record levels, reaching 33.1% in adjusted operating margin. This marks the 16th consecutive quarter of margin expansion. As a result, SAO reported operating income of $174.6 million in the second quarter, a new all-time high for the segment. In addition to mix and price benefits, the record performance reflects the SEO team's ability to actively manage our production schedules, increased productivity at key work centers, manage costs and execute the planned maintenance activities.

Looking ahead to our third quarter of fiscal year 2026, we [indiscernible] down 11% essentially and down 10% from the same quarter a year ago.

As Tony mentioned earlier, the decline was primarily driven by titanium sales which were heavily impacted by lower demand from specific medical customers. As a result, PEP reported an operating income of $6.9 million in the current quarter compared with $9.4 million in the first quarter of fiscal year 2026 and $7 million in the same quarter a year ago. The year-over-year improvement in operating margin reflects increasing sales in our additive business driven by demand as well as the cost benefits of actions we took last year to reduce structural costs in this business. We currently anticipate the PEP segment's operating income for the upcoming third quarter to be in line with the second quarter of fiscal year 2026.

Before we move to cash flow, I just wanted to pull together the pieces that make up our outlook for operating income for the third quarter of fiscal year 2026. We anticipate total operating income of $177 million to $182 million. This includes SAO at $185 million to $200 million, PAC at roughly $7 million and corporate costs of $25 million.

Now turning to the next slide to talk about our cash generation and capital allocation priorities. In the current quarter, we generated $132.2 million of cash from operating activities and spent $46.3 million on capital expenditures, which resulted in adjusted free cash flow of $85.9 million. As I mentioned last quarter, we expect capital spending will accelerate in the second half of fiscal year 2026 as construction activities related to the brownfield capacity expansion project broaden and equipment delivery and installation begins in earnest.

As we look ahead, we expect to generate at least $280 million of adjusted free cash flow in fiscal year 2026. Our free cash flow generation is important as it enables us to deploy a balanced capital allocation. As we've discussed before, our primary focus areas for capital deployment are investing cash in attractive and accretive growth projects and returning cash to shareholders.

In that regard, we continue to execute against our share repurchase authorization and repurchased $32.1 million of shares in the current quarter. This brings the total to $183.1 million spent to date against the $400 million authorization that we announced in July of 2024. In addition to the buyback program, we also continue to fund a recurring and long-standing quarterly dividend. That brings us to investing in growth.

As noted, the brownfield expansion project construction activities are ongoing and rapidly progressing. The project is currently on budget and on schedule. Finally, our ability to deploy capital is also supported by our healthy liquidity and strong balance sheet. In the current quarter, we took actions to strengthen both our balance sheet and liquidity. Namely, we completed the refinancing of our long-term debt to extend the maturity of our notes to 2034 while reducing the interest rate.

In addition, we amended and restated our revolving credit facility primarily to increase our credit facility from $350 million to $500 million and extended the term to 2030. As of the most recent quarter end, our total liquidity was $73.8 million, including $231.9 million of cash and $498.9 million of available borrowings under our credit facility.

Our credit metrics remain very strong with our net debt-to-EBITDA ratio remaining well below 1x. Altogether, we believe our strong balance sheet and outlook for significant cash generation positions us well to fund continued growth and deliver significant shareholder returns.

With that, I will turn the call back to Tony.

Thanks, Tim. Each quarter, important themes emerge that become the focus of attention in the investment community. As I did last quarter, I will address them in detail to make sure Carpenter Technology's position is clear. First, the ongoing discussion concerning the strength and acceleration of the aerospace demand environment with a focus on current and anticipated build rates.

On last quarter's earnings call, I spent a lot of time providing details of positive momentum in the aerospace demand environment. Without repeating everything, I will just state again that the aerospace market is in the midst of 1 of the largest build ramps ever to meet the unprecedented demand projections. Let me provide a couple of new positive data points that have appeared over the last quarter.

Notably, Boeing achieved a milestone of building 42 737s in the month of December. On the earnings call earlier this week, Boeing reaffirmed their intention to increase build rates in calendar year 2026. And most notably, they emphasized that bills would be increasing much higher than deliveries, given that finished plan inventory has now been depleted and their intent to build some 737 ahead of delivery in 2027, while citing an expected 10% increase in deliveries, Boeing noted that build activity would have to increase much more to account for the factors I just mentioned.

In light of this, our aerospace customers continue to report increasing demand in the supply chain to support the build rate ramp. This, in turn, is accelerating confidence in the aerospace outlook across each of our submarkets. Our aerospace engine customers are full steam ahead. The engine OEMs are asking us whether the supply chain has ordered enough material to support part builds. And our direct customers are focused on getting orders placed against, in many cases, recently signed long-term agreements.

Importantly, and as I mentioned previously, we continue to see meaningful sequential increases in order intake for our aerospace engine materials, up 30% sequentially. The I will also repeat my statement from earlier that our aerospace structural customers are moving off the sidelines and ramping up order placement. This is an aerospace submarket that has been lagging the others, and the recent placement of the first large orders with us in several quarters as an encouraging sign of strengthening confidence in the aerospace ramp.

We are also working closely with our aerospace fastener customers to ensure they get the materials needed as they are projecting big increases for calendar year 2026. Altogether, we are clearly in the midst of an acceleration of aerospace demand. Our sophisticated customers understand the accelerating demand dynamics, and we continue to work with them to ensure they have their orders in place so they are not last in line. Our customers also understand that nickel-based super alloys will be in short supply with only a few qualified producers globally. That point leads to the second topic to discuss. Nickel-based super alloy industry supply. This could be a difficult topic to understand and to quantify as there are numerous complex nickel-based super alloys that are supplied into aerospace engines and other critical areas of the aircraft, such as landing gear, avionics and structural.

Before I address supply, it is important to understand the demand projections for nickel-based super alloys into the aerospace supply chain. As we have detailed in our investor event about a year ago, the aerospace industry is targeting build rates of 2,100-plus airplanes per year. To put that into perspective, that is at least 30% higher than the pre-COVID high calendar year 2019 when the industry was effectively sold out of nickel-based superalloys. But aerospace OEM demand is not the only area that competes for scarce nickel-based superalloys. As the installed fleet of planes continues to grow and ages, MRO demand is projected to be at significantly higher levels going forward versus today.

Defense demand is increasing rapidly, driven by the increased number of platforms and by the need of even more advanced capabilities, both of which mean higher demand for specialty materials solutions.

Demand for specialty materials used in space has also been increasing with one driver being that the number of commercial satellite launches continues to increase as the space economy grows. And lastly, power generation demand is increasing substantially. This has been widely discussed with news articles on this topic nearly weekly. And it is driven by the need for power to support their growing data center build-out as well as increasing needs from developing economies. It's important to include the power generation demand in this discussion because in many cases, it competes for time on the same assets used to produce aerospace, nickel-based superalloys.

Taking into consideration increasing demand from several areas, it becomes clear that macro trends support an accelerating explosion of demand for nickel-based superalloys. Now let's address the supply of these outlays. Since the precoded year of 2019, there has been no meaningful increases in overall qualified nickel-based superalloy supply, other than from internal productivity improvements from the current suppliers. Since that time, Carpenter Technology has been the only company to formally announce any investment in capacity expansion in this specific area as we did recently at our February 2025 investor update.

For those who are unfamiliar, we are investing in a brownfield capacity expansion focused on primary milk, specifically a new vacuum induction melting furnace which is a critical piece of equipment in the manufacturing process of high-purity specialty alloys. In total, this project plans to add 9,000 additional tons roughly a 7% increase over our 2019 shipments. While this is meaningful to the financials of Carpenter Technology, it is not a meaningful increase for the industry.

Remember, Carpenter Technology is 1 of 3 players participating in the high-end nickel-based alloy market, and we are only adding a modest 7% additional capacity versus our 2019 shipment levels only. Taking into consideration the significant projected increase in aerospace OEM builds combined with the projected demand increases for aerospace MRO, defense, space and power generation applications our capacity increase may account for only a small single-digit percentage of the total projected supply-demand deficit.

Of course, there could be other incremental capacity announcements on the horizon, given the demand environment. but they too will likely be minimal in terms of their impact on closing the projected gap in supply. Keep in mind, this type of capacity is highly specialized, difficult to operate, costly and take significant time to build, install, develop and qualify. It is this persistent supply-demand gap that is driving the current pricing environment particularly in the nickel-based superalloy market, and we don't see that changing materially.

This leads to the third topic, nickel-based super alloy pricing -- similar to the aerospace demand environment topic, I also spent a lot of time providing details of our pricing and customer contractual arrangements on last quarter's earnings call. Again, all of that commentary still holds true. I will note again to support our view of the pricing dynamic for our materials that in the quarter, we completed negotiations on 3 long-term agreements with aerospace customers with significant price increases. It is also important to note that in turn, our customers also benefit greatly as they are getting surety of supply of our products, which is highly valuable to them in an extraordinarily high demand environment.

Final point on this topic. We have communicated publicly many times and state again today that we believe pricing actions will continue to be a positive tailwind into the future. due to the supply-demand imbalance that exists today and is expected to intensify in the future for nickel-based superalloys.

Lastly, we continue to receive questions about our confidence in our earnings guidance. As you have come to understand, our earnings guidance philosophy is very structured and well thought out. We believe in establishing challenging targets that we have line of sight to achieving with disciplined action plans in place. We have earned a reputation of achieving and exceeding our targets.

At the start of fiscal year 2026, we projected operating income for the current fiscal year of $660 million to $700 million. Given the supply-demand dynamics I just covered and the visibility we have for the second half of the fiscal year 2026, we are raising our guidance to $680 million to $700 million. This range for fiscal year 2026 represents a 30% to 33% increase over our record fiscal year 2025 earnings.

As you recall, we established fiscal year 2027 guidance of $765 million to $800 million almost a year ago in February of 2025. At that time, we stated our belief that the targets for fiscal year 2026 and 2027 with the highest earnings growth trajectory among our industry peers, and we still believe that to be true. However, let me be clear, as this aerospace market continues to accelerate, our focus is not on achieving the fiscal year 2027 guidance. The focus is on exceeding that target.

As we continue to fine-tune our outlook, I would expect in the next few quarters, we will be updating the fiscal year 2027 guidance as well as adding longer-term annual guidance.

Now let's turn to the final slide to summarize this great story. Let me close as I did last quarter with why I think Carpenter Technology is a compelling story for existing and potential shareholders. Let's take a look at the 3 major areas most important to shareholders. One, we have an enviable market position in the industry. We are in the midst of a significant acceleration in demand, especially in the aerospace and defense end-use market. With accelerating build rates driving higher demand for our materials, a fundamental supply-demand imbalance in nickel-based super alloys will tighten even further.

Our world-class collection of unique manufacturing assets and related capabilities are difficult, if not impossible, to replicate. Our leading capacity and capabilities are further differentiated by stringent qualifications necessary to supply advanced materials for aerospace and defense and other key end-use market applications.

Two, we are committed to a balanced capital allocation approach. We have a healthy liquidity position and a strong balance sheet, combined with an impressive free cash flow generation outlook. We are focused on returning cash to shareholders via a long-standing dividend and a robust share repurchase plan. In addition, our strong performance enables us to invest in highly accretive growth projects like our recently announced brownfield expansion. That accelerates earnings growth but will not materially impact the nickel-based supply-demand imbalance.

And three, we have delivered impressive financial results with a strong earnings outlook. We have just completed another record quarter of profitability, driven by significant margin expansion in our SAO segment. Our increased guidance for fiscal year 2026 implies a 30% to 33% increase over a record fiscal year 2025, and we are well on our way to achieving and even surpassing the earnings target for fiscal year 2027. I don't know if anyone in our industry who can say they have a stronger earnings outlook than Carpenter Technology.

Of course, fiscal year 2027 is not expected to be our peak. We have plans and line of sight to further earnings growth beyond 2027. In summary, we believe Carpenter Technology checks every important shareholder criteria box. We have created significant shareholder value to date but we are only at the beginning of this growth journey. The best is still to come. As always, we remain focused on supporting our customer needs, operational execution and living our values as we drive to exceptional near-term and long-term performance.

Thank you for your attention. I will now turn the call back to the operator.

[Operator Instructions] Our first question comes from the line of Gautam Khanna with TD Cowen.

I was wondering Tony, if you could elaborate on how broad-based you're starting to see the airframe customers participate in ordering? And is this kind of Boeing specific stuff where you were previously experienced a bit of a destock post the strike over at Boeing?

Yes. I think 2 really important points that I made in the prepared remarks. I will say at a high level across all of our aerospace submarkets, whether that be engine fastener, structural, we're seeing increased activity with increasing forward demand.

Specifically, though, in this quarter, the 2 things that stood out the most or are that you had engine orders continue to increase sequentially, 30% this quarter. That's significant. Maybe you could argue even more significant is what our structural customers did in the quarter. And you rightly said, Gautam, the impact of Boeing really put them on the sidelines. Prior to those issues, they had been probably the top submarket in terms of ordering quantity. So they had a lot of inventory to see them now come off the sidelines and 2 things, not only one place some significant orders, but then immediately come back to us and say, there's more coming, and they're going to be bigger and more urgent -- that's a big positive sign. And I would agree with you that at least on the structural side, that, that was primarily driven by the confidence in Boeing, not just in what they believe they can do but what they've actually achieved in this last month.

Okay. That's very helpful. And you mentioned the defense submarket saw a bit of a government shutdown impact. Do you have any visibility from customers in that submarket as to how they expect to kind of put in orders over the next couple of quarters?

Yes, we've already seen that come back. I mean quite frankly, they would have liked to have been placing orders during that time but weren't able to do so weren't allowed to do so because of the government shutdown. So you've got some pent-up order demand there. So we see that coming back very rapidly.

Okay. And last one for me, just on -- you mentioned the mix in the quarter itself. So the basic message, I think, is that overall pricing saw no reduction. This is purely a mix dynamic pricing still trending as you said for the last couple of years higher for longer. Is that right?

Well, it's 100% right? Maybe if you allow me to to speak more about this. This is something that we've talked about a lot. In fact, we signaled this on the last call where we said based on some of the planned maintenance that we're going to do specifically in some of the testing equipment at the back end that a lot of the higher-priced aerospace needs to go through that, that would impact that, all right? So I've talked about that quite a bit. And I think that if there's some belief that a small sequential price decline, which we said could happen multiple times, it's somehow a red flag. I don't think you could be any more wrong than that. .

I mean, we just talked about it, Gautam. Aerospace only bookings up 23%. Aerospace engine bookings up 30%, just completed 3 aerospace engine LTAs at substantial price increases. I can tell you very clearly, we are not -- or we did not discount premium aerospace products in the quarter. There's absolutely no reason to do so, and I've repeated this many, many times, and we said it probably several times over the last year that we see pricing actions continue to be a positive tailwind for us going forward. And I would just say, quite frankly, this should be obvious due to the supply demand and balance that exists today, and that's only expected to intensify. So there is no issue with what happened in this quarter in terms of a slight price per pound decrease, and you'll see that continuing to go up over the next several quarters. Hopefully, that's helpful.

Our next question comes from the line of Scott Deuschle with Deutsche Bank.

I can take a shot at a question, not sure if you'll be able to answer, but for the aerospace LTAs that have renewed over the last 6 months, can you say whether the average price increase is more or less than 30%

Scott, I think you already know the answer to that. I mean these are substantial price increases going forward. 30% is not substantial.

And these are post-COVID LTAs?

There are -- there have been 1 or 2 that are longer that were signed prior to COVID. But primarily, these are ones that are -- that have come due again since that time, yes.

Okay. And 30% is not substantial for those.

I agree with you. .

Okay. Tony, just to deliver this strong SAO guide for the third quarter, should we expect volume, price per pound and EBIT per pound to all move up sequentially?

Yes. Scott, I would say yes to that. I don't manage at that level of detail. I know I am sitting on a gold mine here, right, doing something that very few people in the world can do. So I'm going to supply all of those customers to the best of our ability to maximize our profitability. If one quarter, my margin goes down 0.5 percentage point, Scott, that's not an issue. -- right? The overall trajectory is going forward. And I think we get very hung up with this fact of quarter-over-quarter, you have some of these small movements basically because you've got a complex production system that's making 1,000 different types of alloys in any one quarter, right?

So I wouldn't get so hung up on slight movements to that. quarter-over-quarter. I will say year-over-year, absolutely, you will see increases in price per pound and earnings per pound. There is no doubt. It's impossible for us not to deliver that based on the overall market dynamics going forward. Does that make sense.

Absolutely. And just last question. The medical distribution channel, is there any real sizable revenue left in that channel that you're shipping this past quarter? Or I'm just trying to think, is there still downward pressure potential there? Or is it basically completely bottomed out a near 0.

Well, I can tell you that the good news in January from a booking standpoint that we saw that specific area come back and have the highest order intake than it had of any month in 2025. So that would suggest that I agree that -- yes, you're right that it's probably hit the bottom. And I think the big piece here is that's very impactful to the PEP segment. As you all know, Scott, you cover us very closely. It's not material to overall Carpenter, and it doesn't impact what I say about my guidance whatsoever. I want to see that bounce up. And I think when it does here in the next couple of quarters, it will be a tailwind for us. But it's not something I rely on to hit my guidance numbers. .

Next question comes from the line of Joshua Sullivan with Jones Trading.

So you made an interesting comment there. You said jet engine OEMs are asking you if their own supply chains have ordered enough materials to meet projected build rates. But you kind of left us on a cliffhanger there. What was your answer I guess, how is the -- how are those conversations translating to the expectations of their suppliers? .

Well, I mean, the answer is going to be different depending on the customer. I would say that in many cases, our answer to that is no, they're not ordering quick enough. There needs to be more orders in the system based on the demand that -- or the build rate that you want to achieve. So I would say -- and that's a positive thing for me to say is that there needs to be more orders to hit this build rate projection that's out there.

We just talked about specifically on the structural side, there hesitation to place orders and wanting to see more and more evidence of prolonged performance from the airframer, specifically Boeing. You're starting to see that. So you see them now coming off the sidelines. I said that phrase several times now and placing more large orders. So I've talked about this, Scott, more than once about there is not going to be a gradual increase in orders. You're seeing it now, and then you're going to see a significant hockey stick. That's the way it's happened in the past. I believe that's the way it will happen again this time. And I think the structural customers with the activity they had in this last quarter is one of the leading indicators to that.

Got it. And actually, that dovetails nicely to just the conversation on the long-term agreements you highlighted. What's your calculus or your mindset on committing to those versus leaving spot capacity open, as you've talked about in the past, you've got the golden goose. Just curious on your thoughts there.

Well, I don't -- I mean, that's another -- you know this. I mean, the words matter to me. I don't have spot pricing, right? I don't have a generic alloy sitting on the shelf waiting for the highest bidder to come get, right? My LTAs are based on a mutual beneficial relationship with my customers. You have a lot of volume, I'm going to give you a surety of supply. So I'm not here trying to be the riverboat gambler trying to say, let's keep it all speculative. That's not what I'm trying to do.

But I do understand the value of my product as do my customers. So when there's that beneficial relationship to say, let's enter into an LTA with increasing prices, that's good for both of us. So I think, Josh, you know this. I'm not sitting on the sidelines waiting for somebody to bid on my products. I'm pretty sure that's not what you're trying to allude to anyway.

No, I was just curious on the long term. And I guess just relatedly, just outside of aerospace, are you seeing more interest in those types of relationships as you talk about ITT and some of those other markets? Are you seeing similar levels [indiscernible] the capacity might not be there?

Absolutely primarily on the power generation side because, as you well know, in many cases, they use the same assets. But we also see some of that on the medical side as well, primarily on the SAO business, because there's times that there can be overlap on some of the production assets between some of those alloys. So you see more interest in no specific alloys for medical customers because, in many cases, we're the sole supplier and have a proprietary alloy there.

So in both non-distribution medical and especially in power generation, we see some of the same dynamics as far as the openness or the willingness or wanting to have an LTA with us in those areas.

Next question comes from the line of Bennett Moore with JPMorgan.

And Tim, congrats on another impressive quarter. Quick, I wanted to -- thank you for all the color and commentary on the bookings, but could you also comment on how engine and fastener sales trended during the quarter and year-over-year and also what lead times look like for structural products relative to engine alloys.

Yes, it's a good question. Our overall aerospace, you saw our sales were relatively flat quarter-over-quarter, basically because of the number of operating days you've written about this as well as the holidays. So aerospace engine sales were relatively flat, down a couple of percent. Engine fasteners was flat, I think, up 1%. So all of the submarkets inside of Aerospace were plus or minus 1 or 2 on a sequential basis, certainly on a year-over-year basis, all of them up quite substantially, as you would expect. .

The second part of your question was on lead times. You're also very well aware that lead times is a universal indicator of demand increasing just because we limit recap lead times. But I can say that in that area, you have seen them extend across all the areas inside of Aerospace. And I think we'll be pushing right back up to that same level that we were before in their short order. But yes, we did see some -- we did see expansion of lead [indiscernible].

And I guess in the context of your positive commentary around structural customers moving up the sidelines. Is it just fair to assume that lead times generally for the structural alloys are shorter than the engine alloys, so we could see that benefit sooner?

Yes. I think in general, that is a true statement.

Great. And then real quick, I just wanted to ask about the additive business. And you showed strong growth during the quarter. Is this lumpy? Or are you seeing improved adoption in this space? And can you remind us how the margin profile compares for these products? And if this is a space Carpenter would look to grow it into the future.

Yes. I think the second part of your question is the right way to look at it. We see it as something that could be a tailwind for us in the future. We've been inside the additive business for quite some time. This is a higher adoption rate and some increased activity with some very large customers that we bring proprietary alloy in that area. So it's still relatively small in the whole scheme of things, Bennett.

But yes, I think it's something we want to stay in. And I think going forward, we'll see continued growth in that area. So I'm very happy, quite frankly, with the performance of additive. Again, relatively small from an earnings standpoint, but very happy with the way they've been performing over the last couple of quarters.

Next question comes from the line of Andre Madrid with BTIG.

As you look at the LTA signed in the quarter, I mean, are any of these first-time customers on an LTA basis? And I mean, how should we expect the mix of LTAs to trend in the quarters and years to come? .

Well, it's going to be -- there's not a trend. They're all at different times. It seems like we're always working on on some type of LTA. And to answer the first part of your question, the -- these are longer-term customers, so not new.

Got it. Got it. And then we've been hearing a lot of chatter from recent conversations with customers about potentially exploring capacity expansion that they help fund. I mean is that something that you guys would ever look into?

Maybe if something became more than just chatter that I could comment on that. So we have already made our position known. We have gone out there and announced capacity expansion in a very professional manner. We told you exactly what the pounds will be. We've told you exactly when it will come online. We've told you exactly what the equipment will be and we've told you exactly what the impact will be, not only to Carpenter Technologies financials, but the overall supply/demand dynamic. So we've been very, very clear and professional on what that would be. So we've told you already how we would react, and we were able and willing to fund that 100% ourselves.

Got it. Got it. That's clear. And then if I could sneak one more in. I mean can you just maybe break down a little more clearly where the orders are exactly coming from? I mean jet engine versus airframe OEM versus MRO? Like is there a split that you can provide?

Well, I mean, we're having -- orders are up across the board. I mean, I give you a couple of examples. -- engines were up 30%. That's significant, right? So I mean we have order intake increasing across all of the markets. The one I called out from a sales standpoint, you obviously saw a bit of a dip in defense from a sales standpoint, but now you see orders, I think, will start picking back up again. So we have order intake increase across all of the markets.

And again, Andre, that shouldn't be a surprise. And look at what you have out there. Look at what Boeing and Airbus and MRO and what all that is doing, that's increasing significantly. Of course, orders are going to have to increase also.

Our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

Tim, can you give us a review of the CapEx this year again, just in terms of how much you expect to spend overall? And how much of that is going to the new project and how much carries over into fiscal '27?

Yes, Phil, I'll break that into pieces and then you can follow up with one to. The full year guidance for total CapEx was $300 million to $315 million. That includes the $175 million to $185 million for the brownfield capacity expansion. I also said that given where we are, we spend about a little over $80 million through the first half. We said that. We expect Brownfield capacity expansion spending to increase pretty rapidly in the second half as activity ramps up. There's a lot -- there's a fair amount of assumptions there. Look at the big capital project complex. The timing of those capital expenditures may vary and then we're making assumptions about progress payments when the equipment gets delivered payment terms. So we'll provide an update in the next quarter. But I mean, the guidance out there still holds true for now. And that's incorporated into our free cash flow guidance.

And Tony, any of the LTAs that you signed, have they been with PowerGen manufacturers at all? .

Well, the 3 that I mentioned on the call here were all aerospace.

But none of the prior for example, that you mentioned last quarter.

Traditionally, that's not been an area that's been LTH for us, but it's an area I think it was to Josh's question earlier, it's an area that we're now exploring that the customers in that submarket would like to enter into an LTA and that could be something that we're interested in as well. But traditionally, that has not been for us because of the size has been relatively small to the rest of the business, it's becoming, obviously, much bigger now.

And then lastly, I know it's a small business for you all relative to SAO and [indiscernible] but -- what surprised you just relative to the outcome because I know you expected to do better. I know you had mentioned -- I know you had mentioned outright medical, but usually, you have pretty good visibility within a given quarter. So.

Yes, you're speaking specifically of that submarket inside of medical.

I'm just saying in general, for the segment, you -- I know you expected to do better a few months ago, and you usually have a very good inter-quarter visibility. So I'm just saying kind of what surprised you?

Yes, in the PEP segment.

Yes. .

Yes. Yes. I mean, yes, listen, I think that's a fair question. I think we do usually have pretty good visibility. This one on medical distribution, quite frankly, has been a little elusive for us to get a handle around that, quite frankly. I think that's a fair comment. But a good point is that the order intake for that specific submarket was the highest in January had been in any month in 2025. So Phil, I'm hoping that on that for the PEP segment that's hit the bottom. But as you can see with our guidance, we're still remaining fairly cautious in that area.

And as you said, again, it doesn't impact our overall guidance. But it's important to us to do the best we can as far as forecasting what we think PEP can do as well. So a little bit of conservatism maybe or a little bit of let's wait and see to make sure we can get.

That concludes the question-and-answer session. I would like to turn the call back over to John Huyette for closing remarks.

Thank you, operator, and thank you, everyone, for joining us today for our fiscal year 2026 2nd quarter conference call. Have a great rest of your day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

Thank you for standing by. At this time, I would like to welcome everyone to today's Carpenter Technology Q1 Fiscal Year '26 Earnings Presentation. [Operator Instructions]

I would now like to turn the call over to John Huyette, Vice President, Investor Relations. John?

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the fiscal 2026 First Quarter ended September 30, 2025. 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 30, 2025, and the exhibits attached to that filing.

Please also note that in the following discussion, unless otherwise noted, when management discusses 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 begin on Slide 4 with a review of our safety performance. We ended the quarter with a total case incident rate of 1.6. As we continue to drive improvement in multiple leading indicators, I expect to see continued progress. As always, we remain committed to our ultimate goal, a 0 injury workplace.

Let's turn to Slide 5 for an overview of our first quarter performance. First quarter was a great start to fiscal year 2026. Let me highlight the 4 major takeaways. One, record earnings. In the quarter, we generated $153 million in adjusted operating income, exceeding the fourth quarter of fiscal year 2025, which was then a record quarter. And it is a 31% increase over first quarter of fiscal year 2025, a meaningful step-up year-over-year. The earnings exceeded our strong first quarter guidance, driven by increased productivity, product mix optimization and pricing actions, a positive step towards our full fiscal year 2026 earnings outlook.

Two, expanding operating margins. The SAO segment continued to expand margins, reaching an adjusted margin of 32% in the quarter. The 32% margin compares to 26.3% a year ago and 30.5% in the prior quarter. And we don't believe this is the peak margin level over the long term. Our ability to continue to expand margins can be attributed to our solid execution, strong market position and unique capacity and capabilities. As a result of the expanding margins, the SAO segment recorded $170.7 million in operating income, an increase of 27% year-over-year and an all-time record for the segment.

Three, strengthening market demand. We continue to see demand environment strengthen, especially in the Aerospace supply chain as it gains confidence in the Boeing and Airbus build rate ramp. As a result, September was the highest order intake month in over a year. Specifically, in the quarter, we saw bookings for Aerospace and Defense accelerate, up 23% over the previous quarter.

Four, pricing continues to be a tailwind. In this strengthening demand environment, our pricing remains elevated and consistently increasing as evidenced by our financial results. Our customers continue to be focused on securing their supply of our critical materials. As evidenced in the last quarter, we negotiated 5 large LTAs with Aerospace customers with significant price increases, reflecting their strong outlook on the market.

If I were to write the headline for this quarter's performance, it would be Carpenter Technology delivers all-time record quarterly earnings, driving SAO margins to an impressive 32%, even in a quarter where they smartly completed planned maintenance activities. In addition, they shattered the narrative held by some of a seasonally weak quarter, a weakening demand environment and decreasing pricing power by achieving record earnings, strong sequential growth in Aerospace and Defense orders and negotiating 5 aerospace LTAs with substantial price increases.

Let's turn to Slide 6 and a closer look at first quarter sales and market dynamics. In the first quarter of fiscal year 2026, our total sales, excluding raw material surcharge were up 4% over the first quarter of fiscal year 2025 and down 3% sequentially. As expected, the sequential sales decline was driven by the planned maintenance outages we discussed on the last earnings call, offset by increased productivity, improved product mix and pricing actions.

Sales in the aerospace and defense end-use market were up 1% sequentially and up 11% year-over-year. Notably, sales in the engine submarket were up 14% sequentially. Our engine customers continue to be concerned about surety of supply as they navigate high MRO demand while managing the ongoing and accelerating build rate ramp. Across all submarkets, the aerospace supply chain continues to increase activity as build rates ramp and confidence grows in the OEM's ability to perform.

As evidence of this, we saw Aerospace and Defense bookings accelerate in the quarter, increasing 23% sequentially. And as I mentioned earlier, we also completed 5 LTA negotiations with aerospace customers in the quarter, all with significant price increases.

Moving on to the medical end-use market. Our sales were down 20% sequentially and 16% compared to the prior year first quarter. The large majority of the sequential decrease is from medical distribution customers as they continue to see quarter-over-quarter volatility. Recall that coming out of COVID, there was a rapid recovery in patient procedures, generating significant activity in the supply chain. As the medical field caught up on the backlog of procedures and growth rates normalized, the supply chain, especially our distribution customers, has been working to manage working capital levels.

As we've highlighted in previous quarters, this has impacted a portion of our medical business and it is continuing longer than anticipated. Even so, we have still been able to produce record quarterly earnings and see the medical market as an increasing tailwind going forward. Our medical customers report a positive long-term outlook on the market as the fundamental demand drivers remain strong. Further, our broad portfolio of medical alloys is unique and critical to our customers' focus on improving patient outcomes.

Shifting to the energy end-use market. Sales were down 5% sequentially and up 8% year-over-year. As discussed during our last several earnings calls, the energy market is currently driven by the accelerating demand for power generation, and we see this only getting stronger with order intake up 41% in the quarter. As we have stated before, sales in the power generation submarket will fluctuate quarter-to-quarter due to the frequency of orders and our practice of strategically slotting them into our production process.

Of course, the key end-use market for our increasing profitability is Aerospace and Defense, where we see demand strengthening as evidenced by accelerating order intake and increasing pricing actions. Altogether, we are operating in a strengthening demand environment across the high-value end-use markets that we believe will drive meaningful growth in both the near term and long term.

Now I will turn it over to Tim for the financial summary.

Thanks, Tony. Good morning, everyone. I'll start on the income statement summary. Starting at the top, sales excluding surcharge increased 4% year-over-year on 10% lower volume. Sequentially, sales were down 3% on 5% lower volume. The improving productivity, product mix and pricing are evident in our gross profit, which increased to $216.4 million in the current quarter, up 1% sequentially and 23% from the same quarter last year.

SG&A expenses were $63.1 million in the first quarter, essentially flat sequentially and up slightly from the same quarter last year. The SG&A line includes corporate costs, which were $26.6 million. This is flat sequentially and up slightly when excluding the special item from the first quarter of fiscal year 2025. For the second quarter of fiscal year 2026, we expect corporate costs to be about $25 million, which is in line with our quarterly average of fiscal year 2025.

Adjusted operating income was $153.3 million in the current quarter, which is 31% higher than the $117.2 million in our first quarter of fiscal year 2025 and up 1% from our recent fourth quarter. As Tony mentioned earlier, this represents another record quarterly operating income result, breaking the previous record set last quarter. This is even more impressive considering we were able to deliver the results in a quarter with planned maintenance activities.

Moving on to our effective tax rate, which was 15.4% in the current quarter. This quarter's effective tax rate was lower than anticipated and comparable to the same quarter last year due to discrete tax benefits associated with the vesting of certain equity awards in both quarters. For the balance of the fiscal year, we expect the effective tax rate to be between 22% to 23%, and the effective tax rate for the full fiscal year 2026 is expected to be on the low end of the full year guidance we provided of 21% to 23%.

Finally, the earnings per diluted share was $2.43 for the quarter. Again, our recent first quarter was a record quarter for profitability. Our teams continue to drive higher profitability with the manufacturing organization's focus on increasing productivity while managing the product mix to optimize profit and realizing the benefits of pricing actions that we continue to pursue and capture.

Now turning to more detail on each of the segments, starting with our SAO segment. Net sales, excluding surcharge for the first quarter were $533.9 million. Compared to the same quarter last year, sales were up 5% on 11% lower volume, reflecting the impact of product mix optimization and pricing actions. Sequentially, sales were down 3% on 5% lower volume. The sequential decline in volume was in line with expectations given the planned maintenance activities in the quarter.

SAO reported operating income of $170.7 million in the first quarter. But I think the most impressive measure for the SAO segment is the adjusted operating margin of 32%. This marks the 15th consecutive quarter of margin expansion. The record margin is being driven by the growth levers that we consistently highlight, specifically the SAO team's ability to increase productivity at key work centers to drive an improving mix while realizing higher selling prices.

These areas are as relevant as ever as we actively manage our production schedules to optimize the highest value margins while carefully managing costs and executing thoughtful planned maintenance activities. Tony will talk in detail about the pricing environment. Altogether, we continue to see opportunities to expand profitability and margin further as we execute against our growth levers.

Looking ahead to our upcoming second quarter of fiscal year 2026, we anticipate SAO will generate operating income in the range of $168 million to $172 million, in line with the record first quarter. The SAO guidance for the second quarter considers our available effective capacity. This accounts for the impact of time off for the holidays, which is important to our employees and downtime associated with upgrades to key testing work centers. This is an area where it makes sense to spend modest capital to upgrade certain equipment to ensure capacity is available to support our highest value materials, which means we see significant payback on small investments.

Now turning to Slide 10 and our PEP segment results. Net sales, excluding surcharge in the first quarter of fiscal year 2026 were $87.2 million, down 10% sequentially and down 6% from the same quarter a year ago. In the current quarter, PEP reported operating income of $9.4 million compared with $11.7 million in the fourth quarter of fiscal year 2025 and $7.3 million in the same quarter a year ago. The year-over-year increase in profitability despite lower sales reflects the impact of a favorable shift in product mix. We currently anticipate the PEP segment's operating income to be relatively flat in the second quarter of fiscal year 2026.

A few additional comments to keep in mind. PEP represents roughly 6% of the company's overall segment profitability on a trailing 12-month basis. In other words, SAO dwarfs PEP and SAO will continue to be the growth driver for Carpenter Technology. From an outlook perspective, we anticipate PEP results will improve, but would point out that our total company outlook is based largely on our growth expectations for the SAO segment, which will continue to outpace PEP performance. With that said, the PEP business is a small but strategic part of Carpenter Technologies portfolio. We believe that PEP can be a growth accelerator in the future.

Before we move to cash, I just wanted to pull together the pieces that make up our outlook for operating income in the second quarter of fiscal year 2026. We anticipate total operating income of $152 million to $156 million. This includes SAO at $168 million to $172 million, PET roughly at $9 million and corporate costs of $25 million.

Now turning to the next slide to talk about our cash generation and capital allocation priorities. In the current quarter, we generated $39.2 million of cash from operating activities and spent $42.6 million on capital expenditures, which resulted in negative adjusted free cash flow of $3.4 million. For fiscal year 2026, we continue to anticipate generating between $240 million to $280 million of adjusted free cash flow, which includes $175 million to $185 million of spending for our brownfield capacity expansion project. To be clear, the brownfield capital expenditures are on top of the $125 million of annual capital expenditures to fund our normal maintenance and sustaining capital as well as smaller growth projects.

As an update on the brownfield expansion project, construction activities are in full swing. Site work is underway, currently focused on building foundation work at our Athens, Alabama site. The project is currently on budget and on schedule. As the project progresses, we expect that capital spending will begin to accelerate in the second half of fiscal year 2026 as construction activities broaden and equipment delivery and installation begins in earnest.

Moving on to our capital allocation philosophy. As we've discussed before, our primary focus areas for capital deployment are investing cash in attractive and accretive growth and returning cash to shareholders. Our commitment to investing for growth is evident in our brownfield expansion project I just mentioned. In terms of returning cash to shareholders, we continue to execute against our $400 million stock buyback authorization. In the current quarter, we repurchased $49.1 million of our shares, bringing the cumulative total to $151 million.

In addition to the buyback program, we also continue to fund a recurring and long-standing quarterly dividend. Our capital allocation philosophy is enabled by our healthy liquidity and strong balance sheet. Liquidity as of the most recent quarter is $556.9 million, including $208 million of cash and $348.9 million of available borrowings under our credit facility. Our credit metrics remain very strong with net debt-to-EBITDA ratio remaining well below 1x.

Altogether, we believe our strong balance sheet and outlook for significant cash generation positions us well to fund continued growth and deliver significant shareholder returns.

With that, I will turn the call back to Tony.

Thanks, Tim. Over this past quarter, a couple of important topics have garnered the attention of the investment community. I would like to address them to make sure Carpenter Technologies position is 100% clear. There has been much written on the current pricing environment in the nickel-based super alloy market.

We have 2 basic categories that we break our customers into, those that work with us under long-term agreements and those that don't have long-term agreements with us, which we call transactional. Customers in both categories are extremely important and strategic. The customers who do not work with us through a long-term agreement, our transactional customers in almost every case, are long-standing customers with highly specialized and exact specifications.

Quoting for these transactional customers require significant time and effort with multiple levels of internal technical reviews and discussions with the customer. As a result, we do not entertain spot pricing as it is typically defined. There is not a moving daily price, and we do not typically quote for immediate or short-term delivery. In fact, our transactional business pricing is generally higher than LTA pricing. Certainly, we do not provide transactional customers with better pricing than our LTA customers as that would be illogical.

For customers who work with us through long-term agreements, their primary focus during renewal discussions remains the surety of supply of our products. With each contract renewal, we have been able to realize price increases that demonstrate the value of our products in the supply chain and reflect the underlying supply-demand imbalance that is only expected to tighten in the future.

I will note again to support our view of the pricing dynamic for our materials that in the quarter, we completed negotiations on 5 LTAs with aerospace customers with significant price increases. It is also important to note that, in turn, our customers also benefit greatly as they are getting surety of supply of our products, which is highly valuable to them in an extraordinarily high demand environment. You can see the results of our pricing actions in our SAO segment financials as our total sales dollars per shipment pound remained elevated and increased significantly year-over-year.

For more insight, I will note that the year-over-year increase is 10 percentage points higher for the aerospace and defense end-use market. The results demonstrate we are consistently increasing the pricing level of our Aerospace products. If we were discounting Aerospace products are seeing immense pricing pressure, you would have seen a significant sequential decrease in the price per pound. Clearly, that is not the case.

With that said, it is important to repeat something that I've said before. Price per pound may not move in a linear fashion quarter-to-quarter as the product mix in any given quarter influences results. However, we expect that the pricing trend will continue to be favorable.

Final point on this topic. We have communicated publicly many times and state again today that we believe pricing actions will continue to be a positive tailwind into the future due to the supply-demand imbalance that exists today and that is expected to intensify in the future for nickel-based super alloys.

In addition, another topic that has been written about is the Aerospace demand environment and more specifically, the potential weakness in the titanium market. Let me address the titanium portion first. Carpenter Technology does not melt titanium or produce large titanium forgings for aerospace structural applications. To be very clear, any current or future weakness in the titanium raw material or structural markets has no material impact on Carpenter Technology.

In stark contrast to titanium raw materials, nickel-based superalloys, which is our primary focus, are in sharp supply, have only a few qualified producers globally with high barriers to entry and rapidly accelerating demand. As I mentioned earlier, our Aerospace and Defense end-use market orders have been steadily increasing over the last couple of quarters. In this quarter, they were up 23% sequentially. That is after a similar sequential increase in the prior quarter.

This strong sequential growth in bookings was driven by increased volume, which is a very encouraging sign and continued pricing actions. Obviously, the accelerating bookings is a very positive trend developing and signals continuing expansion as the airframers drive for higher build rates.

To support this position, let me provide more color on what we are seeing in each of the aerospace submarkets. I will start by saying that in general, the tone with all of our Aerospace customers is one of increasing positivity as they see large demand upticks on the horizon. Our Aerospace structural customers experienced the most disruption from the OEM build rate issues we have seen over the last 1.5 years. This is due to the relatively low MRO needs on structural versus engine parts. Over this period of time, they have been carefully managing their near-term working capital needs. Encouragingly, some have begun reordering on increasingly positive momentum from Boeing, while others state they are expecting more earnest ordering to begin soon. Collectively, our aerospace structural customers universally agree that strong demand is on the near-term horizon and are considering when and how to ramp activity back up.

Our aerospace fastener customers report steady improvement in their demand. Some customers are already placing orders with us to cover all of calendar 2026. They are continuing to expect improvements in demand, and our quoting activity has increased notably over the last few months. Fastener customers are generally expecting very solid double-digit growth next year based on ongoing improvements in the aerospace OEM build rates.

Our aerospace engine customers continue to remain busy as they generally have been over the last several quarters. Engine OEMs are very active across the supply chain, working to ensure material availability. Customers continue to report high MRO activity and a need for more material from us. In summary, our engine customers continue to be very positive as evidenced by the 14% sequential increase in aerospace engine sales in the quarter.

I don't usually mention the space submarket as it is a much smaller portion of our business, but I will note that we have seen large increases in activity over the last few quarters, and our space customers report expectations for significant ongoing demand.

Finally, I will mention our Defense customers because we have seen significant increase in activity here as well. Our Defense customers are expecting very strong increases in demand based on new programs being worked on as well as the expected fiscal year 2026 defense budget.

With those insights, let me state where we believe the aerospace market stands today. The aerospace market has seen large cyclicality over many years, and we have seen the same pattern play out cycle after cycle. That is the supply chain gets a little ahead of OEMs and then decides to pull back or pause. That is followed quickly by a time when the supply chain realizes they do not have enough material on order, and there is an urgent scramble to place orders. This results in what the industry describes as the bullwhip effect, where there is effectively a run of material. In this case, I'm speaking specifically of nickel-based aerospace materials.

This cycle we are emerging from right now is similar as before, except for one major factor. That is the total demand targets from OEMs are significantly higher than before. Our conversations over the last quarter with our closest customers have focused on advising them to ensure they have their orders placed now, so they are not last in line. The pattern I have described is not a surprise to our nickel-based customers who all understand the question is when, not if this run occurs. And then last week, we have the reporting of the FAA approving a 737 MAX rate increase from 38 to 42 per month, which we believe will support the bullwhip effect I just mentioned.

Lastly, we have received questions about our confidence in our earnings guidance as the marketplace continues to move. To start with, just a couple of points on our earnings guidance philosophy. One, we believe it is important to provide. Two, we established challenging targets that we have line of sight to achieving with disciplined action plans in place. Three, we don't believe multiyear earnings targets should be back-end loaded. Therefore, we commit to meaningful earnings growth in the first year of multiyear guidance. And four, not only do we have a track record of achieving our targets, we exceed them. That philosophy should give you confidence in our future performance.

Now specifically to address our guidance. As a reminder, at our February 2025 investor update, we announced our fiscal year 2027 operating income target of $765 million to $800 million. More recently, on our last earnings call, we provided additional insight as we guided to a strong fiscal year 2026, projecting $660 million to $700 million in operating income. As I stated then, this range for fiscal year 2026 represents a 26% to 33% increase over our record fiscal year 2025 earnings and as we believe the highest earnings growth trajectory among our industry peers, quite impressive.

Now we have just completed the first quarter of our fiscal year 2026 and remain confident in our full year earnings guidance. Most importantly, we have line of sight to the high end of the range with increased volume, pricing actions and productivity, all contributing to higher profitability. As I just mentioned, the reporting that the FAA approved a 737 MAX rate increase from 38 to 42 per month is important. That was a material unknown that has now been revealed and should support a continued increase in Aerospace bookings.

As we look at fiscal year 2027, we also remain committed to that level of profitability, which, by the way, would be an approximately 50% increase over our recently completed record fiscal year 2025. But let me be clear, as this aerospace market continues to accelerate, our focus is not on achieving the fiscal year 2027 guidance. The focus is on exceeding that lofty target.

Now let's turn to the final slide to summarize this great story. Let me close with why I think Carpenter Technology is a compelling story for existing and potential shareholders. Specifically, let's take a look at the 3 major areas most important to shareholders.

One, we have an enviable market position in the industry. We are in the midst of a significant acceleration in demand, especially in the aerospace and defense end-use market. Demand for air travel has never been higher, and OEMs are pushing to ramp production build rates significantly over the next several years, which is just the beginning. With accelerating build rates driving higher demand for our materials, a fundamental supply-demand imbalance in nickel-based super alloys will tighten even further. Our world-class collection of unique manufacturing assets and related capabilities are difficult, if not impossible, to replicate. Our leading capacity and capabilities are further differentiated by stringent qualifications necessary to supply advanced materials for aerospace and defense and other key end-use market applications.

Two, we are committed to a balanced capital allocation approach. We have a healthy liquidity position and a strong balance sheet, combined with an impressive free cash flow generation outlook. We are focused on returning cash to shareholders via a long-standing dividend and a robust share repurchase plan. In addition, our strong performance allows us to invest in highly accretive growth projects like our recently announced brownfield expansion that accelerates earnings growth but will not materially impact the nickel-based supply-demand imbalance.

And three, we have delivered impressive financial results with a strong earnings outlook. We have just completed another record quarter of profitability, driven by significant margin expansion in our SAO segment. Our outlook for fiscal year 2026 implies a 26% to 33% increase over our record fiscal year 2025, and we are well on our way to achieving and even surpassing the ambitious earnings target for fiscal year 2027. I don't know of anyone in our industry who can say they have a stronger earnings outlook than Carpenter Technology. Of course, fiscal year 2027 is not expected to be our peak. We have plans and line of sight to further earnings growth beyond 2027.

In summary, I believe Carpenter Technology checks every important shareholder criteria box. We have created significant shareholder value to date, but we are only at the beginning of this growth journey. The best is still to come. As always, we remain focused on supporting our customer needs, operational execution and living our values as we drive to exceptional near-term and long-term performance.

Thank you for your attention. I will now turn the call back to the operator.

[Operator Instructions] And it looks like our first question today comes from the line of Gautam Khanna with TD Cowen.

Great results, guys. Tony, I did want to get your perspective on a couple of things, a, like what has happened, if anything, in your own jet engine alloy lead times? Are they still kind of fairly extended? And also just what is your best guess as to why some of those channel checks are so not representative of the business? If it is -- I mean, it's -- there's such a dichotomy with what you guys have continued to put up and some of the chatter out there.

And then lastly, just on your comments on Boeing. You guys have already endured a number of quarters of, if you will, destocking. I just wanted to get a sense for like your perspective on had that not happened over the last year, whether you would have had even more profits? And if that's what we're pivoting to, we're starting to see that recovery in the Boeing orders. A lot there, take it anywhere you want.

Okay. Thanks, Gautam, for the questions. One, yes, on engine lead times, they're still extended. And in fact, I think we're at the point now where they're going to start pushing out again pretty quickly because the Boeing news, whereas, of course, many people say, well, that's what they expected. But it's a big deal for the FAA to come out and actually say that. So the discussions we've had with customers just in the last couple of days, remember that was just reported, I think, last Friday, has turned, and you've seen more push to start increasing orders. So I think that's a very significant positive for us.

As far as the news around the industry, it's hard for me to speak to that. That's why we took even extra time on today's call to explain very clearly, and I appreciate that you recognize that. We take it really seriously. These earnings calls, we try to communicate very clearly. We believe we are different than other products, the capabilities, the capacity that we have, the broad customer base we have. So the best thing to do for us is listen to what we have to say, follow what we have to say, and I think we'll do a good job of guiding you there.

The third thing you mentioned was really -- is really important because a lot of people missed the fact that starting back in early of calendar 2024 is really when you started seeing some issues in the Boeing supply chain. And we were able to maintain and, in fact, produce record quarters during that time because of the flexibility that we have. Airbus was still making planes. We had a very robust backlog that we were able to pull in and use. Power generation then stepped up with more demand.

And even in that very difficult time where you had 1 of the 2 airframers, Gautam, effectively making 0 airplanes because remember then later in 2024, they had their work stoppage that we were able to produce record results during that time, I think, went a bit unnoticed and maybe underappreciated. And now here we are where you've got Boeing performing very well, but only at the beginning, Airbus, who has quite a bit further, they want to go, let's say, for example, on their A320 targets. And I think now as we go into the second half of FY '26, that's why you heard the confidence from me and then in terms of our guidance and then also for FY '27. I mean I think there's more opportunities for increase over that guidance than there are risks. Hopefully, I answered all 3 of them for you.

Yes. No, that was a very great answer. And just maybe a quick ask on fastener demand trends, how those tracked in the quarter?

Yes. Sorry about that. I know you usually asked about it. Fasteners for this quarter were down 7% sequentially, 40% up year-over-year. But as we look at the order intake coming in right now, as you well know, fastener orders can be a little lumpy. Those are strong coming into our second quarter. And like I said in the prepared remarks, which I think is a very important point, you're seeing a lot of these fastener companies already trying to place orders for the entirety of their calendar year 2026. So that's a big deal, and that's a really strong evidence of how they see the market playing out.

And our next question comes from the line of Andre Madrid with BTIG. thanks...

You mentioned the 5 new LTAs. And I was just wondering if you could speak more to the duration of these and how we can maybe expect duration mix to shift moving forward.

On these 5 specific ones that I was referencing, they range between 2 years and 5 years.

Got it. And I mean, obviously, these have come in from what you saw pre-COVID, pre-MAX, post-COVID booming. I mean, I guess just how do you expect the duration to -- yes, like what should it look like through the end of the decade, would you say? Would you say it's be consistent at these levels, pulling even further or push out a little bit longer?

Well, I think that contract lengths will stay at this range versus a historical 10-year contract. And that's all -- I mean, that should be obvious that, I mean, that's based on where you think the supply-demand imbalance is going to go. So I think it's interesting as well. I can provide a little bit more color of those 5 contracts, only one of them were a renewal from prior to COVID. So the other 4, this is the second time we've renewed them, if you will, since the post-COVID more robust ordering, especially now. So that's an important point to make as well.

Got it. Got it. No, that's very helpful. And then I think if I could squeeze in one more. When you look at -- it's very clear on the aero side, what the moving pieces are, but can we maybe peel back what some of those pieces are for defense? I know you highlighted still strong demand there, especially inside of a strong budget request. So...

Well, we play across a lot of different areas in defense. I mean we offer products not just that are maybe traditional or historically been offered, but the next level where we're looking at alloys and tweaking those alloys to get better performance based on the outcomes that they're looking for. So you see us across multiple segments inside the defense market. And quite frankly, our relationship there has grown significantly over time, mainly because they're looking for increased performance. They're looking to operate at a higher level and our alloys and our innovations allow them to do that.

And our next question comes from the line of Josh Sullivan with JonesTrading.

Tim, John, congratulations on the quarter. I think I had the title of my note wrapped up, but just had some other questions, Tony. On the aerospace backlog is up nicely, that bullwhip dynamic that just always seems to happen in this industry. Are customers receptive to that messaging to get in now? Or is it your sense that most of the industry is just going to get hit with the rush as it comes?

Well, that's a really good question. And you know this, you've been around long enough. Aerospace customers, there are differences based on whether they're an engine customer or structural, they're in the distribution side. I think that I can tell you they're very receptive to that message. The discussions we've had over the last couple of weeks, they're very receptive. Now all of them are in a little bit different point on where their working capital levels are. But clearly, you've seen an inflection point that says we see this demand coming. We see Boeing continuing to perform well. We see Airbus pushing higher and higher. And I think that has become a pretty uniform feel that now is the time to start increasing the order intake.

You've seen that. I mean, 23% sequential this year on Aerospace. If I remember right, last quarter, it was -- Aerospace was up over 20% as well. So you might not get 20% sequentially, Josh, every quarter for the next 3 or 4 quarters. The point is that linear trend upward, I think, is going to be pretty strong as we go through the rest of this fiscal year.

Got it. And then kind of relatedly, into your comments just on LTAs versus transactional customers, you got the 5 new ones signed up here. How should we think about that optimal mix for -- between the 2 customer sets and then how that layers into Athens? And I think you had mentioned at Paris, there's a lot of interest in Athens.

Yes, there's really nothing overly magic about that. I mean whether somebody is on an LTA or not has a lot to do with their point of view, certainly, our point is a view well. Is that what's best for them to have an LTA. Some customers prefer not to do that. On the distribution side, Josh, that's not their mode of operation.

So I think the point that I was trying to make there is that there's really not a big distinction for us between an LTA customer and a transactional customer. This idea that a non-LTA customer walks in randomly from the street and orders a random aerospace alloy just doesn't exist. These are customers that we've had for decades that order very specific material. So -- and it commands the same type of price, as I said in my prepared remarks. So there's really not a percentage that I'm trying to get to. We manage each of our customers as individuals, and we'll keep doing it that way.

And our next question comes from the line of Scott Deuschle with Deutsche Bank.

Tony, do you already have line of sight to another quarter of sequential A&D growth in the quarter you're in right now?

Right. And that's what I just was telling, Josh. I don't -- I can't tell you it's going to be exactly 23%. But I think over these next several quarters, you're going to see continued growth in order intake for sure.

Okay. And then the EBIT per pound at SAO was up 42% year-over-year on down volumes. So if the volumes actually start to return to growth on the back of this order improvement, is there an upside opportunity in which you could have a repeat of the EBIT growth profile you experienced over the last couple of years?

Well, certainly, the math works out in our favor, right? If we're producing these types of numbers and you still have volume that's not at the point where we think it's going to go to, that's a pretty good equation.

Okay. And then last question for the LTAs that you said repriced this quarter, do we see that benefit hit in the fiscal second quarter? Or do those become effective in January for the third quarter?

I don't want to give specifics on each of the contracts, Scott. But as you know, it varies, right? Some of them will be more, what should I say, earlier, maybe in the second half of this fiscal year. Some of our customers will renegotiate a little bit further out.

[Operator Instructions] And our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

I think you mentioned it earlier in the call. Were the engine sales up 14% year-on-year? Or was that sequentially, Tony?

Yes. Thanks for mentioning that, Phil. It was 14% sequentially. It was about 20% year-over-year.

Okay. Excellent. And you mentioned in your prepared remarks on Space and Defense verticals, and you've had some Space business be a little bit more recurring over the last few quarters. Any sense or color you can provide in terms of how much maybe the combination of Space and Defense is of the A&D business?

Yes. Well, I mean, Space is small, right? But the reason I mentioned it is because it's a growing area. And I think it's just another example of our exposure to this very quickly growing market. And I think probably going forward, you'll see me or see us speak about space more. So it's very small, Phil, but I think it's going to be very strategic for us going forward.

And then lastly, on the brownfield, can you just give us give us an update in terms of what you expect in terms of the construction period in the second half and deliveries and then give us a view of the time line just as we try to envision the project.

Yes. I'll give that one to Tim since he's overseeing that project for us.

Yes. Phil, in terms of time line, just high level, construction now expected to be complete beginning late fiscal '27, early fiscal '28. In my remarks, I said we're -- construction is underway. Most of the focus in these last several months has been about getting the site ready, so doing the land preparation -- site preparation, getting building foundations poured, things like that, getting the structure in place. Over the next several months, several quarters, we'll shift pretty quickly to more building infrastructure, getting the equipment delivered, set up, installed. So high level, we're on track in terms of budget and schedule.

And just to reiterate the guidance for the capital, specifically for the brownfield expansion, we said $175 million to $185 million of CapEx this year, fiscal '26 on top of the normal CapEx of $125 million.

And our next question comes from the line of Bennett Moore with JPMorgan.

Congrats on another impressive quarter. I was hoping you can maybe delineate on the A&D bookings growth sequentially, what this look like between engines and structural. I think you had a comment in there that part of this was volume driven. So just trying to gauge if there's Boeing levered customers to what extent they're coming off the sidelines.

Well, I made the comment around that it was volume-driven as well because that's important, right? And it's -- certainly, price is a big driver. But the point there was it's not just a price increase. The volume is coming from the marketplace. So that was an important point. I don't think I'm not going to get into bookings for each one of the submarkets that would get us into a level of detail that probably is not helpful overall. I'll just keep it at the total Aerospace and Defense level for you and keep it there.

All right. I guess as we think about the fiscal '26 guidance then and the revision towards the high end, what were the prior assumptions around when the structural activity would resume? And how has that changed now? Or is that really just what's reflected in this new guidance?

Well, I mean, the guidance is the same. We've just said we're very open about what we're feeling right now and saying that we see it at the high end, right? So we're always adjusting our forecast based on what we're hearing from our customers. And the takeaway there is that you're seeing, as I think I said in my prepared remarks, a higher degree of positivity coming from them. So based on that, we have line of sight that we'll be on the higher side of that guidance. But it's all based on what we're hearing from the market and from -- directly from our customers.

All right. And then if I could real quick, are you seeing any acceleration in the incremental value being realized in these LTA renewals? Or is kind of the repricing similar to what we saw initially post-COVID?

Tough question only because it really depends on the submarket that you're in, Bennett. I would tell you at a high level that you are seeing continued increased percentages, not always the same for each submarket, if that makes sense.

And it looks like there are no further questions. So I will now hand it back over to John Huyette for closing remarks. John?

Thank you, operator, and thank you, everyone, for joining us today for our fiscal year 2026 first quarter conference call. Have a great rest of your day.

And ladies and gentlemen, that -- again, that concludes today's call. Thank you for joining, and you may now disconnect.