Carpenter Tech (NYSE:CRS) held its third-quarter earnings conference call on Wednesday. Below is the complete transcript from the call.
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Access the full call at https://events.q4inc.com/attendee/872739090
Summary
Carpenter Tech reported record third-quarter operating income of $187 million, a 20% increase from the prior record quarter, driven by strong demand and operational execution.
The company achieved significant margin expansion in the SAO segment, with a record adjusted operating margin of 35.6%, due to productivity gains and pricing strategies.
Strong market demand was noted in aerospace and defense, with increasing orders reflecting OEM production plans; however, the medical market showed a sequential decline.
Carpenter Tech generated $193.5 million in cash from operations and $124.8 million in adjusted free cash flow, supporting capital expenditures and share repurchases.
The company increased its free cash flow outlook for fiscal year 2026 to at least $350 million and highlighted ongoing investments in a Brownfield capacity expansion project.
Management emphasized a positive financial outlook, noting that current earnings targets for fiscal year 2027 are outdated, with updated guidance to be provided in the next earnings call.
Expedite requests from customers are increasing, indicating urgency in supply chain demands, particularly in aerospace structural materials.
Carpenter Tech is executing a balanced capital allocation strategy, including share repurchases and dividend payments, supported by strong liquidity.
Full Transcript
OPERATOR
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 Carpenter Tech third quarter fiscal year 2026 earnings presentation call. Please note that this call is being recorded. After the prepared remarks, there will be a question and answer session. If you’d like to ask a question during that time, please press STAR followed by one on your telephone keypad. Thank you. I would now like to hand the call over to John Hewitt, Vice President of Investment Relations. You may now go ahead please.
John Hewitt (Vice President of Investment Relations)
Thank you. Operator, good morning everyone and welcome to the Carpenter Tech 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 Taine, Chairman and Chief Executive Officer Tim Lane, 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 technologies most recent SEC filings, including the Company’s report on Form 10K for the year ended June 30, 2025, Forms 10Q 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 discuss the sales or revenue, that reference excludes surcharge when referring to operating margins that is based on adjusted operating income excluding special items and sales excluding surcharge. I will now turn the call over to Tony.
Tony Taine (Chairman and Chief Executive Officer)
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 and a zero injury workplace. Let’s turn to Slide 5 for an overview of our third quarter performance. Carpenter Tech 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 four key takeaways that highlight the strength, durability and trajectory of the business. 1. 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 1 93.5 million in cash from operating activities and 1,2 4.8 million of adjusted free cash flow. 2. Expanding operating margins the Specialty Alloys Operations (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 Specialty Alloys Operations (SAO) segment recorded 208 million in operating income, an increase of 19% sequentially and another all time record for the segment. 3. Strengthening market demand we see clear and accelerating demand signals across the aerospace and defense in use market reflected in both OEM production plans and order intake. Notably, bookings for aerospace structural materials continue 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 is a clear signal that the supply chain is accelerating the ramp to support the expected OEM build rates going forward. And four Pricing continues to be 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 three 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 Industrial Gas Turbine (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 Industrial Gas Turbine (IGT) material goes across similar flow paths as aerospace material. As a result, quarterly sales for Industrial Gas Turbine (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.
Tim Lane (Senior Vice President and Chief Financial Officer)
Thanks Tony Good morning everyone. I’ll start in 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 Selling, General and Administrative (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 Selling, General and Administrative (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 costs to be between 25 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 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 2 times 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 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 a 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 …
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