Carpenter Technology Corporation (CRS) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
Earnings call highlights include strong future operating income projections, a positive market demand outlook, and substantial price increases in aerospace LTAs. Despite some challenges in medical distribution, the overall sentiment is optimistic, with significant growth in aerospace and energy markets. The Q&A section supports this with expectations of sequential growth in key metrics and improved adoption in the additive business. While some management responses were vague, the overall guidance and positive trends suggest a positive stock price movement.
Key Financial Performance
Operating Income $155 million in the second quarter, a 31% increase over the second quarter of fiscal year 2025. The increase is attributed to solid execution, strong market position, and unique capacity and capabilities.
SAO Segment Adjusted Operating Margin 33.1% in the quarter, compared to 28.3% a year ago and 32% in the prior quarter. The increase is driven by increased productivity, product mix optimization, and pricing actions.
SAO Segment Operating Income $174.6 million, an increase of 29% year-over-year, attributed to expanding margins and strong execution.
Aerospace and Defense End-Use Market Sales Up 15% year-over-year but down 1% sequentially. The year-over-year increase is due to strengthening demand, while the sequential decline is attributed to seasonal factors.
Medical End-Use Market Sales Down 22% year-over-year and 7% sequentially. The decline is isolated to certain titanium products for specific medical distribution customers.
Energy End-Use Market Sales Up 19% year-over-year but down 10% sequentially. The year-over-year increase is driven by power generation demand, while the sequential decline is due to order frequency and production scheduling.
Gross Profit $218.3 million, up 23% from the same quarter last year. The increase is due to improving productivity, product mix, and pricing.
SG&A Expenses $63.1 million, up $4.5 million from the same quarter last year. The increase is attributed to higher corporate costs.
Adjusted Earnings Per Diluted Share $2.33 for the quarter, excluding the impact of debt refinancing.
PEP Segment Net Sales $77.2 million, down 10% year-over-year and 11% sequentially. The decline is primarily driven by lower demand for titanium sales from specific medical customers.
PEP Segment Operating Income $6.9 million, compared to $7 million in the same quarter a year ago. The year-over-year improvement in operating margin reflects increasing sales in the additive business and cost benefits from structural cost reductions.
Cash from Operating Activities $132.2 million in the current quarter.
Capital Expenditures $46.3 million in the current quarter.
Adjusted Free Cash Flow $85.9 million in the current quarter.
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Operating Highlights
Nickel-based superalloys: Carpenter Technology is investing in a brownfield capacity expansion project to add 9,000 additional tons of nickel-based superalloys, representing a 7% increase over 2019 shipment levels. This is the only announced capacity expansion in the market since 2019.
Aerospace and defense: Strong demand growth, with commercial aerospace bookings up 23% sequentially and aerospace engine material orders up 30% sequentially. Defense submarket orders were down due to government shutdowns.
Medical: Sales down 7% sequentially and 22% year-over-year due to lower demand for titanium products from specific customers. However, orthopedic and dental submarkets remain strong.
Energy: Sales up 19% year-over-year, driven by power generation demand for data centers and developing economies.
Operating income: Achieved record operating income of $155 million, a 31% increase year-over-year. SAO segment margins reached 33.1%, marking the 16th consecutive quarter of margin expansion.
Free cash flow: Generated $85.9 million in adjusted free cash flow in the quarter, with a full-year target of at least $280 million.
Pricing strategy: Completed three long-term agreements with aerospace customers, achieving significant price increases. Pricing actions are expected to remain a positive tailwind due to supply-demand imbalances.
Capital allocation: Continued share repurchase program with $183.1 million spent to date and ongoing investments in growth projects like the brownfield expansion.
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Risk or Challenges
Defense Submarket Orders: Orders were down materially in the quarter due to the government shutdown and uncertainty in terms of the defense budget.
Medical End-Use Market: Sales were down 7% sequentially and 22% compared to the prior year second quarter, primarily due to decreased demand for certain titanium products from specific medical distribution customers.
Energy End-Use Market: Sales were down 10% sequentially, reflecting fluctuations in power generation demand and the frequency of orders.
Nickel-Based Super Alloy Supply: There is a significant supply-demand imbalance for nickel-based super alloys, with no meaningful increases in overall qualified supply since 2019, except for Carpenter Technology's modest capacity expansion.
Titanium Sales Impact: Lower demand from specific medical customers heavily impacted titanium sales, affecting the PEP segment's performance.
Regulatory and Budgetary Uncertainty: Uncertainty in defense budgets and government shutdowns have negatively impacted defense submarket orders.
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Guidance & Outlook
SAO Segment Margins: The SAO segment is expected to continue expanding margins over the next two quarters of fiscal year 2026, driven by increased productivity, product mix optimization, and pricing actions.
Aerospace and Defense Market Demand: Strengthening demand is anticipated, with commercial aerospace bookings up 23% sequentially and aerospace engine material orders up 30% sequentially. Structural submarket customers are ramping up order placements, signaling confidence in the aerospace ramp.
Pricing Trends: Pricing is expected to remain a positive tailwind due to strong demand and supply constraints, particularly in nickel-based superalloys. Long-term agreements with significant price increases have been completed.
Operating Income Guidance: For the third quarter of fiscal year 2026, total operating income is projected to be $177 million to $182 million, with SAO contributing $195 million to $200 million and PEP around $7 million.
Fiscal Year 2026 Guidance: Operating income guidance for fiscal year 2026 has been raised to $680 million to $700 million, representing a 30% to 33% increase over fiscal year 2025.
Nickel-Based Superalloy Supply and Demand: Demand for nickel-based superalloys is expected to accelerate due to increasing aerospace OEM builds, MRO demand, defense, space, and power generation needs. Supply constraints are anticipated to persist, driving pricing dynamics.
Capital Expenditures and Free Cash Flow: Capital spending is expected to accelerate in the second half of fiscal year 2026, with at least $280 million in adjusted free cash flow projected for the year. The brownfield expansion project is on budget and schedule.
Long-Term Earnings Growth: The company aims to exceed fiscal year 2027 guidance of $765 million to $800 million in operating income, with plans for further growth beyond 2027.
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Shareholder Return Plan
Quarterly Dividend: The company continues to fund a recurring and long-standing quarterly dividend as part of its capital allocation strategy.
Share Repurchase Program: The company repurchased $32.1 million of shares in the current quarter, bringing the total to $183.1 million spent to date against the $400 million authorization announced in July 2024.
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Key Q&A
Q:Can you elaborate on how broad-based airframe customers are participating in ordering and whether this is Boeing-specific?
A:Tony Thene explained that across all aerospace submarkets (engine, fastener, structural), there is increased activity and forward demand. Engine orders increased sequentially by 30% this quarter. Structural customers, previously impacted by Boeing's issues, have resumed significant ordering, driven by confidence in Boeing's recent performance.
Q:What is the visibility for defense submarket orders following the government shutdown?
A:Tony Thene stated that the defense submarket has already seen orders come back rapidly after the government shutdown, with pent-up demand being addressed.
Q:Is the overall pricing trend still higher for longer, and was the slight price per pound decrease a concern?
A:Tony Thene confirmed that pricing remains on an upward trend and the slight sequential price per pound decrease was due to planned maintenance and mix dynamics. He emphasized that there is no issue with pricing and that it will continue to rise due to supply-demand imbalances.
Q:For aerospace LTAs renewed in the last 6 months, is the average price increase more or less than 30%?
A:Tony Thene confirmed that the price increases for aerospace LTAs are substantial and greater than 30%.
Q:Should we expect volume, price per pound, and EBIT per pound to all move up sequentially in the third quarter?
A:Tony Thene affirmed that all metrics are expected to move up sequentially, though he cautioned against focusing too much on quarter-over-quarter fluctuations, emphasizing the positive year-over-year trajectory.
Q:Has the medical distribution channel bottomed out, and is there still downward pressure?
A:Tony Thene noted that the medical distribution channel had its highest order intake in January 2025, suggesting it has likely bottomed out. However, it is not material to overall guidance.
Q:Are jet engine OEMs ordering enough materials to meet projected build rates?
A:Tony Thene stated that in many cases, customers are not ordering quickly enough to meet projected build rates, indicating a need for more orders in the system.
Q:What is the approach to committing to long-term agreements (LTAs) versus leaving spot capacity open?
A:Tony Thene clarified that LTAs are based on mutually beneficial relationships with customers, ensuring supply and increasing prices. He emphasized that the company does not rely on speculative spot pricing.
Q:Are there similar levels of interest in LTAs outside of aerospace, such as in power generation or medical markets?
A:Tony Thene confirmed increased interest in LTAs in power generation and medical markets, particularly for proprietary alloys where Carpenter is a sole supplier.
Q:How did engine and fastener sales trend during the quarter, and what are the lead times for structural products versus engine alloys?
A:Tony Thene reported that aerospace engine sales were relatively flat quarter-over-quarter but up substantially year-over-year. Lead times have extended across all aerospace areas, with structural alloys generally having shorter lead times than engine alloys.
Q:Is the growth in the additive business lumpy or indicative of improved adoption?
A:Tony Thene stated that the additive business is seeing improved adoption and increased activity with large customers, though it remains relatively small in the overall business.
Q:Are any of the LTAs signed in the quarter with first-time customers, and how will the mix of LTAs trend?
A:Tony Thene stated that the LTAs signed were with long-term customers, and there is no specific trend in the mix of LTAs as they are signed at different times.
Q:Would Carpenter consider capacity expansion funded by customers?
A:Tony Thene stated that Carpenter has already announced its capacity expansion plans, which are fully funded by the company, and would only comment further if customer-funded expansion became more than chatter.
Q:Can you break down where orders are coming from, such as jet engine versus airframe, OEM versus MRO?
A:Tony Thene stated that orders are up across all submarkets, with engine orders up 30%. He emphasized that increased orders align with the significant growth in Boeing, Airbus, and MRO activities.
Q:What is the CapEx guidance for the year, and how much is allocated to the new project?
A:Timothy Lain provided guidance of $300 million to $315 million for total CapEx, including $175 million to $185 million for the brownfield capacity expansion. Spending is expected to ramp up in the second half of the year.
Q:Have any LTAs been signed with power generation manufacturers?
A:Tony Thene stated that the three LTAs mentioned were all aerospace-related, but there is growing interest in LTAs from power generation customers.
Q:What surprised you about the PEP segment's performance this quarter?
A:Tony Thene acknowledged that the medical distribution submarket within the PEP segment has been challenging to forecast accurately. However, January 2025 saw the highest order intake for this submarket, suggesting it may have bottomed out.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing whether Carpenter would consider customer-funded capacity expansion, dismissing it as chatter. Additionally, the response to the question about breaking down orders by jet engine versus airframe, OEM versus MRO, lacked specific numerical details.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Carpenter Technology
Chairman
SGA
aerospace engine
balance sheet
booking
construction activity
credit facility
debt
defense end
demand aerospace
demand signal
distribution
energy
expansion project
facility credit
generation capital
holiday
maintenance activity
market Sales
market demand
material need
mix product
order intake
price pound
refinancing
sale demand
selling price
set
submarkets
surcharge sale
term agreement
titanium
trend
value
CRS Transcript
Carpenter Technology Corporation (CRS) Q2 2026 Earnings Call Transcript
Positive1-29
Earnings call highlights include strong future operating income projections, a positive market demand outlook, and substantial price increases in aerospace LTAs. Despite some challenges in medical distribution, the overall sentiment is optimistic, with significant growth in aerospace and energy markets. The Q&A section supports this with expectations of sequential growth in key metrics and improved adoption in the additive business. While some management responses were vague, the overall guidance and positive trends suggest a positive stock price movement.
Carpenter Technology Corporation (CRS) Q1 2026 Earnings Call Transcript
Positive10-23
The earnings call reveals strong financial performance with record profitability and increased operating margins. Despite a decline in medical market sales, other segments like aerospace and defense show robust growth. The Q&A section highlights extended jet engine alloy lead times, indicative of strong demand. The company's positive outlook for FY '26 and '27, along with strategic projects like the brownfield expansion, further support optimism. Shareholder returns through dividends and a stock buyback program add to the positive sentiment. Overall, the stock is likely to experience a positive movement of 2% to 8%.
Carpenter Technology Corporation (CRS) Q4 2025 Earnings Call Transcript
Positive7-31
The earnings call indicates strong financial performance with a 48% increase in adjusted operating income and significant free cash flow. The company is also committed to shareholder returns through stock repurchases. The Q&A reveals positive sentiment with strong demand in aerospace and defense, and no significant pricing pressure in key markets. Despite some inventory concerns, the overall outlook is optimistic, supported by strategic maintenance and market expansion plans. These factors suggest a positive stock price movement over the next two weeks.
Carpenter Technology Corporation (CRS) Q3 2025 Earnings Call Transcript
Positive4-24
The earnings call summary indicates strong financial performance with significant increases in operating income, gross profit, and cash flow. The Q&A section reveals positive order trends and management's confidence in future demand and pricing improvements. The company's share repurchase program and liquidity position further support a positive outlook. Despite some uncertainties in pricing specifics, the overall sentiment is positive, suggesting a potential stock price increase of 2% to 8% over the next two weeks.
CRS Report
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