Q3 2025 Carpenter Technology Corp Earnings Call

April 24, 2025

Karen: Thank you for your standing by. My name is Karen, and that will be your conference

Karen: At this time, I would like to welcome everyone to the Carpenter Technology Corp 3 fiscal year 2025

Karen: All lines have been placed on mute to prevent any background noise. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star followed by the number one on your telephone keyboard.

Karen: Do we draw your question? You may press star followed by the number one again. I will now turn the call over to John Huyette. Please go ahead.

John Huyette: Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the fiscal 2025 Q3 ended 31 March 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 Tane, President and Chief Executive Officer, and Tim Lane, Senior Vice President and Chief Financial Officer. Statements made by management during this earnings presentation that are forward-looking statements are based on current expectations.

John Huyette: Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference call for the fiscal 2025-3rd quarter and in March 31st, 2025.

John Huyette: 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.

Speaker Change: Speakers on the call today are Tony Dane, President and Chief Executive Officer, and Tim Lain, Senior Vice President and Chief Financial Officer.

Speaker Change: Statements made by management during this earnings presentation that are forward-looking statements based on current expectations.

John Huyette: 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 30 June 2024, Form 10-Q for the fiscal quarters ended 30 September 2024, and 31 December 2024, and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when management discuss sales or revenue, that reference excludes surcharge. When referring to operating margins, that is based on adjusted operating income excluding special items and sales excluding surcharge. I will now turn the call over to Tony.

Speaker Change: 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.

Speaker Change: including the company's report on Form 10K for the year ended June 30th, 2024. Form 10Q for the fiscal quarters ended September 30th, 2024, and December 31st, 2024, and the exhibits attached to those filings.

Speaker Change: Please also note that in the following discussion, unless otherwise noted, when management discuss sales or revenue, that reference to the concern charge.

Speaker Change: 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 R. Thene: Thank you, John, and good morning to everyone. I will begin on slide 4 with a review of our safety performance. Through Q3 of fiscal year 2025, our total case incident rate was 1.4. Our leaders are actively modeling safety first behaviors and emphasizing hands-on scenario-based training to support our shop floor teams. We're also reinvigorating our daily safety routines to drive increased awareness and focus. We remain committed to our ultimate goal, a zero injury workplace driven by consistent action and continuous improvement. Let's turn to slide 5 for an overview of our Q3 performance. Our Q3 performance was exceptional, exceeding expectations and delivering the most profitable quarter on record.

Tony R. Thene: Thank you, John, and good morning to everyone. I will begin on slide four with a review of our safety performance. Through Q3 of fiscal year 2025, our total case incident rate was 1.4. Our leaders are actively modeling safety first behaviors and emphasizing hands-on scenario-based training to support our shop floor teams. We're also reinvigorating our daily safety routines to drive increased awareness and focus. We remain committed to our ultimate goal, a zero injury workplace driven by consistent action and continuous improvement. Let's turn to slide five for an overview of our Q3 performance. Our Q3 performance was exceptional, exceeding expectations and delivering the most profitable quarter on record.

Tony Tain: Thank you, John , and good morning to everyone. I will begin on slides for with a review of our safety performance.

Tony Tain: Through the third quarter of fiscal year 2025, our total case incident rate was 1.4. Our leaders are actively modeling safety first behaviors and emphasizing hands-on scenario-based training to support our shop floor teams.

Tony Tain: We're also reinvigorating our daily safety routines to drive increased awareness and focus.

Tony Tain: We remain committed to our ultimate goal, a zero injury workplace driven by consistent action and continuous improvement.

Tony Tain: It's turn to slide five for an overview of our third quarter performance.

Tony Tain: Our third quarter performance was exceptional, exceeding expectations and delivering the most profitable quarter on record [inaudible]

Tony R. Thene: In Q3 of fiscal year 2025, we generated $138 million in operating income, a 53% increase over our Q3 of fiscal year 2024 and 10% higher than our previous record in Q4 of fiscal year 2024. Our record Q3 performance was driven by our strong market position, broad solutions portfolio with unique capabilities and focus on manufacturing execution. Notably, the SAO segment continues to expand adjusted operating margins, reaching 29.1% in the quarter, compared to 21.4% a year ago and 28.3% in the prior quarter. The ongoing margin expansion is a result of continued improvement in productivity, product mix optimization, and pricing actions.

In a third quarter of fiscal year 2025 2025

Tony Tain: We generated 138 million in operating income, a 53% increase over our third quarter of fiscal year 2024 and 10% higher than our previous record in the fourth quarter of fiscal year 2024.

Tony Tain: Our record third quarter performance was driven by our strong market position, broad solutions portfolio with unique capabilities and focus on manufacturing execution.

Tony Tain: Notably, the SAO segment continues to expand adjusted operating margins, reaching 29.1% in the quarter compared to 21.4% a year ago and 28.3% in the prior quarter.

Tony Tain: The ongoing margin expansion is a result of continued improvement in productivity, product mixed optimization and pricing actions.

Tony R. Thene: The SAO segment reached a record $151.4 million of operating income, an increase of 46% year-over-year. With the strong earnings and disciplined working capital management, we generated $34 million in adjusted free cash flow during the quarter, and we continued to return cash to shareholders through our repurchase and dividend programs. We purchased $37.5 million of shares in the quarter, raising the total to $78 million for the year. As we look ahead, our strong performance gives us confidence to again increase our guidance for the full fiscal year 2025. In the previous earnings call, we raised our fiscal year 2025 operating income guidance to a range of $500 million to $520 million.

Tony Tain: The SAO segment reached a record 151.4 million of operating income and increase of 46% year-over-year.

Tony Tain: At the strong earnings and disciplined working capital management, we generated 34 million and adjusted free cash flow during the quarter.

Tony Tain: And we continue to return cash to shareholders through our repurchase and dividend programs.

Tony Tain: We purchased 37.5 million of shares in the quarter, raising the total to 78 million for the year. As we look ahead, our strong performance gives us confidence to again increase our guidance for the full fiscal year 2025.

Tony Tain: In the previous earnings call, we raised our fiscal year 2025 operating income guidance to a range of $500 million to $520 million.

Tony R. Thene: Now, with a strong Q3 result and Q4 outlook, we are raising our guidance for the fiscal year to the range of $520 million to 527 million. This would represent a nearly 50% increase in earnings over fiscal year 2024. Now let's turn to slide 6 and take a closer look at our Q3 sales and market dynamics. In the Q3 of fiscal year 2025, sales increased 8% year-over-year and 9% sequentially. This was driven primarily by the aerospace and defense end-use market, which saw sales increase 12% sequentially on 6% higher volumes. Within aerospace and defense, sales were notably up across engines, fasteners, and defense. Our engine sales were up 16% sequentially.

Tony R. Thene: Now, with a strong Q3 result and Q4 outlook, we are raising our guidance for the fiscal year to the range of $520 million to 527 million. This would represent a nearly 50% increase in earnings over fiscal year 2024. Now let's turn to slide six and take a closer look at our Q3 Sales and Market Dynamics. In the Q3 of fiscal year 2025, sales increased 8% year-over-year and 9% sequentially. This was driven primarily by the aerospace and defense end-use market, which saw sales increase 12% sequentially on 6% higher volumes. Within aerospace and defense, sales were notably up across engines, fasteners, and defense. Our engine sales were up 16% sequentially.

Tony Tain: Now, with a strong third quarter result and fourth quarter outlook, we are raising our guides for the fiscal year to the range of 520 million to 527 million.

Tony Tain: This would represent a nearly 50% increase in earnings over fiscal year 2024.

Tony Tain: Now let's turn to slide six and take a closer look at our third quarter sales and market dynamics.

Tony Tain: In the 3rd quarter of fiscal year 2025, Deusch increased 8% year over year and 9% sequentially.

Tony Tain: This was driven primarily by the aerospace and defense in use market, which saw sales increase 12% sequentially on 6% higher volumes.

Tony Tain: Within aerospace and defense, sales were notably up across engines, fasteners, and defense.

Tony Tain: Our engine sales were up 16% sequentially. This was driven by increased shipments to many customers combined with higher pricing as we entered a new calendar year.

Tony R. Thene: This was driven by increased shipments to many customers, combined with higher pricing as we entered a new calendar year. In general, our engine customers remain very busy with Airbus-related platforms and MRO demand and continue reporting strong pulls and a notion of being behind. They continue to look forward to ongoing build rate ramps in the industry and remain concerned about security of supply. As usual, we continue to be in discussions with multiple customers regarding long-term supply agreements. We recently concluded two LTAs that will provide significant benefit to our customers and Carpenter Technology now and in the future. I will note that we also expect to conclude other LTA discussions over the coming quarter. Aerospace OEMs continue to be very active across the supply chain and remain in strategic discussions with us, often on a weekly basis.

Tony Tain: In general, our engine customers remain very busy with Airbus-related platforms and MRO demand and continue reporting strong polls and a notion of being behind.

Tony Tain: They continue to look forward to ongoing build great ramps in the industry and remain concerned about security as applied

Tony Tain: As usual, we continue to be in discussions with multiple customers regarding long-term supply agreements. We recently concluded two LTAs that will provide significant benefit to our customers and Carpenter Technology now and in the future.

Tony Tain: I will note that we also expect to include other LTA discussions over the coming quarter.

Tony Tain: Aerospace OEMs continue to be very active across the supply chain and remain in strategic discussions with us often on a weekly basis.

Tony R. Thene: Our defense business remains strong, and we continue to see urgent requests for material across multiple applications. In the recent quarter, one notable area of increased sales was from a specific platform where Carpenter Technology was asked directly by the Department of Defense to step in and provide emergency support. We continue to be proud of our role in supporting the defense community and will prioritize supply accordingly. In the medical end-use market, our sales were essentially flat sequentially and down 14% compared to a record prior year quarter. Underlying demand in medical remains positive, with ongoing increases in patient procedures. Customers continue to discuss ongoing expectations for steady growth, and more and more are in discussions with us to ensure their supply is secured. While our medical sales have already grown substantially over the last several years, we continue to believe there is significant growth potential looking forward.

Tony Tain: Our defense business remains strong and we continue to see urgent requests for material across multiple applications

Tony Tain: In the recent quarter, one notable area of increased sales was from a specific platform, where Carpenter Technology was asked directly by the Department of Defense to step in and provide emergency support.

Tony Tain: We continue to be proud of all lowly supporting the defense community and will prioritize supply accordingly.

Tony Tain: In a medical in-use market, our sales were essentially flat sequentially and down 14% compared to a record prior year quarter.

Tony Tain: Underline demanded medical remains positive, with ongoing increases in patient procedures.

Tony Tain: Customers continue to discuss ongoing expectations for steady growth, and more and more are in discussions with us to ensure their supply is secured.

Tony Tain: While our medical sails have already grown substantially over the last several years, we continue to believe there is significant growth potential looking forward.

Tony R. Thene: In the energy end-use market, sales were up 9% sequentially and 26% year-over-year, with significant increases in sales to our power generation customers. We are working closely with the power generation supply chain, from OEMs to parts manufacturers, to support their growth as this sub-market has become a valuable strategic advantage for us. Altogether, the near- and long-term demand outlook for Carpenter Technology remains very positive. Moving to slide 7, let's discuss the current tariff situation and how Carpenter Technology's strategic position provides a solid foundation. We have been closely monitoring the evolving tariff news as well as engaging with our customers and suppliers to analyze how tariffs could impact our business. I think the most relevant piece of information is that we, as well as others in our industry, have established long-standing surcharge mechanisms to pass through changing raw material prices to our customers.

Tony R. Thene: In the energy end-use market, sales were up 9% sequentially and 26% year-over-year, with significant increases in sales to our power generation customers. We are working closely with the power generation supply chain, from OEMs to parts manufacturers, to support their growth as this sub-market has become a valuable strategic advantage for us. Altogether, the near- and long-term demand outlook for Carpenter Technology remains very positive. Moving to slide seven, let's discuss the current tariff situation and how Carpenter Technology's strategic position provides a solid foundation. We have been closely monitoring the evolving tariff news as well as engaging with our customers and suppliers to analyze how tariffs could impact our business. I think the most relevant piece of information is that we, as well as others in our industry, have established long-standing surcharge mechanisms to pass through changing raw material prices to our customers.

Tony Tain: In the energy in use market, sales are up 9% sequentially and 26% year over year, with significant increases in sales to our power generation customers.

Tony Tain: We are working closely with the power generation supply chain from OEMs to parts manufacturers to support their growth as this submarket has become a valuable strategic advantage for us.

Tony Tain: Altogether, the near and long-term demand outlook for Carpenter Technology remains very positive.

Tony Tain: Moving to slide seven, let's discuss the current terror situation and how corporate technology strategic position provides a solid foundation.

Tony Tain: We have been closely monitoring the evolving tariffs news as well as engaging with our customers and suppliers to analyze how tariffs could impact our business.

Tony Tain: I think the most relevant piece of information is that we, as well as others in our industry, have established long-standing search-arge mechanisms to pass through changing raw material prices to our customers.

Tony R. Thene: We expect to use these surcharge mechanisms to pass through the impact of any incremental tariffs on our raw materials to our customers. I will also say that not all of our input costs are subject to tariffs as currently proposed or enacted. For reference, nickel, our largest raw material input, is sourced primarily from Canada, and Canadian nickel is currently exempt from tariffs. We have also evaluated how tariffs and ultimately global trade dynamics may impact demand in the near to medium term. Obviously, this is harder to predict as reactions and negotiations are happening in real time involving multiple countries. At a high level, based on what we know today, we anticipate limited impact. First of all, most of our products are highly specialized, designed specifically for our customers' needs. In most cases, these products have undergone significant qualifications.

Tony Tain: We expect to use the surcharge recognitions to pass through the impact of any incremental tasks on our raw materials to our customers.

Tony Tain: I will also say that not all of our input costs are subject to tears, as currently proposed or enacted. For reference, Nickel, our largest raw material input, is sourced primarily from Canada, and Canadian Nickel is currently exempt from tears.

Tony Tain: We have also evaluated how tariff and ultimately global trade dynamics may impact demand in the near to medium term.

Tony Tain: Obviously this is harder to predict as reactions and negotiations are happening in real time involving multiple countries

Tony Tain: At a high level, based on what we know today, we anticipate limited impact

Tony Tain: First of all, most of our products are highly specialized designed specifically for our customers' needs. In most cases, these products have a new going significant qualifications.

Tony R. Thene: This means that there are few sources of these materials, in some cases, we are the only one, and often can only be sourced within the United States. Again, we will continue to monitor the tariff proposals and update our view as new information becomes available. Moving on from tariffs, I think it is worthwhile to highlight a few points about Carpenter Technology that may be underappreciated. These past few years have included significant disruptions in the supply chains that we participate in. Whether it's the tariffs and trade implications I just mentioned, ramping capacity and productivity across the broad aerospace manufacturing industry, airplane build rate changes, or other manufacturing issues at specific OEMs, to name a few. Despite all these disruptions, the team at Carpenter Technology has been solely focused on executing our strategy and consistently delivering record financial results. This is not a coincidence, and it is not luck.

Tony Tain: This means that there are few sources of these materials. In some cases, we are the only warned and often can only be sourced within the United States.

Tony Tain: Again, we will continue to monitor the tariff proposals and update our view as new information becomes available.

Tony Tain: Moving on from terrorists, I think it is worthwhile to highlight a few points about Carpenter technology that may be underappreciated. These past few years have included significant disruptions in the supply chains that we participate in. I think it is worthwhile to highlight a few points about Carpenter technology that may be underappreciated.

Tony Tain: Whether it's the tariffs and trade implications I just mentioned, ramping capacity and productivity across the broad aerospace manufacturing industry, airplane build rate changes, or other manufacturing issues at specific OEMs to name a few.

Tony Tain: Despite all these disruptions, the team at Carpenter Technology has been solely focused on executing our strategy and consistently delivering record financial results.

Tony Tain: This is not a coincidence and it is not luck. It is based on a specific strategy we set a decade ago and continue to execute against today.

Tony R. Thene: It is based on a specific strategy we set a decade ago and continue to execute against today. Our consistent success demonstrates the advantage we have in serving customers across multiple applications and platforms. We are not tied to one single platform or alloy, but instead help a variety of customers solve their most challenging material needs. This includes meaningful content on all commercial aero-engine platforms, whether it is considered legacy, next-gen, wide-body, narrow-body, OEM build, or MRO. On these platforms, our materials support applications from rings and discs to gears, bearings, fasteners, avionics, and structural. There's not a single engine manufacturer in the aerospace industry that we do not count as a customer, and we are already looking ahead at the future generation of engines, still many years from industry adoption.

Tony Tain: Our consistent success demonstrates the advantage we have in serving customers across multiple applications and platform

Tony Tain: We are not tied to one single platform or alloy, but instead help a variety of customers

Tony Tain: This includes meaningful content on all commercial arrow engine platforms whether it is considered legacy, next gen, wide body, narrow body, OEM build, or MRO.

Tony Tain: On these platforms are material support applications from rings and disks to gears, bearings, fasteners, avionics, and structural [inaudible]

Tony Tain: There's not a single engine manufacturer in the aerospace industry that we do not count as a customer and we are already looking ahead at the future generation of engines still many years from industry adoption.

Tony R. Thene: In fact, we are actively working to support OEMs on these types of platforms with recent sales of advanced materials to be tested on these platforms. Our aerospace and defense end-use market accounts for approximately 60% of our revenue. We also serve other very specialized markets that seek out Carpenter Technology's expertise for specialized alloys across a broad portfolio offering. We are selective about which markets and industries we participate in. We focus on high-growth markets with customers who value precise metallurgical properties in their applications, like alloys used in medical implants, highly specialized materials used in the manufacture of semiconductors, and aerospace-like applications used in IGT to support power generation build-out, to name a few.

Tony Tain: In fact, we are actively working to support OEMs on these types of platforms with recent sales of advanced materials to be tested on these platforms.

Tony Tain: Our aerospace defense in-use market accounts for approximately 60% of our revenue, but we also serve other very specialized markets that seek out Carpenter Technology's expertise for specialized alloys across a broad portfolio offering.

Tony Tain: We are selective about which markets and industries we participate in.

Tony Tain: We focus on high growth markets with customers who value precise metallurgical properties in their applications, like alloys used in medical implants, highly specialized materials used in the manufacturer of semiconductors.

Tony Tain: and aerospace-like applications used in IGT to support power generation build-out to name a few.

Tony R. Thene: We have built a broad portfolio of highly specialized solutions in rapidly growing markets, supported by strong mega trends, with an impactful commercial strategy, a focus on manufacturing execution to rigorous quality standards, and above all else, a commitment to the safety of our employees. Our solution portfolio has provided the foundation that has enabled Carpenter Technology to navigate recent near-term challenges and short-term market disruptions. In fact, we have not only navigated the challenges, but we have also set new records for financial performance in the process. Now, I will turn it over to Tim for the financial summary.

Tony Tain: We have built a broad portfolio of highly specialized solutions in rapidly growing markets, supported by strong megatrends.

Tony Tain: For an impactful commercial strategy, a focus on manufacturing execution to rigorous quality standards and above all else, a commitment to the safety of our employees.

Tony Tain: Our solution for folio has provided the foundation that has enabled corporate technology to navigate recent near-term challenges and short-term market disruptions. In fact, we have not only navigated the challenges, but we have also set new records for financial performance in the process.

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

Timothy Lain: Thanks, Tony. Good morning, everyone. I'll start on slide 9, the income statement summary. Starting at the top, sales excluding surcharge increased 8% year-over-year on 7% lower volume. Sequentially, sales were up 9% on 1% higher volume. The year-over-year growth in net sales, despite lower volume, was driven by increasing productivity in key areas necessary to drive stronger product mix, as well as the realization of higher prices. The improving productivity, product mix, and pricing are evident in our gross profit, which increased to $200.8 million in the current quarter, up 37% from the same quarter last year. SG&A expenses were $63 million in Q3, which includes $24.4 million of corporate costs. For the upcoming Q4 of fiscal year 2025, we expect corporate costs to be in line with our recent Q3 of $24 million.

Timothy Lain: Thanks, Tony. Good morning, everyone. I'll start on slide nine, the income statement summary. Starting at the top, sales excluding surcharge increased 8% year-over-year on 7% lower volume. Sequentially, sales were up 9% on 1% higher volume. The year-over-year growth in net sales, despite lower volume, was driven by increasing productivity in key areas necessary to drive stronger product mix, as well as the realization of higher prices. The improving productivity, product mix, and pricing are evident in our gross profit, which increased to $200.8 million in the current quarter, up 37% from the same quarter last year. SG&A expenses were $63 million in Q3, which includes $24.4 million of corporate costs. For the upcoming Q4 of fiscal year 2025, we expect corporate costs to be in line with our recent Q3 of $24 million.

Tim Lain: Thanks, Tony. Good morning, everyone. I'll start on flight 9 in the income statement summary. Starting at the top, sales excluding surcharge increased 8% year every year on 7% lower volume.

Sequentially, sales were up 9% on 1% higher volume

Tim Lain: The year of a year growth in net sales, despite lower volume, was driven by increasing productivity in key areas necessary to drive stronger product mix as well as the realization of higher prices.

Tim Lain: The improving productivity, product mix, and pricing are evident in our gross profit, which increased the $200.8 million in the current quarter up 37% from the same quarter last year.

Tim Lain: SCNA expenses were $63 million in the third quarter, which includes $24.4 million of corporate costs.

Timothy Lain: Adjusted operating income was $137.8 million in the current quarter, which is 53% higher than the $90 million in our Q3 of fiscal year 2024, and up 16% from our recent Q2. As Tony mentioned earlier, this represents our best quarterly operating income result on record. Moving on to our effective tax rate, which was 21.8% in the current quarter. This quarter's effective tax rate was slightly lower than our anticipated rate due to certain discrete tax benefits recorded in the current quarter associated with stock option exercises. For the upcoming Q4 of fiscal year 2025, we expect the effective tax rate to be more in line with our normalized rate of 23%.

Tim Lain: Adjusted operating income was 137.8 million in the current quarter, which is 53% higher than the 90 million in our third quarter at fiscal year

Tim Lain: Moving on to our effective tax rate, which was 21.8% in the current quarter, this quarter's effective tax rate was slightly lower than our anticipated rate due to certain discrete tax benefits recorded in the current quarter associated with stock option exercises.

Tim Lain: For the upcoming fourth quarter of this year 2025, we expect the effective tax rate to be more in line with our normalized rate of 23%.

Timothy Lain: In summary, the earnings per diluted share results for the quarter of $1.88 demonstrate ongoing solid execution against the goals we laid out for this quarter. Now turning to slide 10 and our SAO segment results. Net sales excluding surcharge for Q3 were $519.4 million. On a year-over-year basis, sales were up 8% on 12% lower volume. Sequentially, sales were up 8% on similar volume. The increase in sales reflects the impacts of higher realized prices and increasing productivity at key work centers that enabled an improved product mix relative to a year ago. Moving to operating results, SAO reported operating income of $151.4 million in Q3 of fiscal year 2025.

Tim Lain: In summary, the earnings per diluted share results for the quarter of $1.88, demonstrate ongoing solid execution against the goals we lead you out for this quarter.

Tim Lain: Now, turning this like 10 in our FAO's segment results.

Tim Lain: Net sales excluding surcharge for the third quarter were 519.4 million [inaudible]

Tim Lain: On a year-of-year basis sales were up 8% on 12% lower volume [inaudible]

sequentially sales were up 8% on similar volume.

Tim Lain: The increase in sales reflects the impacts of higher realized prices and increasing productivity at key work centers that enable to improve product mix for all to do a year ago.

Tim Lain: Moving to operating results, SAO reported operating income of 151.4 million in the third quarter of fiscal year 2025.

Timothy Lain: As Tony mentioned, the adjusted operating margin of 29.1% in Q3 is a significant achievement. The continued margin expansion is a result of the SAO team's focus on reliably increasing production levels while closely managing operating costs, realizing higher selling prices, and a richer product mix. These areas are as relevant as ever as we actively manage our production schedules to adjust to changing customer priorities and seek to increase our overall output. Looking ahead to our upcoming Q4 of fiscal year 2025, we anticipate SAO will generate operating income in the range of $160 to $165 million, which will represent another record level of profitability. Now turning to slide 11 and our PEP segment results.

Tim Lain: As Tony mentioned, the adjusted operating margin of 29.1% in the third quarter is a significant achievement.

Tim Lain: The continued margin expansion is a result of the SEO team's focus on reliably increasing production levels, while closely managing operating costs, realizing higher selling prices and a richer product mix.

Tim Lain: These areas are as relevant as ever as we actively manage our production schedules to adjust to changing customer priorities and seek to increase our overall output.

Tim Lain: Looking ahead to our upcoming fourth quarter of fiscal year 2025, we anticipate FAAO would generate operating income in a range of 160 to 165 million, which will represent another record level of profitability.

Now turning to slide 11 and our pet segment results

Timothy Lain: Net sales excluding surcharge in the Q3 of fiscal year 2025 was $96.8 million, up 2% from the same quarter a year ago, and up 12% sequentially. In the current quarter, PEP reported operating income of $10.9 million, compared with $9.2 million in the same quarter a year ago, and $7 million in the Q2 of fiscal year 2025. The improvement in operating income in the current quarter was driven by our additive business. As we anticipated and discussed last quarter, our additives business experienced more normalized shipments to certain strategic customers that we expect to continue through the balance of this fiscal year. As we look ahead, Dynamet is the driver of the PEP segment, representing a significant portion of PEP sales and an even greater percentage of PEP's profitability.

Tim Lain: Net sales excluding surcharge in the 3rd quarter of fiscal year 2025 for 96.8 million, up 2% from the same quarter a year ago, and up 12% sequentially.

Tim Lain: In the current quarter, PEP reported operating income of $10.9 million, compared with $9.2 million in the same quarter a year ago, and $7 million in the second quarter of this year 2025.

Tim Lain: The improvement in operating income in the current quarter was driven by our additive business.

Tim Lain: As we anticipated and discussed last quarter, our additive business experience, more normalized shipments to certain strategic customers that we expect to continue through the balance of this fiscal year.

Tim Lain: As we look ahead, Dynomedicine driver of the PEP segment represent a significant portion of PEP sales and even greater percentage of PEP's profitability.

Timothy Lain: Dynamet's fundamentals are very comparable to SAO, including a strong market demand backdrop in the medical and aerospace end-use markets, which accounts for approximately 95% of Dynamet sales. Like SAO, the focus of Dynamet remains on improving productivity and expanding capacity to increase our output, which has driven improved results. With that in mind, we currently anticipate the PEP segment will deliver operating income in the range of $10 to 12 million in the upcoming Q4 of fiscal year 2025. Now turning to slide 12 to cover some of the highlights of liquidity and cash flow. In the current quarter, we generated $74 million of cash from operating activities and spent $40 million on capital expenditures, resulting in $34 million of adjusted free cash flow. The results were driven by improving profitability and our disciplined approach to working capital management.

Tim Lain: Dynamite Fundamentals are very comparable, SAO, including a strong market demand backdrop in the medical and aerospace venues markets.

which accounts for approximately 95% of dynamite sales.

Tim Lain: Like SAO, the focus of dynamite remains on improving productivity and expanding capacity to increase our output, which has driven improved results.

Tim Lain: With that in mind, we currently anticipate the PEP segment will deliver operating income in a range of 10 to 12 million in the upcoming fourth quarter of fiscal year 2025.

Tim Lain: Now, turning to slide 12 to cover some of the highlights of liquidity and cash flow.

Tim Lain: In the current quarter, we generated 74 million of cash from operating activities and spend 40 million on capital expenditures, resulting in 34 million of adjusted pre-cashable [inaudible]

Tim Lain: The results were driven by improving profitability in our discipline approach to working capital management.

Timothy Lain: I will note that the current quarter's cash flow results includes $38 million of discretionary pension contributions. This is incremental to the minimum required contributions and was made to maintain certain funded ratios for one of our plans. The pension plans remain well-funded and no additional discretionary contributions above the modest minimum required contributions are planned at this time. The cash generation in the current quarter is an important step towards delivering our full fiscal year 2025 adjusted free cash flow target of $250 to 300 million and executing our planned capital allocation priorities. Namely, taking a balanced capital allocation approach to return cash to shareholders and invest for growth. In terms of returning cash to shareholders, we were active against our recently authorized share repurchase program. In the current quarter, we repurchased $37.5 million of our stock.

Tim Lain: I will note that the current quarter's cash flow results include 38 million of discretionary pension contributions.

Tim Lain: This is incremental to the minimum required contributions and was made to maintain certain funded ratios for one of our plans.

Tim Lain: The pension plans remain well-funded and no additional discretionary contributions above the minimum required contributions are planned at this time.

Tim Lain: The cash generation in the current quarter is an important step towards delivering our full fiscal year 2025 adjusted to three cash flow target of 250 to 300 million and executing our plan capital allocation priorities.

Tim Lain: Namely, taking a balanced capital allocation approach to return cash to shareholders and invest for growth.

Tim Lain: In terms of returning cash to shareholders, we were active against our recently authorized share repurchase program.

Tim Lain: In the current quarter, we re-purchased 37.5 million of our stock.

Timothy Lain: Year to date, we have purchased 78 million of our stock against the $400 million authorization. The share repurchase program complements the long-standing quarterly dividend, which we continued this quarter. From an investment perspective, we plan to spend $155 to 160 million in capital expenditures in fiscal year 2025. This includes about $30 million of capital spend related to our recently announced brownfield expansion project. Our liquidity remains healthy. We ended Q3 of fiscal year 2025 with total liquidity of $500.4 million, which includes $151.5 million of cash and $348.9 million of available borrowings under our credit facility. Our leverage ratios remain at historic lows, ending our recent Q3 under 1x with no near-term debt maturities.

Tim Lain: Year to date, we have purchased 78 million of our staff against the 400 million dollar authorization.

Tim Lain: The share repurchase program complements the longstanding quarterly dividend, which we continue

Tim Lain: From an investment perspective, we plan to spend 155 to 160 million in capital expenditures in fiscal year 2025.

Tim Lain: This includes about 30 million of capital spend related to our recently announced Brownfield Expansion Project.

Tim Lain: Our liquidity remains healthy. We ended the third quarter of fiscal year 2025 with total liquidity of 500.4 million, which includes 151.5 million of cash and 348.9 million of available borrowings and are a credit facility.

Tim Lain: Our leverage ratio is remain at historic lows ending our recent third quarter under one time with no near-term debt maturity.

Timothy Lain: We remain confident that we can deliver our targeted adjusted free cash flow of $250 to 300 million for fiscal year 2025. With that, I will turn the call back to Tony.

Tim Lain: and we remain confident that we can deliver our targeted adjusted pre-tash flow of 250 to 300 million for fiscal year 2025.

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

Tony R. Thene: Thanks, Tim. Carpenter Technology just completed another outstanding quarter, and I'd like to highlight the key points from today's call. First, we delivered a record quarter with operating income of $138 million, up 53% from Q3 a year ago. We increased adjusted operating margins in our SAO segment again, reaching 29.1%, another new record. We generate $34 million in adjusted free cash flow with improved earnings and working capital management. We continue to return cash to shareholders, purchasing $37.5 million of shares in the quarter. This raises the total share purchases to $78 million for the year against our $400 million share repurchase program. In addition, we continue our long-standing quarterly dividend. As I highlighted earlier, we are well positioned to navigate the current environment with our strategic positioning, broad portfolio of products, and focus on manufacturing excellence.

Thanks, Kim.

Tony Tain: Corporation Technology just completed another outstanding quarter and I'd like to highlight the key points from today's call.

Tim Lain: First, we delivered a record quarter with operating income of 138 million, up 53% from the third quarter a year ago.

Tim Lain: We increased adjusted operating margins in our FAO segment again, reaching 29.1% another new record.

Tim Lain: We generate 34 million in adjusted free cash flow with improved earnings and working capital management.

Tim Lain: We continue to return past the shareholders, purchasing 37.5 million of shares in the quarter.

Tim Lain: This raises the total share purchases to $78 million for the year against our $400 million share

In addition, we continue our long-standing quarterly dividend.

Tim Lain: As I highlighted earlier, we are well positioned to navigate the current environment with our strategic positioning, broad portfolio products, and focus on manufacturing excellence.

Tony R. Thene: Finally, we're projecting a strong finish to our fiscal year 2025, with Q4 earnings expected to increase 6% to 11% over our record Q3. As a result, we've increased our operating income guidance for fiscal year 2025 again to the range of $520 million to $527 million. We remain on track to generate $250 million to $300 million of adjusted free cash flow in the fiscal year. This financial performance will be a remarkable achievement at a time when the aerospace supply chain is transitioning and only at the beginning of its aggressive build rate ramp. We continue to believe we are in the early stages of our growth journey as demand for our material will only get stronger, and our earnings growth potential will continue to expand.

Tim Lain: Finally, we're projecting a strong finish to our fiscal year 2025 with 4th quarter earnings expected to increase 6 to 11 percent over our record third quarter

Tim Lain: As a result, we've increased our operating income guidance for fiscal year 2025 again to the range of 520 million to 527 million

Tim Lain: and we remain on track to generate 250 million to 300 million of adjusted free cash roll in the fiscal year.

Tim Lain: This financial performance will be a remarkable achievement at a time when the aerospace supply chain is transitioning and only at the beginning of its aggressive build rate ramp.

Tim Lain: We continue to believe we are in the early stages of our growth journey as demand for our material will only get stronger and our earnings growth potential will continue to expand.

Tony R. Thene: Let me close by giving a reminder of our fiscal year 2027 earnings outlook on slide 15. What an exciting time to be part of Carpenter Technology as we are delivering record profits while projecting a future of even higher earnings growth potential. As highlighted at our recent investor update, we have a compelling outlook for the company. We expect strong, sustained earnings growth with operating income anticipated to reach $765 million to $800 million in fiscal year 2027. This would represent a 25% CAGR over the next two years, an earnings growth rate that we believe will outpace most of our peers.

Tim Lain: Let me close by giving a reminder of our fiscal year 2027 earnings outlook on slide 15.

Tim Lain: One exciting time to be part of Carpenter Technology as we are delivering records profits while projecting a future of even higher earnings growth potential.

Tim Lain: As highlighted at our recent investor update, we have a compelling outlook for the company.

Tim Lain: We expect strong sustained earnings growth with operating income anticipated to reach $765 million to $800 million. It's fiscal year 2007.

Tim Lain: This would represent a 25% cater over the next two years and earnings growth rate that we believe will outpace most of our peers.

Tony R. Thene: We project fiscal year 2026 to be materially higher than fiscal year 2025, and we believe fiscal year 2027 is not the peak of our earnings growth trend, with volume, productivity, and product mix all continuing to improve. As with our previous targets, we have high confidence in our ability to achieve these numbers with opportunities to potentially exceed them. With our continued earnings growth and focus on disciplined management of our working capital, we expect our cash generation to accelerate. Specifically, we project significant free cash flow generation of $1 billion from fiscal year 2025 through fiscal year 2027, with an impressive 90% conversion rate. This is before considering the recently announced brownfield capacity expansion investment. This is a meaningful amount of cash to drive shareholder value.

Tim Lain: We project fiscal year 2026 to be materially higher than fiscal year 2025.

Tim Lain: And we believe fiscal year 2027 is not the peak of our earnings growth trend with volume, productivity, and product mix all continuing to improve.

Tim Lain: As with our previous targets, we have high confidence in our ability to achieve these numbers with opportunities to potentially exceed them.

Tim Lain: With our continued earnings growth and focus on discipline management of our working capital, we expect our cash generation to accelerate.

Tim Lain: Specifically, we project significant free cash flow generation of 1 billion from fiscal year 2025 through fiscal year 2027 with an impressive 90% conversion rate.

Tim Lain: This is before considering the recently announced Brownfield capacity expansion assessment.

Tim Lain: This is a meaningful amount cash to drive shareholder value.

Tony R. Thene: As such, we will continue to take a disciplined, balanced approach. We will return cash to shareholders through our quarterly dividend. We will repurchase shares through our $400 million buyback program, and we will invest in long-term strategic, profitable growth. As we detailed in our investor update, we are in a unique position to bring on strategic capacity, given our capabilities and unique collection of assets. The brownfield expansion will add high purity primary and secondary melt capacity that will feed our existing downstream finishing assets. While this brownfield investment will not materially impact the industry's current supply and demand imbalance, it most definitely provides an earnings accelerator to the company's already attractive earnings growth projections. We plan to fund this project through internal cash generation and anticipate an attractive return on capital of greater than 20%.

Tim Lain: As such, we will continue to take a disciplined, balanced approach. We will return cash to share holders through our quarterly dividend. We will repurchase shares through our $400 million by-back program, and we will invest in long-term strategic profitable growth.

Tim Lain: As we detailed in our investor update, we are in a unique position to bring on strategic capacity, given our capabilities and unique collection of assets.

Tim Lain: And while this Brownfield investment will not materially impact the industry's current supply and demand imbalance, it most definitely provides an earnings accelerator to the company's already attractive earnings growth projections. [inaudible]

Tim Lain: We plan to fund this project through internal cash generation and anticipate an attractive return on capital of greater than 20 percent.

Tony R. Thene: Altogether, I think you'll agree that Carpenter Technology is performing at a high level today, and it has a very bright future with sustained growth and value creation for our shareholders. Thank you for your attention. I will now turn the call back to the operator.

Tim Lain: Altogether, I think you'll agree that Carpenter Technology is performing at a high level today and has a very bright future with sustained growth and value creation for our shareholders.

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

Operator: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. The first question comes from Scott Deuschle from Deutsche Bank. Your line is open.

Speaker Change: At this time, I would like to remind everyone in order to ask a question, for a star than the number one on your cell phone keyboard. We will post for a distant moment to compile the Q&A roster.

First question, Gautam from Scott

and Joshua from Toit, Tibet.

Your line is open.

Scott Deuschle: Hey. Thank you. Tony, can you further characterize the order trends you saw in the quarter? Are you seeing any emergency orders coming in yet on the aerospace side as Boeing's build rates gain some momentum here?

Speaker Change: Hey, thank you. Tony, can you further characterize the order trends you saw in the quarter? And then are you seeing any emergency orders coming in yet on the aerospace side as Billings to alterates against the momentum here?

Tony R. Thene: Yeah. Good morning, Scott. Without getting into any of the specific figures on orders, I can tell you that they were up, just a bit over 20% sequentially, so a really good order intake, quarter. Emergency orders, I can say that we still continue to have customers pushing to get their deliveries earlier than planned, whether that constitutes how you wanna call an emergency order or not. We still have that, quite frequently.

Thank you very much. Bye.

Speaker Change: Yeah, good morning, Scott. Without it, getting into any of the specific figures on orders, I can't tell you that they were up just a bit over 20% sequentially. So a really good order intake.

Speaker Change: Corp. Emergency orders, I can say that we still continue to have customers pushing to get their deliveries earlier than planned, whether that constitutes how you want to call an emergency order or not, but we still have that quite frequently.

Scott Deuschle: Okay. Can you give some updated color on leading-edge pricing? I mean, obviously, we see it in the results in a big way, but there's some lag there. I think investors are in a bit in the dark on what the current pricing environment looks like for what's going in the backlog today. Some clarity there I think would be helpful. Thank you.

Speaker Change: Okay, can you give some updated color on leading edge pricing? Obviously we see it in the results in a big way, but there's some lag there and take investors.

Speaker Change: Are in a bit of been the dark on what the current pricing environment looks like for what's going in the backlog today. So some clarity there I think would be helpful. Thank you

Tony R. Thene: Well, I think you know, Scott, for me, it's. I'm not gonna talk specifically about pricing. What I did say in my prepared remarks is that we closed 2 LTAs in the quarter, and I think my words were, I said they were of significant benefit or significant contribution. I'll let you know, figure out what that means. I can also point to the fact, back in the investor update that we gave a couple months ago, we also said that we continue to see pricing actions continue to improve. Really all that's based on is a supply and demand imbalance that's going to get significantly tighter going forward. That's where the pricing is tied to.

Speaker Change: You know figure out what that means I can also point to the fact back in the investor update that we gave a couple months ago we also said that we continue to see pricing actions continue to improve and really all that's based on is

A supply-demand imbalance.

Speaker Change: That's going to get significantly tighter going forward so that's where that's where the price is tied to so I don't think that should be much of a surprise when we said in the investor update that we would anticipate that to continue.

Tony R. Thene: I don't think that should be much of a surprise when we said in an investor update that we would anticipate that to continue.

Scott Deuschle: Okay. Did you get much of the benefit from the LTA price increase in the quarter you just reported, or is that still to come?

John Huyette: Okay, and then did you get much of the benefit from the LTA price increase in the order you just reported, or is that still to come?

Tony R. Thene: Well, not for this LTA that we just signed. Those will be in the future. I think I did also mention in the call that, in the quarter, because the calendar quarter, some of those new LTAs that we've negotiated 9, 10 months ago, then became effective, on 1 January.

Tony R. Thene: Well, not for this LTA that we just signed. Those will be in the future. I think I did also mention in the call that, in the quarter, because the calendar quarter, some of those new LTAs that we've negotiated nine, 10 months ago, then became effective, on 1 January.

We're not for this LTA that we just

John Huyette: Sign. Those will be in the future. But I think I did also mention in the call that in the quarter because the calendar quarter, some of those new LTAs that we've negotiated nine, ten months ago then became effective on January one. [inaudible]

Scott Deuschle: Right. Okay.

Tony R. Thene: Yeah.

Scott Deuschle: Last question, just high level, Tony.

Speaker Change: Right. Okay. The last question is tie level Tony, like a lot happened since her February investor event. I guess are you now more or less confident in the 2020-70 but God relative to your mindset two months ago.

Tony R. Thene: Yeah.

Scott Deuschle: Like, a lot's happened since your February investor event.

Tony R. Thene: Yeah.

Scott Deuschle: I guess, are you now more or less confident in the 2027 EBITDA guide relative to your mindset 2 months ago?

Scott Deuschle: I guess, are you now more or less confident in the 2027 EBITDA guide relative to your mindset two months ago?

Tony R. Thene: Well, I'm more confident because things are in better shape than they were two months ago. I mean, we stand now just a couple recent points. You know, yesterday Boeing had a very good call where they're continuing to make, you know, impressive improvements in their build rate production. GE Aerospace just reported. You know, MRO sustaining at high levels. Hopefully, we'll see some de-escalation from the tariff situation. So I'm much more confident now than two months ago. We're in a much better spot. I really believe over the next, you know, four, five, six months, you're gonna see a massive inflection point. I know right now we wanna talk about, you know, is somebody destocking? Is somebody You know, did your backlog go down by a half a percent?

Speaker Change: Well, I'm more confident because things are in better shape than they were two months ago. I mean, we stand now just a couple recent.

Speaker Change: Point, you know, yesterday Boeing has a very good call where they're continues to make, you know, impressive improvements in their build rate production.

GE Aerospace just reported

Speaker Change: You know, MRO, sustaining at high levels. Hope we will see some de-escalation from the tariff situation. So I'm much more confident now than two months ago. We're in a much better spot. And I really believe over the next

You know, four, five, six months.

Speaker Change: You're going to see a massive inflection point, and I know right now we want to talk about

Speaker Change: You know, if somebody de-stocking, if somebody, you know, did your back wall go down by a half a percent? I mean, in the hope of an extreme of things, we're at a much better spot now than we were two months ago. And I will tell you, we're talking, you know, a quarter to from now, we're going to be right back to urgent demand across the board.

Tony R. Thene: I mean, in the whole big scheme of things, we're in a much better spot now than we were two months ago. I will tell you, we're talking, you know, a quarter or two from now, we're gonna be right back to urgent demand across the board.

Scott Deuschle: Okay. Thank you. Yeah, I'm not too worried about the backlog going down 0.5%, but I appreciate it. Thank you.

Speaker Change: Okay, thank you. Yeah, I'm not too worried about the backlog going down half a percent, but I appreciate it. Thank you.

. . . . .

Operator: The next question comes from Josh Sullivan from The Benchmark Company. Your line is open.

Speaker Change: The next question comes from Joshua Sullivan from the Benchmark Company. Your line is open.

Josh Sullivan: Hey, good morning, Tony, Tim, John.

Thank you, buddy. Tony, Tim, John , Morning.

Tony R. Thene: Morning.

Josh Sullivan: Can you just update us on the lead times? Is there any churn in that book, or what does that look like? Any notable differences within end markets or products at this point?

Speaker Change: Can you just update us on the lead time and then is there any turn in that book or what does that look like? Any notable differences within within markets or products at this point?

Tony R. Thene: On lead times, I will say that no change from before there. You know, when we talk lead times, Josh, just to be clear, we're always talking about aerospace engine. That's the proxy for lead time. I always like to say that just so everyone's clear, with that. We're still at, you know, up to 60 weeks for aerospace engine. I don't see that changing, right? It's not gonna get much shorter. We cap our order book, so you're effectively capping lead times. I think you're gonna be in that up to 60-week lead time, for aerospace engines. No change.

On lead times, I will say that no change

Speaker Change: From before there, you know, when we talk lead times, Josh, just to be clear, we're always talking about aerospace engine, that's the proxy for lead times, so I always like to say that just so everyone's, one's clear with that, but we're still at, you know, up to 60 weeks.

Speaker Change: X for aerospace engine. I don't see that changing, right? It's not going to get much shorter and we cap our order book so you're effectively capping lead times. So I think you're going to be in that up to 60 week lead time.

for our space engines, to no change

Josh Sullivan: Got it. Just on the LTA discussions, and you mentioned the remarks there. You know, compared to last year or even earlier this year, you know, how has the current environment, you know, leaked into those conversations? Or maybe it hasn't. Just curious if the short-term dynamics are influencing those LTA parameters at all.

Yeah.

Speaker Change: And they just thought the LTA discussions, and you mentioned the remarks there, you know, compared the last year or even earlier this year, you know, how is the current environment, you know, leaked into those conversations, or maybe it hasn't just curious if the short-term dynamics are influencing those LTA parameters at all?

Tony R. Thene: They don't impact them at all. I mean, you have very sophisticated customers that are sitting across the desk from you, right? We're not negotiating a deal that's gonna happen today for 10 tons. We're talking about a long-term supply agreement over the next 3, 5+ years that's going to facilitate them making their product, right? That's what we're talking about. They know very well that the supply and demand imbalance is only gonna get tighter. Any disruptions in this near term actually have 0% impact on current LTA discussions or negotiations.

Speaker Change: They don't impact them at all. I mean, you have very sophisticated customers that are sitting across the desk from you, right? They're not negotiating a deal that's going to happen today for 10 times. We're talking about a long term supply agreement over the next three, five plus years. [inaudible]

Speaker Change: That's going to facilitate them making their product, right? So that's what we're talking about and they know very well that supply and demand and balance is only going to get tighter.

Speaker Change: So, mine are these any disruptions in this near term, actually have zero percent impact on permanent LTA discussions or negotiations.

Josh Sullivan: Got it. Then maybe just on PEP. You know, any impact from the SPS fire at this point or, you know, any dynamics there we should be thinking about medium term?

Speaker Change: And then maybe just on tap, you know, any impact from the SPS fire at this point or

Speaker Change: You know, any dynamics there we should be thinking about medium, medium term [inaudible]

Tony R. Thene: No, we didn't have any impact to our business on the SPS fire. I mean, you know, we're in close coordination. We hate to see that happen to somebody, certainly in the industry. You know, we've done everything we can do to support them on any types of materials that we might have been holding so. No material impact to our business.

Speaker Change: No, we didn't have any impact to our business on the SPS fire. I mean, we remain, you know, we're in close coordination. We hate to see that happen to somebody. Certainly in the industry. And, you know, we've done everything we can do to support them on any types of materials that we might have been holding. [inaudible]

So, but no material impact to our business [inaudible]

Josh Sullivan: Okay. Just one last one, just, you know, as additive. Can you just help us think about, you know, within PEP, this, you know, cyclicality within additive and then Dynamet ramping up? How should we think about that, you know, over the next 12 months or long term?

Speaker Change: Okay, and then just one last one, just as additive, can you just help us think about within

Timothy Lain, John Huyette

Tony R. Thene: Well, you should think that Dynamet is by far the major player inside of PEP. You know, we have a good business with additive. We're always in the game. We have the opportunity to move inside of that industry if it picks up. But the real player inside of PEP is Dynamet.

Speaker Change: Well, you should think the dynamite is by far the major player inside of PEP.

Speaker Change: And, you know, we have a good business with Additive. We're always in the game. We have the opportunity to move inside of that.

Speaker Change: Industry if it picks up, but the real player inside a dime, inside a pep disdainment.

Josh Sullivan: All right. Well, thank you for the time.

Well, thank you for the time. Thank you, sir.

Tony R. Thene: Thank you, sir.

Operator: The next question comes from Bennett Moore from JP Morgan. Your line is open.

The next question comes from Bennett Moore from JP Morton

Gerlin is open.

Bennett Moore: Good morning, Tony and Tim. Thank you for taking my questions, and congrats on the quarter.

Thank you for watching!

Speaker Change: Good morning, Tony and Tim. Thank you for taking my questions and graphs in the quarter.

Tony R. Thene: Yeah. Good morning.

Bennett Moore: Despite the greater shipping days, SAO volumes were relatively flat on a similar A&D and medical mix. Could you provide any additional color on the moving parts here and what we might expect to see those volumes trend consistently higher?

Speaker Change: Despite the greater shipping days, FAO volumes were relatively flat on a similar AMD and medical mix. Could you provide any additional color on the moving parts here and what we might expect to see those volumes trend consistently higher?

Tony R. Thene: It's an interesting question, right? We've really moved over the last couple years. Remember, we are really trying to optimize our business not for volume, because we're not a commodity business. We're trying to optimize for profitability. As you see some of these products change, the processing times can be significant between them. When you're looking at an aerospace product or let's just pick something out of the industrial segment or transportation, one of our smaller end-use markets, where you're producing maybe in that other segment significantly more volume at a lot less revenue. We're gonna use our assets where we can, where there's any fungibility at all, to use it on the higher priced products. The result is you'll see your volume going down, but you see your revenue going up quite a bit.

It's an interesting thing.

Speaker Change: Question, right? And it really moved over the last couple of years. Remember, we are really trying to optimize our business not for volume because we're not a commodity business. We're trying to optimize for profitability. And as you see, some of these products change, the processing times can be significant.

of between them. When you're looking at an aerial space,

Speaker Change: Product, or let's just pick something out of the industrial segment or a transportation over smaller in-use markets.

Speaker Change: where you're producing maybe in that other segment, significantly more volume at a lot less revenue. So we're going to use our assets where we can, where there's any fungibility at all, to use it on the higher price products.

Speaker Change: The result is you'll see your volume going down, but you see your revenue going up quite a bit. We believe that's...

Tony R. Thene: We believe that's an easy decision to make, right? That's what we play to. We're gonna play to profitability. Now, I will tell you, as you go forward over the next, let's say, 4 quarters or as we get into our FY 2026 and beyond, you'll see volumes go up. You have to. You've just spent the last 6 months where one of your large OEMs has effectively made no airplanes. For sure, as you look forward over the next several quarters, volumes are going to go up, and that's just going to make the supply-demand picture even tighter.

Tony R. Thene: We believe that's an easy decision to make, right? That's what we play to. We're gonna play to profitability. Now, I will tell you, as you go forward over the next, let's say, Q4 or as we get into our FY 2026 and beyond, you'll see volumes go up. You have to. You've just spent the last six months where one of your large OEMs has effectively made no airplanes. For sure, as you look forward over the next several quarters, volumes are going to go up, and that's just going to make the supply-demand picture even tighter.

An easy decision to make, right? So...

Speaker Change: That's what we play to. We're going to play to profitability. Now, I will tell you, as you go forward over the next, let's say four quarters or as we get into our FY26 and beyond, you'll see volumes go up. You have to. You just spent the last. You'll see volumes go up. You'll see volumes go up. You'll see volumes go up.

Speaker Change: Six months where one of your large OEMs had effectively made no airplanes.

Speaker Change: So for sure, as you look forward over the next step of quarters, volumes are going to go up and that's just going to make the supply demand picture even tighter.

Bennett Moore: Thanks for that. Just given the broader macro backdrop, I'm wondering if you're seeing any order deferrals or pockets forming for some of your more lower margin GDP levered markets?

Speaker Change: Thanks for that. And then just given the broader macro backdrop, I'm wondering if you're seeing any order deferrals or pockets forming for some of your more lower margin GDP levered markets.

Tony R. Thene: Well, some of our lower margin products aren't material, right? To the whole scheme of things. I mean, I tell you we're moving towards aerospace and medical make up 75% of our revenue. Then if you add in IGT, which has aerospace-like margins, some of the semiconductor business, you're close to 80%. That drives the story with us going forward.

Speaker Change: Well, some of our more lower margin products aren't material right to the whole scheme of things. I mean, I tell you, we're moving towards aerospace and medical, make up 75% of our revenue.

Speaker Change: And then if you add in IGT, which has aerospace like margins, some of the semiconductor business, you're close to 80 percent. So that drives this story with us going forward.

Bennett Moore: All right. Thank you. Best of luck.

All right. Thank you. Best of luck All right.

Tony R. Thene: Thank you, sir.

Thank you, sir.

Operator: The next question comes from Andre Madrid from BTIG. Your line is open.

The next question.

Andre Madrid from BTIG. Your line is-

Thank you so much.

Andre Madrid: Hey, good morning, Tony and Tim.

Hey, good morning, Tony, sir.

Tony R. Thene: Good.

Andre Madrid: Looking at the medical business, I know you said the backdrop remains strong, but down 14% year-over-year. I've heard some commentary from my industry contacts as well, implying that this was a little bit weaker as of late. Could you maybe explain what's driving some of that a little bit further?

Good morning.

Speaker Change: Looking at the medical business, I know you said the backdrop remains strong but down 14% year-over-year. I've heard some commentary from...

Speaker Change: from my entry conduct as well, implying that this was a little bit weaker as of late. Could you maybe explain what's driving some of that a little bit further?

Tony R. Thene: Well, I think you've had a little bit of destocking possibly in the medical end use market. That happens. That's not overly surprising. Remember last Q3 was, I think, our second highest medical sales quarter ever. So you've got a tough comparison. To maybe give you a little bit of relief or a little bit of comfort as we look forward, next quarter to Q4, I usually don't project sales by end use market, but medical, we project to be up quite a bit in the Q4 compared to Q3. So what we're hearing from customers that any of that type of destocking, if you will, is largely behind us now.

Speaker Change: Well, I think you've had a little bit of desocking, possibly in the medical in in use market that happens that's not that's not overly surprising. Remember last third quarter was I think our second highest medical sales quarter ever so you've got a tough comparison.

Speaker Change: To maybe give you a little bit of relief or a little bit of comfort, as we look forward, next quarter to fourth quarter, I usually don't project.

Speaker Change: Sales by in-use market, but medical we project to be up quite a bit in the fourth quarter compared to Q3 so what we're hearing from customers that any of that type of destocking if you will is largely behind us now [inaudible]

Tony R. Thene: Our forecast, you know, you know, supports that, and we see a big, a pretty sizable increase in Q4.

Speaker Change: And our forecast, you know, you know, supports that. We see a big, a pretty sizable increase in Q4.

Andre Madrid: Got it. Very helpful. Going back to your comments around raw materials, I mean, you know, you mentioned that most of the nickel you get is from Canada. I mean, maybe just overall, if you're looking at, like, all of your feedstock, how much is domestic versus international?

Speaker Change: Got it, got it, very helpful. And then, going back to your comments around raw material. I mean, you know, you mentioned that most of the nickel you get is from Canada. I mean, maybe just overall, if you're looking at like all of your feedstock, how much is domestic versus international?

Tony R. Thene: Well, our biggest input is nickel, and that comes from Canada and Norway specifically, right? That's where that comes. That's gonna go be managed through the established surcharge. We did a pretty in-depth analysis on what all of the costs in our entire system could be impacted by tariffs. We came to a very small number, very low single digits of our total spend would be impacted, and our plans would be to pass 100% of that through to our customers. Hopefully, that helps.

Speaker Change: Well, our biggest input is nickel, and that comes from Canada and Norway, specifically.

Speaker Change: Specifically, right? So that's where that, that's where that comes. That's, that's going to go be managed through the, the established search charge. We did a pretty in-depth analysis on what all of the costs in our entire system.

Speaker Change: could be impacted by tariffs and we came to a very, very small number, very low single digits of our total spend would be impacted and our plans would be to pass 100% of that.

Through you to our customers.

Andre Madrid: Yeah. Definitely. I guess just to follow up on that, you said, though, you can't control how that might impact demand further downstream. I mean, could you share some more thoughts there?

Hopefully that helped. Yeah.

Speaker Change: Definitely, definitely. And again, it's just to follow up on that. You said, though, you can't control how that might impact a matter further downstream. I mean, could you share some more thoughts there?

Tony R. Thene: You mean how it might impact our sales?

You mean how might impact our sales?

Andre Madrid: Yeah. How it might impact demand downstream?

Yeah, how it might impact a man downstream.

Tony R. Thene: Yeah. The first part was input costs, which you just talked about. The second part, downstream. Right now, we don't see that as being a big impact for us. Because like I said, given our unique portfolio of products that we manufacture, there's not another place to go to pick those up. We don't see that being a major issue for us going forward.

Speaker Change: There's now another place to go to pick those up so we don't see that being a major issue for us going forward.

Andre Madrid: Got it. Tony, I appreciate the color. All right.

Tony Tain: Got it, Tony. Appreciate the color, right? Thank you very much Thank you.

Tony R. Thene: Thank you very much.

Thank you. Bye.

Operator: The next question comes from Spencer Breitzke from TD Cowen. Your line is open.

Speaker Change: The next question comes from Spencer Britsk from T.D. Cohen. Your line is open.

Spencer Breitzke: Hey, thanks for taking the time. I was wondering if you could provide some color on how fasteners and jet engines orders and sales were in the quarter? Thank you.

Spencer Britt: Thanks for taking the time. I was wondering if you could provide some color on how fasteners in jet engine orders and sales weren't in the quarter. Thank you.

Tony R. Thene: Well, sales, I mentioned that in the remarks there, up 16% sequentially. Fasteners up 25% sequentially.

Speaker Change: Well, sales, I mentioned that in the remarks, they're up 16 percent sequentially fasteners up 25 percent sequentially.

Spencer Breitzke: Okay, great. Thank you. I was wondering if do you have any sort of a view on maybe the upper limit of margins at SAO? I mean, they've been so strong.

Speaker Change: Okay, great. Thank you. And I was wondering if do you have any sort of a view on maybe the upper limit of margins at SAO? I mean, they've been so strong.

Tony R. Thene: Well, you know, Gautam must have given you that question. I'm sure he would've. He was the one that asked a couple of quarters ago on whether, you know, where we could get to. At the time I said 30%. I think a lot of people thought that wasn't really achievable in the amount of time that we stated, and we just achieved 29%. Really good performance by the commercial team and the operations team out on the floor. You know, I think it's important, you know, we get to this level of margin percentage expansion. I think that really pushes us to a higher, I would say, into another category in terms of valuation.

Well...

Speaker Change: You know, got them much to have given you that question. I'm sure he was the one that asked

Speaker Change: A couple of quarters ago on whether where we could get to and at the time I said 30%

Speaker Change: I think a lot of people thought that that wasn't really achievable in a amount of time that we stated.

Tony R. Thene: I mean, this is a really important point, I think, for any company to be able to, you know, perform at that type of level. Now, I mean, there's a lot. I think it's, Spencer, you know, important to keep in mind that there's a lot of factors that, you know, impact the margins. You know, any given quarter, you could have some pluses and minuses, and certainly it depends on mix. I'm not here to suggest to you that every quarter it's going to be linear, right? But certainly from our point of view, 30% is not the limit, and we see opportunities that we could push past that number.

of the level. Now, I mean, there's a lot I think it's-

Speaker Change: Spencer, you know, important to keep in mind that there's a lot of factors that, you know, impact the margins and, you know, in a given quarter, you could have some pluses and minuses and certainly it depends on mix. So I'm not here to suggest you that every quarter it's it's going to be linear. You know, I'm here.

Speaker Change: But certainly, from our point of view, 30% is not the limit and we see opportunities that we could push past that number.

Thank you for watching!

Spencer Breitzke: Okay, great. Thanks for taking the time.

Okay, great. Thanks for taking the time.

Tony R. Thene: Thank you.

Thank you.

Operator: The next question comes from Philip Gibbs from KeyBanc Capital Markets. Your line is open.

Philip Gibbs, from Cuban Capital Markets, July ,

Philip Gibbs: Hey, good morning.

Hey, good morning. Good morning, Phil.

Tony R. Thene: Good morning, Philip.

Philip Gibbs: Tony, I'm curious, just from reading some of the tea leaves and being at a recent aerospace conference, if either you've received or you've given any of your customers any force majeure letters, just what's the status of some of that and within your own business and/or what you've seen or heard?

Tony Tain: So Tony, I'm curious just from reading some of the T. Lee's and being at a recent aerospace conference.

Tony Tain: Either you've received or you've given any of your customers any

Tony Tain: Any force, major letters, just what's the status of some of that and within your own business and or what you've seen or heard?

Tony R. Thene: Well, Phil, I'm aware of what you're talking about. I think also you have to remember that there could be significant differences across the aerospace supply chain on where they source material. Do they move material back and forth inside United States to produce that would cause them to do, or they believe that they need to issue some type of letter. We have not done that. We don't see any need that we need to issue a force majeure letter due to tariffs. As I just said, any move on nickel price, which is the largest, by far, input to our cost, we have a mechanism to pass through. You know, I just said that all those other costs, we've done a deep analysis. It's a very small amount, small percentage amount of our overall spend.

Speaker Change: Well Phil, I'm aware of what you're talking about. I think also you have to remember that there could be significant differences across the aerospace supply chain on where they source material, do they move material back and forth inside United States to produce. That would cause them to do or they believe that they need to issue some type of letter.

Speaker Change: We have not done that. We don't see any need that we need to issue a force.

with your letter due to tariffs

Speaker Change: As I just said, any move on nickel price, which is the largest by far input to our cost.

We have a mechanism to pass through

Speaker Change: You know, I just said that all those other costs we've done a deep analysis, a very small amount, small percentage amount of our overall spend and we pass that a hundred percent through. So, from our standpoint, we believe we have the mechanisms in place and don't feel like we need to do any type of force measure or letter. [inaudible]

Tony R. Thene: We pass that 100% through. From our standpoint, we believe we have the mechanisms in place and don't feel like we need to do any type of force majeure letter.

Philip Gibbs: You also mentioned that a lot of your nickel imports are from Canada. Are those not being tariffed right now? I just wanted to be clear.

Speaker Change: Tony, did you also mention that a lot of your nickel imports are from Canada? Are those not being...

Speaker Change: Teraft right now for this one, that's clear. That's correct.

Tony R. Thene: That's correct.

Philip Gibbs: Okay. I think you did mention earlier that backlog relatively flat. You said basically, what? Down 0.5%. Was that theoretical or was that where you're at now?

Okay.

Speaker Change: And then I think you did, you did mention earlier that backlog relatively flat, you said basically what down to half a percent, was that theoretical or was that where you're at now? No, that was theoretical field, that was just quite frankly me showing some of my, you

Tony R. Thene: No, that was theoretical, Phil. That was just, quite frankly, me showing some of my, you know, frustration with some of these small moves back and forth. I mean, our backlog is at 2.5 times what it was pre-COVID, and at that time it was considered strong. You're gonna have movement in your backlog from plus or minus from time to time, especially if you've got a fact that you've got one of the major OEMs not producing planes. You're able to pull forward for other customers to pull into that range. We still have a very healthy backlog, well over 2 times, what it was prior to COVID. Keep in mind also, Phil, when we limit our order intake or close our order book, you're effectively putting a cap on your backlog.

Tony R. Thene: No, that was theoretical, Phil. That was just, quite frankly, me showing some of my, you know, frustration with some of these small moves back and forth. I mean, our backlog is at 2.5 times what it was pre-COVID, and at that time it was considered strong. You're gonna have movement in your backlog from plus or minus from time to time, especially if you've got a fact that you've got one of the major OEMs not producing planes. You're able to pull forward for other customers to pull into that range. We still have a very healthy backlog, well over two times, what it was prior to COVID. Keep in mind also, Phil, when we limit our order intake or close our order book, you're effectively putting a cap on your backlog.

Speaker Change: Frustration with some of these small moves back and forth. I mean, our backlog is two and a half times where it was pre-COVID and if that time it was considered

Strong

Speaker Change: So you're going to have movement in your backlog from plus or minus from time to time especially if you've got a fact that you've got one of the major OEMs not producing planes you're able to pull forward for other customers to pull them to that range. So we still have a very healthy backlog well over two times.

Speaker Change: What it was, prior to COVID, and keep in mind also, Philip, when we limit our order and take our clothes or order book, you're effectively putting a cap on your backlog.

Tony R. Thene: I think it becomes a lot less effective metric to try to judge whether, you know, market demand is up or down.

Speaker Change: So I think it becomes a lot less effective metric to try to judge whether, you know, market demand is up or down.

Philip Gibbs: No, I think why we ask the question is just based on timing, right? When does Boeing, for example, you know, take their foot off the gas in terms of orders, feel like they have enough inventory, and then we can see when they, you know, come back in in a more meaningful way. That's more of the question. Obviously, the pricing's been very good and will continue to be very good. Do you have that latest, you know, updated number you could share?

Speaker Change: No, I think I think why we ask the question is just based on timing, right? So when when does Boeing for example?

Speaker Change: You know, take their foot off the gas in terms of orders feel like they have enough inventory and then we can we can see when they, you know, come back in and more meaningful. That's a wonderful way.

Speaker Change: So that's that's more of the question obviously the pricing's been very good and we'll continue to be very good But if you have you have that latest, you know update a number to share We're within that plus or mine. I mean our backlog doesn't isn't moving that much at the high end now

Tony R. Thene: We're within that plus or minus. I mean, our backlog isn't moving that much at the high end now.

Philip Gibbs: Okay. Thank you.

Speaker Change: Thank you for watching. Please subscribe to my channel. Thank you.

Okay, thank you. Yeah, thank you Thank you.

Tony R. Thene: Yep. Thank you.

Operator: The next question comes from Scott Deuschle from Deutsche Bank. Your line is open.

Speaker Change: The next question comes from Scott Deuschle from Deutsche Band. Your line is open.

Scott Deuschle: Hey, thanks. Tim, the inventory number as a percentage of sales was still pretty high this quarter. I guess, can you explain a bit more what's going on there with inventory, and should we still expect that to unwind in Q4?

Scott Dushall: Hey, thanks. Ten the inventory number as the percentage of sales was still pretty high this quarter, because can you explain a bit more what's going on there with inventory, and should we still expect that to unwind in the fourth quarter?

Tony R. Thene: Yes, Scott. I mean, without getting into any specifics on what the number's gonna be in Q4, we do tend to build in the first half and take it down in the second half. It wasn't quite the build that we had in Q2 and Q3. In Q4, we do expect inventory to come down. That, that's a big driver of our confidence in the cash number for the full year, which obviously implies a big number for Q4. Inventory will come out in Q4.

Scott Dushall: Yes, Scott. I mean, without getting into any specifics on what the number is going to be in the fourth quarter, we do tend to build in the first half and take it out in the second half.

Scott Dushall: It wasn't quite the build that we had in Q2 and Q3, and in the fourth quarter we do expect the inventory to come down to that, and that's a big driver of our confidence in the cash.

Scott Dushall: Number for the full year, which Travis implies a big number for the fourth quarter. So the inventory will come out in the fourth quarter. [inaudible]

Scott Deuschle: Okay. Is that building WIP as you do, you know, work to fulfill your existing order book, or are you building finished goods and sitting on them?

Speaker Change: Okay, is that building whip as you do, you know, the Barcliffe Affiliate or Existing Order book, or are you building finished goods and sitting on them?

Tony R. Thene: No, it's generally a story around WIP. I mean, quarter by quarter it may not work out that way, but generally the focus of all our efforts to bring inventory down is gonna be on WIP, and that's what'll play out in the Q4, WIP comes down.

Speaker Change: No, it's generally a story around Whip. I mean, Quarter by Quarter, it may not work out that way, but generally the focus of all our efforts to bring inventory down is going to be on Whip, and that's what I'll play out in the fourth quarter, Whip comes down.

Scott Deuschle: Okay. Tony, just to clarify, are the aerospace LTAs you're entering into?

and John Huyette.

John Huyette: Okay, and then Tony, just to clarify, are the aerospace LTAs you're entering into, are they still of a shorter duration versus were they historically been up?

Tony R. Thene: Yes.

Scott Deuschle: Are they still of a shorter duration versus where they've historically been at?

Tony R. Thene: Yes.

Scott Deuschle: Are they still of a shorter duration versus where they've historically been at?

Tony R. Thene: Like we've said in the past, they're in that 3 to 5 year range. We try to match up as close as we can to our customer needs, but you should think you're in that 3 to 5 as opposed to a 10. I think a 10-year contract in today's environment doesn't make any sense at all.

Tony R. Thene: Like we've said in the past, they're in that three to five year range. We try to match up as close as we can to our customer needs, but you should think you're in that 3 to 5 as opposed to a 10. I think a 10-year contract in today's environment doesn't make any sense at all.

Thank you for watching!

Speaker Change: I can't believe we've said in the past during that three to five year range. We try to match up as close as we can to our customer needs, but you should.

John Huyette: You should think you're in that 3-5 as opposed to a 10. I think a 10-year contract in today's environment doesn't make any sense at all [inaudible]

Scott Deuschle: Okay, thank you.

Okay. Thank you. Thank you, sir.

Tony R. Thene: Thank you, sir.

Operator: The last question comes from Bennett Moore from JPMorgan. Your line is open.

Speaker Change: The last question comes from Bennett Moore from J.P. Markins, your line is open.

Bennett Moore: Thanks for taking my second question. I just wanted to ask real quick on the brownfield investment, specifically the equipment. What, if any, of this will face tariffs, and is that baked into the CapEx guidance?

Bennett Moore: Thanks for taking my second question. I just wanted to ask real quick on the brown field investment specifically the equipment. What if any of this will face tariffs and is that paid into the CapEx guidance? Thank you.

Thank you.

Timothy Lain: Tim-

Timothy Lain: Hey, Bennett. Tim, yeah, I'll take that. Yes, I mean, the equipment we need is highly specialized, as we talked about before.

Thank you for watching!

Take a very different step. Yeah, I'll take that.

Thank you. Thank you.

Bennett Moore: So, yes, I mean, the equipment we need is highly specialized, as we talked about before. There's a limited number of companies that can make the equipment we need. Those companies happen at least for the critical pieces tend to be in Europe .

Timothy Lain: There's a limited number of companies that can make the equipment we need. Those companies happen, at least for the critical pieces, tend to be in Europe. We expect there will be tariffs associated with that. I would say it's an overall small piece of the overall spend because remember, we've got to do construction, we've got to install the equipment. There's a lot of other pieces to the overall investment other than just the equipment. The other piece is, I mean, obviously, as you know, this is a moving target and the tariffs really wouldn't come into play until the equipment gets delivered, which is sometime now.

So, we expect there will be tariffs associated with that [inaudible]

Bennett Moore: I would say it's an overall small piece of the overall span because you remember we've got to do construction, we've got to install the equipment so there's a lot of other pieces to the overall.

Bennett Moore: Investment, other than just the equipment. And then the other piece is, I mean, obviously, as you know, this is a moving target. And the tariffs really wouldn't come into play until the equipment gets delivered, which is sometime out. [inaudible]

John Huyette, John Huyette,

Operator: All right. Thank you. That concludes our Q&A session. I'll now turn the call over to John Huyette for closing remarks.

All right. Thank you.

Thank you. Thank you.

Bennett Moore: That concludes our Q&A session. I will now turn the call over to John Huyette for closing

John Huyette: Thank you, Karen, and thank you everyone for joining us today for our fiscal year 2025 Q3 conference call. Have a great rest of your day.

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

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

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