Carpenter Technology Corporation

Ladies and gentlemen, thank you for standing by. My name is Desiree and I will be your conference operator today. At this time, I would like to welcome everyone to the Carpenter Technologies second quarter fiscal year earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw a question, again, press the star one. I would now like to turn the conference over to John Hewitt. You may begin.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference call for the fiscal 2026 second quarter into December 31st, 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 Tain, Chairman and Chief Executive Officer, and Tim Lane, Senior Vice President and Chief Financial Officer. Statements made by management during this earnings presentation that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter Technologies' most recent SEC filings, including the company's report on Form 10-K the year ended june 30th 2025 form 10 q for the quarter ended september 30th 2025 and the exhibits attached to those filings please also note that in the following discussion unless otherwise noted when management discussed the sales or revenue that reference excludes surcharge when referring to operating margins that is based on adjusted operating income excluding special items and sales excluding surcharge i will now turn the call over to tony

Thank you, John, and good morning to everyone. I will begin on slide four with a review of our safety performance. We ended the second quarter of fiscal year 2026 with a total case incident rate of 1.4. We saw improvement over the last quarter, and as a result of the actions in this area, I expect to see continued progress going forward. As always, we remain committed to our ultimate goal, a zero-injury workplace. Let's turn to slide five for an overview of our second quarter performance. Second quarter performance continued our earnings momentum and sets us up for a strong second half to fiscal year 2026. Let me highlight the four major takeaways for you. One, record earnings. In the second quarter, we generated $155 million in operating income, exceeding our previous record set in the prior quarter. And it is a 31% increase over our second quarter of fiscal year 2025, another meaningful step up year over year. Our consistent earnings growth continues to be the result of our solid execution, strong market position, and unique capacity and capabilities. Two, expanding operating margins. The SAO segment continued to expand margins. reaching an adjusted operating margin of 33.1% in the quarter. This margin compares to 28.3% a year ago and 32% in the prior quarter. Keep in mind that there are lots of factors that impact what our operating margins can be in any given quarter, most notably the mix of our products. So going forward, we may see some quarters that are flat or slightly lower but their overall trajectory is anticipated to continue upwards. With that being said, our current outlook calls for increasing SAO margins over the next two quarters of fiscal year 2026. As in the past, the positive trend will continue to be driven by increased productivity, product mix optimization, and pricing actions. As a result of the expanding margins, the SAO segment recorded 174.6 million in operating income, an increase of 29% year-over-year, and another all-time record for the segment. Three, strengthening market demand, especially in the aerospace and defense in-use market, as we continue to see strengthening demand signals in terms of OEM production and order intake rates. Our customers are keenly aware of these demand signals and are positioning themselves accordingly. In the quarter, Booking for the aerospace and defense in-use market increased 8% sequentially. However, it is important to note that defense submarket orders were down materially in the quarter due to the government shutdown and uncertainty in terms of the defense budget. Most importantly, commercial aerospace bookings were up 23% sequentially. This is the fourth consecutive quarter of sequential order intake increases for the aerospace and defense in-use market. Seeing such strong bookings in a quarter that's usually quieter due to the holidays is a good indication of the accelerating demand for our materials. And four, pricing continues to be a tailwind. Given the strong demand outlook, our customers continue to be focused on securing their supply, and our pricing continues to increase. As evidence of this, we completed three additional long-term agreements with aerospace customers with significant price increases during the quarter. These long-term agreements represent good value for us and our customers as they look to secure their material needs going forward. Let's turn to slide six and have a closer look at second quarter sales and market dynamics. In the second quarter of fiscal year 2026, our total sales, excluding raw material surcharge, were up 8% over the second quarter of fiscal year 2025 and down 2% sequentially. Net sales were as we expected and the result of multiple factors, including available operating days and customer closure schedules, items which we see at every calendar year end and which I noted in last quarter's earnings call. As we enter our third quarter, these factors are not in play and we expect a sequential increase in net sales. Let me briefly review some of the key markets, starting with aerospace and defense. Sales in the aerospace and defense in-use market were down 1% sequentially and up 15% year-over-year. While down modestly on a sequential basis, the aerospace and defense in-use market net sales represented our second-best quarter on record, and activity with our aerospace and defense customers continues to increase. I will mention two important data points from the aerospace engine and structural sub-markets. Order intake in the quarter for our aerospace engine materials was up 30% sequentially, signaling continued growing strength in demand. And very importantly, our aerospace structural customers are moving off the sidelines and ramping up order placement. Many of them recently placed their first large orders with us in several quarters and are already preparing the next round of orders, which they anticipate being larger and even more urgent. Moving on to the medical in-use market, our sales were down 7% sequentially and 22% compared to the prior year second quarter. The decrease is isolated to certain titanium products for a specific set of medical distribution customers and all within our PEP segment. Clearly, this has impacted the earnings of the much smaller PEP segment, but the impact is not material to total Carpenter Technology results and not material to our overall earnings outlook or our ability to deliver on such outlook. Outside of these distribution customers for titanium, we do see bright spots in other areas of the medical in use market. As to our orthopedic and dental sub markets remain strong, both near and all time record. Our advanced solutions, which are ultimately used to support improved patient outcomes and are critical to trends like minimally invasive surgeries, metal sensitivities, and robotics remain highly valued by our customers. Shifting to the energy end-use market, sales were down 10% sequentially and up 19% year over year. As I've said many times, sales in the power generation sub-market will fluctuate quarter to quarter due to the frequency of orders and our practice of strategically slotting them into our production process. Power generation demand continues to accelerate, driven primarily by the immense energy needs of data centers. We remain in close coordination with the power generation customers across multiple platform types and OEMs to plan for their future material needs. Altogether, we are operating in a strengthening demand environment across the high-value in-use markets that we believe will drive meaningful growth in both the near term and long term. Now I will turn it over to Tim for the financial summary.