Carpenter Technology Corporation

Hello everyone and thank you for joining us and welcome to the Carpenter Technology Corps Q4 FY26 earnings presentation. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to John Huyette, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference call for the fiscal 2026 fourth quarter and in June 30th, 2026. This call is also being broadcast over the internet along with presentation slides. For those of you listening by phone, you may experience a time delay in slide movement. Speakers on the call today are Tony Thene, Chairman, President, and Chief Executive Officer, and Tim 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 for the year ended June 30th, 2025 forms 10Q for the quarters ended September 30, 2025, December 31, 2025, and March 31, 2026, and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when management discuss the sales or revenue, that reference excludes surcharge. When referring to operating margins, that is based on adjusted operating income, excluding special items, and Sales, excluding surcharge. I will now turn the call over to Tony.

Thank you, John, and good morning to everyone. Before I begin this morning, I want to take a moment to share my condolences on behalf of the Carpenter Technology family to Brian Malloy's family. His sudden passing last week was a tragic loss and a shock to all of us. Brian joined the company in 2015 and through various leadership roles was instrumental in advancing Carpenter Technologies strategic priorities over the last decade. And on July 1st, Brian became CEO, a role he was truly excited to take on. Brian will be forever remembered here as a trusted and respected leader for his commitment to our values, employees and the company's long-term success. Brian was a friend and he will be sorely missed. As you know from our press release, I was reappointed by the board of directors to the role of CEO. To be clear, this is not an interim assignment and we are not launching an external search for a new CEO. The plan is for me to remain as a CEO for an indefinite period of time. Now onto the business of the earnings call. Let's turn to slide four and a review of our safety performance. We start every quarterly earnings presentation with our safety slide, reinforcing that a zero injury workplace is our number one value and our ultimate goal. We believe that superior, sustainable operational performance is only possible in a company culture that places the safety of their employees as an unquestionable number one priority. We ended fiscal year 2026 with a total case incident rate of 1.4. We believe we are one of the safest manufacturing companies in the world, but we will only be satisfied with a zero injury workplace, a target that we firmly believe is possible. Let's turn to slide five for an overview of our fourth quarter performance. Corporate Technology just delivered another record quarter, reflecting the continued strong operational execution and accelerating demand across our high-value markets. In the fourth quarter, we generated $206.9 million in operating income, exceeding our previous record set in the third quarter by 11%. The profitability was driven by the SAO segment, which delivered an adjusted operating margin and many more. As a result of the expanding margins, the SAO segment reported $229.7 million in operating income, an increase of 10% sequentially and another all-time record for the segment and above the expectation We had set for the segment. Importantly, these record earnings translated directly into another strong cash flow generation quarter. In the fourth quarter, we generated 240.1 million in cash from operating activities and 155 million of adjusted free cash flow. And we continued returning cash to shareholders through our dividend and repurchase programs, executing 45.2 million of repurchases in the quarter, raising the total to $179.1 million for all of fiscal year 2026. Turning to slide six and a closer look at fourth quarter sales and market conditions. In the fourth quarter of fiscal year 2026, sales increased in a strengthening demand environment year over year and sequentially. Starting with the aerospace and defense in use market, sales were up 3% sequentially, and up 17% year over year. Our sales growth reflects accelerating activity across the aerospace supply chain as OEMs continue to push toward higher build rates. Boeing and Airbus continue to increase production against a backlog of approximately 16,000 aircraft, while engine manufacturers remain focused on securing supply to support both increasing production rates and elevated MRO demand. On their earnings call Tuesday, Boeing stated that they expect to achieve rate 47 per month for the 737 this summer. And they discussed their plans to increase to rate 52 per month in the near term. We see this reflected in the sequential increase in bookings for the aerospace and defense in use market. And we heard this confidence from customers at the Farnborough International Air Show just last week. Our engine customers report strong demand with many commenting that demand is less of a concern than the capacity needed to meet that demand. Our fastener customers are ramping significantly and discussing with us areas where they need more material sooner. Across the board, our structural customers are expecting demand to accelerate in the coming quarters. For an increasing number of structural customers, we are already experiencing accelerated ordering with extending lead times. At the same time, some structural customers remain cautious in their ordering patterns, but at the same time acknowledging that they are ordering below expected demand rates. We agree. And as that caution fades and ordering aligns with expected production rates, we expect demand to accelerate even further. In the defense submarket, we continue to see strong demand and urgent requests for material across multiple platforms. Moving on to the medical in-use market, our sales were up 5% sequentially and down 30% compared to the prior year fourth quarter. This is the first quarter in this fiscal year that medical in-use market sales were up sequentially. Our medical in-use market continues to have solid fundamentals and we see ongoing improvement in demand across orthopedics, dental, and cardiology. This quarter, energy in-use market sales flipped versus the large sequential increase last quarter, down 22% sequentially and 12% year over year. The demand from our IGT customers, primarily driven by the growing energy needs of data centers, remain strong. As we have said many times, quarterly sales for IGT material will fluctuate due to order timing and production scheduling. Finally, we saw a significant uptick in the sales for industrial and consumer in-use market, up 19% sequentially and 22% year over year. This was primarily driven by increasing demand from the semiconductor industry, where our materials are used in critical components in the semiconductor production process. We continue to see strong investment in fabrication facilities, semiconductor equipment, and supporting infrastructure. Customer confidence has improved, demand remains robust, and our position is strengthening in this market. In summary, we continue to operate in an accelerating demand environment across our high value in use markets. We believe that rate of growth will increase in the near term, specifically in the aerospace and defense in use markets, as air framers continue to increase build rates. Combined with our differentiated capabilities and capacity, This positions Carpenter Technology for meaningful growth, both in the near term and over the long term. Now, I will turn it over to Tim for the financial summary.

Thanks, Tony. Good morning, everyone. I'll start on the income statement summary on slide eight. Starting at the top, sales excluding surcharge increased 9% year over year on 22% higher volume. Sequentially, sales were up 4% on 11% higher volume. The improving productivity, product mix, and pricing are evident in our gross profit, which increased to $268.9 million in the current quarter, up 26% from the same quarter last year, and up 7% sequentially. Selling general and administrative, or SG&A, expenses were $62 million in the fourth quarter, roughly flat year over year, and down $3.3 million sequentially. The SG&A line includes corporate costs, which were $28.6 million. This is up $1.3 million sequentially and up $1.7 million from the fourth quarter of fiscal year 2025. For the upcoming first quarter of fiscal year 2027, we expect corporate costs to be roughly in line with our recent fourth quarter. Operating income was $206.9 million in the current quarter, which is 37% higher than our fourth quarter of fiscal year 2025 and up 11% from our recent third quarter. As Tony mentioned earlier, this represents another record quarterly operating income result, breaking the previous record set just last quarter. Moving on to our effective tax rate, which was 20.7% in the current quarter. This quarter's effective tax rate was lower than anticipated, primarily due to discrete tax benefits associated with certain equity awards. Finally, the earnings per saluted share was $3.23 for the quarter. Now turning to more detail on each of the segments, starting with our SAO segment. Net sales excluding surcharge for the fourth quarter were $607.4 million. Compared to the same quarter last year, sales were up 11% on 23% higher volume. Sequentially, sales were up 4% on 11% higher volume. The net sales increase that is outpaced by the volume increase translates to a lower reported ratio of net sales excluding surcharge per pound. In other words, a lower average base price per pound, both sequentially and year over year. In the past, some have mistakenly interpreted a lower aggregated average base price as an indication of declining prices in the portfolio. For those of you newer to the story, it's important to remember that the average base price per pound for the SAO segment in any given quarter is highly dependent on the mix of products. As in previous quarters, The decline in average selling price in the recent quarter is due to the higher proportion of lower priced products in the mix of materials that we shipped in the quarter. Importantly, the lower priced products often come with comparable average profit margins. That is clearly evident in FAO's adjusted operating margin for the fourth quarter, which increased for the 18th consecutive quarter to a new record level of 37.8%. The continued margin expansion reflects the SAO team's ability to actively manage our production schedules, increase productivity at key work centers, manage costs, and execute thoughtful planned maintenance activities. As we have said many times before, quarterly operating margins may be impacted by a number of short-term factors, most notably product mix. That said, clearly operating margins remain on an upward trajectory supported by our core drivers, including productivity, mix, and pricing. As a result of the higher sales and expanding margin, SAO reported operating income of 229.7 million in the fourth quarter, a new all-time high for the segment. As we look ahead to our first quarter of fiscal year 2027, we anticipate SAO will generate operating income in the range of 218 million to 222 million. This implies an impressive 28 to 30% increase from SEO's first quarter of fiscal year 2026. The outlook considers the elevated preventative maintenance levels that traditionally occur in our first fiscal quarter. The preventative maintenance, while reducing the amount of operating time in the quarter, is required to keep our assets healthy and running effectively over the long term. As in previous years, we will offset a portion of the loss in operating time with improved productivity and portfolio optimization. Now turning to slide 10 and our PEP segment results. Net sales excluding surcharge in the fourth quarter of fiscal year 2026 were 98.2 million, up 1% year over year and 8% sequentially. We saw sales increase across most of our end use markets sequentially. most notably our titanium products in the medical end use market. As Tony mentioned earlier, our medical end use market continues to have solid fundamentals and we are continuing to see improving demand. In addition, our additive business continues to deliver year on year and sequential sales growth driven by aerospace and defense demand. PEP reported operating income of 7.1 million in the current quarter compared with 6.7 million in the third quarter of fiscal year 2026 and 11.7 million in the same quarter a year ago. We currently anticipate the PEP segment's operating income for the upcoming first quarter to be between 6 million and 7 million. Before we move to cash flow, I want to pull together the pieces that make up our outlook for operating income for the first quarter of fiscal year 2027. We anticipate total operating income of 195 million to 200 million. This includes SAO $218 million to $222 million, PEP at $6 million to $7 million, and corporate costs of approximately $29 million. Our guidance for the first quarter of fiscal year 2027 implies delivering operating income that would be 27% to 30% higher than last year's first fiscal quarter, which was then a record best first quarter. Now turning to the next slide to talk about our cash generation and capital allocation priorities. In addition to the strong earnings performance, we've generated meaningful cash flows driven by higher earnings and ongoing efforts to manage working capital closely, particularly inventory. In fiscal year 2026, we generated $605 million of cash from operating activities, a 37% increase over fiscal year 2025. The cash generated from operations more than supports the $242.7 million in capital spending in fiscal year 2026. The capital spending includes the Brownfield Capacity Expansion Project. As anticipated, capital spending ramped up in our recent fourth quarter, totaling $85.1 million as activities around the Capacity Expansion Project accelerated. A brief update on this project. The Brownfield capacity expansion remains on budget and on schedule to be completed by the start of fiscal year 2028. The construction phase is well underway with key equipment being delivered and onsite assembly and installation progressing. And the project remains focused on not only completing construction and installation of equipment, but also preparing for a smooth startup of operations. With those details in mind, we generated $362.3 million in adjusted free cash flow in fiscal year 2026, ahead of what we had anticipated. We continue to execute our balanced capital philosophy that includes investing cash in attractive and accretive growth projects like the brownfield capacity expansion and returning cash to shareholders. To that end, we continue to execute against our repurchase authorization and repurchased 179.1 million of shares in fiscal year 2026. This brings the total to $281 million spent to date against the $400 million authorization that we announced in July of 2024. And in addition to the buyback program, we also continue to fund a recurring and longstanding quarterly dividend. Finally, our ability to deploy capital is also supported by our healthy liquidity and strong balance sheet. As of the most recent quarter end, our total liquidity was $892.4 million, including $393.3 million of cash and $499.1 million of available borrowings under our credit facility. Our credit metrics remain very strong, with our net debt to EBITDA ratio remaining well below one times. All together, we believe our strong balance sheet and outlook for significant cash generation positions us well to fund continued growth and deliver significant shareholder returns. Before I turn the call back to Tony, I want to highlight that as we have done in the past, we have included a slide in the appendix of this presentation that includes selected guidance to help model our anticipated fiscal year 2027 results. With that, I will turn the call to Tony.

Carpenter Technology just delivered another significant, record-breaking year of profitability. For fiscal year 2026, we generated $702 million in adjusted operating income, a 34% increase over fiscal year 2025 and more than five times fiscal year 2023. It is clearly a testament to our focus on execution, backed by a strong market position, broad and many more. In addition, with the record earnings and disciplined working capital management, we generated $362.3 million in adjusted free cash flow, including investments in the Brownfield expansion project. And we continue to return cash to shareholders. Over the course of the fiscal year, we executed $179.1 million and Sherry Purchases in addition to $40.3 million in dividends. And we believe our current record results are far from our peak. The same dynamics that drove our success in fiscal year 2026 are only strengthening as we look ahead over the next several years. With that, let's turn to the next slide for our outlook. At the outset, I want to emphasize that our approach to target setting remains the same. We believe in setting targets that we have a high level of confidence we can achieve based on what we can see today. At the same time, our team always focuses on identifying opportunities to exceed the commitments we make. With that in mind, let's start with the near term. As Tim detailed, we are projecting a strong start to fiscal year 2027. with operating income projected between 195 and 200 million. For the full fiscal year 2027, we expect between 850 and 880 million of operating income. That represents approximately 21 to 25% growth over our record fiscal year 2026 performance and continues what we believe is one of the strongest earnings growth projectories within our industry. Importantly, this outlook is supported by anticipated strengthening demand across our most important in-use markets. Looking beyond fiscal year 2027, we expect our strong growth momentum to continue. Our fiscal year 2029 operating income target of approximately 1.2 to 1.3 billion reflects both the continued strength of the projected underlying demand environment and the contribution from our brownfield expansion project. Notably, the fiscal year 2029 target represents more than a 20% three-year CAGR on our record fiscal year 2026 operating income, a number that we believe sets us apart from our industry peers. And we do not believe fiscal year 2029 represents the peak of our earnings power. As the Brownfield project will still be ramping production while the underlying demand environment continues to strengthen. Now let's talk about cash generation. Over the last several years, we have demonstrated the ability to convert earnings into cash. For fiscal year 2027, we anticipate between 400 and 430 million of adjusted free cash flow. Note that level of cash generation includes the remaining investment in our brownfield expansion project that we expect to be completed in early fiscal year 2028. Looking beyond fiscal year 2027, we expect cash generation to continue increasing as earnings expand and the brownfield project contributes to profitability. That brings me to capital allocation. I think it's important to clearly state that our balanced capital allocation philosophy remains unchanged. That is, we are focused on maintaining a balance between investing for growth and returning cash to shareholders. First, we will continue investing in the business. Second, we remain committed to returning capital directly to shareholders. We have a longstanding dividend that reflects the strength and consistency of our cash generation. In addition, to complement the quarterly dividend, we continue to execute against our share repurchase program. The strength of our earnings growth, cash generation, and balance sheet gives us the ability to invest for future growth while simultaneously returning meaningful capital to shareholders. When you step back and look at the outlook we've provided today, we believe it represents one of the strongest growth profiles in our industry. And as we have done in the past, We will work not only to meet these impressive targets, but exceed them. Now let's take a step back and summarize this great story. Fiscal year 2026 was another year of record financial performance and demonstrates the strength of our strategy, a strong market position, and our team's ability to execute. We've delivered record quarterly profits with fourth quarter operating income increasing 37% year over year. and driving operating income to a record $702 million for the full fiscal year. Within our specialty alloys operation segment, adjusted operating margins continue to expand and reach 37.8%, highlighting the power of our business and the benefits of disciplined execution. We also converted those earnings into meaningful cash generation, producing more than $360 million of adjusted free cash flow during the year. including funding our brownfield capacity expansion. And importantly, we continued returning capital to shareholders, executing approximately $179 million in share repurchases while maintaining our longstanding dividend. As I just detailed, our earnings outlook continues to strengthen, supported by the same drivers that have fueled our success over the last several years. Productivity improvement, product mix optimization, and favorable pricing actions. For fiscal year 2027, we expect operating income to be substantially higher than our record fiscal year 2026 performance, while continuing to generate significant cash flow. Looking beyond fiscal year 2027, our brownfield capacity expansion project will begin contributing in fiscal year 2028, providing an additional accelerator to our earnings growth profile. and by fiscal year 2029, we expect operating income to reach approximately 1.2 to 1.3 billion. That's a 20% plus CAGR over three years, a rate that we believe exceeds most in the industry. Just as importantly, we do not view fiscal year 2029 as the peak of our earnings power. The market dynamics we've discussed today are expected to continue to strengthen and the Brownfield expansion will still be in the early stages of its contribution. Finally, we believe Carpenter Technology offers an attractive long-term investment opportunity. We are operating in an accelerating demand environment across many of the most attractive in-use markets in the world. Our portfolio consists of highly specialized solutions serving critical applications where performance matters. Qualification cycles are long and the barriers to entry are significant. We have built a unique collection of manufacturing assets, process technologies, metallurgical expertise and customer relationships that we believe are extraordinarily difficult to replicate. In addition, our strong balance sheet and growing cash flow generation provide us with the flexibility to maintain a balanced and disciplined approach to capital allocation. We will continue investing in profitable growth opportunities, including our brownfield expansion project. We will continue supporting our longstanding dividend, and we will continue returning excess capital to shareholders through our share repurchase program. When you put all those elements together, the investment proposition is straightforward. We are delivering record results today. We have a clear path to significant earnings growth in the years ahead, and we remain committed to creating meaningful long-term value for shareholders through disciplined execution, continuous improvement and profitable growth. Thank you for your time, your interest and your continued confidence in Carpenter Technology.

We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question from the line of Scott Duschle of Deutsche Bank. Your line is open. Please go ahead.

Scott Duschle of Deutsche Bank Tim, can you share what the FY29 EBIT Guide assumes with respect to the brownfields contribution to earnings?

Scott Duschle of Deutsche Bank Yeah, Scott, good morning. So let me talk a little bit about just reaffirming some of the stuff we've already said about the brownfield project. In our prepared remarks, we said it's on track, on schedule, on budget. It comes online early fiscal 28. And then through 28, we expect to ramp up production of those newer assets. And in 28, we expect it to be OI incremental. So that's a big deal for a project like that. And then the next milestone we set when we announced the project was in 2030, it would contribute roughly $150 million of incremental OI. So 29, you referenced the EBIT guide. We gave a 29 number. It won't quite be linear between that first year and the $150 million in 2030. We'd expect it probably actually to be a little bit more weighted towards the 30 number, but that's all baked into the current guide.

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

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

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

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

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

Yeah, good morning, Scott. I appreciate your question. I don't necessarily disagree with you on that. I think from our standpoint, you know, our goal is always to have what, you know, have guidance is right out in front of us. I'll say this. If you want to take that guide and say that's the floor for FY27, you wouldn't get any pushback from me.

All right. Thank you. I'll pass it along.

Your next question from the line of Gautam Khanna of TD Cowan. Gautam, your line is now open. Please go ahead.

Hey, guys. And my condolences to all of the participants. people connected to Brian. That's a real tragedy.

So yeah, thank you very much.

Of course, and we're very lucky to have you back in the seat, Tony. So thanks for doing that.

Yeah, thank you.

I wanted to ask a couple of questions on the the comment of OI Accretive in 28 and not being linear, just to be clear. Tim, were you trying to say that it will be closer to the 150, not closer to the barely break even? Is that what you meant to say? So north of 75 or something?

Yeah, not quite the midpoint between those two, but more towards the 150, yeah.

Okay, cool.

You know, Gotham, it gets difficult, if I can say, it gets difficult on that projection, right? Because You heard Scott earlier talk about, well, is the 150 now a bit dated? And of course, the pricing is higher. But as we run through qualifications as well, we're not 100% sure of the exact mix of those products. So that's why we're a bit hesitant to just put on some type of higher price on those products. We don't believe I should put a target out there that we hope to hit. We think we should put one out there that we have confidence in. So that's why you see us maintaining that 150, because at this point in time, we just don't know 100% what the exact mix of products will be running across those assets.

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

Yeah, no, it's a good question, Gotham. Maybe I'll give you a direct answer and maybe a little commentary just on, you know, guidance in general. But we talk about price, mix, volume. You know, probably the biggest, most significant input to FY27 is the build rate that Boeing and Airbus is going to hit, right? I mean, that's the biggest, you know, input that all of us have. Now, we've made assumptions to that, but that's the biggest input. And then if you take a step back, certainly price is going to be a big driver for us. But also volume, as Tim talked about volume in some of the non-aerospace markets, volume is going to come and be a significant tailwind as well. It has to be. You're still at build rates that are much less to where they want to be. And the comments I made in my prepared remarks, you still have some structural customers, Gotham, that are still not ordering at the levels that they acknowledge they should be ordering at. Let that sink in for a minute. So I think it just magnifies any type of significant uptick in ordering and volume when that does hit. And that will be in this fiscal year for us, of course. So I think that's, you know, all those are going to be major drivers. And you know us well enough, you've covered us a long time. Productivity is always a big driver. a factor for us. We're never satisfied where we're at today. And, you know, you look at our plans for this fiscal year, there is a healthy dose of productivity actions that we have in there.

That's helpful. And last one for me, before I turn it over, just if you could walk through kind of some of the sub market order rates, and maybe sales growth rates, you know, engine fasteners, structural Yeah, I'll do that. Thank you.

Yeah, I'll do that. And maybe I just want to take a step back because I do want to come back to this guidance piece and, you know, what it should be, what it shouldn't be. Gotham, I think it's important to understand that myself and my team, we all understand, you know, that everybody has a model and everybody has corresponding expectations. And of course, I would say the reaction to earnings guidance, you must consider the personality of the company that's giving that guidance. What do I mean by that? Corporate technology provides guidance not that we hope we can achieve. We believe in setting targets that we have a high level of confidence in and what we can see today and then immediately starting to say what I have as far as plans in place and then what I can do to overachieve them. Again, you've covered this long enough to know that We are very disciplined from an operational standpoint, a commercial standpoint, and we've proven quarter over quarter. You know, the proof is in the numbers. So I would argue those are the two factors are the reason that we've consistently overachieved what we put out there as targets. So as I said to Scott, if you want to consider FY27 the floor, you won't get any pushback from me because we're already focused on overachieving that. And I think Before we get too far out and have ourselves and got them, you know, I think you have mentioned this. Let's just keep in mind what the guidance we just gave, right? I mean, that guidance we just gave is 25% higher than our record fiscal year 2026. And as you noted in your note, probably the strongest earnings growth trajectories in the industry. So through all this noise, you know, I'm proud to say, you know, we've got a team that's going to put their head down and we're going to deliver quarter after quarter. We're going to do it the right way. We're going to do it the sustainable way. And I think that operational discipline paired with an aerospace demand environment that appears to be poised to expand significantly over the next couple years, that should yield substantial shareholder value. So I guess that was a long-winded way of saying the bottom line for me is I wouldn't bet against this.

Understood. Yeah, and the submarkets, Keller, if you have it.

I do. Just as a highlight, I'd say, hey, listen, you know, from an overall aerospace standpoint, as you saw in our slide, up 3% sequentially, 17% over a year. That was the highest quarter all time for aerospace for us. So that's an important point to make. And if you look at FY26 in total, that was an all time high. You did that while Boeing was working to regain You know, it's footing and Airbus wasn't where it wanted to be. So it kind of pairs to what I just said from a volume standpoint. There's still a lot more to come there. Now, to your specific question, you've waited long enough. The submarket details. Aero engines were up almost 30% year over year. It was down a bit sequentially. Low single digits just, you know, that was on a sequential quarter before was a very strong one. But even with that, it was the second highest in history. So another strong aero engine sales quarter. I know you always ask about aerospace fasteners. They were up 10% sequentially, 12% year over year. If you take that bucket where it's almost got them non-fastener, non-engine, so that structural distribution bucket that we've talked specifically about those customers, that was up again significantly this quarter, up 25% quarter over quarter, 8% year over year. And I know there was some maybe confusion last quarter about how does that all balance out. You've got, you know, aero engine was down slightly. Defense was also down sequentially about 10%. And that's, you know, that's normal. That's related to the specific nature of this sub market and how it's, you know, built on very program specific. Hopefully that helps you out.

Very much so. Thank you. Appreciate it, Tony.

Your next question from the line of David Strauss with Wells Fargo. David, your line is now open.

Thanks, Maureen, and my condolences as well on Brian's unfortunate passing. Thank you. Yeah. So your arrow in defense for you guys grew 15% extra charge. You mentioned 17% in Q4. Does that growth rate, you think, accelerate in 27 relative to 26?

Yeah, that's a good question. I mean, of course, we see aerospace being accelerated. meaningfully higher than FY27. I mean, as you all know, you've been around longer than that. You know it has to be higher with the build rates that Boeing and Airbus wants to hit. Is it exactly that same growth rate? I think you could argue that that would be the case. The reason I'm hesitating a bit, obviously, it depends on, you know, the success primarily of Boeing and when they can get to that next level and then the level after that.

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

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

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

It's a good question. I can tell you now, this isn't the floor for us. We do believe that we've got opportunities to move higher. It certainly gets tougher and tougher the higher you get, obviously. As you stated before, I'm really not going to start forecasting what our quarterly operating margins are, but we believe there's a lot more growth for us to have going forward, especially some of the work we're doing around productivity is pretty significant. So I think as we get a couple quarters into FY27, we'll see how that lays out, but we still expect very good performance from that standpoint.

Okay. All right. Thanks very much.

Thank you, sir.

Your next question from the line of Bennett Moore with JP Morgan. Bennett, your line is still open. Please go ahead.

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

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

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

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

For that and then my last one real quick is in the past, you guys got it to believe a 90% free cash flow conversion for the prior FY27 free cash flow guide. So I'm wondering if this is still applicable and also, Tim, how we should think about capex cadence through the year. Thank you.

Yeah, Bennett, good morning. In 26 and the number we provided for 27, there are growth investments in the reported adjusted free cash flow. But when you look at those and say take the growth investments out, we've demonstrated that we can hit that 85% to 90% type conversion ratio both in 26, so we demonstrated that, and then what we've projected for 27 in the guidance we provided. and then going forward as the large growth project right now wraps up and we bring that online in 28 on a go forward basis, we'd expect those kinds of conversion rates. Still continue to maintain our balanced capital allocation, but given the growth in profitability that we've laid out and our focus on managing working capital, we think that's more than attainable in the future too. and the CapEx Cadence, please. Oh, yeah, sorry, CapEx Cadence. I mean, given that the project, the Brownfield project is pretty much in full swing, a lot of activity there, a lot going on, I would expect that it would be fairly rateable throughout the year.

Thanks so much. Best of luck.

Thank you.

Your next question comes from the line of Josh Sullivan with Jones Trading. Josh, your line is open.

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

Yeah, I think it's going to be, they'll get more aggressive quite a bit earlier than FY29. So the answer is yes.

and they're just on dynamite as aerostructures picks up and medical, you know, looking a bit better. What is the cadence and the dynamite margin profile look like between now and 29?

Well, that's a good question. I mean, obviously dynamite, we see it as a strategic asset, but at the same time, it's a very small portion of our overall operating income. I mean, SAO is 95% plus of our segment operating income. So it is, again, we see it as very strategic, but it's very, very small. At the same time, I see Dynamet over the next two to five years being a bigger contribution to overall operating income. We flipped Dynamet. It used to be probably 60% aerospace. It's probably flipped and become more of a medical business. Business, then Aerospace. That 60-40 has split. So again, relatively small now and not a big driver to our overall guidance for FY27. To be honest, really not that much of a driver to FY29, although we have, you know, ticked that up going forward. I think there's a lot of opportunity there, Josh, for us to take that even to the next level.

Any update on Athens, you know, to your point on the call, you know, carpenters always created overachieving and efficiency and productivity. You know, are you finding any potentially upside production opportunities or ancillary expansion opportunities as you put Athens together with Brownfield?

Well, Tony said this earlier, I mean, I think we think there's always opportunity. But I also say this project that we're working on, the Brownfield project, is a pretty complex project. and we're managing that project. Within that project we're always finding hey there's pluses or minuses we could potentially change some design here or there but given the complexity of it Josh it's not necessarily those aren't necessarily big opportunities but as we finalize and get you know we're called 12 months away now from bringing that online I think there's going to be some things that we'll find along the way and we'll talk about that as we go but It's such a complex project and it's such a big deal for us that we don't really want to veer too far off from getting that project done. Does that make sense?

No, that's fair. You guys are so good. Well, I'll leave it there and thank you for the time. Thanks, Josh.

Your next question from the line of Andre Madrid with BTIG. Andre, your line is now open.

Yep. Good morning. Thanks for my question. And condolences to everyone.

Yeah, thank you, Andre.

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

Well, I don't have any concerns at all about the mix between OEM and MRO or aftermarket in FY 29. We've talked about that extensively. There's been other people in the industry very, you know, experts talk about that in the industry. So there is no concern about that. And I think it's premature for me to talk about in detail what's in the FY 29 number. You should assume that we see all of our markets increasing going forward in FY 29 because we have all of these were in the right markets, the high value in markets, all the macro demand signals are pointing very positive. So all of our markets we expect to be higher. in FY29. Remember, with aerospace and medical IGT, you're well over 80% of our revenue, and all of those are projected to be very strong going into FY29 and beyond, and we have the same viewpoints.

Got it. And then I guess looking again still at FY29, you've said it's at the peak of earnings. I mean, is that on a margin or nominal earning basis or both? And maybe additionally, if it is on a margin, what do you truly view as maybe the high watermark for margins?

Oh, Andre, you thought you might get me at a weak moment and I tell you what the margin is in our model. But I would say to the first part of your question, it's both. As we look past FY29, we usually go out five years for us internally. And we see growth. That's why we're able to say we're confident we see growth beyond FY29. Got it.

Got it. And then I guess just longer term capital deployment. I mean, you're almost at 900 million total liquidity now. I can only imagine my FY29. I'm not going to ask specifics, but obviously the cash on hand will continue to grow as well. I'm curious, is M&A on the table at all? And if so, what does the process look like? I, you know, I'm just curious to see if maybe beyond, you know, organic investments and growth, you guys are looking in organically.

Well, of course, I mean, you would you would guess that a company like us, we get all of the notices whenever something is, quote, available. And we do our research on all of those. So I'll never say no. But when you have such attractive organic projects or possible projects in front of you, it's hard to rank an M&A opportunity higher than that. When I can control my own destiny and do what I'm doing internally, the risk profile is much better for me. That's not a no. But it's just a tough one to make that work. I don't want to buy M&A or buy something just to buy something. And I think the important point here is what you said earlier. You see a significant amount of cash generation going forward, right, for FY29. If you look at that $1.2 to $1.3 billion, that's three years out. Someone, you know, would ask, do you think that number could be higher? Of course it could. It very easily could be higher based on what the build rates are. And then you put that type of cash conversion number on that, that's a significant amount of cash. And that's the reason why we repeated three or four times in this call that we're going to have a balanced capital allocation process. So there are still growth investments we can make in our core markets maybe some of our smaller markets as well at a much lower level that doesn't disrupt the supply-demand balance that we can work on. And it tells you that we're going to be committed to returning cash to shareholders. You should expect that at any given time we'll probably have some type of share repurchase program in place. We're always going to have the dividend. So it's a good situation to be in to have that If you would like to ask a question, please press star 1 to raise your hand.

Please limit yourself to one question and one follow-up. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your next question comes from the line of Gautam Khanna of TD Cowen. Gautam, your line is now open. Please go ahead. Thank you.

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

No, no, you go ahead. Yeah, lead times are relatively consistent quarter over quarter. There's some specific products that you see that pushing out. Again, we cap that, as you know, like we're not taking orders two years out, but I would see that that's going to accelerate quite a bit here over the next quarter for sure. over the rest of this calendar year.

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

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

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

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

I'll give you one more answer. Yes.

Okay, good. That's helpful. Thank you very much.

And we already have some that are turning over as well because of the shorter durations. We have some that we're working on now that's the second time. If you start the clock in 2021 or 2022, let's say 2022 Gotham, we have some that we're doing the second turn of that one.

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

I would say it's not significant, right? It's not significant. We've moved most of those out. but the reason I said one answer yes because I didn't I was hoping you wouldn't ask for more follow-up but I should have expected that from you that yes there's you know there's still one maybe two that's pre-COVID.

Thanks guys I appreciate you taking more time with me thanks.

Yes thank you we appreciate you as well.

Your next question from the line of Scott Duchelet of Deutsche Bank. Scott your line is now open.

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

Well, what you just said at the end is the most important comment. But I will tell you this, that every contract in the aerospace side that we're working on they ask for more and more material.

Not less. Okay. And your share of that material is generally holding in?

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

Understood. Thank you.

Yep, you're welcome.

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

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

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