Carpenter Technology (CRS) Q1 2027 Earnings Call Transcript

DATE

Thu, Oct. 22, 2026

CALL PARTICIPANTS

• Vice President, Investor Relations - John Huyette
• Chairman and Chief Executive Officer - Tony R. Thene
• Senior Vice President and Chief Financial Officer - Timothy Lain

TAKEAWAYS

• Operating Income -- $196.4 million, representing a record for the first fiscal quarter and a 28% increase year over year driven by productivity gains and pricing.
• SAO Adjusted Operating Margin -- 37.7%, matching the record set in the previous quarter despite increased maintenance activity and fewer operating days.
• Aerospace Distribution and Structural Bookings -- grew 49% year over year and 23% sequentially, reflecting growing customer confidence and backlogs.
• Aerospace Engine Bookings -- increased 22% year over year and 10% sequentially, as engine customers strengthen demand outlooks for calendar years 2027 and 2028.
• SAO Segment Sales -- $573.5 million, up 7% year over year though sales declined 6% sequentially due to planned preventive maintenance downtime.
• PEP Segment Sales -- $83 million, a 5% decrease year over year primarily reflecting lower titanium sales into the medical end market.
• Earnings Per Share -- $3.25, reflecting the record operating performance and tax benefits associated with equity award vesting.
• Free Cash Flow -- negative $24.8 million, as $52.8 million in cash from operations was offset by $77.7 million in capital expenditures for capacity expansion.
• Share Repurchases -- $133.9 million, completing a previous $400 million authorization and initiating purchases under a new $1 billion program.
• Total Liquidity -- $658.6 million, comprised of $159.5 million in cash and $499.1 million available under the credit facility.
• Fiscal 2027 FCF Guidance -- $400 million to $430 million, maintained by management despite elevated capital spending on the brownfield expansion project.
• Q2 Operating Income Guidance -- $192 million to $197 million, which would represent growth of 24% to 27% compared to the second quarter of the prior year.
• SAO Q2 Operating Income Guidance -- $214 million to $218 million, expected to remain in line with the first quarter despite reduced production time during holidays.
• Fiscal 2029 Operating Income Target -- $1.2 billion to $1.3 billion, implying a compound annual growth rate of more than 20% over three years.
• Aerospace and Defense Sales -- grew 10% year over year, representing the second-highest commercial aerospace sales quarter in the company's history.
• Net Debt to EBITDA -- 0.6x, maintaining a strong capital structure with no debt maturities scheduled until 2034.
• Corporate Costs -- $26.1 million, down from $26.6 million in the prior-year period due to lower variable compensation accruals.
• Defense Bookings -- declined on both a sequential and year-over-year basis, driven by budget funding challenges within the defense supply chain.
• Effective Tax Rate -- 15.5% for the quarter, with management expecting the full-year rate to fall near the low end of the 20% to 22% range.

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RISKS

• Thene stated, "The disconnect between demand and supply chain activity is driven by funding challenges as our direct customers are not seeing the flow of funds required to place orders aligned with the Department of War needs," regarding sequential declines in defense bookings.

SUMMARY

Carpenter Technology Corporation (NYSE:CRS) reported record first-quarter operating income and maintained high adjusted operating margins despite planned seasonal maintenance. Management reported that strong demand across commercial aerospace and defense markets is driving increased bookings, with pricing actions continuing to serve as a tailwind for profitability. The company is advancing its brownfield capacity expansion project to meet projected volume increases as the aerospace industry enters what management described as a long-term super cycle. Capital allocation remains focused on funding this growth while returning capital to shareholders through an expanded share repurchase program.

• Thene stated, "it is important to note that we and many others believe the industry is just at the beginning of this super cycle," referencing an industry backlog of over 16,000 aircraft.
• Management reported that current aerospace bookings are not yet supporting existing OEM build rates, suggesting additional growth as ordering activity catches up with demand.
• The company is engaged with the FA XX fighter program supply chain and expects to provide critical material content for the next-generation Navy platform.
• Lain indicated that inventory levels increased during the first quarter but are expected to be reduced as production days increase during the second half of the fiscal year.
• Management identified the recent FAA approval of the Boeing 737 MAX 10 as a strategic accelerant, as the model represents approximately 30% of Boeing's aircraft backlog.

INDUSTRY GLOSSARY

• Brownfield Project: An investment to expand or upgrade existing production facilities rather than building new ones on undeveloped land.
• IGT (Industrial Gas Turbine): Large turbines used in power plants to generate electricity.
• LTA (Long-Term Agreement): Multiyear contracts with customers that often include specified pricing and volume commitments.
• MRO (Maintenance, Repair, and Overhaul): The servicing and repair of aircraft and engines to ensure continued airworthiness.
• PEP (Performance Engineered Products): A business segment focused on differentiated products including titanium, powder metals, and additives.
• SAO (Specialty Alloys Operations): The company's primary segment focused on stainless steels and specialty alloys.
• Surcharge: A pricing mechanism used to pass through fluctuations in the cost of raw materials, such as nickel and cobalt, to customers.
• TCIR (Total Case Incident Rate): A standard safety metric calculating the number of work-related injuries per 100 full-time employees.

Full Conference Call Transcript

Operator: Hello everyone. Thank you for joining us and welcome to the Carpenter Technology's first Quarter Full Year 27 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question. To withdraw your question, press 1 again. I will now hand the conference over to John Huyette, Vice President, Investor Relations. Please go ahead.

John Huyette: Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call. For the fiscal 27 first quarter ended September 30, 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 R. Thene, Chairman and Chief Executive Officer and Timothy Lain, 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 Technology's most recent SEC filings including the company's report on Form 10-K for the year ended 06/30/2026, and the exhibits attached to that filing. Please also note that in the following discussion, unless otherwise noted, when management discuss the sales or revenue, that reference excludes surcharge. When referring to operating margins, that is based on adjusted operating income, excluding special items, and sales, excluding surcharge. I will now turn the call over to Tony.

Tony R. Thene: Thank you, John, and good morning to everyone. I will start on Slide 4 with a review of our safety performance. We ended the first quarter with a total case incident rate of 1.7. We continue to invest in programs for employees. With a focus on identifying potential risks and minimizing the severity of injuries. With our focus on leading indicators, we expect to see continued progress on our ultimate goal. a zero-injury workplace. Let's turn to Slide 5 for an overview of our first quarter performance. Our first quarter performance was a solid start to fiscal year 2027. The quarter's primary talking points fit into a tight, simple narrative.

1, record first quarter operating income. up 28% over the first quarter of last year. The record results were driven by productivity improvement disciplined mix management and continued realization of pricing actions. 2, SAO segment adjusted operating margin matched the record from last quarter. at 37.7%. This is an impressive feat with fewer operating days and increased preventive maintenance activity versus last quarter. And to be clear, we do not view this margin level as the peak. As we expect strengthening demand productivity and pricing actions to drive us to higher levels. 3, bookings continue to increase. Specifically, our bookings for customers in the commercial aerospace supply chain were up again sequentially, and up 25% year over year.

Importantly, the most talked about aerospace submarkets distribution and structural, were up 23% sequentially and 49% year-over-year. And aerospace engine bookings continue to increase sequentially. it is important to note that we and many others believe the industry is just at the beginning of this super cycle. With even stronger demand anticipated in the coming quarters of fiscal year 2027 and beyond. that is an extra data point. We have numerous customers who have confirmed that they are ordering at a level that does not even support current aerospace OEM build rates. Let alone the projected future build rate increases industry is planning for.

This is an important point because it supports the fact that bookings will need to continue to increase significantly in the near future to support demand. 4, pricing continues to be a tailwind. Restricting demand and an expanding supply demand gap for nickel superalloys our pricing for both LTA and non LTA business remains elevated and consistently increasing. 5, strong financial targets for fiscal year 2027 and 2029. That we are focused on overachieving. More on that on my closing slide. That is the summary of the quarter's performance and current state of the business. All 5 primary areas of interest for our shareholders are currently flashing green and exhibit clear positive signals.

Consistent record operating income performance strong operating margins with levers to expand further, accelerating demand across key end use markets continuing benefit from pricing actions, and an industry leading financial outlook with opportunity to overachieve. Let me turn to Slide 6 and a closer look at first quarter sales and market conditions. The first quarter of fiscal year 2027, our total sales, excluding raw material surcharge, were down 7% sequentially and up 5% year over year. As expected, the sequential sales decline was driven by the planned maintenance outages we discussed on the last earnings call. I will focus my comments today on the aerospace and defense end use market as it accounts for the majority of our sales.

Sales in the aerospace and defense end use market were down 5% sequentially. And up 10% year over year. Again, this sequential decline was expected and reflects the impact of our planned maintenance outages. For more submarket sales detail, I will share the following. Aero engine sales sequential change was a bit better than the overall aerospace and defense average. Aerospace fasteners was a bit worse although it was the second highest sales quarter on record. Second only to the previous quarter. Aerospace, structural, and distribution submarkets was roughly flat to a strong previous quarter. And the defense submarket was down sequentially due primarily to lack of clear funding. I will talk more about this a bit later.

It is important to note that at a time when the aerospace market is still only in the early stages of a large ramp, And during a quarter where we had significant plant outages, we posted our second highest quarter of commercial aerospace sales on record. And delivered a record first quarter operating income. As we build on this strong quarterly performance, let me provide you with some color on how we see the near term future unfolding how current bookings are taking shape, and what our customers are telling us right now.

Some have worried that macro events like the Iran conflict increasing jet fuel prices, and rising ticket prices will dampen travel demand and thus the overall aerospace industry. But to date, the industry has been resilient as airlines are still reporting strong demand and air traffic is up 14% quarter over quarter. MRO activity is expected to continue to grow due to the overall demand environment along with the large number of engines approaching their first shop visits. Airbus and Boeing continue to ramp production. With backlogs now over 16 thousand planes, that is more than 10 years of production. The industry is projecting approximately 1.4 thousand to 1.5 thousand new airplane builds in calendar year 2026.

And they want to go higher with target rates above 2.1 thousand. that is a 50% increase above the current year rate. Repeat a 50% increase above the current year rate. So, clearly, we are still in the early stages of this ramp. With significant growth ahead of us. We do not have any customers talking to us about slowing down or about concerns over aerospace market growth in the future. Discussions are only about what pace of growth they will realize. A key development this week was the FAA approving the Boeing 737 MAX 10. This model is strategically important. Since it is the largest 37 variant and roughly 30% of Boeing's backlog.

This provides another positive accelerant to the demand signal for the aerospace supply chain as production of this model ramps. Our quarterly bookings or order intake rate is an important indicator of the expanding growth. As I mentioned earlier, the aerospace distribution and structural submarket bookings were up 23% sequentially and 49% year-over-year. Our aerospace distribution customers in general are reporting that their backlogs are growing with incoming bookings exceeding billings. Their confidence is growing, and they see solid double digit growth in calendar year 2027 and even higher growth rates in calendar year 2028. Our aerospace engine bookings continue to increase, up 10% sequentially and 22% year-over-year.

Our aerospace engine customers remain very busy and their demand outlooks for calendar years 2027 and 2028 continue to strengthen as OEMs increase ordering activity. In addition, we are receiving emergency orders in this submarket. And we expect those to increase as the supply chain ramps and the need for reliable material supply becomes even more critical. Aerospace faster bookings were down sequentially as it is normal for quarterly bookings to be inconsistent in this submarket. Our aerospace fastener customers continue to tell us that their activity has not yet fully caught up to current aircraft build rates. Supporting further growth as ordering catches up with underlying demand. Turning last to the defense submarket.

Where we see a stark contrast between in demand and our direct customer behavior. Bookings were down on a sequential and year over year basis. The disconnect between demand and supply chain activity is driven by funding challenges as our direct customers are not seeing the flow of funds required to place orders aligned with the Department of War needs. Given our position as a critical supplier across multiple defense programs, such as the next generation fixed wing, rotary craft, and missiles and munitions platforms, we have seen a significant uptick in direct engagement from the Department of War and OEMs as customers prepare for future needs.

As an example, over the last quarter, the Navy selected Boeing to build its next generation FA XX fighter. We are already engaged with the supply chain on the design of critical elements for this fighter. And Carpenter Technology will support critical applications and have meaningful material content. On this platform. Overall, the message is crystal clear. The defense industry will need significantly more material to support their goals. We, along with the industry, anticipate greater clarity post the midterm elections. Once budgets can be clarified, we anticipate a rush for material with significant emergency orders driving significant growth in this submarket.

It is clear from my comments that the key demand indicators including higher bookings, growing customer backlogs and increasing urgency for material. All point toward continued demand acceleration across our highest value end use markets. And in this accelerating demand environment, we remain focused on execution to realize the high margin high growth profit opportunity ahead of us. I will take a closer look at our outlook on the last slide. But first, I will turn it over to Timothy for a review of the financials.

Timothy Lain: Tony. Morning, everyone. Starting with the income statement summary, on Slide 8. Net sales excluding surcharge increased 5% year over year and declined 7% sequentially. The sequential decline primarily reflected planned first quarter downtime for preventative maintenance as we discussed last quarter. Improved productivity, products mix optimization efforts, and pricing actions partially offset the impact of reduced operating time. Gross profit was $256.3 million up 18% year over year and down 5% sequentially. Selling, general and administrative, or SG and A expenses, $59.9 million, down $3.2 million year over year and down $2.1 million sequentially. Primarily due to lower variable compensation accruals.

SG and A includes corporate costs of $26.1 million compared with $28.5 million in the fourth quarter of fiscal year 26, and $26.6 million in the first quarter of fiscal year 26. We expect second quarter fiscal year 27 corporate costs of approximately $28 million to $29 million Operating income was $196.4 million up 28% year over year and down 5% sequentially. As Tony noted, this was a first quarter record and provides a strong foundation for the rest of fiscal year 27. Our effective tax rate was 15.5%, similar to the first quarter of fiscal 26 reflecting tax benefits associated with the vesting of certain equity awards.

For fiscal year 27, we expect the effect effective tax rate will be near the low end of our previously provided range of 20% to 22%. Diluted earnings per share for the first quarter were $3.25 Turning to our segment results, starting with SAO on Slide 9. First quarter net sales excluding surcharge were $573.5 million James increased 7% year over year and declined 6% sequentially. The sequential decline reflected planned preventive maintenance downtime across our facilities partially offset by mix management and pricing benefits. SAO's adjusted operating margin was 37.7%, consistent with the prior quarter's record.

This is an impressive result given the lower available operating time that we typically see in our first fiscal quarter as a result of maintenance activities. From a trend perspective, we expect further margin expansion from productivity, mix and pricing. That said, margin may vary quarter by quarter depending on the mix of products that we ship in any given quarter. SEO reported first quarter operating income of $216.3 million For the second quarter of fiscal 27, we expect SAO operating income of $214 million to $218 million in line with the first quarter. Our outlook reflects reduced production time during the holidays.

As in prior years, we expect improved productivity and product mix optimization to partially offset the reduction in operating time. Turning to PEP on Slide 10. First quarter fiscal year 27 net sales, excluding surcharge, were $83 million down 5% year over year and 15% sequentially. Operating income was $7.3 million slightly above our guidance compared with $7.1 million in the fourth quarter of fiscal year 26 and $9.4 million a year ago. The year over year decline primarily reflected lower titanium sales into the medical end use market offset by strength in our additive business. We expect second quarter PEP operating income to be similar to the first quarter.

Before turning to cash flow, let me summarize our second quarter fiscal year 27 operating income outlook. We expect total operating income $192 million to $197 million which is largely in line with our strong first quarter results and implies growth of 24% to 27% compared to last year's second fiscal quarter. The total operating income estimate is comprised of SAO operating income of $214 million to $218 million, PEP operating income of approximately $7 million and corporate costs of approximately $28 million to $29 million. Turning to Slide 11 and our cash generation and capital allocation priorities. In the first quarter of fiscal year 27, we generated $52.8 million of cash from operations.

And spent $77.7 million in capital expenditures that resulted in negative free cash flow for the quarter of $24.8 million Significant cash generation is an important element of our ongoing growth story. We continue to focus our efforts on ensuring cash generation from increasing profitability, as well as focused discipline on working capital management. As expected, capital spending remains elevated as we continue to fund our brownfield capacity expansion project. A brief update on our brownfield project. The expansion project remains on budget and on schedule for completion by the start of fiscal year 28. Site activities are progressing well. Major equipment installation underway.

The project team remains focused on safely completing construction and equipment installation while preparing for a successful operational start up. As we move through this year, we continue to anticipate generating between $400 million and $430 million of free cash flow in fiscal year 27, which is an impressive outlook given that includes the elevated capital spending related to our capacity expansion investments. The cash generation enabled our balanced capital allocation approach. That combines investing in attractive accretive growth projects including the brownfield capacity expansion, with returning cash to shareholders. That is demonstrated by $133.9 million of share repurchases during the quarter.

As announced in August, these repurchases completed the prior $400 million authorization as well as purchases under the newly authorized additional $1 billion program. We also continued paying our long standing quarterly dividend. Our strong balance sheet and liquidity support our capital allocation priorities. At quarter end, total liquidity was $658.6 million comprised of $159.5 million in cash and $499.1 million in available borrowings under our credit facility. Our credit metrics remain very strong with net debt to EBITDA of 0.6x. And our capital structure is well positioned to allow significant flexibility with no debt maturities until 2034.

Again, believe our strong balance sheet solid capital structure and outlook for significant cash generation positions us well to continue to invest in future growth as well as return significant cash to shareholders. With that, I will turn the call back to Tony.

Tony R. Thene: Thanks, Timothy. As I mentioned in my earlier comments, the quarterly performance can be summarized into a tight positive narrative. Consistent record operating income performance. Strong operating margins, with levers to expand further, accelerating demand across key end use markets, and continuing benefit from pricing actions. I also noted an industry leading financial outlook. For fiscal year 2027, we communicated strong financial targets just last quarter. But we are clearly focused on overachieving. And are developing action plans to make that a reality. In fiscal year 2028, our brownfield capacity expansion project comes online. Providing an additional accelerator to our earnings growth profile.

And by fiscal year 2029, we expect operating income to reach approximately $1.2 billion to $1.3 billion that is a 20%-plus CAGR over 3 years. A rate that we believe exceeds most in the industry. But, again, our goal is to overachieve. And we do not view fiscal year 2029 as the peak of our earnings power. Altogether, we believe Carpenter Technology offers a uniquely long term investment opportunity. We are operating in an accelerating demand environment. Across many of the most attractive end use markets in the world. And not only is demand accelerating, but the platforms that serve that demand airplanes, medical implants, power generation, semiconductor fabrication. None of them can be built without Carpenter Technology.

As a result, we have a clear path to significant earnings growth in the years ahead. Our strong and growing margin profile reflects the fact that our portfolio consists of highly specialized solutions. Serving critical applications where performance matters, qualification cycles are long, and the barriers to entry are significant. And our strong balance sheet and growing cash flow generation provide us with the flexibility to maintain a balanced and disciplined approach to capital allocation. Investing in profitable growth opportunities, and returning cash to shareholders. We remain committed to creating a meaningful long term value for shareholders through disciplined execution, continuous improvement, and profitable growth. Thank you for your time and continued confidence in Carpenter Technology.

Operator: We will now begin the question and answer session. Please limit yourself to 1 question and 1 follow-up. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 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 and a roster. Your first question from Andre Madrid. With US Bancorp BTIG. Your line is now open. Please go ahead.

Andre Madrid: Yep. Thanks. Good morning. I appreciate you taking my question. You know, looking at it, I. As you mentioned, maintenance as being maybe 1 of the reasons that Q1 is a little weaker, but it seemed like some of that was already contemplated in your Q1 outlook. So I am just trying to better understand maybe what are some of the other puts and takes I might have driven the, the missed Well, I think there are no other puts and takes.

Tony R. Thene: Mean, the result was about 98% to 99% of the guidance that we gave. So you are only talking about a couple million dollars, Andre, and that could come down to 1 customer unable to arrange a truck to be shipped on the last day of the quarter. that is how small this is what you are talking about. So I do not have a long list of items. We effectively came in at our guidance.

Operator: Your next question from Gautam Khanna. With TD Cowen. Your mic is now open. Please go ahead.

Gautam Khanna: Hey, guys. And I apologize. I missed the front of the call. it is the earnings day. But Tony, I just want. It sounded like nothing has changed in the demand environment. Nothing has changed in the pricing environment. And that your conviction in the 2027 through 2029 outlook is unchanged. Right? I just wanna make sure that was clear.

Tony R. Thene: Yeah. Well, good morning, Gautam. Hi. It is changed. I mean, it is stronger. My outlook on demand is stronger than it was a quarter ago. My outlook on pricing is stronger. Than it was a quarter ago, and my confidence in 2027 and 2029 is stronger. Than it was a quarter ago a quarter ago. So it has changed. To the positive. Okay.

Gautam Khanna: And can you talk a little bit about productivity and kind of income? I know we do not have the tonnage disclosures, which is fine. I just. I am curious, like, anything directionally on capacity unlock, the ability to drive more throughput? In the first quarter and then as we move through the year. Like what you guys are expecting in terms of the ability to unlock. Because you are you are 27 all out at this point. I am just curious what I am.

Tony R. Thene: No. it is a good question. I think it is that is a good question. it is probably 1 of the most important questions. it is across the board, so there is not 1 item. I cannot just work on 1 item. We are working on multiple areas of the plan. And as you well know, when you unlock 1 bottleneck, by definition, that creates another 1. That you go work. Right? And you try to link them all together. So it was across the board. I mean, for SAO, to do 0.1 percentage point less than the record last quarter.

With less operating days and significantly more maintenance activity you have to have that increased productivity to be able to maintain that. I mean, that is actually an unbelievable level to be at that 37.7% in a month like we had. So very happy with what is going on out on the shop floor. But not satisfied. Of course, there is there is a next level and a level after that we can get to. And I would just say this. As you look and you get into Q3 and Q4, the demand signals that are out there that is going to be even more tailwinds to push this margin percentage up.

You are going to significantly more volume coming across the assets. And the price is going to continue to increase. Quarter over quarter. that is very helpful.

Gautam Khanna: Tony, also, just if you could remind us on seasonal maintenance. You guys have been very proactive on doing pulling in maintenance throughout. Mhmm. But obviously, the September quarter has just a heavier load on that front. Is that unique to the quarter? And then just as we move forward, is there any perturbations you can call out now that we should be aware of? Whether it is maintenance or other things?

Tony R. Thene: Yeah. Yeah. Thank you. The key is it is nothing special about the first quarter. that is just when we usually set up our maintenance schedules, and it usually got them is not 1 large piece of equipment out for a long period of time. Just cannot afford that in today's demand environment. So what you have are a lot of smaller maintenance projects all hooked together, and that is what you saw in the first quarter. You are gonna continue to see that type of preventive maintenance throughout the year. My guess right now is none of those events will be as large as the 1 you saw in Q1. That makes sense.

Gautam Khanna: And just given the stock is acting kind of odd as many aerospace stocks these days. How do you prioritize capital allocation from here? Obviously, you guys have been doing buybacks. Just how do you think the board will respond to those?

Tony R. Thene: Well, without being too exact, I agree with you. I think right now, you know, there is a major negative sentiment that is emerged over the last couple months in the aerospace market. I cannot really speak to that, Gautam, because I have not found 1 person that can explain exactly to me what they are negative on. And my guess is you probably would not be able to explain that to me either. But I think my prepared remarks set out a pretty strong near term future, let alone FY 2027 near term positive future. With that said, specifically answer your question, going to continue to fund the brownfield. And certainly at these levels, we are we are.

We will remain active in the repurchase program. Thanks a lot, Tony. Appreciate it. Yeah. Thanks, Gautam. Stay well.

Operator: Your next question from Scott Deuschle with Deutsche Bank. Your line is now open. Please go ahead.

Scott Deuschle: Hi, good morning. Tony, can you provide an update on where the backlog stands today relative to the start of the calendar year?

Tony R. Thene: Without giving specific numbers, Scott. It is continuing to increase. Across all of our end use more.

Scott Deuschle: And then have you placed much of the brownfield capacity on contract at this point, or are you still waiting contract that out?

Tony R. Thene: Well, we do not we do not contract out specific pieces of equipment. So if you look at the demand profile going forward, that volume will be absorbed immediately as it comes online. Okay. And then last question is coming on It will be absorbed by our current-- sorry. It will be absorbed by our current LTAs. Right? All of our LTAs, they will be wanting more material. So that is not a. I do not contract out specific equipment to specific customers. Right. Okay.

Scott Deuschle: And then I guess maybe on that point, can you comment on the share position that you have been securing on new aerospace LTAs and how that share position is or is not changing relative to the contracts that they are replacing and renewing?

Tony R. Thene: Well, I can tell you this. All of them are higher. Every 1 of the customers that we dealing with, and we just we just completed 2 aerospace significant aerospace LTAs this past quarter, the first quarter. And, every customer to a T wants more material.

Scott Deuschle: Is the share percentage higher, or is the volume commitment is higher?

Tony R. Thene: Well, I know which 1 comes first. Right? I mean, the volume is higher. Right? there is only a couple players in the market. And, they are gonna need all that material. So I mean, the volume is significantly higher. The shares are probably gonna remain pretty well the same. there is not a share gain battle going on. Okay.

Scott Deuschle: Thank you very much.

Operator: Your next question from the line of Joshua Sullivan with JonesTrading. Your line is now open. Please go ahead.

Joshua Sullivan: Hey. Good morning. Good morning, John. The struck the structural distribution market, what is your sense of their inventory levels? Are there any you can share with us relative to current or projected build rates? Just trying to get a sense of know, as you see this order flow, know, what their restocking know, cycle kind of looks like or from your perspective here.

Tony R. Thene: Well, Joshua, I will tell you this, that the majority, if not all of the customers in that submarket are reporting decreasing inventories. And that aligns then very. Now all of them will be at different points in time. Right? I am not suggesting that every customer is the same. But they are for the most part, all reporting decreasing inventories, and that is the direct correlation to seeing the increased bookings. I think the good news is that those bookings are going to have to continue to increase significantly, as I said in my remarks. There is no choice when it comes to that.

So I think going forward over the next couple quarters, a very positive outlook when it comes to the. Those 2 submarkets.

Joshua Sullivan: Then and then guess in another submarket on the defense market, just given the impetus to restock various inventories. And I think, you know, you had talked a little bit about emergent demand, but what does that more urgent order flow look like near term?

Tony R. Thene: Well, I was not being you know. I was not exaggerating. I said that I thought there would be a rush of material orders once there is some type of clarity around the budget. And I say that because of the discussions that we have with the Department of War, whether that be with the Navy, the Air Force, the Army, that demand is significant. The real issue is that the Department of War does not place orders. there is multiple companies in the supply chain that place those orders.

And they do not have that funds flow to be able to do it. there is not 1 person in the defense supply chain that does not believe they should be placing orders right now. But the way that the budget works, that is just not possible for them to do right now. Once that clears up, I think saying that there will be a rush on orders will be an understatement.

Joshua Sullivan: Got it. Thank you for the time.

Tony R. Thene: Thank you, sir.

Operator: Your next question from the line of Bennett Moore with JPMorgan. Your line is now open. Please go ahead.

Bennett Moore: Good morning, Tony, Timothy. Thank you for taking my question. Wanted to it is great to see the bookings continue to move in the right direction. I appreciate your comment around, you know, incremental confidence in the 2027 guide, but I am just hoping you could frame you know, looking specifically at structural activity and some of the dislocation on the defense side, how do these compare relative to the assumptions you have in that 2027 guide?

Tony R. Thene: Yep. Bennett, good morning. I will I will say it this way. Based on that f y 2027 guide, I believe that there is upside in volume productivity, and pricing versus the assumptions that we used when we gave that guidance 3 months ago. Alright. Understood.

Bennett Moore: And then a quick housekeeping if I could just on the working capital, the use was a bit bigger than we expected. I see the guide for free cash flow was maintained. So just wondering if this is largely a function of the planned outage or there is anything else we should consider looking ahead?

Timothy Lain: Yeah. Bennett, this is Timothy Lain. I think it. it is a more of a function of timing So we did build some inventory in Q1. As we progress through the year, we have got more available days in the back half of the year. it is a it is a historical trend. We will burn that inventory off. So as we progress through the year, we should see cash flow continue to accelerate. CapEx might be a little bit higher in the second half as we ramp up and try to finish the project later this year. But in general, based on the guidance we gave, the cash has to accelerate here.

In Q2 and then even more in the second half.

Bennett Moore: Great. Thank you both.

Operator: Your next question from the line of David Strauss with Wells Fargo. Your line is now open. Please go ahead.

David Strauss: Thanks. Good morning. Thanks for taking my question. Tony, any comment on the kind of volume versus price algorithm that came through in Q1 revenue for, kind of in total and more specifically on the aero side?

Tony R. Thene: Well, I can tell you that price continues to increase quarter over quarter. The LTAs that we just signed higher price. We have got 1 that sets right now agreement in principle. Higher price. We are working on a couple other major ones as we speak. Both will be higher priced than before. I think it is. David, it is illogical to think that the price would be lower. I mean, demand is accelerating. Not declining. there is no more capacity coming online other than our brownfield, a couple others that. there is no way that we will keep up with that. So the pricing story seems pretty straightforward to me.

David Strauss: Okay. Yeah. I mean, I was just looking if you kinda poke the overall, you know, kind of revenue growth ex surcharge. Was it was it 2 thirds volume, 1 third price? Or you know, any. You know, in terms of the upside year over year there, any sort of color there?

Tony R. Thene: No. No. I see what you are saying. I mean, obviously Yeah. You know, we stopped giving volume this quarter. So I am not going to then start giving it on the Q and A. But, I mean, you think that you got a Q1 with less operating days. Right? Versus Q4, which is usually your biggest 1. But I do not I do not have a volume problem or a volume challenge. I mean, we are running in many cases, the majority of our equipment as full as we can So I do not have a I do not have a volume problem.

Now the issue that you have, David, is that volume is not generic, and it is not a 100% fungible. Right? So there are different products that use different pieces of the of the plant capacity. Having defense be a bit light. Maybe the word a bit light is not the right word. Being light that causes some challenges for us because we have to move some things around. that is some that is that is volume from the defense side that we would have run. Now we are not. Right? So we move some things around. So that can be some give and take. Based on what we what we what we decide to run there.

But in totality, the volume is going to be there. it is even gonna be stronger as we get out over the next couple of quarters.

David Strauss: Okay. And maybe any comments on medical and energy, you know, those end markets, I think you had talked Last call, it seemed like you were a bit optimistic that we would start to see improvement kind of in those you know, those categories? what is the, you know, kind of what did you see in Q1? And how are you thinking about those 2 end markets from here?

Tony R. Thene: Yes. I mean, thanks for the question. Sometimes we forget about that. Medical is going to continue to perform for us. I should say not continue to perform, continue to increase. it is really 1 specific subset inside of medical. that has lagged a bit. Procedures are up. We make products that provide our customers a solution that they cannot get anywhere else. So I think that is we will see that continue to increase over the next couple of I am not overly worried with medical and it is not driving down my overall performance. Energy, interesting. Small piece of my overall revenue, certainly on the IGT side has been very strong.

And I would anticipate that to remain strong going forward. We have a very small oil and gas business even, David, that is been relatively weak, I would say, that we see coming back a little bit here now in this quarter and the next couple quarters. So overall, for those 2 markets, in total, again, much smaller than aerospace, but both I would say with some positive tailwinds. All right. Thanks very much.

Operator: Analysts are now invited to rejoin the queue and ask additional questions. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. Your next question from the line of Andre Madrid with US Bancorp BTIG. Your line is now open. Please go ahead.

Andre Madrid: Yep. Thanks for getting me back in the queue. I do not know what happened there, but guess I want to follow-up on that by maybe asking a bit more about LTA mix. I know it seems like you guys might have resigned some new ones recently. Just should we be expecting the LTA mix to kind of start trending upward again? Locking in some favorable pricing, or how should we be thinking about that?

Operator: Let me make sure I understand your question.

Tony R. Thene: Do you mean by when you say the LTA trend? LTA train. How much work? Like, the mix of business that is driven through LTAs, do you expect that to continue to grow through the end of the decade? Are you guys like starting to you know, kind of lock in some more favorable pricing, or is it going to kind of stay where it is at for the time being? Yeah. So a couple of questions in there. Of course, the pricing is going to be higher, Andre. As I said earlier, it would be illogical for it not to be in the current environment.

But from a total percent of our total portfolio, I would say it is gonna be relatively the same. Right? Volume is increasing, and, you know, the LTAs that we are renewing are primarily with existing customers. The majority of our aerospace business is under LTA now.

Andre Madrid: Yeah.

Tony R. Thene: Yeah.

Andre Madrid: No. that is, that is clear. No. I appreciate that. And then, I guess, if I could just squeeze 1 more in. I mean, looking specifically at the engine aftermarket I know you talked about it already a little bit, but there has been some concern broadly speaking, across commercial aero on the effect of maybe, you know, higher fuel prices. It does not seem like some of your peers and downstream customers have been seeing it affecting demand yet. Seems to be the same case for you. But I guess just what specifically are you seeing in engine aftermarket that might inspire some more confidence that demand will persist?

Tony R. Thene: Well, we have never seen a drop-off of it. So I understand some of that negative sentiment out there. We have not seen it, and we have not heard that from any of our customers. Appreciate the color. Thanks, Tony. Thank you, sir.

Operator: Your next question from Chuck Minervino with Susquehanna. Your line is now open. Please go ahead.

Chuck Minervino: Thanks. Good morning. I was wondering if you could elaborate a little bit on, your comments that you have some actions and projects you are working on that could exceed the operating income targets for fiscal 2027 and 2020. So I was just wondering if you could provide a little bit more detail on some of the levers you could pull there to maybe unlock some of that.

Tony R. Thene: Well, welcome, Chuck. Think about the 3 big buckets. Number 1, volume. I think, has the opportunity to be higher than what we thought it would be a quarter ago just because of the ordering patterns We just talked about the pent up demand in defense That is that is a balloon that is ready to bust. Right? I mean, the demand is increasing and increasing in the orders are not there. So I think that is going to be a significant could be a significant tailwind from a volume standpoint. And then across the rest of the aerospace supply chain.

We know Customers have told us they are ordering today at a rate that does not even support the current build rates. For Boeing and Airbus. So we know that is gonna have to come back, and we sense that will be in the near term. So I think volume can be an upside. What we have seen with our current work now in LTAs the pricing potentially can be an upside as well. And then on productivity, yes, there is multiple areas that we continue to drive productivity in through our use of AI in many cases, that we have been able to unlock faster and I would say, at a greater quantity than we had originally planned.

So all 3 of those buckets Chuck, are going to contribute to us potentially beating that FY 2027 guidance. And remember, I mean, it does not take it does not take a huge percentage increase for example, in price or in volume to you know, to exceed that to exceed that guidance. So it is all it is not easy, but it is all doable.

Chuck Minervino: Got it. And if I could just ask 1 more. Could you talk a little bit about your kind of outlook for margins in SAO? Maybe this year, but also kind of beyond this year and where some of the levers may be to expand margins in that segment?

Tony R. Thene: Yeah. it is a good question and it is almost. I can give you the same answers I gave to you about how do you increase overachieve on FY 2027. The margins are going to be driven by increased volume, pricing, we believe, is a tailwind and then also productivity. So we will be working all 3 of those. Right? As you are able to run your plant at higher and higher utilization levels, and find more and more output available to you that is a direct uplift to the margin. So you know, we have to be careful. Everybody, you know, obviously, a lot of concern over it going down 0.1 percentage point in SAO.

A quarter that they have significant preventive maintenance and less operating days. I will have a hard time understanding that 1. So you will have some of that variability quarter to quarter. But if you look over the long term, certainly the opportunity for us to continue to increase SAO margins is clearly there. Great. Thank you.

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

John Huyette: Thank you, operator, and thank you everyone for joining us today for our fiscal year 27 first quarter conference call. Have a great rest of your day.

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

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