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    CRS
    Earnings call· Dec 2024(Q2 FY25)

    CARPENTER TECHNOLOGY Q2 FY25 earnings call CRS

    Jan 30, 2025 Source

    Executive summary

    Carpenter Technology Q2 FY25 — Record Operating Income and Raised FY25 Guidance

    Carpenter Technology delivered a record second quarter, driven by strong productivity, product mix optimization, and pricing actions, leading to a significant increase in SAO segment margins and a raised full-year operating income outlook. Despite some sequential sales decline due to holiday shutdowns and cautious 737-related customer behavior, the company maintains confidence in continued robust earnings growth, especially as the aerospace supply chain ramps up. Management plans to share a long-term outlook at an upcoming investor event.

    Highlights

    5

    • Generated $119 million in operating income, a 70% increase year-over-year, marking the second most profitable quarter on record.

    • SAO segment achieved a record adjusted operating margin of 28.3%, up from 20% a year ago and 26.3% in the prior quarter.

    • Increased full fiscal year 2025 operating income guidance again to a range of $500 million to $520 million.

    • Generated $38.6 million in adjusted free cash flow during the quarter.

    • Total case incident rate improved to 1.1, reflecting ongoing safety improvements.

    Concerns

    3

    • Sequential sales declined 5% on 10% lower volume due to customer year-end shutdowns and holiday operational pauses.

    • Customers with direct exposure to the 737 platform are in a "wait-and-see mode" regarding production ramps, impacting order activity.

    • Additive business within the PEP segment experienced deferral of orders over the last two quarters, impacting segment profitability.

    Guidance & targets

    6
    CategoryTargetConfidence
    Full fiscal year 2025 Operating Income
    $500 million to $520 million
    high materiality
    High
    SAO Operating Income
    $140 million to $145 million
    medium materiality
    High
    PEP Operating Income
    $10 million to $12 million
    medium materiality
    High
    Effective Tax Rate
    23%
    low materiality
    High
    Corporate Costs (SG&A)
    $23 million to $24 million
    low materiality
    High
    Full fiscal year 2025 Adjusted Free Cash Flow
    $250 million to $300 million
    high materiality
    High

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    SAO
    Sales increase on 11% lower volume reflects higher realized prices and improving product mix. Margin expansion driven by focus on consistent production, managing operating costs, and optimizing product mix. Shipments influenced by customer year-end shutdowns and holiday operational pauses.
    Adjusted operating margin: 28.3% (vs 20% YoY, 26.3% QoQ)
    		$479.6 millionup 15%down 6%$135.6 million operating income / 28.3% adjusted operating margin
    PEP
    Operating income compared to $7.1 million YoY and $7.3 million QoQ. Dynamet is the primary driver, with strong market demand in Medical and Aerospace. Additive business experienced order deferrals impacting segment results, but outlook is improving for Q3.
    Dynamet sales from Medical and Aerospace: 95%
    		$86.2 milliondown 2%down 7%$7 million operating income

    Operational metrics

    17
    Total Case Incident Rate
    1.1improvement
    Q2 FY25 YTD

    Reflects improvements as newer employees gain experience and develop in safety-first culture.

    Operating income growth
    70%YoY
    Q2 FY25

    From $69.8 million in Q2 FY24 to $118.9 million in Q2 FY25.

    Sales growth (excluding surcharge)
    13%YoY
    Q2 FY25

    On 6% lower volume. Driven by increasing productivity, stronger product mix, and higher prices.

    Sales change (excluding surcharge)
    -5%QoQ
    Q2 FY25

    On 10% lower volume. Driven by customer year-end shutdowns and holiday operational pauses.

    Gross profit
    $177.5 millionup 45% YoY
    Q2 FY25

    Reflects improving productivity, product mix, and pricing.

    SG&A expenses
    $58.6 million
    Q2 FY25

    Includes $23.6 million of corporate costs.

    Effective tax rate
    20%lower than normalized
    Q2 FY25

    Lower than normalized rate due to certain discrete tax benefits.

    Earnings per diluted share
    $1.66
    Q2 FY25

    Demonstrates solid execution.

    Cash from operating activities
    $67.9 million
    Q2 FY25

    Driven by improving profitability and disciplined working capital management.

    Capital expenditures
    $29 million
    Q2 FY25
    Shares repurchased
    $8.2 million
    Q2 FY25

    Against a $400 million authorization.

    Total liquidity
    $511 million
    Q2 FY25

    Includes cash and available borrowings.

    Power generation sales
    2% to 3%
    Q2 FY25

    Accounts for approximately 2% to 3% of total net sales.

    Aerospace & Defense sales
    60%
    Q2 FY25

    Approximately 60% of net sales.

    Medical sales
    13%
    Q2 FY25

    Accounts for roughly 13% of net sales.

    Fasteners net sales change
    2.5%up
    Q2 FY25

    Whipsaws quarter-to-quarter, was down 12% sequentially last quarter.

    Engine sales change
    -14%QoQ
    Q2 FY25

    Down sequentially, but up 22% YoY. Production plan in Q2 focused on other markets.

    Industry KPIs

    2
    MetricValueDetails
    Total company backlog$1.9 billionUSD
    Aftermarket services split—

    Orderbook & backlog

    1
    Total Order Backlog$1.9 billionQ2 FY25

    down from over $2.2 billion

    Approximately 2.5x what it was prior to COVID. Half of backlog is Aerospace. Majority (2/3 to 3/4) is material wanted earlier, allowing for strategic management and pulling in orders.

    Risks & headwinds

    3
    Boeing 737 production ramp uncertaintynext few quarters

    some customers with direct exposure to specific platforms, particularly the 737, are still in a wait-and-see mode

    Mitigation: Company works with customers to manage priorities, has other optionality with strong backlog, and can pull in other orders (e.g., power gen).

    Additive business order deferralslast 2 quarters

    deferral of orders over the last 2 quarters from certain key strategic customers

    Mitigation: Additive demand outlook and customer order visibility is improving. We anticipate that the additive results will improve beginning in our upcoming third quarter.

    Potential tariffs on inputsfuture

    if there are any types of tariffs, that would be applied... to any of our inputs that correspondingly could increase our cost

    Mitigation: we would pass those through to the customer.

    What to watch in Q3 FY25

    5

    SAO Operating Income

    Q3 FY25
    Current28.3% adjusted operating margin
    Target$140 million to $145 million operating income

    Why it matters

    SAO segment margin expansion is a key driver of overall profitability and a record achievement.

    Looking ahead to our upcoming third quarter of fiscal year 2025, we anticipate SAO will generate operating income in the range of $140 million to $145 million, which represents another step up in profitability.

    Q&A highlights

    8

    Inquired about changes in engine channel lead times and any destocking impact from Boeing on orders.

    Lead times for aerospace materials, especially engine materials, have slightly pulled in by a couple of weeks due to productivity improvements. Orders were slightly down sequentially, but aero engine orders were slightly up. Noted a pause from Boeing-tied customers due to the 737 situation and Boeing strike, but emphasized the company limits order intake and has a strong backlog.

    “We've actually been able to pull in our lead times slightly, not significantly, but by a couple of weeks. And that's 100% due to the great productivity improvements we've had, primarily on the primary melt operations.”

    asked by Gautam Khanna · answered by Tony Thene

    2 min read7 chapters

    Detailed Narrative

    01

    Record Profitability and Margin Expansion

    Carpenter Technology achieved its second most profitable quarter on record, with $119 million in operating income, a 70% increase year-over-year. The SAO segment's adjusted operating margin reached an all-time high of 28.3%, driven by productivity improvements, product mix optimization, and pricing actions.

    02

    Raised Full-Year Outlook

    The company raised its full fiscal year 2025 operating income guidance for the second time to a range of $500 million to $520 million, citing continued execution and line of sight to robust earnings growth beyond FY25. This follows pulling in their FY27 target by two years.

    03

    Aerospace Market Dynamics

    While commercial aerospace customers expect significant output ramps, some with direct 737 exposure are cautious, leading to a "wait-and-see" approach. Conversely, platforms with greater clarity show strong demand, and MRO demand is extremely high. Defense applications also show strong, urgent demand.

    04

    Strategic Production Management

    Sequential sales declined 5% due to conscious actions, including customer year-end shutdowns and holiday operational pauses. The company expects a healthy increase in Q3 net sales driven by higher volumes from more operating days, productivity gains, and higher pricing. Management prioritizes profit maximization over volume, actively managing product mix towards higher-value materials.

    05

    Medical Market Strength

    The Medical end-use market (13% of net sales) continues to exhibit strong demand, with customers proactively seeking to shift more business to Carpenter and engage in long-term contracts for new product areas, reflecting confidence in patient surgical rates.

    06

    PEP Segment Performance and Additive Business

    The PEP segment's profitability is primarily driven by Dynamet, which mirrors SAO's strong market demand in Medical and Aerospace. However, the additive business within PEP experienced order deferrals from key strategic customers, impacting segment results, though an improvement is anticipated in Q3 FY25.

    07

    Capital Allocation and Liquidity

    Carpenter generated $38.6 million in adjusted free cash flow and continued its share repurchase program, buying $8.2 million in shares against a $400 million authorization. The company ended the quarter with $511 million in total liquidity, including $162.1 million in cash.

    AI-generated summary of the company’s earnings call. Not investment advice.