Carpenter Tech (NYSE:CRS) reported first-quarter financial results on Thursday. The transcript from the company’s first-quarter earnings call has been provided below.
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Summary
Carpenter Technology Corporation reported record first quarter operating income, up 28% year over year, driven by productivity improvements, disciplined mix management, and pricing actions.
The company anticipates continued demand growth, particularly in the aerospace sector, with bookings up 25% year over year and further increases expected due to strong OEM production forecasts.
Carpenter plans to complete a brownfield capacity expansion by fiscal year 2028, which is expected to enhance future earnings growth.
Despite a sequential sales decline due to planned maintenance, the company maintained strong operating margins and expects further margin expansion through increased productivity and favorable pricing.
Management expressed confidence in achieving and potentially exceeding their financial targets for fiscal years 2027 and 2029, citing robust demand indicators and strategic investments.
Full Transcript
OPERATOR
Hello everyone. Thank you for joining us and welcome to Carpenter Tech first quarter fiscal year 2027 earnings call. After today’s prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to John Hewitt, Vice President, Investor Relations. Please go ahead.
John Hewitt (Vice President, Investor Relations)
Thank you. Good morning everyone and welcome to the Carpenter Tech earnings conference call for the fiscal 2027 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 Thene, Chairman and Chief Executive Officer, and Tim Lane, Senior Vice President and Chief Financial Officer. Statements made by management during this earnings presentation that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter Tech’s most recent SEC filings, including the company’s report on Form 10-K for the year ended June 30, 2026 and the exhibits attached to that filing.
Please also note that in the following discussion, unless otherwise noted, when management discusses 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 Thene (Chairman of the Board and Chief Executive Officer)
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’s 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. As an extra data point, we have numerous customers who have confirmed that they are ordering at a level that doesn’t even support current aerospace OEM build rates, let alone the projected future build rate increases the 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 with strengthening demand and an expanding supply-demand gap for nickel superalloys. Our pricing for both LTA and non-LTA business remains elevated and consistently increasing and 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 five 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 and 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. In 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 were 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 when we had significant planned 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 16,000 planes. That’s more than 10 years of production. The industry is projecting approximately 1,400 to 1,500 new airplane builds in calendar year 2026 and they want to go higher, with target rates above 2,100. That’s 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 737 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 and demand becomes even more critical.
Aerospace fastener 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 end 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 Defense 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 Defense and OEMs as customers prepare for future needs. As an example, over the last quarter the Navy selected Boeing to build its next generation F/A-XX fighter. We are already engaged with the supply chain on the design of critical elements for this fighter and Carpenter Tech 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 Tim for a review of the financials.
Tim Lane (Chief Financial Officer)
Thanks, Tony. Good 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, product 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&A, expenses were $59.9 million, down $3.2 million year over year and down $2.1 million sequentially, primarily due to lower variable compensation accruals. SG&A includes corporate costs of $26.1 million compared with $28.5 million in the fourth quarter of fiscal year 2026 and $26.6 million in the first quarter of fiscal year 2026. We expect second-quarter fiscal year 2027 corporate costs of approximately $28 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 2027. Our effective tax rate was 15.5%, similar to the first quarter of fiscal 2026, reflecting tax benefits associated with the vesting of certain equity awards. For fiscal year 2027, we expect the 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. Sales increased 7% year over year and declined 6% sequentially. The sequential decline reflected planned preventative 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. SAO reported first-quarter operating income of $216.3 million. For the second quarter of fiscal 2027, we expect SAO operating income of $214 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 2027 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 2026 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 2027 operating income outlook. We expect total operating income of $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 to $29 million.
Turning to Slide 11 and our cash generation and capital allocation priorities, in the first quarter of fiscal year 2027 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 2028. Site activities are progressing well with major equipment installation underway. The project team remains focused on safely completing construction and equipment installation while preparing for a successful operational startup.
As we move through this year, we continue to anticipate generating between $400 million and $430 million in free cash flow in fiscal year 2027, which is an impressive outlook given that it includes the elevated capital spending related to our capacity expansion investments. The cash generation enables 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 the $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 0.6 times, and our capital structure is well positioned to allow significant flexibility with no debt maturities until 2034. Again, we 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’ll turn the call back to Tony.
Tony Thene (Chairman of the Board and Chief Executive Officer)
Thanks, Tim. 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 to $1.3 billion. That’s a 20% plus CAGR over three 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 Tech offers a uniquely attractive 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 Tech. 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 meaningful long-term value for shareholders through disciplined execution, continuous improvement, and profitable growth. Thank you for your time and continued confidence in Carpenter Tech.
OPERATOR
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 1 to raise your hand. To withdraw your question, press star 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&A roster. Your first question, from Andre Madrid with US Bancorp BTIG.
Your line is now open. Please go ahead.
Andre Madrid (Analyst at US Bancorp BTIG)
Yep, thanks. Good morning, and appreciate you taking my question. You know, looking at it, you mentioned maintenance as being maybe one of the reasons that 1Q is a little weaker. But it seemed like some of that was already contemplated in your 1Q outlook. So I’m just trying to better understand maybe what are some of the other puts and takes that might have driven the miss.
Tony Thene (Chairman of the Board and Chief Executive Officer)
Well, I think there are no other puts and takes. I mean, the result was about 98% to 99% of the guidance that we gave. So you’re only talking about a couple million dollars, Andre, and that could come down to one customer unable to arrange a truck to be shipped on the last day of the quarter. That’s how small this is, what you’re talking about. So I don’t 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 (Analyst at TD Cowen)
Hey, guys. And I apologize I missed the front of the call, it is 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 ’27 through ’29 outlook is unchanged. I just wanted to make sure that that was clear.
Tony Thene (Chairman of the Board and Chief Executive Officer)
Right. Yeah. Well, good morning, Gautam. It has changed—I mean, it’s 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. So it has changed to the positive.
Gautam Khanna (Analyst at TD Cowen)
Okay. And can you talk a little bit about productivity? I know we don’t have the tonnage disclosures, which is fine. I just am curious—anything directionally on capacity unlock, the ability to drive more throughput in the first quarter and then as we move through the year, what you guys are expecting in terms of the ability to unlock, because you’re 24/7 all out at this point. I’m just curious what on—
Tony Thene (Chairman of the Board and Chief Executive Officer)
That’s a good question. I think it’s—that’s a good question. It’s probably one of the most important questions. It’s across the board. So there’s not one item. I can’t just work on one item. We’re working on multiple areas of the plant. And as you well know, when you unlock one bottleneck, by definition that creates another one 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 one-tenth of a 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’s actually an unbelievable level—to be at that 37.7% in a month like we had. So very happy with what’s going on out on the shop floor, but not satisfied. Of course, there’s 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’s going to be even more tailwinds to push this margin percentage up. You’re going to have significantly more volume coming across the assets, and the price is going to continue to increase quarter over quarter.
Katherine
That’s very helpful, Tony. Also, just if you could remind us on seasonal maintenance, you guys have been very proactive on pulling in maintenance throughout, 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’s maintenance or things?
Tony Thene (Chairman of the Board and Chief Executive Officer)
Yeah. Thank you. Yeah. The key is, it’s nothing special about the first quarter. That’s just when we usually set up our maintenance schedules, and it usually isn’t one large piece of equipment out for a long period of time. You just can’t afford that in today’s demand environment. So what you have are a lot of smaller maintenance projects all hooked together, and that’s what you saw in the first quarter. You’re going to 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 one you saw in Q1.
Katherine
That makes sense. 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 know, you guys have been doing buybacks. Just how do you think the board will respond to those?
Tony Thene (Chairman of the Board and Chief Executive Officer)
Well, without being too exact, I agree with you. I think right now, you know, there’s a major negative sentiment that’s emerged over the last couple months in the aerospace market. I can’t really speak to that, Gautam, because I’ve not found one person that can explain exactly to me what they’re negative on. And my guess is you probably wouldn’t be able to explain that to me either. But I think my prepared remarks set out a pretty strong near term future, let alone FY27 near term positive future.
With that said, to specifically answer your question, we’re going to continue to fund the brownfield and certainly at these levels we’ll remain active in the repurchase program.
Katherine
Thanks a lot, Tony. Appreciate it.
Tony Thene (Chairman of the Board and Chief Executive Officer)
Yeah, thanks Katherine. Stay well.
OPERATOR
Your next question from Scott Deshle with Deutsche Bank. Your line is now open. Please go ahead.
Scott Deshle (Analyst at Deutsche Bank)
Hi, good morning, Tony. Can you provide an update on where the backlog stands today relative to the start of the calendar year?
Tony Thene (Chairman of the Board and Chief Executive Officer)
Without giving a specific number, Scott, it is continuing to increase across all of our end use markets.
Scott Deshle (Analyst at Deutsche Bank)
And then have you placed much of the brownfield capacity on contract at this point or are you still waiting to contract that out?
Tony Thene (Chairman of the Board and Chief Executive Officer)
Well, we don’t, we don’t 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. And then last comment. It’ll be absorbed by our current—sorry, it’ll be absorbed by our current LTA’s. All of our LTA’s. They’ll be wanting more material. So that’s not a—I don’t contract out specific equipment to specific customers.
Scott Deshle (Analyst at Deutsche Bank)
Okay. And then I guess maybe on that point, can you comment on the share position that you’ve been securing on new aerospace LTA’s and how that share position is or is not changing relative to the contracts that they are replacing and renewing?
Tony Thene (Chairman of the Board and Chief Executive Officer)
Well, I can tell you this, all of them are higher. Every one of the customers that we are dealing with—and we just, we just completed two significant aerospace LTA’s this past quarter, the first quarter—and every customer to a T wants more material.
Scott Deshle (Analyst at Deutsche Bank)
Is the share percentage higher or is the volume commitment higher?
Tony Thene (Chairman of the Board and Chief Executive Officer)
Well, I don’t know which one comes first, right? I mean the volume is higher. Right. There’s only a couple players in the market and they’re going to need all that material. So I mean the volume is significantly higher. The shares are probably going to remain pretty well the same. There’s not a share gain battle going on.
Scott Deshle (Analyst at Deutsche Bank)
Okay, thank you very much.
OPERATOR
Your next question from the line of Josh Sullivan with Jones Trading. Your line is now open. Please go ahead.
Josh Sullivan (Analyst at JonesTrading)
Good morning. The structural distribution market, what’s your sense of their inventory levels or are there any metrics you can share with us relative to current or projected build rates? Just trying to get a sense of, as you see this order flow, what their restocking cycle kind of looks like from your perspective here?
Tony Thene (Chairman of the Board and Chief Executive Officer)
Well, Josh, I will tell you this, that the majority, if not all of the customers in that submarket are reporting decreasing inventories, and that aligns them very well. Now, all of them will be at different points in time. Right. I’m not suggesting that every customer is the same, but they’re 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 those two submarkets, I guess another submarket in the defense market just given the impetus to restock various inventories.
Josh Sullivan (Analyst at JonesTrading)
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 Thene (Chairman of the Board and Chief Executive Officer)
Well, I was not being, you know, I was not exaggerating when I said that I thought there would be a rush of material orders once there’s 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 doesn’t place orders. There’s multiple companies in the supply chain that place those orders and they don’t have that funds flow to be able to do it.
There’s not one person in the defense supply chain that doesn’t believe they should be placing orders right now. But the way that the budget works, that’s 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.
Josh Sullivan (Analyst at JonesTrading)
Thank you for the time.
Tony Thene (Chairman of the Board and Chief Executive Officer)
Thank you, sir.
OPERATOR
Your next question from the line of Bennett Moore with J.P. Morgan. Your line is now open. Please go ahead.
Bennett Moore (Analyst at J.P. Morgan)
Good morning, Tony. Tim, thank you for taking my question. I wanted to know—it’s great to see the bookings continue to move in the right direction. I appreciate your comment around, you know, incremental confidence in the 27 guide, but I’m just hoping you could frame, you know, looking specifically at structural activity and some of the dislocation on the defense side, you know, how do these compare relative to the assumptions you have in that 27 guide?
Tony Thene (Chairman of the Board and Chief Executive Officer)
Yeah, Ben, good morning. I will, I will say it this way. Based on that FY27 guide, I believe that there is upside in volume, productivity and pricing versus the assumptions that we used when we gave that guidance three months ago.
Bennett Moore (Analyst at J.P. Morgan)
All right, understood. 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 if there’s anything else we should consider looking ahead.
Tim Lane (Chief Financial Officer)
Yeah. Ben, this is Tim Lane. I think it’s a more of a function of timing. So we did build some inventory in Q1. As we progress through the year, we’ve got more available days in the back half of the year. It’s a historical trend. We’ll 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 (Analyst at J.P. Morgan)
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 (Analyst at Wells Fargo)
Thanks, Maureen. Thanks for taking my question. Tony, any comment, you know, kind of the volume versus price algorithm that came through in, you know, in the, in the Q1 revenue or kind of in total and more specifically on the aero side?
Tony Thene (Chairman of the Board and Chief Executive Officer)
Well, I can tell you that price continues to increase quarter over quarter. The LTA’s that we just signed, higher price, we’ve got one that sits right now agreement in principle, higher price. We’re working on a couple other major ones as we speak. Both will be higher price than before. I think it’s—David, it’s illogical to think that the price would be lower. I mean demand is accelerating, not declining. And there’s no more capacity coming online other than our brownfield, a couple others that there’s no way that will keep up with that.
So the pricing story seems pretty straightforward to me.
David Strauss (Analyst at Wells Fargo)
Okay. Yeah, I mean I was just looking—if you kind of took the overall, you know, kind of revenue growth ex-surcharge, was it, was it two-thirds volume, one-third price or, you know, any, any, any, you know, in terms of the upside year over year there—any sort of color there?
Tony Thene (Chairman of the Board and Chief Executive Officer)
No, no, I, I, I, I, I see what you’re saying. I mean, obviously, you know, we stopped giving volume this quarter, so I’m not going to then start giving it on the Q and A. But obviously you think that, you know, you got a Q1 with less operating days, right, versus Q4, which is usually your biggest, biggest one. But I don’t have a volume problem or a volume challenge. I mean, we’re running in many cases the majority of our equipment as full as we can.
So I don’t have a, I don’t have a volume problem. Now the issue that you have, David, is that volume isn’t generic and it’s not 100% fungible, right? So there are different products that use different pieces of the plant capacity. Having defense be a bit light—maybe the word a bit light isn’t the right word—being light, that causes some challenges for us because we have to move some things around. That’s volume from the defense side that we would have run. Now we’re 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 and it’s even going to be stronger as we get out over the next couple quarters.
David Strauss (Analyst at Wells Fargo)
Okay. And maybe any comments on medical and energy? You know, those end markets. I think you had talked, you know, 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, what’s the, you know, kind of what did you see in Q1 and you know, how are you thinking about those two end from here?
Tony Thene (Chairman of the Board and Chief Executive Officer)
Yeah, I mean, thanks for the question. Sometimes we forget about that. Medical is going to continue to perform for us. I mean, I should say not continue to perform, continue to increase. It’s really one specific subset inside of Medical that has lagged a bit. Procedures are up. We make products that provide our customers a solution that they can’t get anywhere else. So I think that we’ll see that continue to increase over the next couple quarters.
I’m not overly worried with medical and it’s not driving down my overall performance. Energy, interesting small piece of my overall revenue, but certainly on the IGT side has been very strong and I would anticipate that to remain strong going forward. But we have a very small oil and gas business. Even, David, that’s been relatively weak. I would say that we see coming back a little bit here now in this quarter, in the next couple quarters. So overall for those two markets in total, again, much smaller than aerospace, but both, I would say, with some positive tailwinds.
David Strauss (Analyst at Wells Fargo)
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 star one to raise your hand. To withdraw your question, press star one again. Your next question from the line of Andre Madrid with US Bancorp btig, your line is now open. Please go ahead.
Andre Madrid (Analyst at US Bancorp BTIG)
Yep, thanks for getting me back in the queue. I don’t know what happened there, but appreciate the response to the first question. I 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 re-signed 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
Tony Thene (Chairman of the Board and Chief Executive Officer)
That makes sure I understand your question. What do you mean by when you say the LTA trend,
Andre Madrid (Analyst at US Bancorp BTIG)
Like the mix of business that’s 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’s at for the time being?
Tony Thene (Chairman of the Board and Chief Executive Officer)
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’s going to be relatively the same. Right. Volume is increasing and, you know, the LTA that we are renewing are primarily with existing customers. The majority of our aerospace business is under LTA now.
Andre Madrid (Analyst at US Bancorp BTIG)
Yeah, yeah, no, that’s. That’s clear. No, I appreciate that. And then I guess if I could just squeeze one 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 higher fuel prices. It doesn’t 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 Thene (Chairman of the Board and Chief Executive Officer)
Well, we’ve 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.
Andre Madrid (Analyst at US Bancorp BTIG)
Appreciate the color. Thanks, Tony.
Tony Thene (Chairman of the Board and Chief Executive Officer)
Thank you, sir.
OPERATOR
Your next question from Chuck Minervino with Susquehanna. Your line is now open. Please go ahead.
Chuck Minervino (Analyst at Susquehanna)
Thanks. Good morning. I was wondering if you could elaborate a little bit on your comments that you have some actions and projects you’re working on that could exceed the operating income targets for FY27 and 2029. 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 Thene (Chairman of the Board and Chief Executive Officer)
Well, welcome Chuck. Think about the three big buckets. Number one, 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 a balloon that is ready to bust. Right. I mean the demand is increasing and increasing and the orders aren’t there. So I think that’s going to be a significant or 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 doesn’t even support the current build rates for Boeing and Airbus. So we know that’s going to have to, to come back and we, we sense that that will be in the near term. So I think volume can be an upside. What we’ve seen with our current work now in LTAs, the pricing potentially can be an upside as well. And then on productivity, yes, there’s multiple areas that we continue to drive productivity into our use of AI in many cases that we’ve been able to unlock faster and I would say at a greater quantity than we had originally planned. So all three of those buckets, Chuck, are going to contribute to us potentially beating that FY27 guidance. And remember, I mean it doesn’t take, it doesn’t take a huge percentage increase for example in price or in volume to exceed that, to exceed that guidance.
So it’s all, it’s not easy but it’s all, but it’s all doable.
Chuck Minervino (Analyst at Susquehanna)
Got it. And if I could just ask one more, could you talk a little bit about your kind of outlook on margins in SAO maybe, you know, this year but also kind of beyond this year and where some of the levers may be to expand margins in that segment.
Tony Thene (Chairman of the Board and Chief Executive Officer)
Yeah, it’s a good question and it’s almost, I can give you the same answers I gave to you about how do you increase overachieve on FY27. The margins are going to be driven by increased volume. Pricing, we believe, is a tailwind and then also productivity. So we’ll be working all three of those, right? As you’re able to run your plant at higher and higher utilization levels and find more and more output available to you, that’s a direct uplift to the margin.
So, you know, we have to be careful. Everybody, you know, obviously a lot of concern over going down one tenth of a percentage point in SAO in a quarter that they have significant preventive maintenance and less operating days. I’ll have a hard time understanding that one. 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.
Chuck Minervino (Analyst at Susquehanna)
Great. Thank you.
Tony Thene (Chairman of the Board and Chief Executive Officer)
Thank you.
OPERATOR
This concludes our Q and A session. I will now turn the call back to John Hewitt for closing remarks.
John Hewitt (Vice President, Investor Relations)
Thank you, operator. And thank you everyone for joining us today for our fiscal year 2027 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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