Carpenter Technology Corp Q1 FY2026 Earnings Call

Thank you for your patience. I would like to welcome everyone to today's Carpenter Technology Q1 Fiscal Year '26 Earnings Presentation. I will now turn the call over to John Huyette, Vice President of Investor Relations. John?

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

Thank you, John, and good morning to everyone. I will begin on Slide 4 with a review of our safety performance. We ended the quarter with a total case incident rate of 1.6. As we continue to drive improvement in multiple leading indicators, I expect to see continued progress. As always, we remain committed to our ultimate goal, a 0 injury workplace. Let's turn to Slide 5 for an overview of our first quarter performance. First quarter was a great start to fiscal year 2026. Let me highlight the 4 major takeaways. One, record earnings. In the quarter, we generated $153 million in adjusted operating income, exceeding the fourth quarter of fiscal year 2025, which was then a record quarter. And it is a 31% increase over the first quarter of fiscal year 2025, a meaningful step up year-over-year. The earnings exceeded our strong first quarter guidance, driven by increased productivity, product mix optimization and pricing actions, a positive step towards our full fiscal year 2026 earnings outlook. Two, expanding operating margins. The SAO segment continued to expand margins, reaching an adjusted margin of 32% in the quarter. The 32% margin compares to 26.3% a year ago and 30.5% in the prior quarter. And we don't believe this is the peak margin level over the long term. Our ability to continue to expand margins can be attributed to our solid execution, strong market position and unique capacity and capabilities. As a result of the expanding margins, the SAO segment recorded $170.7 million in operating income, an increase of 27% year-over-year and an all-time record for the segment. Three, strengthening market demand. We continue to see demand environment strengthen, especially in the Aerospace supply chain as it gains confidence in the Boeing and Airbus build rate ramp. As a result, September was the highest order intake month in over a year. Specifically, in the quarter, we saw bookings for Aerospace and Defense accelerate, up 23% over the previous quarter. Four, pricing continues to be a tailwind. In this strengthening demand environment, our pricing remains elevated and consistently increasing as evidenced by our financial results. Our customers continue to be focused on securing their supply of our critical materials. As evidenced in the last quarter, we negotiated 5 large LTAs with Aerospace customers with significant price increases, reflecting their strong outlook on the market. If I were to write the headline for this quarter's performance, it would be Carpenter Technology delivers all-time record quarterly earnings, driving SAO margins to an impressive 32%, even in a quarter where they smartly completed planned maintenance activities. In addition, they shattered the narrative held by some of a seasonally weak quarter, a weakening demand environment, and decreasing pricing power by achieving record earnings, strong sequential growth in Aerospace and Defense orders, and negotiating 5 aerospace LTAs with substantial price increases. Let's turn to Slide 6 and a closer look at first quarter sales and market dynamics. In the first quarter of fiscal year 2026, our total sales, excluding raw material surcharge were up 4% over the first quarter of fiscal year 2025 and down 3% sequentially. As expected, the sequential sales decline was driven by the planned maintenance outages we discussed on the last earnings call, offset by increased productivity, improved product mix, and pricing actions. Sales in the aerospace and defense end-use market were up 1% sequentially and up 11% year-over-year. Notably, sales in the engine submarket were up 14% sequentially. Our engine customers continue to be concerned about surety of supply as they navigate high MRO demand while managing the ongoing and accelerating build rate ramp. Across all submarkets, the aerospace supply chain continues to increase activity as build rates ramp and confidence grows in the OEM's ability to perform. As evidence of this, we saw Aerospace and Defense bookings accelerate in the quarter, increasing 23% sequentially. And as I mentioned earlier, we also completed 5 LTA negotiations with aerospace customers in the quarter, all with significant price increases. Moving on to the medical end-use market. Our sales were down 20% sequentially and 16% compared to the prior year first quarter. The large majority of the sequential decrease is from medical distribution customers as they continue to see quarter-over-quarter volatility. Recall that coming out of COVID, there was a rapid recovery in patient procedures, generating significant activity in the supply chain. As the medical field caught up on the backlog of procedures and growth rates normalized, the supply chain, especially our distribution customers, has been working to manage working capital levels. As we've highlighted in previous quarters, this has impacted a portion of our medical business and it is continuing longer than anticipated. Even so, we have still been able to produce record quarterly earnings and see the medical market as an increasing tailwind going forward. Our medical customers report a positive long-term outlook on the market as the fundamental demand drivers remain strong. Further, our broad portfolio of medical alloys is unique and critical to our customers' focus on improving patient outcomes. Shifting to the energy end-use market. Sales were down 5% sequentially and up 8% year-over-year. As discussed during our last several earnings calls, the energy market is currently driven by the accelerating demand for power generation, and we see this only getting stronger with order intake up 41% in the quarter. As we have stated before, sales in the power generation submarket will fluctuate quarter-to-quarter due to the frequency of orders and our practice of strategically slotting them into our production process. Of course, the key end-use market for our increasing profitability is Aerospace and Defense, where we see demand strengthening as evidenced by accelerating order intake and increasing pricing actions. Altogether, we are operating in a strengthening demand environment across the high-value end-use markets that we believe will drive meaningful growth in both the near term and long term. Now I will turn it over to Tim for the financial summary.

Thanks, Tony. Good morning, everyone. I'll start on the income statement summary. Starting at the top, sales excluding surcharge increased 4% year-over-year on 10% lower volume. Sequentially, sales were down 3% on 5% lower volume. The improving productivity, product mix, and pricing are evident in our gross profit, which increased to $216.4 million in the current quarter, up 1% sequentially and 23% from the same quarter last year. SG&A expenses were $63.1 million in the first quarter, essentially flat sequentially and up slightly from the same quarter last year. The SG&A line includes corporate costs, which were $26.6 million. This is flat sequentially and up slightly when excluding the special item from the first quarter of fiscal year 2025. For the second quarter of fiscal year 2026, we expect corporate costs to be about $25 million, which is in line with our quarterly average of fiscal year 2025. Adjusted operating income was $153.3 million in the current quarter, which is 31% higher than the $117.2 million in our first quarter of fiscal year 2025 and up 1% from our recent fourth quarter. As Tony mentioned earlier, this represents another record quarterly operating income result, breaking the previous record set last quarter. This is even more impressive considering we were able to deliver the results in a quarter with planned maintenance activities. Moving on to our effective tax rate, which was 15.4% in the current quarter. This quarter's effective tax rate was lower than anticipated and comparable to the same quarter last year due to discrete tax benefits associated with the vesting of certain equity awards in both quarters. For the balance of the fiscal year, we expect the effective tax rate to be between 22% to 23%, and the effective tax rate for the full fiscal year 2026 is expected to be on the low end of the full year guidance we provided of 21% to 23%. Finally, the earnings per diluted share was $2.43 for the quarter. Again, our recent first quarter was a record quarter for profitability. Our teams continue to drive higher profitability with the manufacturing organization's focus on increasing productivity while managing the product mix to optimize profit and realizing the benefits of pricing actions that we continue to pursue and capture. Now turning to more detail on each of the segments, starting with our SAO segment. Net sales, excluding surcharge for the first quarter were $533.9 million. Compared to the same quarter last year, sales were up 5% on 11% lower volume, reflecting the impact of product mix optimization and pricing actions. Sequentially, sales were down 3% on 5% lower volume. The sequential decline in volume was in line with expectations given the planned maintenance activities in the quarter. SAO reported operating income of $170.7 million in the first quarter. But I think the most impressive measure for the SAO segment is the adjusted operating margin of 32%. This marks the 15th consecutive quarter of margin expansion. The record margin is being driven by the growth levers that we consistently highlight, specifically the SAO team's ability to increase productivity at key work centers to drive an improving mix while realizing higher selling prices. These areas are as relevant as ever as we actively manage our production schedules to optimize the highest value margins while carefully managing costs and executing thoughtful planned maintenance activities. Tony will talk in detail about the pricing environment. Altogether, we continue to see opportunities to expand profitability and margin further as we execute against our growth levers. Looking ahead to our upcoming second quarter of fiscal year 2026, we anticipate SAO will generate operating income in the range of $168 million to $172 million, in line with the record first quarter. The SAO guidance for the second quarter considers our available effective capacity. This accounts for the impact of time off for the holidays, which is important to our employees and downtime associated with upgrades to key testing work centers. This is an area where it makes sense to spend modest capital to upgrade certain equipment to ensure capacity is available to support our highest value materials, which means we see significant payback on small investments. Now turning to Slide 10 and our PEP segment results. Net sales, excluding surcharge in the first quarter of fiscal year 2026 were $87.2 million, down 10% sequentially and down 6% from the same quarter a year ago. In the current quarter, PEP reported operating income of $9.4 million compared with $11.7 million in the fourth quarter of fiscal year 2025 and $7.3 million in the same quarter a year ago. The year-over-year increase in profitability despite lower sales reflects the impact of a favorable shift in product mix. We currently anticipate the PEP segment's operating income to be relatively flat in the second quarter of fiscal year 2026. A few additional comments to keep in mind. PEP represents roughly 6% of the company's overall segment profitability on a trailing 12-month basis. In other words, SAO dwarfs PEP and SAO will continue to be the growth driver for Carpenter Technology. From an outlook perspective, we anticipate PEP results will improve, but would point out that our total company outlook is based largely on our growth expectations for the SAO segment, which will continue to outpace PEP performance. With that said, the PEP business is a small but strategic part of Carpenter Technologies portfolio. We believe that PEP can be a growth accelerator in the future. Before we move to cash, I just wanted to pull together the pieces that make up our outlook for operating income in the second quarter of fiscal year 2026. We anticipate total operating income of $152 million to $156 million. This includes SAO at $168 million to $172 million, PET roughly at $9 million and corporate costs of $25 million. Now turning to the next slide to talk about our cash generation and capital allocation priorities. In the current quarter, we generated $39.2 million of cash from operating activities and spent $42.6 million on capital expenditures, which resulted in negative adjusted free cash flow of $3.4 million. For fiscal year 2026, we continue to anticipate generating between $240 million to $280 million of adjusted free cash flow, which includes $175 million to $185 million of spending for our brownfield capacity expansion project. To be clear, the brownfield capital expenditures are on top of the $125 million of annual capital expenditures to fund our normal maintenance and sustaining capital as well as smaller growth projects. As an update on the brownfield expansion project, construction activities are in full swing. Site work is underway, currently focused on building foundation work at our Athens, Alabama site. The project is currently on budget and on schedule. As the project progresses, we expect that capital spending will begin to accelerate in the second half of fiscal year 2026 as construction activities broaden and equipment delivery and installation begins in earnest. Moving on to our capital allocation philosophy. As we've discussed before, our primary focus areas for capital deployment are investing cash in attractive and accretive growth and returning cash to shareholders. Our commitment to investing for growth is evident in our brownfield expansion project I just mentioned. In terms of returning cash to shareholders, we continue to execute against our $400 million stock buyback authorization. In the current quarter, we repurchased $49.1 million of our shares, bringing the cumulative total to $151 million. In addition to the buyback program, we also continue to fund a recurring and long-standing quarterly dividend. Our capital allocation philosophy is enabled by our healthy liquidity and strong balance sheet. Liquidity as of the most recent quarter is $556.9 million, including $208 million of cash and $348.9 million of available borrowings under our credit facility. Our credit metrics remain very strong with net debt-to-EBITDA ratio remaining well below 1x. Altogether, we believe our strong balance sheet and outlook for significant cash generation positions us well to fund continued growth and deliver significant shareholder returns. With that, I will turn the call back to Tony.

Thanks, Tim. Over this past quarter, a couple of important topics have garnered the attention of the investment community. I would like to address them to make sure Carpenter Technologies position is 100% clear. There has been much written on the current pricing environment in the nickel-based super alloy market. We have 2 basic categories that we break our customers into, those that work with us under long-term agreements and those that don't have long-term agreements with us, which we call transactional. Customers in both categories are extremely important and strategic. The customers who do not work with us through a long-term agreement, our transactional customers in almost every case, are long-standing customers with highly specialized and exact specifications. Quoting for these transactional customers requires significant time and effort with multiple levels of internal technical reviews and discussions with the customer. As a result, we do not entertain spot pricing as it is typically defined. There is not a moving daily price, and we do not typically quote for immediate or short-term delivery. In fact, our transactional business pricing is generally higher than LTA pricing. Certainly, we do not provide transactional customers with better pricing than our LTA customers as that would be illogical. For customers who work with us through long-term agreements, their primary focus during renewal discussions remains the surety of supply of our products. With each contract renewal, we have been able to realize price increases that demonstrate the value of our products in the supply chain and reflect the underlying supply-demand imbalance that is only expected to tighten in the future. I will note again to support our view of the pricing dynamic for our materials that in the quarter, we completed negotiations on 5 LTAs with aerospace customers with significant price increases. It is also important to note that, in turn, our customers also benefit greatly as they are getting surety of supply of our products, which is highly valuable to them in an extraordinarily high demand environment. You can see the results of our pricing actions in our SAO segment financials as our total sales dollars per shipment pound remained elevated and increased significantly year-over-year. For more insight, I will note that the year-over-year increase is 10 percentage points higher for the aerospace and defense end-use market. The results demonstrate we are consistently increasing the pricing level of our Aerospace products. If we were discounting Aerospace products or seeing immense pricing pressure, you would have seen a significant sequential decrease in the price per pound. Clearly, that is not the case. With that said, it is important to repeat something that I've said before. Price per pound may not move in a linear fashion quarter-to-quarter as the product mix in any given quarter influences results. However, we expect that the pricing trend will continue to be favorable. Final point on this topic. We have communicated publicly many times and state again today that we believe pricing actions will continue to be a positive tailwind into the future due to the supply-demand imbalance that exists today and that is expected to intensify in the future for nickel-based super alloys. In addition, another topic that has been written about is the Aerospace demand environment and more specifically, the potential weakness in the titanium market. Let me address the titanium portion first. Carpenter Technology does not melt titanium or produce large titanium forgings for aerospace structural applications. To be very clear, any current or future weakness in the titanium raw material or structural markets has no material impact on Carpenter Technology. In stark contrast to titanium raw materials, nickel-based superalloys, which is our primary focus, are in sharp supply, have only a few qualified producers globally with high barriers to entry and rapidly accelerating demand. As I mentioned earlier, our Aerospace and Defense end-use market orders have been steadily increasing over the last couple of quarters. In this quarter, they were up 23% sequentially. That is after a similar sequential increase in the prior quarter. This strong sequential growth in bookings was driven by increased volume, which is a very encouraging sign and continued pricing actions. Obviously, the accelerating bookings is a very positive trend developing and signals continuing expansion as the airframers drive for higher build rates. To support this position, let me provide more color on what we are seeing in each of the aerospace submarkets. I will start by saying that in general, the tone with all of our Aerospace customers is one of increasing positivity as they see large demand upticks on the horizon. Our Aerospace structural customers experienced the most disruption from the OEM build rate issues we have seen over the last 1.5 years. This is due to the relatively low MRO needs on structural versus engine parts. Over this period of time, they have been carefully managing their near-term working capital needs. Encouragingly, some have begun reordering on increasingly positive momentum from Boeing, while others state they are expecting more earnest ordering to begin soon. Collectively, our aerospace structural customers universally agree that strong demand is on the near-term horizon and are considering when and how to ramp activity back up. Our aerospace fastener customers report steady improvement in their demand. Some customers are already placing orders with us to cover all of calendar 2026. They are continuing to expect improvements in demand, and our quoting activity has increased notably over the last few months. Fastener customers are generally expecting very solid double-digit growth next year based on ongoing improvements in the aerospace OEM build rates. Our aerospace engine customers continue to remain busy as they generally have been over the last several quarters. Engine OEMs are very active across the supply chain, working to ensure material availability. Customers continue to report high MRO activity and a need for more material from us. In summary, our engine customers continue to be very positive as evidenced by the 14% sequential increase in aerospace engine sales in the quarter. I don't usually mention the space submarket as it is a much smaller portion of our business, but I will note that we have seen large increases in activity over the last few quarters, and our space customers report expectations for significant ongoing demand. Finally, I will mention our Defense customers because we have seen a significant increase in activity here as well. Our Defense customers are expecting very strong increases in demand based on new programs being worked on as well as the expected fiscal year 2026 defense budget. With those insights, let me state where we believe the aerospace market stands today. The aerospace market has seen large cyclicality over many years, and we have seen the same pattern play out cycle after cycle. That is the supply chain gets a little ahead of OEMs and then decides to pull back or pause. That is followed quickly by a time when the supply chain realizes they do not have enough material on order, and there is an urgent scramble to place orders. This results in what the industry describes as the bullwhip effect, where there is effectively a run of material. In this case, I'm speaking specifically of nickel-based aerospace materials. This cycle we are emerging from right now is similar as before, except for one major factor. That is the total demand targets from OEMs are significantly higher than before. Our conversations over the last quarter with our closest customers have focused on advising them to ensure they have their orders placed now, so they are not last in line. The pattern I have described is not a surprise to our nickel-based customers who all understand the question is when, not if this run occurs. And then last week, we have the reporting of the FAA approving a 737 MAX rate increase from 38 to 42 per month, which we believe will support the bullwhip effect I just mentioned. Lastly, we have received questions about our confidence in our earnings guidance as the marketplace continues to move. To start with, just a couple of points on our earnings guidance philosophy. One, we believe it is important to provide. Two, we established challenging targets that we have line of sight to achieving with disciplined action plans in place. Three, we don't believe multi-year earnings targets should be back-end loaded. Therefore, we commit to meaningful earnings growth in the first year of multi-year guidance. And four, not only do we have a track record of achieving our targets, we exceed them. That philosophy should give you confidence in our future performance. Now specifically to address our guidance. As a reminder, at our February 2025 investor update, we announced our fiscal year 2027 operating income target of $765 million to $800 million. More recently, on our last earnings call, we provided additional insight as we guided to a strong fiscal year 2026, projecting $660 million to $700 million in operating income. As I stated then, this range for fiscal year 2026 represents a 26% to 33% increase over our record fiscal year 2025 earnings and as we believe the highest earnings growth trajectory among our industry peers, quite impressive. Now we have just completed the first quarter of our fiscal year 2026 and remain confident in our full year earnings guidance. Most importantly, we have line of sight to the high end of the range with increased volume, pricing actions and productivity, all contributing to higher profitability. As I just mentioned, the reporting that the FAA approved a 737 MAX rate increase from 38 to 42 per month is important. That was a material unknown that has now been revealed and should support a continued increase in Aerospace bookings. As we look at fiscal year 2027, we also remain committed to that level of profitability, which, by the way, would be an approximately 50% increase over our recently completed record fiscal year 2025. But let me be clear, as this aerospace market continues to accelerate, our focus is not on achieving the fiscal year 2027 guidance. The focus is on exceeding that lofty target. Now let's turn to the final slide to summarize this great story. Let me close with why I think Carpenter Technology is a compelling story for existing and potential shareholders. Specifically, let's take a look at the 3 major areas most important to shareholders. One, we have an enviable market position in the industry. We are in the midst of a significant acceleration in demand, especially in the aerospace and defense end-use market. Demand for air travel has never been higher, and OEMs are pushing to ramp production build rates significantly over the next several years, which is just the beginning. With accelerating build rates driving higher demand for our materials, a fundamental supply-demand imbalance in nickel-based super alloys will tighten even further. Our world-class collection of unique manufacturing assets and related capabilities are difficult, if not impossible, to replicate. Our leading capacity and capabilities are further differentiated by stringent qualifications necessary to supply advanced materials for aerospace and defense and other key end-use market applications. Two, we are committed to a balanced capital allocation approach. We have a healthy liquidity position and a strong balance sheet, combined with an impressive free cash flow generation outlook. We are focused on returning cash to shareholders via a long-standing dividend and a robust share repurchase plan. In addition, our strong performance allows us to invest in highly accretive growth projects like our recently announced brownfield expansion that accelerates earnings growth but will not materially impact the nickel-based supply-demand imbalance. And three, we have delivered impressive financial results with a strong earnings outlook. We have just completed another record quarter of profitability, driven by significant margin expansion in our SAO segment. Our outlook for fiscal year 2026 implies a 26% to 33% increase over our record fiscal year 2025, and we are well on our way to achieving and even surpassing the ambitious earnings target for fiscal year 2027. I don't know of anyone in our industry who can say they have a stronger earnings outlook than Carpenter Technology. Of course, fiscal year 2027 is not expected to be our peak. We have plans and line of sight to further earnings growth beyond 2027. In summary, I believe Carpenter Technology checks every important shareholder criteria box. We have created significant shareholder value to date, but we are only at the beginning of this growth journey. The best is still to come. As always, we remain focused on supporting our customer needs, operational execution, and living our values as we drive to exceptional near-term and long-term performance. Thank you for your attention. I will now turn the call back to the operator.

Our first question today comes from Gautam Khanna with TD Cowen.

Great results, team. Tony, I wanted to hear your thoughts on a couple of things, like what has changed, if anything, regarding your jet engine alloy lead times. Are they still fairly extended? Also, what do you think is the reason some of the channel checks aren't accurately reflecting the business? There seems to be a significant contrast between your continued performance and some of the discussions happening. Lastly, regarding your comments on Boeing, you've already experienced several quarters of destocking. I'd like to understand your view on whether you would have seen even higher profits if that hadn't occurred in the past year, especially as we begin to see recovery in Boeing orders. There’s a lot to unpack here, so feel free to address any part of it.

Thanks, Gautam, for your questions. Yes, engine lead times are still extended, and it seems they will start increasing again soon due to the recent Boeing news. While some may have expected this, it's significant for the FAA to acknowledge it publicly. Our recent discussions with customers, particularly following last Friday's report, indicate a growing push to increase orders, which is a positive development for us. Regarding the industry news, I appreciate your recognition that we took extra time to clarify things during today's call. We take these calls seriously, and we aim to communicate clearly. We believe our products, capabilities, and customer base set us apart. It's important for you to listen to our insights as we guide you through these developments. Additionally, it’s crucial to note that issues in the Boeing supply chain began early in calendar 2024. However, we were able to maintain and even achieve record results during that period due to our flexibility, even while Airbus continued production and we utilized our robust backlog. Even when one of the major aircraft manufacturers was virtually grounded due to a work stoppage later in 2024, we still produced outstanding results that may have gone unnoticed. Now, Boeing is performing well, but there's still significant room for Airbus to grow, particularly regarding their A320 targets. As we head into the latter half of FY '26, you can see my confidence reflected in our guidance for FY '27. I believe the opportunities for exceeding that guidance outweigh any risks. Hopefully, I addressed all your concerns.

Yes. No, that was a very great answer. And just maybe a quick ask on fastener demand trends, how those tracked in the quarter?

Yes. Sorry about that. I know you usually asked about it. Fasteners for this quarter were down 7% sequentially, 40% up year-over-year. But as we look at the order intake coming in right now, as you well know, fastener orders can be a little lumpy. Those are strong coming into our second quarter. And like I said in the prepared remarks, which I think is a very important point, you're seeing a lot of these fastener companies already trying to place orders for the entirety of their calendar year 2026. So that's a big deal, and that's a really strong evidence of how they see the market playing out.

And our next question comes from the line of Andre Madrid with BTIG.

You mentioned the 5 new LTAs. And I was just wondering if you could speak more to the duration of these and how we can maybe expect duration mix to shift moving forward.

On these 5 specific ones that I was referencing, they range between 2 years and 5 years.

Got it. Clearly, these have evolved from what you observed before COVID, before MAX, and during the post-COVID surge. How do you expect the duration to appear through the end of the decade? Do you think it will remain steady at these levels, increase even more, or extend out a bit longer?

I believe that contract lengths will remain within the current range rather than returning to the historical 10-year contracts. This is clearly influenced by expectations about the future supply-demand imbalance. It's worth noting that of the five contracts I mentioned, only one is a renewal from before COVID. The other four have been renewed for the second time since the post-COVID period of increased ordering. This is an important point to highlight as well.

Got it. No, that's very helpful. And then if I could squeeze in one more question. When you look at the aero side, it's clear what the moving pieces are, but can we peel back to see what some of those pieces are for defense? I know you highlighted that there is still strong demand there, especially with a robust budget request. So...

Well, we play across a lot of different areas in defense. I mean we offer products not just that are maybe traditional or historically been offered, but the next level where we're looking at alloys and tweaking those alloys to get better performance based on the outcomes that they're looking for. So you see us across multiple segments inside the defense market. And quite frankly, our relationship there has grown significantly over time, mainly because they're looking for increased performance. They're looking to operate at a higher level and our alloys and our innovations allow them to do that.

And our next question comes from the line of Josh Sullivan with JonesTrading.

Tim, John, congratulations on the quarter. I think I had the title of my note wrapped up, but just had some other questions, Tony. On the aerospace backlog is up nicely, that bullwhip dynamic that just always seems to happen in this industry. Are customers receptive to that messaging to get in now? Or is it your sense that most of the industry is just going to get hit with the rush as it comes?

That's a really good question. There are differences among aerospace customers depending on whether they are engine or structural customers within the distribution side. I can say they are very receptive to that message. The discussions we've had in recent weeks indicate that they are open to it. Each customer is at a different point regarding their working capital levels, but there is clearly a trend indicating increasing demand. Boeing continues to perform well, and Airbus is ramping up significantly. This creates a consistent sentiment that it’s time to boost order intake. You’ve seen a 23% sequential increase this year in Aerospace, and if I remember correctly, it was over 20% last quarter as well. While you might not see a 20% sequential increase every quarter for the next few quarters, I believe the overall upward trend will be strong throughout the remainder of this fiscal year.

Got it. Related to your comments on long-term agreements versus transactional customers, you've signed up five new ones. How should we consider the optimal mix between these two customer types and how does that relate to Athens? I recall you mentioned at Paris that there is significant interest in Athens.

Yes, there's really nothing particularly complex about this. Whether someone is on a long-term agreement or not largely depends on their perspective. Our position is that having a long-term agreement can be beneficial for them. Some customers choose not to pursue that. On the distribution side, that isn't their typical approach. The key point I want to emphasize is that we don't see a significant difference between a long-term agreement customer and a transactional customer. The notion that a non-long-term agreement customer just strolls in and places a random order for aerospace alloy isn’t accurate. These are established customers we've worked with for many years who order very specific materials. As I've noted in my previous comments, these orders command similar pricing. Therefore, there's no specific percentage I’m trying to convey. We treat each of our customers as individuals, and we will continue to do so.

And our next question comes from the line of Scott Deuschle with Deutsche Bank.

Tony, do you already have line of sight to another quarter of sequential A&D growth in the quarter you're in right now?

Right. And that's what I was just telling Josh. I can't say it's going to be exactly 23%. But I believe that over the next several quarters, you will definitely see continued growth in order intake.

Okay. And then the EBIT per pound at SAO was up 42% year-over-year on down volumes. So if the volumes actually start to return to growth on the back of this order improvement, is there an upside opportunity in which you could have a repeat of the EBIT growth profile you experienced over the last couple of years?

Well, certainly, the math works out in our favor, right? If we're producing these types of numbers and you still have volume that's not at the point where we think it's going to go to, that's a pretty good equation.

Okay. And then last question for the LTAs that you said repriced this quarter, do we see that benefit hit in the fiscal second quarter? Or do those become effective in January for the third quarter?

I don't want to give specifics on each of the contracts, Scott. But as you know, it varies, right? Some of them will be more, what should I say, earlier, maybe in the second half of this fiscal year. Some of our customers will renegotiate a little bit further out.

And our next question comes from Phil Gibbs with KeyBanc Capital Markets.

I think you mentioned it earlier in the call. Were the engine sales up 14% year-on-year? Or was that sequentially, Tony?

Yes. Thanks for mentioning that, Phil. It was 14% sequentially. It was about 20% year-over-year.

Okay. Excellent. And you mentioned in your prepared remarks on Space and Defense verticals, and you've had some Space business be a little bit more recurring over the last few quarters. Any sense or color you can provide in terms of how much maybe the combination of Space and Defense is of the A&D business?

Yes. Well, I mean, Space is small, right? But the reason I mentioned it is because it's a growing area. And I think it's just another example of our exposure to this very quickly growing market. And I think probably going forward, you'll see me or see us speak about space more. So it's very small, Phil, but I think it's going to be very strategic for us going forward.

And our next question comes from the line of Bennett Moore with JPMorgan.

Congrats on another impressive quarter. I was hoping you can maybe delineate on the A&D bookings growth sequentially, what this looked like between engines and structural. I think you had a comment in there that part of this was volume driven. So just trying to gauge if there's Boeing levered customers to what extent they're coming off the sidelines.

I mentioned that the growth was largely driven by volume, which is crucial. While price is a significant factor, it's important to note that the volume is originating from the marketplace. I won't go into specifics about bookings for each submarket as that level of detail may not be beneficial. I'll keep my comments focused on the overall Aerospace and Defense sector.

All right. I guess as we think about the fiscal '26 guidance then and the revision towards the high end, what were the prior assumptions around when the structural activity would resume? And how has that changed now? Or is that really just what's reflected in this new guidance?

The guidance remains unchanged. We are transparent about our current sentiments, indicating that we anticipate reaching the high end of our expectations. Our forecasts are continually updated based on feedback from our customers. The key point is that we have observed increased positivity from them. Consequently, we believe we will achieve the higher end of our guidance, which is informed by what we are hearing from the market and directly from our customers.

All right. And then if I could real quick, are you seeing any acceleration in the incremental value being realized in these LTA renewals? Or is kind of the repricing similar to what we saw initially post-COVID?

Tough question only because it really depends on the submarket that you're in, Bennett. I would tell you at a high level that you are seeing continued increased percentages, not always the same for each submarket, if that makes sense.

And it looks like there are no further questions. So I will now hand it back over to John Huyette for closing remarks. John?

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

And that concludes today's call. Thank you for joining, and you may now disconnect.