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Good day, and welcome to the Carpenter Technology Fiscal Fourth Quarter and Full Year 2024 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Huyette, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the Fiscal 2024 fourth quarter ended June 30, 2024. 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 and slide movement. Speakers on the call today are Tony Thene, President 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, 2023, Forms 10-Q for the quarters ended September 30, 2023, December 31st, 2023, and March 31st, 2024, and the exhibits attached to those filings. Please note that in the following discussion, unless otherwise noted, when management discuss the sales or revenue, that reference excludes surcharge. When referring to operating margins, that is based on adjusted operating income, excluding Special Items and sales excluding surcharge. I will now turn the call over to Tony.

Thank you, John, and good morning to everyone on the call today. I will begin on Slide 4 with a review of our safety performance. For fiscal year 2024, our total case incident rate was 1.8. Although a 1.8 injury rate was ranked as one of the safest metal manufacturing companies, it is not a rate we accept at Carpenter Technology. Our goal is to be a zero injury workplace. As we enter fiscal year 2025, we continue to believe our zero injury goal is possible and we will continue to invest and work tirelessly to achieve that goal. Now let's turn to Slide 5 for an overview of our fourth quarter performance. Carpenter Technology continues to exceed growth expectations. In the fourth quarter of fiscal year 2024, we generated $125 million in adjusted operating income, the most profitable quarter on record, beating our previous guidance by approximately 12%. To put this in perspective, it is a 39% increase over our then record sequential third quarter and double our fourth quarter a year-ago. Further, we generated $142.4 million of adjusted free-cash flow during the quarter. The strong fourth quarter performance is a result of continued improvement in productivity, product mix optimization, and pricing actions. The SAO segment exceeded expectations, delivering $140.9 million in operating income, well above the outlook we provided on last quarter's call, and 36% above the sequential third quarter performance. Notably, SAO achieved adjusted operating margin of 25.2%. This is a meaningful step-up from the 21.4% in the previous quarter and our pre-COVID best of approximately 20%. With this exceptional performance, we finished fiscal year 2024 with $354.1 million in adjusted operating income, an annual earnings record for Carpenter Technology. Let's turn to Slide 6 and take a closer look at our fourth quarter sales and market dynamics. In the fourth quarter of fiscal year 2024, sales increased 15% sequentially on higher volumes, improving product mix, and higher realized pricing. Notably, the SAO segment saw a sequential increase in shipments of 13%, the result of increased productivity across facilities, particularly at key melt work centers. You may recall that we previously identified these productivity efforts as a driver of our anticipated second-half performance. We were able to accelerate these efforts as seen in our third quarter performance and then exceed them again for the fourth quarter. With demand for our premium material solutions well-above supply levels across our end-use markets, we continue to remain focused on allocating capacity to where customers value it most. In the fourth quarter, sales to our largest end-use market, Aerospace and Defense, were up 19% sequentially and up 28% year-over-year. Let me dive a bit deeper into the aerospace market. First, it's important to note that industry demand remains robust as measured by passenger traffic, airline miles, and airline operators' desire for new planes. The backlog for commercial airplane bills reported by Boeing and Airbus is now over 15,000 planes or roughly nine years of demand. Again, fundamental dynamics are driving demand. More people than ever in history want to travel and airline operators want the newest generation of airplanes to replace aging fleets, to realize the fuel efficiency they provide, and to meet the additional needed capacity for more airline miles. Today, there is some noise in the supply-chain about build rate attainment and regular news about the timing of production goals. Let me talk about what all that means as we think about our outlook. Carpenter Technology is a key supplier into the aerospace supply-chain with broad exposure to aerospace platforms. This includes narrow-body and wide-body, Airbus and Boeing and MRO and OEM. We like the rest of the supply chain are managing through the current build rate adjustments. Often, even before information is broadly communicated externally, our customers are talking to us about issues they are facing and changes they may need to make. For example, as new bills have lagged, MRO demand remains elevated. As a result, customers may prioritize a different portfolio of products in the near-term. We also have a large backlog of orders, both in aerospace and other markets like defense, energy, and medical. Our broad supply-chain exposure and visibility into future customer needs gives us the flexibility to adjust our production schedules to meet the evolving demands of our customers. Further, despite ongoing increases in our production rate, we still have substantial portions of our backlog wanted earlier by customers, which gives us the opportunity to pull-in orders when needed. Changes to near-term build rates are clearly something we are aware of and will continue to react to and adjust for if and when needed. To bring it all together, there are four important points you should take-away from my comments. One, due to our broad reach of products and capabilities, we are currently able to navigate any near-term adjustments in the aerospace supply-chain due to build rate changes. Two, our backlog remains at record levels. And despite ongoing efforts to limit orders to maintain lead times, we had high order intake across markets in the fourth quarter. Three, even with modest assumption for build rate increases over the next 12 months, we are still increasing our earnings outlook, as I will discuss shortly. And four, looking beyond the next 12 months, we see significantly higher demand on the horizon. We and most others in the industry are confident that there will be ongoing build rate increases, given an extraordinary current and increasing future demand. Moving to the defense market, our customers continue to request emergency orders to support elevated military activity levels due to ongoing world events. We will continue to prioritize these orders given the essential nature of our support. In our medical end-use market, we saw another record quarter with sales up 9% sequentially and 38% year-over-year. Our customers continue to see strong market demand-based on robust procedure backlogs. Like aerospace, our medical customers are focused on securing their much needed supply given the strong demand environment, and view specialty materials as a key strategic area. In addition, customer engagement on new products remains high, driven by innovation in the use of robotics, increasing adoption of less invasive surgeries, and alloy sensitivities, among others. As a result, we continue to see high growth opportunities in the medical industry. Taken together, our aerospace and defense and medical end-use markets are nearly three quarters of our overall business and continue to grow in share. Across our other end-use markets, customer engagement is high and demand for our premium solutions remains positive. For example, we are seeing strong demand for power generation, which drove a 31% sequential sales increase in the energy end-use market. Bottom line is that we are operating in a strong market and we anticipate that to continue and expand in the long-term. Now, I will turn it over to Tim for the financial summary.

Thanks, Tony. Good morning, everyone. I'll start on Slide 8, the income statement summary. As Tony already covered in his remarks, this quarter's results exceeded our expectations and broke any previous records for quarterly profits. Starting at the top, sales excluding surcharge increased 15% sequentially on 13% higher volume. The growth in net sales was driven by increasing volumes primarily related to our improving productivity that we signaled two quarters ago, combined with the ongoing shift in product mix as we continue to focus our capacity on our most profitable products. The improving productivity and product mix is evident in our gross profit, which increased to $190.6 million in the current quarter, up 30% from our recent third quarter. SG&A expenses were $65.4 million in the fourth quarter, up roughly $8 million sequentially. The increase sequentially is primarily due to higher variable compensation accruals and the timing of certain expenses. Note the SG&A line includes corporate costs, which totaled $26.9 million in the recent fourth quarter when excluding the Special Item. As we look-ahead to the upcoming first quarter of fiscal year 2025, we expect corporate costs to return to a more normalized run-rate of approximately $23 million to $24 million. Operating income was $108.3 million in the current quarter, or $125.2 million of adjusted operating income, which is 39% higher than the $90 million in our recent third quarter of fiscal year 2024 and ahead of the expectations we set last quarter. We continue to build operating momentum and expand margins, delivering total company adjusted operating margin of 19.7% in the current quarter. Moving on to our effective tax rate, when excluding the net benefits associated with the Special Items, the effective tax rate for the quarter was 17%, which is slightly lower than our expectations due to benefits associated with certain changes in prior year tax positions taken in the current quarter, as well as the benefits associated with stock option exercises. For fiscal year 2025, we expect the effective tax-rate to be in the range of 21% to 23%. Adjusted earnings per share was $1.82 for the quarter. The adjusted earnings per share results exclude the impact of pre-tax restructuring and asset impairment charges associated with our additive business in the PEP segment as we continue to look at opportunities to streamline operations. The Special Items also include a U.S. tax benefit associated with the additive restructuring. In summary, the adjusted earnings per share results for the quarter of $1.82 demonstrates our improving profitability, driven by solid manufacturing execution in a strong demand environment. Now turning to Slide 9 and our SAO segment results. Net sales excluding surcharge for the fourth quarter were $559.5 million, up 16% sequentially on 13% higher volume. In addition to the step up in volume, we drove favorable product mix and realized pricing actions, primarily in the aerospace and defense and medical end-use markets, as Tony reviewed earlier. Moving to operating results. SAO reported operating income of $140.9 million in our recent fourth quarter, which outpaced our expectations and represents a significant new record in the history of SAO. As shown on the slide for context, SAO operating income increased by $60.9 million from the same quarter last year, a 76% improvement. And on a sequential basis, operating income increased $37.4 million, a 36% improvement. The improvements in productivity, product mix and pricing are evident in the adjusted operating margin, which has increased to 25.2% in the current-period. To put the current quarter's performance in historical perspective, prior to fiscal year 2024, the highest quarterly profit that the SAO segment achieved was just under $87 million in the fourth quarter of fiscal year 2019 with a corresponding adjusted operating margin of 20.4% at the time. This quarter's results are over 60% higher than the previous record with considerably higher margins. Although we highlight the impressive results we have just reported, we believe they are only milestones on the path towards our future increases in profitability. With the backdrop of strong market conditions, the SAO team remains focused on executing actions to further increase and maintain consistent production levels and to continue to actively manage the product mix to maximize capacity for our most profitable products. As we have said before, in the current environment, we recognize the heightened importance of maintaining our assets. This includes actively managing preventative maintenance schedules to ensure the availability of the assets for the long term. Looking ahead to our upcoming first quarter of fiscal year 2025, we anticipate SAO will generate operating income in the range of $127 million to $133 million, which would represent a record for the segment's first quarter performance. Now turning to Slide 10 and our PEP segment results. Net sales excluding surcharge revenue in the fourth quarter of fiscal year 2024 were $102.3 million, up 8% sequentially. In the current quarter, PEP reported operating income of $10.6 million, up from $9.2 million in the third quarter of fiscal year 2024. Sequential sales and profitability growth was primarily driven by our Dynamet Titanium business, which like SAO is seeing strong market demand in key end-use markets and is working to further increase production rates across the operations. With that in mind, we currently anticipate that in the upcoming first quarter of fiscal year 2025, the PEP segment will deliver operating income in line with the fourth quarter of fiscal year 2024 or roughly $10.6 million. Now turning to Slide 11 and a review of adjusted free cash flow. In the current quarter, we generated $169.5 million of cash from operating activities compared to $83.4 million in our recent third quarter. As outlined last quarter, for the first half of fiscal year 2024, we increased in-process inventory as we continue to ramp manufacturing activity to meet the strong demand environment while we focused our efforts on increasing production rates across our operations. And as planned, we reduced inventory by $59 million in the fourth quarter, driven by higher activity and sales levels. The inventory reduction was also driven by increased productivity at key work centers, improving the flow of material through our facilities. The inventory management focus combined with increased profitability drove the significant improvement in cash flow from operations. For the current quarter, we spent $27.7 million on capital expenditures, and finished fiscal year 2024 at just under $100 million in capital expenditures. With those details in mind, we reported adjusted free-cash flow of $142.4 million in the fourth quarter of fiscal year 2024. For the full fiscal year 2024, we generated $179 million of adjusted free cash flow and ended the year with a $199 million of cash on the balance sheet. Clearly, the improving profitability and disciplined working capital management are yielding results, but we are not satisfied and see further opportunities. Our solid balance sheet position, with no near-term debt maturities and comfortable leverage ratios, positions us well for the future. Before I turn the call-back to Tony, I wanted to highlight for those on the call that we have included in the appendix of this presentation, a slide with certain selected fiscal year 2025 guidance to help with modeling. With that, I'll turn the call back to Tony.

Thanks, Tim. Now let's turn to the fiscal year 2025 outlook. For context, a little over a year ago, at our Investor Day in May of 2023, we laid out a path to double our fiscal year 2019 operating income by fiscal year 2027. That four-year goal represented a 40% operating income CAGR from our expected fiscal year 2023 performance. Even with such impressive growth, we acknowledged it was a conservative estimate. We further clarified that the earnings growth would be front end loaded. Through fiscal year 2024, we have accelerated our earnings growth, driven by multiple initiatives with a focus on improved productivity, product mix optimization, and pricing actions. Recognizing our accelerating performance in our last quarter earnings presentation, less than a year-after our Investor Day, we pulled our original fiscal year 2027 goal ahead at least one year into fiscal year 2026. And now after exceeding expectations with another record quarter, we are pulling our goal in another full year. We are projecting $460 million to $500 million of operating income for fiscal year 2025, at the high-end of the range. That's approximately a 41% increase over our record fiscal year 2024 performance. In addition, we are projecting approximately $250 million to $300 million in adjusted free cash flow during fiscal year 2025, which represents approximately 85% conversion rate and marks another step-up in our cash flow performance. Now shifting to the more near-term and our first quarter fiscal year 2025 outlook. As I communicated last quarter, we anticipate starting the year strong. For the first quarter of fiscal year 2025, we are projecting between $114 million and $120 million in operating income. This accounts for the impacts of preventive maintenance, offset by higher productivity, improving mix, and realized pricing. This target is approximately 70% higher than last year's first fiscal quarter, which was then a record best first fiscal quarter, and it sets up well to achieve our accelerated full-fiscal year 2025 target. For those of you who have been following our story, you've seen the accelerating performance over the last several quarters as we have consistently exceeded expectations. And now in the span of just 14 months, that impressive 40% operating income CAGR four-year goal has become a 90% CAGR two-year goal, with approximately 60% in the bank in year-one fiscal year 2024. By now, I hope you appreciate that we don't communicate targets that we don't have line of sight to and confidence in achieving. With that said, the Carpenter Technology team is not satisfied with just achieving targets. Our team is focused on exceeding expectations as demonstrated in our results. With respect to the fiscal year 2025 target just communicated, we believe there are opportunities to outperform our assumptions related to execution in areas like productivity, mix, and pricing. Further, what is now our fiscal year 2025 target will not be the peak of our earnings growth. The same dynamics that are driving our current performance are expected to only get stronger into the future, as I detailed earlier on the market slide. We continue to believe this is only the beginning of our earnings growth journey. With that in mind, let's turn to the next slide to review our approach to capital allocation. With strong recent earnings and accelerated earnings outlook and a solid balance sheet, we are well positioned to take a balanced approach to our capital allocation. We clearly have a strong growth outlook with the asset base we have in-place today, and it is incumbent upon us to invest to make sure our operations are running as consistently and efficiently as possible. We won't put any of our assets at unnecessary risk and we'll continue to identify debottlenecking opportunities that improve productivity. To that end, we continue to expect to spend about $125 million each year in capital expenditures, which is roughly in line with annual depreciation. Beyond the $125 million, we are evaluating incremental growth projects that will target high-growth end-use markets, like aerospace and defense, and medical, by either enhancing current capabilities or enabling throughput improvements. Needless to say, given our already strong growth projections, any projects we undertake must be high value with attractive returns. In addition, our intention is to return capital to our shareholders. We have long supported a dividend, including through the COVID years and expect to maintain it at the current level, which is approximately $40 million annually going forward. Further, we announced today that Carpenter Technologies Board of Directors has authorized a share repurchase program up to $400 million. The primary use of this program will be to offset dilution. We may also deploy it to capitalize on opportunities the market may present. Earlier in my comments, I stated that we are projecting approximately $250 million to $300 million in adjusted free cash flow during fiscal year 2025. It is important to note that does not include any capital expenditures above the stated $125 million share repurchases or dividend payments. As we have demonstrated, we aim to be good stewards of our capital. As a result, we believe we will continue to drive strong shareholder returns over the long term. Now let's turn to the next slide for my closing comments. I will say it again, we completed a historic fourth quarter of fiscal year 2024. We delivered $125.2 million of adjusted operating income, exceeding expectations and setting a new quarterly result record. We generated $142.4 million of adjusted free cash flow. We continue to build operating momentum with increased productivity, improved mix and higher realized prices. We expanded SAO adjusted operating margins to 25.2%, up from 21.4% the previous quarter. And we completed the most profitable year on record with $354.1 million in adjusted operating income. We are operating in a strong demand environment across end-use markets with the long term outlook even stronger than today. And given our unique assets and capabilities, we are well positioned to realize the high value demand. With that in mind, we just pulled forward our earnings outlook again, pulling in our fiscal year 2027 target two years to fiscal year 2025. For fiscal year 2025, we are projecting $460 million to $500 million in operating income, and $250 million to $300 million in adjusted free cash flow. And we expect to start the fiscal year strong with $114 million to $120 million in operating income in the first quarter of fiscal year 2025. In addition, we announced a share repurchase program up to $400 million, further supporting our shareholder returns. Finally, we believe we are just getting started in our earnings growth journey. 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.

[Operator Instructions] The first question comes from Gautam Khanna with TD Cowen. Please go ahead.

Hi Tony, Tim, and John. Great results. I wanted to ask a couple of questions. First, with respect to your prepared remarks, are you actually seeing a lot of perturbation in the order book? Are you seeing any increase in deferral requests? Just kind of given all the concern about lower 787 final assembly rates and 737 final assembly rates, I'm just wondering how that has been conveyed to you guys in terms of your engine lead times and maybe your airframe product lead times.

Yes, good morning, Gautam, hope you're doing well. As I said in the prepared remarks, overall, we had a very strong order intake in the fourth quarter. We were actually up sequentially and year-over-year. So that would be total Carpenter Technology, but I can also say that holds true for our aerospace end-use market as well. Also keep in mind that lead times have not come in. I think last quarter I said 65-plus weeks, they're there still, if not extended a little bit. Now, when you ask about specific customers, if there is a customer that is tied very closely to the 77th as you referenced, they could be in a different situation and they might be asking for some adjustments. But the important thing that I said in my remarks is that at this time, I mean, we're able to navigate any of those type of adjustments because we have an order book that's three times what it was prior to COVID, and our estimation is that three quarters of that are for customers that want product early. So we have an opportunity to pull-- to pull that -- to pull that in. I can, you know, take this opportunity also to kind of give you maybe a little bit more color as far as the customers we work with and we don't have anybody coming to us and saying that they want to -- they want to cancel or anybody that wants to give up production slots. In fact, we have OEMs saying, hi, they're going to use this opportunity to take up production. So we have people calling us saying, if anybody wants to, again not cancel but push out because they have a very strong connection to 737, we're interested, put us in there. So I think that's the takeaway. There's -- you've been around long enough to know, Gautam, there's going to always be some type of noise in the aerospace supply chain. There's multiple different types, thousands of different materials that go into making an airplane. And -- but for our specific piece of that, because of our breadth and because of the visibility we have, we feel very confident we can manage any of those build rate changes here in the near-term. The good news or the powerful piece after that is that everybody inside of the industry that I talk to, including us, believe that those build rates are going to increase significantly over the coming months. So we've taken all of that into consideration, all of that into consideration and still increased our earnings outlook significantly, pulling it forward a year. So I think that puts Carpenter Technology in a unique spot that says we can move through all this so much so that we're willing to increase our earnings outlook. And I hope that -- hope that helps out with the extra color.

Yes, that's a great answer. And as a follow-up, I'm curious if you're -- you guys are obviously driving a lot of throughput gains, maybe you could just step back and give us some broader context on where you are with some of the productivity enhancements because obviously, that's going to be key to driving the higher throughput throughout fiscal '25. Maybe you can give us some examples on the furnaces or where you've had bottlenecks that you've alleviated. Any context would be helpful.

Well, Gautam, you and I have been talking about this for several years now, right? And it's a great -- it's a great point. I think you always, you know, zeroing in on what the SAO margins are, it's a primary leading indicator. And you know, we're always before COVID, very excited about getting to 20%. We just hit 25%, Gautam. And I mean, that's significant and our sights are on 30%. That's doable. If you take a step back to answer your question more specifically what's driving that, obviously, it has to be across the entire process because every work center is linked. But I will say the work that we've done on the front end of the process, on the melt side, that has been the biggest, you know, uplifting of our total output, right? I mean, I'm -- the workers that we have out on the shop floor Reading and Latrobe, what they've been able to do with the output from primary melting is, fantastic. And you know, as you talk to them, they're not done. They have an immense amount of pride into doing that safely and high-quality, and, you know, they're just big drivers behind where this productivity has been. And importantly, you know it's not the top for us. I mean, the next level is 30% and I believe that's doable.

Thanks, Tony. I'll get back in the queue. I appreciate it.

Thank you, sir.

The next question comes from Josh Sullivan with Benchmark. Please go ahead.

Hi, good morning. Congratulations on a great quarter here.

Good morning, Josh.

Just looking at inventory, you know, what are the metrics you're comfortable with at these operating levels or what are the channels that we should kind of think about going forward as you maybe are a little bit more level loaded?

Well, it's a big driver, obviously, of free cash flow. And the way we look at it now with significant increases in volume over FY '25, our goal is to keep inventory relatively flat, which means you'll have a significant improvement in days on-hand, or inventory turnover, whatever metric you use. Now, you know, you've been around long enough that that's going to fluctuate from quarter-to-quarter. So it's not going to be inventory is going to stay flat every quarter, but over that the next FY '25, that's our target, that's our goal. And we're going to do what's best to make sure we get as much product as we can to our customers. But at a high level, our overall goal for FY '25 is to stay in that flat area versus FY '24.

Got it. And then just on the comment on prioritizing defense orders, how much runway is there? Is this a short term immediate need on the defense side or is there a longer term dynamic there that will continue?

I think there's both. Certainly, I think longer term with the world environment that we're in, this is going to continue to stay strong. Short term, yes, with current world event, as you see our Department of Defense re-evaluate where they're at, what they wanted from a readiness standpoint. Our discussions with our Department of Defense has always been strong. I will say that it has amplified over the last several quarters, over the last year that we're working with them very closely on not only next-generation alloys or products, but near-term what can we do to help support, you know, their current goals. And we're proud to do that, we're happy to do that and we will pull them into the schedule as much as we can with any type of questions they have.

Great. Thank you for your time.

Thank you, sir.

Next question comes from Scott Deuschle with Deutsche Bank. Please go ahead.

Hi, good morning. Great results.

Good morning, Scott. Nice to have you on board.

Thank you. Tony, should we expect EBIT to grow sequentially throughout 2025 like it typically does?

It's a good question. And at a high-level, the answer is yes. But there is a dynamic that we're in right now, Scott, and that is we're effectively sold-out. So everything we produce, we can ship. So this idea of seasonality has been more offset than by this elevated demand. So the only real difference between quarters is the number of days you have to operate. And that's why it's really important to understand planned maintenance and what we're doing, as we've just guided our first quarter to be slightly down from fourth quarter, why is that? It's almost 100% due to the fact that we took some primary melt preventive or planned maintenance outages in the fourth quarter and it takes about a quarter for that to flow through. That's why you see a little bit down in the first quarter. Has nothing to do with the market, no red flags. The market isn't getting weaker, it's getting stronger, but we must protect our assets and we must take that planned maintenance. So could there be a quarter, Scott, in the future that EBITDA or earnings or whatever your metric is down slightly? It could, but that will be 100% related to how we take our planned maintenance. I hope that answered your question.

Yes, no, that's great. And then, Tony, can you characterize the current pricing environment? Has that deteriorated at all recently or is the pricing power you've been exercising the last two years still holding in really well?

Yes. I don't want to talk too in depth about specifics on pricing, but I think as you can see from our results that continues to increase quarter-over-quarter. And I think the big driver there, Scott, is the market from what we see it, even with these small little blips here in front of us, which in the whole scheme of things aren't going to be relevant long-term, right? I mean, we've shown you that we're able to offset that. That doesn't impact us right now. Now it can't last three or four years, but nobody believes that that's going to be the case. In fact, this will just put even a steeper, you know, trend-line up over the next year, I believe. So with that type of demand environment, you should assume that pricing would remain -- would remain strong just because of supply-demand, just because of supply-demand dynamic. And if I could, Scott, I'd like to -- it brings me to another point. I hope -- I don't want to take your time, but it brings to this other point around this whole supply-and-demand and when we talked about our capital allocation and the fact that we're going to be balanced. We're look -- we've signaled before that we are intent to return capital to shareholders. Obviously, we just announced the buyback program that's evidence of that. And we talked about these potential incremental growth projects. I wanted to be clear, it says there is -- or there are no projects that we are currently contemplating that would come anywhere close to pushing supply above demand in the products that we supply into aerospace. So the-- those incremental growth projects that we look at is where can we find that next, you know, notch of capability, that next notch of incremental capacity that can accelerate an already-- a very impressive earnings over the next several years. Those are the things we're talking about. When you start talking about large projects that would try to close that gap, they're just not doable. So I think that's important to say that we're looking at would not -- would not -- would not solve the equation. The gap is that significant. And we don't have anything on our plates that would do that. So thanks for the time. So let me jump in there and say that.

Yes. Thank you. One last question for now, you know, Tony, it sounds like there's a pretty big issue with yields at the forgings and castings houses and I apologize for the ignorant question here. But when those companies experience issues with yields, does that generally drive more demand for CRS products or do those firms typically have their own revert loop that allows them to just reprocess what falls out as a result of those defects? Thanks.

Well, I want to be careful with this, Scott, because I'm not -- when you say the forging houses, I'm not 100% -- I don't want to assume who you're -- who you're speaking with, right? So I don't want to answer something with not having enough knowledge, I mean, obviously. I'll answer it this way. We work very closely with those large forgers, if it's who I think you're talking about, obviously. And again, it's much like the build rates at the final-- similar level. There's always going to be some little noise here and there. The market is so strong right now and more importantly, Carpenter Technology with the ability we have to move some things around, it more than offsets that. I mean, another good example, we talked about aerospace a lot, but you've heard all in the news around you know power generation or land based turbines and the need for more power and artificial intelligence. And that's a different alloy for us, but it runs across similar assets. So again, that's another alloy that wants to jump into the production flow and we're able to get margins for those products even to aerospace margins. So it's just another tool that we have to offset any of that type of near-term noise. I'm confident that those people you talk to, they're very, very well-run and any short-term noise will be behind us soon, I'm sure.

Thank you.

Thank you, Sir.

[Operator Instructions] The next question will come from Andre Madrid with BTIG. Please go ahead.

Hi, all, thanks for taking my question. So, I mean looking ahead-- so obviously, FY '27 guide got pulled in into '25. So with that said, I mean, how should we be looking at '27 and beyond now? I mean, do we expect the same kind of pace of growth-- of expansion, a plateauing of sorts? I mean, how should we think about, you know, looking at the performance here on out?

Yes, Andre, welcome as well. I mean, it's one of those no good deal goes unpunished, right. I mean, we just pulled FY '27 last quarter up one year, now two years. So the question is, what are you going to do in FY '26, right? And as I said on my prepared remarks, we think this is just the beginning. So FY '25 is not -- is not the peak for us. We do plan on giving updated '26 and '27 guidance in the future in this fiscal year. I mean, we have a practice in the fall of every year where we update our long-term outlook. It's a very detailed market-by-market, product-by-product, customer-by-customer bottoms-up projection. We're getting ready to kick that off. I'd like to let that run its course. On our current look that we have, certainly FY '26 and '27 are another steps up from FY '25. But I want to let that run the course. As I've said before, we don't take lightly the guidance that we give. We want to have line of sight to it. We want to have confidence that we can hit it. So we're going to let the process play out. We're going to do that detailed workup and get a refresh '26 and '27. And our plan would be to communicate that. But make no mistake that '26 and '27 would be nice steps up from FY '25.

Appreciate it. Thank you. That was helpful. If I can tackle on other there. I mean, looking at the outlook, I know that previously you had said $500 million CapEx through 2027. But seeing as though the guide has kind of remained intact to be about $125 million for FY '25, I mean, are you guys able to hit these increases without having to expand CapEx beyond the, kind of the going levels? I mean, is it -- I would have -- or is that just, you know, going to be all done through pricing? I mean the operating income increases?

Yes, it's a good question. Thank you for that. All of our targets that we have communicated externally are based on our current capabilities and capacity. We do not assume any new capacity coming on to hit those targets. None. So that's a very, very important point. So every target that earnings target that we've given you only takes into account our current capabilities and our current capacity. The $125 million a year is primarily sustaining capital, right? So which is a, you know, roughly equal to our depreciation. You need to always be refreshing your assets. So those are, you know, taking care of the current assets. Those aren't adding any really new capacity. Now inside of that $125 million, I will say there are at times smaller debottlenecking projects that can improve productivity that's inside that $125 million. I would assume over the next several years, that $125-ish million range is going to be pretty consistent. And then anything above that would be any type of growth type capacity capabilities adding CapEx. And if we did that, that would add to the earnings growth on-top of what already is a really impressive number. So I appreciate the question because that's an important distinction to make that there's no CapEx we need to spend to hit our current guidance. Above the $125 million.

Thank you. Thank you.

Yes.

The next question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Hi, Tony, good morning. Congrats on the strong results.

Yes, good morning. Good to hear from you.

The engine revenues in your last quarter, can you give us a texture in terms of how much that grew sequentially or year-over-year?

Yes, sure. Aerospace engine sales were up 22% year-over-year and 17% sequentially. So very strong quarter for aerospace. That's the industry. Just to be specific, that's aerospace engines.

Okay. Thank you. And can you give us an idea of how much defense right now is in your A&D mix as a percentage? I'm just trying to read the tea leaves given you've said it's been strong and you pulled some stuff in for the government and obviously defense spending has been strong last couple of years.

I think roughly, you know, defense is about 10% of the -- maybe a little higher of the total aerospace and defense end-use market.

And then lastly for me, can you give us any color on the long-term contracts within SAO? Obviously, you've achieved higher pricing on anything you've renewed. Have you put more pass through clauses in some of your new contracts or altered the duration of some of the contracts that you've re-signed?

Yes, for sure that over the last year, maybe longer and going into the future, there are more of those types of, you know, clauses, as you said, some type of accelerator if energy moves to this point, if inflation moves. So there's much more of those in the contract to try to, you know, project if there's any large move-in some of those items that we don't get burned by that. So that is true that that's a part of all of our contracts going-forward. On the second part of your question, I would say that contracts are for a shorter-duration now than what they were, you know, prior to COVID.

I appreciate that. And then lastly for me on labor. How do you -- how do you all feel on that side of the equation and to the extent that you debottleneck further, unlock more capability, is there a more training or more hiring that you need to do? Or you feel like you're pretty equipped on the hiring front at this point. Thank you.

Yes. We have a couple of areas that we want to increase staffing, nowhere near the extent that it was three or four quarters ago, maybe a year ago when it was a real issue for us. We've passed that. But there are a couple of areas that we want to add some staffing. From a training standpoint, yes, that's going to continue for quite some time. I mean, you're replacing people with 35, 40 years with newer people and we're very happy with the progress that we've made, but there's always room for improvement there. As you know, these are very complex pieces of equipment. It takes a very skilled operator to run those. So, you know, you can't buy experience, right? You just got to put the time into the job. And we're pleased with the progress that our operators are making.

Thank you so much.

Yes, thank you, sir.

Our next question is a follow up from Gautam Khanna with TD Cowen. Please go ahead.

Hi, thanks for the follow-up. Curious, Tony, just to get your impressions or your opinion on-- you've heard like GE talk about five troubled supplier sites and I-- to an earlier question, I presume it's the forgings and castings houses. But I'm just curious, like do you have a view that maybe the buy-to-fly ratio is particularly sloppy right now? Pretty low right now and therefore, you're having the opportunity to, kind of, sell products more than once, if you will, just because their yields downstream are much worse than what was anticipated and what they might be a couple of years from now. And if that's the case, is there any negative implications of that longer term, as the buy-to-fly starts to may revert back to a better level?

You know, to be 100% honest, I mean there could be some of that. I mean you have some great insights into that side. That's not something that dominates the discussions I have with our commercial team and says, hi, we need to sell so much more, the demand is so much greater because of that. It just -- that hasn't come up with us. So we don't see that as a major driver, which means there's not a hole in the future when that gets better. And as you well know too, Gautam, right now, I mean the gap between a supply of our specialty materials and the demand for them is pretty wide and I don't see that changing much. And I get where you're coming from, right? Because everybody is looking for that, hi, here's a move over here. How does that impact you? And you know, we're just -- we're able -- we're in a very unique position where we're able to navigate all those. And to summarize, I mean, I have not seen that be a high, you know, discussion point between myself and our commercial team.

Yes. And I almost wonder like how it would be discernible. I guess it would just be if some of those customers that are having yield challenges are asking you to expedite shipments or asking for more than what you expected them to ask for as you move through a quarter or whatever.

It's hard to say like what was the driver. I mean, we're getting -- we get those types of expedite requests across the board, right? And it could be many things. It could be this, there's a bunch of other things going on. So it's pick one -- pick which one you want, but expedites and the desire of customers to move forward is real. And that's one of the things we talked about earlier, Gautam, which is a really important point, because we can get very singular and hear a data point and say, hi, I heard from this entity that they're really pulling back on their orders. And if you dig deep, you'll say, well, yes, but that entity 90% -- I'm making this up a little bit, 99% of their businesses to the 737, of course, they're going to make adjustments. Across the whole industry though, that's small and many other people then you move-in to take advantage of that. So that's why we're -- Gautam, that's why we were able with all of this noise, we just pulled our guidance -- our earnings guidance in another year, right? We took all that into consideration. And I think that's -- to me, that's extremely strong outlook for us over the next several years.

I appreciate that. And one last follow-up. I did hear you say 30% is possible at SAO, I'm not holding you to that obviously, but I am curious about pricing and your expectations longer-term for it. As the contracts that you've renewed with the shorter duration come up for renewal again in the next two or three years, presumably the price resets aren't going to be as great as they were, just given inflation is not going to be as high. But do you have an-- do you have like a ballpark-- I mean, are we thinking you're still going to get net price as you move out and renew? Is that still part of your base case when you look out beyond 2026?

Yes, I want to be careful there. I don't want to signal anything to the market what we may or may not do on the pricing side, right, because I don't think that's appropriate. But I will say that we believe that going-forward that the imbalance that we have where demand is going to exceed supply is going to continue for our products, right? I don't see anything that's going to solve that. And you know that's going to make that a, you know, a-- an advantageous market for us going forward. And I'll leave it at that.

Okay. And you may have said it, but what was the fastener sequentially year-over-year?

Yes, I did not. So thanks for bringing that up. Fastener sales up 11% year-over-year and 8% sequentially.

Great. Thanks a lot, guys. Appreciate it.

Yes. Thank you, Gautam.

Next question comes from Scott Deuschle with Deutsche Bank with a follow up. Please go ahead.

Hi, thanks. Tony, you made the point that Carpenter won't be making any big investments in capacity to rock the boat on supply-demand, but just theoretically, if another industry participant were to make a meaningful investment to expand capacity, do you have a sense for how long it would take for that to come online in a meaningful way? Is it like seven to eight years a reasonable framework for that duration?

Yes, I think it's seven to 10 years. And I think it's important to take a step back. If that happened, right, that's still not going to really, as you say, rock the boat, right? The gap is pretty small. The second piece that I said, I mean, we'll look at ways where we can increase capabilities and capacity. Like we're going to look at ways we can do that. There's not some big bang out there. You know, let's build a new plant, so to speak. And then -- but back to your original question, you know, it's going to take several years to design. Even if it was someone like us that's been around for 140 years, it's going to take several years to design. It's going to take several years, 18 months to 24 months to build the equipment. It's very specialized equipment, and then pick your number, five years or-- to qualify. There's nobody going to ease the qualification requirements. So yes, it's a very long runway to get to that. And you'd be -- when you talk about is there someone else, you'd be talking about someone that has never done it before. So the, you know, the knowledge that's required to run these types of facilities is massive. So you don't just do that and learn how to do that in a couple of years. It's just not doable.

Got it. Do you think those qualification requirements are even tougher now given the powder metal contamination issue that Pratt had?

There's no doubt. There's no doubt that their qualifications are tougher, not just because of that example that you gave, but other examples, over the past any type of failures that you've had, they are more stringent. And rightly so, right? I mean, we want this industry to be as safe as possible. That just makes it more and more difficult for other people to say, I'm going to go out and put in this capacity. It just -- it's not a lemonade stand. It's much more than that. So there's no doubt that the qualification process is more difficult than it was five or six years ago.

Yes. Got it. And then, Tony, it looks like a pretty good amount of cash on the balance sheet exiting the year. Is it fair to think you might get started on this buyback sooner rather than later given that you've got the ability to do so? And it sounds like really high confidence in this outlook?

Well, I think we're in good place, right, Scott. I don't want to signal when or what levels it would be that we'd be in the market. But I think we're sitting at a very good place coming out of the year with about $200 million of cash on the balance sheet, a nice forecast going forward. I just believe it's all about execution for us now and it's a good time to be a shareholder, right? Because we've got a great earnings growth, we got great free-cash flow. We just put out a repurchase program that says that's going to be a meaningful use of our cash going forward. I've just said from a -- we're going to look at growth CapEx that can be incremental to us. There's not that big thing that's going to flip the supply-and-demand and we look out over the next several years and see a very strong demand environment. So-- but we're in a good spot right now, but we know we have to earn it every day and that's what that's what our team is focused on.

Fantastic. And Tim, one question for you. Just anything on free cash flow for the first quarter worth calling out? Should we expect a typical seasonal outflow there or can the EBIT strength you're guiding to allow first cat -- first quarter free cash flow to be closer to breakeven or maybe even positive? Thanks.

Yes, Scott, good morning. Like Tony said, the biggest driver for free cash flow is working capital, specifically inventory. That inventory is going to fluctuate seasonally, as you mentioned. So we're going to manage that as best we can and make good decisions. But our goal for the-- overall for the year is to keep inventory relatively flat.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to John Huyette for any closing remarks.

Thank you, Operator. And thank you, everyone, for joining us today for our conference call. Have a great rest of your day.