CRS - NYSE

Thank you for standing by. My name is Karen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Carpenter Technology Corporation Quarter Three Fiscal Year 2025 Earnings Presentation. All lines have been placed on mute to prevent any background noise. There will be an opportunity to ask questions. You may press star followed by the number one on your telephone keypad. To withdraw your question, I will now turn the call over to John Huyette. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Corporation Earnings Conference Call for the Fiscal 2025 Third Quarter, ended March 31, 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, 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 Corporation's most recent SEC filings, including the company's report on Form 10-Ks for the year ended 06/30/2024, Form 10-Q for the fiscal quarters ended 09/30/2024, and 12/31/2024, and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when management discusses sales or revenue, that reference includes 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 four with a review of our safety performance. Through the third quarter of fiscal year 2025, our total case incident rate was 1.4. Our leaders are actively modeling safety-first behaviors and emphasizing hands-on scenario-based training to support our shop floor teams. We are also reinvigorating our daily safety routines to drive increased awareness and focus. We remain committed to our ultimate goal, a zero-injury workplace, driven by consistent action and continuous improvement. Let's turn to Slide five for an overview of our third quarter performance. Our third quarter performance was exceptional, exceeding expectations and delivering the most profitable quarter on record. In the third quarter of fiscal year 2025, we generated $138 million in operating income, a 53% increase over our third quarter of fiscal year 2024 and 10% higher than our previous record in the fourth quarter of fiscal year 2024. Our record third quarter performance was driven by our strong market position, broad solutions portfolio with unique capabilities, and focus on manufacturing execution. Notably, the SAO segment continues to expand adjusted operating margins, reaching 29.1% in the quarter compared to 21.4% a year ago and 28.3% in the prior quarter. The ongoing margin expansion is a result of continued improvement in productivity, product mix optimization, and pricing actions. The SAO segment reached a record $151.4 million of operating income, an increase of 46% year over year. With the strong earnings and disciplined working capital management, we generated $34 million in adjusted free cash flow during the quarter, and we continue to return cash to shareholders through our repurchase and dividend programs. We purchased $37.5 million of shares in the quarter, raising the total to $78 million for the year. As we look ahead, our strong performance gives us confidence to again increase our guidance for the full fiscal year 2025. In the previous earnings call, we raised our fiscal year 2025 operating income guidance to a range of $500 million to $520 million. Now, with a strong third quarter result and fourth quarter outlook, we are raising our guidance for the fiscal year to the range of $520 million to $527 million. This would represent a nearly 50% increase in earnings over fiscal year 2024. Now let's turn to slide six and take a closer look at our third quarter sales and market dynamics. In the third quarter of fiscal year 2025, sales increased 8% year over year and 9% sequentially. This was driven primarily by the aerospace and defense end-use market, which saw sales increase 12% sequentially on 6% higher volumes. Within aerospace and defense, sales were notably up across engines, fasteners, and defense. Our engine sales were up 16% sequentially. This was driven by increased shipments to many customers combined with higher pricing as we entered a new calendar year. In general, our engine customers remain very busy with Airbus-related platforms and MRO demand and continue reporting strong pulls and a notion of being behind. They continue to look forward to ongoing build rate ramps in the industry and remain concerned about security of supply. As usual, we continue to be in discussions with multiple customers regarding long-term supply agreements. We recently concluded two LTAs that will provide significant benefit to our customers and Carpenter Technology Corporation now and in the future. I will note that we also expect to conclude other LTA discussions over the coming quarter. Aerospace OEMs continue to be very active across the supply chain and remain in strategic discussions with us often on a weekly basis. Our defense business remains strong; we continue to see urgent requests for material across multiple applications. In the recent quarter, one notable area of increased sales was from a specific platform where Carpenter Technology Corporation was asked directly by the Department of Defense to step in and provide emergency support. We continue to be proud of our role in supporting the defense community and will prioritize supply accordingly. In the medical end-use market, our sales were essentially flat sequentially and down 14% compared to a record prior year quarter. Underlying demand in medical remains positive, with ongoing increases in patient procedures. Customers continue to discuss ongoing expectations for steady growth, and more and more are in discussions with us to ensure their supply is secured. While our medical sales have already grown substantially over the last several years, we continue to believe there is significant growth potential looking forward. In the energy end-use market, sales were up 9% sequentially and 26% year over year, with significant increases in sales to our power generation customers. We are working closely with the power generation supply chain, from OEMs to parts manufacturers, to support their growth as this submarket has become a valuable strategic advantage for us. Altogether, the near and long-term demand outlook for Carpenter Technology Corporation remains very positive. Moving to slide seven, let's discuss the current tariff situation and how Carpenter Technology Corporation's strategic position provides a solid foundation. We have been closely monitoring the evolving tariff news as well as engaging with our customers and suppliers to analyze how tariffs could impact our business. I think the most relevant piece of information is that we, as well as others in our industry, have established long-standing surcharge mechanisms to pass through changing raw material prices to our customers. We expect to use these surcharge mechanisms to pass through the impact of any incremental tariffs on our raw materials to our customers. I will also say that not all of our input costs are subject to tariffs, as currently proposed or enacted. For reference, nickel, our largest raw material input, is sourced primarily from Canada, and Canadian nickel is currently exempt from tariffs. We have also evaluated how tariffs and ultimately global trade dynamics may impact demand in the near to medium term. Obviously, this is harder to predict as reactions and negotiations are happening in real time involving multiple countries. At a high level, based on what we know today, we anticipate limited impact. First of all, most of our products are highly specialized, designed specifically for our customers' needs. In most cases, these products have undergone significant qualifications. This means that there are few sources of these materials; in some cases, we are the only one, and often can only be sourced within the United States. Again, we will continue to monitor the tariff proposals and update our view as new information becomes available. Moving on from tariffs, I think it is worthwhile to highlight a few points about Carpenter Technology Corporation that may be underappreciated. These past few years have included significant disruptions in the supply chains that we participate in. Whether it's the tariffs and trade implications I just mentioned, ramping capacity and productivity across the broad aerospace manufacturing industry, airplane build rate changes, or other manufacturing issues at specific OEMs, to name a few. Despite all these disruptions, the team at Carpenter Technology Corporation has been solely focused on executing our strategy and consistently delivering record financial results. This is not a coincidence, and it is not luck. It is based on a specific strategy we set a decade ago and continue to execute against today. Our consistent success demonstrates the advantage we have in serving customers across multiple applications and platforms. We are not tied to one single platform or alloy, but instead help a variety of customers solve their most challenging material needs. This includes meaningful content on all commercial aero engine platforms, whether it is considered legacy, next-gen, wide-body, narrow-body, OEM build, or MRO. On these platforms, our material supports applications from rings and discs to gears, bearings, fasteners, avionics, and structural. There is not a single engine manufacturer in the aerospace industry that we do not count as a customer, and we are already looking ahead at the future generation of engines, still many years from industry adoption. In fact, we are actively working to support OEMs on these types of platforms, with recent sales of advanced materials to be tested on these platforms. Our aerospace and defense end-use market accounts for approximately 60% of our revenue, but we also serve other very specialized markets that seek out Carpenter Technology Corporation's expertise for specialized alloys across a broad portfolio offering. We are selective about which markets and industries we participate in. We focus on high-growth markets with customers who value precise metallurgical properties in their applications, like alloys used in medical implants, highly specialized materials used in the manufacture of semiconductors, and aerospace-like applications used in IGT to support power generation build-out, to name a few. We have built a broad portfolio of highly specialized solutions in rapidly growing markets, supported by strong megatrends. With an impactful commercial strategy, a focus on manufacturing execution to rigorous quality standards, and above all else, a commitment to the safety of our employees, our solution portfolio has provided the foundation that has enabled Carpenter Technology Corporation to navigate recent near-term challenges and short-term market disruptions. In fact, we have not only navigated the challenges, but we have also set new records for financial performance in the process. Now I will turn it over to Tim for the financial summary.

Thanks, Tony. Good morning, everyone. I'll start on Slide nine, the income statement summary. Starting at the top, sales excluding surcharge increased 8% year over year on 7% lower volume. Sequentially, sales were up 9% on 1% higher volume. The year-over-year growth in net sales despite lower volume was driven by increasing productivity in key areas necessary to drive a stronger product mix, as well as the realization of higher prices. The improving productivity, product mix, and pricing are reflected in our gross profit, which increased to $200.8 million in the current quarter, up 37% from the same quarter last year. SG&A expenses were $63 million in the third quarter, which includes $24.4 million of corporate costs. For the upcoming fourth quarter of fiscal year 2025, we expect corporate costs to be in line with our recent third quarter of $24 million. Adjusted operating income was $137.8 million in the current quarter, which is 53% higher than the $90 million in our third quarter of fiscal year 2024 and up 16% from our recent second quarter. As Tony mentioned earlier, this represents our best quarterly operating income result on record. Moving on to our effective tax rate, which was 21.8% in the current quarter. This quarter's effective tax rate was slightly lower than our anticipated rate due to certain discrete tax benefits recorded in the current quarter associated with stock option exercises. For the upcoming fourth quarter of fiscal year 2025, we expect the effective tax rate to be more in line with our normalized rate of 23%. In summary, the earnings per diluted share results for the quarter of $1.88 demonstrate ongoing solid execution against the goals we laid out for this quarter. Now turning to Slide 10 and our SAO segment results. Net sales excluding surcharge for the third quarter were $519.4 million. On a year-over-year basis, sales were up 8% on 12% lower volume. Sequentially, sales were up 8% on similar volume. The increase in sales reflects the impacts of higher realized prices and increasing productivity at key work centers that enabled an improved product mix relative to a year ago. Moving to operating results, SAO reported operating income of $151.4 million in the third quarter of fiscal year 2025. As Tony mentioned, the adjusted operating margin of 29.1% in the third quarter is a significant achievement. The continued margin expansion is a result of the SAO team's focus on reliably increasing production levels, while closely managing operating costs, realizing higher selling prices, and a richer product mix. These areas are as relevant as ever as we actively manage our production to adjust to changing customer priorities and seek to increase our overall output. Looking ahead to our upcoming fourth quarter of fiscal year 2025, we anticipate SAO would generate operating income in the range of $160 to $165 million, which will represent another record level of profitability. Now turning to Slide 11 and our PEP segment results. Net sales excluding surcharge in the third quarter of fiscal year 2025 were $96.8 million, up 2% from the same quarter a year ago and up 12% sequentially. In the current quarter, PEP reported operating income of $10.9 million compared with $9.2 million in the same quarter a year ago and $7 million in the second quarter of fiscal year 2025. The improvement in operating income in the current quarter was driven by our additive business. As we anticipated and discussed last quarter, our additive business experienced more normalized shipments to certain strategic customers that we expect to continue through the balance of this fiscal year. As we look ahead, Dynamet is the driver of the PEP segment, representing a significant portion of PEP sales and an even greater percentage of PEP's profitability. Dynamet's fundamentals are very comparable to SAO, including a strong market demand backdrop in the medical and aerospace end-use markets, which accounts for approximately 95% of Dynamet sales. Like SAO, the focus of Dynamet remains on improving productivity and expanding capacity to increase our output, which has driven improved results. With that in mind, we currently anticipate the PEP segment will deliver operating income in the range of $10 million to $12 million in the upcoming fourth quarter of fiscal year 2025.

Now turning to Slide 12 to cover some of the highlights of liquidity and cash flow. In the current quarter, we generated $74 million of cash from operating activities and spent $40 million on capital expenditures, resulting in $34 million of adjusted free cash flow. The results were driven by improving profitability and our disciplined approach to working capital management. I will note that the current quarter's cash flow results include $38 million of discretionary pension contributions. This is incremental to the minimum required contributions and was made to maintain certain funded ratios for one of our plans. The pension plans remain well funded, and no additional discretionary contributions above the modest minimum required contributions are planned at this time. The cash generation in the current quarter is an important step towards delivering our full fiscal year 2025 adjusted free cash flow target of $250 million to $300 million and executing our planned capital allocation priorities. Namely, taking a balanced capital allocation approach to return cash to shareholders and invest for growth. In terms of returning cash to shareholders, we were active against our recently authorized share repurchase program. In the current quarter, we repurchased $37.5 million of our stock. Year to date, we have purchased $78 million of our stock against the $400 million authorization. The share repurchase program complements the long-standing quarterly dividend, which we continued this quarter. From an investment perspective, we plan to spend $155 million to $160 million on capital expenditures in fiscal year 2025. This includes about $30 million of capital spend related to our recently announced brownfield expansion project. Our liquidity remains healthy. We ended the third quarter of fiscal year 2025 with total liquidity of $500.4 million, which includes $151.5 million of cash and $348.9 million of available borrowings under our credit facility. Our leverage ratios remain at historic lows, ending our recent third quarter under one times with no near-term debt maturity. And we remain confident that we can deliver our targeted adjusted free cash flow of $250 million to $300 million for fiscal year 2025. With that, I will turn the call back to Tony.

Thanks, Tim. Carpenter Technology Corporation just completed another outstanding quarter, and I'd like to highlight the key points from today's call. First, we delivered a record quarter with operating income of $138 million, up 53% from the third quarter a year ago. We increased adjusted operating margins in our SAO segment again, reaching 29.1%, another new record. We generated $34 million in adjusted free cash flow, with improved earnings and working capital management. We continue to return cash to shareholders, purchasing $37.5 million of shares in the quarter. This raises the total share purchases to $78 million for the year, against our $400 million share repurchase program. In addition, we continue our long-standing quarterly dividend. As I highlighted earlier, we are well-positioned to navigate the current environment with our strategic positioning, broad portfolio of products, and focus on manufacturing excellence. Finally, we're projecting a strong finish to our fiscal year 2025, with fourth-quarter earnings expected to increase 6% to 11% over a record third quarter. As a result, we've increased our operating income guidance for fiscal year 2025 again to the range of $520 million to $527 million. And we remain on track to generate $250 million to $300 million of adjusted free cash flow in the fiscal year. This financial performance will be a remarkable achievement at a time when the aerospace supply chain is transitioning and only at the beginning of its aggressive build rate ramp. We continue to believe we are in the early stages of our growth journey, as demand for our material will only get stronger and our earnings growth potential will continue to expand. Let me close by giving a reminder of our fiscal year 2027 earnings outlook on slide 15. What an exciting time to be part of Carpenter Technology Corporation, as we are delivering record profits while projecting a future of even higher earnings growth potential. As highlighted at our recent investor update, we have a compelling outlook for the company. We expect strong sustained earnings growth with operating income anticipated to reach $765 million to $800 million in fiscal year 2027. This would represent a 25% CAGR over the next two years, an earnings growth rate that we believe will outpace most of our peers. We project fiscal year 2026 to be materially higher than fiscal year 2025, and we believe fiscal year 2027 is not the peak of our earnings growth trend, with volume, productivity, and product mix all continuing to improve. As with our previous targets, we have high confidence in our ability to achieve these numbers, with opportunities to potentially exceed them. With our continued earnings growth and focus on disciplined management of our working capital, we expect our cash generation to accelerate. Specifically, we project significant free cash flow generation of $1 billion from fiscal year 2025 through fiscal year 2027, with an impressive 90% conversion rate. This is before considering the recently announced brownfield capacity expansion investment. This is a meaningful amount of cash to drive shareholder value. As such, we will continue to take a disciplined, balanced approach. We will return cash to shareholders through our quarterly dividend. We will repurchase shares through our $400 million buyback program. And we will invest in long-term strategic profitable growth. As we detailed in our investor update, we are in a unique position to bring on strategic capacity given our capabilities and unique collection of assets. The brownfield expansion will add high-purity primary and secondary melt capacity that will feed our existing downstream finishing assets. And while this brownfield investment will not materially impact the industry, current supply and demand imbalance, it most definitely provides an earnings accelerator to the company's already attractive earnings growth projections. We plan to fund this project through internal generation and anticipate an attractive return on capital of greater than 20%. Altogether, I think you'll agree that Carpenter Technology Corporation is performing at a high level today and has a very bright future, with sustained growth and value creation for our shareholders. Thank you for your attention. I will now turn the call back to the operator.

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. The first question comes from Scott Deuschle from Deutsche Bank. Your line is open.

Hi, thank you. Tony, can you further characterize the order trends you saw in the quarter? And then are you seeing any emergency orders coming in yet on the aerospace side as Boeing's build rates gain some momentum here?

Yeah. Good morning, Scott. Without getting into any of the specific figures on orders, I can tell you that they were up just a bit over 20% sequentially. So a really good order intake quarter. Emergency orders, I can say that we still continue to have customers pushing to get their deliveries earlier than planned. Whether that constitutes how you want to call an emergency order or not, but we still have that quite frequently.

Okay. And can you give some updated color on leading-edge pricing? Obviously, we see it in the results in a big way, but there's some lag there. I think investors are a bit in the dark on what the current pricing environment looks like for what's going in the backlog today. So some clarity there, I think, would be helpful. Thank you.

Well, I think, Scott, for me, it's I'm not gonna talk specifically about pricing. What I did say in my prepared remarks is that we closed two LTAs in the quarter. I think my words were I said they were of significant benefit or significant contribution. So I'll let you figure out what that means. I can also point to the fact back in the investor update that we gave a couple of months ago, we also said that we continue to see pricing actions continue to improve. And really, all that's based on is a supply and demand imbalance that's going to get significantly tighter going forward. So that's where the pricing is tied to. So I don't think that should be much of a surprise. We said in an investor update that we would anticipate that to continue.

Okay. And then did you get much of the benefit from the LTA price increase in the quarter you just reported, or is that still to come?

We're not for this LTA that we just signed. Those will be in the future. But I think I did also mention in the call that in the quarter, because the calendar quarter, some of those new LTAs that we negotiated nine ten months ago then became effective on January 1.

Right. Okay. Last question, just high level, Tony. Like, a lot's happened since your February investor event. I guess, are you now more or less confident in the 2027 EBIT guide relative to your mindset two months ago?

Well, I'm more confident because things are in better shape than they were two months ago. I mean, we stand now just a couple of recent points. You know, yesterday, Boeing had a very good call where they're continuing to make impressive improvements in their build rate production. GE Aerospace just reported MRO sustaining at high levels. Hopefully, we'll see some de-escalation from the tariff situation. I'm much more confident now than two months ago. We're in a much better spot. And I really believe over the next four, five, six months, you're gonna see a massive inflection point. And I know right now, we wanna talk about is somebody destocking? Did your backlog go down by a half a percent? I mean, in the whole big scheme of things, we're in a much better spot now than we were two months ago. I would tell you we're talking a quarter or two from now, we're gonna be right back to urgent demand across the board.

Okay. Thank you. Yeah. I'm not too worried about the backlog going down half a percent. But I appreciate it. Thank you.

The next question comes from Josh Sullivan from The Benchmark Company. Your line is open.

Hey. Good morning. Tony, Tim, John. Good morning. Can you just update us on the lead times? And then is there any churn in that book, or what does that look like? Any notable differences within end markets or products at this point?

On lead times, I will say that no change from before there. You know? When we talk lead times, Josh, just to be clear, we're always talking about aerospace engine. That's the proxy for lead time. So always like to say that just so everyone's clear. With that. But we're still at up to sixty weeks for aerospace engine. I don't see that changing. Right? It's not gonna get much shorter. And we cap our order book. So you're effectively capping lead times. So I think you're gonna be in that up to sixty-week lead time. Aerospace engines. So no change.

Got it. And then just on the LTA discussions, and you mentioned the remarks there, compared to last year or even earlier this year, how is the current environment leaked into those conversations? Or maybe it hasn't just curious if the short-term dynamics are influencing those LPA parameters at all.

They don't impact them at all. I mean, you have very sophisticated customers that are sitting across the desk from you. Right? They're not negotiating a deal that's gonna happen today for 10 tons. We're talking about a long-term supply agreement over the next three, five plus years that's going to facilitate them making their product. Right? So that's what we're talking about. And they know very well that the supply and demand imbalance is only gonna get tighter. So any disruptions in this near term actually have 0% impact on current LTA discussions or negotiations.

And then maybe just on TAP, you know, any impact from the SPS fire at this point? Or any dynamics there we should be thinking about medium-term?

No. We didn't have any impact on our business of the SPS fire. I mean, we remain, you know, we're in close coordination. We hate to see that happen to somebody, certainly in the industry. And, you know, we've done everything we can do to support them on any types of materials that we might have been holding. So but no material impact on our business.

And then just one last one. Just, you know, as additive you just help us think about, you know, within PEP, this cyclicality within additive and then Dynamet ramping up? How should we think about that over the next twelve months or long term?

Well, you should think that Dynamet is by far the major player inside of PEP. And, you know, we have a good business with additive. We're always in the game. We have the opportunity to move inside of that industry if it picks up. But the real player inside of Dynamet inside of PEP is Dynamet.

Got it. Well, thank you for the time.

Thank you, sir.

The next question comes from Bennett Moore from JPMorgan. Your line is open.

Morning, Tony and Tim. Thank you for taking my questions and congrats on the quarter.

Yes, good morning.

Despite the greater shipping days, SAO volumes were flat on a similar AMD and medical mix. Can you provide any additional color on the moving parts here and what we might expect to see those volumes trend consistently higher?

It's an interesting question. Right? And we've really moved over the last couple of years. Remember, we are really trying to optimize our business not for volume, because we're not a commodity business. We're trying to optimize for profitability. And as you see some of these products change, the processing times can be significant between them. When you're looking at an aerospace product or let's just pick something out of the industrial segment or transportation while we're smaller end-use markets. Where you're producing maybe in that other segment, significantly more volume at a lot less revenue. So we're gonna use our assets where we can, where there's any fungibility at all, to use it on the higher price products. The result is you'll see your volume going down, you see your revenue going up quite a bit. We believe that. An easy decision to make. Right? So that's what we play to. We're gonna play to profitability. Now I will tell you as you go forward, over the next let's say, four quarters or as we get into our FY '26 and beyond, you'll see volumes go up. You have to. You just spent the last six months where one of your large OEMs has effectively made no airplanes. So sure, as you look forward over the next several quarters, volumes are going to go up, and that's just going to make the supply-demand picture even tighter.

Thanks for that. And then just given the broader macro backdrop, I'm wondering if you're seeing any order deferrals or pockets forming for some of your more lower margin GDP-levered markets?

Well, some of our more lower what do you call it? Lower margin products aren't material. Right, to the whole scheme of things. I mean, I tell you, we're moving towards, you know, aerospace and medical make up 75% of our revenue. And then if you add in IGT, which has aerospace-like margins, some of the semiconductor business, you're close to 80%. So that drives the story. With us going forward.

Alright. Thank you. Best of luck.

Thank you, sir.

The next question comes from Andre Madrid from BTIG. Your line is open.

Hey. Good morning, Tony and Tim. Good morning. Looking at the medical business, I know you said the backdrop remains strong, but down 14% year over year. I've heard some commentary from my industry contact as well implying that this was a little bit weaker as of late. Could you maybe explain what's driving some of that a little bit further?

Well, I think you've had a little bit of a destocking possibly in the medical end-use market. That happens. That's not overly surprising. Remember, last third quarter was, I think, our second-highest medical sales quarter ever. So you've got a tough comparison. To maybe give you a little bit of relief or a little bit of comfort as we look forward next quarter to the fourth quarter. I usually don't project sales by end-use market, but medical, we project to be up quite a bit in the fourth quarter compared to Q3. So what we're hearing from customers is that any of that type of destocking, if you will, is largely behind us now. And our forecast supports that. We see a pretty sizable increase in Q4.

Got it. Got it. Very helpful. And then, going back to your comments around raw materials, I mean, you mentioned that most of the nickel you get is from Canada. I mean, maybe just overall, if you're looking at, like, all of your feedstock, how much is domestic versus international?

Well, our biggest input is nickel, and that comes from Canada and Norway specifically. Right? So that's where that comes. That's gonna be managed through the established surcharge. We did a pretty in-depth analysis on what all of the costs in our entire system could be impacted by tariffs. And we came to a very, very small number, very low single digits of our total spend. Would be impacted, and our plans would be to pass 100% of that through to our customers. Hopefully, that helps.

Yeah. Definitely. Definitely. And, I guess, just to follow-up on that, you said, though, you can't control how that might impact demand further downstream. Could you share some more thoughts there?

You mean how it impacts our sales? Yeah. How it might impact demand downstream. Yeah. So the first part was input costs, which you just talked about. The second part, downstream. Right now, we don't see that as being a big impact for us. Because like I said, given our unique products that we manufacture, there's not another place to go to pick those up. So we don't see that being a major issue for us going forward.

Got it. Tony, appreciate the color.

Thank you very much.

The next question comes from Spencer Britz from TD Cowen. Your line is open.

Hey. Thanks for taking the time. I was wondering if you could provide some color on how fast fasteners and jet engines orders and sales were in the quarter? Thank you.

Well, sales, I mentioned that in the remarks. They're up 16% sequentially. Fasteners up 25% sequentially.

Okay. Great. Thank you. And I was wondering if do you have any view on maybe the upper limit of margins at SAO? I mean, they've been so strong.

Well, Gautam must have given you that question. I'm sure he would've he was the one that asked a couple of quarters ago on whether, you know, where we could get to. And at the time, I said 30% I think a lot of people thought that wasn't really achievable in the amount of time that we stated. We just achieved 29%. So really good performance by the commercial team and the operations team out on the floor. And, you know, I think it's important we get to this level of margin percentage expansion. I think that really pushes us to a higher I would say, into another category in terms of valuation. I mean, this is a really important point I think, for any company to be able to perform at that type of level. Now I mean, there's a lot. I think it's Spencer, you know, important to keep in mind that there's a lot of factors that impact the margins and, you know, any given quarter. You could have some pluses and minuses, and certainly, it depends on mix. So I'm not here to suggest to you that every quarter, it's going to be linear. Right? But certainly, from our point of view, 30% is not the limit, and we see opportunities that we could push past that number.

Okay. Great. Thanks for taking the time.

Thank you.

The next question comes from Phil Gibbs from KeyBanc Capital Markets. Your line is open.

Hey, good morning.

Good morning, Phil.

So, Tony, I'm curious just from reading some of the tea leaves and being at a recent aerospace conference. If either you've received or you've given any of your customers any force majeure letters, just what's the status of some of that and, within your own business and or what you've seen or heard?

Well, Phil, I'm aware of what you're talking about. I think also, you have to remember that there could be significant differences across the aerospace supply chain on where they source material, they move material back and forth inside the United States to produce that would cause them to do or they believe that they need to issue some type of letter. We have not we have not done that. We don't see any need that we need to issue a force majeure letter due to tariffs. As I just said, any move on nickel price, which is the largest by far input to our cost. We have a mechanism to pass through. I just said that all those other costs, we've done a deep analysis. It's a very small amount, small percentage amount of our overall spend. And we pass that 100% through. So from our standpoint, we believe we have the mechanisms in place and don't feel like we need to do any type of force majeure letter.

Tony, did you also mention that a lot of your nickel imports are from Canada? Are those not being tariffed right now? Just wanted to be clear.

That's correct.

And then I think you did mention earlier that backlog is relatively flat. You said basically what down 0.5%. Was that theoretical, or was that where you're at now?

No. That was theoretical, Phil. That was just quite frankly, me showing some of my frustration with some of these small moves back and forth. I mean, our backlog is at two and a half times where it was pre-COVID. And at that time, it was considered strong. So you're gonna have movement in your backlog from plus or minus from time to time, especially if you've got a fact you've got one of the major OEMs not producing planes. You're able to pull forward for other customers to pull into that range. So we still have a very healthy backlog well over two times what it was prior to COVID. And keep in mind also, Phil, when we limit our order intake or close our order book, you're effectively putting a cap on your backlog. So I think it becomes a lot less effective metric to try to judge whether market demand is up or down.

No. I think why we asked the question is just based on timing. Right? So when does Boeing, for example, take their foot off the gas in terms of orders, feel like they have enough inventory, and then we can see when they come back in a more meaningful way. So that's more of the question. Obviously, the pricing's been very good and will continue to be very good. But do you have that latest updated number you could share?

We're within that plus or minus. I mean, our backlog isn't moving that much at the high end now.

Okay. Thank you.

Yep. Thank you.

The next question comes from Scott Deuschle from Deutsche Bank. Your line is open.

Hey, thanks. Tim, inventory number as a percentage of sales was still pretty high this quarter. Guess, can you explain a bit more what's going on there with inventory? And should we still expect that to unwind in the fourth quarter?

Yes, Scott. I mean, without getting into any specifics on what the number is going to be in the fourth quarter, we do tend to build in the first half and take it out the second half. It wasn't quite the build that we had in Q2 and Q3. And then in the fourth quarter, we do expect inventory to come down. So that and that's a big driver of our confidence in the cash number for the full year, which obviously implies a big number for the fourth quarter. So inventory will come out in the fourth quarter.

Okay. And is that building WIP? As you do, you know, work to fulfill your existing order book, or are you building finished goods and sitting on them?

No. It's generally a story around WIP. I mean, quarter by quarter, it may not work out that way. But generally, the focus of all our efforts to bring inventory down is gonna be on WIP, and that's what will play out in the fourth quarter WIP comes down.

Okay. And then, Tony, just to clarify, are the aerospace LTAs you're entering into, are they still of a shorter duration versus where they've historically been at?

Like I said, we've said in the past, they're in that three to five-year range, we try to match up as close as we can to our customer needs, but you should think you're in that three to five as opposed to a ten. I think a ten-year contract in today's environment doesn't make any sense at all.

Okay. Thank you.

Thank you, sir.

The last question comes from Bennett Moore from JPMorgan. Your line is open.

Thank you for taking my second question. I just wanted to ask real quick on the brownfield investment specifically the equipment. What if any of this will face tariffs and is that baked into the CapEx guidance?

Hey, Ben. This is Tim. Yeah. I'll take that. So yes. I mean, the equipment we need is highly specialized as we talked about before. There's a limited number of companies that can make the equipment we need. Those companies happen at least for the critical pieces, tend to be in Europe. So we expect there will be tariffs associated with that. I would say it's an overall small piece of the overall spend because remember, we've gotta do construction. We've gotta install the equipment. So there's a lot of other pieces to the overall investment other than just the equipment. And then the other piece is, I mean, obviously, as you know, this is a moving target. And the tariffs really wouldn't come into play until the equipment gets delivered which is some time now.

Alright. Thank you.

That concludes our Q&A session. I'll now turn the call over to John Huyette for closing remarks.

Thank you, Karen, and thank you everyone for joining us today for our fiscal year 2025 third-quarter conference call. Have a great rest of your day.