Thank you for standing by. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the CRS Investor Update event. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to John Huyette, VP Investor Relations. You may begin.
Thank you, Operator. Good morning, everyone, and thank you for joining us this morning for our Investor Update webcast. Before we begin, a couple of important points to cover. First, statements made by management during this earnings presentation that are forward-looking 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 30th, 2024, Forms 10-Q for the fiscal quarters ended September 30th, 2024, and December 31st, 2024, and the exhibits attached to those filings. Second, a recording of this presentation will be posted on our Investor Relations website alongside the materials that you see. We have a great agenda for you today, providing an update on our business and outlook.
And following the prepared remarks, we will have a Q&A session with the management team. You can enter your questions in the chat function at any time throughout the presentation, and I will ask a selection of them during the Q&A session. With that, I will now turn the call over to Tony Thene, President and CEO.
Good morning, everyone, and welcome to the Carpenter Technology Investor Update. There is certainly a lot of interest in this event, and we are excited to share with you our outlook of a continuing exciting future for Carpenter Technology. Let's start with a quick overview, as it is important to remember the uniqueness of the company. Our vision is to remain the preferred solutions provider in specialty materials, with a reputation for zero injuries, manufacturing excellence, unquestionable quality, intimate customer connections, innovative growth, creative technology, and engaged talent. Our driving force is to leverage our core technical strength in engineered materials and process capabilities to solve our customers' current and anticipated challenges. Carpenter Technology will grow in market verticals where we can provide differentiated and value-added solutions to complex problems. We focus on serving attractive markets with strong fundamentals and high-growth outlooks like aerospace, defense, and medical.
We manufacture highly specialized products designed to meet customer and application-specific technical needs, and in many cases, we are the only company in the world able to make the material. We are a capabilities company operating a world-class collection of unique manufacturing assets that are difficult, if not impossible, to replicate. Our production process requires strict adherence to rigorous quality and operating standards as we manufacture mission-critical, never-fail products. A strict adherence to our vision and the passionate execution of our strategy have delivered the remarkable results of the last two years. And as you will see with our financial outlook, that same dedication will continue to drive significant earnings growth into the future. Let's turn to slide six and highlight how our focus on executing our strategy delivered the benchmark success of the last two years. It feels like yesterday we hosted our May 2023 Investor Day event.
At that time, we said we were at an inflection point, the beginning of a significant ramp in earnings driven by operational execution and a strong market demand for our unique portfolio of materials. We communicated a four-year vision of how we saw the business growing, driven by productivity, product mix optimization, and pricing actions. Needless to say, we have significantly exceeded expectations, accelerating our earnings goal by two full years. And just a couple of weeks ago, on our second quarter earnings call, we raised our fiscal year 2025 guidance to $500 million to $520 million of adjusted operating income. The impressive performance has been driven by exceeding expectations on all three dimensions of our growth: increasing productivity, optimizing product mix, and realizing pricing actions. Aerospace and defense increased as a share of our revenues from 50% in fiscal year 2023 to over 60% in the last reported quarter.
Margins in our SAO business have expanded significantly, from under 12% in fiscal year 2023 to over 28% in the last reported quarter. Following the earnings growth, cash generation continues to accelerate, with $250 million-$300 million in adjusted free cash flow expected in this fiscal year. For this period, we've been disciplined with our capital, taking a balanced approach to allocation. This has included returning cash to shareholders through our annual dividend and the $400 million share repurchase program that was recently authorized. As a result of our performance, investors have been rewarded. Our total shareholder returns are over 300% since the May 2023 Investor Day, and Carpenter Technology's position in the market has grown from $2.2 billion to over $9 billion in market cap. It's been a remarkable journey, but we are here today to say emphatically that there is more to come.
We are even more excited about the next several years as the fundamental dynamics that have driven our recent success are only set to accelerate, and we are better positioned than ever to fully realize the opportunity. Now let's turn to slide seven to introduce our outlook. There are three components to how we are framing the outlook. First, we expect strong, sustained earnings growth, with operating income anticipated to reach $765 million-$800 million in fiscal year 2027. This represents a 25% CAGR over the next two years, an earnings growth rate that we believe will outpace most of our peers. As with our previous targets, we have high confidence in our ability to achieve these numbers, with opportunities to potentially exceed them. We operate today in a very strong demand environment without enough industry capacity to meet that demand and expect that to continue into the future.
As a result, we expect to continue to implement favorable pricing actions, both short-term and long-term, for our critical alloys due to capacity constraints in our industry. In addition, in our fiscal year 2027 outlook, we are projecting volume, productivity, and product mix all continuing to improve. It is important to note that no additional capacity is required to achieve the fiscal year 2027 target. We have the assets we need to achieve this goal. Second, with our continued earnings growth, we expect our cash generation to accelerate. In addition to the higher earnings, we continue to focus on disciplined management of our working capital. Notably, inventory levels have not risen at the same rate as our sales over the last two years, and we expect that trend to continue.
In addition, we will continue to fund our sustaining CapEx program at or close to current levels to ensure our equipment remains well maintained to serve the accelerating demand. As a result, we expect our cash conversion rate to be 90%. This leaves 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 $40 million annual dividend, repurchase shares through our $400 million buyback program, and invest in long-term strategic profitable growth. This brings me to the third component of our outlook. We are in a unique demand environment where industry capacity for our specialized materials is well short of demand.
As you will hear later in the presentation, our operations continue to achieve higher levels of productivity to realize more of that demand, but the gap remains significant, especially in the commercial aerospace industry. This opens the door for us to invest in a brownfield expansion without materially changing the industry's fundamental supply-demand imbalance. The project 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's current supply-demand imbalance, it most definitely provides an earnings accelerator to the company's already attractive earnings growth projections. In addition, we plan to fund this project through internal cash generation and anticipate an attractive return on capital of greater than 20%. We believe Carpenter Technology is best positioned to successfully complete such a project, given our capabilities and unique collection of assets.
My colleagues will provide more details on project cost and timeline later in the presentation. Each of these three components on this slide contribute to a very bright future for Carpenter Technology. Together, they represent a compelling story of sustained growth and value creation for our shareholders. Before I turn it over to the team to provide more color and detail, let me repeat a couple of key items to make sure it is 100% clear to everyone. Concerning the brownfield expansion, let me repeat and emphasize a few very important points to take away. We do not expect the underlying market dynamic, that is, demand that exceeds supply, to change anytime soon. As Marshall will detail later in the presentation, demand is expected to accelerate. That will only increase the gap to our industry's ability to supply.
The brownfield expansion I just mentioned will not have a material impact on the supply-demand imbalance, as this new capacity will only be a small fraction of the current and anticipated supply gap and will not begin to come online until fiscal year 2028. It is also important to note that at this time, we do not anticipate any new additional qualified capacity coming online in the near or medium term. Keep in mind there are only a few companies in the world with the demonstrated knowledge and capabilities to pursue such an expansion. We've had discussions with strategic customers concerning a potential brownfield expansion. All have expressed a profound need for such capacity, a keen interest in securing the capacity, as well as a willingness to fully support the qualification efforts.
Lastly, we will fund the brownfield expansion from internal cash generation and expect a project return of over 20%. This brownfield expansion represents an amazing opportunity for Carpenter Technology to accelerate an already significant earnings growth trajectory while not materially impacting the supply-demand imbalance. Now concerning our two-year financial outlook update, we anticipate continued favorable pricing actions driven by our differentiated products and limited industry capacity. In addition, in our fiscal year 2027 outlook, we are projecting volume, productivity, and product mix to continue to improve. Although we do not give specific margin percentage guidance, we expect our margins to continue to expand, driven by continued improvement of the four items that I just mentioned. In addition, we expect fiscal year 2026 to be materially higher than fiscal year 2025 and a solid progression to our fiscal year 2027 earnings target.
We chose fiscal year 2027 as our target year so we don't get too far into the future and that it is near-term enough to be relevant. However, by no means do we expect fiscal year 2027 to be our earnings peak. We expect earnings to continue increasing beyond fiscal year 2027, with the brownfield expansion project accelerating them even further beginning in fiscal year 2028. I hope that was helpful and look forward to the Q&A session for any follow-up questions you may have. With that, I will hand it over to Marshall to provide an update on the demand environment for our material solut ions.
Thank you, Tony, and good morning. I think it's reasonable to say that Carpenter Technology's performance over the last two years has demonstrated just how strong of a demand environment we are operating in. This has been driven by the macro trends in each of our markets and by the high-value applications that we serve. We provided many examples of those applications in our May 2023 Investor Day presentation and would encourage those of you newer to the story to review those materials. Today, I'll discuss a few examples where we have seen demand only strengthen since our last event. Let's start with defense, where we have seen an urgent increase in demand. While some of this has been associated with ongoing world events, most is related to needs for next-generation air, land, and sea platforms as the United States reacts to a changing threat environment. Our materials are critical for the industry's ongoing efforts to increase military preparedness and develop new capabilities.
So much so that in the last two years, we've seen a step change in the level of engagement with OEMs and their customers as they look to ensure supply over the long term. For example, we've seen situations where a competitor or prior generation material has failed and customers have turned to us for emergency support. We've seen other examples where customers were working on a next-generation platform and there were no material options that would enable the performance needed. We have stepped in, suggested alternative material solutions, or in some cases, developed new materials, and those are now the standard and used by the customer. Moving on to the energy market, where we have also seen increasing demand. There is more and more power needed to support AI and data center growth, as well as growing global energy needs more broadly.
This translates into higher demand for industrial gas turbines, which Carpenter Technology supports with multiple material solutions, and as those products compete for the same capacity we use for aerospace, we see margins there similar to our aerospace portfolio. The demand is so high that some of our customers are telling us just to use any available manufacturing spots possible to send the material. This area has been a nice tailwind for us, as you've seen in our recent financial performance, and we expect it to continue for the foreseeable future. Another area of increasing demand has been from the semiconductor industry. Our materials, which aren't in the chips themselves, are critical enablers of various components of the fabrication process. Given the expected growth in semiconductor demand, the industry is investing heavily to build needed infrastructure for that demand.
This is creating strong pull for our materials and is expected to continue. Now shifting to medical, where we've seen extended double-digit growth due to both the industry's growth and advancements we've made in solutions for certain applications. The medical market is an exciting space for us, one where our vision of partnering with our customers to solve their challenges has come to life. In working with medical OEMs, we are regularly developing new advanced solutions that improve patient outcomes. For example, in cardiology, our customers working with us have developed an implant which lasts significantly longer than prior generations, enabled by our specialty material. What this means for patients is that they are less likely to face the prospect of replacement surgery and have a much better quality of life.
Currently, our medical business is approximately 15% of our revenue, with margins similar to or higher than our aerospace and defense business, which is approximately 60% of revenue. Taken together, that's approximately 75% of our portfolio focused on the highest value, highest margin markets. Over the next several years, because of our customers' demand, we see our medical business continuing to grow as a percentage of our overall revenue, right alongside the aerospace and defense market. Let's now turn to aerospace, where the outlook is the same, if not greater. First, it's important to keep in mind that when we talk about commercial aerospace, Carpenter Technology has broad exposure across the supply chain. Our material solutions are found on all major platforms for Boeing and Airbus, including both narrow body and wide body.
Our materials support legacy and next-generation platforms and are used in new builds as well as for MRO. This means we aren't beholden to a specific platform or activity in the supply chain. Our material goes where the supply chain is active. For example, if MRO activity is accelerating because OE build rates are lower, more of our material goes to MRO activity. And when OE activity picks up, more of our material will go there. So as overall industry demand increases, so too does demand for our materials. And the forward outlook is extremely strong. Global air traffic continues to hit new records and in 2024 was up 4% over pre-pandemic highs. Industry forecasts are for an additional 8% growth in 2025. It is clear people want to travel. Load factors, a measure of how full planes are, reached record levels in 2024.
This was partly due to airline efficiencies, but also partly due to a shortage of airplanes. The aerospace industry wants, needs more airplanes. That's why we've seen backlogs for Boeing and Airbus grow. These now stand at over 14,000 planes, which at last year's production levels represents 13 years of production. The bottom line is the forward production outlook is very robust, and the industry continues to target large production increases. Now let's take a look at what this means for the specialty materials industry and specifically for Carpenter Technology. As I mentioned, demand for specialty materials is directly tied to build rates. The more planes that are built, the more material needed. Pre-COVID, the industry was effectively sold out at approximately 1,500 new plane builds. Post-COVID, even though build rates are not yet back to those levels, the industry quickly became stressed.
This has been driven by a few things. One, we in the industry were restarting production, and it takes time to ramp back up. And two, demand is higher now due to much higher MRO activity. MRO demand has been higher because they're flying longer, and there have been increased overhauls of certain platforms. The industry is targeting a roughly 30%-35% increase in new plane builds versus prior highs. And with expectations for ongoing high MRO levels, the total demand is even higher. We and others believe we are in the midst of a significant airplane build cycle that can last for quite some time. Although the chart shows production out to 2029, that is not the end of the airplane build ramp. This is what we mean by a strengthening demand environment.
The gap between demand and what the specialty materials industry is able to supply is only widening. This is why we've seen our backlogs grow and why they would be even higher if we weren't actively restricting order intake. Altogether, Carpenter Technology is in a very strong position where we can optimize our product mix and direct our manufacturing activities toward the areas where they are most valued by our customers. With that, I'll turn it over to Brian to review our operations and what we're doing to realize this opportunity.
Thank you, Marshall, and good morning. Marshall just highlighted the magnitude of the demand that we're experiencing today and the shortage of industry supply in the market to support it. This supply-demand imbalance is not a short-term disruption. It will persist for years, creating the unique opportunity for us to drive sustained long-term earnings growth.
With that context, let me take a moment to remind everyone what we do and why it's so difficult. We don't just manufacture metal, ingot, or bar. We make highly specialized solutions within these forms, each designed to meet the precise specifications of our customers. In our SAO segment, we manufacture over 500 distinct base alloys. But the reality is far more complex than that. Each of those alloys can have multiple variations customized to meet the individual customer specifications. Take, for example, 718, a nickel-based alloy used in the hot section of jet engines. We don't produce just one or two versions of 718. We have over 100 unique variations on this single alloy, each tailored to exacting performance criteria. When you then factor in the various forms these alloys can take, bar, wire, strip, or billet, it multiplies the complexity exponentially.
In total, we manage well over 15,000 unique SKUs, each following its own intricate production path through our system. That system is made up of four primary manufacturing facilities with over 750 work centers distributed across them. Each product's path is governed by a rigorous multi-step process that includes primary melting, secondary melting, hot working, and finishing. Considering the multiple tests and quality checks across the major manufacturing steps shown in the graphic for just one product, it gives you an appreciation for the sheer complexity of our operations when you factor them across the thousands of products we produce each quarter. In addition, you need the metallurgical material and processing expertise required to manage the thousands of critical variables to make our specialized products.
Success demands an intricate understanding of how each product must be processed, not just on an individual machine level, but across an entire production flow path. At every stage, there are countless points where things can go wrong. Yet we execute at scale, delivering precision and consistency where others cannot. This should give you a sense of why so few companies in the world can do what we do, and it's important to understand that this level of capability cannot simply be bought. It cannot be replicated overnight with investment and resources alone. It takes decades to refine, optimize, and consistently prove our ability to meet the stringent quality standards demanded by our customers at an industrial scale. That is what sets us apart. Now let's take a look at what goes into those customer qualifications.
Our materials are used in the harshest, most demanding environments, such as the rotating components of the hot section in a jet engine, operating at 30,000 ft and under extreme temperatures and stresses. When we say that our materials are used in mission-critical, never-fail applications, we mean it in the most literal sense. Our critical materials can never fail. Our customers accept nothing less. This is why the qualification process for our materials, in many cases, is far more rigorous than standard industry certifications. The bar is extremely high as each customer mandates that we not only meet their specifications, but also demonstrate repeatability and consistency at scale, 100% of the time. Achieving this level of qualification is not a quick process.
It takes years, particularly for the rotating parts in the hot section of a jet engine, which are subject to the most demanding performance requirements and the longest qualification timelines in the industry, and we believe the challenges will only increase over time. As technology advances, qualification requirements become more stringent, more exacting, and more difficult to achieve. Even after qualification has been achieved, 100% of the material we ship undergoes extensive multi-stage testing throughout the production process to ensure that it meets the exacting standards of our customers. This includes some of the most advanced testing technologies in the market, including some that were developed in-house because industry solutions either did not exist at the time or the ones that did simply did not meet our precision requirements. We like to say that certification is a part of our product because it, in fact, is.
Our customers are receiving the assurance and validation that each piece of material that we produce meets their specifications without exception. Hopefully, this gives you a deeper appreciation of just how difficult it is to do what we do and why so few companies in the world, if any, can match our capabilities. Perhaps more importantly, it reinforces why the supply gap is not just significant. It is persistent and structural. With that in mind, let's take a look at what we're doing to capture the demand opportunity. As Tony highlighted in his opening remarks, we are driving growth through three main levers: increases in productivity, mix optimization, and pricing realization. From our operations standpoint, that means producing as much of the highest value material as possible. To do that, we focus on two areas: maximizing asset utilization and increasing productivity rates. First, let's take a look at asset utilization.
As I mentioned earlier, our manufacturing assets are unique and critical. We need them to remain healthy and produce consistently. When operating in an extremely tight demand environment like the one we're in now, any downtime, planned or unplanned, impacts the customer. Given the nature of manufacturing processes, unplanned downtime is inevitable. For those unplanned events, it's all about getting the machine up and running as safely and quickly as possible. This means having critical spares on hand and having the playbook ready to make the necessary repairs quickly and effectively. But it also means having a detailed preventative maintenance schedule planned out several quarters in advance. When the unplanned maintenance occurs, we not only address the affected asset, but we can pull in preventative maintenance for other assets in the impacted flow path, reducing downtime in the future.
We operate an agile, data-driven preventative maintenance program that not only minimizes unplanned events, but is sequenced to minimize the impact on shipments. By using advanced data analytics, we're better able to predict maintenance needs than ever before. For example, different material grades can have a significant impact on equipment degradation. So by comparing machine vibration data with process grades, volumes, and critical process variables, we can train our AI models to predict failure modes for equipment, allowing targeted maintenance before breakdowns occur. Now let me turn to productivity. Given an increasingly dynamic talent pool, we stress the fundamentals, including standardized work, deeper, more frequent employee training, and translating best practices across our facilities. In a manufacturing environment, there are always bottlenecks. And with a lean approach, we clear those incrementally while also addressing overall system flow, given the wide range of products we produce.
Here, we also use advanced data analytics to both identify the highest priority areas and the tools to improve productivity. For example, within our melting processes, we take traditional data like material chemistry and furnace lining life. Then, using bigger data tools, we combine it with the performance of molds and other key variables. We can then compare this to previously demonstrated golden runs in finely tuned models, allowing us to reduce recharge durations, material costs, and overall cycle times. Our efforts in this specific example and other work centers across our sites have pushed productivity reliably and well above nameplate capacity at historical levels. This is an area where we think we have only begun.
The tools and models we are developing now will continue to evolve, and we expect to identify even more opportunities to improve as we harness the power of data and its relationships in our complex manufacturing environment to make optimal operating decisions. We'll continue to improve our production rates to capture the highest value opportunities available. So we've talked about what we're doing to increase productivity on our current assets. Now let's take a look at a brownfield expansion that will drive even more profitable earnings growth. As Tony highlighted in his opening remarks, we have a unique opportunity to invest in a brownfield expansion to accelerate long-term earnings growth. Given our current system of assets, we can add high-purity melt capabilities while leveraging our current system of hot working assets to increase our overall output.
We believe we are uniquely positioned in our industry to successfully execute this project. First of all, we are the industry leader in high-purity melting, currently operating seven vacuum induction melting furnaces, or VIMs, across several sites with the most stringent customer qualifications. Second, we have large-scale hot working assets already in place to process the additional melt. This reduces the overall upfront cost of adding capacity, and it accelerates the implementation. Finally, because we have a long history of installing and qualifying assets, we understand the intense qualification process. Because we have intimate customer relationships, we believe we can expedite the arduous qualification process. Let's get into the specifics of the project. The primary centerpiece of the project is a new VIM, which will go into our Athens, Alabama facility. Our Athens facility, built over 10 years ago, was designed to manufacture aerospace material.
It includes remelt, hot working, and finishing capacity, and was originally designed with space to add VIM equipment. In order to operate the VIM, we need additional complementary equipment to support its operations. This includes more remelting capacity, which will also go in at the Athens facility, and we'll invest in smaller downstream finishing assets to process the material. These assets will be deployed across the system, primarily at the Reading facility. The expected net incremental impact of the brownfield expansion is approximately 9,000 tons that will fluctuate based on product mix. Importantly, this material will be going into our highest value markets, like aerospace, defense, and medical. We're targeting to have the equipment commissioned in early fiscal year 2028. We'll immediately start producing premium material, which requires shorter qualification cycles.
And as we gain more stringent qualifications, we'll ramp our production and add those products to our mix of materials. Finally, given the interest in these assets for use in the aerospace industry and the support of several key customers, we anticipate having the majority of qualifications by calendar year 2030. This is an exciting opportunity for our operations to deliver more high-value volume and accelerate our long-term earnings growth trajectory. I'll now turn it over to Tim to review the financials of the brownfield expansion.
Thanks, Brian. Operating in an environment where demand far exceeds the overall supply, it makes sense that we explore opportunities to add capacity and realize more earnings growth. We've taken a thoughtful approach to what a project like this could look like for our earnings outlook, as well as how it could impact our customers and the overall industry.
In that regard, as we evaluated capacity expansion, our analysis ensured that any incremental capacity additions cannot meaningfully impact the supply-demand imbalance and undermine the strength of our position in the market, and any growth investments require an attractive return profile, given our already high expected growth rates. We believe we found the right opportunity in this brownfield expansion. The overall investment is approximately $400 million, the majority of which will be spent over the next three years through fiscal year 2027. For clarity, the $400 million excludes any impact of capitalized interest, which will be included in how we report capital expenditures. As Brian detailed, the scope of the project includes the cost of the equipment, including the VIM furnace, remelt furnaces, and finishing assets, and the installation and related construction and infrastructure costs.
As a reference point, additional incremental capacity estimated at approximately 9,000 tons is only 7% of our fiscal year 2019 volumes. Due to this relatively small incremental capacity increase, it will not materially impact the overall supply-demand imbalance. As another reference point, refer to the chart on the right showing the Aero build expectations. Visually, it is clear that this additional capacity falls well short of where the industry wants to go. And this chart doesn't include higher demand from MRO activity, the medical market, and other attractive end-use markets, such as power generation. While maintaining our strong market position, we anticipate these incremental tons to have a meaningful impact on our financials. We expect to produce and ship material with less rigorous qualification requirements in year one of operation, generating an immediate accretive return to our profitability.
As we ramp up the incremental capacity, the accretive impact will continue to grow. As a checkpoint, we expect the majority of the less stringent qualifications to be achieved by fiscal year 2030, with operating income reaching approximately $150 million. As the remaining more stringent qualifications are achieved, the annual operating income is projected to increase significantly. The accretive impact is obviously dependent on our assumptions related to pricing, which should be well above the overall SAO price per pound that you see in our financial statements, given the investment expands our capacity for our more premium VIM products. Of course, the operating income is net of any fixed cost investments, the largest component of which is depreciation. With the various financial assumptions, which we consider to be relatively modest, the estimated return on investment is over 20%.
As I'll detail in just a moment, we're able to fund this through our cash flow, even as we balance returning cash to shareholders through the share repurchase program and dividend. Altogether, this brownfield expansion presents a unique opportunity to drive meaningful earnings growth over the long term while not limiting our approach to returning cash to our shareholders. As I hope you've picked up from our presentation so far, we're excited about the future, given our unique capabilities combined with a strong demand outlook. We expect operating income to reach $765 million-$800 million in fiscal year 2027. This would represent an impressive 25% CAGR on operating income over our fiscal year 2025 guidance. Our growth will continue to be driven by increasing sales and expanding margins from improving productivity, product mix, and pricing actions.
The contribution of each of these individual areas may vary from period to period. Our confidence in the supply-demand outlook, combined with our operations and planning teams driving improved execution, factor into our ability to deliver the operating income target we've laid out today. To provide more color on how we get there, I'll share a few additional points. Net revenues, excluding surcharges for fiscal year 2027, are expected to be between $2.8 billion and $2.9 billion. SAO, which accounts for over 85% of our revenue and an even greater percentage of our segment operating income, will be the major driver of our profitability. The outlook for SAO will be driven by what we have highlighted, namely higher volumes and improving product mix and pricing actions.
It's important to note that the brownfield expansion project does not impact the operating income target for fiscal year 2027, as this capacity is not expected to come online until early fiscal 2028. And as you've heard Marshall describe, the supply-demand imbalance is expected to widen further in the coming years. Altogether, we believe that the guidance for fiscal year 2027 is not the peak in our journey. Our opportunities for growth are just beginning and extend well beyond our fiscal 2027. Now let's take a look at how our earnings growth will drive cash flow generation. Carpenter Technology has a strong track record of generating cash from operations. As we've ramped our profitability, we've demonstrated an acceleration in our cash generation. Beyond earnings growth, we have also demonstrated disciplined management of working capital, the largest portion of which is inventory.
As we've improved the productivity of our system, we've also reduced the amount of inventory required to capture additional sales. And we expect this trend to continue. With the improving profitability and cash generation, our balance sheet remains healthy, as evidenced by our historic leverage ratios, currently under one time, and no debt maturities until fiscal year 2029. As we look ahead, we will continue to fund a sustaining capital expenditures program at approximately $125 million per year. As Brian detailed in his comments, it is critical that we maintain the health of our assets to realize our growth potential, and we will continue to invest in them to ensure success. Altogether, we are expecting Adjusted Free Cash Flow of $1 billion cumulatively through fiscal 2027.
This includes the $250 million-$300 million that we've guided to in fiscal year 2025, before any incremental capital spending from the project we are announcing today. We expect the adjusted free cash flow conversion rate to reach 90% in fiscal year 2027, and just like our earnings, we don't expect this to be the peak of our cash flow generation. Now let us take a look at how we plan to generate shareholder value with our cash flow. Our capital allocation strategy is based on maintaining the right balance between investing for growth and returning cash to shareholders. We believe that this is the best way to drive shareholder value and ensure the company remains a force for the long term, and as we look ahead through fiscal year 2027, we believe we are well positioned to strike that balance.
In terms of investing to accelerate our long-term earnings growth, today we announced the $400 million brownfield expansion. Second, and just as important, returning cash to shareholders. We plan to continue to fund the existing quarterly dividend for a total of $120 million over the three-year period. This leaves more than enough cash to execute against the $400 million share repurchase program that we announced in July of 2024. That means we can achieve our goals to accelerate growth and return cash to shareholders strictly through our own cash generation. We believe this sets us up for long-term success and is a powerful value proposition to our shareholders. With that, I'll turn it over to Tony for his closing remarks.
Thank you, Tim. We have just presented an impressive vision of what we intend to accomplish through fiscal year 2027 and beyond. We have shared significant insights, all showcasing the strength of Carpenter Technology and pointing towards exceptional growth. This last slide summarizes every key takeaway from this investor update. Let's take them one by one. The current market dynamics are strong, and we expect them to accelerate quickly in the near term. A 25% adjusted operating income CAGR over the next two years, which is above expectations, and we believe the majority of our peers. Volume, product mix optimization, and pricing actions will continue to improve. Although we do not communicate specific operating margin guidance, the revenue and earnings targets communicated imply continued solid margin expansion. 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.
And we project significant cash generation of $1 billion from fiscal year 2025 through fiscal year 2027, with an impressive 90% conversion rate. I understand that some may believe that any capacity addition is a red flag, but in this case, it is just the opposite. It is a significant green flag. We have detailed a project that will contribute significant earnings by fiscal year 2028 while having no material impact on the supply-demand imbalance. In addition, we plan to fund this project through internal cash generation while maintaining our balanced approach to capital allocation. This incremental capacity will be highly sought after by multiple customers wanting to ensure surety of supply. We have had customer discussions about such a possibility over the last year, and now, since we have announced it, the discussions will certainly intensify.
Such a strong earnings and cash generation outlook points to significant stock price appreciation potential in the short and long term. This is clearly an exciting time for Carpenter Technology. In closing, we sincerely appreciate your time this morning and your interest in Carpenter Technology. We look forward to continuing this exciting earnings growth journey with you over the coming years. Now, I will turn it over to the operator to field your questions.
Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star one on your cell phone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Scott Deuschle with Deutsche Bank. Please go ahead.
Hey, good morning. Tony, you're right. I'm not disappointed by your targets.
Thanks, Scott.
You know, Tony, last time you guided 2027, though, you obviously ended up massively outperforming that guide, you know, as you earlier stated. I guess, do you see levers that could potentially allow you to do something at least directionally like that again? Obviously, understanding you've set the bar higher. And then if those levers do exist, what would they be?
Yeah, t hanks for the question, Scott, and I appreciate your coverage. As always to do it , when we put out a target, we need to have high confidence that we can hit it. I think we've done that again today. In addition, we always believe there's going to be upside to that. If you're looking at upside over this 25% CAGR, Scott, you're in a significant earnings growth mode. For us to get to that point, we'll be pulling all the levers. That'll be on pricing actions, continued mix optimization, and on the volume side. Clearly, this is laid out for us over the next couple of years to provide significant value to our shareholders.
Okay. Tony, on slides 11 and 12, you have the estimated airplane build forecasts. I feel like an implicit point here is that those build forecasts are actually just fundamentally wrong because there's not enough specialty material to support them. Is that a fair way to characterize this market and those forecasts? Or do you think you really could actually achieve those based on the supply that's out there? Thanks.
I think that's fair. And the reason we use that chart is to really stress the point of where we're at with this supply-demand imbalance. Remember back in 2019, with roughly 1,500 planes, you are effectively sold out with our specialty materials. And they want to get to 2,100 with no new capacity coming on during that time. That just shows you the strength of our position right now. Now, add on to that the fact that we know, Scott, and you've written about this, that MRO activity is not only going to stay possibly where it is today, but potentially increase over the next couple of times. And then add in that we want to grow our medical market.
You've talked about power gen now with the AI needs and how that's going to accelerate. It just puts you in a position where demand is going to significantly outstrip supply in the near term and the medium term because the capacity that we just announced, obviously, is just a really very small piece of that. So that's what we wanted to show with that chart, that the demand is strong and this small incremental supply that we had just announced will do nothing to that imbalance, but in fact, add an unbelievable earnings accelerator for us starting as early as our fiscal year 2028.
Okay. And then, Tony, just to clarify that point you made on MRO, do you have a sense for how much of the demand for aerospace metal ultimately goes to support the MRO market and how that compares to 2019?
Hey, Scott, this is Marshall. Yeah, thanks for the question. You know, we talk about ranges, 15%, 20%, 30%. You know, it goes up and down. I think, you know, as we commented in the presentation, our materials go to both OE and MRO. So if MRO is higher, our portion of sales that's going to support that at that point in time is going to be higher. You know, if it's more normalized, our portion of sales is going to be more normalized. So it really bounces around, but something in that ballpark depending on where the industry is.
Okay. And last question here, Tony, do a majority of your customers have pass-through treatment for the cost of the alloys that they buy from you? Meaning just as you have pass-throughs for your own raw material cost, do the customers that buy your product also have pass-through mechanisms to the OEM for the material that they buy from you?
That's a good question. I would assume the answer, hopefully, for them is yes, but I think that's a question left for them to answer.
Okay. Thank you.
Your next question comes from Gautam Khanna with TD Cowen. Please go ahead.
Hey, good morning, guys.
Morning, Gautam. Good morning.
Wondering, could you phase in how the CapEx will flow? So how much in 2026, 2027, the growth CapEx, and how much maybe even in fiscal 2025?
Yeah, Gautam, this is Tim. We talked about, I mean, I think it's fair to say that most of the spending will be in 2026 and 2027 fairly evenly. I would assume that there might be some modest CapEx that comes in in 2025, but not significant. It'll be mostly in 2026 and 2027.
Gotcha. And your point was that in the short term, you'll be putting material that doesn't have as strict qualification standards. When does it get to rotating grade? Is that 2030, or do you think it's even beyond that?
Yeah, it's a good question, Gautam. As we look, and that's why we gave you that reference point at 2030, to give you an idea of what the magnitude of this could be. So when we get to 2030, we would have the majority of the qualifications less those most stringent ones, right? And even with that, you can get a number in that $150 million plus. Then in that calendar fiscal year 2031, 2032 is when you start adding the extremely difficult ones.
And then you can see a big upswing in the profitability even beyond the 150 a year. That's why we gave it to you like that to show, and I think it's one of the distinguishing factors for Carpenter Technology that we're able to bring on this type of capacity and get that return quickly. And the reason is because we have a broad market base where we can reach into medical, we can reach into power generation, and use this asset for those high-end products while at the same time, or in parallel, if you will, qualifying the more stringent materials. And in that case there, we're talking about the rotating part aerospace.
So it really is a win-win for us to be able to bring this thing on fairly quickly where we say it's hitting our profitability at a very nice rate in 2028, but then still the ultimate goal would be to qualify the rotating part type material as well.
Makes sense. And maybe, Tim, can you frame up the level of fixed cost associated with it in fiscal 2026 and 2027, if any? Like when does it start to depreciate? When do you have to have labor costs and what have you associated with t he new capacity? And what is the level of those in 2026 and 2027?
Yeah, Gautam, not much of an impact in 2026 and 2027. I mean, certainly depreciation is the biggest aspect of fixed costs, and that doesn't actually come until we commission that. So we're talking about 2028. So you see the depreciation start to hit in 2028 when we actually have the equipment running. The other stuff, like I said, not a big impact. I mean, there may be hiring in advance of commissioning, but not meaningful before we commission the equipment. So not till 2028.
Gotcha. Okay. And then last one, sorry, on just other capital return. You guys are still committed to the $400 million of buyback. I was wondering if there's any room to go beyond that, or what are you guys thinking with whatever capacity exists beyond that, which is based on? Thanks.
Yeah, it's a good question, Gautam. And that's why we dedicated that one slide to it, to really show that we can do both. We can do the $40 million a year in dividend. We can do the $400 million in buyback, and we can do this growth project and still have room. And I would say that I don't want to tip our hand to what we might do, but this is the big growth project that we're doing. So what it says at a high level is that you've got opportunity to go beyond the $400 million.
I'll leave it at that. Thanks.
Yeah.
Yeah, I appreciate it. Thanks, guys. Take care.
Thank you, sir.
Again, if you would like to ask a question, please press star one on your cell phone keypad. And our next question comes from Bennett Moore with JP Morgan. Please go ahead.
Hi, Tony and team. Thank you for taking my questions this morning and sharing these exciting targets. I wanted to start with Athens and the ability to kind of absorb this new capacity downstream. I know you mentioned there is some additional ability to do so, but we also need to see progress on the debottlenecking initiatives between now and ramp.
Sorry, Bennett. Of course, we've taken all that into consideration, right? So as we build out our facility, we have, as we put this together, we have some opportunity to use those finishing assets for this additional mill. That's a lot what you talk about us doing the product mix optimization. It's also a key of why this was, why Carpenter Technology, if you will, was the most qualified company to do it. We did not have to build a greenfield, right? We did not have to build from start to finish an entire production flow. We were able to use to just spend on the primary and secondary melt.
And then, because of our existing asset and the great work that Brian and his team has done on productivity in the back end, being able to absorb that. And that's a really important point that you bring up, that we're able to put this in. And just others in the industry are not able to do that. And that just makes it where it's almost an impossible rate of return to achieve.
Great. Thanks for that. And then are you able to help frame it all, kind of how much of the supply gap this investment will fill, at least on the nickel billet side? Are we talking there'd be multiples of similar size to fill it, or maybe even something larger?
Minimal. This will be minimal. Look at that chart. Going from 1,500 to 2,100, this will not make a dent in that. It will be a great accelerator to our earnings, but it doesn't make a dent in that chart that we showed, which doesn't even account for MRO and the other market demand. So that's why this is a win-win. It's a big earnings accelerator, but it is nominal, minimal to the overall supply demand imbala nce.
Thank you for that, and best of luck.
Thank you, sir.
Our next question comes from Andre Madrid with BTIG. Please go ahead.
Hey, everyone. Good morning, and thanks for taking the question. Good morning. I think, strategically, looking at it from an end market perspective, how should we think about mix moving forward? I know we're in that + 60% range, which is pretty important too because it could impact mix and whatnot.
And I'm just trying to think, how should we expect that mix to trend moving forward, and what could the high watermark look like for aerospace and defense? I'm discussing aerospace and defense here when I say 60%+ .
Well, Andrey, we've been very clear that we're going to chase profitability, not volume. And with that being said, you should expect that the aerospace, defense, and medical will continue to increase in the percentage. That's our focus, right? So over the next several years, you'll see that percentage increase.
Good. Good. Awesome. Glad to hear. And I guess pivoting over to your targets, maybe this is one for Tim. You gave ex surcharge for 2027, but how should we think about sales ex surcharge stepping up in 2025 and 2026 specifically? I mean, could you maybe, is it more back-end weighted, more balanced? How should we think about that trend?
Yeah, Andrey, I think it's going to be maybe not a level load quarter by quarter, but when you look at it on a yearly basis, I mean, I think you see another big step up in 2026, and then that step up to where we need to get to in 2027. So meaningful step-ups each year.
Understood. And then looking at the qualification timeline, if you look at how long it took Athens to initially get qualified and what you're expecting now with the brownfield, it seems like it's being pulled in. It's going a bit quicker. I mean, could that be said industry-wide? Are we seeing qualification timelines just being pulled in significantly? And if so, I mean, what does that mean for competitive capacity coming online and any potential the re?
Yeah, thanks for the question. This is Brian. We don't see those being pulled in across the industry. We did talk about how difficult this is in the prepared remarks. So what I just want to highlight is we're best suited to manage the qualification process because of the broad customer base that Tony mentioned that we have. We've got a range of qualification timelines. So that enables us to start manu facturing material with lower requirements sooner while we're gaining the more stringent qualifications.
Got it. Got it.
And Andrey, if I just put a finer point on there, Brian's exactly right. But the question you have, I mean, we want to be very clear that qualification timelines are getting more difficult, not easier. That's the key to what we're able to do because this is not a greenfield. This is just a brownfield.
So it's a lot less of equipment that needs to be qualified to do this. And that's why we're able to - what you stated seems like shorter. But the whole industry to qualify this across from start to finish is significantly harder and will take longer than it did five, 10 years ago, without question.
That's super helpful. Thank you, Tony. And then, I mean, as we think about this expansion, to dig in a little bit further, is it being made with specific customers in mind and maybe put it a different way? I mean, how should we think about customer mix moving forward?
Well, this is the way you should think of it. I'm sure now, since we've announced it, Marshall is going to get multiple calls in the next two days. Prior to this announcement, we were working with multiple customers about the potential that we might put in capacity. And they were very willing to say, "What can we do? Can we get that? Can we get in line? What can we do to get that capacity?" So as opposed to this being, "Hey, I'm worried about extra capacity coming online that's very minimal," you should look at this as being highly sought-after capacity that will be competitively asked if they can get it. So I think it's totally the opposite of what you might believe. This is going to be extremely competitively sought-after capacity addition.
Excellent. Excellent. Glad to hear it. Tony, Tim, Brian, thanks so much. And I'll leave it there.
Thank you, sir.
Thanks, Andre.
Again, if you would like to ask a question, please press star one on your cell phone keypad. Our next question comes from Scott Deuschle of Deutsche Bank. Please go ahead.
Taking the follow-ups. Have the IGT OEMs secured LTAs for a meaningful portion of their metal needs yet, or are they being forced onto the spot market still for most of their n eeds?
Hey, Scott, this is Marshall. I think we won't comment on specific customers with specific LTAs. I'll just go back and say, in general, the request is as much material as possible, looking at the demand of that end market.
Okay. And Tony, can you give an update on what the average contract length in aerospace is right now and the percent of your aerospace capacity that's on LTA? Just trying to get a sense for whether or not that's been changing the last year or s o.
Well, it's going to continue to get shorter over the last couple of years. So you're looking at three to four years from that standpoint. The interesting thing about this is, as Marshall and his team talk to the customers, they would love that to be much longer. And that just tells you of how they view the market going forward. But for us, those contract lengths have decreased significantly over time.
Okay. And last question, Tony. Just I think your guide here for 2027 implies SAO margins probably north of 30%, which would be nearly one of the best aerospace businesses out there. I guess, what's the ceiling on where you think SAO margins can go longer term? Could this be a 35% or 40% operating margin business?
Well, I mean, Scott, I can expect you to ask that question, right? So it's a good one. Y ou're exactly right that this type of guidance pushes us above 30% in SAO, and it's Brian's main challenge to say, "What else can we get?" I mean, we are never going to be satisfied with a communicated SAO margin. There's always room for us to grow.
Thank you.
Thank you, Scott.
Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.
Hey, thank you. Good morning. Good morning. Hey, Tony. How much of the volume or revenues are those longer-term agreements now versus the transactional or more spot-oriented piece of the business? I know historically it was about 50/50, but where is that now, given I know your mix is a little bit more shaded to aerospace versus history?
Hey, Phil, this is Marshall. Thanks for the question. Yeah, I think the LTA percentage bounces around that level that you talk about. I'll just react to your comment about "spot." Maybe some misconception there. We really don't think of spot as applicable to our business. The products that we supply all are very custom-made to exact customer requirements. So we really don't have customers just coming in and quoting for something and purchasing right there like you'd think of in a spot business. So our relationships with customers are longstanding and ongoing, so regardless of LTA or not. So just a comment back there on your spot question.
So outside of long-term agreement, what are you all anticipating that to do over the next couple of years? Are you anticipating that pricing and mix to sustain versus where it's been, or are you expecting it to improve where it's been? Are you trying to align that non-LTA pricing versus the LTA pricing? How is that? Where is that gap right now in the thought process?
Yeah. So I think Tony made it sort of clear in his comments too around the general environment is for ongoing high demand. And really, LTA or non-LTA, it doesn't matter. We expect ongoing favorable pricing action.
Yeah. I think the other thing, Phil, this is Tim. I mean, the pricing that we're entering into backlog today is higher than the pricing we're realizing in the current financials. So that's positive, and that's a trend that we continue to expect to see. The other part of it is not just price as we continue to evolve the mix and opt imize your mix. We do see a net per pound sales price increase as well.
And I know the volume has been obviously nicely improving in aerospace and defense, both OE and MRO. What's the customer appetite in some of the industrial and consumer markets that have been a bit more, I would say, a bit more in kind of a running-in-place situation over the last couple of years in terms of their demand outlook? I know you've moved away from some of them and prioritized the mix in aerospace, but is there a different level of price-pointer conversations where the demand may not be as strong?
I think you made the smart comment there, Phil, is that we've been moving away from that. I mean, we're aerospace, defense, and medical. That's 80+% of our revenue. And then when you add in IGT, semiconductors, you get even a higher %. That's what moves the needle for us. So any discussion around some of these other products that you're interested in are just not relevant for Carpenter Technology.
T hank you.
Our next question comes from Gautam Khanna with TD Cowen. Please go ahead.
I appreciate Scott asking the question on where can SAO margins go. Saves me from doing it. I was going to also ask, 718Plus, that's theoretically going to be off-patent or is. What's Carpenter's plan to qualify to make that material and when?
Well, I'd rather not comment on that. I think you would—you've been around long enough to know that I'm sure there's an interest to have other folks do that. And we've been around long enough to be a potential player there.
And does it take—I mean, is that a multi-year process in getting qualified, or do you think it could be a shorter timeline?
It's possible.
Okay. And I was also curious. You mentioned the brownfield, the VIM at Athens. Could you talk about? Is there any incremental growth CapEx going on at Latrobe or elsewhere right now besides the downstream that you mentioned?
Well, Gautam, always inside that $125 million or so a year, there's always some what you would rightly classify as growth CapEx, smaller CapEx, some finishing equipment, maybe a grinder or a testing equipment. That's always inside that $125 million. But primarily, the long-term, what you would talk about as far as growth capital is going to be this project we just announced. And that's at Athens and Reading and would not impact Latrobe. Now, that doesn't mean that, again, some of the small growth projects could be in Latrobe. They're operating very, very well. But that would be within the $125 million.
Terrific. Thanks so much, guys.
Thanks, Gautam.
There are no more questions on the phones. I'll now turn the call over to John for the questions that came in via chat. Please go ahead.
Thank you. First question that came in: What are you seeing in the aerospace supply chain now that the Boeing strike is over and they appear to be making airplanes?
Yes. I can take that. This is Marshall. Just some general comments about what we're seeing happening in the aerospace market right now. I think the general discussion is very positive. It's really about acceleration. The theme is acceleration from our customers. January, as far as we understand, was a pretty good month in terms of manufacturing activity in the supply chain. Our customers are looking at that, thinking about how the rest of the year is going to play out. They're talking about timing of order placement, order acceleration with us.
So altogether, just a very positive set of comments as we're entering the new calendar year here. Everyone, of course, believes demand is there. That's clearly evident in the backlogs of Boeing and Airbus, and manufacturing activity, they believe, is going to continue to ramp to meet that output, so just some color about what we see with our customers on a day-to-day basis. As Tony mentioned, ongoing requests for security of supply for longer periods of time. Those discussions are ongoing. We continue to get, on a daily basis, sort of emergency requests or urgent requests for material that we have on order. Can it be delivered faster, and we continue to see customers in other non-aero markets starting to get worried about getting orders in, placing orders in time to make sure that they have a spot in the queue for production.
So just altogether, a pretty positive start here to the calendar year and ongoing expectation for increases.
Along similar lines, we have a question: What are you assuming for build rates in your outlook?
Yeah. This is Marshall. I can take that again. So we don't disclose, of course, specific build rate assumptions. Obviously, we're expecting them to increase from where they are today. But what I can say is we're assuming rates that are far below where Boeing and Airbus want to be.
Great. Next, we have: If Russian metal is welcomed back into the market, how would that impact the returns on your newly announced capital plans?
Well, let me start that, and then Tim can follow up. But I think in this case, you would say Russian metal, you're talking specifically about titanium. So this announced capital plan is not a titanium facility.
It's a nickel billet facility. So to answer your question, it would have no impact. We are not a titanium melter, and one of our businesses in PEP, we buy titanium and then process that into a final end product that goes into medical and aer ospace. That's right.
Okay. Do you anticipate selling this capacity before turning the asset on? Well, that's an interesting question.
That's possible. As I said, those discussions with customers have been ongoing prior to the announcement because we were talking about the potential. Obviously, we didn't tell them for sure that we were going to do it. So we're open to a lot of different options here, but all of it will be based on what's best for Carpenter Technology. We're fully aware that we're in a stressed supply and demand imbalance situation and intend to do what's best for the Carpenter Technology shareholders.
Okay. All right. This concludes our Q&A session. Thank you, everybody, for joining the webcast this morning. I hope you have a great rest of your day.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.