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spk07: Good day and welcome to the Carpenter Technology Corporation fourth quarter fiscal 2022 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to the management. Please go ahead.
spk05: Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology earnings conference call for the fiscal 2022 fourth quarter and year ended June 30th, 2022. This call is also being broadcast over the internet along with presentation slides. Please note, for those of you listening by phone, you may experience a time delay in slide movement. Speakers on the call today are Tony Tain, President and Chief Executive Officer, and Tim Lane, Senior Vice President and Chief Financial Officer. Statements made by management during this earnings presentation that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter Technologies' most recent SEC filings, including the company's report on Form 10-K, for the year ended June 30th, 2021. Form 10-Q for the quarters ended September 30th, 2021, December 31st, 2021, and March 31st, 2022, and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when management discuss sales or revenue, that reference excludes surcharge. When referring to operating margins, that is based on adjusted operating income, excluding special items, and sales excluding surcharge. I will now turn the call over to Tony.
spk09: Thank you, Brad, and good morning to everyone on the call today. Let's begin on slide four and a review of our safety performance. For our fiscal year 2022, our total case incident rate was 1.0. It is above our fiscal year 2021 performance of 0.6, which was our best fiscal year safety performance on record. A rate of 1.0 is approximately 65% lower than an all-industry rate. However, our ultimate goal is to be a zero-injury workplace. We believe it is possible, and we will continue to work towards that goal. Now let's turn to slide five and a review of the fourth quarter. We continue to see strong increasing demand in each of our in-use markets. Most notably, we see the aerospace and defense in-use market continue to ramp to pre-COVID levels. Although global passenger traffic is not yet fully recovered, the aerospace ramp is accelerating, and our order backlogs are likewise increasing rapidly. And medical in-use market conditions continue to improve. as the industry addresses the backlog of surgeries delayed by COVID-19. We see many indicators across our in-use markets of the strong demand environment. Let me highlight two. First, our backlog increased 29% sequentially and 191% year over year. This marks the sixth consecutive quarter of backlog growth. Second, we continue to realize price gains on both our contractual and transactional business. Specifically, we recently increased base prices on our transactional business by 12% to 15%. This was the fourth such price increase in the last 14 months. We are working closely with our customers, as most are requesting additional volume with accelerated delivery dates. Our focus is on increasing productivity across our operations to meet this aggressive demand. For the quarter, our SAO and PEP segments exceeded our expectations, driven by higher net sales as a result of the growing market demand. And importantly, our liquidity remains healthy. During the quarter, we generated $65 million of free cash flow and finished the year with $448 million in total liquidity. Now let's move to slide six in the in-use market update. Most of our in-use markets were up sequentially and year-over-year, reflecting the recovering demand environment. Our aerospace and defense in-use market sales were up 17 percent sequentially and 8 percent year-over-year. Demand for our materials is increasing substantially as customers across each of the aerospace submarkets accelerate their activity to meet build rates. As a result, lead times across the industry have extended and our backlog continues to rise. Specifically, our aerospace and defense in-use market backlog is up 36% sequentially and 224% year over year. In the medical in-use market, sales were up 16% sequentially and up 41% compared to last year. The results reflect ongoing recovery in elective surgeries with customers focused on increasing stock levels to meet demand. The overall outlook continues to be positive as medical procedures are expected to rise to pre-pandemic levels in the second half of calendar year 2022. We are seeing replenishment in the supply chain to support the expected growth as our medical in-use market backlog is up 31% sequentially and 249% year over year. In the transportation in-use market, Sales were up 2% sequentially and down 10% compared to last year. Light duty remains very high, with consumers continuing to buy even as inventories are at historic lows. The industry continues to make modest improvements in the supply chain challenges, namely the chip shortages that are impacting production. With strong demand and low inventories, build rates are expected to increase through the end of this calendar year. In the energy in-use market, sales were down 9% sequentially and up 57% compared to last year. In the oil and gas sub-market, a demand and supply imbalance is driving growth in investment. As the world recovers from the pandemic requiring more energy, global supply has not kept up. The supply shortage has been further challenged by recent geopolitical disruptions. In addition, we are seeing growing demand for advanced premium alloy solutions for drilling activity in harsh environments. In the industrial and consumer end-use market, sales were flat on a sequential basis and up 22% year over year. We continue to see historically high demand for our semiconductor solutions and expect demand to remain strong throughout the year. In addition, we continue to see healthy demand in the electronic sub-market, with increased sales and backlog growth of 70% year over year. Growth in the electronic sub-market is largely driven by customer engagement on a recently commissioned hot strip mill in Redding. Now I will turn it over to Tim for the financial summary.
spk08: Thanks, Tony. Good morning, everyone. I'll start on slide eight, the income statement summary. Net sales in the fourth quarter were $563.8 million, and sales excluding surcharge totaled $403.2 million. Sales excluding surcharge increased 16% from the same period a year ago on 8% higher volume. Sequentially, sales are up 9% on 4% higher volume. Gross profit was $72 million in the quarter compared to negative $21.3 million in the fourth quarter of last year and $39.5 million in the third quarter of fiscal year 2022. It's important to note that the current quarter's gross profit results include a benefit of $11.9 million related to employee retention credits that were recorded and called out as a special item this quarter. The improvement in gross profit, both sequentially and year-over-year, is primarily driven by the higher sales and improving product mix and increasing pricing to offset inflationary cost increases. SG&A expenses were $47.4 million in our recent fourth quarter, largely in line with the same period a year ago and up $9 million sequentially. When adjusting for the special items that we called out in each quarter, SG&A expenses were up roughly $3 million sequentially due to the timing of certain expenses and certain legal reserve adjustments. Note that the SG&A line includes corporate costs, which totaled $15.5 million in the fourth quarter. The reported corporate costs are down about $5 million from the same quarter last year and relatively flat sequentially when considering the special items included in each period. As we look ahead to fiscal 23, we would expect corporate costs to run on average between 18 to 20 million per quarter. Operating income was 24.6 million in the current quarter. When excluding the impact of special items, adjusted operating income was 14.9 million in the current quarter compared to an adjusted operating loss of 12.5 million in the prior year period and an adjusted operating loss of 1.6 million in our recent third quarter. Our effective tax rate for the fourth quarter was 51.9%, which brings our full-year effective rate to about 22%. The fourth quarter rate is higher than the statutory rate, largely due to the outsized impact that certain non-taxable earnings and permanent items have on the rate given our pre-tax earnings in the quarter. Earnings per share for the current quarter was $0.05 per share. When excluding the impact of special items, adjusted earnings per share were breakevens. Now turning to slide nine in our SAO segment results. Net sales for the fourth quarter were $484.9 million, or $327.2 million, excluding surcharge. Compared to the same period last year, net sales excluding surcharge increased 13% on 8% higher volumes. Sequentially, sales increased 9% on 4% higher volumes. The improvement in net sales was driven by increased sales of materials across our key end-use markets, as Tony reviewed on the market slide. Moving to operating results, SAO reported adjusted operating income of $20 million in our recent fourth quarter. The same quarter a year ago, SAO's adjusted operating income was $2.7 million, and in the third quarter of this fiscal year, SAO reported adjusted operating income of $7.6 million. Adjusted operating income increased by about $17 million year-over-year and $12 million sequentially. The improvement in operating performance both on a year-over-year and sequential basis was largely due to higher shipments coupled with an improving mix and higher selling prices. Looking ahead, our backlog remained strong and grew sequentially again this quarter as order rates across all of our end-use markets continued to increase. As we have highlighted, we see increased activity across the aerospace supply chain to meet anticipated increases in build rates by the OEMs. Our teams remain focused on ensuring that we accelerate activity levels and production flow to meet the needs of our customers for the foreseeable future. Based on current expectations, we anticipate SAO will generate similar sequential adjusted operating income in the range of 18 to 20 million in the upcoming quarter. Now turning to slide 10 and our PEP segment results. Net sales in the fourth quarter of fiscal year 2022 were 95.8 million, or 92.9 million, excluding surcharge. Net sales, excluding surcharge, increased 23% from the same quarter last year and were up 8% sequentially. The year-over-year growth in net sales reflects increased demand and shipments across all the business units. In our dynamite titanium business, net sales increased by double digits in both the aerospace and defense and medical and use markets from the same quarter a year ago. We've also seen a significant improvement in year-over-year sales in our additive and distribution businesses. The sequential increase in net sales was led by growth in sales of titanium, primarily for medical applications. In the current quarter, PEP reported adjusted operating income of $8.2 million. This compares to adjusted operating income of $2.8 million in the same quarter a year ago and adjusted operating income of $4.4 million in our recent third quarter. Adjusted operating income improved by about $5 million from the same period a year ago and about $4 million sequentially. The operating income improvement on both a year-over-year and sequential basis is primarily the result of increased net sales across each of the business units driven by ongoing improving market demand conditions. As we look ahead, we believe that demand conditions will continue to improve in the coming quarters. We currently anticipate that the PEP segment will deliver adjusted operating income in the range of $7 to $9 million for the upcoming first quarter. Now turning to slide 11 and a review of pre-cash flow. In the current quarter, we generated $107 million of cash provided from operating activities. The cash from operations in the current quarter was driven by strong earnings combined with the benefits of solid working capital management. In the current quarter, we reduced inventory by 30 million. We continue ramping production levels across our facilities and will continue to manage inventory closely to ensure we can satisfy our customers' orders. We will also continue to actively manage our supply chain to minimize potential disruptions. We maintain regular contact with key suppliers to ensure we have a steady supply of our critical raw materials and other operating supplies for the foreseeable future. With the latest geopolitical events unfolding, we have not identified nor do we expect any potential sourcing issues. In the current quarter, we received 47 million of tax refunds related to prior year tax filings. Offsetting this was an increase of 49 million in accounts receivable as a result of strong sales in the fourth quarter. In the fourth quarter of fiscal year 2022, we spent 33 million on capital expenditures. We finished the year with capital expenditures totaling 91 million. As we talked about over the course of this year, we did experience some delays in projects due to the availability of outside contractors, as well as extended lead times for certain materials. But with that said, We prioritize projects to ensure our equipment is in good working condition and our employees can perform their work safely. We have also targeted areas where we see opportunities to invest in growth or near-term capacity expansion in selected areas. Moving down the chart, we continue to fund a constant dividend to our shareholders, which we consider as part of our free cash flow. With those details in mind, we generate $65 million in free cash flow in the fourth quarter. Our liquidity remains healthy, and we ended the current quarter with total liquidity of $448 million, including $154 million of cash and $294 million of available borrowings under our credit facility. Let's move to slide 12 to talk about selected fiscal year 2023 guidance. We're providing this selected information to help modeling for our fiscal year 2023. Depreciation and amortization is expected to be $132 million in fiscal year 2023, which is roughly in line with $131 million in fiscal year 2022. We expect to spend about $100 million in capital expenditures in fiscal year 2023. At this level, we will spend the required amounts for maintenance-type capex. It also allows for opportunities to make targeted investments in growth areas, as well as expand capacity in certain constrained flow paths. Moving to minimum required pension contributions, we don't expect to have any minimum required pension contributions for our U.S. qualified plans in fiscal year 2023. For non-cash net pension expense, we expect net pension expense to increase by about 27 million, moving from 7 million of pension income to 20 million of pension expense. For clarity, about 10 million of the pension expense for next year will be included in operating income, similar to fiscal year 2022. the balance, or approximately $10 million, will be reported in other income expense throughout the next fiscal year. Next, interest expense is estimated to increase from $45 million in fiscal year 2022 to $51 million in fiscal year 2023. The increase is driven by the higher interest rates on a portion of our debt that was refinanced in fiscal year 2022. Lastly, with respect to the effective income tax rate for fiscal year 2022, our reported full-year effective tax rate was about 22%. For fiscal year 2023, we expect the effective tax rate to be in the range of 22% to 24%. As we saw this year, the effective tax rate will fluctuate on a quarterly basis during the year due to the impact of non-taxable and permanent items in relation to each quarter's pre-tax income. With that, I will turn the call back over to Tony.
spk09: Thanks, Tim. Now to recap our fourth quarter and fiscal year 2022. We are well positioned with a backdrop of a strong demand environment and a positive outlook in each of our in-use markets. Notably, the aerospace and medical markets continue to accelerate their recovery. As a result, our backlog continues to grow, and we expect it to remain strong for the foreseeable future. We continue to ramp up our operations. deploying a carpenter operating model to maximize throughput and productivity in key flow paths. We have taken the necessary steps to address the current supply chain challenges and inflationary pressures facing the broader economy. Over the past couple of quarters, we have worked closely with our vendors to ensure a reliable supply of raw materials for our operations, given the ongoing geopolitical challenges. Through our raw material surcharge mechanism and our ability to increase prices on our contractual and transactional business, we are able to mitigate a large percentage of the recent inflationary pressures. We continue to work closely with key customers, navigating the recovery and supply chain challenges and partnering to solve the critical needs. As a result of these efforts, we believe we will continue to maintain a healthy liquidity position. Now let's take a look at our near-term and long-term outlook. We are in an advantageous position as we have a strong outlook across each of our in-use markets. A combination of the recovery from the pandemic and positive macro trends have positioned our material solutions for both near-term and long-term growth. Near-term, the strength of the demand for our materials is confirmed by the acceleration of our order intake and the growth of our backlog. Bookings are up 15% sequentially and 122% year-over-year, and backlogs are up 29% sequentially and 191% year-over-year. On a long-term basis, the end-use markets we serve are supported by strong macro trends. Let me give you a couple examples. In our aerospace and defense end-use market, we will benefit from the continuing growth in global air travel demand. Supporting this growth are narrow body build rates, which are expected to return to pre-pandemic levels in calendar year 2023. Carpenter Technology is well positioned to capture additional demand with the incremental capacity at our Athens facility. For these reasons, we have been able to negotiate long-term aerospace contracts that locked in share and pricing gains even during the pandemic. In defense, we are partnering with customers on the development of next generation programs and platforms that require our material solutions. The industry is demanding more and better solutions for new platforms like hypersonic, vertical lift, and fixed wing programs. To support that demand, we are engaging with customers on supply agreements for our material solutions, new product trials, and funded R&D programs. And given the geopolitical environment, investment is expected to continue well into the future. For the medical in-use market, our broad portfolio of biocompatible, long-last materials for implantable devices positions us to support customers' strategic initiatives. In order to keep up with their growing demand, we invested in capacity and capabilities in our titanium facilities, which came online just as the pandemic hit. Now, As we emerge from the pandemic, we anticipate significant growth in this market and are positioned well to capitalize on this demand. With the focus on improved patient outcomes, the medical device industry continues to innovate, requiring high-value material solutions. And the aging population and growth in expected procedures should drive demand well into the future. In addition to the earnings power of our legacy businesses, we are investing in areas such as electrification and additive manufacturing that will further accelerate our growth trajectory. Specifically in electrification, we are well positioned in electric motors with our power-dense solutions. We are already a leader in soft magnetic materials for auxiliary power units, or APUs, in the aerospace industry. We are also finding increasing needs for power-dense solutions for electric motors in other industries. Companies looking for the performance properties that our materials provide are experimenting with our materials and pulling us down the value chain. In addition to manufacturing the soft magnetic material, we are now producing stacks, the core component in the electric motor for our customers. While we are currently producing stacks at lower rate volumes, we are looking to further scale capacity as these applications grow in demand. In the aerospace industry, We are working with customers in electric vertical takeoff and landing aircraft and regional hybrid electric aircraft that need the power-dense motors required for flight. In the automotive industry, we are working with high-end electric vehicles and supercars to provide the power and range they need. And we are working with customers in the defense industry on various applications that require power-dense motors. In summary, corporate technology only participates in high-growth submarkets. We produce highly engineered, technically advanced materials through proprietary processes. And we are moving across the value chain, entering new frontiers to support our customers. The obvious question is, how does that translate into earnings? Earlier this year, I spoke publicly about our projection that sometime in FY23, we could achieve a run rate equal to our FY19 actual performance. Rightly so, that garnered a lot of attention. So let me address it again. In terms of total company operating income, we project that we will be at a run rate equal to FY19 full-year operating income in the fourth quarter of FY23. In other words, fourth quarter FY23 actual operating income annualized is expected to be at the FY19 four-year level. Three important points I would like to make. First, we anticipate that the operating income growth over the coming quarters will be relatively linear. Second, we're working hard to see if we have an opportunity to pull that into the third quarter of FY23. And third, our current view of inflation Supply chain constraints and labor availability are built into this projection. Obviously, the environment can change quickly, and we will keep you updated on a quarterly basis. In addition, I say that once we get back to FY19 operating income level, we believe we can double that by FY26. We still believe in that projection. The bottom line is that Carpenter technology is poised to significantly increase earnings over FY23 and the longer term due to the strong markets we participate in, our innovative solutions, strong customer relationships, and our growth opportunities. Thank you for your time, and now I will turn it over to the operator to take your questions.
spk06: Thank you. We will now begin the question and answer session.
spk07: To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.
spk06: Our first question comes from Josh Sullivan with the Benchmark Company.
spk07: Please go ahead.
spk10: Hey, good morning. Good morning, Josh. This week, there's been a lot of discussion just around castings and the aerospace market and some limits that it's put on Boeing and Airbus deliveries. Can you just talk about how Carpenter fits into that discussion? You know, is it limiting your growth or customers taking in your materials to build stocks while capacity builds throughout the industry? And then just what do your aerospace lead times look like right now versus the previous quarter?
spk09: Yeah, Josh, thanks for your question. So just at a high level, certainly aware of the commentary that's out there around supply chain issues and how that may impact deliveries. I can tell you from our standpoint, we still see extremely high demand, high output rate targets per month. Now, there's some discussion around this, but we don't see this being any drag on what we're going to produce over the coming quarters. I mean, the market is just too tight right now. In terms of lead times right now for us, And I would think the industry in total from an engine standpoint, nickel billet for engines, we're in that high 40s to low 50s lead times.
spk10: Got it. And then the Europeans look to be allowing Russian titanium supply coming through, but then you have U.S. firms like Raytheon are committed to altering their supply base. or even in the medical markets, have you received any firm contracts resulting from reshoring titanium supply chains at this point?
spk09: Josh, are you saying people moving away from Russian supply?
spk10: Yeah, is there any incremental activity on the titanium front given the change in the Russian supply dynamics?
spk09: Yeah, I think it's two pieces. I mean, one, you could see some U.S. entities that provide large titanium fortunes. You know, they may pick up some share. And in that case, we would participate via conversion services to those customers. That would be on the aerospace side. On the medical side, we compete via dynamite with some of those suppliers. And as customers are looking at accessing what they want to do going forward, that could be an opportunity for us as well. If you put it all together, depending on how that plays out, that could be a meaningful opportunity for a dynamite business.
spk10: And just one last one, you know, the move into stacks, you know, how vertically integrated, you know, could Carpenter get in the electric motor space? You know, could we see a name brand Carpenter product at some point? Or could you just explain some of your vertical integration strategy there?
spk09: Well, we'll take one step at a time. I mean, right now we're building out the stack piece of it right now at lower rate levels, but getting a lot of interest from customers and producing as we speak right now. Could we take that next step? It's possible as we do our analysis, but right now we're focused on the stack piece. Got it.
spk04: Thank you for the time. Thank you.
spk06: As a reminder, if you have a question, please press star, then 1 to be joined into the queue.
spk07: The next question comes from Michael Leshock with KeyBank Capital Markets. Please go ahead.
spk01: Hey, good morning. I wanted to follow up on the castings commentary as we look down the road and the market isn't as tight as it is today. Where do you see that castings capacity going? In other words, when we were at much higher rates pre-pandemic, where did the capacity go that supported those rates? Is that still in place or is some of that permanently offline?
spk09: I can't speak to the casting side of the market since we don't participate there.
spk01: Okay. And then on your transactional business, you had called out the price increases, the 12% to 15%. um, what percentage of your business is transactional? Is that something you've given? Um, and where does the transactional piece compare to where it historically is as a percentage of sales?
spk09: Yeah, we don't give that exact percentage, but I can give you this guidance. Uh, all of the larger customers, the, uh, are under longterm contracts. So, um, That would give you a pretty good idea of what the split is. It's stayed relatively the same over the last several years.
spk01: Okay. And then did you give your jet engine revenues in the quarter?
spk09: Well, I can tell you that engines are – the revenue is up 5% sequentially. That's usually the question that you folks at Key ask.
spk01: All right. Well, thank you, guys. Appreciate it. Yeah, thank you.
spk06: Our next question comes from Gautam Khanna with Cowen. Please go ahead.
spk09: Hi. Sorry, I joined late, so I don't know if this was asked, but I wanted to get your perspective, Tony, on some of the complaints we're hearing about engine supply chain constraints. And maybe if you could help us identify where they might be coming from. Are they broad-based among your customers, or are they isolate it to one or two or just, I'd love to get your perspective on it. Cause it seems like that's pushing, you know, Airbus taking up the A320 rate and obviously Boeing made comments, uh, to that effect yesterday on their earnings call about how they would ramp production faster on the 737 max if it was, if it wasn't for the engine supply chain. So I just wanted to get your perspective on where do you see the pinch points among your customers and, Is it isolated to one or anything you could say? Yeah, good morning, Gotham. If you remember, you know, it was probably a year or so ago we were talking, and we both kind of predicted that this is where we would be, right? You're at a period where everybody believes that aerospace is never coming back, and we'll get to the point where it will come back quickly, and there will be pinch points across the entire supply chain. And guess what? That's where we're at. So I don't think there's any one – specific area in the supply chain that's behind. I think it's multiple areas in the supply chain that are running really fast to get ramped up. As you know, there's many workflows that go into the manufacturer of an engine. So I don't think there's just one area. Across the board, all of our customers in that area, in the engine side, believe their inventories are too low and that they'd like to have more material at a shorter lead time. So that's what we're working on now to continue to ramp up our production. As you all know, these are very sophisticated equipment, so you don't just turn it on like you turn on a water faucet. They're a very high-quality product, so we have to do that in a very structured way, and that's what we're doing over the next couple quarters. as you see us going into the first quarter and the second quarter as we continue to bring on more capacity. Okay. And I was curious if there's any residual impact from the press outage back in December, or are we totally beyond that at this point? Well, really this fourth quarter, Gotham was the first full quarter we had with the press being back up, right? Because it came back to roughly the end of March timeframe or so. So I would anticipate over the next quarter, this first quarter, that we'll continue to work on that. And then as we get into the second quarter, we'll have that behind us. I'm not saying we'll be ahead and we'll be at much lower lead times, because at the same time we're pulling out and recovering from the press outage, demand is increasing. So, you know, that's going to be the case here, I think, over the next several quarters as the entire industry ramps up. As you know, our Our lead times, or I shouldn't say lead times, our production time for our products are usually somewhere between three months on the short end and four or five months on the longer side. So it does take quite a while to kind of cycle that through. Got it. And at one point you guys had suggested that there could be a quarter in fiscal 23 that approaches the run rate established in 2019. I was curious, do you still see that as possible this year, like a dollar in any one of the quarters of fiscal 23? Yeah, as you said earlier, you joined a little late. I know you've probably got a lot of different companies out there you're covering. But I did mention that in my prepared comments, and that right now as we look forward, a couple comments. We believe that we'll be at that run rate by the fourth quarter. Right. So, and I, and I, I tried to make it a little bit easier to cover. So I moved in and said, let's just talk about operating income. So we're not talking about the noise below the line. So if you look at FY 19 operating income, uh, that we would be at that annualized run rate by the fourth quarter of this year. Right. So I gave a little bit more clarity on that than what I'd said publicly before. A couple of comments I made around that is that we believe that that, that Growth between now and the fourth quarter, which is only a couple quarters away, would be relatively linear. Number two, we're working really hard to see if maybe we can pull that even into the third quarter, Gotham, that we can make that even a quarter. And I think that's really the story, right? The story is, you know, hey, what's going to be your next quarter? I know we like to talk about that, but I think the real story for Carpenter Technology and maybe many other companies in the industry as they ramp up is where do you think you can be in a relatively short period of time? That's only a couple quarters away. And for us, if you can say by the end of this year, maybe even the third quarter, that I can be at the rate that I was pre-pandemic, that was one of the highest, you know, financial performance years in our history, I think that's a really good thing to point to. And I think that's really a compelling thing point around carpentry technology right now. That makes sense. Last question. As some of the folks in the industry, customers in the industry, move away from VSMPO, I was curious, have you guys seen any benefit in the medical business or in aerospace fastener coil wire and bar? Because I know VSMPO was a bit player in those markets. I didn't know if it helped you at all yet. Yeah, they are a significant player. We have had discussions with customers. Some might decide to stay with that supplier. Some may decide to leave. So they're looking through those sourcing decisions as we speak. We do believe there's an opportunity for us. It could be meaningful for a dynamite facility as we go forward. So we could probably provide a little bit more clarity as that gets more firm in the coming quarters. Thanks a lot, Tony. Appreciate it. Yeah, thank you, sir. Have a good day.
spk07: The next question comes from Michael Glick with JP Margin. Please go ahead.
spk02: Hey, guys. Good morning. Just had a couple follow-ups on your 4Q comments. Just as we think about margin progression in SAO, should that be pretty linear as well? And then, you know, is the free cash flow growing at, you know, that kind of linear rate as well?
spk09: Yeah, it's a good question. The margins will move with that operating income, right? So as we continue to ramp up, you'll see those margins improve in SAO. Free cash flow, yes, it should follow. uh, the operating income, I will tell you early on, we'll, we'll make some investments in, in working capital, primarily inventory work in process, because as you know, as we ramp up and I just said to the, to the other question that our production times are three to six months. Uh, so, you know, you're going to increase your whip, right? So we'll have to do, we'll have to, we'll have to offset that. But then when you see these types of, you know, increases, um, If you just look at this fourth quarter SAO operating income, or I'd say total carpet operating income, and what we're saying it would be in the fourth quarter of F-123, you're more than four times higher. So it's significant. So those increased sales will certainly lead to improved pre-cash flow. But do keep in mind we will build some some inventory WIP in the short term to support that.
spk02: Got it. Thank you, and good quarter.
spk04: Yeah, thank you.
spk06: This concludes our question and answer session.
spk07: I would like to turn the conference back over to Brad Edwards for any closing remarks.
spk05: Thank you, and thanks to everyone for joining us today for our fourth quarter earnings conference call. We appreciate your interest and your questions and look forward to connecting with everybody soon. Have a great rest of your day.
spk07: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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