Good day, and welcome to the Carpenter Technology Corporation Fourth Quarter Fiscal 2022 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to the management. Please go ahead.

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 30, 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 Thene, President and Chief Executive Officer; and Tim Lain, Senior Vice President and Chief Financial Officer. Statements made by management during this earnings presentation that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter Technology's most recent SEC filings, including the company's report on Form 10-K for the year ended June 30, 2021, Form 10-Q for the quarters ended September 30, 2021, December 31, 2021 and March 31, 2022 and the exhibits attached to those filings. Please also note that in the following discussion, unless otherwise noted, when management discusses sales or revenue, that reference excludes surcharge. When referring to operating margins, that is based on adjusted operating income excluding special items, and sales excluding surcharge. I will now turn the call over to Tony.

Thank you, Brad, and good morning to everyone on the call today. Let's begin on Slide 4 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 5 and a review of the fourth quarter. We continue to see strong increases in demand in each of our end-use markets. Most notably, we see the aerospace and defense end-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. The medical end-use market conditions continue to improve as the industry addresses the backlog of surgeries delayed by COVID-19. We see many indicators across our end-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 segment exceeded our expectations driven by higher net sales as a result of the growing market demand. 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 6 and the end-use market update. Most of our end-use markets were up sequentially and year-over-year, reflecting a recovering demand environment. Our aerospace and defense end-use market sales were up 17% sequentially and 8% 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 end-use market backlog is up 36% sequentially and 224% year-over-year. In the medical end-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 end-use market backlog is up 31% sequentially and 249% year-over-year. In the transportation end-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 end-use market, sales were down 9% sequentially and up 57% compared to last year. In the oil and gas submarket, a demand and supply imbalance is driving growth and 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. Additionally, we are seeing growing demand for our 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. Furthermore, we continue to see healthy demand in the electronics submarket with increased sales and backlog growth of 70% year-over-year. Growth in the electronics submarket is largely driven by customer engagement on our recently commissioned hot strip mill in Reading. Now I will turn it over to Tim for the financial summary.

Thanks, Tony. Good morning, everyone. I'll start on Slide 8, the income statement summary. 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 were 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 million 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 breakeven. Now turning to Slide 9 and 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 remains strong and grew sequentially again this quarter as order rates across all of our end-use markets continue 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 million 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 Dynamet Titanium business, net sales increased by double-digits in both the aerospace and defense and medical end-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 million to $9 million for the upcoming first quarter. Now turning to Slide 11 and a review of free 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 we'll 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 generated $65 million of 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 but 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 was 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.

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 end-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 our 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 their 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 end-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 were 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 of 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 materials 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 the supply agreements for our material solutions, new product trials, and funded R&D programs. Given the geopolitical environment, investment is expected to continue well into the future. For the medical end-use market, our broad portfolio of biocompatible long-lasting materials for implantable devices positions us to support customers' strategic initiatives. In order to keep up with the 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. 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 electric motors, 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 take-off 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. Additionally, we are working with customers in the defense industry on various applications that require power-dense motors. In summary, Carpenter 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 FY '23, we could achieve a run rate equal to our FY '19 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 FY '19 full-year operating income in the fourth quarter of FY '23. In other words, fourth quarter FY '23 actual operating income annualized is expected to be at the FY '19 full-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 are working hard to see if we have an opportunity to pull that into the third quarter of FY '23. 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 stated that once we get back to FY '19 operating income level, we believe we can double that by FY '26. We still believe in that projection. The bottom line is that Carpenter Technology is poised to significantly increase earnings over FY '23 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.

Thank you. We will now begin the question-and-answer session. Our first question comes from Josh Sullivan with The Benchmark Company. Please go ahead.

Hey. Good morning.

Good morning, Josh.

This week, there's been a lot of discussion just around castings in 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? Is it limiting your growth or are customers taking 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?

Yes, 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. 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 were in that high 40s to low 50-week lead times.

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 reassuring titanium supply chains at this point?

Josh, are you saying people moving away from Russian supply?

Yes. Is there any incremental activity on the titanium front given the change in the Russian supply dynamic?

Yeah. I think it's two pieces. I mean, one, you could see some U.S. entities that provide large titanium origins. They may pick up some share, and in that case, we would participate in the conversion services to those customers and would be on the aerospace side. On the medical side, we compete via Dynamet 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 our Dynamet business.

And then just one last one, the move into stacks, how vertically integrated could Carpenter get in the electric motor space? Could we see a name brand Carpenter product at some point? Or could you just explain some of your vertical integration strategy there?

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 a lower rate levels, but getting a lot of interest from customers and producing as we speak. 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. Thank you for the time.

Thank you.

The next question comes from Michael Leshock with KeyBanc Capital Markets. Please go ahead.

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? 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?

Yeah, Mike. I can't speak to the castings side of the market since we don't participate there.

Okay. And then on your transactional business, you had called out the price increases, the 12% to 15%. What percentage of your business is transactional? Is that something you've given? And where does the transactional piece compare to where it historically is as a percentage of sales?

Yeah. We don't give that exact percentage, but I can give you this guidance. All of the larger customers are under long-term contracts. So that will give you a pretty good idea of what the split is. It's stayed relatively the same over the last several years.

Okay. And then did you give your jet engine revenues in the quarter?

I can tell you that revenue from engines was up 5% sequentially. That's usually the question that you folks at Key ask.

All right. Well, thank you guys. Appreciate it.

Yeah. Thank you.

Our next question comes from Gautam Khanna with Cowen. Please go ahead.

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 isolated to one or two? Just I'd love to get your perspective on it because it seems like that's pushing Airbus to take up the A320 rate. Obviously, Boeing made comments to that effect yesterday on their earnings call about how they would ramp production faster on the 737 MAX 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. Is it isolated to one? Or anything you could say on that?

Good morning, Gautam. If you recall, about a year ago we discussed this, and we both anticipated that this is where we would end up. Currently, there is a widespread belief that aerospace is not going to recover. However, I believe we will soon reach a point where recovery happens quickly, leading to constraints throughout the entire supply chain. And that's precisely the situation we find ourselves in now. I don’t think there's just one specific area in the supply chain lagging; it’s several areas that are striving to ramp up quickly. As you know, manufacturing an engine involves numerous workflows. Our customers in the engine sector are expressing that their inventories are too low and they would prefer to have more materials available with shorter lead times. That's what we are currently focusing on as we continue to increase our production. It's important to note that this equipment is very sophisticated, and we can't simply activate it like a faucet. The products are of high quality, so we are approaching this increase in a structured manner. We plan to keep adding capacity over the next couple of quarters as we move into the first and second quarters.

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?

This fourth quarter was the first full quarter with the press operational again, as it returned at the end of March. I expect we will continue to address this in the first quarter, and as we move into the second quarter, it will be largely resolved. However, while we may not be ahead, and lead times could still be somewhat extended, we are also dealing with an increase in demand alongside the recovery from the press outage. This situation will likely persist over the next several quarters as the industry as a whole ramps up. Our production times for our products typically range from three months on the shorter end to four or five months on the longer side, which means it can take a while to cycle through the process.

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.

Yeah.

I was curious, do you still see that as possible this year, like a dollar in any one of the quarters of fiscal 2023? Or a dollar of earning.

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 in that right now, as we look forward, a couple of comments, we believe that we'll be at that run rate by the fourth quarter. And I tried to make it a little bit easier to cover, so I moved 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, 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 had said publicly before. A couple of comments I made around that is that we believe that, that growth between now and the fourth quarter, which is only a couple of 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, Gautam, that we can make that even a quarter earlier. I think that's really the story, right? The story is, Hey, what's going to be your next quarter? I know we'd like to talk about that. But I think the real story for Carpenter Technology and maybe many others in the industry as they ramp up is, where do you think you can be in a relatively short period of time? It's only a couple of 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 financial performance years in our history, I think that's a really good thing to point to. I think that's really the compelling point around Carpenter Technology right now.

No, that makes sense. And last question, just 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 don't know if it helped you at all yet.

Yes. They are a significant player, and 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 Dynamet 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. Have a good day.

The next question comes from Michael Glick with JPMorgan. Please go ahead.

Hey, guys. Just had a couple of follow-ups on your 4Q comments. Just as we think about margin progression in SAO, should that be pretty linear as well? And then is the free cash flow growing at that kind of linear rate as well?

Yes, that's a great question. The margins will adjust with the operating income. As we continue to increase our output, you can expect to see improvements in the SAO margins. Regarding free cash flow, it should track alongside the operating income. Initially, we will invest in working capital, especially in inventory work in process. As we ramp up, our production times are between three to six months, which means we will need to increase our work in process inventory. We will need to manage that effectively. Looking at the fourth quarter SAO operating income, it is projected to be more than four times higher than in the fourth quarter of FY '23, indicating significant growth. These increased sales will definitely contribute to better free cash flow, but please remember that we will build some inventory work in process in the short term to support this growth.

Got it. Thank you and good quarter.

Yeah. Thank you.

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

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.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.