Q4 2022 Carpenter Technology Corp Earnings Call
Good day and welcome to the Carpenter Technology Corporation fourth quarter fiscal 2022 countries.
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I would now like to turn the conference or what does 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 30th 2022.
The 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 Chang, President and Chief Executive Officer.
And Tim Lang, 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.
It 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 32021 Form 10-Q for the quarters ended September 32021 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 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.
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 fiscal year 2022, our total case incident rate was 1.0.
As above our fiscal year 2021 performance 0.6, which was our best fiscal year safety performance on record.
A rate of 1.0 is approximately 65% lower than in all industry rate. However, our ultimate goal is to be a zero injury workplace.
Do you 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 end use markets. Most notably we see the aerospace and defense end use market continued to ramp to pre COVID-19 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 end use market conditions continued to improve.
Industry addresses the backlog of surgery 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.
Basically 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 S T O and Pep segment exceeded our expectations driven by higher net sales.
All of the growing market demand.
And importantly, our liquidity remains healthy during.
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 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 sub markets accelerate their activity to meet build rate.
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.
He duty remains very high with consumers continuing to buy even if 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 inventory 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.
Oil and gas sub market.
Mandan 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.
In addition, we are seeing growing demand for an 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 electronics market with increased sales and backlog growth of 70% year over year.
Growth in the electronic Submarket is largely driven by customer engagement on our recently commissioned hot strip mill and ready.
Now I will turn it over to Tim for the financial summary.
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 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 and 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 were 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 'twenty three.
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.
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 adjusted operating loss of $1 6 million and a 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 pretax earnings in the quarter.
Earnings per share for the current quarter was five cents per share.
When excluding the impact of special items adjusted earnings per share were breakeven.
Now turning to slide nine and our 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.
<unk> 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 slot.
Moving to operating results, we reported adjusted operating income of $20 million and our recent fourth quarter.
Same quarter, a year ago I figure. It was adjusted operating income was $2 7 million and then the third quarter of this fiscal year <unk>.
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've 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 accelerated activity levels and production flow to meet the needs of our customers for the foreseeable future.
Based on current expectations, we anticipate <unk> 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 in our Pep segment results.
Net sales in the fourth quarter of fiscal year 2022 were $95 8 million were $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 in shipments across all the business units.
In our Dynamo 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 and are 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.
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.
Yeah.
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.
And 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 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 prioritized projects to ensure our equipment is in good working condition and our employees can perform their work safely.
We've also targeted areas, where we see opportunities to invest in growth where near term capacity expansion in selected areas.
Moving down the chart.
We continue to find a constant dividend to our shareholders, which we consider as part of our free cash flow.
But 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 <unk>.
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 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 'twenty three.
At this level, we will spend the required amounts your maintenance type capex.
It also allows for opportunities to make targeted investments in growth areas.
Well as expand capacity in certain constraints low pass.
Drilling day 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.
Were noncash 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 pension expense for next year will be included in operating income similar to fiscal year 2022.
The balance of 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, 2000, $22 million 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.
Fact of income tax rate for fiscal year 2022.
Our reported full year effective tax rate was about 22%.
For fiscal year 'twenty 'twenty, three 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.
The impact of non taxable and permanent items in relation to each quarter's pretax income.
With that I will turn the call back over to Tony.
Thanks Kim.
Now to recap, our fourth quarter and fiscal year 2022.
We are well positioned with a backdrop of a strong demand environment and positive outlook in each of our end use markets, notably the aerospace and medical markets continue to accelerate the 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.
Key flow path.
We've 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 a 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.
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.
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 lock 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 part material solutions, new product trials and funded R&D programs and.
And 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 last materials are implantable devices positions us to support customer strategic initiatives.
In order to keep up with the growing demand we are investing in capacity and capabilities in our titanium facility, which came online just as the pandemic hit.
Now as we emerge from the pandemic, we anticipate significant growth in this market and we're positioned well to capitalize on this demand.
With a focus on improved patient outcomes. The medical device industry continues to innovate requiring high value material solutions MAA.
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 and electric motors with our power dense solutions.
We are already a leader in soft magnetic materials for auxiliary power units or a P use in the aerospace industry.
We're also finding increasing needs for power dense solutions for electric motors and other industries.
Smoking for the performance properties that our materials provide our experiment 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 and electric motor for our customers.
While we are currently producing stacks at lower rate volumes, we're looking to further scale capacity as these applications grow in demand.
In the aerospace industry, we are working with customers and electric vertical takeoff and landing aircraft and regional hybrid electric aircraft they need the power against motors required for flight.
In the automotive industry, we are working with high in electric vehicles and Supercars.
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, Carpenter technology only participate 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 'twenty three 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 FY 'twenty three.
In other words fourth quarter FY 'twenty three 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're working hard to see if we have an opportunity to pull that into the third quarter of FY 'twenty three and third our current view of inflation supply chain constraints and labor availability or built into this projection.
Obviously, the environment can change quickly and we will keep you updated on a quarterly basis.
In addition, I stay that once we get back to FY 19 operating income level. We believe we can double that by FY 'twenty six we still believe in that projection.
The Bottomline is that Carpenter technology is poised to significantly increase earnings over FY 'twenty, three and the longer term due to the strong markets, we participate in our innovative solutions and strong customer relationships and our growth opportunities.
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 our next question 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.
Is that any Daniel 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 gotcha.
Our first question comes from Josh Sullivan with the Benchmark company. Please go ahead.
Hey, good morning.
Good morning, Josh.
You know there's this week, there's been a lot of discussion just around castings in the aerospace market and there are some limits that are 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 in your materials to build stock swap while capacity builds throughout the industry and then just what are your aerospace lead times look like right now versus the previous quarter.
Yes, Josh Thanks for the question. So just at a high level are certainly aware of.
The commentary that's out there around supply chain issues, and how that may impact deliveries.
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 to 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 40 still own 50 week lead times.
Got it.
And then the.
Europeans looked to be allowing Russian titanium supply coming through but then you have U S firms like Raytheon are committed altering their supply base.
Or are you going into medical markets have you received any firm contracts, resulting from reassuring titanium supply chains at this point.
Yeah.
Josh are you, saying people moving away from a Russian supply.
Yeah is there any incremental activity on the titanium front given the change in the you know the Russian supply dynamic.
Yeah, I think it's two pieces I mean, one you could see some U S b.
Entities that provide light large titanium forgings, yeah. They may pick up some some share and in that case, we would participate the conversion services to those customers that would be on the aerospace side on the medical side, we compete.
Died in that 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.
Meaningful opportunity for a direct business.
And then just one last one the move into <unk>.
Stacks, how vertically integrated could carpenter get in the electric motor space, you know could we see a named brands Carpenter product at some point or could you just explain to me your vertical integration strategy there.
Well, we'll take one step at a time I mean right now we're building out the stack a piece of it right now.
Lower rate levels, but getting a lot of.
Interest from customers and.
You don't 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.
Thank you for the time.
Okay.
As a reminder, if you have a question. Please press star then one to be giant into the queue.
The next question comes from Michael Lewis shock 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 in the market isn't as tight as it is today, where do you see that casting.
Capacity.
In other words, where 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, Matt 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, that's transactional is that something you've given.
And where does the transactional piece compared to where it historically is.
The stage of sales yes.
Yeah, we don't give that exact percentage, but I can give you this guidance.
All of the larger customers.
Oh, they're long term contracts so that.
I'll give you a pretty good idea of what the what the split is it's it's stayed relatively the same over the last several years.
Okay, and then did you give your jet engine revenues in the quarter.
Well I can tell you that engines are the revenue was up 5% sequentially. That's usually the question Nate.
You folks a kiosk.
Alright, well. Thank you guys appreciate it.
Thank you.
Our next question comes from Gautam Khanna with Cowen. Please go home.
I am 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 were 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 because it seems like that's pushing.
Airbus taking up the <unk> hundred 20 rate.
Obviously Boeing made comments.
Could that affect 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.
Is it isolated to one or anything.
Anything you could say yes.
Yeah. Good morning, Gautam. If you remember you know, it's probably a year or so ago.
Were talking and I, we both kind of predicted that this is where we would be right. You know it appeared where everybody believes that aerospace it's never coming back and we will get to the point, where it will come back quickly and there'll be pinch points across the entire supply chain and.
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 right there.
Running really fast to get ramped up.
As you know there's many.
Many workflows that go into that the manufacturer of engine. So I don't think Theres just one area.
Ross the board all of our customers.
In that area in the engine side believes our inventories are too low and that they'd like to have.
The more material at a shorter lead time. So that's what we're working on that ramp continue to ramp up our production as you. All know these are very sophisticated.
Equipment. So you don't just turn it on and I can turn on a.
You know a waterfall.
They're 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 of quarters.
As you see us go into the first quarter and second quarters, we continue to bring on more capacity.
Okay and I was curious if there's any residual impact from the pass outage back in December or are we totally beyond this point.
Well really this fourth quarter Gotham was the first full quarter, we had with the fresh being back up right because it came back to roughly be in the March.
March timeframe or so so I would anticipate over the next quarter. This first quarter that we will continue to work and work on that and then as we get into the second quarter, we'll have that behind us I'm not saying it will be a head and will 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.
That's going to be the case here I think over the next over the next several quarters as the entire industry ramps up as you know are our lead times or I shouldn't say lead times are.
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.
One point you guys had.
Suggested that there could be a quarter in fiscal 'twenty three 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 us.
Quarters of fiscal 'twenty three or.
Yeah as you said earlier you joined us.
I know, you've probably got a lot different.
Different companies out there you know covering but I did mention that in my in my prepared comments and that right now as we look forward a couple of comments, we believe we'll be at that run rate by the fourth quarter.
So and I and I I tried to make it a little bit easier to cover so I'd look and say, 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 and what I've 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 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 <unk> got something that we can make that even a border.
And I think that's really the story right. The story is that 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 others.
And the industry as they as they ramp up yes.
Where do you think you can be in a relatively short period of time, it's only a couple of quarters away.
For us if you can say by the end of this year, maybe in the third quarter that I can be at the rate that I was pre pandemic. It was one of the highest you know our financial performance years in our history I think that that's really that's a really good.
I think the point to and I think that's really the compelling point around a carpenter technology right now.
No that makes sense and last question just.
Yeah.
Some of the.
Folks in the industry customers in the industry move away from V. S. NPL I always.
I'm curious have you guys seen any benefit on the medical business or an aerospace fastener.
Coil wire and bar, because I know <unk> was a bit player in those markets, but I don't know if that helped you at all yet.
Yes, they are a significant player and we have had discussions with customers.
I'm Mike <unk>.
Aside to stay with that supplier some may decide to leave so theyre looking through those social sourcing decisions as we speak and we do believe there's an opportunity for us it could be meaningful for Dynamo our facilities as we go forward. So we can probably provide a little bit more clarity as that gets a more firm in the country.
<unk>.
Thanks, a lot Tony I appreciate it.
Thank you Sir I have a good day.
Yeah.
Our next question comes from Michael Glick with J P. Morgan.
I hope.
Hey, guys. Good morning, just had a couple of follow ups on your <unk> comments, just as we think about margin progression and that's a or should that be pretty linear as well and then you know is the free cash flow growing at that kind of a linear rate as well.
Yeah, It's a good question.
The margins will will move with that operating income right. So as we continue to do to ramp up youll see those margins are improving in S. L free cash flow, yes, it should follow.
The operating income I will tell you early on we'll we'll make some investments 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.
So you know youre 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 increase in these.
If you just look at this fourth quarter.
Operating income.
And.
Alright, so the total carpenter operating income and what were saying it would be in the fourth quarter of FY 'twenty, three or more than four times higher so it's significant so.
Those increased sales will certainly.
Need to improve.
Improved free cash flow.
But do keep in mind, we will build some some some inventory with a in a in the short term support that.
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 has now concluded. Thank you for attending today's presentation you may now disconnect.