Carpenter Technology Corporation (NYSE:CRS) Q1 2024 Earnings Call Transcript

Carpenter Technology Corporation (NYSE:CRS) Q1 2024 Earnings Call Transcript October 26, 2023

Carpenter Technology Corporation beats earnings expectations. Reported EPS is $0.89, expectations were $0.75.

Operator: Good day, and welcome to the Carpenter Technology Corporation First Quarter 2024 Fiscal Year Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. John Huyette, Vice President, Investor Relations. Please go ahead.

John Huyette: Thank you, operator. Good morning everyone and welcome to the Carpenter Technology earnings conference call for the fiscal 2024 first quarter ended September 30, 2023. 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, 2023 and the exhibits attached to that filing.

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Please note, that in the following discussion, unless otherwise noted, when management discuss the 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.

Tony Thene: Thank you, John. And good morning to everyone on the call today. I will begin on Slide 4 with a review of our safety performance. For the first quarter fiscal year 2024, our total case incident rate was 2.1. This rate has been elevated over the last several quarters as we integrate a large number of new employees into our operations. We are focused on specific actions to maintain the lower severity and identified potential risks. Our target remains a zero injury workplace and we will continue to work tirelessly to achieve that target. Now let’s turn to Slide 5, and a review of the first quarter. On our last earnings call, we provided an outlook for the first quarter of fiscal year 2024 and signaled operating income was expected to be flat or slightly up sequentially, even though we outperformed the fourth quarter expectations.

At first quarter guidance represented a meaningful improvement compared to the historical trend of a sequential decline in profits, in the first quarter of a fiscal year. Building on our operating momentum, we exceeded that guidance and reported first quarter operating income of $69 million, a 10% increase sequentially. Most notably, the SAO segment exceeded expectations for the quarter, delivering $80.8 million in operating income, above the outlook we provided of $72 million to $77 million. Further, SAO realized an adjusted operating margin of 19.4%, growing from 16.8% in the previous quarter. This impressive margin expansion came as a result of targeted improvement in product mix, higher realized prices and continued focus on productivity.

We continue to realize price gains on both contractual and transactional business. As evidenced at the beginning of October, we announced another price increase of 7% to 12% on our SAO transactional business. We also generated $7.4 million of cash from operations during the quarter, maintaining a healthy liquidity of $366.4 million. Finally, we are positioned at a strong demand environment across our end use markets where our material solutions are valued by our customers. Now let’s take a closer look at our demand outlook on Slide 6. Carpenter Technology produces specialized highly engineered products that are essential to the functioning of critical applications across the aerospace, defense, medical and other end use markets. Our unique collection of assets and capabilities to produce these products are not easily replicated.

And it required decades of experience to generate the high quality needed to meet stringent industry standards. Demand for our difficult to manufacture products is exceeding industry supply and we see tangible evidence of this. Our backlog continues to grow, setting new records every quarter. In the first quarter of fiscal year 2024, our backlog was up 5% sequentially and 32% year-over-year. We continue to raise prices with our most recent announcement earlier this month of a 7% to 12% increase on our SAO transactional business. Lead times remain at record levels and could be even longer as we are actively managing incoming orders and customers continue to tell us their primary concern is surety of supply, asking when they can book more with us.

We expect this demand environment to remain strong. In aerospace, OEMs continue to work to increase build rates, targeting levels exceeding pre-pandemic highs. Defense demand, already growing is projected to accelerate due to geopolitical events. Medical demand continues on a steady climb due to strong trends such as aging population and focus on patient outcomes. And demand for our premium products in our other markets is also projected to remain high due to ongoing energy investment needs, light duty vehicle builds and semiconductor capacity expansion. As always, there is active discussion in the general marketplace about near-term demand. For example, even most recently this week, some aerospace OEMs discussing build rate target adjustments and ongoing delivery challenges within the supply chain, or the impact of disruption to vehicle manufacturing associated with workers strikes.

What we can affirm is that these issues are not affecting our general demand levels. We remain oversubscribed in terms of demand with customers generally wanting more than we can produce. We have a substantial backlog of orders with material wanted sooner, even as we work to increase output. We also see unexpected emergency demand from areas like medical and defense associated with current world events, are from aerospace associated with spares need. What you are hearing from the marketplace is an affirmation of the strong demand in the near term and the long-term. Beyond the near term, our customers also continue to partner with us on our strategic growth efforts. Medical innovations, next generation defense platforms and electrification are examples of areas where customers are partnering with us to develop their next-generation products.

In this demand environment, we are well positioned to continue to drive topline growth while expanding our margins through productivity improvements, product mix optimization and higher prices. Now let’s review first quarter sales performance. In the first quarter of fiscal year 2024, sales decreased sequentially and increased significantly year-over-year. The year-over-year performance reflects our significant productivity gains. As anticipated, volumes decreased sequentially due to fewer operating days, planned preventive maintenance activity and most importantly targeted mix management. Importantly, profitability improved in the quarter, resulting in a sequential increase in our operating income on lower sales. Notably, SAO’s adjusted operating margin was 19.4% in the quarter, up from 16.8% in the fourth quarter of fiscal year 2023.

The profit margin expanded through a combination of productivity efforts, price increases and strategic mix management. This means we are actively allocating capacity to the areas where we add the most value. We serve critical applications across all of our end use markets, and apply ongoing strategic mix management and how we serve them to capitalize on the higher margin products. Our profitability has been increasing over the previous quarters and will continue to improve with higher pricing, product mix optimization and continued productivity improvements. Now, I will turn it over to Tim for the financial summary.

Timothy Lain: Thanks, Tony. Good morning, everyone. I’ll start on Slide 9, the income statement summary. Net sales in the first quarter were $651.9 million net sales excluding surcharge totaling $492.8 million. Sales excluding surcharge increased 31% from the same period a year ago on 12% higher volume. Sequentially, sales were down 12% on 18% lower volume. The year-over-year increase was driven by significant productivity gains to meet growing demand. As Tony mentioned earlier, the lower sales and volumes sequentially were primarily the result of fewer operating days and planned preventative maintenance activities, necessary to ensure our equipment continues to perform at high levels. Gross profit was $124.1 million in the current quarter compared to $54.8 million in the same quarter of last year and $119 million in the fourth quarter of fiscal year 2023.

Gross profit in the current quarter is up 126% compared to the same quarter last year and up 4% sequentially. SG&A expenses were $55.1 million in the first quarter, up about $9 million from the same period a year ago, and roughly $1 million lower sequentially. The increase in SG&A expenses versus the same quarter last year is primarily driven by headcount and higher variable compensation accruals. The SG&A line includes corporate costs, which totaled $20.9 million in the recent first quarter. As we look ahead to the upcoming second quarter of fiscal year 2024, we expect corporate costs to be similar to the first quarter at about $21 million. Operating income was $69 million in the current quarter compared to $8.3 million in the same quarter a year ago and $62.9 million in our recent fourth quarter of fiscal year 2023.

The sequential improvement in operating income, up 10% was driven by our productivity efforts, actions we took to manage product mix, as well as the benefits realized from higher base prices. As a result of these actions, we continue to see profit margin improve with total company adjusted operating margin reaching 14% up from 11.2% in the previous quarter. Moving onto our effective tax rate. For the recent first quarter our effective tax rate was 16.1% which is below our expected full year effective tax rate of roughly 22% to 24%. The lower effective tax rate was driven by tax benefits recognized in the current quarter related to certain share-based compensation awards. Note, that tax benefits were worth approximately $0.07 per share relative to the guidance we provided.

As we look ahead to the upcoming second quarter of fiscal year 2024, we expect the effective tax rate to return to a more normalized rate of about 24%. We affect our full year effective tax rate for fiscal year 2024 to be in line with the range we previously communicated of 22% to 24%. Earnings per share for the current quarter was $0.88 per share. The results demonstrate our continued momentum supported by improving profitability and a strong demand environment. Now turning to Slide 10 and our SAO segment results. Net sales for the first quarter were $570.1 million, were $417.3 million excluding surcharge. Compared to the same period last year net sales excluding surcharge increased 37% on 12% higher volumes. Sequentially, net sales excluding surcharge decreased 13% on 19% lower volumes.

The year-over-year improvement in net sales was driven by higher shipment volumes due to productivity gains, the impacts of higher prices and an improving product mix across our key end use markets, as Tony reviewed on the market slide. Sequentially, lower volumes as anticipated were impacted by the planned preventative maintenance, fewer operating days and the deliberate actions to improve product mix. Moving to operating results. SAO reported operating income of $80.8 million in our recent first quarter which outpaced our expectations. On a year-over-year basis, SAO operating income improvement of $61 million is largely due to higher sales, driven by strong demand, higher prices and increased production levels. On a sequential basis, operating income improved by about $1 million.

Again, our operating income results improved despite the lower volumes. This improvement was largely the result of the positive impact of targeted mix improvements, higher prices and realized production efficiencies. The improvements in productivity, product mix and pricing are evident in the adjusted operating margin, which has increased to 19.4% in the current period as compared with 6.5% in the same period a year ago and 16.8% sequentially. Looking ahead, the SAO team remains focused on executing actions to further increase production levels and production flow and to actively manage the product mix to maximize the capacity for high-value products. Based on current expectations, we anticipate SAO will generate operating income in the range of $78 million to $82 million in the upcoming second quarter of fiscal year 2024.

Now turning to Slide 11 and our PEP segment results. Net sales in the first quarter of fiscal year 2024 were $101.8 million or $93.1 million excluding surcharge revenue. Net sales excluding surcharge increased 6% from the same quarter last year and decreased 13% sequentially. The year-over-year growth in net sales was driven by strong demand conditions, primarily in our Dynamet Titanium business. More specifically in our Dynamet Titanium business, the growth in net sales from the same quarter a year ago was driven by materials used in medical applications. In the current quarter, PEP reported operating income of $9.1 million. This compares to operating income of $6.3 million in the same quarter a year ago and operating income of $5.9 million in the fourth quarter of fiscal year 2023.

The increase in operating income in the current quarter is primarily the result of improving profitability in our Dynamet business. Similar to SAO, Dynamet continues to focus on improving productivity to meet strong demand in the aerospace and defense and medical end use markets for our titanium products. We currently anticipate that the PEP segment will deliver operating income in the range of $9.5 million to $10.5 million for the upcoming second quarter of fiscal year 2024. Now turning to Slide 12 and a review of adjusted free cash flow. In the current quarter, we generated $7.4 million of cash from operating activities, compared to $174.9 million in our recent fourth quarter and cash used for operating activities of $78 million in the same quarter last year.

On a year-over-year basis, the cash from operations was significantly influenced by higher profitability and less pronounced inventory build as we continue to improve productivity and product flow across our operations. In the first quarter of last year, we built $121 million of inventory as compared with $68 million of inventory built in the current first quarter. In the first quarter of fiscal year 2024, we spent $22 million on capital expenditures. We continue to expect to spend a total of about $125 million in capital expenditures for fiscal year 2024. With those details in mind, we reported negative adjusted free cash flow of $15 million in the first quarter of fiscal year 2024. Our liquidity remains healthy and we ended the current quarter with total liquidity of $366 million including $18 million of cash and $348 million of available borrowings under our credit facility.

With that, I’ll turn the call back to Tony.

Tony Thene: Thanks, Tim. Now let’s review the key takeaways from today’s call. We realized 10% sequential growth in operating income in the first quarter of fiscal year 2024. This was a meaningful improvement compared to the historical trend of a sequential decline in profits, in the first quarter as a fiscal year. And we outperformed our previous guidance. The strong quarterly performance is indicative of the demand environment and our ongoing operating momentum. The SAO segment exceeded expectations with operating income of $80.8 million and adjusted operating margin of 19.4% in the first quarter. SAO continues to build momentum with increased productivity, higher prices and improved product mix. We are operating in a strong demand environment for our material solutions with positive near and long-term outlooks in our end use markets.

This is demonstrated in our record backlogs. Long lead times and customer focus on a security of supply. Our strong first quarter financial performance combined with the second quarter guidance would result in one of the two highest first half financial results in the history of the company. Building on that first half momentum, we project second half fiscal year 2024 operating income to be 28% to 35% higher in the first half. Let’s take a closer look at the second half outlook on the next slide. As evidenced by our recent performance, we’ve seen meaningful increases in our productivity over the last several quarters, especially in SAO. However, we still have plenty of runway, as we have yet to return to our pre-COVID operating rates in some of our key work centers.

We continue to invest in training and mentoring programs for our shop-floor employees to safely drive productivity gains, while maintaining our high quality standards. But most importantly, we have certain key work centers, which have not been running at their full potential as our mix continues to shift to more difficult to manufacture products. We expect meaningful increases in productivity at these specific units in the second half of this fiscal year. This next level increase in productivity, combined with continued realization of higher pricing and improvement in product mix should drive operating margins even higher in the second half of fiscal year 2024. Now let’s take a look at how this fits in with the longer-term earnings growth projections.

As I’ve detailed in previous calls, our goal is to double fiscal year 2019 operating income by fiscal year 2027. These figures imply a 40% compounded annual growth rate on the operating income from fiscal year 2023 through fiscal year 2027, a very strong growth target. I’ve also noted that this growth was not going to be back-end loaded and that we expected to make significant progress towards our goal in fiscal year 2024. As you can see with what we expect for the remainder of the fiscal year, we are setting ourselves up to take a meaningful step towards our longer-term goal. With estimated fiscal year 2024 operating income in the range of $310 million to $330 million, we expect to realize approximately 50% of the opportunity in fiscal year 2024.

This level of performance, would be the highest annual profitability in the history of the company and we are working to accelerate productivity gains and capacity to push earnings even higher. This is an exciting time for Carpenter Technology. The near-term and long-term demand outlook is strong across our end use markets for our broad portfolio of specialized solutions. We have leading capabilities with a difficult to replicate system of assets and we continue to drive improved productivity to unlock additional capacity to capture demand. Looking ahead, we are well positioned to continue to drive growth and achieve our long-term operating income goal. Thank you. And I will now turn the call back to the operator.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Gautam Khanna with TD Cowen. Please go ahead.

Elizabeth Huseynov: Good morning. This is Liz Huseynov on for Gotham. And I was just wondering if you can provide any detail about order trends in the quarter by aero end market for instance fasteners versus engine versus other structures?

Timothy Lain: Yes. Good morning. I’ll take that question. Aerospace engine sales were up 43% year-over-year, down 8% sequentially. So, even though down 8% sequentially due to the items that we noted in our prepared remarks, the quarterly shipments are about 90% of pre-pandemic engine ship rate. So, bottom line is that engine sales remain strong and were oversubscribed and the ramp pushed — as the ramp pushes demand even higher, well beyond pre-pandemic levels. On fasteners, sales up 7.7% year-over-year and down sequentially about 13% same story there as engines. So, hopefully that’s helpful.

Elizabeth Huseynov: Yes, thank you. And then, is there any incremental weakness to demand in non-aero markets given the macro?

Tony Thene: Well, certainly, you’ve heard, you know, commentary out there in the market around the general industrial market and I can comment on that. That is a, that’s a limited portion of our sales. That’s used to support that general industrial activity. Those trends are not material meaningful to our bottom line as our focus is really on high value difficult to manufacture products, where demand is currently outstripping supply by quite a bit. So, as you know our portfolio consists of premium high value products and you know any type of weakness in those submarkets will not impact our bottom line materially in the short-term or the near term.

Elizabeth Huseynov: Okay. Thank you. And then just one more. Can you give any color on which work centers have the most opportunity for productivity gains?

Tony Thene: Yes, it’s a good question. It’s a really good question. The biggest driver certainly is on the front end of our, our process, which is the primary melting areas, there’s a lot more productivity and output we can get from those. So, that’s the major driver, but also on the back end and finishing, if you think outside of that sale and look at Dynamet, for example, their biggest increase in productivity is on the back end, and some of the finishing pieces. And in fact, we’ve got a couple of pieces of equipment that will be installed here in the near-term that could see Dynamet’s profitability, our operating income much like SAO, will go up as close to 50% higher quarterly in the second half versus the first half. So, there’s a lot of areas that we’re working on.

I think the good news is, that we’re able to achieve these very high levels of operating income knowing that our business is still not operating at 100%. So, from a shareholder standpoint, there’s a lot more that we can do to drive profits even higher.

Elizabeth Huseynov: Okay. Great. Thank you.

Tony Thene: Thank you.

Operator: The next question comes from Josh Sullivan with The Benchmark Company. Please go ahead.

Josh Sullivan: Hi, good morning, Tony, John.

Tony Thene: Good morning, Josh.

Tony Thene: Congratulations on the quarter here. Just on the base price increase on the non-contract alloys. Is there a way to think of percentage your capacity that’s available for that transactional business at this point? And then, in previous cycles, where aerospace was consuming more capacity, what does that mix shift look like for the non-aerospace markets? And I’m just curious to hear how those non-aerospace markets are responding in this cycle versus historical cycles?

Tony Thene: Let me see if I can tackle that question for you. Certainly, in this cycle here, aerospace and medical are the ones, driving the quickest for us and that makes up, you know, well over 75% of our revenue. Some of the other markets, for example, like energy is single digits for us in terms of percent of revenue. But again for them to get time on the mill, we’re seeing prices move up significantly in the energy side where they challenge aerospace type prices and that’s what it takes for us to be really interested in those types of products. So obviously, our main focus is on the aerospace and medical, Josh. And I would say if you compare, you asked to prior cycles, the amplitude of this ramp is significantly greater than in prior cycles.

Josh Sullivan: Got it. And then, Tony, you spent some time there, just talking about the fiscal ’27 targets and the front-end loaded nature of how the guidance is put together. But as far as the back-end of those targets, you know, is there any reason we would think to plateau there or is it just conservatism on your nature?

Tony Thene: Well, we’ve heard that as that was, I thought, I did a question on this, Josh. And if you let me kind of go on for a little bit to kind of put all that in context and then come back to your question. I spent some time, last night, and I was thinking about what we’ve really said over the last couple of quarters, and as you well know, you were there, this all started in May of 2023 when we had our Investor Day, right where we said we were going to double operating income FY ’19 versus FY ’27, which is one of our most profitable years by the way, 40% CAGR from ’23 to ’27. As you mentioned, we said it wasn’t going to be back-end loaded. It was going to have a meaningful cash generation and we didn’t need to make any large scale capital expenditures for capacity or M&A to get there.

We come out with the fourth quarter, and we actually exceed our target of getting into FY ’19 run rate profitability. So, that’s a big, that’s a big checkmarks. During that fourth quarter so, about three months ago, we said that this first quarter was going to be slightly down to flat and it was going to, you know bust through the normal seasonality where you see the first quarter being sequentially down. And as you all know, we had a lot of people doubt us and say that you couldn’t do that. Well, we actually exceeded that number. And now we come in and say that the second quarter is going to be another impressive quarter, just like Q1 even though we’ll continue to do our planned maintenance even though its got two major holidays in there, we’re still going to operate at that level.

And then, what you’re getting to the new piece of information that we came out with today. We said that even after those two quarters, put those together and we’re going to do another 28% to 35% on top of that, it’s, it’s very impressive growth and that’s why we took the time Josh to talk to you about that some of these work centers are still not running at the rates that we know they can run at. That’s how we have line of sight to that second half. Again, we said, it wasn’t going to be back-end loaded, but we never said that we were going to get 50% in year one or four. And I think your question is that, that’s an awfully strong comment, we’ve heard — now does that mean that years two, three and four could be even more and is there some conservatism put in there.

You might have a point, maybe there probably, there probably is a little conservatism in there and we have the ability to even push that higher.

Josh Sullivan: That’s right. Good. No. Thank you. Thank you for that. And just one on the productivity side of that, you think Carpenter is doing anything different on the labor side and those works centers or do you think it’s just a natural factor of timing experienced that they’re getting better?

Tony Thene: I don’t know if we do anything differently. I mean we have to be very, I’ll use the word cautious right, because we are producing products that can never fail. A very high quality standards. So, we just don’t take chances, if an operator is not ready, they’re not ready. And we don’t push them to put them in a situation where we could sacrifice the quality of our product that’s just, that’s just unacceptable. I’ll give you a couple of numbers that are interesting. If you think about a new employee that’s been with us two years or less. And if you look at our SAO operation. Our plants range anywhere from 30% to 60% of our shop floor workers have been there two years or less. And our Dynamet facility, we have one facility that’s 50% are new in the last two years.

The other is almost 30%. That is a big influx of new employees highly qualified. I mean, the level of employee that we’re, that we’re attracting is very high, but it’s a complex, very sophisticated equipment that we’re going to make sure that they can operate it, number one, safely and always within the quality standards that we hold ourselves, doing that the industry requires. So, you’ve seen some nice improvement over the last couple of quarters. The good news is there’s still, there’s still more improvement to come. Hopefully that answers your question.

Josh Sullivan: Yes. Yes. Great, thank you. Congrats on the quarter. And thank you for the time.

Tony Thene: Thank you.

Operator: [Operator Instructions] The next question comes from Chris Olin with Northcoast Research. Please go ahead.

Chris Olin: Hi, good morning and congrats on the quarter, guys.

Tony Thene: Hi, Chris. Good morning.

Chris Olin: I was just wondering on the near term. Has there been any type of negative volume impact associated with the drop in the commodity nickel market? Just wondering, if some customers will delay orders. Are you seeing any of that because of the surcharges visibility or are we at a point where like the long-term behavior has kind of changed when your customers are worried about supply?

Tony Thene: I think, the ladder right and I think, I know we’re not having any customers delay orders because of where the nickel prices or where they think it’s going to go. I mean we have, we have all of our customers, trying to get into the order book earlier. Right? As you know we’ve closed the order book, a couple times. So, that comment that you just made in this type of environment does not, it’s never made, it’s never, it’s never discussed, that’s not a factor.

Chris Olin: Okay. I may have missed it, I apologize if I had, but I was just thinking about the pricing dynamics and your comments about the increases. I was just wondering if there are contract renewals on the horizon, yet? I can’t recall from the last quarter.

Tony Thene: Yes, there are. I mean over the last couple of years, obviously, by our results, you can tell that we’ve had contracts that have renewed and now you’re seeing that, that higher price come through and there are a couple more that are in the works as well. So, it seems like at any point in time, we have one or two that we’re, that we’re working through. And there’s a couple significant ones that we’re working through, as we speak.

Chris Olin: Is it safe to assume something like, you know, 20%, 30% renews price each year for the model?

Tony Thene: Let me make sure I understand your question. Are you saying that 20% or 30% of contracts renew every year?

Chris Olin: Yes. Will you renew at a higher price. So, I could put that in my–

Tony Thene: Well, all contracts renewing at a higher price, that’s something that’s significant, that’s consistent across the industry, you can, you can take, you can take that with a high level of confidence that all contract renewals, will be at a much higher price.

Chris Olin: Okay. Just last one of the shift quickly back to at Dynamet and guess, I’m thinking a bit about the Boeing 707 and the A350 build rate increases kind of the peak outlook and I can’t recall if Dynamet is levered to one platform more than the other. And you know, would you benefit kind of significantly from a doubling of the production targets? And I just lastly, do you have enough capacity to satisfy that if you do?

Tony Thene: Well, to answer your last piece of your question first. No, there’s not enough capacity in the system across multiple sub-markets. For us, we sell to every one of the fastener company. So, whether it’s Boeing or Airbus it’s on top of demand environment when demand is so much higher than supply. That’s just not, that’s just not a factor. We’re oversubscribed and we anticipate that being like that for several years to come regardless of the split between widebody and single-aisle and Boeing or Airbus.

Chris Olin: Would a, would a capital investment be on the horizon for that to address?

Tony Thene: Possibly, I mean Dynamet, just like SAO is working to get up to rate as well. We’re not running in Dynamet at the level we need to run at. And I want to, previous question from Cowen. I said that in fact we have a couple of pieces of equipment that are coming in here in the near term into Dynamet that will increase our finishing capacity. So, that will help as well.

Chris Olin: Okay. Great, thanks so much.

Tony Thene: Yes. Thank you, sir.

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

Michael Leshock: Hi, good morning. I just wanted to ask here on volumes that we saw a decline in the quarter given the less shipping days. But looking forward, how do you see volumes increasing relative to price and mix? So, if your long-term guidance incorporates a 15% to 20% increase in volumes above fiscal ’19, do you expect that volume uptick to be largely in fiscal ’24 or is the big step up this year more so, a function of price and the volume piece is more linear over the course of your long-term guidance?

Tony Thene: Well, the volume is going to follow our productivity for the most part, I mean, as you’ve seen now in this quarter into next, a big part of our strategic mix management is, is moving that volume around, because some of the products as we moved to different types of products, they take longer to process through the system. Right? Especially, like in a primary mill product, it could be noted three times that just takes longer to go through the system much higher margins on that, but it takes longer. But as you see our productivity continue to increase as we’ve talked about as some of these other pieces come online certainly volume will be higher in the second half than the first half.

Michael Leshock: And then, on maintenance, were you able to get all your normal seasonal maintenance spending done just given the lower CapEx spend sequentially and maybe running your assets above normal seasonal utilization levels? Or do you see any spilling into the second quarter?

Tony Thene: Well, we’re in perpetual preventive maintenance. The days of shutting your plant down for three weeks and turning everything off and sending everyone home and doing all your preventive maintenance all over, right, that just doesn’t, that’s not the most efficient way. We are always in a cycle of preventative maintenance. And you know, what, I think, I’ve been asked why do I talk about this and you know, when you’re in a situation where supply can meet demand, you know certainly no one really talks about preventive maintenance but when you’re in a sold-out environment, where any amount of downtime, any amount of downtime will translate to customer impact. As a matter of product you could ship within that, that’s why it makes it important.

That’s why it’s important to say at any point in time, we’re going to be doing that. Secondly, I would say it’s really important to remember Mike, we have really exclusive highly sought after assets and it’s our job as skilled operators to protect that equipment, obviously, over the long term. So, we’re aiming for a 40% CAGR, annual CAGR over the next four years. That’s our goal. Our goal is not to run, you know, run the equipment to failure simply to earn a couple more million dollars on top of already a record quarter. Right? So, I mean that that would be unprofessional. So, it’s not about trying to — let’s run it more to try to get out another couple of million. We’re in for the long haul. We’re going to, you know, double operating income versus FY ’19 over four years.

So, we got to protect our equipment and treat it the right way.

Michael Leshock: Got it. Appreciate all the detail.

Tony Thene: Thank you.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to John Huyette for any closing remarks.

John Huyette: Thank you, operator. And thank you everyone for joining us today for our fiscal year 2024 first quarter conference call. Have a great rest of your day.

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