Bert Subin: Thank you.
Operator: We’ll go next to Ken Herbert at RBC Capital Markets.
Ken Herbert: Hi good morning Nick and Patrick.
Patrick Winterlich: Good morning.
Nick Stanage: Good morning Ken.
Ken Herbert: Hey. Maybe either one of you, I wanted to start off first. You didn’t buy any of your stock in the fourth quarter. And I wanted to see that reflected just maybe uncertainty around just sort of the outlook or anything else. But I guess more importantly, can you refresh us on how you would view capital allocation here in 2024 and the potential for some more return to shareholders as you look at relatively low leverage, the significant step up cash generation and other maybe priorities as you think about investments, working capital, et cetera. But how should we think about the opportunity for more capital to shareholders in 2024?
Nick Stanage: Yes, Ken, thanks for the question. I’ll approach that a couple of ways. First, our outlook had absolutely nothing to do with the fact that we chose not to buy back shares in the fourth quarter. Quite the opposite. We’re very bullish on our expected cash generation looking forward and we discuss that regularly with the Board and how we’re going to prioritize. I guess I want to take the opportunity on your question to really highlight our focus on utilization of our cash is prioritized on organic growth. And that’s investing in fiber and resin technologies. It’s investing in new weaving technologies that basically advance composites make them even more attractive than they are today, make them even more manageable for different and expanded part production going forward, which ultimately will drive lower cost solutions, lower weight solutions and more efficient solutions for our customers.
So when you think about the products that are being envisioned and worked on, you can go through the new platforms, wings and for now central wing box, whether it’s for the next new narrowbody, the next new business jet or the next new commercial application where there’s a conversion from metal to composite to get weight advantage. Lots of opportunities around new engine technology with the Rolls-Royce UltraFan, the Rise platform, the new nacelles. Remember, we have great content on engine and nacelles, which are included in our total shipset value. When you look at — on the military side, the flow, the V-280, the combat drones, the next-generation air dominance, all the technology initiatives we’re working on are going to help us win even more content on these applications.
And then when I look internally, I look at things like infrastructure, efficiency, productivity, modifying our assets so that we get even higher utilization out of our legacy assets, to one, make us more cost effective. And secondly, to be able to defer our CapEx investment further to the right. So future factory, process improvement, productivity improvement are front and center. So clearly, organic growth is our priority. Now as always, we look at our balance sheet, we look at our debt leverage ratio, and we look at how we manage that efficiently and effectively. And clearly, share buyback and dividend increases are front and center as we evaluate M&A options and actionability, and whether or not we confine something that enhances our portfolio and allows us to grow our core competency.
So that’s kind of a summary and the priorities that we’re working on. Remember, we built our new R&T Center of Excellence in Salt Lake City. We’ve been adding talented scientists and technicians. And we’re doing that because, as I said in my remarks, I’ve never seen the poll. I’ve never seen a request from customers higher than I do today. And that’s for applications that are mid-term and applications that some are longer-term. But overall, that’s what we’re investing in, Ken.
Ken Herbert: Thanks Nick. Appreciate all the color.
Nick Stanage: You’re welcome.
Operator: We’ll go next to Pete Skibitski at Alembic Global Advisors.
Pete Skibitski: Hey. Good morning, guys. Patrick, a couple of points of clarity. Just on the fourth quarter gross margin, you’ve — obviously you talked about the labor and similar volumes for the first half of 2023. But was there any mix issue in the fourth quarter that impacted gross margin, or was that all the impact of labor. And to that point, should we think about a similar gross margin in the first half of 2024?
Patrick Winterlich: Yes. I mean, it’s certainly — it’s not really a mix issue. It’s more fundamentally, I would say, a broad overhead infrastructure cost issue. I wouldn’t just say labor. Labor is definitely part of that. But it’s also maintaining the plant, running the plant, operating, general kind of input costs and support infrastructure costs. That’s really the headwind right now and why we need that volume leverage. And what I — I mean, in terms of margin, yes, we’re going to see a gradual margin growth and improved leverage over that infrastructure overhead based as 2024 continues and then 2025 and beyond. So yeah, it’s not going to be a sudden snap change. We’re going to gradually see increase with maybe the lump here or there, but we should see a gradual increase as volumes grow.
Peter Skibitski: Okay. And then it was a great free cash flow year, obviously, and a pretty strong 2024 cash outlook as well. And just as you think about your midterm top line growth over the next two to three years with what you’ve done with inventory, do you really — do you not expect to have to grow inventory over the next couple of years, even with the growth that you’re expecting?
