Prepared remarks
Good day, and welcome to the Carpenter Technology's Corporation Second Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to John Huyette, Vice President, Investor Relations. Please go ahead.
Thank you, operator. Good morning everyone and welcome to the Carpenter Technology earnings conference call for the fiscal 2025 second quarter ended December 31, 2024. This call is also being broadcast over the Internet along with presentation slides. For those of you listening by phone, you may experience a time delay in slide movement. Speakers on the call today are Johnny 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, 2024, Form 10-Q for the fiscal quarter ended September 30, 2024, 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 surcharges. When referring to operating margins, that is based on adjusted operating income, excluding special items and sales, excluding surcharges. I will now turn the call over to Tony.
Thank you, John and good morning to everyone. I will begin on Slide 4 with a review of our safety performance. Through the second quarter of fiscal year 2025, our total case incident rate was 1.1. We continue to see improvements, as our newer employees gain experience and develop in our safety-first culture. But we still have more to do to achieve our goal of a zero-injury workplace. We continue to invest in training for all employees with a focus on proactively identifying risks and hazards. Let's turn to Slide 5 for an overview of our second quarter performance. Building on our strong start to fiscal year 2025, we continued our earnings momentum with a record second quarter and our second most profitable quarter on record. Specifically, in the second quarter of fiscal year 2025, we generated $119 million in operating income, a 70% increase over our second quarter of fiscal year 2024. Notably, the SAO segment continues to expand adjusted operating margins, reaching 28.3% in the quarter compared to 20% a year ago and 26.3% in the prior quarter.
The impressive margin expansion is a result of continued improvements in productivity, product mix optimization, and pricing actions. Further, we generated $38.6 million in adjusted free cash flow during the quarter, and we continued to return cash to shareholders through our repurchase program, a part of our balanced approach to capital allocation. Our strong second quarter performance was driven by our continued ability to execute and our strong market position. Further, our strong performance gives us confidence to again increase our guidance for the full fiscal year 2025. For those of you that have been following us, you know that we have demonstrated remarkable growth over the last two years. This has resulted in regular increases to our financial outlook in each of the last several quarters. In the last earnings call, after pulling in our fiscal 2027 target two full years into fiscal year 2025, we raised our fiscal year 2025 guidance to approximately $500 million in operating income.
On that call, we said we had line of sight to activities that could push operating income even higher. Well, we've continued to execute, improving productivity and working with customers to optimize our production plan. As a result, we are raising our guidance for the full fiscal year 2025, again to the range of $500 million to $520 million. And we have confidence that fiscal year 2025 isn't the peak of our earnings, as we have line of sight to continued robust earnings growth in the years ahead. The same market forces that are driving our current performance are expected to only get stronger in the future. Customers remain focused on the surety of supply of our highly specialized material solutions to meet their long-term growth needs. And we remain focused on continuing to improve our operational performance to meet that demand. While today's discussion is focused on our second quarter performance and the fiscal year 2025 outlook, we are excited to share our outlook beyond fiscal year 2025, at an upcoming investor event.
At that time, we will also provide a business update, including our view of the end-use markets and our operations. That event is scheduled for Tuesday, February 18, and will be held virtually. Now let's turn to Slide 6 and take a closer look at our second quarter sales and market dynamics. In the second quarter of fiscal year 2025, sales increased 13% year-over-year and decreased 5% sequentially. The modest sequential sales decline was driven by conscious actions we took at the end of the quarter. First, some customers closed operations earlier than usual for their end of the year, and we agreed to hold that material for them. Secondly, as you know, we operate 24x7 every day of the year. This year, we decided to stop operations on Christmas Eve, Christmas Day, and New Year's Eve to give our employees the opportunity to enjoy more time with their families. I will also note that the sequential change in our energy market, where we are coming off a strong quarter, was related to the timing of certain shipments to power generation customers.
Also, keep in mind that power generation only accounts for approximately 2% to 3% of our total net sales. Most importantly, looking forward to the third quarter, we expect a healthy increase in total net sales. This will be primarily driven by higher volumes with more operating days in the quarter as well as continued productivity gains, product mix optimization, and higher realized pricing. Let me take a couple of minutes to zoom out a bit and talk generally about what we are seeing in terms of demand signals and what we are hearing from our customers. As it is approximately 60% of our net sales, I’ll start with the Aerospace and Defense end-use market. For the commercial aerospace market, it’s important to keep in mind that we are a key supplier with broad exposure to Aerospace platforms. This includes Boeing and Airbus, narrow-body and wide-body, MRO, and OE activity. This broad exposure gives us visibility across the supply chain and positions us to support the supply chain wherever the activity is focused.
Across the board, our Aerospace customers continue to expect significant ramps in output from the OEMs. However, some customers with direct exposure to specific platforms, particularly the 737, are still in a wait-and-see mode in terms of their specific plans for the next few quarters as they assess how quickly Boeing can ramp production and provide confidence to the supply chain that they are on the path to a credible and stable increase in build rates. With this in mind, we continue to work with those customers where we can, to manage our priorities for orders as we plan our production schedules. Even though those customers are more cautious today, they are actively talking to us about securing additional material from us as the demand conditions accelerate. Conversely, for platforms where the customer has greater clarity and confidence, they continue to push ahead. And correspondingly, we continue to see strong demand in those areas.
In addition, many of our customers have shifted focus to satisfy extremely high MRO demand where our material solutions are critical. We also have a strong portfolio of program-specific defense applications where demand remains strong, as we are currently receiving urgent requests for more material faster. In our other end-use markets, such as Medical, which accounts for roughly 13% of net sales, we continue to see strong demand as our material solutions play an important role in solving their complex needs. Looking at our total order backlog, we continue to see improvements in the mix and pricing, which supports our expectations for ongoing sales increases. From our connected vantage point, we see clear signs that demand will continue to strengthen into the future.
Thanks, Tony. Good morning everyone. I'll start on Slide 8, the income statement summary. Starting at the top, sales excluding surcharge increased 13% year-over-year on 6% lower volume. Sequentially, sales were down 5% on 10% lower volume. The year-over-year growth in net sales was driven by increasing productivity necessary to drive a stronger product mix, as we focus our capacity on our most profitable products and the realization of higher prices. The improving productivity, product mix, and pricing are evident in our gross profit, which increased to $177.5 million in the current quarter, up 45% from the same quarter last year. SG&A expenses were $58.6 million in the second quarter, which includes $23.6 million of corporate costs. As we said last quarter, we expect corporate costs to be approximately $23 million to $24 million per quarter for the balance of fiscal year 2025. Operating income was $118.9 million in the current quarter, which is 70% higher than the $69.8 million in our second quarter of fiscal year 2024.
As Tony mentioned earlier, this represents our second-best quarterly operating income result on record. Moving on to our effective tax rate, which was 20% in the current quarter. This quarter's effective tax rate was lower than our normalized tax rate due to certain discrete tax benefits recorded in the current quarter. For the upcoming quarters of fiscal year 2025, with no further discrete benefits anticipated, we expect the effective tax rate to be more in line with our normalized rate of 23% each quarter. In summary, the earnings per diluted share results for the quarter of $1.66 demonstrates solid execution against the goal we laid out for this quarter. Now turning to Slide 9 and our SAO segment results. Net sales excluding surcharge for the second quarter were $479.6 million. On a year-over-year basis, sales were up 15% on 11% lower volume. The increase in sales on lower volume reflects the impacts of higher realized prices and an improving product mix relative to a year ago.
Sequentially, sales were down 6% on 11% lower volume. As Tony mentioned, the shipments were influenced by the actions we took at the end of the quarter associated with customer year-end shutdowns and reducing our operations on holidays. Moving to operating results, SAO reported operating income of $135.6 million in the second quarter of fiscal year 2025. As Tony mentioned, the adjusted operating margin of 28.3% in the second quarter is a significant achievement. The continued margin expansion is a result of our SAO's team's focus on executing actions to further increase and maintain consistent production levels to closely manage operating costs and to optimize the product mix to maximize capacity for our most profitable products. These areas are as relevant as ever, as we actively manage our production schedules to adjust to changing customer priorities and seek to increase our overall output.
Looking ahead to our upcoming third quarter of fiscal year 2025, we anticipate SAO will generate operating income in the range of $140 million to $145 million, which represents another step up in profitability. Now turning to Slide 10 and our PEP segment results. Net sales excluding surcharge in the second quarter of fiscal year 2025 were $86.2 million, down 2% from the same quarter a year ago and down 7% sequentially. In the current quarter, PEP reported operating income of $7 million compared with $7.1 million in the same quarter a year ago and $7.3 million in the first quarter of fiscal year 2025. As we have said previously, Dynamet is the driver of the PEP segment, representing a significant portion of PEP sales and an even greater percentage of PEP's profitability. Dynamet's fundamentals are very comparable to SAO, including a strong market demand backdrop in the Medical and Aerospace end-use markets, which together account for approximately 95% of Dynamet sales.
Like SAO, the focus at Dynamet remains on improving productivity and expanding capacity to increase our output, which has driven improved results. With that said, Dynamet is not the only business in PEP. Our additive business, although not material to overall Carpenter Technology, has seen a deferral of orders over the last two quarters from certain key strategic customers. Given the size and cost structure of the additive business, such deferrals can be impactful on the business and the segment even if it does not have a material impact on the overall company. The additive demand outlook and customer order visibility are improving. We anticipate that the additive results will improve beginning in our upcoming third quarter. With that in mind, we currently anticipate that in the upcoming third quarter of fiscal year 2025, the PEP segment will deliver operating income in the range of $10 million to $12 million.
Thanks, Tim. What an exciting time to be part of Carpenter Technology as we are delivering record profits while projecting a future of even higher earnings growth potential. Carpenter Technology just delivered a record second quarter and our second most profitable quarter in the history of the company. We increased adjusted operating margins in our SAO segment again, reaching 28.3%, a new all-time high. We continue to execute against our share repurchase program that complements our long-standing quarterly dividend, demonstrating our commitment to return cash to our shareholders. And we've increased our operating income guidance again to the range of $500 million to $520 million for fiscal year 2025. We are delivering strong record results, even as the Aerospace supply chain is transitioning and is only at the beginning of its aggressive build rate ramp. This is a very important point because it means demand for our material will only get stronger and our earnings growth potential will continue to expand. We continue to believe we are in the early stages of our growth journey, and we look forward to updating our long-term outlook at our virtual investor event on February 18. Thank you for your attention. And I will now turn the call back to the operator.
Questions and answers
Thank you. We will now begin the question-and-answer session. And your first question today will come from Gautam Khanna with TD Cowen. Please go ahead.
Hi, good morning guys.
Good morning, Gautam.
Tony, unfortunately, I missed the first couple of minutes of the call. But I was wondering if you could comment on lead times in the engine channel if they've changed? And just I know you talked a little bit about some of the customer perturbations in terms of when they want stuff. Was there any kind of impact from destocking on the Boeing side that manifested this quarter relative to last quarter? If you could just talk about what you are seeing in that Boeing channel as well. Thank you.
Yes, will do. Thanks for the question. First on lead times. This is a good news story for us in terms of lead times, specifically for the Aerospace material, which you are referring to. We've actually been able to pull in our lead times slightly, not significantly, but by a couple of weeks. And that's 100% due to the great productivity improvements we've had, primarily on the primary melt operations. So as you know, those higher production rates translate into higher shipments, and that's going to allow us to get critical product to our customers quicker. So that's a good news story. I might take this time to, Gautam, just to kind of give a couple of other points that you might ask about in terms of orders and sales, and maybe this will answer your question. Without getting into too specific figures, we did see orders this quarter be slightly down from what they were the quarter before. Now interestingly, the submarket aero engines, orders were slightly up sequentially.
But that is really not a surprise when you think Boeing, for example, was on strike from, what was it, mid-September until early November and probably didn't really start producing even at low levels until December. So we knew that impacted the order activity of our customers, especially those that are very tied to Boeing. I think it's also important to note, Gautam, as you know, we also limit our order intake. So if that were not the case, our backlog and certainly, orders could be higher. But it's clear that we have seen some pause from customers that are specifically connected to Boeing.
Okay. That's interesting. And just to follow-up on that. In your point, it sounds like that's outside of the Engine business. So that's more on structural and fasteners. Is that what you are saying?
Yes, mostly on the structural side. I mean it is always interesting to note what fasteners do quarter-to-quarter. I believe you asked me this question last quarter if I remember right. Fasteners were down sequentially 12%. Our net sales for fasteners are actually up about 2.5% this quarter. So that whipsaws back and forth from quarter-to-quarter. But I actually had a little bit of an increase in fastener net sales.
And then naturally, that is going to lead people to wonder about the pricing environment because it has been a supply-constrained environment for a number of years. I'm just curious, have you seen any slack in kind of spot pricing activity? Or has that remained very strong?
Well, I'm sure in the spot market, if there is somebody out there that has capacity, maybe in some of these alloys, that somebody can get some discount, if you will. But that's not long-term, right? I mean you got to remember, you're in an environment where one of your top airframers wasn't making any planes effectively, right? And we are still delivering these types of record profit. So you're going to come very quickly to a point where I think this market comes back really quickly, and you are going to be right back into this really tight demand and a lot of emergency phone calls. I can tell you this, Gautam, every discussion we had with customers is always long-term. It is long-term focused. It's about surety of supply. And we're just going to stay focused on that.
Okay, thanks, Tony.
Your next question today will come from Josh Sullivan with Benchmark. Please go ahead.
Hi, good morning.
Good morning, Josh.
What's your perspective on the potential for the tempo of global conflicts to abate? Any indication, poll on defense-related materials is reflecting any customer expectation that things might change either in the near or medium-term? I think you noted Defense was still strong in your comments, but just curious if there is any change in the forward look.
I don't think so, Josh. I think that is going to stay strong in the coming years regardless of what goes on in the conflicts, and I hope they are resolved as soon as possible. But I think we have a rebuilding of the military to get to a different level. And so I sense that, that will be strong for us over the coming years. That's the feedback that we are getting from people in that space.
And then I know answering Gautam's question there, you talked about the long-term perspective with customers. Obviously, Boeing suppliers are judiciously kind of eyeing the ramp here. But longer-term, there still does seem to be some tightness in the industry. And how is that conversation versus maybe what they're going to need in two years or three years versus what they necessarily need to pull today? And I imagine you're having an investor event here coming up. But a question on capacity longer-term. How are you addressing those? Or what are those conversations like right now?
Well, there's been no change for us. I mean this isn't something that happened last week. I mean certainly, Boeing has had some challenges now for quite some time. And those companies that are very closely tied to them are looking for some type of push out in those orders. And we are willing to accommodate them as much as we can because we have other optionality, Josh. I mean we've got a backlog that's at $2 billion, half of that is Aerospace. I would say that the majority of that is wanted sooner. So we are able to pull that in and fill. We've had some increases in power generation where we've been able to pull those in. So that broad exposure we have, we've been able to run at very high levels. So this has not impacted us. And now I really believe, I think you could go through the next couple of quarters where we are waiting through the implications of Boeing and what type of progress they're going to make in their build rates.
And I think we'll be right back into these daily emergency requests for materials. I think that's going to come sooner than what you think. So from us, we're still running at 100%. There are no plans to change that. And I think that's a really important point to make that there is no weakness from that standpoint. And we are much better now than we were at our last earnings call, Josh, when Boeing was on strike. I mean Boeing is back and looks like to me, making good, credible, sound improvements going forward. So I think we are going to get right back into a big snap up and there's going to be a lot of urgent demand as well.
Thank you.
Your next question today will come from Scott Deuschle with Deutsche Bank. Please go ahead.
Hey, good morning. Tony, it looks like the price per pound at SAO is up about 29% this quarter. I guess, can you roughly characterize how much of that was just straight price on like-for-like alloys versus how much of that was mix as you presumably tilted more of the capacity to the high-priced engine alloys?
Tough question, Scott. A good one but a tough one. So I'm going to respectfully punt a little bit on saying how much was price and how much was mix because it is a very fluid concept as we are running our production process. I’ll say this. You are 100% correct. We are not a commodity supplier. So I am not trying to maximize tons. I'm trying to maximize profit, right? So we are always looking at how we can make more of the higher-valued material. As you all know, almost 100% of the time, the higher price material, the longer it takes to go through the production process. So that's why you see the difference and say, wow, why aren't volumes going up? Well, because we are not a commodity player, that's why, and we're going to maximize profit. So I mean, you are spot on with the price increases. Certainly, we've seen new contracts come on place that were effective in our Q2, you will see more that will become effective in our Q3. But don't underestimate the impact of us actively managing that mix optimization as well.
Okay. Thank you. And then consensus is projecting about 16% EBIT growth in 2026, Tony, versus the 45% you are guiding to for this year. I'm not trying to get ahead of Investor Day or maybe I am. But I guess, does that type of deceleration in your EBIT growth makes sense to you, particularly if Boeing does get to rate 38?
I am going to make you wait until February 18. As you look ahead over the next couple of years, it may be challenging. The growth rate we've experienced over the last couple of years has been exceptional, and you probably haven't encountered any companies with that level of increase. However, we believe there is still significant potential for us moving forward, and we look forward to sharing more details on February 18. I would be surprised if you are let down.
Okay. And then sorry, last question. And I may have missed this, but it seems like Medical has seen some destocking over the last few quarters. Do you have a sense for when that ends?
Yes, I think you're always going to be in a constant state of some type of destocking in the medical market, right? I mean there is always going to be some ups and downs. So let me give you a couple of examples for Medical that makes us stay very positive about it. As we talk to those customers, they still feel like they have a very positive demand outlook related to patient surgical rates. And that's where we play, right, in orthopedic and cardiology. So that is positive for us. Also, we've seen several of our customers proactively come to us, asking to shift even more of their business to us. And Scott, what's interesting is not just more of the business that we do but asking us to get involved in products that historically we have not made. And can we get into those types of areas and make it for them? And the last thing I'll say in Medical that gives us a lot of confidence is that next-level customer in the supply chain is now working even more closely with us and talking about potential long-term contracts, long-term agreements, and that's a bit of a new development as well and very positive. So I mean, Medical is roughly 15% of our business. You've got Aerospace type margins in some cases higher. So we remain very confident, very positive in that market.
Thank you.
And your next question today will come from Andre Madrid with BTIG. Please go ahead.
Tony, Tim, John. Thanks for taking the question. I want to start first, given the new administration coming in this month and a lot of talks around tariffs, especially on the material front. I know a lot of what you guys use is recycled from your own plants. But I mean, if we were to see any pressure, where might it materialize?
Good question. We are closely monitoring that transition and believe we are well positioned regardless of the direction the administration takes. Not too long ago, we faced the last tariff regime, which had minimal impact on our business. We expect a similar outcome this time. If there are any new tariffs applied to our inputs that might increase our costs, we would pass those costs on to the customer.
Yes, that makes a lot of sense. And if I could follow up there. Looking at SAO volumes, in our previous conversations, I know you guys say you are still below pre-COVID levels on SAO volumes. Is there any expectation to get back above that? Or will most of it just be driven by pricing and mix moving forward?
No, I think you will see increases in volume for sure. When you've got this type of build rate expectation or build rate plan for the Boeings and Airbuses to get to, there will be more volume coming. That is going to be a big player for us over the next several years, as far as that we continue to increase our profitability, volume, price, and mix.
Got it. Got it. And if I could sneak just one more. And I know you said lead times were coming down in some regard. But last I heard, in some exotics, there are still lead times extending out over 100 weeks. I mean this was a conversation I had probably last month. Is that the case? Or are you seeing those coming down as well?
It depends on the product. When I answered that earlier question, I was mainly referring to engine materials where we've seen some improvement that we were able to achieve, not necessarily for the entire industry, including engine structural and other aerospace materials. We can bring those in because we are performing well in the plant. Both our Reading facility and our Latrobe facility are doing a great job with the primary melting rates, allowing us to produce more material and push more through. That's the reason we've been able to improve those lead times. They're not cut in half, but they have decreased from 65 weeks to around the low 60s now. A reduction of two or three weeks can make a significant difference.
Yeah, definitely. Tony, thanks so much for the color. I will leave it that, thanks.
Thank you.
And your next question today will come from Bennett Moore with JPMorgan. Please go ahead.
Good morning Tony and Tim. Thank you for taking my questions. Based on the order backlog and the growing A&D and Medical mix, is there a level at which you look to cap this? And I guess, given these products require more time on the assets, could we see shipments remain somewhat flat to down this year as was the case last year? I know you're expecting growth in volume longer term but thinking more just this year.
Well, it is a tough paradigm to break, right, because I know that everybody wants to look at volumes and say, that is the driver of this company, and it's just not, right? I mean some of those products on submarkets like transportation, some of the industrial products, very, very high tons, but low margin. And those are the ones that you see us moving away from if we can use any of the assets within that production process flow for other higher-end materials. So you can see big changes in volume because we've moved away some products and see a corresponding large increase in profit because we've chosen to use parts of those assets in that production process to increase our profitability. We are going to keep doing that because we think that's the reason people buy our shares, it is to increase profitability, not to increase volume.
Thank you for that. And if I could turn to energy. I realize the comps were tough sequentially. But could you shed any additional color on the puts and takes? Was the decline entirely IGT driven? And I appreciate it is early, but given all the recent noise around AI potentially being less power-intensive, has this come up at all in customer conversations?
Yes, good question. It is, energy, especially the power generation submarket inside of energy, is an interesting submarket for us. It's a little confusing because on one hand we'll say, well, it is only 2% or 3% of our total revenue, which is true. But on the other hand, that's an alloy that we like to make, right? That's an alloy that we can pull into our system. We get Aerospace-like margins, and we use that at times when for example, when I was talking earlier to a customer that's very dependent on Boeing wants to take a bit of a pause, we are able to move those products in and run them across the same primary mill assets. So we like that product, and we like that business for that point. We have customers inside that business that say, whenever you have a gap in production, just make material for us, we'll take it. I mean so that's the type of demand that we have in that area. Certainly, I got a lot of attention when you heard about AI in these data centers. We couldn't make enough material for them before that. So that was just a whole other level. So I believe over the next several years, this submarket, although small for us, will be a very nice market for us and to be able to pick up very nice margins.
Thanks, Tony. Best of luck.
Thank you.
Your next question today will come from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.
Hi, good morning. Congrats on all the progress. Tony, first question is just on the jet engine sales as I typically ask. Any color on what those did specifically either sequentially or year-over-year?
The engines were down sequentially because our production plan in the second quarter focused more on other markets. We adjusted our plans based on developments with Boeing. Looking ahead to the third quarter, while I don't want to forecast sales by market, we anticipate a significant increase in aero engines in that period.
Okay. Any specificity for the model, just down 5% and down 10% and then relative to Q1?
Phil, exactly down 14%, but up 22%.
Thank you very much. Regarding the backlog, Tony, did you mention that it stands at around $2 billion? Is that the approximate figure at the moment? I know it's been slightly above $2.2 billion.
I think it's about $1.9 billion. Remember, even at $1.9 billion, I believe it's like 2.5 times what it was prior to COVID. This is an important point. That backlog is a significant advantage for us because it allows us to pull material in. Some might wonder how Carpenter Technology can achieve this level of profit if Boeing is not building planes, but there are others in the industry that are producing aircraft and products. We mentioned power generation, and we can draw from that backlog because the majority of it, two-thirds to three-quarters, consists of materials that are needed sooner. Therefore, we are managing to bring that in strategically, which is a critical source for us.
Can you elaborate on what you are observing in the Defense sector regarding customer conversations? Specifically, are there positive impacts from the current administration on one side, while on the other side, there's the potential for de-escalation of conflict? We're trying to consider these factors as we look to the future and would like to know your insights.
Our discussions with the Department of Defense are confidential. However, I can say that there is urgent demand, and I believe this will not change with the current administration. While I hope all conflicts are resolved, I don't anticipate a shift in that urgent demand. This reflects a repositioning of the U.S. military, and I expect that demand to remain strong. Currently, I would describe the situation in that area as urgent.
Thank you so much.
That concludes our question-and-answer session. I would like to turn the conference back over to John Huyette, Vice President, Investor Relations, for any closing remarks.
Thank you, operator, and thank you, everyone, for joining us today for our fiscal year 2025 second quarter conference call. Have a great rest of your day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.