Q4 2020 Carpenter Technology Corp Earnings Call
[music].
Good day and welcome to the Carpenter technology fourth quarter fiscal 2020 earnings conference call.
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I would now like to turn the conference over to Brad Edwards. Please go ahead.
Thank you operator, good morning, everyone and welcome to the corporate or technologies earnings conference call for the fiscal 2024th quarter and year ended June Thirtyth 2020 <unk>.
This call is also being broadcast over the Internet along with presentation slides. Please note that there would you be listening by phone you may experience they timed awakens wide movement.
Because on the call today, or Tony chain, President and Chief Executive Officer, and Tim Wayne, Vice President and Chief Financial Officer.
Great. That's made by management. During this earnings presentation that are forward looking statements are based on current expectations.
Risk factors that could cause actual results could differ materially from those forward looking statements can be found a corporate technologies. Most recent FCC filings.
Putting the companies report on form 10-K for the year ended June Thirtyth 2019 form 10-Q for the quarters ended September Thirtyth 2019 December 31st 2019 at March 30, Onest 2020, and the exhibits attached to those filings.
Please also note that in the following discussion unless otherwise noted when management discuss it sales or revenue that reference excludes surcharge when referring to operating margins that is based on operating income and sales excluding surcharge I will now turn the call over to Tony.
Thank you Brad good morning, everyone on the call today, I Hope you and your family's 11 today.
Let's begin on slide four with a review of our safety performance.
Total peak incident rate or PCR was 1.1 fiscal year 2020.
This is our lowest annual incident rate to date as we continue our journey to deal injury workplace.
This is an impressive achievement.
Given the challenges of operating or manufacturing facility during the cold It 19 pandemic.
Our employees have done it continue to do an exceptional job followed the safety protocols in place to keep our clean safe.
If you turn to fiscal year 2021.
Safety activity looked on employee engagement will continue to support our drive to is really injury workplace.
Now, let's turn to slide five and review the fourth quarter performance.
These two quarters ago at the midpoint of our fiscal year 20 Twond.
Copper technology had significant momentum.
It's a real segment was achieving margins at historic highs.
We just completed or 12th consecutive quarter of year over year sales and earnings growth.
The company was on track for the best financial performance here in our history.
And our growth accelerated such as new investments in Athens facility self magnetic and additive manufacturing well poised to start contributing to the bottom line in the years to come.
Of course, the cold igniting pandemic was thrust upon this.
It has had a devastating impact on the personalized and on the economy.
Fortunately corporate technology within a strong position.
Understanding the magnitude of the downturn, we aggressively pushed forward this portfolio restructuring and cost reduction initiatives to strengthen an already strong liquidity position and balance sheet.
Our actions today include.
The elimination of approximately 20%.
Our global salary positions.
For many many hiring freeze and deferring annual merit increases for most salaried employees.
Reducing a plan to capital expenditures by 50 million fiscal year 2021 compared to fiscal year 2020.
After reviewing and prioritizing our capital investments.
Executing always temporary photos for certain production maintenance and salaried employees.
And completely targeted portfolio actions, including a decision to exit the a mega west oil and gas business.
Idle or west, Virginia powder facility, and divest or Rhode Island powder facility.
All of those actions will critically important its sales in the fourth quarter, the down 30% year over year and 24% sequentially.
This depressed volume will likely continue over the next couple of quarters in a full recovery will take even longer.
We also actively managed to quarter to prioritize free cash flow like celebrating our inventory reduction plan.
Which was successful in generating cash flow. However, it had a significant negative impact.
On our operating results.
In fact, the primary highlight from a fourth quarter results, there's a strong free cash flow generation.
We drove 100 million or free cash flow in the quarter, which significantly strengthened our liquidity position.
We enter fiscal year 2021, with a total liquidity position of 417 million.
Which we enhanced even further with the bond offering this month.
We have ample liquidity to continue managing through the covert night people paying debt.
Equally impressive is our ability to keep all of her facilities operating continuously in this challenging environment.
This accomplishment clearly demonstrates the power of our core safety value as well as the steadfast dedication of our employees.
Our employees has demonstrated a great commitment.
[music] projecting each other and serving our customers during this challenging period.
This heightened commitment is resulting deeper customer relationships and new opportunities for our solutions.
For the past several months you have enriched indoor extended supply agreements at the request of key aerospace medical semiconductor customers expressed concerns about the stability and long term reliability of other suppliers.
We have demonstrated resiliency that is resonating with customers and winning us market share.
The pandemic has caused near term challenges for us as well as our entire industry.
Trusted solutions provider of critical applications.
Our specialty metal alloys are unique and we have one of a handful of suppliers in some cases with soul credible supplier of materials essential to production of aircraft medical devices and implants semiconductors consumer electronics automobiles another application.
Our stablish quote business and leadership and critical emerging technologies, including additive manufacturing and soft magnetics supports a long term sustainable growth profile.
Now, let's new to slide six in the English market update.
Looking first at the aerospace and defense in this market, where sales were down both sequentially and year over year.
The results were driven by customers across the supply chain adjusting both the production schedules and inventory levels in response to revive production rates went bowling and airbags.
A large number of cancellations and push us is filter through the entire supply chain.
A high level of uncertainty.
We currently fetus challenging operating environment, continuing during the second half of calendar year 2020, and then beginning to improve in calendar year 2021.
This past quarterly Indonesia, with many of our customers, who suddenly saw reduce need for our materials and together develop forward support branch.
These plans included slower shipment of finished products in exchange for sure or pricing game.
While conversations with many of our customers are ongoing and at different stages.
All are actively engage with us they understand we will remain in sidel part of their supply equations moving forward.
Over the mid and longer term, we believe in market demand will return.
And we are confident Carpenter technology will play an instrumental loan immediate.
Because our solutions are uniquely capable of providing power efficiency longevity and performance.
They are already found across a wide range of Oems platforms and applications.
It's airline operators rebuild their fleet with today's and Tomorrow's models, they will be flying with Carpenter technologies high quality technically assured materials.
Moving onto the medical use market, where we are seen some near term impact on demand as the elective surgery market continues to recover.
With that said of cardiology business.
Please resilient and maintain steady demand throughout the quarter.
Expected to remained steady in the near term.
We expect to recovery orthopedic markets to take shape beginning in calendar year 2021, while the market for dental applications is expected to turn to normal like levels later in 2021.
During the fourth quarter, we quickly leveraged our industry, leading portfolio and responded to critical demand for materials eastern cardiology and trauma devices.
We also responded to restocking is OEM begin I'm prepared to address picked up demand for elective surgery.
Over the long term, we believe we are well positioned to continue supporting the medical device market with the largest portfolio of material solutions, coupled with a strategic investments, we have made capabilities and capacity.
Our application solutions are aligned with key industry, megatrends, including aging population and increased emphasis being placed on improving patient outcomes.
And the transportation English market, the global light vehicle market with significantly impacted by OEM plant closures related to cope with 19.
Pandemic also created challenges and the heavy duty truck Margaret which had already been working to a cyclical low.
Now I'm moving to the energy English market, where market conditions in North America remained depressed in international activity is largely stagnant.
In addition to power generation Submarket continues to work of a low base.
While sales and the industrial and consumer market were down we experienced solid demand for our high end semiconductor applications and consumer electronics or proprietary alloy solutions are gaining an increasing sure and applications, including smartphones smart watches and other wearable technologies.
Now I'll turn it in the call over to Tim for financial review.
Thank you Tony good morning, everyone.
I'll start on Friday, the income statements summary.
Net sales and the fourth quarter or $437 million and sales, excluding surcharge totaled $376 million.
Sales, excluding surcharged decreased 24% sequentially on 23% of our volume.
Compared to the fourth quarter, a year ago sales decreased 30% on 32% lower volumes.
As Tony covered in his review of the markets. The results reflected weakening demand in the near term across all and use markets to the significant impact of covered 19.
Also is Tony mentioned as a result of the current demand conditions, we made the decision to adjust our production schedules and accelerate our inventory reduction program.
These actions had a significant positive impact on cash flow results, which we will talk about shortly but had a negative impact on our operating income results in the quarter.
The tradeoff between cash flow and operating income was an easy decision given our focus on strengthening liquidity in the near term.
In addition to the demand implications of Cove at 19, we continue to deal with the impacts of the pandemic on our production facilities.
The additional safety measures necessary to protect our employees and ensure that we can can continually operate have impacted productivity.
The teams continue to deal with certain south isolation measures that affects staffing levels of key work centers.
I'll talk more about the Cobra 19 mitigation cost impacts on a result, shortly and the segment details.
SG&A expenses were $42 million in the fourth quarter down $13 million from the same period, a year ago and down about 9 million sequentially.
The lower SG&A expenses, primarily reflect the impacts of salary farallones.
Remote working impacting certainly administrative costs, such as travel and entertainment.
And lower costs associated with variable compensation programs.
The current quarters results include $130 million a special items.
This includes 95 $5 million of restructuring charges.
Principally associated with the actions, we previously announced related to the exit of her Omega west oil and gas business.
The disposal of a powder facility in Rhode Island.
And the idling of a powder facility in West Virginia.
As well as the cost to execute the elimination of 20% of global salary positions.
In addition to the restructuring charges. We also recorded a goodwill and apparently charge of 34 6 million associated with our additive business unit.
Operating loss was $148 $2 million in the corner.
When excluding the impact of the restructuring an impairment charges.
Operating also is $18 $1 million compared to operating income of 67 $9 million and the prior year period, and 58 $7 million in Q3 of this year.
Are effective tax rates for the fourth quarter was 22%.
Earnings per share for the quarter was a loss of $2.46 per share.
When excluding the impacts a restructuring and apparently charges earnings per sure was the loss of 31 cents.
Now I'm, turning to slide nine and our Sio segment results.
Net sales for the quarter, where 369 $4 million or 308 6 million excluding surcharge.
Compared to the fourth quarter last year sales, excluding surcharge increased 27% on 31% lower volumes.
Sequentially sales, excluding surcharge decreased 23% on 22% lower volumes.
The results reflect demand headwinds across all markets and the quarter, especially in aerospace and defense as a supply chain adjust to publish spilled rates.
And the transportation and use market as a result of production.
<unk> reported five $3 million of operating income for the current quarter with adjusted operating margin at one 7%.
The same quarter a year ago <unk> operating income was 86 $9 million.
The actions we took in Q4, two significantly reduce inventory by adjusting production schedules and light of near term uncertainty had a significant negative impact on sco's profitability in the corner.
In addition, the current quarters results reflect approximately six 5 million of incremental costs associated with Cove at 19.
Again, it's worth noting that despite the significant disruption caused by kovar 19, the operating teams insured that our facilities could safely continue to satisfied customer needs.
Looking ahead, we expect demand conditions across most and use markets will remain challenge in the first half of fiscal 21.
As we enter the second half, we anticipate demand levels to stabilize and begin to recover.
In response to these conditions, we continue our focus on managing our costs and liquidity.
We will work closely with our customers to service there needs in the near term and adjust production schedules accordingly.
To deal with the impacts lower volumes and reduce production schedules, we've implemented furloughs for certain production of maintenance physicians as we matched our workforce needs to production schedules in each of our facilities.
And this environment rapidly changing requirements and plans we continue to emphasize the principles of the Carpenter operating model and areas such as waster elimination liter standard work and problem solving.
We believe the Carpenter operating model will provide significant operating leverage as we navigate these challenging conditions.
Based on current expectations sales are anticipated to be down 10% to 15% sequentially and Q1 in <unk>.
In addition, based on assumptions around demand and related production levels and cost actions, we expect sio to generate an operating loss of approximately $10 million to $15 million in Q1 in fiscal year 2021.
Now turning to slide Chang and our Pep segment results.
Net sales, excluding surcharge or $76 million, which were down 39% from Q for fiscal year, 2019, and down 29% sequentially.
Demand conditions across all and use markets have been impacted by Cove at 19.
Especially in aerospace and defense and distribution.
Distribution demand as more sensitive to overall general economic conditions, and say significant headwinds from the impacts of shutdowns across auto manufacturing in the current quarter.
The results also included sequential and year over year weakness and energy sales more specifically and oil and gas submarket.
B declining demand conditions in oil and gas that we're further amplified by the coven 19, pandemic, where the driving force behind our decision to exit the Mega last oil and gas business during the quarter.
We have taken the necessary actions in or near completion of exiting this business.
In addition, during the fourth quarter, we completed the disposal of a pattern facility in Rhode Island, and we Idaho the powder facility in West Virginia.
These portfolio actions were identified and executed in short order as part of our overall cost savings initiatives to streamline the business to save costs.
And the current quarter Pep reported and operating loss of eight $4 million.
Again the results for Pap, we're heavily influenced by the Coke 19 situation.
Despite significant operating challenges credit goes to the teams for doing whatever it took to ensure employee safety and keep the facilities operational at this critical time.
As we look ahead, we anticipate papo generate an operating loss of $3 million to $5 million in the first quarter of fiscal year 2021.
Now turning the side 11 and are you a free cash flow.
And the current quarter regenerated $137 million of cash from operating activities and free cash flow was $100 million.
As a result of the strong free cash flow performance, we ended the year with $417 million a total liquidity.
Within the quarter, we decreased inventory by $117 million with the bulk of the inventory reduction coming from S. A L.
This reduction insignificant unnecessary given the uncertainty created by the pandemic.
As we move forward, we expect an inventory remains an opportunity for additional cash flow generation.
And the fourth quarter, we spend $27 million on capital expenditures and finish the year spending just over $170 million as planned.
With a majority of our growth projects completed we have an opportunity to significantly reduced capital spending and fiscal year 2021, as we had previously disclosed.
Let's move to slide 12 to talk about a recent bond issuance.
Shortly after a year and in July 2020, we completed a $400 million bond offering.
Proceeds will be used to repay $250 million of notes that mature in July 2021, and further bolster our already healthy liquidity position.
With the proceeds and resulting redemption of the $250 million notes, we estimated that are pro forma liquidity after giving effect to these transactions would be approximately $553 million.
The bonds or senior unsecured notes that mature in July 2028.
With a repayment of the July 2021 notes. We have also extended are that majority profile.
As a reminder, we have a 400 million revolving credit facility that expires in March 2022.
Which provides flexible access to liquidity as we need it.
We have a solid banking group and continue to maintain positive ongoing relationships with the banks who participate in the facility.
It's also important to note that we are currently well within requirements for compliance with the covenants under the credit facility.
As we look ahead, we have no near term that maturities or significant pension contributions and believe that the strength of our balance sheet and are healthy liquidity position continues to represent a competitive advantage, especially in the current environment.
With that let's move to slide 13th to talk about selected fiscal year 2021 guidance.
We're providing the selected information to help modeling for fiscal year 2021.
Appreciation amortization is expected to increase from $124 million in fiscal year, 2020, $239 and fiscal year 2021.
As we previously disclosed we carefully evaluated R capital extending for fiscal year, 21, and expect to reduce capital expenditures by about $50 million to $120 million in fiscal year 2021.
We've completed significant growth investments and the emerging Tech center on our Athens campus invested in dynamite capacity to enhance our growing position in the medical and use market.
And will complete the 100 million Hot strip mill project and fiscal year 2021.
Pension require minimum contributions are expected to increase from $7 million to about $20 million in fiscal year 2021, and non-cash net pension expense is expected to remain relatively flat.
Interest expense is expected to increase to $35 million in fiscal year, 2021, which reflects the new that issuance and redemption of the $250 million July 2021 notes to be completed during Q ones.
Lastly, the effective income tax rate, excluding the impact of any special items.
Is expected to be 32% to 35% professional year 2021.
With that I will turn the call back over to Tony.
Thank you Tim let's move to slide 15 in a brief review of our immediate priority.
Ah first priority will remain protecting our employees and communities.
Rapid response team remains hard at work safeguarding our facilities implementing various colbath 19 protocols.
Our self reporting on self isolation programs Roman place and hiring effective. We also continued to run an operation to any part alignment in order to deter virus transmission within a department are shift.
Communications with.
All our constituents remains frequent including for east state and local governments as well as customers.
Our ability to keep a facilities open and running very nice unprecedented times.
Clearly demonstrates the commitment of all of our employees as well as the benefit of course take the value of culture.
A second can priority is strengthening or liquidity and maintaining our solid financial position.
We've taken aggressive access to reduce our cost structure through several targeted initiatives and portfolio restructuring. In addition, we reduced R capital spending budget for fiscal year 2021.
In total we expect our efforts will reduce our annual costs by $60 million to $70 million.
This will make us a leader and more flexible company better positioned to drive accelerated grow with the main levels normal lives.
Focus for fiscal year 2021 is cash generation.
As we continue to reevaluate additional actions to bolster our position.
Lastly, we will remain in contact with our customers and will continue to support their evolving material performance needs.
The impact of Cove at 19 across our English market as severe it has created demand shocks widespread inventory management and unconventional demand adjustments.
We are working closely with our customers to reprioritise of production schedules <unk>.
Comedy changing orders as well as urgent request.
As I noted earlier, and our key aerospace and defense and medical in this market <unk>.
We have accepted deferrals and order push out in exchange for increased sure on key girls platforms.
In addition, despite scaled back production rates across the market. We continued to win spot business due to a reliability of our operations competitively times and quality of our solutions.
Ultimately, we expect to emerge on the other side of cover 19 with stronger customer relationships as well as meaningful sure goes across the key platform and applications and aerospace and defense medical and other in these markets.
Listening to slide 16, and my closing comments.
And it's clear that market conditions are you near term will remain challenging due to cope with 19th is our first quarter fiscal year 2021, net sales could be down at an additional 10% to 15%.
Compared to the fourth quarter fiscal year 2020.
This increased volume combined with a week or mix continued inventory reduction initiatives Covid 19 mitigation costs as well as higher interest expense.
Will likely result quarterly earnings per share loss of 55 to 65.
This the lines with a segment guidance 10 days earlier in the presentation.
However, most importantly.
We expect to generate additional positive free cash flow.
And the first quarter fiscal year 2021.
Looking forward. We currently project the second half of fiscal year 2021 to improve versus the first half.
During the significant market downturn successful companies are the ones that can remain cash flow positive.
Deepen relationships with our customers and continued to move forward on innovative growth platforms for the future.
Harper technology checks each of those boxes.
Despite the near term headwind real well positioned across or at least market in the long term outlook for each remains intact.
Pier, one is a handful and sometimes the only supplier critical applications to customers across are in these markets.
We have made sure on key platforms key and use market of aerospace and defense and medical.
The additional opportunities to deepen customer relationships gaming incremental sure and unlocked attractive market adjacencies.
While they might not necessarily get as much attention.
Inspiration in industrial consumer English markets also offer solid long term growth potential.
And are established core business is supported by investment we have made a critical emerging technologies, including additive manufacturing and soft magnetics for electrification.
Despite the market challenges caused by Kovar 19, we expect to generate positive free cash flow and positive EBITDA for a full fiscal year 2021.
That is a powerful statement and one that I believe speak to the resiliency the impact of strategic accidents, we've already taken and our continued commitment to actively managing all business.
We ended the fiscal year and a strong financial position with total liquidity of $417 million <unk>.
Edition.
A recent bond offering increases are total liquid any further it extends are that maturity profile.
The key to success in this downturn is the ability to generate cash and maintaining a healthy liquidity position.
Technology is poised to do both.
We are confident that we can and will continue to navigate these challenging times.
<unk> a stronger company.
Thank you for your interest and I'll turn it back to the operator to field your questions.
Thank you so you won't topic and my question and answer session.
To ask a question you May press Star N. One plenty of catch 10 pounds.
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So let's try your question Please press star and 10.
At this time cause I'm entirely too <unk>.
My first question comes from Goodson Kinda with telling please go ahead.
Yeah. Thanks, good morning, guys.
Awesome.
I had a couple questions first I was curious you have the visibility carpet down sales sequentially Q1.
What can you say at this point about cute too.
Of course like how much visibility do you have on.
Customer order schedules and.
Oh, you're still seeing kind of a shuffling of.
Of delivery schedules were talks are asking to push things out.
Yeah, I figured just expand on what you're saying.
Well good morning got some hope you and your family are.
Doing well.
Yeah, there's still some movement.
Far as visibility and the second quarter.
But I believe we have a pretty good line of sight I mean, we gave you EPS guidance for the second.
And.
You said that we will remain pre cash flow path. So pretty good handle on what we think is going to happen over the next.
The next quarter.
I'm sorry.
I thought you gave ETS guidance for Q1 correct.
<unk>, Yeah, sorry, Yeah, and you also get a SEC you too.
No I apologize, yes around keystroke anymore.
Okay, I think so too.
Let me expand a little bit I think I think the first half with F Y R. F Y 21, we could it be needed and I think you'll see the recovery coming in our last two quarters.
Alright.
No I think we really went out to provide guidance for the first quarter not ready to do that.
Specificity for the second quarter, but I do believe it's gonna be the end of this kind of the year until we started seeing some improvement and I think that lines up in fact, I know that lines up with me and the company's name reported to be.
Sorry for the confusion when you said guidance I thought you were talking about.
My apologies.
No problem.
Just to be clear, what do I mean, so that would imply because the rates the production rates on the aerospace side or obviously going down.
And then they stay down.
So.
I guess.
What is the reason that it would come back in the second half of the fiscal year is it just.
Some level of Destocking that to amplify in the current downturn or is it.
Seasonality I'm, just curious what and if so what is the order of magnitude offset destocking Angela seasonality that doll.
But we can expect to come back.
Okay, Yeah, it's a good point, you're exactly right with the downturn everybody is adjusting base the Hornets.
Change in Bill Gates for the primary aircraft manufacturers, that's what everybody's pivoting also.
It was even magnified for us because there was a huge suggested.
Lightly so destocking impact so that amplify the impact for US now as you start to rebuild remember that.
Fly signal for us will probably be two to three quarters in front of that.
So we get hit pretty hard when you're just shut off the the.
The the flow.
Because of the Destocking.
Come back quicker I believe that ran because it's such a.
Distinct call when you do see that demand signal come back.
Would be pretty significant and I think you'll go right back to shortages remember when we went into this pandemic.
The products that we produce.
You were out of capacity Athens, being the only capacity coming on.
And with long lead time, so I think you'll go back to that pretty quickly.
Okay and then.
To follow up on your remarks about increased market share.
Could you speak to and can you give us any specifics around it says that Ah.
Was that in the engine channel was in the landing gear side.
Fasteners, what specifically what product areas have you been able to secure more sure in.
And why do you think.
That is the case I mean are you seeing other suppliers that compete with carpenter.
Maybe falling off a little bit in terms of quality or.
Or just financial distress anything you could expand on there would be helpful.
That's a good question.
The majority of those customers are the larger customers are big customers I would go as far as soon as primarily on the inside but it does go through the fasteners and some some other pieces.
The main issue is right now we're focused on.
Delivery performance and lead time and I think.
Do you look at Carpenter technology in the long term availability to have that additional capacity will accompany that the.
Other.
Customers want to partner so it's a really.
It hasn't been a difficult discussion to say, we're willing to work with you in exchange for some increased market share in the future.
That's been a very productive conversation quite frankly, not a difficult one.
Okay. Thank you very much.
Okay, and if you'd like to ask a question. Please press star N. One.
Our next question comes from Josh Sullivan with a benchmark company. Please go ahead.
Thank you morning.
Good morning Joshua.
Just to follow up on the first half outlook I know you're looking for.
Demand across on markets.
But which markets you have more confidence that we're closer to abandon them.
Aerospace and medical maker over 70% of our.
The market portfolio. So those are the ones were focused on certainly transportation industrial consumer are important to us with the percentages are are much lower.
I can't tell you what you were at the bottom now we're not it feels like.
Like we are.
I'm sure he's listening to the phone calls from.
The other large Indian manufacturers and.
Airplanes buildings and.
I think that maybe we're getting close to that.
I do believe I think what's important is that there's a significant amount of airplanes that are being retired early there was a significant amount they needed to be retired is paying them to cast pullback forward. So when air travel does come back I think you're going to see the need to build to continue.
Those airplanes, which including me.
Supplied to incorporate technology.
Suppliers into the aerospace.
Punching.
Okay, well it and then kind of a related question. I mean can you is there any detectable difference between demand for materials on next generation engines versus legacy engines, which which might be more aftermarket related.
Difficult question right now I think going forward.
There is going to be a need to bureau mode.
The newer planes.
I think that's just Matt if you look at the megatrend any believe.
No traffic is coming back as we do you look at the.
Increased retirement, the planes and the cost savings you can get.
I think it makes sense.
Those new planes being built again for us we are a bit agnostic because we make we make.
It seems that go along across every platform.
Let's say that we're more heavily concentrating on the OEM purses despaired market, but we probably material across the entire spectrum.
Alright.
And then just told the inventory reduction requirements.
Metrics on days outstanding or otherwise.
Do you think you're comfortable going.
Sure do you need to use and Carrie.
Yes, you caches, you mentioned adelphia prepared remarks.
Well, Tim mentioned that I think.
Earlier in his comments that we have more room to go on the inventory side I mean.
Because of the dynamics of a market prior to the pandemic, we used our Alex sheet to build inventory because we didn't want to disappoint any of our customers really had 50.
Times.
No.
Capacity active the Rams.
As we continue to work or carpet operating model, we we're achieving significant productivity gains, but you don't get all of those evenly across the system. So in front of our process on the melting sank primarily unfortunately, we were getting productivity gains quicker than on the back in and finishing.
Truly manufacturing, we would vital when upstream to balance knows but we didn't want to do that because we need a eventually we.
Getting a productivity and ambitious side and we would.
Question I didn't forget.
Sales demand that was out there so when the pandemic hit that gave us a mismatch inventory.
Allow us to bring it down or more.
Oh reasonable levels I think there's still more to go and you wanted to Maine.
Point to the Cocker operating model is to have the most sufficient inventory levels possible. So they still alone opportunity.
We have there I wouldn't say that it'll be in this magnitude that we had the fourth quarter like recording for this year plenty of opportunity on the inventory side.
To generate some cash.
Got it thank you for the time.
Our next question comes from Michael with shock with Keybank. Please go ahead.
Hey, guys good morning.
Good morning.
So first I just wanted to to touch on the Boeing an Airbus cuts to their wide body platforms over the past 24 hours or so.
You mentioned some customers responding to these these prior cuts, but what have you been hearing in the arrow supply chain, there's obviously banking destocking, but was there any anticipation of further cuts on these platforms.
I would say that the aerospace supply chain.
Very.
Explicated supply chain.
Stay in vehicles contact with ultimate customers So I.
I think the majority of the supply chain is aware of of what that production levels are going to be an anticipated.
I'm going to that for everybody, but put majority I would say that they have a proven handle on what we think those production links will be and I have spent the last several months adjusting accordingly, now some customers our suppliers are certainly in a different.
Position.
If you are if you came into this pandemic, where you were did not have the strongest balance sheets.
You might take more severe actions and destock, even quicker than what you might.
You are going to have to build up yeah me too much quicker than that comes back I think it's a big positive for Carpenter technology, because we came in with such a strong balance sheet.
And when you talk to many companies and this pandemic one of the questions you're asking what's the cash in Orange is going to be right and that's not a question you have.
S Harper with technology because.
Cash to pay this quarter next calling to be free Cantrall positive I think that's a big benefit for coffee with technology versus maybe some organizations.
Got it that's helpful and then I'm Howard jet engine sales in the corridor either year over year quarter over quarter.
They were pretty consistent can be overall.
They were about 30, roughly 30% downcourt over quarter, and 30% down year over year that compares to our total total that was 30%.
20, 24% sequentially.
Indians Alright aerospace was about.
230% year over year down.
Go over quarter, and James year over year about 29% Coral Court.
And our current backlog levels just for the overall business.
In the quarter and what's what's been the biggest driver for that that Delta.
Well backlog here down if you look year over year, our overall backlog is down and approximately 30% price sequentially 25, it's driven by.
Aerospace.
Primarily.
All of the market backlogs down I think that makes sense based on the severe economic downturn network and right now.
Okay, and then lastly, just gone the Covid cost you had an impact of six 5 million. This quarter I think it was five and a half million prior corridor, how do you see these costs going forward.
I'm just trying to gauge the cadence and when these incremental costs will will level out. Thanks.
That's a good question and it allows me to talk about that a little bit I'm not going to skimp on those costs.
My point of view is I'm going to protect our employees were able to run notes facility. So $6 million is a big number for us, but it's a lot less than if I have to shut down or facility like you've seen utility other industries. So those cost include.
Have a very robust self reporting system with one of our employees.
A certain criteria.
<unk> travel whatever it might be they self report to our medical team and medical team. Besides they need to go on itself isolation and not coming to our facility.
They are still paid we still pay them as if there is related to encourage them to self important and keep everyone safe that includes the extra cost of clean.
Whenever we have any type of issue where will you think that's appropriate we put ourselves pod environment. So there are some extra costs.
Costs there. So I think those cost will continue into our second quarter.
And I don't really see as easy knows much over the next six months.
But again, that's going to depend on the pandemic and I'm going to be very conservative there I'm not gonna I'm not going to put our employees.
And ask them to come into our facility and work really hard and a tough situation and I do have anything I can get to protect to help with themselves and their families and the community quite frankly.
I appreciate the detail thanks, guys.
This concludes our question and answer session.
Like to turn the conference backup better proud Edwards spanning closing remarks.
Thank you thanks to everyone for joining us for a fourth quarter earnings call. We look forward to speaking with you all again on our first quarter 2021 earnings call take care of and enjoy the rest of your summer.
The conference is now concluded. Thank you for attending today's presentation you may know disconnect.
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