Q1 2021 Carpenter Technology Corp Earnings Call

Our total case incident rate or t c i r with 0.4 in the first quarter. It's marked are the lowest quarterly PIRA ever recorded in addition. We achieved our first official injury free month in a company's a hundred and Thirty-One year history during the month of September 8th zero injury workplace is possible and we look forward to having our next Milestone on our way to zero before moving on. I want to take a minute to recognize and thank all of our employees for their own going hard work and commitment during these unprecedented times all of our facilities remain open and operating safely, which is a tremendous accomplishment. Our team has done a remarkable job of building on our core safety value pack texting each other and the communities we operate in while at the same time staying focused on serving our customers.

Now let's turn to slide 5 and review the first quarter.

Our first quarter operating performance was in line with a previous guidance as demand headwinds across there in news markets continue to be the driving Factor.

Given the current environment the demand weakness is difficult to offset. However, as I stated before or primary focus is staying cash flow positive. We have taken significant actions, which enabled us to continue our strong cash generation performance in q1.

In the first quarter, we generate $63 million free cash flow and ended the first quarter with over six hundred million in total liquidity, including 219 million of cash.

In addition, we completed a bond offering that extended our maturities profile and provides us additional Financial flexibility as we navigate the current environment. We have faith quiddity to continue managing through the COVID-19 pandemic.

in the first

Quarter, we completed the divestiture of our Omega West oil and gas business and took additional restructuring actions in our adequate business unit to streamline operations and reduce costs.

At the same time we are pushing forward with our long-term growth initiatives and balancing our actions to ensure that we emerge in an even stronger Market position with our customers.

This includes our Athens facility which remains a key long-term growth driver is differentiator for Carpenter Technology. We continue to collaborate with customers and make progress on achieving key additional qualifications for the facility.

In addition, we have further strengthened our capabilities and critical emerging Technologies. Most recently through the launch of our Carpenter electrification brand electrification is a rapidly growing area of focus across our end use markets and we believe our material Solutions can help customers Drive enhance performance for the products.

Our new Huts treadmill installation is nearing completion which will enable us to further Excel and our capabilities in this emerging area.

Now, let's move to slide number 6 in the end-use market update.

Let me spend a little more time than usual on this slide. As I anticipate most of the questions will be focused on market dynamics, especially in the Aerospace and defense in used Market.

Starting with the Aerospace and Defence in U stock market and specifically the Aerospace submarket the supply chain continue to adjust to revise or build rates and the lowered demand environment off most Supply chains continue to be over inventory and oems continued the process of adjusting inventory levels across the supply chain during the quarter.

individual customers reported on going to stocking at various rates

many customers continue to report refusals of obligations throughout the supply chain and several customers, especially in Europe had longer than normal extended shutdown.

We continue to closely with all of our customers and finalize commercial discussions with many regarding forward sales Arrangements going to press levels. We continued to secure and support area a real demand.

Cancellation and default request. Well not all together behind us did decline in the quarter direct bookings were relatively flat. They'll stock shipment activity declined as I had lowered consumption requirements versus contracts.

And our fiscal second-quarter, we expect customers to continue to work through these stocking requirements while we are seeing an uptick of demand activity in some limited areas. Most customers can talk to report significant amount of inventory.

At the extreme some customers report over 12 months of inventory at the current shipment levels for certain parts on the other end. Some customers are beginning to discuss restocking off the what very limited levels.

All right.

Our second quarter We are continuing to support near-term customer needs and are also in negotiation with key customers developing mutually beneficial outcomes in both the mid and long-term.

It's credit has become an increasing concern with some of our customer base. We are also closely monitoring and adjusting the customer Financial situations as necessary.

Concerning our defense submarket, we continue to see study activity standing in contrast to commercial Aerospace.

Many of our customers involved in commercial Aerospace are also involved in defense and some customer locations report Defense work as the main activity that is currently sustaining their operations.

Some of the defense programs we support are seeing increased activity and we are working to support these accordingly. We continue to be involved in new platform design and prototyping and remain sided about our long-term growth.

Let's turn to our Medical end-use Market from a macro perspective as it relates to Trends in electric procedures hospitals reported a gradual recovery of procedures beginning of fiscal came with recovery expected to continue.

Medical device companies acknowledge this gradual return of elective surgery during fiscal q1, but are continuing to manage inventory levels downwards and only reordering necessary material to replace critical needs restocking efforts to level off within our fiscal Q2 at both OEM and Distributors that support the medical device Market wage.

In the transportation and used market sales increased 42% sequentially, but were down on a year-over-year basis Global light-duty vehicle production rebounded across most money markets in North America. We believe the light vehicle Market is currently on track to recover and come close to reaching prepay endemic levels in calendar year 2021 overall confidence is returning to the supply chain and we believe we can benefit given the unique value our high temperature Solutions deliver in a heavy duty truck Market. We began to see signs of recovery of historical low levels due in part to cyclical timing but also increased freedom and

Now moving to the energy in your Market where conditions in North America remained challenged and drilling activity. Is that severely depressed levels?

International Market has held up better due to longer project cycle lead time for current activity levels are low in the power generation submarket within energy. We are seeing some signs of increased activity related to a delayed maintenance cycle, but a potential uptick remains in the early stages lastly for the industrial and consumer in East Market sales were up with year-over-year and sequentially is that your sales were driven by continued strong demand for our semiconductor and control applications.

now turned over to Tim for the

Financial review

Thank you, Tony. Good morning everyone. I'll start on slide eight the income statement summary.

Net sales in the first quarter worth $353 million in sales excluding surcharge totaled $307.

Sales, excluding surcharge decreased 18% sequentially on 8% lower volume.

Compared to the first quarter a year ago sales decreased 37% on 29% lower volume.

Assuming covered in his review of the end use markets the results reflected ongoing demand impacts driven by COVID-19 headwinds in our key and use markets of Aerospace and defense and medical. This is partially offset by increased sequential demand and transportation as North American vehicle production rebounded albeit off a low base from the COVID-19 related shutdowns in clubs.

As we've mentioned since the beginning of the pandemic we continue to actively manage our production schedules and focus on accelerating a targeted inventory Reduction Program.

While the reduction in inventory drives near-term cash flow generation, which I will talk about shortly it negatively impacts our operating income performance.

Sg&a expenses were forty two point three million in the first quarter down $11 million from the same period a year ago and flat sequentially.

The lower year-over-year sg&a expenses primarily reflect the impacts of restructuring actions, including the elimination of salaried positions salary furloughs as well as the impact of remote working conditions that reduce certain administrative costs such as travel and entertainment.

The current quarter's operating results include 17.9 million a special items. This includes ten million of restructuring charges including Severance costs non-cash asset impairment charges off at least acceleration costs.

These costs are principally associated with actions that we initiated in the current quarter to reduce costs and streamline operations in our additive business unit. The special items also include 16.9 million in COVID-19 related costs included in these costs are direct incremental operating costs including outside services to execute enhanced cleaning protocols. I pay for employees potentially exposed to COVID-19 and additional personal protective equipment and other operating supplies and costs necessary to maintain the operations while keeping them safe against possible exposure.

COVID-19 cost and the current quarter also include 3.1 million of costs associated with a customer bankruptcy resulting from the COVID-19 pandemic.

The operating loss was 48.8 million and a quarter when excluding the impact of the special items adjusted operating loss was 30.9 Million compared to operating in off of 59.8 million in the prior year. And adjusted operating loss of 10.7 million and the fourth quarter of fiscal year 2020.

The current quarter's results reflect the impact of significantly lower volume combined with a targeted inventory reduction.

Our effective tax rate for the first quarter was 28.6%

income tax benefit was below our full-year tax rate guidance as a result of the discrete tax impact of the special items as well as a 1.2 million discreet tax charge associated with certain stock based compensation Awards investing in the quarter.

Earnings per share for the quarter was a loss of ninety-eight cents per share when excluding the impact of special items adjusted earnings-per-share was a loss of $0.58 per share.

Now turning to slide 9 and our Sao seconds results.

Net sales for the quarter worth 300.7 million or 250 4.8 million excluding search arms compared to the first quarter last year sales excluding surcharge wage is 35% on 28% lower volume sequentially sales excluding surcharge decreased 17% on 6% lower volume.

The results reflect ongoing demand headwinds in Aerospace and defense as the supply chain continues to deal with the near-term reductions in OEM build rates.

This is partially offset by stronger shipments and transportation as North American production returned from COVID-19 related shutdowns and by higher demand in certain industrial applications.

SEO reported an operating loss of 18.6 million for the current quarter.

The same quarter a year ago. SEO is operating income was $81 million and in the fourth quarter of fiscal year 2020 SEO generated 5.3 million of operating income.

You're a year reduction in operating income primarily reflects the impacts of lower volume as well as the negative income statement impacts of reducing inventory.

to know during the quarter Sao reduced inventory by approximately $73 million the actually the lower operating income result is principally the result of lower volume. Well as the impact of an unfavorable product mix due to the pronounced decline in Aerospace and defense

in addition, the current quarter's results reflect approximately 7.3 million of direct incremental costs associated with our efforts to protect our facilities and employees against COVID-19. And as I mentioned earlier also includes 3.1 million a cost associated with a customer bankruptcy directly resulting from COVID-19.

Looking ahead. We expect a man conditions across most end use markets will remain challenged in our upcoming second quarter of fiscal year 2021 as we have stated before we anticipate that system and environment across our key and Niche markets will stabilize and begin to recover as we enter the second half of our fiscal year 22 and one

In response to current market conditions. We continue our focus on managing costs and further enhancing our liquidity position via working Capital Management.

Based on current expectations, we expect to generate an operating loss of approximately eighteen to twenty-three million in the second quarter of fiscal year 2021. This estimate includes three to four million of COVID-19 related costs in the quarter.

Now turning to slide 10 and our pets segment results.

Net sales excluding surcharge were 61.2 million which were down 43% from the same quarter a year ago and down 20% Sequentially the year of year decline sales driven by the impacts of lower demand as a result of COVID-19 particularly in Aerospace and defense medical and distribution additionally sales in the energy and use Market declined as a result of exit of the Omega West or gas business.

Sequential decline in sales files and themes covered in the market summer ongoing near-term demand pressures in Aerospace and defense and medical are due primarily to the impacts of the global pandemic wage and its impact on aircraft OEM build rates and medical elective procedures. The bright spot was in our distribution business where we saw sequential increase in sales off a relatively low base wage.

And the current quarter type reported an operating loss of 3.6 million this compares to an operating loss of eight point four million in the fourth quarter of fiscal year, 2020 and an operating loss of two million in the same class last year.

You sequential operating results reflect the unfavorable impacts of lower volume driven primarily by covet. I'll set by savings realized from the actions. We initiated over the last several months both in our additive business unit and the recent divestiture of our our Omega West oil and gas business.

The approach to reducing costs an additive has been balanced and that we recognize The Importance of Being Innovative in this business and remade excited about its long-term future prospects.

With that approach in mind we took action to rationalize our footprint and infrastructure and we have identified areas where we can reduce costs without affecting our ability to capitalize on the anticipated long-term growth opportunities as we look ahead we currently anticipate papal generate an operating loss of three to five million or upcoming second quarter.

Now turning to slide eleven and it review of free cash flow.

In the current quarter, we generated $88 cash from operating activities.

This cash generation was driven by improvements and working capital primarily inventory within the quarter. We decreased inventory by $85 billion with a bulk of the inventory reduction coming from Sao.

Introduction is substantial and the result of considerable effort throughout the organization to accelerate targeted inventory reduction programs across their facilities.

Worth noting that we also reduced inventory by 117 million in the fourth quarter of fiscal year 2020 that's a reduction of over two hundred million of inventory in the last two quarters.

We remain constant communication with our key customers to ensure that we maintain the appropriate inventory and Lead times are aligned as demand patterns change.

And the first quarter we spent $33 million on Capital expenditures. We remain on track to spend about $120 billion in capital expenditures for fiscal year 2021 as planned down as a reminder within the hundred and twenty million plan for fiscal year. 2021 is the completion of the multi-year 100 million dollar outstrip. No project to support growing demand for our self magnetics materials.

Tony will speak to the importance of this new hot strip Mill will have to further enhance our leading position in the emerging area of electrification.

We are also nearing the completion of a large-scale Erp system implementation that is expected to be operational in the second half of this fiscal year.

In addition as I mentioned previously, we completed the divestiture of our Mega West oil and gas business. We are pleased that we could complete this transaction and realize 18 million a month in our current quarter.

But those highlights in mind we generated $63 million of free cash flow on the quarter.

From a liquidity perspective. We ended the current quarter with a total liquidity of $613 including $219 million of cash and $394 million of available under our credit facility.

The increase liquidity reflects the cash flow generation the quarter as well as the debt refinancing we completed in the quarter in which we issued four hundred million of notes and use the proceeds to repay the $250 million of notes that were due to mature in July of 2021.

Reference the net incremental cost of extinguishing the notes of eight point two million is included in our reported interest expense for the quarter and is treated as a special item net attack when calculating adjusted eps.

Our focus on the quality is essential in the near-term as we work our way through the temporary Market disruptions brought on by COVID-19 in our end use markets are thoughtful approach to Capital allocation over the years as well as the actions. We have taken since the onset of the pandemic have been critical and will enable us to exit this latest challenge even stronger than we entered with that. I will turn the call back over to me.

Thanks, Tim moving to slide number 13. I'll keep priorities in the near-term continue to be safeguarding our facilities and employees maintaining liquidity and working closely with our customers while our near-term focus is centered on the execution of those priorities. We cannot turn a blind eye to our future and the future needs of our customers off during its long history Carpenter Technology has weathered many downturns both cyclical and macroeconomic driven and each time emerged on the other side a stronger company despite these unprecedented times. We believe we have that opportunity again.

today we

Remain focused on Innovation and creating unique solutions that address evolving industry Trends and customer material requirements to that end during the first quarter. We launched our Carpenter of electrification branded electrification is an exciting Trend that is changing the way we live in and move around or World part of this movement involves electric motors and generators, which are replacing combustion engines in vehicles. This is where Carpenter electrification plays a significant role.

Before see a rapid increase in the use of electric motor and Generator systems and a wide variety of Mobility applications. The electric motor is now a well-established technology for passenger cars electric vehicles have been rapidly gaining in popularity over the last five years and are now a reliable alternative to internal combustion engines.

This trend is beginning to take hold in other markets as well new commercial aircraft already using more on board electricity to power their systems than ever before we have seen an increase in wage hybrid and electric aircraft designs and prototypes over the last few years.

In addition, we see similar Trends in the defense industry and other markets that rely on mobility and miniaturization such as drones autonomous robots and consumer electronics application.

In cars aircraft and other Mobility applications size and weight are always issues that must be considered for overall performance vehicle designers are increasingly turning two months powerful and efficient Motors that must also be small and light improve system designs and new technologies will deliver the performance improvements needed for future applications.

Your designs are using Advanced state of the art materials to achieve Optimal Performance or high induction hyper mobility and low loss off. Magnetic Alloys took delivery performance benefits miniaturization and product development flexibility.

It's product manufacturers pushed the boundaries of performance or electrification. They need stronger technology Partners applications and testing support are increasingly important as long as companies worked to optimize their product designs. They also need a reliable and streamlined supply chain and partners that can scale with them from prototypes to production.

With a high-performance soft magnetic Alloys portfolio technical expertise in advanced production capability Carpenter electrification is uniquely positioned to help Electronics Motor & vehicle OEM bring new electrification solutions to the world.

With the technology and market demand as a backdrop. We remain excited about the completion of a hot strip Mill installation on a reading campus. This project wants completed later this fiscal year will provide us with significant capability and critical capacity to service this growing opportunity.

that was

Turn to the next slide in my closing comments.

Our first quarter performance was as anticipated given volume and cost headwinds related to COVID-19 as well as our focus on driving and preserving liquidity in the near-term looking at we expect market conditions will remain largely challenging but do anticipate some recovery in the second half of fiscal year 2021.

We've chosen not to Simply sit back and wait for market conditions to improve rather. We continue to actively manage our organization and align our cost structure and business activities were having in used market conditions. You have taken significant action since the start of the pandemic to reduce costs and generate cash flow.

These actions include accelerating working capital Improvement via the carpenter operating model executing on targeted portfolio actions, including idling and divesting underperforming businesses as well as reducing cost reposition eliminations temporary furlough and hiring freezes among many other actions.

With the bulk of our growth Investments largely completed. We are also able to significantly reduce Capital expenditures beginning in fiscal year 2021.

These actions have been critical to maintain our healthy balance sheet and provide ample liquidity to whether the near-term challenges created by the pandemic.

Despite the challenges related to COVID-19 today. We remain and establish supply chain partner and often one of only a few providers especially solution that enabled mission for a performance. We are a leader in our industry today and are committed to remaining a leader for decades to come.

In the face of these unprecedented times, we reaffirm that we expect to generate positive free cash flow and positive adjusted ebitda in fiscal year 2021.

We have taken and will continue to take the necessary steps to position Carpenter Technology to be an even stronger company on the other side of this pandemic. Thank you for your life, and I'll turn it back to the operator to field your questions.

Thank you. We will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad. If you're using a speaker phone, please pick up the handset before pressing the keys to withdraw your question, please press * then two.

At this time, we will pause momentarily to assemble our roster.

And the first question will come from Gotham, with Colin, please go ahead.

Hi, good morning, guys. Thanks for the detail morning Gotham.

I wanted to just maybe ask you to expand on your comments about kind of the various level of levels of Channel inventory. You know, we have some customers with the years worth and found a restocking. Is there any broad Trends you can characterize maybe if you could talk about, you know engine oriented applications versus Fasteners versus other airplanes or wage its if there's anything you can expand upon.

Yeah got them. This is generally the engine customers are the ones that have greater inventory or not. We see variations across whether it's engines Fasteners structural or distribution business office space Oh, really? No difference there.

Okay, and you know you guys have talked about how in the second half of the fiscal year. So the March quarter you'll start to see, you know demand recover. What what grounds of view I'm just curious like do you have order visibility? Do you have you know what gives you that conviction?

What we we are very close to our customers spend a lot of time obviously with our customers. So we have a good line of sight on what we think is going to happen in the second half. And in fact, we just found that internally are going through it, you know customer of our customer market-by-market. So I don't think you're going to see a 50% increase in the second half, I don't think anybody is saying but I do think that you'll see an uptick in a certain the fourth quarter keep it in mind that you know a person second quarter has been obviously extremely low. So yes, we're we're fairly often enough taking a second half

I'm sorry to keep belaboring the point but just to be clear on, you know magnitude, you know right now obviously, we're in a stock. So it looks like you know sales levels are below underlying consumption by the end of customers what it should be any way is the right way to think about where the Aerospace surcharge sales will shake out once we get through talking as Thirty or forty percent below what you guys did in-house disco nineteen, you know, so we get back to some level obviously below where we work is production rates are down. I'm just curious like in terms of gauging the magnitude of the potential recovery, you know, is that where we should think things level out kind of sixty seventy percent of where they were

Preco because the production rates are down by that level or is there some sort of offset to that where you share or otherwise or you know?

Because of really yeah, really?

Yeah, I got them tough question obviously and it's the question that most people are asking if you just take a look at this quarter on a year-over-year basis Aerospace is down $45 to 15% So when does that come back? Is it two three four quarters? I can tell you this that might help you if you take a look at what we think the second half of the year is going to be your project in that 10 to 15 for your in that team. You're the type of recovery that I think you'll see it. I think it's going to be a gradual Improvement the mail.

got it, like ten to fifteen percent above where we are now they're about

Yeah, I think that's I think that's I think that's a reasonable. Yeah.

And just last one for for the any changes as he talked about, you know coming to better more mutually beneficial kind of events and customer over the mid and long-term. I just am curious what types of things is Carpenter advocating for is it kind of minimum quantity guarantees? Is it better pricing? This is you know, what are the types of things that you guys are advocating for it to kind of?

What would you consider better terms?

Yeah, it's a good question. Like we have great relations. We have great relationships with our customers and it really hasn't been where Carpenter Technology is reaching out to them and dictating. This is what we require in many cases. They're giving us ideas as well. They understand that the market is going to come back. There's no one we're talking to that said well Aerospace is never going to come back. So everyone understands that the market is going to come back everyone still believes in the macro Trend and they know the Carpenter Technology is only one of a couple companies that can supply them the materials they need so it is a very it's a mutual respect type of relationship and what we're looking for and what they're in many cases very happy to do is log in to extend that contract for a period of time or less increase the share that we have on that contract. So it's those types of items that were that we're looking for. And quite frankly. Yep.

Get a lot of pushback in that area.

Thank you very much Sony. Appreciate it. Yes. Thank you, sir.

The next question will come from Josh Sullivan with the Benchmark Company, please go ahead. Hey, good morning.

Josh on the refusal of service that you mentioned at the Aerospace customers for Q3 prepared marks there. What is the Temple of those here in the queue for the same Pace as cute through those instances, you know either decelerated or for Accelerated here.

I made that comment, you know that's across I would say that across all the supply chain. It's not just Carpenter Technology. I mean you can

I'm sure you've heard many times when you have this Taco drastic slow down. Everyone's trying to conserve cash and many people are trying not to take shipments. So that's happening across the entire supply chain across the every level. That is that's pretty well-known from our standpoint. It's much like the the answer. I just gave. Them as we work with closely with our customers trying to get to a win-win and then specifically for us we've seen that type of activity slowed down quite a bit and believe the majority of them. I just right now,

Got it. Got it on the medical exposure. How do you think that the restocking takes place? You know, you're going to be a snapback is the elective surgeries come back or you know, we might see KO research here. Just just what do you thinking about the restocking on the medical side? And the time you have I think that you know, John says you're really good question in my remarks, you know, I talked to about we saw an increase in surgery in procedures, but not necessarily A one-for-one as far as our supply to them which allows you that

Those medical device companies and others in the supply chain or decreasing their inventories. Everybody's looking to conserve cash. What we're getting prepared for is that I think you should see a steeper recovery than in the second half as opposed to what you would normally see because I just don't think there's a one-for-one right now. I think people are still trying to protect their inventory home, especially as we get to most everyone else that the calendar year is the end of their fiscal year and they're they're being extra cautious. They're so a long way of an odd question to say. Yes, I think that the spice that you'd see in shipment or demand. Let's say for medical could be a little steeper than maybe other Market.

And they just done on the inventory drawdown between the components of the raw materials finished. You know, where are you focused right now and maybe how should we see that progress since it just took that second half, you know ten fifteen percent kind of looks like if you just walk us through some other components there and some of them changing Dynamics.

Well, the three big components are raw materials work in practice and finished goods. We look at all of those and I think it's important to note that this inventory drawdown that we're having is not an approach. It says take inventory out at all cost. It's a very disciplined approach based on our lean manufacturing philosophy and Thursday as you well know just six months ago. We were running at 100% and trying to make as much as possible. So in many cases, yes, we produce the inventory for future dates going that I was never going to shut down front end of my process that had 50 weekly times. So our inventory got a little higher than what we would have like grew up from when you're looking at it from lean manufacturing point of view. So this is giving us an opportunity to continue to work on productivity and balance our plan and take

Check out that image.

We become more balanced inventory in many cases is is it the tractor to productivity because it keeps you from working on the right thing. So this has been a very

Surgical if you will inventory reduction, I think there's still more that we can do but obviously we're not going to take off these levels inventories for the next four or five six quarters. There will be a long time. We're we're we're balanced. I think the important thing is Josh is when you see the man come back, we're not going to put ourselves in a position where you'll have to see it as significant inventory build to support that we're going to get down to these levels where the locking in our productivity and we'll be able to maintain these types of relative levels. Even when we see Adam and pick up over the next several quarters.

No, that's very helpful. And just one last one, you know, you talk about your your push and into the electric world, you know, can you talk a little bit about your you know, your special Alloys there? You know, how do those compare to the black market offering? Is there any way to quantify some of the you know special attributes its weight power or some Metric while you think Carpenter is going to be you know successful in those markets.

I appreciate you asking that question because we think this is really important for us. We have a we have our Core Business that is going to grow over the next several decades just because the macro Trends but what we're trying to do is look at other areas of growth in areas that were already participating in but we can take it to the next level and and if I could take a step back, you know in this game what we call soft magnetic they running an electric motor, you know the real the real key there. Is that your the material that you're using that soft magnetic material is magnetizing it off on and off and that's what was created the location in the motor. And that's what creates the the ultimate power the material that you use is really important because of that material will dictate the magnetic response or what I said in my prepared comments the induction. So the higher the induction material that leads to a better performing motor that leads to a motor with higher power.

Has a torque higher speed all at the same time making that motor smaller and lighter which is really important for electric vehicles are proprietary product hyper cold does all those and it is rated as the best in the industry right now. So that's why we have a lot of interests for that product. Now remember Josh even before the pandemic a Carpenter Technology was the leader in this area when it came to auxiliary power unit in Aerospace. We're just taking it to the next level as the as the market continues to grow the electrification of the world. We are moving closer to the customer by not just making the material but moving into stock production and quite frankly being pulled off our customers get even more involved. And now as Tim mentioned in his remarks finishing up the almost a hundred million dollar project in our reading campus to Thursday.

hot strip Mill which will increase

The capacity but more importantly the capability to produce that that product at a lower cost than we do now and hopefully even you know, attract more and more business that way it is. It's a big market today and it's a market that could be three to four times bigger over the next five or ten years. So really appreciate the the question and allow us to talk about something that can really be an earnings accelerator for corporate technology over the next over the next year.

Thanks for coming.

once again as a reminder, if you would like to ask a question, please press * then 1

the next question will come from Phil Gibbs with keybanc capital markets, please. Go ahead. Hey, good morning. Tony and Steve Good morning, Tony. Can you give us some color changes on your backlog either the change sequentially or your rear backlog was down about 18% sequentially wage across all of carpenter. That's total Aerospace backlog was down 16% sequentially on a year-over-year basis backlog was down about 40% Aerospace back office down a couple of percentage points higher than that.

It's helpful. And then on Aerospace engine specifically what was the either year-over-year or sequential Decline and and engine revenues. If you look at engine you remember last quarter, sequentially, it was down 30% now we get to this quarter down another almost 40% year-over-year wage quarter Aero engines down 50%

Now remember to you know, you're you're comparing two periods a year ago that were at the high point of the last five ten years you were at the high point. So the criminal the the tops off you are you 50% down. So you're saying year-over-year down 50 on Arrow Engine, okay.

Yeah, and then I just wanted to be clear on on the net working capital side. So this this coming quarter this December quarter. It sounds like it's going to be another dog another strong quarter of of of taking down your your inventories is that I got that just a simple question on that and then I'll ask a a part be that right? That's that's correct. Maybe not the same levels but we do still see opportunity where we'll be taking inventory out. So anyway to to handicap the the impacts to to the p&l just from the loss absorption and this in this past quarter. I mean, I think you you had a knee bit lost in Sao of you know north of fifteen thousand million. If if you weren't taking out inventory just trying to gauge what that you know intrinsic Prophet would have been would have been closer to break even if you hadn't been taking out inventory and losing a dog.

Yeah.

Tim take that one on let him get involved.

Yeah, Phil. I mean, I think that's a fair way of looking at it certainly would have been closer to break even or positive. I mean, it really is an absorption impact them. I mean you've got fixed costs that don't go into inventory and you've also got the variable cost when you're running at you know, lower levels have have a larger impact on on your p&l long as you're bringing the inventory down. So I think that's a fair estimate directionally of what it would look like this quarter. Okay. So you had about a plus or minus a $1 hit from under absorption. And then you're also saying you had about a 3 and 1/2 million dollar hit from from

The cover cost we said were about seven at seven point three weeks and included in that 7.3 is a $3000000 bankruptcy impact so direct costs about 5, so just to clarify on that. So what so was that it was that bankruptcy hit was that bankruptcy hit in your your numbers. You didn't strip it out.

We added it back for adjusted EPS, but it's in the segment numbers that we were boarded.

Okay, and then on on these covert costs, what can you can you just explain what these what these actually are you may have done that if I apologize if you did, yeah, I mean sure we tried to give some high-level. It's basically the cost of keeping the facilities going that we wouldn't have had it not been for COVID-19 protocols that we had initiated, uh, you know rentals of of equipment and extra PPE for the people in the facilities. There's some aspect of you know, as people suspect they have them exposed to COVID-19 paying them to stay home and then just kind of other operating supplies, you know for just general protection in the current environment.

Thanks very much.

And the next question will come from Chris Bowen with tier four research, please go ahead.

Hey, good morning, guys. Thanks for taking my call the morning Chris. I apologize. I got disconnected there for a second. So hopefully I'm not competing anything. If I do let's just chalk it up twenty twenty, but I wanted to just follow up. I heard a tail end of the magnetic Q&A session and I I just wanted to make sure I understood how the I should think about the timeline wage. I guess maybe you'd given numbers like just forgotten. But how do I think about the receive the man could be five to ten times greater you mentioned earlier and markets that you're looking at home. Where do we start taking Bob those call them green bananas turning into real value more than such and starts. I guess I'm asking cuz I was wondering if there was any wiggle room in terms of the cat box and the time.

Yeah, just to be clear on that. I said the current available Market to us.

could

You know three and four times higher over the next five to ten years. So not 5 to 10 times three to four times titles. And yeah, okay, so that's still a big stick number and I think if you follow this for a long time, you're aware that we've been in this market for for quite some time on the Apu side with Aerospace and it's just the way for us to early broadnax. You know, I mean, we're moving more and more towards the electrification. So this just takes a proprietary products and now process and increased equipment wage into into other markets like Transportation defense and and I got so and consumer electronics. So, you know this we're we're we're getting earnings and revenue for this right now and I think over the next several quarters, you'll see that continue to increase I can't give you a specific time on on when that might get to that trip home.

But I do think it's over the next five years. Okay, so we're not waiting for anything like the the new Tesla plant in Texas or anything like that. It's just a gradual Outlook of growth.

I think it's a gradual Outlook. But you read all of the stores that mean more and more companies are moving to this Direction. I mean, you saw the announcement from General Motors and what they're going to do that Thursday musical across Aerospace how you could potentially see, you know, Electric commercial flights certainly has very small scale. They're doing the testing that now this is not this is going to touch a lot of areas drones and Robotics and I think we're really at the right point in time here to capitalize on it and I think the most important point to make real life not only do we have the expertise. We have a private area product and we now within the next three to six months. We'll have our new Mill up and running which is quite an accomplishment. We're getting significant pull from our customers that want us to not only Supply that proprietary product but wants to move further and are closer closer to them.

In supply-chain, whether that be in the building of stacks what we may or may not do going forward in terms of Motors. So it's a really exciting opportunity for us that is near term at the bottom line. The near-term. It's not it's not a decade away. Okay, that makes sense. One of the issues. I used to follow pretty closely what the whole product approval process at Athens and I guess I was wondering if anything has changed since the the coconut break and kind of everybody got distracted by other issues. Like it has it slowed down or are you doing less work there or nah? Maybe it pushes out some of the longer-term opportunities.

I wouldn't say that. I think the best word is that different now the, you know qualification process for a long long time. It's a very face-to-face type of process the customer visits your plant you visit the customer obviously with the travel restrictions that has been limited Thursday. We deal with a very sophisticated customer group. So we found other ways to continue to push this process along. I mean, I would I wouldn't say they were at the exact speed that we were at prior to pandemic but it has not slowed much again because of the sophisticated customer base. They know that this Market is coming back and they know off to the pandemic. This is a sold-out market that could not meet their demand. In other words. They couldn't build enough engines prior to the pandemic so they know how important that facility. Yep.

They continue to push forward.

Albeit in a different manner than we did before. Is there still low-hanging fruit in terms of like, you know some big products out there a big volume products that that could move the needle

Yeah, there's still a couple of big ones out there for us to get qualified for sure. Okay, and then just the last question. I thought Tim said distribution office and picked up. I was wondering if that was just transportation-related or Cadet Titan to I thought you said you there was some areas Aerospace that were getting better. Just curious what drove that home. Yeah, just to be clear when I said distribution. I was talking and in the pet business unit at that segment. We got a distribution business within our Pap segment and I think that you're right at the comment distribution is tied pretty significantly to Transportation. So that automakers return to work they suck spike in in demand.

Great. Thanks for all the info on the call cast.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back up with Brad Edwards for any closing remarks.

Thanks Chad. Thanks everyone for joining us today. Excuse me on a first quarter of fiscal 21 conference call to look forward to speaking with all of you on our second quarter call. Thanks again and have a great day off. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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