Q3 2020 CIRCOR International Inc Earnings Call
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Ladies and gentlemen, thank you for sending by and welcome to the key 320, 20th darker International earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question during the session you'll need to Crestar then one on your telephone please be advised that today's conference eighth being recorded if you require any further assistance. Please press star then zero.
Now like the hand, the conference over to your Speaker today Mister David <unk>. Thank you. Please go ahead.
Thank you and good morning, everyone on the call today are Scott backup circle, as president and CEO and I'll be counter wall, the company's chief financial officer, despise will be referring to today or.
Mailable on surfboards website at Www Dot <unk> dot com on the webcast and presentations section of the investors link please turn to slide too.
Today's discussion contains forward looking statements that identify future expectations. These expectations are subject to known and unknown risks uncertainties and other factors for a full discussion of these factors. The company advises you to review <unk> 10-K, 10 cues and other SEC filings the company.
These filings are available on its website at circle Dot com actual results could differ materially from those anticipated or implied by today's remarks any forward looking statements only represent the company's views as of today November 5th 2020.
While circle I may choose to update these forward looking statements at a later date the company specifically disclaims any duty to do so.
On today's call management referred to adjusted operating income adjusted operating margins adjusted net income adjusted EPS free cash flow net debt inorganic measures. These non-GAAP metrics exclude certain special charges and recoveries. The reconciliation of Sarcoid non-GAAP measures to the comparable gap measure.
<unk> are available in the financial tables of the earnings press release on sort of course website now I'll turn the call over to Scott. Please turn to slide three.
Thank you David and good morning, everyone.
Software delivered a strong third quarter, despite unprecedented macro challenges.
We need to focus on de leveraging the balance sheet.
Now I'd like to provide some highlights from the third quarter. Please turn to page four.
We booked orders of $167 million down 19% organically due to the impact of COVID-19 on our industrial and commercial aerospace businesses.
Defense orders were relatively low in the quarter due to timing of large programs the growth outlook for defense remains strong.
Sales came in as expected at $187 million flat to prior quarter and down 15% organically.
We continue to believe Q3 is the bottom for sales and orders.
And show improvement in Germany, India, and China with orders increasing in the low double digit range, partially offsetting pressure in North America.
While OEM capital projects remain depressed we.
We experienced sequential improvement in the aftermarket side of the business on a global basis.
As expected.
The industrial segment had sales of $124 million.
Flat to prior quarter and down 18% organically.
The EBITDA margin was 7.9%.
Okay.
And 260 basis points sequentially.
With $6 million Lord of Avenue.
The aerospace and defense team delivered $1 million of incremental operating income driven by price for activity and other aggressive cost actions.
Turning to slide seven.
Four Q3.
The effective tax rate was approximately 13% lower than the 14.8% in the back or.
You too are changing the statutory tax rate where circle operates.
Four cute for the tax rate is projected to be approximately 15%.
The company took a non-cash charge of approximately $42 million.
To create a valuation allowance against its remaining U S before tax assets.
This non-cash charge was quite under GAAP accounting rules pray.
Primarily due to recent U S tax law changes in.
And losses in the U S from our divested businesses.
Discharge does not impact are non gift tax results for the quarter and is not expected to have an impact on our future non-GAAP tax results.
Looking at special items and restructuring charges.
And.
Regionally, we saw weakness in North America, and most of Europe, offset by strength in Germany, China, and India across most major sectors.
As we mentioned in last quarter's earnings call. We believe that Q3 marks the bottom and we expect industrial segment orders and revenue to improve sequentially in queue for.
Both for market, an aftermarket orders are expected to increase double digit sequentially.
From an end market perspective, we expect slight sequential improvement in many of our larger and markets.
Our generation is showing early signs of improvement globally.
Downstream oil and gas orders are improving as high priority capital projects and certain maintenance activity moves forward.
Are shorter cycles, chemical processing and markets, which are more closely linked to consumer demand are showing slow improvement.
For industrial revenue in queue for we expect a moderate improvements sequentially with growth ranging from flat to up 10% while year over year revenue is expected to be down between five and 15%.
Most OEM, an aftermarket and markets are expected to improve in queue for compared to Q3.
Downstream oil and gas revenue is expected to be up sequentially due to the timing of project shipments and higher aftermarket activity in the quarter.
Regionally, we're seeing pockets of economic improvement in China, India, and Germany, which we expect to continue.
Commercial Marina midstream oil and gas are expected to remain at low levels due to depressed activity and shipbuilding low ship utilization, an ongoing project delays in midstream oil and gas. Please.
Please turn to slides 10 and 11.
Overall, we expect aerospace and defense orders in queue for to be in line with Q3 sequentially and down versus prior year driven by the timing of defense program orders, an ongoing covid related headwinds in the commercial business.
For aerospace and defense revenue in queue for we expect a significant sequential improvement from Q3.
Defense revenue should see sequential growth of 20% to 25% and year over year growth of 15% to 20%.
Growth in the quarter is driven by strong shipments across a submarine portfolio, our missile portfolio and for the joint strike fighter.
Commercial revenues expected to grow sequentially between 15, and 25%, but we'll be down year over year between 40 and 45%.
Arching statement, there's optimism about 2021.
You mentioned some of my prepared remarks around refiners and that may be.
They may be a little more bullish about 2021 than than what we're hearing and other markets but.
Starting in Q4 here, we're expecting that capital project orders that have been delayed through the year are going to start to drop into into Q4, and we're already we're already seeing that happening here in October the aftermarket in downstream oil and gas is.
There's a couple of different pieces here says you as you think about Q2, Decrementals and you know at 19% you should expect cute for in the mid 20th if you're all right. So as you as you look at where we are in the work we've done around costs dog, you should feel pretty comfortable as we go into the queue for a decrementals being in the mid twenties as you look for uhm as.
Talk about the N D business and look at where you know where it was before in Q3, a margin going into cute for should be.
Close to what the margins when Q3 and the N b side of the word.
And I'll be any thoughts on Incrementals, you know when you do start to recover.
We agree in general, we expect to see aftermarket recover sooner than than than for market with some notable exceptions, but yes. So we did see aftermarket slightly improving in Q3.
Coming into Q4, we're expecting that trend to continue so so aftermarket we still expect will lead the the OEM recovery, but we're also anticipating we're going to see the OEM business improve as we go into Q4 as well so.
Maybe a little bit more improvement in aftermarket versus OEM, but both are expected to improve in Q4 for both orders and revenue.
Then maybe just specifically on the downstream business, obviously critical flow can be very lumpy when it comes to orders and pretty lumpy when it comes to revenue as well.
I think you talked about a pretty low level of orders in the third quarter expectation for that to improve in the fourth quarter can you give us a little bit more color on what you're seeing out there in the market maybe firm up a little more long term.
Kind of trends in that business.
When those fourth quarter orders start to hit revenue will we see that early in the new year or just take a few more months before that turns into revenue.
Sure so.
That's exactly right in the downstream business that can be very lumpy our orders can can be.
50% of prior year or or a 100% up from prior year in any given quarter. So you have to kind of be careful about extrapolating too much from from one quarter in that business. So orders were significantly down versus prior.
Prior year in our downstream business in Q3, but we're expecting a pretty strong snap back in Q4, and we're going to we're going to see order intake in Q4 on both capital projects and aftermarket jumped significantly from Q3 and as I mentioned in the prepared remarks that the aftermarket they can only delay for so long I mean these are critical price.
Also sees and they start taking a lot of risk if they delay any longer than about 12 months. So we're seeing the aftermarket projects start to start to pick up we're actually seeing some unplanned maintenance activity as a result of too much delaying.
Earlier in the year and so obviously, we get the price for that so we're getting some aftermarket business there.
As well when we look at the project business we've been active.
Actively working a big project pipeline all year and as you know these projects have not turned into orders yes.
Yes, we are we.
We think that Q4, we're going to see a number of these projects start to turn into orders and we'll start executing them in Q4.
Your question around timing of orders to revenue.
In general we start recognizing revenue about three to six months. After we receive an order on these capital projects and we can ship anywhere between six and 12 months, but the revenue recognition would would start sooner simply because of the way the accounting works and then.
Aftermarket of course, it hit the revenue recognition happens as we're executing the door.
Got it one more on on defense, obviously, some good solid growth there I.
I think you guys have pretty good visibility to that is there any kind of color you can give us on what you're thinking about the defense market for 2021.
Sure. So we this is also lumpy as you know so we really have to look at about a 12 months rolling order intake for defense.
Defense we are.
We're very you're right we have a lot of visibility were very kind of comp.
Confident in strong double digit growth on the defense side going into next year. We're on platforms that are bipartisan platforms going into next year, where we know that production rates and investment and spend from the government is going to happen going into next year. So we've got submarine platforms that are launching.
We're increasing production rates, we've got missile platforms, we've got the joint strike fighter. So we're we're very confident in strong growth on the defense side going into next year.
Great. Thanks, very much I'll pass it on.
Thank you David.
Thank you. Our next question comes from John Franzreb with Sidoti and company. Your line is now open.
Good morning, gentlemen, Scott.
Scott.
I want to start with your ability to implement price increases can you talk about which businesses are having the most success in that and which ones are finding the most challenging.
Sure.
We'll start with we are getting the most price on the aerospace and defense side is as you know.
We are.
Getting.
About the same net price increase on both the commercial as well as the defense side of the business, which is around 4%.
Total revenue.
The the bias on the.
Price increases is aftermarket orders and spot orders for many of the smaller platforms that are no longer on long term agreements. So if you look at at added distribution of the types of revenue that we have there's quite a bit on long term agreements, we have some defense business that subject to two.
Yes.
Those those are not areas, where we're getting short term price increases as contracts roll over we typically can get a price increase on.
Where there is a long term agreement and we do that.
But we're obviously.
Leveraging the aftermarket and spot orders and on both the commercial and the defense side and aerospace and defense and we're doing a very nice job of pricing based on value when when a customer needs in order urgently, we charge for that and.
And so we have a pretty detailed decision tree on on how we do this and we're getting better at it every quarter.
On the industrial side, we're netting about 1% of revenue on price.
This again is is much more biased towards the aftermarket part of in industrial. It's the same it's the same kind of thinking if you will around where we where we can price based on value. So when we're getting orders for screws first group bumps in their urgent we will we will price.
Based on the level of urgency required and so that's that's largely where the price is coming from right. Now is aftermarket on the industrial side again, we're where we can raise prices on the OEM side, we will but the majority of our price increases are in the aftermarket.
Okay, and I guess just to stick on the defense side a little bit.
I think the commentary you said that the order outlook for the fourth quarter is supposed to be largely flat.
But you also commented that the revenue profile seems to be looking better in Q4 and equal improvements versus your prior expectations in your top programs the joint strike fighter, but.
And your Dread now could you just kind of talk a little bit about the improved revenue profile, which program specifically is coming from and why is that change occurred from the previous quarter.
Sure.
So we if you look at our backlog I'm not sure if we disclose our backlog by defense or commercial but we were right at a record backlog on our defense business right now going into Q4 and into next year. So so if you.
And what we're doing here when we when we guide the quarter here is were looking very much at the backlog and the shipments expected in the quarter and those things that can move around a little bit based on when our customers.
Ask for.
Delivery. So the improved outlook is based on the.
The expectations our customers have for shipments in Q4 versus what we thought they were going to ask for.
Last time, we talked about this in Q3, so so yes, the top programs, we're expecting better shipments in Q4 as well as many of the other OEM platforms that were on in defense.
Okay, but there's no bias like Virginia, the subs, if you will versus the JSF.
No. They are all higher than we thought coming there than we thought three months all of them are running higher client.
Got it.
And then on the new product launches you touched on.
Earlier.
35, 32 is it an AG and 13 industrial could you talk about how much incremental revenue the contributing in Q3, and maybe what your expectations of incremental revenue contribute in 2021.
So so the.
We measure John we measure vitality for CIRCOR.
And because of the amount of time it takes for revenue to ramp up.
Product launched in Q2 this year is not going to generate a tremendous amount of revenue in this year and so the way we measure vitality is we look at revenue in the current year from products launched within the last three years and that's a number that's that's been growing consistently for the for the last.
For five years at CIRCOR and Thats, one that we measure.
So looking at year over year from new products. The way we look at it is products launched within the last three years. So so the direct answer to your question has anything launched this year the rat incremental revenues going to be relatively small it's not really moving the needle yet it takes a year or two for the revenue to ramp up.
Okay. That's helpful. Thanks, guys I'll get back in queue.
Okay. Thank you.
Thank you and our next question comes from Jeff Hammond with Keybanc capital markets. Your line is now open.
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Hey, guys. This is Brad on for Jeff.
Hi, Brad.
Good morning brand focused gaming hey, good morning.
Just one on the Arrow and then sorry, if I missed it but I think it was a little bit weaker than you were expecting in the third quarter and when I'm seeing a pretty.
Pretty big Downshift in the aftermarket business.
In the fourth quarter was that the driver maybe a little bit of weakness in Threeq you versus your expectation coming into Twoq and then when you kind of forecast that aftermarket business within within defense going forward I get something that might be more of a near term dynamic and could snap back pretty quickly or or is one of the lower for longer situate.
Hi, there.
Jeff I think you broke up in the very beginning you'd said you asked about quarters in orders in Q3 was that revenue in Q3 for aerospace and defense.
Revenue and just the impact that the aftermarket business man May surprise, you in the third quarter.
Yes, yes, okay. So so I'd say.
For aerospace and defense revenue in the third quarter was not too too far was it was in line more or less maybe a little light from what we expected in the third quarter as to answer your question about aftermarket.
Aftermarket came in more or less as expected as well in the third quarter, you'll notice the growth rate of aftermarket and defense going into the fourth quarter is lower than what we saw in the third quarter and that's simply timing its timing of project orders and shipments for for aftermarket on defense program. So we would expect that to snap back as.
He said quickly so we will see that.
Q1, Q2 next year, you will see that snap back to two to being kind of more of a normalized rate. If you will I think it was stronger than normal in Q3 with above 20% growth and it's a little weaker than normal now.
In Q4 with.
Relative to single digit single digit grow the right number somewhere between the two.
Okay that makes sense.
And then maybe on the cost side, you guys seem pretty confident about the $45 million savings target could you just remind us what that temporary or structural split out of that saving days.
And maybe just shift gears to 2021, how should we think about the carryover of some of these permanent saving versus.
And then maybe add backs and stuff on the temporary side.
Absolutely this will be I'll answer that for you. So first of all we're in line to as we as we talked about earlier in the previous earnings calls.
Line to deliver the $45 million at cost on Debbie lit up laid out right. So one of the $45 million five of that is cost of wood and so if you take a look at what's left over in left with about $40 million out of $40 million $20 million of structural cost. So thats, obviously incurred that's already happened and that will carry forward into 2021, because thats cost that we took up the business.
The remaining $20 million was was temporary cost and quite frankly, a very small portion of that is committed back to.
To come back in the business, which is tied to the four when it get match for example, but majority of that cost is going to depend upon when the war zones and when the volume comes back. So a good example would be a big chunk of that temporary cost out whats Carlos. So we obviously are not going to bring people back. If you will on Thats. The volume comes back so thats, how I would think about it so the $20 million.
Structural cost obviously outlets gain will be part of our lumber. It next year and the remaining $20 million of temporary a small portion is going to do but the majority of the cost that we took out is going to depend upon when the word tons and the volume comes back.
Okay that makes sense.
What did you realize in the third quarter relative to that target or maybe what is what is the savings target for the fourth quarter specifically.
Yeah. So so third quarter, we realized $30 million and as Youve same number for Q4.
Okay, and then maybe just kind of focusing on fourth quarter from a higher level. It sounds like things are going pretty well. Thus far in October have you seen any kind of retrenchment, given the escalation and tobin or or.
Have you baked that into your guidance at all for any kind of step back and a lot of two months of the year.
So we have a we have a range for industrials growth of zero to 10% in the fourth quarter.
I think one thing I don't know if I've mentioned this publicly before but as we enter a quarter in industrial roughly 70% of the revenue is is in the backlog. So we're really dependent on orders for 30% of the revenue in the quarter.
30% of the revenue, we get the order in the quarter and ship it in the quarter. So so that would be the the part that might have some uncertainty October so far is in line with what the way. We're guiding obviously, so October no indication of changes related to covert in Europe or the U.S.
Wes is going to is going to put his change anything about what were saying here. So we did use a range for that reason there is obviously uncertainty.
As we exit the year here and we're seeing we're seeing what's happening in all the major companies in major countries in Europe right now, but we are not seeing.
The impact on the order intake in on our expectation with shipments for Q4 at this point, so still some unknowns and some uncertainty, but but so far what were seeing and what we're hearing from customers is is in line with with the way we are guiding Q4 on the top line.
Okay very helpful. Thanks for the time.
Okay.
Thank you and I'm showing no further questions in the queue at this time, ladies and gentlemen, Thank you for your participation on today's conference. This does conclude the program and you may now disconnect.
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