Q4 2020 CIRCOR International Inc Earnings Call
Greetings and welcome to circle or Internationals fourth quarter 2020 earnings conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I will now turn the conference over to Alex Mackie, Vice President financial planning and analysis and Investor Relations. Thank you Sir you may begin.
Good morning, and welcome to the third cores fourth quarter 2020 earnings call on <unk>.
And today by Scott Blackout, circled as president and CEO and <unk>, the company's Chief Financial Officer.
Before we start I'd like to remind you that today's presentation and press release are available on <unk> website at investors that circle for Dot com.
Today's discussion contains forward looking statements only represent the company's views as of today.
These expectations are subject to known and unknown risks uncertainties and other factors and actual results could differ materially from those anticipated or implied by today's remarks.
While certain core may choose to update these forward looking statements at a later date the company specifically disclaims any duty to do so.
Can find a full discussion of these factors and circle, where its form 10-K, 10, Qs and other SEC filings also located on our website.
On today's call management will refer to GAAP and non-GAAP financial measures. The reconciliation of certain non-GAAP measures for the comparable GAAP measures are available on our earnings press release with that I'll turn the call over to Scott.
Thank you Alex and good morning, everyone.
2020 was another transformational year for <unk> and despite the continued challenges presented by COVID-19, our team made significant progress on executing our strategic plan.
I'm proud of the resilience and efforts of the entire <unk> team in navigating such a challenging year, while continuing to deliver for our customers and shareholders.
As we saw throughout the year, our diversified product portfolio across multiple end markets and geographies helped mitigate the impact of a weaker macro environment.
Our defense business delivered strong results for the year, which mostly offset lower demand for commercial products.
Our differentiated technology and market position enabled us to increase prices across the portfolio.
We executed well throughout this year's downturn and exited the year with positive momentum.
With the health and safety of our employees as our foundation, we are focused on the things we control.
We achieved decremental margins of 25 per cent for the year through value based pricing and difficult, but necessary cost actions of $45 million.
Aerospace and defense improved their margins by 290 basis points, despite lower volume, notably Aerospace and defense won 20, new programs, including 16 in defense and foreign commercial.
We continued to implement the surf for operating system across the company, resulting in improved operational performance.
So for us well positioned to take advantage of an eventual market recovery in 2021 and beyond.
With the sale of instrumentation and sampling and distributed valves earlier in the year, our exit from upstream oil and gas is complete.
We continue to invest in innovation launching 49, new products in 2020 versus 33 in 2019.
We delivered on our free cash flow commitments throughout the year and ended with strong free cash flow of $20 million on the fourth quarter.
And finally, we reduced our debt by $126 million for 22%.
I want to highlight some new mission critical technology, we introduced in 2020.
On the defense side, our new missile arming switches are designed to operate more severe environments with respect to temperature radiation and G Force.
We launched itself arming switches in support of various missile programs, including hypersonic applications.
On the commercial side, we introduced a switch which activates the aircraft's location transmitter in case of on the in flight emergency.
In industrial we launched a series of new gas pressure reduction systems to help our customers and marine medical and public utility industries.
These systems help our customers transport and manage high pressure industrial gas LNG C N G biomethane fuels and medical oxygen.
Now I'd like to provide some financial highlights from the fourth quarter.
We booked orders of $168 million in the quarter, which was flat sequentially and down 25% organically.
Industrial was up 12% in the quarter.
A N D had lower order sequentially down 21% due to the timing of large naval program orders that pushed into 2021.
Revenue in the quarter was $208 million up 10% sequentially driven by strong defense deliveries, mainly on U S naval programs and moderate growth across most end markets in industrial.
Adjusted operating income was $23 million, representing a margin of 11, 2% up 200 basis points from the prior quarter.
Margin improvement was driven by sequential volume recovery pricing cost actions and productivity.
As a result of improved operating income the company delivered 66 cents of adjusted earnings per share.
Finally, we generated strong free cash flow of $20 million during the fourth quarter as we exited the year with operational cash flow unencumbered by transformation disbursements.
Now, let me turn the call over to Abe to discuss our fourth quarter results in more detail.
Thank you Scott and good morning, everyone.
As we talked through our segment results. This morning, we will discuss both sequential and year over year changes to results.
We are providing both comparisons due to the significant impact of COVID-19 on our end markets and year over year comparisons.
Starting with industrial on slide four.
In Q4.
Industrial segment orders were up 12% sequentially and down 22% organically.
The industrial segments on a sequential recovery in all major end markets.
By opening economies.
Revenue in the quarter was $131 million up 4% from prior quarter and down 13% organically.
Sequential improvement was primarily driven by strength in aftermarket sales across the portfolio.
We exited the year with an operating margin of 9% a sequential improvement of 160 basis points, driven by price increases and cost actions taken throughout the year.
Lower sales volume continued to drive a lower operating margin versus prior.
Turning to slide five.
Our aerospace and defense segment booked orders of $47 million on the quarter.
21% sequentially and down 33% versus prior year.
Both declines are primarily driven by timing of large defense program orders.
And the ongoing impact of COVID-19 on our commercial business.
We remain confident in the segment's growth outlook in 2021.
Revenue in the quarter for $78 million up 25% from prior quarter.
Strong defense deliberate mostly offset the COVID-19 impact on commercial aerospace.
Putting in only 3% lower revenues versus prior year.
Finally.
Operating margin was 24% per quarter, roughly flat sequentially and year over year.
Pricing up 3% combined with Dr <unk> and cost actions.
Drove strong margin in line with prior year, despite lower revenue.
Moving to slide six.
For Q for the effective tax rate was approximately 14%.
The company took a non cash charge.
Of approximately $15 million to record a valuation allowance against the remaining deferred tax assets in Germany.
This non cash charges required under GAAP accounting rules.
This charge does not impact on non-GAAP after tax results for the quarter and is not expected to have an impact on our future non-GAAP after tax results.
Looking at special items and restructuring charges, we recorded a total pretax charge of $13 $4 million on the quarter.
The acquisition related amortization and depreciation was.
It was a charge of $12 million.
With the remaining charges associated with restructuring activities in the quarter.
Interest expense for the quarter was $8 $5 million.
Down $2 $3 million compared to last year as a result of lower debt balances.
Other income was approximately $1 million.
Similarly, driven by pension income.
Finally, corporate costs were $7 $8 million on the quarter.
Turning to slide seven.
As Scott mentioned previously our free cash flow was $20 million on the fourth quarter up 11% compared to 2019.
Free cash flow was positively impacted by improved operating income.
On lower working capital, particularly inventory.
Do you see working capital demands on one of our top priorities and we expect further improvement in 2021.
We used the proceeds from the sale of our instrumentation and sampling business to reduce our net debt to $442 million.
A reduction of $126 million or 22% year over year.
Free cash flow generator in 2021 will be used to further pay down debt and we continue to target a leverage ratio of two to two five times net debt to adjusted EBITDA.
Now I will hand, it back over to Scott to provide some color on our end markets.
Thanks, Amit, let's start with our industrial outlook on slide eight.
Has it been mentioned signs of order recovery were evident in the fourth quarter across most major industrial end markets after hitting the bottom in Q3.
Geographically, we continued to see growth in China, and India, and we started to see signs of recovery in Europe, and North America in the quarter.
Downstream orders were up sequentially, driven by an increase in aftermarket orders, but down significantly versus last year due to a difficult compare.
We're expecting Q1 industrial revenue to come in between down, 1% and up 4% year over year.
We expect to see a normal seasonal dip in revenue sequentially in Q1 versus Q4.
We're starting to see improvement in our short cycle end markets, including machinery manufacturing chemical processing and wastewater as consumer demand starts to improve.
We're also expecting a mid single digit increase in aftermarket as global economies open up and consumption increases.
Downstream oil and gas revenue is expected to be down as refiners continue to manage capex.
We're seeing a similar customer capex dynamic across midstream oil and gas power generation and building construction, but to a lesser degree.
We expect these end markets to improve further as the year unfolds.
Pricing is expected to be a benefit of roughly 1% consistent with prior quarters.
Moving to aerospace and defense.
Aerospace and defense orders in Q4 were down sequentially and versus prior year.
Both declines were primarily driven by the timing of large defense program orders and the ongoing impact of COVID-19 on our commercial businesses.
We expect order strength across our defense programs to continue through 2021, driven largely by the joint strike fighter and multiple missile and drone programs.
We expect a modest improvement in commercial orders as aircraft utilization improves and OEM production rates increase through the year.
We remain confident in this segments growth outlook in 2021.
Revenue in the first quarter is expected to be down 7% to 12% versus prior year.
Defense revenue is expected to be down 1% to 5% due to the timing of large defense shipments and lower U S defense spares orders leading into the quarter.
We anticipate growth of 5% to 10% from our other OEM group, which includes products for drones missiles and helicopters.
In addition, we're planning for increased build rates for the predator drone in the U S and the Rafael fighter jet in Europe.
Commercial revenue is expected to be down between 35 and 40% in line with the broader commercial aerospace market.
Our market position on both Boeing and Airbus aircraft is strong and we expect revenue to improve throughout the year in line with aircraft utilization and production rates.
Pricing is expected to be a benefit of 1% in the quarter, but in line with 2020 for the full year.
Now I'll hand, it over to <unk> to discuss our guidance.
Before jumping into total year guidance I'd like to share a few more expectations for the first quarter.
In addition to the revenue guidance that Scott provided.
We're expecting incremental margins of 30% to 35% industrial and decremental margins of 30% to 35% in aerospace and defense.
Decremental margins in aerospace and defense on slightly higher than our full year 2020 decrementals.
Due to the expected mix of OEM and aftermarket revenue.
We're also planning for corporate cost of $8 5 million.
Higher than our expected full year run rate.
Due to the timing of certain expenses such as Rfps.
Interest expenses expected to be roughly $8 $5 million on Q1.
Finally.
Free cash flow for Q1 will be negative.
Due to seasonality of annual disbursements.
Now moving to full year 2021 guidance.
We're expecting organic revenue growth of zero to 4%.
With aerospace and defense is expected to grow at low to mid single digits.
And industrial at low single digits.
We are planning for a continued slow recovery in commercial aerospace.
We expect to be better than 2020.
But remained significantly lower than pre pandemic levels.
Our defense business remains healthy as we continue to win new business and deliver on growing U S defense programs.
In our industrial end markets.
We expect to see modest recovery <unk>.
Non stream activity improving in the back half of 2021.
We're expecting adjusted earnings per share of $2 to $2 20.
A 40% to 54% increase versus 2020.
This improvement is driven by top line growth and improved margin from price increases.
Structural cost out in 2020 and ongoing productivity.
Finally, we're planning to deliver free cash flow as a percent of adjusted net income of 85% to 95%.
We feel that this guidance reflects what we're seeing on our end markets and the operational improvements that we can control within the four walls of <unk>.
We're confident in our ability to deliver these results not only for our shareholders, but for our customers suppliers and employees.
Now I'll hand, it back to Scott to wrap up.
To summarize we remain focused on delivering our strategic priorities.
In 2021, we're taking actions to further improve our customers experience and our operational and financial performance.
We remain focused on attracting developing and retaining the best talent, while fostering a diverse and inclusive culture.
We continue to invest in growth through innovative new products aftermarket support technology to enhance our customers' experience and regional expansion.
Value based pricing continues to be a top priority leveraging our differentiated technology and our strong market positions in the niches where we compete.
The third core operating system will continue to drive operational improvement and margin expansion.
And by enhancing free cash flow through efficient working capital management will continue to delever the balance sheet.
In closing I'd like to thank the entire serve for team for their ongoing commitment to safety and delivering mission critical products to our customers with.
With that I'll be and I'll be happy to take your questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a call for.
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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you. Our first question comes from the line of Andy Kaplowitz with Citi. Please proceed with your question.
Hey, good morning, guys.
Morning, Andy.
Morning, Scott, maybe just talking about industrial first day.
In terms of your revenue guide for Q4. It came in at the lower end and last quarter. You said you expect it to pick up in sequential order is what you do.
Did see just focusing on downstream for a second obviously your Q1 assumptions for downstream are still quite muted. So can you give us some more color on what's going on specifically in downstream related businesses in your assumptions for 'twenty one.
Sure so so in.
In downstream so for let's start with Q4, what happened in downstream. So we had a difficult compare year over year last year in queue for downstream business was up about 50%.
So this year you see you see a fairly significant.
For the significant drop in orders as a result of the difficult compare.
If you look at industrial overall, all X X downstream it was roughly flat without without downstream. So that was the big variance from the quarter for Q4, as we look at Ed downstream going forward.
We are taking a somewhat cautious view through the first half we have a lot of of activity actually as we did in Q4, we continue to see a lot of activity a lot of activity on the aftermarket side and downstream. It is global we are we're managing and quoting and in process on a lot of different aftermarket project.
On the Capex side on the on the capital project side it.
It's more international outside of North America. So we will see a decent amount of activity in India, and Russia and to some degree in Europe, and so but in North America on capital projects or are there a lot less activity. So when we look forward in downstream were expecting an improvement sequentially in orders as we go into <unk>.
Q1.
And I'd say, we're being cautious for the first half, but we're pretty excited about the back half. We think a lot of these projects that we're managing right now, particularly aftermarket they have to drop the refiners can only delay aftermarket projects for so long and then they have to eventually convert and start doing the work. So so we think.
We think we will see improvement through the first half, but we're.
We are optimistic that the back half will be significantly better than the first half.
Thanks, Scott and then you were maybe a similar question for defense.
You are pretty confident coming into 'twenty, one at least when you were talking last quarter. It seems like some of these projects and programs are pretty lumpy.
So you know you're talking about Q1 being down here. So I guess my question has anything changed or is it really just timing you mentioned the spares. Obviously the administration has changed so has the outlook changed or is this really just timing.
So.
And in our defense business as you know we get we can get very lumpy orders, we can get orders.
10, 15 $20 million of orders in defence that fundamental change.
For a quarter.
We did see.
Some big orders pushed from from Q4 on the Navy side into the first half of 2021.
What you see on the Navy spares piece is largely timing and so I think in aggregate when you look at our aerospace and defense business. The defense piece, what Youre seeing is largely timing. So we're still very bullish about defense were bullish about the programs that we're on.
We want a lot of new platforms in 2020 that are going to start ramping up in 'twenty, one and 'twenty. Two so we still feel good about defense going forward and we are.
What youre seeing in terms of variances year over year is largely timing of large orders with specifically with respect to the Navy.
Thanks, Scott and then last question for me obviously, good cash flow in Q4, maybe just talk about the working capital situation you mentioned improvement in inventory in Q for further improvement expected in 'twenty, one so maybe give us a little bit more color on that sort of what's the potential on the working capital side.
And to hit that 85 to 95 per cent Gandhi.
Yeah, absolutely. So look as you think about 2020 and we've been talking about throughout 2020 as the <unk>.
Opportunity on the working capital side, specifically on inventory. So if you look at 2020 on a year over year basis, we drove about $6 million of inventory out.
We have further work to go do so as you think about 2021 on going into 2021, and so on net income starts to improve on a year over year basis, youre going to see that coupled with coupled with working capital improvement over the long long haul we expect the company to be to be in the 20% range Thats what industrial companies typically are we have some we have some work to go do.
And that's what we're focused on.
Okay. Thanks.
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Our next question comes from the line of Jeff Hammond with Keybanc. Please proceed with your question.
Hey, good morning, guys. Good morning, Jeff Good morning.
So I think the biggest variance from the framework versus versus my model is industrial and I just thought given.
How easy the comps are we'd see more growth and I understand some markets are maybe turning faster, but just wanted to get a better sense of.
Beyond the downstream discussion on what Youre seeing in some of these lagging markets in terms of.
Quoting activity and bidding activity that would suggest kind of further acceleration because we're seeing.
It seems very broad industrial recovery here.
Yeah, I think so.
So let me let me let me start.
For industrial specifically where were seeing some pieces of that business lead lead in terms of recovery. We saw in Q4, and we're expecting that to continue in Q1, so the industrial orders were up.
About 12% sequentially in Q4, and we're expecting there going to be up again, but rough order of magnitude you know high.
High single digits again sequentially as we go into the into Q1.
On the specific pieces, we are seeing a difference geographically, but also by end market.
But let me start with aftermarket versus OEM. So aftermarket we're seeing an improvement before we're seeing the OEM part of industrial improve and we have been seeing.
Let me shift to geographic we haven't seen growth in Asia in China, and India, and we are continuing to see that.
Europe, and or I should say EMEA and North America are both starting to come back as well. So we're seeing improvement in Europe, and North America. When we look at the end market specifically the shorter cycle businesses are recovering first and so this is where we're being a little bit cautious about what's going to happen with the longer cycle pieces of of <unk>.
For our core, but we're certainly seeing on improvement in chemical processing machinery manufacturing wastewater. These are areas that tend to be short cycle for us and that's where it seems to be starting the longer cycle is slower we're not sure what the pace will be here.
And so we're trying to be balanced here as we look at the future and Theres still a lot of uncertainty with the way. These economies are going to open up.
And the way these markets are going to turn so we're being a little bit cautious here with how we look at this specifically.
Specifically with respect to the longer cycle pieces of the business.
Okay, Great and then on.
On the Aerospace Defense you guide for the full year is low to mid single digits is there a way to break out.
You know how you think about commercial growth versus how you think about defense growth.
Sure.
Yes, we can do that so.
Yeah.
When you look at commercial we're expecting a modest recovery as build rates start to improve and haven't been announced to improve and as aircraft utilization starts to improve so we when we look at our commercial business was down it was down along with the whole market significantly in 2012.
We expect 2021 to be modestly better and.
Obviously far away from where we were in 19, we still expect.
That commercial doesn't get back to 2019 levels until around 2024. So we think it's a long slow recovery, but having said that 2021 is better than 2020, and we expect orders to improve as aftermarket and OE starts to on it starts to starts to recover on the defense side.
We are we are still bullish about defense, we we expect organic growth from 2020 to 2021, we expect in line with guidance, we expect roughly mid single digit growth as we go into 2020 and into.
Into 2021.
Maybe on the other both kind of both kind of in that low to mid single band.
Exactly that's right correct is keep in mind as we as we progress through the year the comps on commercial aerospace get free.
Easy to so you can start to see that growth come through which kind of ties back to the guidance, we laid out and.
A lot of this is is linked to specific platforms. We're seeing good growth in our navy platforms.
For submarines missiles.
Those are two big pieces that are driving the growth.
Okay, and then just on the cost side, how do we think about I don't know if I missed this from the prepared remarks, but how do we think about temp costs coming back yeah, I can I can answer that question.
Before I answer that question, let me set the standard level, just so that we can all be on the same page here what is that.
Think about 2020, a day, we've talked about the $45 million of cost out the three pieces to it there's a $20 million.
<unk>, which is structural now keep in mind that structural cost start coming out even before the pandemic. So as we went through the pandemic a lot of that was already was already part of the run rate. So if you just think about structural for a second we have about $2 $5 million of carryover that's going to come in 2021, but majority of that is already a part of the run rate <unk>.
The balance of $20 million was tied to a temporary costs and when you think about that really the benefit portion of debt.
Temporary cost avoidance is already back into the business, but there is about half of that is still out there that hasn't come back which is tied to furloughs or travelers to travel expenses still being at a lower level because the world is still.
Still pretty shot.
And Thats a lot of the business and then when it comes back as the volume starts to come back. So that's how I would think about the temporary temporary cost base. So roughly about half of its back end and the other half is waiting on volume correct.
Okay perfect. Thanks, guys.
A final reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.
Good morning, everyone.
Net of Nathan.
I think quite upbeat on the inflation in the system here.
He had recently can you guys talk about price cost.
Able to pass these through are you able depositary quickly.
And what's the assumed contribution from crossing the revenue guidance this year.
Okay. When I started my okay. So on we will start with the your ear inflation here in place of inflation question, So where we are.
I think the weighted the way to think about inflation for soy for let me start by what we buy it's rare that we're buying raw commodity.
We're almost always buying components and parts that we're assembling and so when you think about our businesses in general.
Our supply chain team has done a nice job on signing our suppliers up with long term contracts those long term contracts usually have some kind of.
Band of absorbable in inflation that the suppliers will absorb.
Anything outside of that band and we get into a negotiation at this point, we don't expect a.
A significant variance associated with inflation and in fact, we're still expecting that our net productivity from our supply chain team will be positive, meaning we'll get more cost reductions than the inflation that will absorb so so we're not expecting inflation to be a major issue for circle or at this point based on the name.
<unk> of our supply base and in the contracts, we have in place with our suppliers.
On the pricing side.
For the full year.
I think you should expect pricing more or less in line with 2020.
Is what you should expect from us in 2021, that's the way we're expecting it to play out.
Some seasonality in pricing.
You'll see relatively low percentages in Q1, that's that's linked to the relative volume of aftermarket and the kinds of the nature of the mix of the business. If you will but we're expecting pricing more or less in line with 2020.
So Nathan this is to be so.
When you think about the company in total what you saw in 2020 was about a 2% price in 2020 and you should expect similar levels in 2021.
Helpful. Thanks.
Hearing about some supply chain shortages from supply chain disruptions can you guys talk about you know anything that youre seeing out there and any mitigating factors that youre undertaking.
So.
At this point in time, where all of our factories are up and running at the levels of demand and so we're not we're not experiencing any meaningful disruption of course, we have some shortages here and there that we manage day to day, but there's nothing nothing meaningful like we saw a few times last year. So.
On the World seems to have adapted for the most part at least our supply chain has as well as us and we're not we don't have any meaningful supply chain issues at the moment.
Alright, thanks for taking my questions.
Thank you Nathan.
Ladies and gentlemen, there are no further questions at this time.
You for joining us today. This does conclude our conference call.
May now disconnect your lines at this time. Thank you for your participation and have a wonderful day.
Got it.