Q4 2021 Carpenter Technology Corp Earnings Call
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Hello, and welcome to the call protect all G Corp, fourth quarter fiscal 2021conference call.
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Over to Brad Edwards Investor Relations. Mr. Edwards. Please go ahead.
Thank you operator, good morning, everyone and welcome to the Carpenter Technology earnings Conference call for the fiscal 2021 and fourth quarter and full year ended June 32021.
This call is also being broadcast over the internet and along with presentation.
Dentation slides. Please note for those of you listening by phone you may experience a time delay in slide movement.
Speakers on the call today are Tony <unk>, President and Chief Executive Officer, and Tim Lain, Senior Vice President and Chief Financial Officer.
Statements made by management during this earnings presentation that are forward looking statements.
Based on current expectations risk factors that could cause actual results to differ materially from those forward looking statements can be found and carpenter technology's. Most recent SEC filings, including the company's report on form 10-K for the year ended June 32020 form 10-Q for the quarters ended September 32000.
20 December 31, 2020, and March 31, 2021, and the exhibits attached to those filings. Please also note that and the following discussion unless otherwise noted when management discuss sales or revenue that reference excludes surcharge when referring to operating margins that is based on operating.
Operating income and sales excluding surcharge I will now turn the call over to Tony.
Thank you Brad and good morning to everyone on the call. This morning.
Let's begin on slide 4 and a review of our safety performance.
For fiscal year 2021, our total case incident rate was 0.6.
Marking our best fiscal year safety performance on record.
Today Carpenter technology is 1 of the safest manufacturing companies and the United States. However.
However, our ultimate goal is a zero injury workplace.
Continued progress we made in fiscal year 2021 was due to our focus on fundamental.
So safety programs, including enhanced safety human performance leadership development and employee engagement activities.
And fiscal year 2022, we plan to build upon and momentum and take our next step towards a zero injury workplace.
Now, let's turn to slide 5 and a review of the fourth quarter.
I meant on fourth quarter results finished ahead of our expectations.
<unk> reflect our efforts to position ourselves to capitalize on the emerging recovery and market opportunities.
While the recovery remains in the early stages and varies by end use market. We are encouraged by the market signals we are seeing we.
We saw demand.
<unk> improved sequentially across our major end use markets, including aerospace and defense and medical.
During the quarter, we continued to execute a strategy focused on driving liquidity strengthening key customer relationships and advancing our manufacturing capabilities with.
We generated free cash flow of 43.
<unk> billion and for the full year delivered free cash flow of $132 million quite an accomplishment when many in the industry burn through cash during the market downturn.
We finished the fiscal year with $582 million, and total liquidity, including $287 million and cash.
Customer engagement around Athens remains high as we continue to broaden our capabilities and customer base.
Notably we received another important qualification during the quarter.
The Athens facility will be a competitive differentiator for carpenter technology as the industry build rates rise and lead times bigger.
<unk> mixed and.
In addition, I'm excited to share that our hot strip mill and already campus recently completed its commissioning.
The timing for the strip mill coming online is ideal as prior to the pandemic and now on to the recovery, we have seen and continue to see steady growth from existing African.
<unk> like high temperature engine, gaskets, fasteners, and electrification applications, including motor stack laminations for jewelry power units and generators.
The mill significantly strengthens our soft magnetics capabilities and production capacity at a time when electrification is increasingly.
And really disrupting major end use markets.
The higher frequency motors being used for electrification and require thinner strip, which is more challenging to produce.
And as these markets grow enhanced thin flat rolled product capabilities would become increasingly critical to overall system performance.
Productivity quality and consistency of our new Hot strip mill will create an advantage for carpenter electrification motor snacks assembled from the spin laminations.
We are already producing materials to support new EV Asian Motors that are and the process of FAA services.
Certification.
We are also producing products for sensors and resistors that are now in newer more advanced electric vehicle electronic systems.
Now, let's move to slide 6 and the end use market update.
As I mentioned earlier, we are seeing increasing signs of recovery across our.
These markets. We continue to believe the worst is behind us and that demand conditions across end use markets will further improve as we move through fiscal year 2022.
Our aerospace and defense market sales were up 21% sequentially and a growing number of our customers are pointing to further demand acceleration.
We're in early calendar year 2022.
Activity in the defense Submarket continues to be strong and we are generating increased interest and our advanced materials as customer source for new programs.
And the medical end use market sales were up 22% sequentially.
Elective procedures volumes.
<unk> increased and the fourth quarter as patients sentiment and hospital capacity continued to improve due to higher global vaccination rates.
Conditions continue to vary by region and dependent on COVID-19 concerns and impact on procedures.
Results and our orthopedic and cardiology Submarkets were also strong.
<unk> and we began to see increased stocking activity in the distribution channel.
Looking ahead, our customers expect order rates and backlog to show further improvement and the current quarter as the overall market continues to ramp and support of the ongoing recovery and elective surgeries and.
As predicted that orthopedic.
And procedures will reach 85% to 90% of pre pandemic levels in the coming quarter.
Cardiovascular procedures will reach 80% to 85% of pre pandemic levels.
Although the emergence of the Delta variant could soften the elective surgeries increase and some areas.
We.
We had been delivering consistently strong growth and our medical end use market prior to the pandemic and believe it will return to being 1 of our fastest growing markets post pandemic.
And the transportation end use market sales were up 25% sequentially and 111% compared to last year.
The global.
<unk> per vehicle production forecast for calendar year, 2021 remains robust and we achieved record shipments for heavy duty truck applications and the quarter due to increasing demand for our exhaust valve solutions.
We continue to see market share growth opportunities and both the light vehicle and heavy duty truck submarkets.
And continue to further penetrate key market adjacencies, including off road marine and aftermarket.
Now moving to the energy and use market.
And the U S oil and gas sub market, we are seeing initial signs of recovery, but the pace is measured.
And the international markets have largely stable.
Stabilized and the outlook is becoming more positive.
As a reminder, the prior year fourth quarter results included our Omega West business and that was divested early in fiscal year 2021.
And our power generation and sub market, we are working closely with customers as the maintenance upgrade cycle continues.
And lastly for the industrial and consumer end use market sales were up 21% on.
On both a sequential and year over year basis.
Growth for both periods was driven by historically high demand for our semi com solutions recovery and industrial distribution as well as increased consumer electronics.
Okay.
Now I will turn it over to Tim for the financial review.
Thanks, Tony Good morning, everyone I'll start on slide 8 the income statement summary.
Net sales and the fourth quarter were $421.6 million and sales excluding surcharge totaled $348.
Demand.
Sales, excluding surcharge increased 17% sequentially on 27% higher volume.
Compared to the fourth quarter, a year ago sales decreased 7% on flat volume.
As Tony covered in his review of the end use markets, we continue to see signals of improving demand.
Conditions across most of our end use markets.
SG&A expenses were $47.9 million and in the fourth quarter up $6 million from the same period, a year ago and relatively flat sequentially.
The year over year increase reflects higher amortization costs related to the ERP system that.
1 placed and serviced during fiscal year 2021.
And higher accruals related to certain incentive compensation programs.
These items were partially offset by the actions, we took to reduce costs, including the elimination of certain salary positions late last fiscal year.
The current quarter's operating results in.
That was $28.2 million of special items, which include the following.
First $52.2 million of LIFO decrement charges.
About $48 million of this charge is included in the <unk> segments the results.
And with the remainder or $4 million related to our dynamic business within the Pep segment.
<unk> took a LIFO decrement charges due to our significant reduction of inventory.
As required we recorded a noncash charge to reflect the liquidated historical LIFO layers that are well above current inventory costs.
Second $2.9 million and COVID-19 costs, which are in line with the 2.
$7 million of COVID-19 costs and current as our recent and third quarter.
As a reminder, these costs include direct incremental operating costs, such as outside services to execute enhanced cleaning protocols.
Isolation pay per employees potentially exposed to COVID-19, and.
And additional personnel.
And I'll protective equipment and other operating supplies necessary to maintain our operations, while keeping employees safe against possible exposure.
Third the current quarter special items include about 3 million and restructuring and asset impairment charges. The.
And the restructuring and asset impairment charges, including inventory write downs.
Our associated with executing the near final steps against our planned actions to reduce costs and narrow our focus and our additive business unit within our <unk> segment.
The operating loss of $70.7 million and the current quarter.
And excluding the impact of the special items I just highlighted and.
Adjusted operating.
<unk> was $12.5 million and the current quarter compared to $8.9 million and the prior year period, and $29.7 million and the third quarter of fiscal year 2021.
Again, the current quarter's results exceeded the expectations, we set at the beginning of the quarter and reflect the impact of higher than anticipated shipments coupled.
And with our continued focus on cost controls.
Our effective tax rate for the fourth quarter was 27, 7%.
Earnings per share for the quarter was a loss of $1.18 per share.
When excluding the impact of special items adjusted earnings per share was a loss of 28 per share.
Now turning to slide 9 and our <unk> segment results.
Net sales for the quarter were $361.5 million or $289.9 million excluding surcharge.
Compared to the fourth quarter of last year sales, excluding surcharge decreased 6% on 3% higher volume.
Sequentially sales.
Excluding surcharge increased 18% on 28% higher volume.
The sequential sales improvement reflects higher sales across all end use markets other than energy.
The largest contributor to the sequential sales growth was aerospace and defense, where sales were up 20% sequentially.
Other than energy all other end use markets reported sales up sequentially, 20% or higher.
<unk> reported an operating loss of $47.3 million for the current quarter.
The same quarter, a year ago <unk> operating income was $5.3 million and and the third quarter of fiscal year 2021.
<unk> reported an operating loss of $9.9 million.
It's important to note that the current quarters operating results for SCO include $47.9 million related to the LIFO decrement charge I mentioned earlier.
And also include $2.1 million of COVID-19 costs.
When excluding those 2 items.
And <unk> would have reported operating income of $2.7 million.
Again, excluding the impact of the LIFO decrement and COVID-19 costs, the sequential improvement and operating income performance.
Is due primarily to the higher sales.
Also of note, excluding the impact of the noncash LIFO debt.
<unk> large <unk> reduced inventory by $47 million and the current quarter and for the full fiscal year 'twenty, 1 SCO reduce inventory by $193 million.
Looking ahead, we expect that demand conditions across most end use markets will continue to improve.
Based on current expectations.
And matures, we anticipate <unk> will generate a similar sequential operating income performance and in the first quarter of fiscal year 2022.
For clarity on when a highlight a couple of key points and this guidance first this estimate includes similar sequential COVID-19 related costs and the upcoming first quarter and second we.
And do not expect any further LIFO liquidation impacts at this time.
The anticipated results take into account and our continued focus on managing costs closely as activity levels begin to normalize as the broader market recovery take shape and we execute against our plan and annual maintenance shutdowns, which are critical to ensure our operations.
<unk> future anticipated demand.
Now turning to slide 10, and our Pep segment results.
Net sales, excluding surcharge were $75.6 million.
Which were essentially flat from the same quarter, a year ago and up 16% sequentially.
It is important to note debt sales.
And were essentially flat year over year. Despite the fact that the same quarter of last year included sales and associated with our Omega West business that was divested and the first quarter of fiscal year 2021.
The year over year growth, excluding and Mega West was driven primarily by growth and are additive sales as well as improving.
Demand conditions and our distribution business.
The sequential increase and sales reflects increased demand for titanium materials used in the aerospace and defense and medical end use markets.
In addition, our additive business drove a sequential increase in sales as demand conditions and can continue to improve.
And the current quarter Pep reported and an operating loss of $2.3 million.
This compares to an operating loss of $8.4 million and the same quarter, a year ago, and an operating loss of $3.3 million in the third quarter of fiscal year 2021.
For clarity the current quarter's results include a $4.3 million LIFO decrement charge associated.
And with our dining and that business unit.
Excluding that LIFO decrement charge operating income for the current quarter would have been $2 million.
The sequential operating results reflect the favorable impact of higher volumes the.
The year over year results reflect the benefits of the portfolio actions, we've taken over the last several quarters.
And particularly focused on reducing costs and more additive business unit.
And the divestiture of a megawatt business earlier this fiscal year.
As we look ahead, we believe the demand conditions will continue to improve in the coming quarters.
With that said given some of the same dynamics and lastly, O faces some planned summer shutdowns.
And Q1 for both us and our customers well.
And we currently anticipate capital generate on.
Operating results of breakeven to a $2 million loss and our upcoming first quarter.
Also as I mentioned for <unk> the.
And the Pep guidance includes COVID-19 costs largely in line with the fourth quarter.
Now turning to slide 11, and a review of free cash flow.
And the current quarter, we generated $75 million of cash from operating activities and.
Total of $250 million for the full fiscal year.
As you can see within the cash flow generated from operations, we continue to reduce inventory.
And the current quarter, we drove a $57 million reduction.
For all of fiscal year 'twenty, 1 we've reduced inventory by just under $240 million.
Moving down we funded the minimum required pension contributions to our qualified pension plans of $20 million as planned for fiscal year 'twenty 1.
And the fourth quarter, we spent $22 million of capital expenditures and finished the year with just over $100 million of capital expenditures.
We finished the year with lower capital spending than expected.
Largely as a result of our concentrated efforts to complete the hot strip Mill project.
And the lack of availability of <unk>.
Tractors and other resources to start certain projects.
We also continued to fund a constant dividend to our shareholders, which we consider as part of our free cash flow.
We continue to highlight that we have paid a regular dividend to our shareholders. Despite the market headwinds.
This was an important signal to our shareholders.
And of our conviction and the long term outlook for our business as.
And as well as our desire to continue to return value to our shareholders.
With those details in mind, we generated 43 million of free cash flow and the quarter.
And 132 million per the year.
From a liquidity perspective, we ended the current quarter.
With total liquidity of $582 million, including 287 million and cash and $295 million of and available borrowings under our credit facility.
With that let's move to slide 12 to talk about selected fiscal year 2022 guidance.
We're providing the select and information to help for modeling the.
Fiscal year.
Depreciation and amortization is expected to increase from $124 million and fiscal year, 2000, $21 million to $135 million and fiscal year 2022.
The increase reflects a full year of amortization related to the new ERP system that we implemented in fiscal year 2021.
As well as a full year of depreciation for the Hot strip mill that was recently placed in service.
We expect to spend about 125 million and capital expenditures and fiscal year 2022.
At this level, we'll spend on required amount for maintenance type capex, but this also allows us opportunities to make targeted.
<unk> investments and growth areas as well as expand capacity and certain constrained flow paths.
Moving to minimum required pension contributions.
And fiscal year 2021, as I mentioned, we contributed $20 million to our qualified pension plans.
With the enactment of the American rescue plan.
Plan Act of 2021 in March of 2021, our minimum pension contributions are effectively eliminated for fiscal year 2022.
For non cash net pension expense as a result of favorable asset returns and.
Slightly higher discount rates, we expect net pension expense.
To decline.
By $21 million and moved from $13 million of net pension expense to net pension and benefit of $8 million and fiscal year 2020.2.
For clarity the fiscal year 2021 number on this slide excludes $11.4 million of pension settlement charges recorded in fiscal year 2020.
Moving on.
Net interest expense is estimated to increase from 33 million and fiscal year, 'twenty $1 million to $41 million and fiscal year 2020 to be.
The increase was driven largely by lower capitalized interest due to the completion of several large multi year projects and the current fiscal year.
And lastly, the effective income tax rate.
For fiscal year 2021, our reported effective tax rate was about 23%. However.
However, when excluding the impact of special items, the fiscal year 2021 rate was about 29% for.
For fiscal year 2022, we expect the effective rate.
To be 28% to 30%.
With that I will turn the call back over to Tony.
Thanks, Tim.
Let's turn to slide 14, and my closing remarks.
And last year has been a challenging but successful year for Carpenter technology.
And navigating the pandemic, we have strengthened our company.
To best capitalize on the come and recovery.
With respect to our facilities and employees fiscal year 2021 was the safest and the history of the company.
By operating and unprecedented conditions.
In terms of managing our business, we moved quickly to execute various portfolio.
Folio initiatives and cost reduction programs, which will deliver between 60 and $70 million and annualized cost savings.
In addition, we have been relentlessly implementing the carpenter operating model across key work centers and have secured notable productivity gains.
We also focused on.
Company liquidity and finished the fiscal year 2021, with total liquidity of $582 million, including $287 million and cash.
And our enhanced operations and strong financial position will provide us with increased flexibility as we look to best capitalize on market.
On drive Attunity and the overall recovery as it continues to take shape.
We also expect to benefit from our Athens facility and the incremental capacity and offers to aerospace market as production levels rise and industry capacity begins to tighten.
We have meaningfully expanded and strengthened key customer relationships.
Ships during the downturn.
We have worked closely with our customers to address their changing material needs and production schedules and demonstrated that Carpenter technology is both a critical solutions provider as well as a valued business partner.
We remain a market leader and our core business, where we have provided mission.
And critical solutions to the world's largest industries for more than 130 years.
In addition, we have invested and emerging areas like our soft magnetic portfolio as electrification is a major trend moving forward.
As I said last quarter, the worst is behind us and the recovery path.
Part of it.
And while different recovery timelines across our end markets will continue to influence our shorter term quarter to quarter performance. We're excited about the midterm and longer term outlook.
Thank you for your time and now I will turn it over to the operator to take your questions.
Yes. Thank you.
<unk>.
At this time, we will begin the question and answer session to ask a question you May Press Star then 1 on your touched on and found it.
If youre using a speakerphone, please pick up perhaps up before pressing the case.
Your question. Please press Star then 2.
At this time, we will pause momentarily to assemble the roster.
And the first question on comes from Gautam Khanna with Cowen.
Yeah.
Yes, hey, thanks, good morning, guys.
Good morning.
Was wondering NSA go there was mention of.
Some closeouts in the quarter benefiting sales and profits and.
You can quantify that.
Not to the exact number gautam, but we just wanted to mention that there was some of that is a year ago. When we work with our customers to delay some shipments.
We true that up and the.
And this quarter here so.
So not.
Not overall significantly material, but it was it wasn't 1 of the drivers too.
Higher sales and the quarter.
Okay and.
And the commentary around the fiscal Q1 and SCO.
And being similar to.
Q4.
Anyway, just curious what are you seeing and the aerospace like backlogs.
Where are you seeing demand picking up.
Is it engine does and fasteners and structures.
Could you characterize sort of what's been going on and that channel.
Well I can say to you look forward and why we're confident and it's a couple.
A couple of data points overall.
Our total backlog is up 20% sequentially and that's across all of our end use markets different percentages, but all of our end use markets. The backhaul vs. Increasing bookings sequentially were up 14% some markets higher than that for example, and.
Medical and it had very strong bookings in the quarter and lead times or are extending across the board as well. So if you look on all those things start to come together. It gives you a very positive outlook now it's fair to say that not all customers are at the same point, we have some customers that.
Ordering.
Right now for immediate needs, we have other customers that are telling us hey, I've got another.
30, 60, 90 days of inventory I need to burn through so they are all at different points in time, but as I said overall when you take a look at lead times bookings and backlogs.
And orders it points to a pretty clear signal that we're net we're moving forward.
And any meaningful differences between.
Engines fasteners and structural components.
In terms of sale and module sales backlog in terms of demand, Iowa order.
And <unk>.
Orders, Yes lead times, yes sales sales on.
And the sales Psi engines were strong and they were up 26% sequentially.
Fasteners were down a bit but as you will know that can be that can be up and up and down.
And if you look at from a backlog standpoint.
All of the Submarkets and aerospace was up except structural which was flat quarter over quarter.
And then if you look at bookings we had bookings were.
<unk> were up slightly in aerospace and some mixing.
Mixing different and scientists.
On the Submarkets.
Okay, and lead times and general or I.
And I imagine the faster lead times and short but.
How are they trending and engines.
I would.
I remember correctly, if I remember correctly last quarter I said that engine spreads are about 10.
And to 12 weeks.
We track pretty closely with the others in the industry, maybe a couple of weeks here and there are different.
And if you look at this quarter.
Lead times, roughly or extended 50, and 60%. So several weeks pushout on the on the on the lead times and I've said.
Got it and you know every quarter and that's going to continue private and pandemic. We were roughly 52 weeks and here. We are I said 10 to 12.
Last quarter, you and the high teens, maybe this quarter, that's going to continue to increase as more and more customers start placing those increased orders.
Yes. Thank you very much appreciate it.
Thanks, Gautam and have a good day.
Thank you.
Thank you and once again, please press Star then 1 and if he would like to ask a question.
And the next question comes from Michael <unk> with Keybanc capital markets.
Hey, guys good.
<unk>.
Yes, good morning.
So first I just wanted to ask about your current inventory levels do you feel comfortable with where they're at now or should we expect further destocking and the first quarter or do you see any benefit from inventory absorb absorption going forward.
Good morning, good question and thanks for asking.
I think that.
We spent the last year really diving deeper into the carpenter operating model to to get our inventories at a lower rate overall. So when you look at days on hand, overall, and we want that and number.
<unk> to be lower going forward prior to the pandemic.
We consciously moved our inventories up because again, we were at 52 week lead times and we wanted to supply our customers. We were we were melting non stop right and we invested and our customers and put that in inventory we were allowed to balance that more during this pandemic.
Yeah, It's Mike So as we go forward I do not see us going back to those higher inventory levels, because we've taken some corrective actions now.
Well every quarter be a step down no you could see quarters over the next year or 2 where we build a little bit of inventory.
Because of some specialized.
Situations, but overall going forward, our inventories and will stay flat and and we believe that we still have some opportunity to take them down over a longer period.
And hopefully that helps out.
Yeah, that's helpful and then.
And then.
And.
And different platforms do you see some platforms that are destocking more or less than others within aerospace whether that be by platform or by product, but just wanted to know what opportunities do you see are there to ship more upon the recovery and some of the supply chain inventory levels.
Well.
And as you know we're on all of the platforms. So.
Whichever ones.
Coming back quicker or slower.
For us.
Demand is still there so like I said, if you just take a look at the lead times and our backlog and our bookings across.
And the entire aerospace industry right now.
That's pretty compelling data and it says.
And we're moving forward and this recovery I do think it's important to note that.
And that over the next couple of quarters, even when I say that you have and the positive trend moving forward.
It could be lumpy and.
And the aerospace market, you could see a quarter where.
Engines are down a couple points going forward and that's that's nothing to be alarmed about I think if you look at it year over year, though youre going to see positive increases going forward and what we are saying.
On the call today.
Lines now.
Spot on to what you're hearing from other manufacturers and the industry and have released.
Earnings recently and arent talked external recently, so I think were right in line with what you're hearing other people and industry, saying.
Got it appreciate.
And the color thanks, guys.
Yeah.
Thank you and.
And this concludes our question and answer session and I would like to turn conference back over to Brad Edwards for any closing comments.
Thanks, Keith Thank you everyone for joining us today for our earnings conference call. We look forward to speaking with all of you again in the near future and enjoy the.
Today and have a great summer.
Thank you.
And so that has now concluded thank you for attending today's presentation.
And at your lines.
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