Q1 2022 Carpenter Technology Corp Earnings Call
Hello, and welcome to the Carpenter Technology Corporation first quarter fiscal 2022 conference call.
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After todays presentation, there will be an opportunity to ask questions.
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Thank you operator, good morning, everyone and welcome to the Carpenter Technology earnings Conference call for the fiscal 2022 first quarter ended September 32021.
This call is also being broadcast over the Internet along with presentation 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 are based on current expectations.
Risk factors that could cause actual results to differ materially from these forward looking statements can be found in carpenter technology's. Most recent SEC filings, including the company's report on Form 10-K for the year ended June 32021, and the exhibits attached to that filing.
Please also note that in the following discussion unless otherwise noted when management discusses sales or revenue that reference excludes surcharge when referring to operating margins that is based on operating income and sales excluding surcharge I will now turn the call over to Tony.
Thanks, Brad and good morning to everyone.
Let's begin on slide four and review of our safety performance.
Through the first quarter. Our total case incident rate of 1.1 is tracking above our fiscal year 2021 performance.
<unk> <unk>, six which was our best fiscal year safety performance on record.
Our ultimate goal continues to be a zero injury workplace.
That and our safety teams are placing emphasis on key initiatives, including enhanced safety leadership development and employee engagement.
Can read more about our safety programs in 2021 sustainability report, which we released earlier. This month. In addition to highlighting our commitment to health and safety of our employees report details, our environmental stewardship, and social programs to engage employees and local communities.
We will take some time to read the report and learn more about our environmental social and governance programs.
Turn to slide five and a review of the first quarter.
We continue to see demand patterns improve across our customer base. So the pace varies by end use market.
Notably we saw demand improve via backlog growth key aerospace and defense and medical end use market, which together accounted for approximately 55% of our revenue this quarter.
A key indicator of improving market conditions is backlog growth, where we generated increases of 25% sequentially and 49% year over year.
While the Pep segment finished ahead of our expectations performance in the SA O segment was impacted by operational delays, most notably workforce shortages driven by COVID-19 isolation at certain key work centers due to the delta variant and hiring difficulties.
<unk> labor environment.
Looking ahead, we don't expect any long term impact of these challenges and expect Seo performance will accelerate as market conditions continue to improve.
Importantly, our liquidity remains healthy as we finished the quarter with over $500 million in total liquidity, including $213 million in cash.
We also continued to provide direct returns to our shareholders through our quarterly dividend program.
Collaboration with our customers it's been critical during the downturn and we remain focused on working with them to align our production with their evolving material requirements.
It's also important to note that customer engagement on Athens qualifications remains high as we continue to broaden our capabilities.
As we shared on our last earnings call. We recently commissioned a new hot strip mill and already in Kansas.
Significantly strengthens our soft magnetic capability and production capacity at a time when electrification is increasingly disrupting our major end use markets.
Productivity quality and consistency of our new Hot strip mill is a competitive advantage for us.
<unk> has already resulted in increased demand from customers.
Now, let's move to slide six and the end use market update.
Our aerospace and defense end use market sales were down 18% sequentially and 9% year over year. This decrease was not driven by weaker demand and sequential decrease was driven primarily by customer arrangements, which required them to take material before the close of our fiscal year as stocking agreements expire.
As noted the majority of those agreements were in the aerospace and defense and huge market.
If you remember it makes at this point on our fourth quarter call.
Year over year sales results were impacted by higher prior year shipments as we were then continuing to process and ship orders placed prior to the pandemic a year ago demand backlog was falling as customers reacted to bill rate reduction to date is growing.
Our aerospace and defense backlog was up 25% sequentially and 17% year over year as customers anticipate ongoing improvement.
Industry consensus is still anticipating a dramatically improved calendar year 2022 compared to 2021.
And we have already seen some customers preparing for increased production plant for example, the faster and distribution Submarkets are beginning to lean in to replenish the supply chain.
Calendar year 2022 replenishment planning continues for our engine customers.
In the medical end use market sales were down 3% sequentially and up 24% compared to last year results reflect demand has improved since this time last year, while working through COVID-19 headwinds.
Well there are some geographical concerns about the ongoing impact of COVID-19.
They're all outlook is positive as medical procedures are expected to increase next quarter and into calendar year 2022, as the market approaches pre pandemic levels.
As a result, we expect booking rates backlog and shipments to show further improvement in the coming quarters.
The transportation end use market sales were down 14% sequentially and up 28% compared to last year.
Results reflect the supply chain challenges and chip shortages that are impacting the end use market.
As widely reported uncertainty in the supply chain for parts is driving reductions in production at most manufacturers. However, we see solid demand over the mid and long term.
Fundamentals in our light duty Submarket remains strong as consumers continue to spend even as inventories are low.
And we still see market share opportunities in both the light vehicle and heavy duty truck submarkets, while continuing to further penetrate key market adjacencies, including off road marine and aftermarket.
In the energy end use market sales were up 21% sequentially and down 24% compared to last year.
Oil and gas Submarket, we are seeing signs of recovery in North America. This is evident as the North America rig count is up 100% compared to last year.
International markets have largely stabilized in the outlook is becoming more positive.
And we saw sequential growth in the power generation Submarket as we continue to work closely with customers on a maintenance upgrade cycle.
The industrial and consumer end use market sales were down 2% on a sequential basis and up 5% on a year over year basis.
We continue to see historically high demand for our semi con solutions and expect demand to remain strong throughout the fiscal year.
In addition, we continue to see healthy demand in the electronics Submarket.
Now I will turn it over to Tim for the financial summary.
Thanks, Tony Good morning, everyone.
I'll start on slide eight the income statement summary, net.
Net sales in the first quarter were $387 6 million and sales excluding surcharge totaled $312 9 million.
Sales, excluding surcharge increased 2% from the same period, a year ago on 2% lower volume.
Compared to our recent fourth quarter sales decreased 10% on 9% lower volume.
As Tony covered in his comments, we continue to see signals of improving demand conditions across most of our end use markets as evidenced by our growing backlog.
Gross profit was $25 2 million in the current quarter compared to $3 5 million in the first quarter of last year and negative $21 3 million in the fourth quarter of fiscal year 2021.
The year over year improvement in gross profit is primarily due to the higher net sales.
As well as the significant negative impact on profitability in the first quarter of last year related to lower activity levels across our facilities combined with the significant inventory reduction actions that were executed.
When normalizing for the impact of a LIFO charge in the fourth quarter of fiscal year 2021, the lower gross profit sequentially is largely due to the reduction in volume in the current quarter.
SG&A expenses were $44 3 million in the first quarter up $2 million from the same period, a year ago and down 4 million sequentially.
The year over year increase reflects higher amortization costs related to the ERP system that was placed in service during fiscal year 2021.
The sequential reduction is largely due to a reduction in professional services and lower accruals for certain incentive compensation plans.
The operating loss was $19 1 million in the current quarter.
When excluding the impact of special items adjusted operating loss was $17 5 million in the current quarter compared to a loss of $30 9 million in the prior year period.
A loss of $12 5 million in the fourth quarter of fiscal year 2021.
Our effective tax rate for the first quarter was 41, 3%.
The effective tax rate is above the annual effective tax rate guidance, we gave due to the impact of certain permanent book to tax differences and losses in certain tax jurisdictions for which a tax benefit cannot be recorded.
For the balance of the year, we expect that our effective tax rate will normalize we continue to anticipate our full year effective tax rate will be in line with the guidance that we provided at the beginning of the fiscal year.
Earnings per share for the quarter was a loss of <unk> 31 per share.
When excluding the impacts of special items adjusted earnings per share was a loss of 28 per share.
Now turning to slide nine and our Sao segment results.
Net sales for the quarter were $331 9 million or $258 2 million excluding surcharge.
To the first quarter last year sales, excluding surcharge increased 1% on 1% lower volume.
The year over year net sales results were driven by increased sales of materials to the medical transportation and industrial and consumer end use markets. There were largely offset by declines in aerospace and defense.
Year over year results for aerospace and defense were impacted due to the timing of shipments of orders placed prior to the pandemic.
Shipments remained elevated in the first quarter last year, while demand backlog this falling as customers reacted to build rate reductions.
Sequentially sales, excluding surcharge decreased 11% on 10% lower volume.
The sequential decline reflects the impact of the anticipated planned maintenance outages in our facilities in the current quarter as well as summer shutdowns for certain customers.
During the quarter. We also experienced some unanticipated short term impacts related to COVID-19 isolation at key work centers.
Which put us behind from a production standpoint throughout the quarter.
The COVID-19, escalations compounded some other labor shortages across certain areas of our operations as we dealt with the same hiring challenges that many other businesses are facing in the current environment.
Moving to operating results.
<unk> reported an operating loss of $5 9 million for the current quarter.
The same quarter a year ago as he goes operating loss was $18 6 million in the fourth quarter of fiscal year 2021 S reported an operating loss of $47 $3 million.
Year over year operating results improved by almost 7 million when adjusting for the impacts of COVID-19 costs in both periods.
The year over year improvement is driven by the negative profitability impacts of reducing inventory we experienced in the first quarter of last year at a time when raw material prices were increasing.
The year over year benefit was partially offset by increased depreciation costs associated with our ERP system that was placed in service during fiscal 2021, and the newly commissioned Hot strip mill.
When adjusting for the impact of the LIFO charge in the fourth quarter of fiscal year 2021, and the Covid costs.
Operating results decreased by about $7 million sequentially.
The decrease was primarily due to lower volumes, partially offset by improving cost performance.
Looking ahead, we expect the demand conditions across most end use markets will continue to improve.
As Tony mentioned earlier, our backlogs are growing and we continue to expect a more pronounced aerospace supply chain recovery.
Take shape in the second half of our fiscal year 2022.
Our teams are focused on managing costs closely and continuing efforts to unlock productivity improvements as the activity rates continued to ramp up.
Based on current expectations, we anticipate <unk> will generate operating results in the range of a $2 million operating loss.
Two 2 million of operating income in the second quarter.
This takes into account current customer demand as well as the holiday schedules that both we and our customers are anticipated.
Now turning to slide 10 in our Pep segment results.
Net sales in the first quarter of fiscal year, 2022 were $74 6 million or $73 6 million excluding surcharge.
Net sales, excluding surcharge increased 20% from the same quarter last year.
We're down about 3% sequentially.
Year over year growth in net sales reflects increased sales across all business units led by our dynamite titanium business principally in the aerospace and defense end use market and our distribution business.
The sequential decline in sales primarily reflects reductions in our additive business due to the timing of certain customer shipments, partially offset by increased sales of titanium materials used in aerospace applications.
In the current quarter.
Pep reported operating income of <unk> 6 million.
This compares to an operating loss of $3 6 million in the same quarter, a year ago and operating loss of $2 3 million in the fourth quarter of fiscal year 2021.
The year over year operating income improvement is primarily the result of increased net sales as well as the benefits of the actions we took to restructure the additive business unit in fiscal year 2021.
The sequential decline in operating income when excluding the impact of a LIFO charge of $4 3 million in last year's fourth quarter is primarily due to the lower sales combined with incremental cost investments to drive expanded capacity in future quarters to meet the growing demand.
As we look ahead, we believe that demand conditions will continue to improve in the coming quarters.
With that said.
Given some of the same dynamics that oh faces with holidays and customers expecting to manage their year end inventory positions.
We currently anticipate purple generate similar sequential operating income and our upcoming second quarter.
Now turning to slide 11, and a review of free cash flow.
In the current quarter, we used $47 million of cash for operating activities.
The cash flow used in operations was primarily the result of increasing inventory by $67 million in the current quarter.
The increased inventory in the current quarter is primarily the result of increasing activity levels and the production delays I mentioned earlier.
We expect this build in inventory can be temporary and have plans in place to reduce inventory for the balance of the year, despite improving demand conditions.
Moving down we previously provided guidance that we do not expect to have any required minimum pension contributions for our U S qualified plans during fiscal year 2022.
In the first quarter, we spent $14 million on capital expenditures.
We continue to target a $125 million of capital expenditures for fiscal year 2022.
But we are monitoring the impact of labor shortages and supply chain disruptions on the timing of our anticipated projects the balance of the fiscal year.
We also continued to fund a constant dividend to our shareholders, which we consider as part of our free cash flow.
With those details in mind, we reported $71 million of negative free cash flow in the quarter.
Our liquidity remains very healthy and we ended the quarter with total liquidity of $508 million, including $213 million of cash and $295 million of available borrowings under our credit facility.
With that I will turn the call back over to Tony.
Thanks, Tim.
Conditions across our end use markets continue to largely improve and we are focused on capitalizing on favorable demand patterns.
This is supported by our strong backlog growth generated during our fiscal first quarter.
While the results for first quarter of fiscal year 2022 were impacted by near term operational challenges. We believe they are short term in nature and won't impact our ability to serve our customers and drive growth over the long term.
Our strong financial position and solid customer relationships position us to capitalize on market opportunity and the overall recovery as it continues to take shape.
Our liquidity position remained strong with over $500 million in available liquidity, including $213 million in cash.
We continue to work closely with key customers navigating a recovery and partnering to solve their critical needs.
We also continue to implement the carpenter operating model to drive improved efficiencies across all of our facilities.
Finally, our soft magnetics and additive manufacturing platforms offer long term growth opportunities.
Thank you for your time and now I'll turn it over to the operator to take your questions.
Yes. Thank you at this time, we will begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
Speaker phone please pick up your handset before pressing the keys.
Try your question you May Press Star then two at this time, we will pause momentarily to assemble the roster.
And the first question comes from Michael a shock with Keybanc capital markets.
Hey, good morning, first I, just given some of the commentary that we got this week from Boeing and other Aero suppliers do you have a sense. How you are shipping relative to the COVID-19, a month 737, Max production that they stated or maybe whether the supply chain is above or below that rate.
And then do you do you see the supply chain position to be able to support the ramp to $2 31, a month and beyond in 2022 or do you see more restocking there. Thanks.
Yeah. Good morning. Thanks for the question I thought it was a really important point that they made during that call. We see the same thing as far as demand increasingly expected to accelerate through 2022 as well.
I think it's an important point I've said this many times.
Prior to the pandemic that aerospace nickel billet was constrained and you saw the lead times, where we were.
Close to a year.
And I've said that once we get on the other side of the pandemic.
That market that we provide the aerospace will be constrained again and that is why our Athens facility. It's so important that is why customers continue to work with us to qualify Athens throughout the pandemic and it's why I think carpenter technology.
Big accelerator in earnings.
Opportunity because we have Athens that prior to the pandemic was.
Basically not utilized and now I think you're going to see.
Forward.
Boeing and other stages, they see constraints in that area youre going to see Athens become much more impactful to carpenter technology going forward, because it's the only new capacity in the market.
Got it that's helpful. And then what were jet engine revenues in the quarter either year over year sequentially and then how should we think about the cadence of jet engine revenues relative to total aero as your fiscal year progresses.
Yes. Thanks for that question, let me give you maybe a little bit more detail than what you want because it is.
Hmm.
Confusion at times, if you remember last quarter engine sales for US was up 26% and I said, hey, that's inflated because of it.
Pushed out customer orders during the pandemic customers didn't need it we work with payment pushed it out, but we said we needed to close that out by the fourth quarter or last quarter, which we did so that 26% was too high if you look from a sequential basis. This quarter jet engine sales were down sequentially, 20%. If you just with micro nor.
Like that over the two quarters, probably last quarter you'd be roughly up 7% this quarter be up roughly 12%. So that's really the way you should look at at our engines over the last couple of course I'll give you two more pieces of information it might be helpful to you.
Julien is alone backlog in jet engines up 21% sequentially bookings for our aerospace engine up 49% sequentially I think that really tells the story that says that that's a market coming back and could be quicker than what some might think.
Great and then just lastly for me on the temporary inventory build is that a one quarter event or should we expect a drawdown in inventory in the fiscal second quarter.
Yes, if you remember too Michael Good question, we took out about $280 million of inventory last year that we would keep that relatively flat. We did increase in the first quarter. Our plans are to decrease.
Inventory in our second third and fourth and gets back to that flat year over year number.
So that's the plan, we don't see any reason why we need to build.
Considerable inventory, even with the volumes going up because we think we can be more efficient.
<unk>.
Got it thank you.
Yes, Thank you Sir.
Thank you and the next question comes from Gautam Khanna with Cowen.
Yeah.
Yeah, Hey, Thanks was wondering on the tie fastener.
Feedstock.
Is it broad based demand that youre seeing or is it.
One OEM or one channel in particular anything you can say.
More than one customer so we've seen it from a couple of the as you know there's three or four.
The big ones, there and we've seen it across the across the board.
It's both in our <unk> segment and in our Pep segment. So.
Stainless steel fasteners is what I was thinking.
Okay. That's good to hear the other.
The thing I was curious about is just seasonality. This year in normally you mentioned Q4 has the vacations and all that Youre managing.
But we don't really see a big step up in the second half of the year.
The fiscal year or first half of the calendar I mean are you expecting kind of a big sequential impact given the demand.
The backlog growth.
Yes, I don't want to quantify that exactly to give you exactly where we see the second second half, but yes, we do see considerable.
The increase in the second half versus the first.
I can tell you. This we talk we talk about aerospace allot, and certainly ourselves and everyone else is talking about that first half of calendar year 2022, being up and increase you've heard some companies come out and re lease right before us that have said the exact same thing I think it's important as well when you think about <unk>.
Technology, there's other markets either.
Aerospace, even though that's close to 50% in the industrial side.
We're at levels higher than it was pre COVID-19 and in fact.
We're spending some capital expenditures to increase our capacity on the Bakken side for some of those markets right now because were at levels higher than pre COVID-19. So that's really good to see that we've got other markets outside of aerospace that we see growing significantly going going forward as well.
Good point Tom.
Last one anything on.
Ply chain constraints other that affected carpenters, the ability to put out output or core among customers where they couldn't.
They're not able to move product for whatever reason agnostic carpenter, but I'm. Just curious like is there anything that any sales that you think are left on the pay your ballpark.
That are unusual with respect to backlog growth.
Because I think.
Yeah, I think the entire supply chain.
Sure.
So a real they manifest themselves.
Most of them.
Bigger biggest impact standpoint, putting the labor shortage I mean, it's really difficult to get calculated employee to come in we've adjusted our wages up really in many sites to attract and retain on some of the other areas you know from from some of our not some or all of our raw materials, primarily nickel we have.
This is in place, where we pass those price changes through our contracts so not a lot of impact there, but some of the other packaging materials and process materials like Libre.
Lubricants and acid, yes, we've seen increases in those as well and we've had to make some changes in some cases on where reallocate some of those.
All of that.
Supply not just standpoint that it was a significant event for us and we do see that as we go forward, but kaki.
Carpenter technology like everyone else is dealing with that those types of shortages of disruption. If you will on a day to day basis.
Thanks, a lot.
Thank you.
And once again. Please press Star then one if you would like to ask a question.
And the next question comes from Chris Allen with tier four in research.
Good morning.
I apologize for the bad connection here, but.
I wanted to ask a little bit on titanium.
And thinking about this.
This movement, we can like magnesium titanium scrap some of the alloys.
Is there any impact on your business, if sponge and scrap starts pushing the ingot prices higher.
Well I think I'll answer it this way Chris in a more general level. When we look at our titanium business now as you well know we serve two primary markets we serve.
Medical market and we serve the aerospace market both of those markets for us going forward, we've seen increases in the current quarter and expect those to accelerate over the next couple of quarters as far as feedstock.
We have in many cases locked in long term contracts.
Okay.
There is a labor situation going on at one of your competitors and Im wondering yes.
And any fallout from that.
Impact on your business either way.
Maybe you could clarify that labor shortage.
Someone else's how it impacted us.
Yeah, sorry.
Right.
Well, we haven't seen really any impact there. We plan ahead, accordingly, and trying to keep all of that in front of us So no material impact from that.
As of today.
Yes.
And then just last on the ERP system.
Is that where are you on that or we don't agree.
In the middle of the <unk>.
All the history I mean, something like that can you give me like a partnership with her.
Well I can say, we kicked off a new ERP system.
Yeah.
They are difficult I mean.
We've had our share of challenges we stayed very close with our customers that I've spoken with customers over the last couple of weeks, specifically on ERP and what it's done for them.
To a customer they are saying, we're going to stick with you because we know you'll get through it.
We need you in the future, but Chris Theres no denying has been a challenge for us and we.
We've delayed some shipments getting to customers than we would've liked to have gotten a little sooner.
<unk>.
It impacts probably 20% of our overall customer base is primarily those new orders that are coming in but yes, we do see light at the end of the tunnel and think will be behind all of that by the end of this calendar year.
Okay, great. Thank you so much.
Thank you.
Thank you.
A question and answer session I would like to turn the Florida, Brad Edwards for any closing comments.
Thank you and thanks, everyone for joining us today for our first quarter fiscal 2022 conference call. We look forward to speaking with all of you in the in the coming months take care and have a great rest of your day.
Thank you.
Now concluded. Thank you for attending today's presentation you may now disconnect your lines.
Yeah.
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