Q3 2022 Circor International Inc Earnings Call
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Greetings and welcome to the third core International's third quarter 2022 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 Mr. Scott Sullivan Senior Vice President of the company's Investor Relations for Sharon Merrill Associates. Thank you Sir you may begin.
Thank you and good morning, everyone. Before we begin let me remind you that our earnings release and presentation are available on <unk> website at investors that circle or dot com, if you'd like to receive copies of the materials. Please email C. I R at Investor Relations Dot Com and our IR team will provide.
Them for you.
Turning to slide two today's discussion will contain forward looking statements as they are defined under the safe Harbor provisions of the U S. Private Securities Litigation Reform Act of 1995.
These statements represent the company's views only as of today November 14, 2022. 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 <unk> may choose to update these forward.
Looking statements at a later date the company specifically disclaims any duty to do so you can find a full discretion of the factors in <unk> 10-K, 10, Qs and other SEC filings also located on our website.
As referenced on slide three on today's call management will refer to GAAP and non-GAAP financial measures.
A reconciliation of these non-GAAP measures to the comparable GAAP measures are available in our earnings press release.
Please turn to slide four.
Joining me on today's call are Tony in his yard circle, as President and Chief Executive Officer, and a J Sharma, Chief Financial Officer, and senior Vice President of business development.
Tony will begin with a strategic overview of the highlights of our third quarter performance.
Jay will review the financials and discuss our guidance for full year 2022, Tony will provide a market outlook and then management will be happy to take your questions. Now please turn to slide five as I hand, the call over to Tony.
Thank you Scott good morning, everyone and thank you for joining us to discuss our third quarter 2022 financial results.
Before we review our results I want to thank our teams across the globe for their continued focus on execution and for their resilience in the face of a challenging macroeconomic environment.
Our Q2 earnings calls I have spent most of my time with our teams and customers.
<unk>, having the opportunity to spend time with our global defense sales team and customers at T urn It Val exhibition in Paris, and within our industrial sales team and customers at that would that be international Petroleum exhibition and conference.
I continue to be delighted by the level of customer intimacy that our teams are driving and by the strength of the sort of core family of brands throughout the industries we serve.
Our team performed extremely well in the third quarter and delivered excellent results, we navigated ongoing supply chain disruptions.
An inflationary environment and rising energy costs to deliver 26% organic orders growth, 3% revenue growth or 10% on an organic basis as well as 550 basis points of margin expansion.
Our results underscore our continued success in executing on our strategic priorities.
These include first margin expansion, which includes value pricing simplification best cost country sourcing and manufacturing and factory modernization second organic growth through new product development and leverage of our strong aftermarket position and third reducing our leverage which we are.
Especially in Q3, adjusted EBITDA growth and further monetization of our real estate portfolio, a Jane will provide more details on our improved leverage and outlook in his prepared remarks.
Turning to our third quarter highlights on slide six organic orders increased 26% versus prior year driven by growth in both segments orders in A&D were exceptionally strong growing over 74% organically with strength in A&D was driven by the defense aftermarket various missile.
Grabs medical products, the continued recovery in commercial aerospace and pricing.
Industrial orders were up 8% organically supported by strength in our aftermarket pricing and downstream oil and gas primarily in the aftermarket and capital projects in India.
Pricing was strong in both segments, which is indicative of the power of our brands and our teams focus on maximizing value from the products and services we provide.
Backlog at the end of Q3 was up 14% from the same period last year to $497 million positioning us well for the remainder of the year and into 2023.
On the top line, we reported year over year revenue growth of 3% or 10% on an organic basis with A&D up in the high teens and industrial up mid single digits. We accomplished this despite the continued supply chain challenges, which impacted some of our largest businesses in the quarter.
Our 70% increase in NOI was primarily driven by our industrial segment supported by our core industrial business and downstream oil and gas now.
The margin expansion was heavily driven by our value pricing initiatives and cost out actions that our teams have executed in the businesses and at corporate a J, who will provide additional color on the margin drivers in the quarter during his prepared remarks.
The demand environment for our products continued to be positive as evidenced by sustained order strength and our healthy backlog. We are positive about our business as we move through the fourth quarter of 2022 and look ahead into 2023.
Moving to slide seven each quarter I'd like to highlight specific growth areas that our teams are driving in Q2, we focused on new and adjacent markets, where we are leveraging our core technologies and manufacturing capabilities. Today I'll highlight a couple of key growth areas that our A&D team and industrial pumps Amir.
Our team are driving and <unk>.
Wendy we are highlighting two product lines for missile applications first our mechanical Connecticut switches used in missile and bomb fusing applications designed to sustained extreme conditions. These are reliable quick response switches used SaaS motion acceleration for safe and arm and impact we expect to grow with us.
In this product line to continue with new products, we're infusing applications as well as applications for hypersonic missiles that we are currently developing.
Our our brushless DC Motors, where we have won several new applications for various missile programs, which are currently in various stages of development. Our motors are used in the missile control actuation system, which is a core part of the missile guidance and control system.
With heightened geopolitical tension around the world Advanced Air Defense Technology is expected to play an increasingly important control and defending the U S and its allies, we expect to be part of supporting these critical applications with our current programs. We are working as well as future applications that we are pursuing in total.
We have generated over $17 million from these products year to date.
Almost 40% over last year. Some of these programs are still in the early stages of development.
With modest revenues in the current tier, but they are expected to deliver significant long term growth for our A&D segment.
The second growth area, but I would like to highlight is from our largest pump business in EMEA and APAC, where we enjoy a strong aftermarket position our dedicated aftermarket team has been driving various initiatives leveraging 80, 20 principles and value based pricing to drive growth and expand margins we are forecasting over 22.
Your son growth year over year with a significant portion of this growth coming from pricing. We expect the growth in this area to continue with our team's continued focus to maximize value from the products and services we provide.
Before I turn the call over to a J I would like to provide you a quick update on our strategic review process. Our board supported by our external advisers and the management team continues to progress with the review we are in the final stages and preparing for the formal launch and expect this to happen in near future at <unk>.
This time, we are not able to provide any additional details.
Now, let me turn the call over to a J to cover the financial results in more detail.
Thank you Tony and good morning, everyone.
Let's turn to third quarter financial highlights on slide eight.
We delivered step change performance and treat you.
Excluding previously divested businesses, we posted the highest backlog and absolutely Oi margin and confided Eli module and at least the past three and a half years.
We are beginning to see the financial benefits of the transformation that was kicked off early in the year.
We're in the early stages of this transformation and see strong runway for continued growth and margin expansion.
Okay.
Organic orders were up 26%.
Primarily driven by A&D and supported by broad based growth across industrial.
We saw this growth in most of the regions and markets and in both the after market and foreign market.
The order strength remains robust, but it speaks to the power of our brands and the strength of our technologies.
On the top line, our business teams mitigated supply chain disruptions and labor constraints to deliver double digit organic revenue growth.
Each one of our businesses across the industrial and aerospace and defense posted organic sales growth in the quarter.
We continue to execute value pricing maintained cost controls drive growth and reduced corporate costs.
These efforts helped us generate a 70% year over year increase in adjusted operating income and 550 basis points of Oi margin expansion we.
We delivered 69 cents off adjusted EPS up <unk> hundred, 3% and grew adjusted EBITDA, 62% to 33 million.
Adjusted free cash flow was negative 14 million.
Cash flow was primarily impacted by select investments in working capital and our industrial pumps and Navy business.
FX headwinds and.
And expenses related to the restatement and our ongoing strategic review also contributed to the negative cash flow performance.
Turning to slide nine and our aerospace and defense segment results.
Organic orders were up 74%.
At 19 million Q3 marked our highest aerospace and defense orders quarter in the past 14 quarters.
We saw broad based growth across all A&D market supplemented by large orders in medical switches for missile programs and maybe spares.
Organic revenue grew 18% with all the aerospace and defense businesses posting revenue growth in the quarter.
<unk> growth of 6% reflected compressed margins due to a difficult prior year compare against a particularly strong mix in Q3 2021.
Sequentially NOI.
Margins improved 320 basis points.
On both a dollar and margin basis, we expect a O I to improve sequentially again in Q4.
Moving to our industrial segment results on slide 10.
Organic orders were up 8% with good traction across all markets and regions the.
The exit from pipe engineering adversely impacted orders growth by five points.
We were especially pleased to see continued momentum in our industrial aftermarket.
<unk> posted organic orders growth of 14%.
Within industrial after market, our European pumps aftermarket orders grew 20%.
We are laser focused on growing this high margin part of our business and see tremendous opportunity to leverage value pricing and take share.
Our downstream business saw organic orders growth of 25%.
This is the second successive quarter of orders growth.
We are starting to see more robust sales funnel and project activity.
We expect order intake to remain lumpy given increasingly optimistic about the outlook and I would expect to post flat orders growth for the full year in downstream.
Organic revenue grew 6% with broad based strength across the platform that more than offset headwinds from supply chain constraints and the exit of pipe My engineering.
Industrial posted exceptional NOI growth of 121% and a lot of margin expansion of 720 basis points.
The margin performance was made possible by relentless focus on cost optimization.
Growing the aftermarket and solid execution.
Turning to slide 11.
Net leverage and compliance language have continued to improve throughout the year.
We ended Q net leverage of five times.
Which ones do you know 0.9 tonnes lower than to Q.
With our expectation of continued expansion of EBITDA and debt pay down we now expect to exit 2022, but net leverage in the high fours and compliance leverage in the mid fours.
Does not include clothing, any subsequent sale leaseback transactions.
Turning to slide 12, and our expectations for full year 2022.
Based on our strong performance and positive momentum, we are increasing our guidance for the full year.
Continue to see growth in industrial after market and medical orders and benefit from the recovery in commercial aerospace and our position on defense platforms.
With record backlog exiting <unk>, we now expect organic revenue growth of 9% at the midpoint of our range.
From our previous expectation of 7%.
Pricing remained a strong driver of NOI growth and margin expansion.
We are seeing signs of easing of supply chain constraints and moderating inflationary pressures.
We continue to simplify our cost structure and now expect to realize 13 million in annualized cost savings this year.
<unk> 6 million of carryover benefits in 2023.
Two of our factories in Germany are affected by regional wage negotiations between the Union.
Industry Representatives.
The low end of our guidance seeks to account for the potential impact of the labor work out or slow down.
Yeah.
Looking at for Q.
Segment NOI performance is expected to be consistent with the exceptional <unk> performance.
We expect industrial to be largely flat to treat you and Andy to improve sequentially.
Corporate costs are expected to be up in fourth Q as a result of higher benefits cost audit fees and consulting.
For the full year, however, we expect corporate cost to be down from prior year and to further reduce into 2023.
As a result of volume growth pricing opex optimization and accounting for continuation of supply chain constraints. We now expect full year NOI growth of 42% at the midpoint of our range.
From a previous midpoint growth of 36%.
We expect full year adjusted EPS to be in the range of 30.
37, $2 52, a 40% increase at the midpoint of our range.
FX headwinds.
<unk> full year, NOI by 7 million and EPS by 25 cents.
And the law says off by engineering are impacting NOI by $4 4 million and EPS by <unk> 16 cents.
Overall, we are bullish about the fourth quarter and continue to build a strong foundation for delivering and improving performance in 2020 three.
I'll hand, the call back to Tony to discuss our market outlook for orders on slide 13.
Okay.
Thank you a J based on our year to date performance and our outlook for Q4, we now expect organic orders growth in the range of 8% to 10% and need driven by A&D and core industrial products. This represents an increase from the previous range of 2% to 4% we provided on our Q2 earnings call.
At the segment level, we now expect industrial organic orders growth of three 5% compared to prior year core industrial orders are expected to grow about 7% with downstream oil and gas being relatively flat and.
In our general industrial business, we expect 9% to 11% organic growth compared to prior year, driven by power generation midstream oil and gas as well as new business activities and pricing in both our four market and aftermarket.
Commercial marine we expect about 10% to 12% organic growth driven mostly by the aftermarket supported by increased utilization and pricing.
And downstream oil and gas our outlook has improved significantly since our Q2 earnings call. We now expect orders to be relatively flat compared to prior year compared to the 25% to 30% decline that we communicated in our Q2 earnings call a few weeks ago.
The improvement is driven by a large order that our team has been pursuing in North America and now expect to book in Q4.
Oh square in this segment, we expect about 19% to 22% orders decline due to non repeat of a multiyear large defense order for the U S. Navy.
Turning to aerospace and defense for the full year 2022, we expect about 18% to 20% organic orders growth in this segment.
In our defense business, we now expect 19% to 21% organic growth, which is significantly higher than the 10% to 12% that we communicated during our Q2 earnings call. This growth is driven by increased activities in the aftermarket new products for missile fusing devices and space applications and pricing.
Some offset from the timing of large defense orders.
And commercial aerospace, we expect about 19% to 20% organic growth, primarily driven by the market recovery for the single aisle platforms at Airbus and Boeing as well as the increased activity NAFTA market supported by pricing and the rebound in air travel.
All square in the segment, we expect about 16% to 18% organic growth driven by new products for the hydrogen market and increased activities in our medical business.
Turning to slide 14 in summary, we are very pleased with our results through the first nine months of 2022 and are advancing through the final quarter of the year with strong momentum.
We expect to continue to leverage our strong aftermarket position in our industrial segment and deploy our value based pricing and 80 20 principles across the organization generating margin expansion and staying ahead of inflation. Despite the current macroeconomic climate.
We continued to benefit from the ongoing rebound of the commercial aerospace market and look for further momentum in our defense business driven by our positions on key platforms, new product development and the strength in the aftermarket.
We strive to maximize value creation for our shareholders, we're showing organic revenue and margin growth through new product development value based pricing simplification and cost out actions while at the same time pursuing the parallel path of a potential strategic transaction.
Our value based pricing initiatives is expected to deliver about $35 million of pricing benefit in 2022 heavily driven by our core industrial segment, and we expect our value pricing strategy to continue to drive growth and margin expansion as we look ahead to 2023 and beyond.
Simplification initiatives will deliver about $13 million of annualized savings with more opportunities being evaluated for future implementation.
While our industry continues to be affected by the inflationary environment rising energy costs and supply chain disruptions, we remain focused on the areas within our control to minimize the impact from these headwinds now a J and I would be happy to take your questions. Operator. Please open the line for Q&A.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you. Our first question is from Jeff Hammond with Keybanc capital markets. Please proceed with your question.
Hey, guys. Good morning. This is much more on for Jeff.
Good morning, I was just good morning, I was just wondering if you could give some color on some of the commodity inflation headwinds and if you could parse out priced caused by itself.
Second here.
Yeah.
So and A&D basically what we're seeing from a material perspective.
We're seeing that benefit.
With our sourcing savings.
With some offset from inflation, but overall for the full year, we expect to be a positive from our material sourcing perspective, the headwind is primarily from logistics, which is.
Taking away from the price benefit, but overall pricing is more than offsetting all of the inflation, including.
The logistics cost on the industrial side. There is some material impact are we do have savings and before what we've.
Accomplished but we do have some material inflation. So there is a net impact.
From material.
And then there's also some impact from freight and logistics, but the pricing is quite significant offsetting all of that and obviously, adding to the margin expansion as we discussed in our prepared remarks.
Okay, Great. That's helpful. And then yeah, great great quarter and orders for Andy I was just wondering it was there was there a single large order driving most of that improvement or is that kind of broad based and I'm kind of in a similar vein.
Have you seen supply chain get any better, particularly particularly in aerospace and defense just seems like things are starting to get a little bit better, particularly outside of Europe .
Yeah. The order growth was broad based a lot of activities in the defense aftermarket specifically with our naval programs.
The medical.
Strong as well, which is reported in our aerospace and divest numbers commercial aerospace continues to recover still not at the 2019 levels. So theres a lot more room, there, but that continued to recover on the supply chain side, our biggest challenge on the aerospace and defense side is primarily with our naval programs.
And it's really around some of the very challenging castings that recur in queer bi and the quality of these castings. So we have been working with our customers are looking for solutions and we are starting to see improvements where we did see some supply chain challenges in aerospace was in Europe are some.
Fly based in Europe struggling to keep up with the recovery, but it was not meaningful.
Very manageable.
Okay, great. Thank you.
Yeah.
Thank you. Our next question is from Andy Kaplowitz with Citigroup. Please proceed with your question.
Hey, good morning, everyone.
Good morning, Good morning, Anthony.
Morning, So obviously displayed and good margin expansion in Q3, but could you give us a little more color in terms of your initiatives and how you're thinking about them going into 'twenty. Three I know you mentioned simplification tailwind, but how could all of your transformational initiatives impacting margin as you go into 'twenty three as specific land industrial margin in the low teens now can you consistently deliver.
That loaded mid teens margin in that segment.
So and you're looking at the Q3 performance and specific to industrial it's really two things for US one is opex, we keeping opex flat to down and you can see it in the in the year to date trading and that's the expectation for the full year as well for the industrial segment.
And then a lot of language on pricing.
This year, we are seeing probably 40% to 45% of pricing dropped through to ally with.
So there's a lot of headwinds and offsets against pricing for chassis when inflation as well that just inefficiency in the factories title with material availability labor availability.
So we feel pretty good about the the margin performance in Q3 be sustainable now in Q4, we expect industrial to perform in line with Q3 book in terms of dollars ally in hot.
In performance and then as we look into next year, we see reasonable.
Reasonable expansion in both dollars and margins again in 2023 again on those on the same principles of keeping opex flat to down driving pricing on minimizing offsets against that pricing.
Got it no. That's helpful until I think last quarter. Tony you suggested you were you call it or it maybe we're starting to see some decelerating growth in industrial.
You know downstream was expected to be down meaningfully in orders. Obviously, you just talked about and it's bigger order that youre going to get have you not started to see any weakness in any of your sort of geographic markets. Maybe you could talk about Europe and China in particular, and you know what do you see headed any by region going into 'twenty three.
So based on our current order activities in our quote activity and customer discussions. We do expect continued orders growth in Q4 as well as into 2023.
Our commercial teams I have not indicated any measurable slowdown anywhere in our segments. We did see some slowdown in our four market, but it's still a growing compared to prior year and aftermarket continues to be.
Quite strong and we believe that sustainable.
Thanks for that.
Yes.
As far as the regions Europe . This year, we expect to grow about 10% to 12% compared to prior year. So it's still quite strong.
Europe , China, a little bit down.
Not a huge exposure for us, but it's a little bit down compared to prior year, but Europe quite strong in North America was quite strong in our industrial business as well.
And Tony you haven't seen this deceleration yet in Europe , so you're saying.
No we haven't got it and then maybe I can ask you about cash flow can you give us a little more color into how to think about sort of the drags on your cash flow and when would when we would expect you to generate cash and improve cash conversion.
Yeah. So you know there are.
Two.
To attribute impacting cash flow negative with the C. O. One is I would classify as one timers and these are the impact of FX. The unwinding of the Russia project and all the special expenses tied to the restatement and the strategic review process collectively these account for about <unk>.
$5 million to $30 million of cash drag this year.
The we are also building working capital.
That's about $30 million.
So this yet in states to two specific areas. One is enough pumps business. So these pumps businesses ran at about low teens as a percentage of sales of working capital and you have to selectively make investments in inventory.
So because they've got our customers again supply chain disruptions.
And the other area, where we've built up working capital as Navy and that's tied to both the the order growth you're seeing and maybe but also just the supply chain constraints into new ones. Tony mentioned in his response so it's.
It's those two building up of working capital as we grow sales, but also to safeguard our customers on the on the pump side and on the Navy side.
As we look into next year, the one timers go away.
And I would say generally speaking in a flat sales.
Sales growth in line when you should see.
90% of adjusted net income converts to free cash flow and then depending on how we grow sales.
But yeah, well that eats into where the growth in working capital.
It's helpful age it thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will confirm your line is in the question queue.
Our next question is from Brett Kearney with Gabelli funds.
With your question.
Hi, guys. Good morning, Thanks for taking my question.
Good morning, Brett Good morning, Brad.
Good performance in the quarter, particularly in aerospace and defense you guys provide a lot of great color on the products in the missile fusing device area also mentioned in the slide deck growths in space applications for circle or could you help us think about what parts of the space market Circle was involved in a I guess from a defense and.
Hum.
Private sector standpoint, and opportunities you're seeing for the company there.
Well, we're a default African products, both on the defense and commercial space.
Areas of the business, primarily with cryogenic type valves out of our business on long Island.
It's still in the early stages of it we did see some good development.
Late last year and this year and we expect that to continue looking ahead.
It's still not a meaningful part of our business. So we see a lot of upside in that part of the market and we do have a product pedigree, we're improving that pedigree with every product that we developed and are continuing to see good activity support activities from our customers.
Great. Thanks, so much right.
Thank you there are no further questions at this time. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Yeah.