Q1 2023 CIRCOR International Inc Earnings Call
Speaker 1: Before I turn the call over to Ajay, I would like to provide you with a quick update on our strategic review process. As we mentioned in mid-March and reiterated in this morning's earnings release, our board supported by our external advisors and the management team continues to progress with the review. Dialogue is underway with a number of parties that have expressed interest in acquiring all four parts of the company. Now, let me turn the call over to Ajay to cover the financial results in more detail. Thank you, Tony, and good morning, everyone. Let's turn to first quarter financial highlights on slide nine. We posted another strong quarter of orders growth and margin expansion, further validating the margin expansion and value creation potential inherent in our portfolio. But three consecutive quarters of solid performance.
Speaker 1: we continue to see the financial benefits of the ongoing transformation we launched in early 2022 and believe we have a long runway for growth and margin expansion. Organic orders were up 13%, primarily driven by pricing, aftermarket, downstream, and continued commercial aerospace recovery. We saw orders growth across our platforms and end markets. On the top line, our teams delivered double-digit organic revenue growth. In both industrial and aerospace and defense, most of our businesses posted organic sales growth in the quarter.
Speaker 1: We continue to execute value pricing, maintain cost controls, and drive growth. These efforts help generate 173% increase in adjusted operating income and 840 basis points of adjusted operating margin expansion.
Speaker 1: We delivered 53 cents of adjusted EPS up 960% and grew adjusted EBITDA 103% to $31.8 million.
Speaker 1: Adjusted free cash flow was negative 16.6 million for the quarter, an improvement of 2.9 million or 15% over the prior period.
Speaker 1: Higher AOI was offset by interest cost.
Speaker 1: Special expenses and choose not only your working capital.
Speaker 1: We expect Precashflow to be positive for the full year.
Speaker 1: Turning to slide 10 and our aerospace and defense segment results.
Speaker 1: We saw 12% organic orders growth led by pricing, commercial aerospace, medical and UK Navy partly offset by timing of joint strike fighter order and prior year.
Speaker 1: Organic revenue grew 10% with continued commercial recovery and medical growth.
Speaker 1: aerospace and defense delivered solid adjusted operating margin of 21.5% expanding AOI margins by 360 basis points over prior year
Speaker 1: EOI, my own expansion was driven by pricing and broad-based volume growth.
Speaker 1: Moving to our industrial segment results on slide 11.
Speaker 1: Organic orders were up 14% driven by pricing, aftermarket and downstream, partly offset by exit from by-plane engineering. We were especially pleased to see continued momentum in our core industrial aftermarket, which posted organic orders 12% year over year. We continue to remain laser focused.
Speaker 1: on growing this high margin part of our business as we leverage value pricing and take share.
Speaker 1: Organic revenue grew 15%, with broad-based trends across the platform that more than offset the climate navy and the exit of hyperengineering.
Speaker 1: Industrial posted exceptional AOI growth of 196% and AOI margin expansion of 960 basis points.
Speaker 1: The margin expansion was largely a result of the on-lane transformation of our pumps businesses fueled by value pricing, factory modernization, and improving execution.
Speaker 1: The exit from Piper Engineering contributed 190 basis points on margin expansion.
Speaker 1: At 15.2%, our first quarter industrial AOI margin continues to validate our business differentiation and margin expansion potential.
Speaker 1: With continued success of value pricing, aftermarket growth, and improving execution, we are increasingly confident of delivering AOI margins between 18 to 20 percent in the next three to four years.
Speaker 1: During the slide 12, net leverage and compliance leverage have continued to improve. We ended first quarter at net leverage of 3.8, which was 0.4 turns lower than fourth quarter 2022 and 2.5 turns lower than first quarter 2022.
Speaker 1: We continue to see signs of easing of supply chain constraints and improving execution, particularly in our pumps businesses. Interest expense is expected to be approximately 58 million for the full year, up approximately 16 million compared to prior year. The increase in interest cost is a result of higher rates. As a result of stronger adjusted operating income, partly offset by higher interest costs,
Speaker 1: Thank you, AJ. Based on our Q1 results and current market conditions, we now expect full year, 2020, three orders to be outflow single digits. We also expect a book to beretio over one, supporting continued future growth. In our John Dust show business, we expect orders to be outflow single digits, strength and the after market and pricing will be somewhat offset by lower or market activities. In commercial marine, we also expect low single digits or organic growth driven mostly by the after market supported by increased utilization.
Speaker 1: Turning to Aerospace and Defense, we expect high single-digit orders growth with solid contributions from the defense and commercial end markets.
Speaker 1: In our defense business, we expect low double-digit orders growth. This growth is driven by increased activities in naval programs, new products for missile using devices in space applications and pricing.
Speaker 1: In commercial airspace, we expect mid-double-digit orders growth, primarily driven by the continued market recovery for the single-aisle platforms at Airbus and Boeing, the initial recovery of the Airbus twin-aisle platforms, as well as the increased activity in the aftermarket, supported by pricing and rebound in air travel.
Speaker 1: Elsewhere in the segment, we expect orders to be down high single digits due to timing of a large medical order.
Speaker 1: Turning to slide 15, in summary, we are extremely pleased with our strong start in Q1, and we are well positioned as we move into Q2 and look ahead for the balance of the year.
Speaker 1: We expect to continue to leverage our strong aftermarket position in our industrial segment and deploy our value-based pricing and AD20 principles across the organization, generating margin expansion and staying ahead of inflation.
Speaker 1: We continue to benefit from the rebound of the commercial air space market and look for further momentum in our defense business driven by our positions on key platforms, new product development and strength in the after market. We strive to maximize value creation for our shareholders.
Speaker 1: pursuing organic revenue and margin growth, through new product development, value-based pricing, simplification, and cost-add actions, while at the same time pursuing the parallel path of a potential strategic transaction.
Speaker 1: We expect our value pricing strategy to continue to drive growth and margin expansion in 2023 and beyond.
Speaker 1: We are also continuing to evaluate further simplification opportunities in the businesses and at corporate. We are also continuing to evaluate further simplification opportunities in the businesses
Speaker 1: While our industry continues to be affected by various macroeconomic factors, we remain fully focused on the areas within our control to minimize the impact from these headwinds and deliver growth and margin expansion. Now, Ajay and I would be happy to take your questions.
Speaker 2: Operator, please open the line for Q&A. Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker 2: A confirmation tone will indicate your lines in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker 2: 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 Nathan Jones with Steve-O. Please proceed with your question.
Speaker 3: Good morning, this is Adam Farley on for Nathan Jones. I wanted to start on your value-based pricing initiatives. Could you maybe just go into a little more detail?
Speaker 3: on the various value-based pricing initiatives you have in place across the businesses and how that should layer into operating margins through the year.
Speaker 1: Yeah, good morning Adam. This is Tony. So it's really coming from two places. In the foreign market when long-term agreements come up for renewal, we start with a cycle that takes usually six months to a year and we conclude negotiations and that's one part of the pricing that we have been able to do.
Speaker 1: AJ and myself are fully focused on that. We do establish targets that the team track on a regular basis, and that's been a significant factor of the results that you saw in Q1, as well as what we delivered in Q3 and Q4 of last year. So the value pricing initiatives that we have, the 80-20 simplification.
Speaker 1: Understanding our position in the market is really the same strategy that we deployed strongly last year in the industrial business and have been deploying in A&D for quite a few years is continuing. And that's where the value pricing is coming from. We expect full year to be similar to what we did last year. Q1 started stronger than what we expected, stronger than last year.
Speaker 3: And that's been a significant factor in the margin expansion in Q1 in addition to the cost controls that we've been implementing. Okay, that's helpful. And then just shifting over to orders growth, really strong organic orders, maybe specifically for industrial, how did industrial orders trend through the quarter? Are orders continuing at a similar pace?
Speaker 3: share from the installed base as well as the pricing impact. So that's a significant portion. In North America the foremarket continues to be quite strong in power generation, midstream type activities with our three screw pumps.
Speaker 3: as well as chemical processing. So in general, industrial markets continues to be quite strong in North America. We're seeing good activities with battery manufacturing processes. We mentioned one example with the control valves. So overall, a foreign market in North America, a solid foreign market in Europe is a little bit slower.
Speaker 3: Yeah, there's activities in the U.S. markets with the large refiners. There's activities in Mexico. There's a lot of quoting activities in Brazil. And then even in the Middle East, some activities in Abu Dhabi and that region as well with refiners. So there's...
Speaker 3: But for the full year, we are still expecting to be down compared to prior year, simply because of the very large orders that we booked in Q4 that will not quite repeat. But we are seeing improvements, at least based on Q1. And Q2 started relatively well both downstream and…
Speaker 4: Good morning, everyone.
Speaker 4: Hey, good morning, everyone Good morning, Adi
Speaker 5: Tony, maybe you'd give us some more color regarding your investment margin progression. Obviously, strong progress into the mid-teens. You talked about it. You talked about the value-based pricing model. I assume that's a lot of this, but how much more runway do you have there on value-based pricing? How much is this cost really starting to come down?
Speaker 3: Last half of last year, Q1 this year has been a critical factor. In addition to pricing, inflation is starting to ease. So inflation was pretty muted in Q1. Energy cost, which was a significant headwind last year, is starting to ease, especially in our factory in Germany.
Speaker 3: The other factor is, you know, we've spoken about factory modernization. Some of that equipment is in place and starting to support productivity. The improvement in supply chain is also supporting productivity. So there's various pieces, but looking at the Q1 results, pricing continues to be the largest piece. The other side of it is cost control.
Speaker 3: with OPEX, so we are significantly focused by our leadership team and controlling costs as we grow, so we'll get the leverage from the growth as well. So there's various factors, but pricing at this point is the largest element as we look ahead and that's why we reiterated our confidence in achieving that 18 to 20% in the next two weeks.
Speaker 3: three to four years because of all the other factors that will come into play, plus the continued focus on the pricing, which again in Q1 started significantly stronger than what we had expected. Thank you so much, Have a good day.
Speaker 5: Tony, maybe I could follow up there and just ask, you mentioned you're evaluating new simplification and cost of projects, I think. Again, you delivered the margin growth in Q1. We know you've been working on this stuff for a while. To use an American term, what inning are you in of your transformation?
Speaker 3: So, last year, you know, we spoke about taking out about $14 million of cost on a run rate basis about $6 to $7 million. Basically what will happen this year, portion happened last year, portion will happen this year.
Speaker 3: We still have higher OPEX in businesses than we believe we need. So two things that we're doing as attrition happens in the businesses, we're replacing some of those roles where it makes sense in our shared service center in India. And then as we grow, the plan and what we have been doing is to do more than just the
Speaker 3: continue to drive. Again, a lot of actions have been implemented and more is ahead.
Speaker 5: I'm not sure if you can answer this, but I'll ask it anyway. A strategic review has obviously been going on for a while now. Any additional thoughts on timeline? What's a realistic timeline for all of us to think about for the board to make the decision that it needs to make? Thank you very much.
Speaker 3: Andy, it's very difficult for us to comment on timing. Obviously as we said and reiterated, the process is underway. If you recall, we spoke initially about strategic review back in March of last year, but all of last year was focused on catching up with our filing, the restatement process that we had to go through.
Speaker 1: underway and the board is committed to completing that review.
Speaker 5: It's totally fine. One more question from me. Like AJ, on cash generation, you mentioned it would be positive for 23. You start out seasonally week. Maybe commentary on sort of improvement in sort of working capital. Like how do you feel about this year versus where you entered sort of last year at this time?
Speaker 1: Yes, I would say Andy, you know, we are growing the top line this year, so there still would be in dollar terms growth in working capital through the year. Consistent with what we said in the last earnings call, we expect to have mid-single digit sort of in dollar terms mid-single digit.
Speaker 1: free cash flow performance for the full year. The first half would be negative. The second half turns positive. And this is while maintaining the elevated levels of CapEx as we continue to modernize our large and critical factories. Thanks for watching.
Speaker 1: cash flow performance for the full year. The first half would be negative, the second half turns positive. And this is while maintaining the elevated levels of CapEx as we continue to modernize our large and critical factories. Thank you guys.
Speaker 2: Thank you, Andy. Our next question comes from Lina Brett Carney with Gabelli.
Speaker 3: Thank you, Andy. Our next question comes from line of Brett Carney with Gabelli. Please keep it with your question. Hi guys, thanks for taking my question and congrats on...
Speaker 3: on the continued momentum. Good morning. You guys touched on this a bit already. But Tony, as you get out more, you visit the factories, meet with teams, it feels like coming through in the results, there's a reenergization process that's taking place.
Speaker 3: You've spoken about a number of the performance drivers. I was wondering if you can expand a bit on the factory modernization initiative, what opportunities you've seen there, and whether those investments have been made or continuing to be made at some of your core sites today. Yeah, so we have...
Speaker 3: several new machining centers including robotic type machining centers with the key focus being on our screw pump type product line. So there are already significant investments that have been put in use.
Speaker 3: you know, starting late last year, continuing this year, and there's more that's on order that we expect to receive into this year as well, can continue to put into production. It's still in the early stages of the benefits from that, but we are starting to see signs and we've been able to leverage this equipment.
Speaker 3: and are a solid backlog to drive this revenue growth, and we expect that to continue in the year as well. So we're probably 30, 40%, you know, down that modernization path, and expect to maybe get to about 60% of it by the end of this year.
Speaker 3: And most of the equipment that we are planning to invest in will be on order throughout this year And we'll continue to come into next year as well And then just lastly on new product development, great you highlight another
Speaker 3: key win with the control valve product line. I guess more broadly, can you talk about what you touched on in terms of the deeper market mapping and segmentation work that the teams are doing to really identify some of these growth verticals and go after them in a more impactful way?
Speaker 3: Yeah, so that's going on in both segments, but specifically in the industrial segment. So we spoke about the control valves. I think I touched a little bit on the pumps. The control valves is just one element of growth that we see in this area. There's opportunities and where there's netnick in the trees with your entire fallout important management okay. Then we have an unfortunate growth rate where poor they've hadgard spikes in all of those hotels in the area. There will be a feel better and the
Speaker 3: carbon capture and various other, you know, renewable type markets or clean energy. But specifically with the batteries, that's obviously a high growth area, high growth market. Beyond the control valves, we have meeting pumps that have applications and we're already applying those in various applications.
Speaker 3: And we also have our progressive cavity pumps with applications and moving lithium slurry in addition to some of our pumps that are used on the mining side, some of our large propeller pumps. We have various elements in our portfolio.
Speaker 3: and we're looking at the whole supply chain for that side of the market to continue to drive growth. It's still in early stages. It's hard to put a number on it, but we see significant potential from that market as we look ahead.