Carpenter Technology - Earnings Call - Q3 2020

Transcript

Speaker 0

Good day, and welcome to the Carpenter Technology Corporation Third Quarter Fiscal twenty twenty Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Brett Edwards of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology Earnings Conference Call for the Fiscal Third Quarter ended 03/31/2020. This call is also being broadcast over the Internet along with presentation slides. Note, for those of you listening by phone, you may experience a time delay in slide movement. Speakers on the call today are Tony Tang, President and Chief Executive Officer and Tim Lane, 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 those forward looking statements can be found in Carpenter Technology's most recent SEC filings, including the company's report on Form 10 ks for the year ended June 3039, Form 10 Q for the quarters ended September 3039, and December 3139 and the exhibits attached to those filings. 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 margin, that is based on operating income and sales, excluding surcharge. I will now turn the call over to Tony.

Speaker 2

Thank you, Brad, and good morning to everyone on the call today. I hope you and your families are well and safe. Let's begin on Slide four with a review of our safety performance. Our total case incident rate, or TCIR, dropped to 1.1 in the third quarter of fiscal year twenty twenty. We worked extremely hard over the last five years to make safety the cornerstone of our company culture.

The goal of a zero in the workplace is embedded across all of our locations. With that same mindset, we are able to quickly respond to the COVID nineteen pandemic with an immediate focus on protecting our employees, their families, and our facilities. Let's go to the next slide and talk more about our actions. Company's technology, especially in metal alloy materials, they need. And in some cases, the same source for premium material solutions in critical applications, making them viable for continued production of essential manufactured products.

We fully understand our role as a essential business and know that it is important for us to continue to operate during this challenging period. We took immediate actions such as remote working, enhanced personal hygiene, social distancing, and limiting access to our facilities. But our total pandemic response is much deeply complex. We have focused on four pillars, which are game changers in terms of safely operating and manufacturing facilities during the pandemic. The first is the rapid response team made up of employees in multiple disciplines who spend 100% of their time focused on safely operating our facilities during the COVID nineteen crisis.

The second is a robust self reporting and self isolation program. We require all employees to self report to our market team if they meet any of the detailed criteria. If the necessary, they are placed on a paid twenty one day self isolation. The third is a modularized or pod work environment that acts as a circuit breaker to virus transmission within a department or shift. The pod consists of two fundamental principles.

One, full separation between shift and a thirty minute air gap, and two, strict defined boundaries within a shift. The full picture screen for everyone on-site, employees, contractors, and delivery drivers. Extensive protocols and work instructions have been implemented for each of the four pillars. Because of Carpenter Technology's deep rooted safety culture, we have been able to keep our facilities operating while providing unparalleled safety protections for our employees. Now let's turn to Slide six and review our third quarter performance.

Our ability to act quickly and work safely during the global pandemic is a significant strategic advantage for Corporate Technology. It sets us apart from other companies and reinforces our position as a resilient and reliable supplier. For the third quarter, we achieved earnings per share of $0.82 Those results were driven by strong commercial and manufacturing execution in a challenging environment. Our operating income of $58,700,000 for the quarter included a negative impact of approximately $5,500,000 from COVID-nineteen. Despite the headwinds, SAO delivered operating margin of 19.2%, the fifth consecutive quarter with adjusted operating margin above 18%.

In addition, customer engagement regarding VAT approval at our Athens facility remains consistent as we have seen another meaningful approval being recorded. In the aerospace and defense end use market, sales increased 7% year over year, while the aerospace engine submarket increased 11%. In the medical end use market, sales increased 10% sequentially. Although still close to historical highs, backlog decreased year over year for the first time in 13, down 7%. Our ability to pull in orders helped offset the impact of the seven thirty seven MAX production halt and COVID-nineteen.

However, as the COVID-nineteen pandemic progressed, forward demand patterns across all English markets began to be adopted. To that end, we have implemented targeted portfolio restructuring and cost reduction initiatives in order to maintain our strong balance sheet. Tim will provide more details on these portfolio moves and our strong liquidity position during these remarks. Make no mistake, we will continue to preserve liquidity and enhance our financial flexibility as we navigate the challenging environment caused by COVID-nineteen. Now please to Slide seven for the English market update.

I will be brief in discussing the third quarter market details as the primary focus of today's discussion is on the forward market outlook, which I will address earlier. Looking first at the aerospace and defense industry market, which accounted for 59% of our sales in the quarter. Sales increased 7% compared to last year and were up 5% sequentially. Overall, our performance in the quarter was solid, given the slowdown across the Allstate supply chain related to the seven thirty seven MAX. Moving on to the medical end use market, which accounted for 10% of our sales in the quarter.

Sales were up 1% year over year and up 10% sequentially. The transportation end use market accounted for only six percent of total sales in the quarter, and sales were down both year over year and sequentially. Activity heavily impacted by lower white vehicle sales due to client closures around the globe as well as the flattening of the North American heavy duty truck market. Now moving to the energy needs market, which accounted for just 6% of total sales in the quarter, sales declined 29% year over year. The oil and gas downturn rapidly accelerated in the third quarter due to a combination of COVID-nineteen and oversupply dynamics.

In the industrial and consumer end markets, revenues were down 6% year over year, but increased sequentially by 6% due to the continued strength in the semiconductor demand and higher consumer electronics sales. Now I'll turn it over to Tim for the financial review. Thanks, Tony. Good morning, everyone. I'll start on Slide nine, the income statement summary.

Net sales in the third quarter were $585,400,000 and sales excluding surcharge totaled $495,000,000 Sales excluding surcharge increased 5% sequentially on 5% higher volume. Compared to the third quarter a year ago, sales decreased 2% on 9% lower volumes. As Tony covered in his review of the markets, the year over year results reflected strong growth in aerospace sales, offset by weakening demand in the energy and transportation end use markets. The performance is significant given the challenges that we faced late in the quarter related to COVID-nineteen. This impacted our ability to get shipments out of our mills, both due to enhanced safety measures implemented in our facilities as well as the impact on certain customers who are unable to accept deliveries as they were forced to shut down their operations, particularly in Europe as a result of the pandemic.

Our production teams adjust extremely well to the additional safety measures, but the transition to this new way of working clearly impacted productivity. The teams also had to deal with certain self isolation measures that affected staffing levels at key work centers. I'll talk more about the impacts on our results shortly in the segment details. SG and A expenses were $50,800,000 in the third quarter, up roughly $1,000,000 from the same period a year ago and down $4,500,000 sequentially. The sequential change reflects the timing of certain expenses from quarter to quarter.

Operating income was $58,700,000 in the quarter compared to $73,200,000 in the prior year period. As Tony mentioned, the current quarter's results include about $5,500,000 of COVID-nineteen related impacts. Last year's third quarter included $11,400,000 insurance recovery benefit related to our Dynamet facility that was included in our PEP segment's operating income results. Adjusted operating income as a percentage of sales was 11.9% in the quarter, representing margin contraction of two seventy basis points as compared to Q3 in fiscal year twenty nineteen. When excluding the impact of the insurance recovery, year over year margin came down about 40 basis points, which is impressive considering the challenging environment.

While not specifically shown on this slide, our results for the current quarter include mark to market losses related to investments we hold for certain benefit plans. The mark to market losses totaling $3,900,000 are included in other income loss and are the result of a significant decline in equity values of these underlying assets during the quarter, especially in March. Our effective tax rate for the third quarter was 20%. The tax rate was favorable versus our expectation due to a favorable adjustment related to prior year taxes that were finalized during the current quarter. Net income for the quarter was $39,900,000 or $0.82 per diluted share.

Now turning to Slide 10 and our SA segment results. Net sales for the quarter were 488,100,000.0 or $398,800,000 excluding surcharge. Sales excluding surcharge increased 1% year over year on 10% lower volumes. The results reflect strong demand in the aerospace and defense and medical end use markets, partially offset by weakness in the energy and transportation markets. The aerospace and defense performance speaks to the underlying strength of our position in the supply chain.

We offer solutions across multiple platforms, applications and a broad base of customers. The results are especially significant given the ongoing headwinds facing the supply chain recently related to the seven thirty seven MAX production halt. Sequentially, sales excluding surcharge increased 4% on 4% higher volumes. SAO operating income was $76,400,000 for the third quarter with adjusted operating margin at 19.2%. The same quarter a year ago, SAO's operating income was $73,600,000 Again, it's worthy to note that despite the significant disruption caused by COVID-nineteen late in the quarter, the operating teams ensured that our facilities could safely continue to satisfy customer needs.

The current quarter's performance reflects approximately $5,000,000 of operating income impacts for SAO, including both delayed shipments and incremental expenses due to COVID-nineteen. Looking ahead to the fourth quarter, we are expecting operating income to be down approximately 50% when compared to our recent Q3 results. Most of the decline in operating income in SAO will be driven by the impacts of the significant reduction in inventory in Q4 as we look to manage cash. Although we had already planned to reduce inventory in the fourth quarter, as we demonstrated last year, we are now targeting further reductions in inventory. The significant reductions in new material starts and the associated reduction in raw materials in a time of declining prices will have a significant negative impact on our upcoming fourth quarter's profitability.

We are also expecting sales to be down sequentially as the global economy adjusts to the ongoing disruption caused by the current pandemic. Forward visibility is limited, and the impact to each individual market will vary. In addition, individual customer demand adjustments or reactions will vary depending on their individual situation. Our main objective is to stay close to our key customers to understand their needs and further strengthen their position. To deal with the impacts of lower volumes, we have implemented furloughs for certain production and maintenance positions as we match our workforce needs to production schedules in each of our facilities.

In this environment of rapidly changing requirements and plans, we continue to emphasize the importance of the Carpenter operating model. We will continue to lean heavily on areas such as waste elimination, leader standard work, and problem solving. The actions we have taken to implement the CoPener operating model are expected to pay further dividends, and we believe will provide significant operating leverage as we continue to navigate these challenging conditions. Now turning to Slide 11 and our PEP segment results. Net sales, excluding surcharge, were $107,100,000 which were down $18,800,000 from Q3 of fiscal year 'nineteen and up slightly sequentially.

The year over year decline reflects ongoing weakness in energy sales, more specifically in the oil and gas submarket, as well as weaker sales in the distribution business that is more sensitive to global economic conditions. On the positive side, we continue to see year over year and sequential growth in medical sales. In PEP, sales for the medical market increased 27% sequentially and 19% year over year. In the current quarter, PEP reported an operating loss of $300,000 For clarity, last year's third quarter operating income of $16,600,000 included an $11,400,000 benefit from insurance recovery. The results for PEP were influenced modestly by the COVID-nineteen situation.

Again, credit goes to the teams who are doing whatever it took to ensure our employees' safety and to keep the facilities operational at this critical time. As we look ahead to the fourth quarter, we expect to see headwinds across most of the markets related to COVID-nineteen. Given the uncertainty associated with COVID-nineteen on the PEP business, we have initiated several key actions focused on reducing cost and preserving our liquidity. Similar to SAO, we've initiated furloughs for production and maintenance positions across most of the facilities. In addition, we have also recently made several key strategic decisions affecting the type segment.

Given the ongoing weakness in the oil market, which has worsened since the end of the quarter, we have decided to exit the Omega West business. Actions to exit this business, including strategic discussions with third parties, are underway and anticipated to be completed by the end of our upcoming fourth quarter. We have also decided to idle two domestic metal powder production facilities. We remain committed to metal powder production but consider it necessary to close these two facilities to save cost and preserve cash flow in the near term. Action plans have been initiated, and we expect those facilities to be closed during the fourth quarter.

We expect that the actions to exit the Omega West business and idle the two Powder facilities will generate estimated annual savings of 15,000,000 to $20,000,000 based on the current run rates for these businesses. As we look ahead, we expect PEP to report an operating loss of 5,000,000 to €6,000,000 in the fourth quarter. Now turning to Slide 12 and a review of cash flow. Free cash flow in the third quarter was positive $13,000,000 Within the quarter, we decreased inventory by $23,000,000 As I mentioned earlier, we expect to continue to reduce inventory in the fourth quarter. In the third quarter, we spent $50,000,000 on capital expenditures.

We expect to spend $170,000,000 on capital expenditures for fiscal year twenty twenty, consistent with the guidance we previously provided. Within the $170,000,000 there are several large multiyear projects. First, the $100,000,000 hub strip mill being constructed on our Reading, PA campus. This investment will complete be completed next fiscal year and will enhance our soft magnetics portfolio and increase capacity. Second, we have substantially completed the capacity expansion projects for our Dynamite titanium business, allowing us to capture emerging growth for high value titanium solutions in the medical market.

Finally, we completed our emerging technology center, which demonstrates and drives the commercialization of new technologies supporting the company's growth programs. I'll talk a little bit about our future CapEx plans as well as our liquidity on the next slide. As we move to Slide 13, our liquidity position remains solid, which is critical in today's environment. As of the close of the current quarter, we have 317,100,000 of total liquidity, including $93,000,000 of cash. I should note that during the third quarter, given the significant uncertainty as the COVID-nineteen situation unfolded, we drew $50,000,000 from our credit facility as a preventative measure in the event there were any potential issues with our ability to access our credit facility as needed.

We did this purely as a precaution, and we remain in regular contact with our banking group participants. We are confident in our banking group's ability to meet the funding commitments under our credit facility. It is also important to note that we are well within requirements for compliance with the covenants under the credit facility. As I mentioned numerous times already, our focus clearly has shifted to preserving liquidity in response to the uncertainty created by the pandemic. Although our current liquidity is strong at 317,000,000, we are continuing to execute plans to increase cash flow.

First, as I mentioned, we are rigorously evaluating our production schedule and related inventory levels to ensure we are aligned with our customer needs. We believe inventory represents a significant cash flow lever for us over the next several quarters. Second, we are actively managing our cost structure. We have already taken actions such as production and maintenance workforce furloughs and a global hiring freeze. Also, given that we are finished with the bulk of our spending on growth projects, we expect to be able to reduce capital expenditures for fiscal year twenty twenty one by 25 to 30% or 40 to 50,000,000.

In addition, as I mentioned, we've taken strategic steps to rationalize our business and facilities portfolio. We've initiated plans to exit the Mega West and Idol two Powder facilities. Again, these strategic actions are anticipated to save 15,000,000 to $20,000,000 annually based on current run rates. We've identified additional levers available to us in the event the situation worsens. We have evaluated various scenarios and believe even in scenarios where demand is meaningfully depressed for an extended period of time, we have ample liquidity.

Although we have no near term maturities, we will continue to actively evaluate options to access the capital markets as necessary to ensure the strength of our balance sheet and continue to execute against our disciplined capital allocation philosophy. The actions we have taken over the last several years to ensure the strength of our balance sheet and financial position have put us on solid footing even as we face the current uncertainty. With that, I'll now turn the call back over to Tony. Thanks, Tim. Let's move to Slide 15 in a more detailed market outlook.

Let me give you a bit more color on how we see our markets for this coming quarter and into our fiscal year twenty twenty one. In our aerospace and defense end use market, we see our next quarter as a pause in the reset quarter. Clearly, the near and midterm demand profile has changed, and no one yet understands what the final demand profile will be. We're going to use this time to strengthen our relationship with our customers to maximize our share and work directly with them as they are processing large updates to their forward dreams almost daily. We believe we will show more resilience than our competitors as we have seen a huge struggle with COVID related operating disruptions.

Assuming we have some macro return to normalcy in our fiscal year twenty twenty one first quarter, which some are now projecting, the industry could begin firming up its ramp back rate in need. That in turn could allow us and our customers higher confidence and visibility into the future. Turning to our medical news market. Although states are currently beginning to reduce restrictions on elective surgery, we do expect destocking efforts to continue in the third quarter at both billings and OEM customers as well as distributors supporting the medical device market as the market adjusts to the change in demand initiated in the third quarter. These destocking efforts are expected to continue to affect our orthopedic and dental markets.

We expect the return of elective surgeries to continue to the first quarter of the fiscal year twenty twenty one, mostly in orthopedic markets. We expect end user OEMs and distributors will replenish some depleted stocking levels and begin to attempt cut the demand. Although it represents a small percentage of our total sales, we have enjoyed some success in the transportation in this market where we supply high value solutions. In fiscal year twenty twenty fourth quarter, we expect this market will be extremely challenged as North America, Europe and South America have been effectively closed through the month of April. As we move into fiscal year twenty twenty one, we do expect some stabilization, but at much lower levels.

For energy in this market, we see a continuation of a slowdown in oil and gas with the rig count in North America reducing to historic lows. We expect oil and gas will remain at depressed levels with further scale back in The US run rate to around 200 at the end of calendar year 2020. This forward outlook coupled with the continued disruption resulted from COVID nineteen is what prompted our decision to exit The United Arab Emirates business. In summary, it was no surprise we had a subdued outlook over the next couple of quarters. Across the technology, it is an advantage for approximately 70% of our total sales originated in the aerospace and defense and in medical and use markets, both markets that are supported by long term macro trends.

In addition, we have invested in emerging technologies such as active manufacturing and self magnetics that could be accelerated due to changes caused by this pandemic. Proceed to Slide 16 in my closing comments. As I said in my opening comments, the first priority is to protect our employees who have demonstrated another level of dedication and commitment during these challenging times. We are safeguarding our employees and facilities, delivering on customer material needs, working diligently to ensure our supply chain is functional and taking decisive actions to manage our cost structure and strengthen our financial position. We executed from both a commercial and manufacturing perspective to deliver a strong full year performance of WTCO efficiently, and that includes five point five million negative impact due to COVID-nineteen.

Today and certainly with the new, we always define stable footing. And at company technology, we have a path forward to successfully navigate the near term disruption caused by COVID-nineteen. We have an impressive manufacturing system that includes unique assets capable of producing products that only a few of the world can match. We produce highly specialized products, several proprietary that are focused on innovative solutions that our customers require. Our customer relationships are strong and growing.

Over the last several years, those relationships have resulted in meaningful share gains. During these challenging times, we have demonstrated our resiliency, and that has grown our customers' inducing. A strong balance sheet, maybe underappreciated in the past, is now critical to our customers and shareholders. And as Tim mentioned, we have multiple cost reduction and cash generation actions available to us that will allow us to remain in a cash positive position even in an extreme market downturn. In addition, our leading position in aerospace and defense and high value product offerings in the medical market account for approximately 70% of our total sales.

With the exit of the megawatts business, we reduced our presence in the volatile energy market to just 3% of total sales and preserve an estimated 15,000,000 to $20,000,000 operating income in the upcoming annual period. Over the last several years, we have consistently delivered quarter over quarter earnings growth. We've also made investments in critical emerging technologies, including additive manufacturing and self magnetics that will enhance our long term sustainable growth profile. Healthy technology has led us many market ventures and difficult operating environment that is reported in thirty plus year history. Like the previous challenges we have faced, we will navigate this current crisis with a unified approach to safety, serving our customers, supporting the foundation of our business, and delivering value to our shareholders.

We are already looking to the future to envision what's the new normal may look like once we defeat COVID-nineteen and our markets begin to recover. We are working on strategic plans to capture opportunity and build on our long term growth potential. We will emerge from this crisis with an even stronger safety culture, stronger relationships with our customers and a business well positioned to excel in a new normal economy. Thank you for your interest, and I'll turn it back to the operator to field your questions.

Speaker 0

Thank you. We will now begin the question and answer session. And our first question will come from Gautam Khanna of Cowen. Please go ahead.

Speaker 2

Hi. Good morning, guys. Good morning, Gautam. Wanted to just explore on on the decision to exit Omega West and to shut the two power facilities down. What are there any cash costs associated with the Internet that are one time in nature?

There are some cash cost options primarily around the settlements that we will pay on to the you the majority of the charge would be noncash. It would be the property and accident write downs and any lease obligations we have in the portfolio. Okay. Any sense for how much that is in aggregate with cash related cost? The majority is on the noncash side.

I can say that. Okay. And then the 50% decline anticipated at FAO sequentially, is this I'm just curious, what is sort of the visibility around that? Have you already received orders that reflect the new the new announced build rates at Airbus and and Boeing? I imagine.

But I'm wondering if you should get worse sequentially as we move into the back half of the calendar year. Normally, there's seasonality that's down sequentially, second half versus first half. But then we're also transitioning to lower rates. I I wonder how long does it take to actually get those orders to Carpenter to reflect what is actually gonna be the ongoing OEM production rates. So do you see like a much bigger step down than we normally do in the second half of the calendar year on top of what you're expecting in in calendar q two?

It's it's the it's the number one question. Right, Gautam? And I think maybe our old models that we've used in the past as far as seasonality or cyclicality in the oil space business and industry might not be very useful anymore because we see such major shifts. So as opposed to seeing a downturn in the first half, you could see some, you know, changing in or the new pattern just because you you have such a low level now. So I don't know if we can use the same message that we've been in the past.

To answer your first question, certainly, it's a moving target. We feel comfortable with let's say, comfortable as you can get with the guidance. It is moving around every day with our market leads are talking to our customers. The other piece of that guidance is we really made the decision to take out more inventory than we normally would. I mean, we had a strong balance sheet.

We wouldn't carry some inventory. We were gonna take a step back from that and say, now is not the time to do that. So we're gonna sacrifice some operating income next quarter to pick up a substantial amount of cash. And we think that's the right decision to make. It's probably not the best time to be reducing the risk just because raw material prices are lower.

But again, I think the focus here should be on the cash side, and we'll we'll take a bit on the operating income side, Jen, to do that. I hope that answers your questions. Yeah. No, Joe. I guess I'm trying to frame up I think this year is almost over.

Yeah. For Carpenter, it's the fiscal year. I'm trying to frame up, you know, the following year and and perhaps the year after. We we have announcements now, some Boeing and Airbus, wide body rates, somewhere near down 50%, you know, 70 less, And and single aisles, got Airbus down a third, and Boeing ramping much more slowly than we had hoped for, you know, just three months ago. So in that kind of environment, do you think the operating income at SEO state does it sort of follow that production, you know, down kind of 40% in a blended in terms of operating profit relative to, you know, what maybe calendar nineteen was.

Is that sort of the right is that how you you're thinking about your thinking about Well, there was a Let's see. Listen. It's the absolute right answer. But as you know, I mean, the vision that we have going forward is where they need it, and it's tough to take very high level assumptions because every customer is different. And, honestly, they are changing from day to day.

Now this quarter for us, the fourth quarter, will be a bit more subdued than normal because we're going very aggressively on inventory. We think that's the right thing to do. So if we would have taken a step back and been more conservative on the inventory reduction and say, you know what? Let's just kinda manage the way we usually do. You'd see a you'd see a quarter that would be materially better.

The tip that we're gonna take to take the inventory is not as significant in this quarter. So it's gonna be a little bit difficult, Gautam, for us to kinda go quarter to quarter because they're really making some significant changes in the way we do business. I think we're all going to have to do work together and kind of do this in a quarter to come. And then just one last one for me, Tony. In these downturns in the past, how have competitors responded with pricing to capture, you know, emerging demand or, you know, just get more share on existing contracts where there may be, you know, some flexibility with the customers as to what the share is, you know, if it's in a band.

And and have customers do you think customers are gonna be coming back to Carpenter and asking for those kind of price concessions. You know, what what do you anticipate happens just based on, like, normal cyclical downturns? Again, it's a good question. It's a good question, and we have seen that. And limited areas inside of our industry.

That's why I took a little extra time early on in my presentation to talk about the really detailed actions we took to keep our plants running safely. And, doctor, you know that there's a lot of operations out there across many industries that have had to shut down, not necessarily because the demand wasn't there, it's because they could not safely put their employees to work. They might have had an outbreak that they had to shut down. That's really important for our customers, and I would say more important than a temporary price increase that they know they're working with the company that values the safety of their workers, number one. They're gonna take those productivity hits that we did in the third quarter and still had record actual results.

And that's the company that they wanna go with long term as opposed to chasing a price for for a short period of time. In fact, we've had customers come to us just because of that and want to increase the business they do with us or increase our share just because of our ability to operate which is volume. So there are some trade offs. It's always about price. If you're in a market that you believe has long term positive natural demand, it's gonna be there.

This this will pass. And you wanna be talking with the company that's always gonna be resilient and reliable as a supplier. Thanks for the candor. I appreciate it. And keep healthy, and good luck.

Yeah. Thank you, Duncan. Hope you understand and see you all.

Speaker 0

Our next question will come from Josh Sullivan with Benchmark. Please go ahead.

Speaker 1

If we just think about the Carpenter operating model you've put in

Speaker 2

place over the last couple of years, is there any way to quantify how it would have helped in previous downturns? Just maybe what's operationally different versus 2014 or 2008 overall? Just trying to understand from a comparison perspective how Carpenter's evolved, as that's been put in

Speaker 1

place over the last couple of years.

Speaker 2

It's a good question. Hard to quantify because there's so many moving parts right now. But I think it's a as a company and as a workforce, we're blessed to have this corporate operating model because it's become even though I and I've said many times, Josh, I think we're still in early innings. I still believe there's a lot more we can can do with this operating model. It's not always easy, like everyone would do it.

So I do believe there's still a lot more left in the tank. But as we moved in as the pandemic became worse and worse, having that DNA now in Carpenter, I mean, my site leaders have been absolute superstars to have that type of grounding in a way they move so quickly to go to this modularized pod system, that is massive. And I can tell you there's a lot of operating locations not doing that. To be able to put that in so quickly, they they lean on their proper operating model It speaks as far as we understand it work, flow, communication, and I would tell you having that being have practiced that for the last five years was critical to us to be able to provide the quote that he did this time. Comparing to the past, it's been tough to give you an exact number, but I will tell you that that was significant, our ability to respond quickly because we've had that DNA kind of baked in right now.

It's a great question. Got it. And then just thinking about the balance of work that you can shift between NASA and the Catholines and the legacy facilities. I know you want to talk about it as one operating system. But at one point, Reading was almost redlined on, you know, certain areas that had to be qualified with aerospace.

But just given the overall reduced demands, you know, is there is there a way to balance more of the work in Athens, which may have a lower cost structure just because it's a newer facility? I believe as we go through the depressed moment, we're gonna need ready Manhattan. We're very well, I'm very sensitive and conscious to the workforce that we have in those locations. And I think it's a great time for them to say, we understand we have lower volume. We understand we need to flex our labor.

What we're doing is some, rolling furlough, taking shorter work week as opposed to having permanent layoffs because we want to keep those employees and invest in them. They care about customer technology. So we'll have individuals go off on a furlough for two to three weeks. We'll help them work on whatever benefits they have available to them. We continue to supply them medical benefits.

We're not gonna take away that when they're on this rolling furlough. And in two to three weeks, we can bring them back and have another set of employees go off. So we keep everybody working. We keep everyone insured. And in some in some plans, it might be more beneficial for us instead of being rolling furlough to go from a forty hour week to a thirty two hour week.

And that's just a better way to keep everybody involved. And during this tough time, everybody has an opportunity to support their family. So that's our approach. It's not about let's go 100% dark in this area and move it all down to Athens. We wanna have a balanced approach to keep as many employees viable as we can.

Got it. And and and kind of related to that, just keeping the structure in place for an eventual recovery, what do you think the red herring is going to be for recovery for you? Are we going see it in the distribution side, auto? What vertical do you think we'll see first as an eventual recovery takes hold? That's a good question.

I mean, from our standpoint, we've said a couple of times now, 60% is airspace and defense. And then you add in defense I mean, you add in medical. And then on our industrial, we can choose by adding the semiconductor and the high end consumer electronics. We're talking 80 plus percent of our business. So that's really our focus.

And now from a you know, you talk about other verticals like energy, that we're gonna be less than 3% in the energy in the energy market. That volatility in the energy market is not going to impact Carpenter Technology going forward. And in transportation, we have great customers, and we've done a good job of really going after and gaining share in that high level. But, again, it's 5% or 6% of our market. So in the local Carpenter, I think the focus why we ship sales in aerospace defense, medical, which is really good for people.

There's more funding available.

Speaker 3

Got it.

Speaker 1

Thanks for your time. Mhmm.

Speaker 2

Yes. Thank you.

Speaker 0

Our next question will come from Phil Gibbs with KeyBanc. Please go ahead.

Speaker 3

Hey. Good morning, Tony and Tim. Good morning, Phil. First question is just on the Towder's side. Where, from an end market standpoint or application standpoint, is is a lot of that going?

And and I guess, why did you feel the need to to idle some of that some of those facilities given given some of that may be going into your future growth plans and additives?

Speaker 2

Yeah. Great. I'll start with Rhode Island. Rhode Island is a small facility for, like, it's a new atomizer. They primarily produce metal injection molded market, so for the molded market.

Like an uneven market for us, they give a very large order, and then our facility will be utilized. It's it's not a money making facility for us. And as we go through this period of time, we can really focus on it. It's it's very applicable to having offshore producers because they're going to be low cost, and that's just not our strategy. So it it was planned.

We've been thinking about it for the same time, something that the market number, just couldn't do that service time to to exit. So what we're doing with the story is a little different. That is a titanium powder facility. So we still believe the titanium powder is gonna be extremely strategic for the additive market going forward. Unfortunately, when we brought online our West Virginia facility, there were many others that brought on titanium powder capacity.

So that was in a oversupply position right now. So we'll hire that. I would assume that would be that we'll come back in that facility in a period of time. So we can fill off a full portfolio to our customers in the office side, type in and power that we can we can source that from from somewhere else. So, hopefully, that's something that as an institution that we would need to bring back as the market is going you know, continue to mature.

And because of this, I think that's very important. When we have a critical event like this happen, everybody thinks that the first the first is is to cut cut cost, cut R and D, cut innovative ideas. But the companies that will emerge better and stronger are the ones that are measured in what they cut. They still look at their R and D, and they and they spend money on critical project, additive and software development. I think it is gonna be two of those.

So we still have very forward thinking companies that now is just probably looking at a couple of those areas and saying, we wanna go faster than what we did before because you see a new one as we come out of them. Hope that answers your question.

Speaker 3

No problem. And just from a capital allocation standpoint and and liquidity, I just wanted to clarify. Tim, did you say that you you drew out of the revolver out And then secondarily, do you have do you have every intention right now as a company to to maintain the dividend?

Speaker 2

Hey, Phil. I'll take the first piece and give the second piece in dividend, and I'll turn it over to to Kim. That's a that's a good question from a dividend. We are at Carpenter Technology very fortunate. We have an experience board, and we have a very detail oriented board.

So in our last board meeting, we spent the majority of the time with our board going through all of the different scenarios. 20% down, 30% down, 50% down. What does that mean? What are all the cost levers we have? Right?

You know, who's the new hires? We do not it's the first people. There's so many other things we can we can do. And after looking at that detailed analysis, the board was very comfortable to say to approve this dividend and to pay it. Regardless of the pandemic, the dividend is approved on a quarterly basis.

So the board looks at our position as a quarterly. We'll continue to do that. But I think it does speak very positively that the board did a lot of homework, looked at all the scenarios, and felt very sensitive to this time. And I don't need to out in front of the board, but But we have laid out a pretty strong plan that they see an extremely downturn. And we just take cash positive without being asking the need of those costing.

I'm not saying that's huge question. Yeah. Phil, in my comments, mentioned we drew down the revolver by $50,000,000 in the quarter. So you'll when you see our balance sheet, we've got a little bit more cash on the balance sheet than we typically have. That was purely as precaution given, you know, in the early days of this as it unfolded.

Just a, you know, really preventative measure, but we're generally comfortable with with our banking group and don't believe we'll have any issues accessing that that credit to that credit facility. So so now 50,000,000, is that in

Speaker 3

the March, or are saying you

Speaker 1

do that after the quarter? I'm sorry.

Speaker 2

No. Yeah. In the March.

Speaker 3

Okay. Got it. And then lastly, for me, it's just on the the Jet Engine business, Tony, you typically give give us a read in terms of what that business did. Any any thoughts on what what that was year on year from a from a gross standpoint? Thank you.

Speaker 2

Yeah. Aero ending was up 11% year over year and 9% sequentially. So still a pretty good quarter there. And even though you have some of this, obviously, building of demand, we have a a very long, very strong backlog. So we're we're working very hard to bring some of that back backlog in, and there's still customers that would would like to get to pull that order up.

That is probably the first time I think in about 13 quarters, you saw our backlog decreased over 67%, but it's still a historic level. So we are able to put some price in and, you know, reducing the demand. Appreciate it.

Speaker 0

This concludes our question and answer session. I would like to turn the conference back over to Brad Edwards for any closing remarks. Please go ahead, sir.

Speaker 1

Thank you, operator, and thanks, everyone, for joining us today for our third quarter conference call. We look forward to speaking to all of you on our near end call during the summer. Take care, and have a great rest of your day.

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.