Carpenter Technology - Earnings Call - Q4 2020
July 30, 2020
Transcript
Speaker 0
Good day, and welcome to the Carpenter Technology Fourth Quarter Fiscal twenty twenty Earnings Conference Call. All participants will be in listen only mode. Ask presentation, Please note this event is being recorded. I would now like to turn the conference over to Brad Edwards. Please go ahead.
Speaker 1
Thank you, operator. Good morning, everyone, and welcome to the Carpenter Technology earnings conference call for the fiscal twenty twenty fourth quarter and year ended 06/30/2020. This call is also being broadcast over the Internet along with presentation slides. Please note for those of you listening by phone, you may experience a time delay in slide movement. Speakers on the call today are Tony Tain, 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 k for the year ended 06/30/2019, Form 10 Q for the quarters ended 09/30/2019, 12/31/2019, and 03/31/2020, 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 margins, 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, was 1.1 for the fiscal year twenty twenty. This is our lowest annual incident rate to date as we continue our journey to a zero injury workplace.
This is an impressive achievement considering the challenges of operating our manufacturing facilities during the COVID nineteen pandemic. Our employees have done and continue to do an exceptional job of following the safety protocols in place that keep our plants safe. As we turn to fiscal year twenty twenty one, our safety activities built on employee engagement will continue to support our drive to a zero injury workplace. Now let's turn to Slide five and review the fourth quarter performance. Just two quarters ago, at the midpoint of our fiscal year twenty twenty, Carpenter Technology had significant momentum.
Our SAO segment was achieving margins at historic highs. We just completed our twelfth consecutive quarter of year over year sales and earnings growth. The company was on track for the best financial performance year in our history. And our growth accelerators, such as the investments in the Athens facility, Soft Magnetic and additive manufacturing, were poised to start contributing to the bottom line in the years to come. Of course, the COVID nineteen pandemic was thrust upon us, and it has had a devastating impact on our personal lives and on the economy.
Fortunately, Carpenter Technology was in a strong position. Understanding the magnitude of the downturn, we aggressively pushed forward with portfolio restructurings and cost reduction initiatives to strengthen an already strong liquidity position and balance sheet. Our actions today include the elimination of approximately 20% of our global salary positions, implementing a hiring freeze and deferring annual merit increases for most salaried employees, reducing our planned capital expenditures by 50,000,000 in fiscal year twenty twenty one compared to fiscal year twenty twenty after reviewing and prioritizing our capital investments executing rolling temporary furloughs for certain production, maintenance and salaried employees and completing targeted portfolio actions, including the decision to exit the Omega West oil and gas business, idle our West Virginia powder facility and divest our Rhode Island powder facility. All of those actions were critically important as sales in the fourth quarter were down 30% year over year and 24% sequentially. This depressed volume will likely continue over the next couple of quarters, and a full recovery will take even longer.
We also actively managed the quarter to prioritize free cash flow by accelerating our inventory reduction plan, which was successful in generating cash flow. However, it had a significant negative impact on our operating results. In fact, the primary highlight from our fourth quarter results was our strong free cash flow generation. We drove $100,000,000 of free cash flow in the quarter, which significantly strengthened our liquidity position. We enter fiscal year twenty twenty one with a total liquidity position of 417,000,000, which we enhanced even further with the bond offering this month.
We have ample liquidity to continue managing through the COVID nineteen pandemic. Equally impressive is our ability to keep all of our facilities operating continuously in this challenging environment. This accomplishment clearly demonstrates the power of our core safety value as well as the steadfast dedication of our employees. Our employees have demonstrated a great commitment to protecting each other and serving our customers during this challenging period. This heightened commitment is resulting in deeper customer relationships and new opportunities for our solutions.
Over the past several months, we have enriched and or extended supply agreements at the request of key aerospace, medical, and semiconductor customers who expressed concern about the stability and long term reliability of other suppliers. We have demonstrated a resiliency that is resonating with customers and winning us market share. The pandemic has caused near term challenges for us as well as our entire industry. However, our long term growth potential and that of the markets we serve remains intact. Our core business was strong prior to COVID nineteen pandemic, and the long term outlook for our markets remains robust.
Carpenter Technology is and will remain a trusted solutions provider of critical applications. Our specialty metal alloys are unique, and we are one of a handful of suppliers, in some cases, the sole credible supplier of materials essential to production of aircraft, medical devices, and implants, semiconductors, consumer electronics, automobiles and other applications. Our established core business and leadership in critical emerging technologies, including additive manufacturing and soft magnetics, supports our long term sustainable growth profile. Now let's move to Slide six and the end use market update. Looking first at the aerospace and defense end use market, where sales were down both sequentially and year over year.
The results were driven by customers across the supply chain adjusting both their production schedules and inventory levels in response to revised production rates from Boeing and Airbus. A large number of cancellations and push outs have filtered through the entire supply chain, and there remains a high level of uncertainty. We currently see this challenging operating environment continuing during the second half of calendar year twenty twenty and then beginning to improve in calendar year twenty twenty one. This past quarter, we engaged with many of our customers who suddenly saw reduced need for our materials and together developed forward support plans. These plans included slower shipment of finished products in exchange for share or pricing gains.
While conversations with many of our customers are ongoing and at different stages, All are actively engaged with us as they understand we will remain a vital part of their supply equations moving forward. Over the mid and longer term, we believe end market demand will return, and we are confident Carpenter Technology will play an instrumental role in media. Because our solutions are uniquely capable of providing power efficiency, longevity, and performance, they are already found across a wide range of OEMs, platforms, and applications. As airline operators rebuild their fleets with today's and tomorrow's models, they will be flying with Carpenter Technology's high quality, technically assured materials. Moving on to the medical end use market where we are seeing some near term impact on demand as the elective surgery market continues to recover.
With that said, our cardiology business is resilient and maintained steady demand throughout the quarter, and we expect it to remain steady in the near term. We expect the recovery of the orthopedics market to take shape beginning in calendar year 2021, while the market for our dental applications is expected to return to normalized levels later in 2021. During the fourth quarter, we quickly leveraged our industry leading portfolio and responded to critical demand for materials used in cardiology and trauma devices. We also responded to restocking needs as OEMs began preparing to address pent up demand for elective surgeries. Over the long term, we believe we are well positioned to continue supporting the medical device market with the largest portfolio of material solutions coupled with the strategic investments we have made in our capabilities and capacity.
Our application solutions are aligned with key industry megatrends, including an aging population and an increased emphasis being placed on improving patient outcomes. In the transportation end use market, the global light vehicle market was significantly impacted by OEM plant closures related to COVID nineteen. The pandemic also created challenges in the heavy duty truck market, which had already been working through a cyclical low. Now moving to the energy end use market, where market conditions in North America remain depressed and international activity is largely stagnant. In addition, the power generation submarket continues to work off a low base.
While sales in the industrial and consumer market were down, we experienced solid demand for our high end semiconductor applications. And in consumer electronics, our proprietary alloy solutions are gaining an increasing share in applications, including smartphones, smartwatches and other wearable technologies. Now I'll turn the call over to Tim for the financial review.
Speaker 3
Thank you, Tony. Good morning, everyone. I'll start on Slide eight, the income statement summary. Net sales in the fourth quarter were $437,000,000 and sales excluding surcharge totaled $376,000,000 Sales excluding surcharge decreased 24% sequentially on 23% lower volume. Compared to the fourth quarter a year ago, sales decreased 30% on 32% lower volumes.
As Tony covered in his review of the markets, the results reflected weakening demand in the near term across all end use markets due to the significant impact of COVID-nineteen. Also, as Tony mentioned, as a result of the current demand conditions, we made the decision to adjust our production schedules and accelerate our inventory reduction program. These actions had a significant positive impact on cash flow results, which we will talk about shortly, but had a negative impact on our operating income results in the quarter. The trade off between cash flow and operating income was an easy decision given our focus on strengthening liquidity in the near term. In addition to the demand implications of COVID-nineteen, we continue to deal with the impacts of the pandemic on our production facilities.
The additional safety measures necessary to protect our employees and ensure that we can can continually operate have impacted productivity. The teams continue to deal with certain self isolation measures that affect staffing levels at key work centers. I'll talk more about the COVID-nineteen mitigation cost impacts on our results shortly in the segment details. SG and A expenses were $42,000,000 in the fourth quarter, down $13,000,000 from the same period a year ago and down about $9,000,000 sequentially. The lower SG and A expenses primarily reflect the impacts of salary furloughs, remote working impacting certain administrative costs such as travel and entertainment and lower costs associated with variable compensation programs.
The current quarter's results include $130,000,000 of special items. This includes $95,500,000 of restructuring charges principally associated with the actions we previously announced related to the exit of our Amega West oil and gas business, the disposal of a powder facility in Rhode Island and the idling of a powder facility in West Virginia, as well as the cost to execute the elimination of 20% of global salary positions. In addition to the restructuring charges, we also recorded a goodwill impairment charge of $34,600,000 associated with our additive business unit. Operating loss was $148,200,000 in the quarter. When excluding the impact of the restructuring and impairment charges, operating loss was $18,100,000 compared to operating income of $67,900,000 in the prior year period and $58,700,000 in Q3 of this year.
Our effective tax rate for the fourth quarter was 20.2%. Earnings per share for the quarter was a loss of $2.46 per share. When excluding the impacts of restructuring and impairment charges, earnings per share was a loss of $0.31 Now turning to Slide nine and our SAO segment results. Net sales for the quarter were 369,400,000 or $308,600,000 excluding surcharge. Compared to the fourth quarter last year, sales excluding surcharge decreased 27% on 31% lower volumes.
Sequentially, sales excluding surcharge decreased 23% on 22% lower volumes. The results reflect demand headwinds across all markets in the quarter, especially in aerospace and defense as the supply chain adjusts to published build rates and in the transportation end use market as a result of production closures that significantly reduced activity levels across the supply chain. SAO reported $5,300,000 of operating income for the current quarter with adjusted operating margin at 1.7%. The same quarter a year ago, SAO's operating income was $86,900,000 The actions we took in Q4 to significantly reduce inventory by adjusting production schedules in light of near term uncertainty had a significant negative impact on SAO's profitability in the quarter. In addition, the current quarter's results reflect approximately $6,500,000 of incremental costs associated with COVID-nineteen.
Again, it's worth noting that despite the significant disruption caused by COVID-nineteen, the operating teams ensured that our facilities could safely continue to satisfy customer needs. Looking ahead, we expect demand conditions across most end use markets will remain challenged in the first half of fiscal twenty twenty one. As we enter the second half, we anticipate demand levels to stabilize and begin to recover. In response to these conditions, we continue our focus on managing our costs and liquidity. We will work closely with our customers to service their needs in the near term and adjust production schedules accordingly.
To deal with the impacts of lower volumes and reduced production schedules, we've 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 principles of the Carpenter operating model in areas such as waste elimination, leader standard work, and problem solving. We believe the Carpenter operating model will provide significant operating leverage as we navigate these challenging conditions. Based on current expectations, sales are anticipated to be down 10% to 15% sequentially in Q1 in SAO. In addition, based on assumptions around demand and related production levels and cost actions, we expect SAO to generate an operating loss of approximately 10,000,000 to $15,000,000 in Q1 of fiscal year twenty twenty one.
Now turning to Slide 10 and our PEP segment results. Net sales excluding surcharge were $76,000,000 which were down 39% from Q4 of fiscal year twenty nineteen and down 29% sequentially. Demand conditions across all end use markets have been impacted by COVID-nineteen, especially in aerospace and defense and distribution. The distribution demand is more sensitive to overall general economic conditions and faced significant headwinds from the impacts of shutdowns across auto manufacturing in the current quarter. The results also included sequential and year over year weakness in energy sales, more specifically in the oil and gas submarket.
The declining demand conditions in oil and gas that were further amplified by the COVID-nineteen pandemic were the driving force behind our decision to exit the Amega West oil and gas business during the quarter. We have taken the necessary actions and are near completion of exiting this business. In addition, during the fourth quarter, we completed the disposal of a powder facility in Rhode Island and we idled a powder facility in West Virginia. These portfolio actions were identified and executed in short order as part of our overall cost savings initiatives to streamline the business to save cost. In the current quarter, reported an operating loss of $8,400,000 Again, the results for PEP were heavily influenced by the COVID-nineteen situation.
Despite significant operating challenges, credit goes to the teams for doing whatever it took to ensure our employees' safety and keep the facilities operational at this critical time. As we look ahead, we anticipate PEP will generate an operating loss of 3,000,000 to $5,000,000 in the first quarter of fiscal year twenty twenty one. Now turning to Slide 11 and a review of free cash flow. In the current quarter, we generated $137,000,000 of cash from operating activities and free cash flow was $100,000,000 As a result of the strong free cash flow performance, we ended the year with $417,000,000 of total liquidity. Within the quarter, we decreased inventory by $117,000,000 with the bulk of the inventory reduction coming from SAL.
This reduction is significant and necessary given the uncertainty created by the pandemic. As we move forward, we expect that inventory remains an opportunity for additional cash flow generation. In the fourth quarter, we spent $27,000,000 on capital expenditures and finished the year spending just over $170,000,000 as planned. With the majority of our growth projects completed, we have an opportunity to significantly reduce capital spending in fiscal year twenty twenty one as we had previously disclosed. Let's move to Slide 12 to talk about our recent bond issuance.
Shortly after year end in July 2020, we completed a $400,000,000 bond offering. The proceeds will be used to repay $250,000,000 of notes that mature in July 2021 and further bolster our already healthy liquidity position. With the proceeds and resulting redemption of the $250,000,000 notes, we estimated that our pro form a liquidity after giving effect to these transactions would be approximately $553,000,000 The bonds are senior unsecured notes that mature in July 2028. With the repayment of the July 2021 notes, we have also extended our debt maturity profile. As a reminder, we have a $400,000,000 revolving credit facility that expires in March 2022, which provides flexible access to liquidity as we need it.
We have a solid banking group and continue to maintain positive ongoing relationships with the banks who participate in the facility. It's also important to note that we are currently well within requirements for compliance with the covenants under the credit facility. As we look ahead, we have no near term debt maturities or significant pension contributions and believe that the strength of our balance sheet and our healthy liquidity position continues to represent a competitive advantage, especially in the current environment. With that, let's move to slide 13 to talk about selected fiscal year twenty twenty one guidance. We're providing this selected information to help modeling for fiscal year twenty twenty one.
Depreciation and amortization is expected to increase from $124,000,000 in fiscal year twenty twenty to $130,000,000 in fiscal year twenty twenty one. As we previously disclosed, we carefully evaluated our capital spending for fiscal year twenty one and expect to reduce capital expenditures by about 50,000,000 to 120,000,000 in fiscal year twenty twenty one. We've completed significant growth investments in the emerging tech center on our Athens campus, invested in Dynamet capacity to enhance our growing position in the medical end use market, and we'll complete the $100,000,000 hot strip mill project in fiscal year twenty twenty one. Pension required minimum contributions are expected to increase from $7,000,000 to about $20,000,000 in fiscal year twenty twenty one and non cash net pension expense is expected to remain relatively flat. Interest expense is expected to increase to 35,000,000 in fiscal year twenty twenty one, which reflects the new debt issuance and redemption of the $250,000,000 July 2021 notes to be completed during q one.
Lastly, the effective income tax rate, excluding the impact of any special items, is expected to be 32% to 35% for fiscal year twenty twenty one. With that, I will turn the call back over to Tony.
Speaker 2
Thanks, Tim. Let's move to slide 15 and a brief review of our immediate priorities. Our first priority will remain protecting our employees and communities. Our rapid response team remains hard at work safeguarding our facilities and implementing various COVID nineteen protocols. Our self reporting and self isolation programs remain in place and are highly effective.
We also continue to run our operations in a pod alignment in order to deter virus transmission within a department or shift. Communications with all our key constituents remains frequent, including employees, state and local governments, as well as customers. Our ability to keep our facilities open and running during these unprecedented times clearly demonstrates the commitment of all of our employees as well as the benefit of our core safety value and culture. Our second key priority is strengthening our liquidity and maintaining our solid financial position. We've taken aggressive actions to reduce our cost structure through several targeted initiatives and portfolio restructurings.
In addition, we reduced our capital spending budget for fiscal year twenty twenty one. In total, we expect our efforts will reduce our annual cost by 60,000,000 to 70,000,000. This will make us a leaner and more flexible company, better positioned to drive accelerated growth when demand levels normalize. Our focus for fiscal year twenty twenty one is cash generation as we continue to evaluate additional actions to bolster our position. Lastly, we will remain in contact with our customers and will continue to support their evolving material performance needs.
The impact of COVID-nineteen across our end use markets is severe and has created demand shocks, widespread inventory management and unconventional demand adjustments. We are working closely with our customers to reprioritize our production schedules and accommodate changing orders as well as urgent requests. As I noted earlier, in our key aerospace and defense and medical in these markets, we have accepted deferrals and order push outs in exchange for increased share platforms. In addition, despite scaled back production rates across our markets, we continue to win spot business due to our reliability of our operations, competitive lead times and quality of our solutions. Ultimately, we expect to emerge on the other side of COVID-nineteen with stronger customer relationships as well as meaningful share gains across key platforms and applications in aerospace and defense, medical and other end use markets.
Let's move to slide 16 and my closing comments. It is clear that market conditions in the near term will remain challenging due to COVID-nineteen as our first quarter fiscal year twenty twenty one net sales could be down an additional 10% to 15% compared to the fourth quarter of fiscal year twenty twenty. This decreased volume, combined with a weaker mix, continued inventory reduction initiatives and COVID-nineteen mitigation costs, as well as higher interest expense will likely result in a quarterly earnings per share loss of $0.55 to $0.65 This aligns with the segment guidance Tim gave earlier in the presentation. However, most importantly, we expect to generate additional positive free cash flow in the first quarter of fiscal year twenty twenty one. Looking forward, we currently project the second half of fiscal year twenty twenty one to improve versus the first half.
During this significant market downturn, successful companies are the ones that can remain cash flow positive, deepen relationships with their customers and continue to move forward on innovative growth platforms for the future. Carpenter Technology checks each of those boxes. Despite the near term headwind, we are well positioned across our end use market, and the long term outlook for each remains intact. We are one of a handful and sometimes the only supplier of critical applications to customers across our end use markets. We have gained share on key platforms in our key end use markets of aerospace and defense and medical and see additional opportunities to deepen customer relationships, gain incremental share, and unlock attractive market adjacencies.
While they might not necessarily get as much attention, the transportation and industrial consumer end use markets also offer solid long term growth potential. And our established core business is supported by investments we have made in critical emerging technologies, including additive manufacturing and soft magnetics for electrification. Despite the market challenges caused by COVID-nineteen, we expect to generate positive free cash flow and positive EBITDA for our full fiscal year 2021. That is a powerful statement and one that I believe speaks to the resiliency, the impact of strategic actions we've already taken and our continued commitment to actively managing our business. We ended the fiscal year in a strong financial position with total liquidity of 417,000,000.
In addition, our recent bond offering increases our total liquidity further and extends our debt maturity profile. The key to success in this downturn is the ability to generate cash and maintain a healthy liquidity position. Operator Technology is poised to do both. We are confident that we can and will continue to navigate these challenging times and emerge a stronger company. 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. Our first question comes from Gautam Khanna with Cowen. Please go ahead.
Speaker 4
Yes, thanks. Good morning, guys.
Speaker 2
Good morning, Gautam.
Speaker 4
I had a couple of questions. First, I was curious, you have the visibility of the down sales sequentially in Q1. What can you say at this point about Q2? Have like, how how much visibility do you have on customer order schedules? And are you still seeing kind of a a shuffling of of delivery schedules where folks are asking to push things out.
Yeah. If you could just expand on what you're saying.
Speaker 2
Well, good morning, Gautam. Hope you and your family are doing well. Yes, there's still some movement as far as visibility in the second quarter, but I believe we have a pretty good line of sight. I mean, we gave you EPS guidance for the second quarter and said that we would remain free cash flow positive. So we've got a pretty good handle on what we think is going to happen over the next quarter.
Speaker 4
I'm sorry. I thought you gave EPS guidance for q one. Correct? Fiscal q one. Sorry.
Yeah. Did you also give it for
Speaker 2
q two? No. No. I apologize. That's right.
Just for q one. Okay. So expand let a little bit. I think the I think the first half of f y or f y twenty one is gonna be muted, and I think you'll see the recovery coming up in our last two quarters. I think we really went after to provide guidance for the first quarter, not ready to do that in that specificity for the second quarter.
But I do believe it's going to be the end of this calendar year until we start seeing some improvement. And I think that lines up in fact, know that lines up with many of the companies that have reported today. Sorry for the confusion when you said guidance. I thought you were talking about the first quarter. My apologies.
No problem. And just to be clear, what do you
Speaker 4
I mean, so that would imply because the rates the production rates on the aerospace side are obviously going down, and then they stay down. So, you know, I guess, what what is the reason that it would come back in the second half of the fiscal year? Is it just some level of destocking that's amplifying the current downturn, or is it seasonality? I'm just curious at what and and if so, you know, what is the order of magnitude of the destocking and or seasonality that that we could expect to come back? You know?
Speaker 2
Yeah. Yeah. It's a good point. You're exactly right. With the downturn, everybody is adjusting based on the change in build rates for the primary aircraft manufacturers.
That's what everybody's pivoting off of. It was even magnified for us because there was, as you suggested, rightly so, a destocking impact. So that amplified the impact for us. Now as you start to rebuild, remember that the supply signal for us will probably be two to three quarters in front of that. So we get hit pretty hard when you just shut off the the the flow because of the destocking it's just come back quicker.
I I believe that when because it's such a, distinct halt when you do see that demand signal come back, that's gonna be pretty significant. And I think you'll go right back to shortages. Remember, when we went into this pandemic on the products that we produce, you were out of capacity after this being the only capacity coming on and with long lead times, and I think you'll go back to that pretty quickly. Okay. And
Speaker 4
then just to follow-up on your remarks about increased market share.
Speaker 2
Could you speak to any can you give
Speaker 4
us any specifics around it? Is it was that in the engine channel? Was it in the landing gear side? Was it, you know, fasteners? What specifically, you know, what product areas have you been able to secure more share?
And and why do you think that is the case? I mean, are are you seeing other suppliers that compete with Carpenter, you know, maybe falling off a little bit in terms of quality or or just financial distress? Anything you could expand
Speaker 5
on there would be helpful.
Speaker 2
Yeah. It's a good question. The majority of those customers are the larger customers or big customers. I would go as far as saying it's primarily on the engine side, but it does filter into fasteners and some some other pieces. I think the main issue is right now, the focus is on delivery performance and lead times.
And I think when you look at corporate technology in the long term and their ability to have that additional capacity, we're a company that these, other customers want to partner with. So it's a really, it hasn't been a difficult discussion to say we're willing to work with you in exchange for some increased market share in the future. That's been a very productive conversation and, quite frankly, not a difficult one.
Speaker 4
Okay. Thank you very much.
Speaker 0
Our next question comes from Josh Sullivan with The Benchmark Company. Please go ahead.
Speaker 5
Hey, good morning.
Speaker 3
Good morning, gentlemen.
Speaker 5
Just to follow-up on the first half outlook, I know you're looking for skewed demand across end markets. Which end markets do you have more confidence that we're closer to the bottom end?
Speaker 2
Well, of course, you know, aerospace and medical make up over 70% of our market portfolio. So those are the ones we're focused on. Certainly, transportation, industrial, consumer are important to us, but the the procedures are are much lower. I can't tell you whether we're at the bottom now or not. It feels like like we are.
I'm sure you've listened to the phone calls from the other large engine manufacturers and airplane builders, and I think that maybe we're getting close to that. I do believe I think what's important is that there's a significant amount of airplanes that are being retired early. There was a significant amount that needed to be retired. This pandemic has pulled back forward. So when air travel does come back, I think you're gonna see the need to build to continue to build those airplanes, which in turn means supply from corporate technology and and other suppliers into the aerospace supply chain.
Speaker 5
Got it. Well, and then kind of a related question. I mean, can you is there any detectable difference between demand for materials on next generation engines versus legacy engines, might be more aftermarket related?
Speaker 2
Difficult question right now. I think going forward, you know, there is going to be a need to build the newer planes. I I think that's just math. If you look at the megatrends and we believe that the air traffic is coming back as as we do, you look at the increased retirements of planes and the cost savings you can get, I think it makes sense that you see those new planes being built. Again, for us, we're a bit agnostic because we make materials that go on across every platform.
I would say that we're more heavily concentrated on the OEM versus the spare market, but supply material across the entire spectrum.
Speaker 4
Got it. Then just on
Speaker 5
the inventory reduction plan, what metrics on days outstanding or otherwise, where do you think you're comfortable going should we need to use inventory as a source
Speaker 2
of cash, as you mentioned in the prepared remarks? Well, Tim mentioned that I think earlier in his comments that we have more room to go on the inventory side. I mean, because of the dynamics of the market prior to the pandemic, we used our balance sheet to build inventory because we didn't wanna disappoint any of our customers when we had fifty week lead times, no, you know, capacity, actives being ramped up. As we continue to work our corporate operating model, we were achieving significant productivity gains, but you don't get all of those evenly across the system. So in the front end of our process, on the milking side primarily and the forging side, we were getting productivity gains quicker than on the back end and the finishing.
In truly manufacturing, we would have idled the the upstream to to balance those. But we didn't wanna do that because we knew that eventually we gain productivity in the finishing side, and we would we would flush that inventory out with the sales demand that was out there. So when the pandemic hit, that gave us a mismatch of inventory that allowed us to bring that down to more reasonable levels. I think there's still more to go. And one of the main points of the corporate operating model is to have the most efficient inventory levels possible.
So there's still a lot of opportunity we have there. I wouldn't say that it will be at this magnitude that we had in the fourth quarter, that reported. But there's still plenty of opportunity on the inventory side to generate some cash.
Speaker 5
Got it. Thank you for the time.
Speaker 0
Our next question comes from Michael Lashock with KeyBanc. Please go ahead.
Speaker 6
Hey, guys. Good morning.
Speaker 1
Good morning.
Speaker 6
So first, I just wanted to touch on the Boeing and Airbus cuts to their widebody platforms over the past twenty four hours or so. You mentioned some customers were responding to these prior cuts, but what have you been hearing in the aerospace supply chain? There's obviously been some destocking, but was there any anticipation of further cuts on these platforms?
Speaker 2
I would say that the aerospace supply chain is a very sophisticated supply chain. We stay in very close contact with their ultimate customers. So, I think the majority of the supply chain is aware of of what that production levels are going to be and anticipated where that is. I wouldn't say that for everybody, but, for the majority, I would say that they have a proven handle on what they think those production rates will be and have spent the last several months adjusting accordingly. Now some customers or suppliers are certainly in a different position.
If you are if you came into this pandemic where you were did not have the strongest of balance sheets, you might take more severe actions and destock even quicker than what you might. That means you're going to have to build up your returns quicker when the demand comes back. I think it's a big positive for Carpenter Technology because we came in with such a strong balance sheet. And when you talk to many companies in this pandemic, one of the questions you're asking what the cash burn is gonna be. Right?
And that's not a question you have to ask, company technology because we're generating cash to pay this quarter and the next quarter, so we'll be free cash flow positive. I think that's a big benefit for company technology versus maybe some of the others in the supply chain.
Speaker 6
Got it. That's helpful. And then on how were jet engine sales in the quarter, either year over year or quarter over quarter?
Speaker 2
They were pretty consistent to me overall. They were about 30% roughly 30% down quarter over quarter and 30% down year over year. That compares to our total that was 30% year over year and 24% sequentially. Engines, aerospace was about 30% year over year, down 20% quarter over quarter and then engines year over year about 29% quarter over quarter, 30%.
Speaker 6
And how are current backlog levels just for the overall business in the quarter? And what's been the biggest driver for that delta?
Speaker 2
Well, backlogs are down. If you look year over year, our overall backlog is down approximately 30%, probably sequentially 25%. It's driven by aerospace primarily. All of the markets, the backlogs are down. I think that makes sense based on the severe economic downturn that we're in right now.
Speaker 6
Okay. And then lastly, just on the COVID cost, you had an impact of $6,500,000 this quarter. I think it was $5,500,000 the prior quarter. How do you see these costs going forward? I'm just trying to gauge the cadence on when these incremental costs will level out.
Thanks.
Speaker 2
That's a good question. It allows me to talk about that a little bit. I'm not going to skimp on those costs. I mean, my point of view is I'm going to protect our employees. We're able to run those facilities.
So 6,000,000 is a big number for us, but it's a lot less than if I have to shut down a facility like you've seen in some of the other industries. So those costs include where we have a very robust self reporting system where if one of our employees meet a certain criteria, symptoms, travel, whatever it might be, they self report to our medical team. Our medical team decides they need to go on self isolation and not come into our facility. They are still paid. We still pay them as if they're in that facility to encourage them to self report and and keep everyone safe.
That includes the extra cost of cleaning. Whenever we have any type of issue where we think that's appropriate, we put ourselves in a pod environment, so there's some extra costs costs there. So I I think those costs will continue into our second quarter, and I don't really see us easing those much over the next six months. But, again, that's gonna depend on the pandemic, and I I'm gonna be very conservative there. I'm not gonna I'm not gonna put our employees and ask them to come into our facilities and work really hard in a tough situation and not do everything I can to protect the health of themselves and the and the community, quite frankly.
Speaker 6
Appreciate the detail. Thanks, guys.
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.
Speaker 1
Thank you. Thanks, everyone, for joining us for our fourth quarter earnings call. We look forward to speaking with you all again on our first quarter twenty twenty one earnings call. Take care and enjoy the rest of your summer.
Speaker 0
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.