This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Greetings, and welcome to CIRCOR International's fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I will now turn the conference over to Alex Mackey, Vice President, Financial Planning and Analysis and Investor Relations. Thank you, sir. You may begin.
spk01: Good morning, and welcome to SIRCOR's fourth quarter 2020 earnings call. I'm joined today by Scott Buckout, SIRCOR's president and CEO, and Abid Kondawal, the company's chief financial officer. Before we start, I'd like to remind you that today's presentation and press release are available on SIRCOR's website at investors.sircor.com. Today's discussion contains forward-looking statements and only represent the company's views as of today. These expectations are subject to known and unknown risks, uncertainties, and other factors, and actual results could differ materially from those anticipated or implied by today's remarks. While SERCOR may choose to update these forward-looking statements at a later date, the company specifically disclaims any duty to do so. You can find a full discussion of these factors in CIRCOR's Form 10-K, 10-Qs, and other SEC filings, also located on our website. On today's call, management will refer to GAAP and non-GAAP financial measures. The reconciliation of CIRCOR's non-GAAP measures to the comparable GAAP measures are available in our earnings press release. With that, I'll turn the call over to Scott.
spk05: Thank you, Alex, and good morning, everyone. 2020 was another transformational year for CIRCOR, and despite the continued challenges presented by COVID-19, our team made significant progress on executing our strategic plan. I'm proud of the resilience and efforts of the entire CIRCOR team in navigating such a challenging year while continuing to deliver for our customers and shareholders. As we saw throughout the year, our diversified product portfolio across multiple end markets and geographies helped mitigate the impact of a weaker macro environment. Our defense business delivered strong results for the year, which mostly offset lower demand for our commercial products. Our differentiated technology and market positions enabled us to increase prices across the portfolio. We executed well throughout this year's downturn and exited the year with positive momentum. With the health and safety of our employees as our foundation, we focused on the things we control. We achieved decremental margins of 25% for the year through value-based pricing and difficult but necessary cost actions of $45 million. Aerospace and Defense improved their margins by 290 basis points despite lower volume. Notably, Aerospace and Defense won 20 new programs, including 16 in defense and four in commercial. We continue to implement the CIRCWAR operating system across the company, resulting in improved operational performance. SERCOR is well positioned to take advantage of an eventual market recovery in 2021 and beyond. With the sale of instrumentation and sampling and distributed valves earlier in the year, our exit from upstream oil and gas is complete. We continue to invest in innovation, launching 49 new products in 2020 versus 33 in 2019. We delivered on our free cash flow commitments throughout the year and ended with strong free cash flow of $20 million in the fourth quarter. And finally, reduced our debt by $126 million, or 22%. I want to highlight some new mission-critical technology we introduced in 2020. On the defense side, our new missile arming switches are designed to operate in more severe environments with respect to temperature, radiation, and G-force. We launched self-arming switches in support of various missile programs, including hypersonic applications. On the commercial side, we introduced a switch which activates the aircraft's location transmitter in case of an in-flight emergency. In industrial, we launched a series of new gas pressure reduction systems to help our customers in marine, medical, and public utility industries. These systems help our customers transport and manage high-pressure industrial gas, LNG, CNG, biomethane fuels, and medical oxygen. Now I'd like to provide some financial highlights from the fourth quarter. We booked orders of $168 million in the quarter, which was flat sequentially and down 25% organically. Sequentially, industrial was up 12% in the quarter. A&D had lower orders sequentially, down 21%, due to the timing of large naval program orders that pushed into 2021. Revenue in the quarter was $208 million, up 10% sequentially, driven by strong defense deliveries, mainly on U.S. naval programs, and moderate growth across most end markets and industrial. Adjusted operating income was $23 million, representing a margin of 11.2%, up 200 basis points from the prior quarter. Margin improvement was driven by sequential volume recovery, pricing, cost actions, and productivity. As a result of improved operating income, the company delivered 66 cents of adjusted earnings per share. Finally, we generated strong free cash flow of $20 million during the fourth quarter as we exited the year with operational cash flow unencumbered by transformation disbursements. Now, let me turn the call over to Abhi to discuss our fourth quarter results in more detail.
spk02: Thank you, Scott, and good morning, everyone. As we talked through our segment results this morning, we will discuss both sequential and year-over-year changes to results. We are providing both comparisons due to the significant impact of COVID-19 on our end markets and year-over-year comparisons. Starting with industrial on slide four. In Q4, industrial segment orders were up 12% sequentially and down 22% organically. The industrial segment saw a sequential recovery in all major end markets driven by opening economies. Revenue in the quarter was $131 million, up 4% from prior quarter and down 13% organically. Sequential improvement was primarily driven by strength in aftermarket sales across the portfolio. We exited the year with an operating margin of 9%, a sequential improvement of 160 basis points, driven by price increases and cost actions taken throughout the year. Lower sales volume continues to drive a lower operating margin versus prior year. Turning to slide five, our airspace and defense segment booked orders of $47 million in the quarter, down 21% sequentially, and down 33% versus prior year. Both declines are primarily driven by timing of large defense program orders and the ongoing impact of COVID-19 on our commercial business. We remain confident in the segment's growth outlook in 2021. Revenue in the quarter was $78 million, up 25% from prior quarter. Strong defense deliveries mostly offset the COVID-19 impact on commercial aerospace, resulting in only 3% lower revenues versus prior year. Finally, operating margin was 24% of the quarter, roughly flat sequentially, and year-over-year. Pricing, up 3%, combined with productivity and cost actions, drove strong margins in line with prior year, despite lower revenue. Moving to slide 6. For Q4, the effective tax rate was approximately 14%. The company took a non-cash charge of approximately $15 million to record a valuation allowance against its remaining deferred tax assets in Germany. This non-cash charge is required under GAAP accounting rules. This charge does not impact our non-GAAP after-tax results for the quarter and is not expected to have an impact on our future non-GAAP after-tax results. Looking at special items and restructuring charges, we recorded a total pre-tax charge of $13.4 million in the quarter. The acquisition-related amortization and depreciation was a charge of $12 million, with the remaining charges associated with restructuring activities in the quarter. Interest expense for the quarter was $8.5 million, down $2.3 million compared to last year as a result of lower debt balances. Other income was approximately $1 million, primarily driven by pension income. Finally, corporate costs were $7.8 million in the quarter. Turning to slide seven. As Scott mentioned previously, our free cash flow was $20 million in the fourth quarter, up 11% compared to 2019. Free cash flow was positively impacted by improved operating income and lower working capital, particularly inventory. Reducing working capital remains one of our top priorities, and we expect further improvement in 2021. We use the proceeds from the sale of our instrumentation and sampling business to reduce our net debt to $443 million, a reduction of $126 million, or 22% year-over-year. Free cash flow generated in 2021 will be used to further pay down debt, and the continued target leverage ratio of 2 to 2.5 times net debt to adjusted EBITDA. Now, I will hand it back over to Scott to provide some color on our end markets.
spk05: Thanks, Abhi. Let's start with our industrial outlook on slide 8. As Abhi mentioned, signs of order recovery were evident in the fourth quarter across most major industrial end markets after hitting the bottom in Q3. Geographically, we continued to see growth in China and India, and we started to see signs of recovery in Europe and North America in the quarter. Downstream orders were up sequentially, driven by an increase in aftermarket orders, but down significantly versus last year due to a difficult compare. We're expecting Q1 industrial revenue to come in between down 1% and up 4% year over year. We expect to see a normal seasonal dip in revenue sequentially in Q1 versus Q4. We're starting to see improvement in our short cycle end markets, including machinery manufacturing, chemical processing, and wastewater as consumer demand starts to improve. We're also expecting a mid-single-digit increase in aftermarket as global economies open up and consumption increases. Downstream oil and gas revenue is expected to be down as refiners continue to manage CapEx. We're seeing a similar customer CapEx dynamic across midstream oil and gas, power generation, and building construction, but to a lesser degree. We expect these end markets to improve further as the year unfolds. Pricing is expected to be a benefit of roughly 1%, consistent with prior quarters. Moving to aerospace and defense, aerospace and defense orders in Q4 were down sequentially and versus prior year. Both declines were primarily driven by the timing of large defense program orders and the ongoing impact of COVID-19 on our commercial businesses. We expect order strength across our defense programs to continue through 2021, driven largely by the Joint Strike Fighter, and multiple missile and drone programs. We expect a modest improvement in commercial orders as aircraft utilization improves and OEM production rates increase through the year. We remain confident in this segment's growth outlook in 2021. Revenue in the first quarter is expected to be down 7 to 12 percent versus prior year. Defense revenue is expected to be down 1 to 5 percent due to the timing of large defense shipments and lower U.S. defense spares orders leading into the quarter. We anticipate growth of 5% to 10% from our other OEM group, which includes products for drones, missiles, and helicopters. In addition, we're planning for increased build rates for the Predator drone in the US and the Rafale fighter jet in Europe. Commercial revenue is expected to be down between 35% and 40%, in line with the broader commercial aerospace market. Our market position on both Boeing and Airbus aircraft is strong. and we expect revenue to improve throughout the year in line with aircraft utilization and production rates. Pricing is expected to be a benefit of 1% in the quarter, but in line with 2020 for the full year. Now I'll hand it over to Abhi to discuss our guidance.
spk02: Before jumping into total year guidance, I'd like to share a few more expectations for the first quarter. In addition to the revenue guidance that Scott provided, we're expecting incremental margins of 30% to 35% in industrial, and decremental margins of 30 to 35% in aerospace and defense. Decremental margins in aerospace and defense are slightly higher than our full-year 2020 decrementals, due to the expected mix of OEM and aftermarket revenue. We're also planning for a corporate cost of $8.5 million, higher than our expected full-year run rate, due to the timing of certain expenses, such as RFPs. Interest expense is expected to be roughly $8.5 million in Q1. Finally, free cash flow for Q1 will be negative due to seasonality of annual disbursements. Now moving to full year 2021 guidance. We are expecting organic revenue growth of 0% to 4%, with aerospace and defense expected to grow at low to mid single digits and industrial at low single digits. We are planning for a continued slow recovery in commercial aerospace, where we expect to be better than 2020, but remain significantly lower than pre-pandemic levels. Our defense business remains healthy as we continue to win new business and deliver ongoing U.S. defense programs. In our industrial end markets, we expect to see modest recovery with downstream activity improving in the back half of 2021. We're expecting adjusted earnings per share of $2 to $2.20, a 40% to 54% increase versus 2020. This improvement is driven by top line growth and improved margins from price increases structural cost out in 2020, and ongoing productivity. Finally, we're planning to deliver free cash flow as a percent of adjusted net income of 85% to 95%. We feel that this guidance reflects what we are seeing in our end markets and the operational improvements that we can control within the four walls of SIRCOR. We're confident in our ability to deliver these results, not only for our shareholders, but for our customers, suppliers, and employees. Now I'll hand it back to Scott to wrap up.
spk05: To summarize, we remain focused on delivering our strategic priorities. In 2021, we're taking actions to further improve our customers' experience and our operational and financial performance. We remain focused on attracting, developing, and retaining the best talent while fostering a diverse and inclusive culture. We continue to invest in growth through innovative new products, aftermarket support technology to enhance our customers' experience, and regional expansion. Value-based pricing continues to be a top priority, leveraging our differentiated technology and our strong market positions in the niches where we compete. The CIRCOR operating system will continue to drive operational improvement and margin expansion. And by enhancing free cash flow through efficient working capital management, we'll continue to de-lever the balance sheet. In closing, I'd like to thank the entire CIRCOR team for their ongoing commitment to safety and delivering mission-critical products to our customers. With that, Bea and I will be happy to take your questions.
spk00: 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. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. 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 Andy Kaplowitz with Citi. Please proceed with your question. Hey, good morning, guys. Good morning, Andy.
spk06: Good morning, Andy. Maybe talking about industrial first, in terms of your revenue guide for Q4, it came in at the lower end, and last quarter you said you expected to pick up in sequential orders, which you did see. Just focusing on downstream for a second, obviously your Q1 assumptions for downstream are still quite muted. So Can you give us more color on what's going on specifically in downstream related businesses and your assumptions for 21?
spk05: Sure. So let's start with Q4, what happened in downstream. So we had a difficult compare year over year. Last year in Q4, downstream business was up about 50%. So this year you see a fairly significant drop in orders as a result of the difficult compare. If you look at industrial overall, all X downstream, it was roughly flat without downstream. So that was the big variance in the quarter for Q4. As we look at downstream going forward, we're taking a somewhat cautious view through the first half. We have a lot of activity, actually. As we did in Q4, we continue to see a lot of activity here. On the aftermarket side and downstream, it's global. We're managing and quoting and in process on a lot of different aftermarket projects. On the CapEx side, on the capital project side, it's more international. It's outside of North America. So we see a decent amount of activity in India, in Russia, and to some degree in Europe. But in North America, capital projects are a lot less activity. So when we look forward in downstream, we're expecting an improvement sequentially in orders as we go into Q1. And I'd say we're being cautious for the first half, but we're pretty excited about the back half. We think a lot of these projects that we're managing right now, particularly aftermarket, they have to drop. The refiners can only delay aftermarket projects for so long, and then they have to eventually convert and start doing the work. So So we think we'll see improvement through the first half, but we're optimistic that the back half will be significantly better than the first half.
spk06: Thanks, Scott. And then you were maybe a similar question for defense. You're pretty confident coming into 21, at least when you're talking last quarter. It seems like some of these projects and programs are pretty lumpy. So you're talking about Q1 being down here. So I guess my question is, has anything changed? Is it really just timing? You mentioned the spares. Obviously, the administration has changed. Has the outlook changed, or is this really just timing?
spk05: In our defense business, we can get very lumpy orders. We can get orders, $10, $15, $20 million orders in defense that fundamentally will change the nature of a quarter. We did see some big orders push from Q4 on the Navy side into the first half of 2021. What you see on the Navy spares piece is largely timing. And so I think in aggregate, when you look at our aerospace and defense business, the defense piece, what you're seeing is largely timing. So we're still very bullish about defense. We're bullish about the programs that we're on. We won a lot of new platforms in 2020 that are going to start ramping up in 21 and 22. So we still feel good about defense going forward. And what you're seeing in terms of variances year over year is largely timing of large orders, specifically with respect to the Navy.
spk06: Thanks, Scott. And then last question for Abhi. Obviously, good cash flow in Q4. Maybe just talk about the working capital situation. You mentioned improvement in inventory in Q4. further improvement expected in 2021. So maybe give us a little bit more color on that, sort of what's the potential on the working capital side to hit that 85% to 95% guide that you have.
spk02: Yeah, absolutely. So look, as you think about 2020 and what we've been talking about throughout 2020 is that we've opportunity in the working capital side, specifically in inventory. So if you look at 2020 on a year-over-year basis, we drove about $6 million of inventory out. That said, we have further work to go do. So as you think about 2021 and going into 2021, and as our net income starts to improve on a year-over-year basis, you're going to see that coupled with working capital improvement. Over the long haul, we expect the company to be in the 20% range. That's what industrial companies typically are. We have some work to go do, and that's what we're focused on. Thanks.
spk00: As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Jeff Hammond with KeyBank. Please proceed with your question.
spk04: Hey, good morning, guys. Good morning, Jeff. Good morning. So I think the biggest variance in the framework versus my model is industrial, and I just thought given – kind of how easy the comps are, you know, we'd see more growth. And I understand, you know, some markets are maybe turning faster. But just want to get a better sense of, you know, beyond, you know, the downstream discussion, what you're seeing in some of these lagging markets in terms of quoting activity and bidding activity that would suggest, you know, kind of further acceleration. Because we're seeing, you know, it seems, you know, very broad industrial recovery here.
spk05: Yeah, I think, so let me start. For industrial specifically, we're seeing some pieces of that business lead in terms of recovery. We saw it in Q4, and we're expecting that to continue in Q1. So the industrial orders were up about 12% sequentially in Q4, and we're expecting they're going to be up again, rough order of magnitude, high single digits again sequentially as we go into Q1. The specific pieces, we are seeing a difference geographically, but also by end market. But let me start with aftermarket versus OEM. So aftermarket, we're seeing an improvement before we're seeing the OEM part of industrial improve. And we have been seeing – let me shift to geographic. We have been seeing growth in Asia, in China, and India, and we're continuing to see that. Europe and, or I should say, EMEA and North America are both starting to come back as well. So we're seeing improvement in Europe and North America. When we look at the end market specifically, the shorter cycle businesses are recovering first. And so this is where we're being a little bit cautious about what's going to happen with the longer cycle pieces of SIRCOR. But we're certainly seeing an improvement in chemical processing, machinery manufacturing, wastewater. These are areas that tend to be short cycle for us. And that's where it seems to be starting. The longer cycle is slower. We're not sure what the pace will be here. And so we're trying to be balanced here as we look at the future. And there's still a lot of uncertainty with the way these economies are going to open up and the way these markets are going to turn. So we're being a little bit cautious here with how we look at this, specifically with respect to the longer cycle pieces of the business.
spk04: Okay, great. And then on aerospace defense, your guide for the full year is low to mid-single digits. Is there a way to break out how you think about commercial growth versus how you think about defense growth?
spk05: Sure. Yes, we can do that. So we – When you look at commercial, we're expecting a modest recovery as build rates start to improve and have been announced to improve and as aircraft utilization starts to improve. So when we look at our commercial business, it was down along with the whole market significantly in 2020. We expect 2021 to be modestly better. But obviously far away from where we were in 19. We still expect that commercial doesn't get back to 2019 levels until around 2024. So we think it's a long, slow recovery. But having said that, 2021 is better than 2020, and we expect orders to improve as aftermarket and OE starts to recover. On the defense side, we are still bullish about defense. We expect organic growth from 2020 to 2021. We expect, in line with guidance, we expect roughly mid-single-digit growth as we go into 2021. They're both kind of in that low to mid-single band.
spk04: That's exactly, yeah, that's right.
spk02: Correct. Keep in mind as we progress through the year that the comps and commercial airspace get pretty easy too. So you may start to see that growth come through, which kind of ties back to the guide we laid out.
spk05: And, you know, a lot of this is linked to specific platforms. We're seeing good growth in our Navy platforms, the submarines, missiles. Those are two big pieces that are driving the growth.
spk04: Okay, and then just on the cost side, how do we think about, I don't know if I missed this in the prayer remarks, But how do we think about, you know, temp costs coming back?
spk02: Yeah, I can answer that question. So before I answer that question, let me set the stage a little bit just so that we can all be on the same page here. But if I think about 2020, right, we talked about the $45 million of cost down. There are three pieces to it. There's a $20 million piece to it, which is structural. Now, keep in mind, that structural cost started coming out even before the pandemic. So as we went through the pandemic, a lot of that was already, you know, was already part of the run rate. So if you just think about structural for a second, we have about $2.5 million of carryover that's going to come in 2021, but the majority of that is already a part of the run rate. The balance, $20 million was tied to temporary costs. And when you think about that, really, you know, the benefit portion of that temporary cost avoidance is already back in the business, but there's about half of that that is still out there that hasn't come back, which is tied to furloughs or travel expenses still being at a lower level because the world is still, you know, still pretty shut. And that's a lot of the business, and that only comes back as the volume starts to come back. So that's how I would think about the temporary cost piece.
spk05: So roughly about half of it's back, and the other half is waiting on volume. Correct. Okay.
spk04: Perfect. Thanks, guys.
spk00: A final reminder, if you would like to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Nathan Jones with Stiefel. Please proceed with your question.
spk03: Good morning, everyone. Good morning, Nathan. Good morning, Nathan. There's been quite a bit of inflation in the system here recently. Can you guys talk about price costs? Are you able to pass this through? Are you able to pass it through quickly? And what's the assumed contribution from pricing in the revenue guidance this year?
spk05: Okay. Want to start with me? Okay. We'll start with your inflation question. I think the way to think about inflation for Sorker, let me start by what we buy. It's rare that we're buying raw commodity. We're almost always buying components and parts that we're assembling. And so when you think about our businesses in general, Our supply chain team has done a nice job of signing our suppliers up with long-term contracts. Those long-term contracts usually have some kind of band of absorbable inflation that the suppliers will absorb. Anything outside of that band, then we get into a negotiation. At this point, we don't expect a significant variance associated with inflation. In fact, we're still expecting that our net productivity from our supply chain team will be positive, meaning we'll get more cost reductions than the inflation that we'll absorb. So we're not expecting inflation to be a major issue for SERCWR at this point, based on the nature of our supply base and the contracts we have in place with our suppliers. On the pricing side, for the full year, I think you should expect pricing more or less in line with 2020. is what you should expect from us in 2021. That's the way we're expecting it to play out. There's some seasonality in pricing. You'll see relatively low percentages in Q1. That's linked to the relative volume of aftermarket and the nature of the mix of the business, if you will. But we're expecting pricing more or less in line with 2020.
spk02: So Nathan, this is B. So if you really think about the company in total, What you saw in 2020 was about a 2% price in 2020, and you should expect similar levels in 2021.
spk03: Helpful, thanks. Hearing about some supply chain shortages, some supply chain disruptions, can you guys talk about anything that you're seeing out there and any mitigating factors that you're undertaking?
spk05: So at this point in time, all of our factories are up and running at the levels of demand, and so we're not experiencing any meaningful disruption. Of course, we have some shortages here and there that we manage day to day, but there's nothing meaningful like we saw a few times last year. So the world seems to have adapted for the most part, at least our supply chain has, as well as us, and we don't have any meaningful supply chain issues at the moment.
spk03: Thanks for taking my questions.
spk05: Thank you, Nathan.
spk00: Ladies and gentlemen, there are no further questions at this time. Thank you for joining us today. This does conclude our conference call. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.
Disclaimer