Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Carpenter Technology Corp. (NYSE:CRS)

F4Q09 (Qtr End 6/30/09) Earnings Call

July 30, 2009 10:00 AM ET

Executives

David A. Christiansen - Investor Relations

Anne L. Stevens - Chairman, President and Chief Executive Officer

K. Douglas Ralph - Senior Vice President, Finance and Chief Financial Officer

Michael L. Shor - Executive Vice President for AMO and PA Operations

Sanjay Guglani - Vice President and Chief Marketing Officer

Analysts

Gautam Khanna - Cowen & Co., LLC

Lloyd O'Carroll - Davenport & Company

Edwards Marshal - Sidoti & Company

Operator

Good morning and welcome to the Carpenter Technology's Fourth Quarter 2009 Earnings Conference Call. My name is Carol and I'll be your coordinator for today. At this time, all participants will be in a listen-only mode. After the speaker's remarks, you will be invited to participate in a question-and-answer session towards the end of this call. At that time, we will review the procedure for asking your question.

I'd now like to turn the call over to your host for today, Mr. Dave Christiansen, Vice President for Investor Relations and Business Development. Please proceed.

David A. Christiansen

Thank you, Carol. Good morning, everyone. Welcome to Carpenter's earnings conference call for the fourth quarter and our fiscal year-ended June 30, 2009.

This call is also being broadcast over the Internet. With me today are Anne Stevens, Chairman, President and Chief Executive Officer. Doug Ralph, Senior Vice President and Chief Financial Officer; and Mike Shor, Executive Vice President for AMO and PA Operations, as well as other members of the management team.

Statements made by management during this conference call that are forward-looking statements, are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter's most recent SEC filings, including the company's June 30, 2008 10-K September 31, 2008, December 31, 2008 and March 31, 2009 10-Qs and the exhibits attached to those filings.

I will now turn the call over to Anne.

Anne L. Stevens

Thank you, Dave. We said during our last earnings call, that we expected market conditions to be challenging during our fourth quarter, they were. The results we reported this morning including the operating loss are consistent with the expectations we shared with you back then.

Continued weak global manufacturing activity, effected demand throughout our customer base including our higher value products in energy and aerospace. Yet despite these difficult economic conditions and a high level of capital investment, we achieved our financial goal of generating positive free cash flow for the year, which allows us to maintain a strong balance sheet. We're proud of this accomplishment. It demonstrates our ability to manage effectively to an economic downturn that is broader and more severe than the one we experienced in 2002-2003.

Specifically the management actions we are taking, to control cost through downturn include, reducing production hours by 30 to 40% and cutting labor roles by over 300 position. Slashing SG&A spending, driving down inventories and tightening control over credit and receivable.

At the same time, management continues to take action to create a strong base, so the company can respond quickly to increase demand when the markets begin to recover.

In this respect, we have protected the core capabilities of our workforce. Completed the capacity expansion of our premium melt program, closed our UK metal strip manufacturing facility and invested in new products and research and development, advance new marketing programs that will grow our customer base and focused resources on international growth opportunity.

Our commitment to drive growth and operational excellence will yield results as volumes return. Let me reiterate that Carpenter is a financially strong company with tremendous global growth opportunity. Our top financial goal for fiscal 2010 remains to generate positive free cash flow which will maintain our strong balance sheet.

Now I'll review end-use markets and then Doug will cover the financial highlights. To provide better insight into our performance, quarterly sales numbers and the year-over-year revenue comparison excludes surcharges.

Aerospace sales were $98 million, a 31% decline over a year ago. Shipment volumes were down 32% from last year, reflecting the continued impact of a reduced airplane build schedule, lower overall passenger miles and excess inventory in the jet engine market. While the aerospace market has remained depressed, we've strengthened our market position with our customers.

Since our last call, aerospace fastener demand has weakened further. The impact was exaggerated by destocking in the fastener supply chain. We are encouraged by the recently updated airline monitor forecast, if this forecast were to materialize we could see increase demand for jet engine material in the middle of our fiscal 2010.

Carpenter sales to the industrial market were $47 million, a decline of 50% compared with the fourth quarter last year on 53% less volume. Our performance was inline with industrial production. We continue to experience volume losses in commodity type products, where pricing has become very competitive.

We expect this market to bottom out in our first quarter, and recover gradually throughout the rest of the fiscal year.

The medical market remains resilient, driven primarily by steady increases in the number of orthopedic implant procedures in North America, Japan and EU. On 3% higher volumes our medical market sales in the fourth quarter were $23 million a decrease of 26% compared with the fourth quarter of fiscal 2008.

The increase in medical shipments, reflected higher demand for products for implant and medical instruments. The lower revenue in medical came from competitive market conditions and a linear mix of products. Orthopedic implant procedures using our type of material are projected to increase federal rate of four to 5% per year and we expect to grow somewhat faster than the market, as we strengthened our position with key customers.

Carpenter sales to the consumer market were $17 million down 46% from the last year on 38% lower volume. Housing starts declined 54% during the same quarter. The decline in consumer revenue reflected lower sales across all consumer segments, primarily led by housing electronics.

Supply chain inventories remain low and many customers and distributors conserve cash in light of tight credit market. We think that consumer market hit bottom near the end of fourth quarter. House sales rose in June and are projected to increase gradually through fiscal 2010. On the other hand consumer electronic remains difficult to project beyond the current quarter.

Our energy market sales were $17 million down 68% and 77% lower volume. In oil and gas, the rig count decline 13% from its peak and there continues to be significant access inventory in the supply channels where we recurrently compete. Although we are expanding our customer base, we do not expect much improvement in our demand thorough fiscal 2010.

Power generation continues to stay weak with no anticipated recoveries for most of fiscal 2010, especially in the large capacity units, to which Carpenter is a key supplier.

Our sales to the automotive market were down 71% to $11 million 62% lower volume. This was inline with the overall decrease in market demand seen in the fourth quarter. Sharply lower consumer spending and lower availability of automotive financing, continue to suppress auto sales and production rates.

We were very pleased with our accounts receivable collection during this challenging time for the automotive industry. Market indicators predict an increase in the number of new cars being built starting in our first quarter.

Auto production levels are likely to plateau in subsequent quarters. We continue to evaluate opportunities for our materials and new fuel efficient technologies under development, a Tier-1 suppliers for domestic and global manufactures.

Including surcharge, Carpenter's international sales in the fiscal fourth quarter were $82 million, a 54% decrease over the 2008 fiscal fourth quarter. The reduction reflects declines in energy and aerospace demand, especially in Canada and Europe. International sales were 32% of our total fourth quarter revenues, which is unchanged from last year.

At this point, let me turn it over to Doug, so he can walk you through our financial results.

K. Douglas Ralph

Thanks Anne. As I stated on our last call, our primary financial objective during this downturn is to deliver positive free cash flow which will preserve our strong balance sheet. As we ended our fiscal year in June, we achieved this goal by overcoming the mid year free cash flow deficit of $72 million, due to the strong management actions.

We finished the year with cash on hand of 355 million, a slight reduction in debt to 279 million in ending inventory level slightly below the prior year. Our team also continues to do a very good job managing our customer receivable exposure in the current environment.

Positive free cash flow is also our tough financial goal for fiscal 2010. In the current business environment, we will reduce our capital spending from a 116 million this year or last year to about 50 million this fiscal year.

Let me now move to our fourth quarter income statement. Net sales in the quarter were 257 million or 54% below a year ago. Excluding raw material surcharge, sales were down 45%. Overall tonnage volume decreased 50% in the quarter; we're seeing our steel products down 54%, special alloy products of 41% and titanium products down 29%

Fourth quarter gross profit was 8.4 million compared with 117.3 million, a year ago. Excluding surcharge revenue, our gross margin in the period was 3.9% versus 30.1% last year. Our SG&A expenses decreased 45% year-over-year. The decrease was 19% to view just how the impact of non cash pension expense in both years and a special $21 million litigation reserve in the last quarter of fiscal year 2008.

The lower SG&A is the result of actions we have taken to reduce head count and spending across the business, as well as lower variable compensation expense. We had $7.3 million restructuring charge in the quarter from completion of the announce closure of our Crawley UK strip facility with a total impact of 9.44 million for the fiscal year.

The net cash outlay associated with disclosures about $3 million with an ongoing profit improvement of 2 million per year. For the quarter, we had an operating loss of 32.1 million compared with income of 57.2 million in last year's fourth quarter.

Our operating margin, excluding surcharge, the Crawley restructuring cost in the 2008 special litigation reserve, was a negative 11.6% for the quarter down from a positive margin of 20% last year.

The lower gross and operating margins primarily result from reduced demand levels and related manufacturing inefficiency. The margins were adversely affected by a linear mix of products, due to lower demand for premium alloys for energy and aerospace applications.

In addition, fourth quarter margins were negatively impact by about $12 million of LIFO and other quarterly accounting effects from nickel prices and lower inventory levels as we discussed last quarter.

While our operating margin was negative for the quarter, we've done a good job reducing costs to adjust at a lower volume levels. We eliminated nearly all but essential overtime in the second half for the year and have most of the operation working on a reduced schedule with lower staffing levels accomplished mainly through determination of temporary workers and voluntary employee programs.

We are focusing on cost performance on a weekly basis and have put special emphasis on many areas of operating efficiency that are yielding positive results. We also had strong focus through the year on SG&A and manufacturing overhead costs as reflected in our results.

Continuing down the income statement, our fourth quarter tax provision was a benefit of 13.2 million or 38.8% of the pre-tax loss compared with an income tax expense of 17.2 million or 31.5% of pre-tax income in the same period last year. The tax benefit reflects the operating loss and 1.6 million favorable adjustment related to a prior tax period.

Our full year effective tax rate is 24%. On the net income line, we reported a fourth quarter loss of 20.8 million or $0.48 per diluted share versus comparable income from continuing operations of 37.4 million or $0.81 per diluted share a year ago.

Despite these difficult market conditions, we continue to maintain a strong and consecutive balance sheet. We ended the year with a net cash position of 76 million and plenty of liquidity and cushion within our credit facility covenants.

With debt markets improving, we will look to renew our unsecured credit facility some time in the middle of this fiscal year.

Looking forward, our top financial goal for fiscal year 10 is to continue taking the necessary actions to deliver positive free cash flow though the current downturn.

As discussed on our last call, we still think our volume and revenue level will hit bottom in the first quarter of this fiscal and gradually improve of that level during the year. Overall revenue for the year will likely be lower than our fiscal year 09 level.

Moving to earnings we will see another significant increase in non cash pension expense for fiscal year 10 to 61 million or $0.83 per share. This is based on pension asset values and other estimates as of June 30th 2009. The fiscal year 10 number is basically fixed at this point and will be spread evenly across the year.

Cash contributions to the pension plan will not be fully determined until the end of the calendar year. We currently expect to contribute about 45 million of cash, during calendar year 2010 with only about 7 million falling into this fiscal year. There is discussion in Congress about additional funding relief that could still affect the timing of any cash contributions.

With the current volume level and product mix, we expect to post a net loss for the first quarter. We see earnings improving during the year, as demand picks up and also expect to see less volatility in our quarterly results due to better inventory management.

Based on current market expectations, even with the higher non cash pension expense and lower projected revenue level, we would still expect to deliver positive EPS in fiscal year 10.

We are prepared to actions as appropriate to achieve our financial goals if the revenue picture turns out differently than we anticipate. With that let net income now turn things back to Anne for some closing comments.

Anne L. Stevens

Thank you Doug. Our previous actions and continued focus position the company well through this extended downturn and eventual recovery. Although we do not yet see convincing signs of recovery in our results, our dashboard of leading indicators is starting to show improvement. For example airline monitor is forecasting growth starting in 2009 and building into 2010.

Auto production and housing start indicator are also beginning to point out. And a recovery however is expected to be gradual and uniquely timed for each of the market. This creates an ongoing challenge and an opportunity for management. We will continue to do more of what we are already doing, tightly controlling costs, managing working capital, prioritizing and reducing capital expenditures, improving manufacturing efficiencies and taking the other actions necessary to generate positive free cash flow and maintain our strong balance sheet.

We will also remain proactive in our new products and global marketing programs, leveraging our presence in the long-term international growth market and grow our market share and higher margin product. Equally important, we will remain close to our customers and be prepared to ramp up production to meet their needs when the demand returns.

With that, we will now open the line for you question.

Question-and-Answer Session

Operator

Thank you, Ma'am. (Operator Instructions). Your first question comes to you from the line of Gautam Khanna of Cowen & Company. Please proceed.

Gautam Khanna - Cowen & Co., LLC

Hi, Gautam Khanna, Cowen. Wanted to just ask a couple of questions Doug about the LIFO effect in the quarter, were you expecting a $20 million negative and it was a 12 and so how should we think about whatever lingering impact there maybe going forward?

K. Douglas Ralph

Yeah Gautam, the primary difference between the 20 that we were expecting in the 12 is really due to the progress that we made on inventory. So inventory levels finished lower then what we were anticipating which actually created a bit of a positive LIFO decrement so to speak. And that would not have any impact carrying forward in fiscal year '10 and then is to manage to about that same inventory level at the end of fiscal year '10.

Gautam Khanna - Cowen & Co., LLC

Okay. And when it comes to the dividend, given the balance sheet look strong and you're looking for positive free cash generation, how do you view kind of dividend policy? Any chance for a hike, any risk of a cut...

Anne Stevens

I can give you some comments obviously it's a Board decision and we review it with them every quarter, but as we said before we do have the cashes you've pointed and we will continue to generate and expect to continue to generate the free cash flow on the business. So the dividend right now cost a little bit more then 30 million. So, we've got the financial flexibility to continue it. If it's the right strategy for deploying the cash our yield attractive versus industry and historic level. But at the end of it's a Board decision and it's a decision that has supported in the past continuing with the dividend.

Gautam Khanna - Cowen & Co., LLC

Okay. And perhaps the last question I'll pick it over to someone else. When you talk about, we haven't talked much about the automotive business. That becomes smaller and smaller. But there is some talk about production rates coming up in the second half of the year, of the calendar year and in '10, what is your expectations through this year, you're fiscal year on automotive?

Michael Shor

We believe -- this Mike Shor speaking. We believe that automotive in particular is at for near bottom. We see little inventory remaining in the supply chain. So, we are preparing for short-term requirements as they come towards us. But this is a market that we do feel as either at or very close to the bottom.

Operator

That answer your question, sir?

Gautam Khanna - Cowen & Co., LLC

Thank you.

Anne Stevens

Thanks Gautam.

Operator

Your next question comes to you from the line of Lloyd O'Carroll of Davenport & Company. Please proceed.

Lloyd O'Carroll - Davenport & Company

Yes, a numbers question on the pension. The pension land in the statements doesn't seem to be the $20 million, is that in the segments and I'm thinking about modeling for fiscal '10 should that be varied in the segments or spread across the pension line in the reconciliation.

K. Douglas Ralph

We have there is bit in this segments and that's the annual service cost our pension EID you're familiar with that, is the difference between that and the $20 million. Our annual service cost runs about $20 million year.

Lloyd O'Carroll - Davenport & Company

Okay. So basically 20 should be in the segments and everything else would be in the separate line.

K. Douglas Ralph

That's right.

Lloyd O'Carroll - Davenport & Company

Okay. Thank you.

Operator

Thank you, sir. Your next question comes from the line of Edward Marshal of Sidoti & Company. Please proceed.

Edwards Marshal - Sidoti & Company

Good morning everyone.

Anne Stevens

Good morning.

Edwards Marshal - Sidoti & Company

I'm focusing on the inventory levels in both the aerospace and energy markets. What is your feel from base somewhat your customers are saying about the destocking efforts that made thus far, do will we see a sequential pickup and throughout 2010 or fiscal 2010?

Anne Stevens

Well, I think the first thing there are different answers for the different markets. But let me address aerospace first. And when we look at aerospace for us two large ones that we obviously look at are the inventory chain that's related to fastener and then the year -- the chain that's related to the engine markets. Now, if the airline monitors, numbers come to be factual, then we would expect the engine market to start pulling more material out of the system. And the other thing with the two pieces of the market, there is difference lead time with engine and fastener. Engine lead time is 12 to 18% versus the fastener lead time is six, a little maybe six to 12%.

So we would expect that the pull will come from the engine market first. The second thing is it will be a little bit slower on the fastener side. One thing with the fastener that one is tied two new playing bills when you look at the engine obviously there is a replacement part on that one. But with the fastener side of the market, the production slowed quicker then the engine side. So, we believe that there is more excess inventory out there plus the other thing that we have on that one, is the delay in the 787 will also impact some of the consumption on the titanium side. That's the aerospace side of the market. So, the bottom line is that.

Edwards Marshal - Sidoti & Company

If I can interrupt for just a seconds and I apologize, but how comfortable are you with the airline monitors projection based on what conversations you've been having with your customer base?

Anne Stevens

Well. I'm going to let Sanjay Guglani comment on that because he did speak with them this past weak. So he can speak from natural conversation.

Sanjay Guglani

We have or the last couple of years started using the airline monitor and we are quite comfortable with the forecast that they are giving. There has been a recent change in their forecast compared to six months ago. And that is based on the logic that a lot of the airlines have old fuel inefficient planes that they would like to change. And that has been backed up by some recent announcement by U.S. based airlines. So, we are actually basing our forecast on the airline monitor to change forecast and hoping that it will materialize.

Anne Stevens

So, the basis of that bottom-line is that some of the domestics will start ordering planes and we are seeing some activity in that direction. I think typically in the past what would you say there plus minus 20% accurate.

Sanjay Guglani

Actually in the first year they are better rated about 14 or 15%.

Anne Stevens

Yeah so if you kind that put us 15% plus minus on that. It's reasonably well for forecast and obviously there was very closely with those selling and airbus development numbers. On the other market -- I'm a bit in optimistic then and again this is opinion on the aerospace coming back. I think that on the energy side there is more inventory in the supply chain, so the probability of those markets coming back in our fiscal 2010, I believe is lower than the probability on the aerospace side.

Medical market I commented, I think that supply chain from what we see is pretty in balance, they destocked and reduced inventories down back a couple years ago. So I think that will be as demand pull growth than will see those rates and in industrial basically, I think they are reasonably well in balance and what we are seeing on that end, some of them and that segment have been drained to control their your own cash since credit has been tight.

Edwards Marshal - Sidoti & Company

I see. Okay thank you guys very much.

Operator

Thank you, sir. (Operator Instructions) Your next question comes to you from the line of Mark Parr of KeyBanc Capital Markets. Sir, you may proceed.

Unidentified Analyst

This is Ferguson (ph) for Mark Good morning.

Anne Stevens

Good morning.

Unidentified Analyst

I just had a question, I had just had a couple quick ones here. As far as base pricing levels average based pricing levels and stainless steel and specialty alloys, are we seeing some satiability there, there is some upside into the next quarter and also has surcharges also started moving up in those product?

Anne Stevens

So I'm going to let Mike Shor answer this because it's a bit different from the different segments.

Michael Shor

Good morning. As far as pricing, we are still continuing to feel the pressure of the supply demand dynamics that are out there, and the economic environment in general. Obviously our customers in these times are always coming at us for looking for reduced prices but we are constantly talking about the value that we add. High value differentiated products.

I would say in premium products those products are go through premium melt facilities. We had most part continue to maintain our pricing because the large portion of that business is through the long-term agreements. The transactional business that is out there for the most part both on the premium side and the stainless side is still in very tough environment because it's playing them in.

Unidentified Analyst

Okay. And as far as margins going forward in the various segments, that smell is obviously for brand of inventory destocking negative gradual impacts in the June quarter and premium metal premium alloys rather held up fairly really well. How are we, how are we suppose to be looking at that in the September quarter, if that melts probably obviously not going to be that probably for sometime but how we are suppose to look at that?

Anne Stevens

Well try to comment on the advanced metal part of the business most of our plant personnel and the cost in that really relate to the finishing operations which is related to the forms of those products which the aim of business fares and volume reductions that we had early in the downturn in the quarter recently had been skewed more to these commodity type products. So that have to do it in the past going forward when we talk about margins we've done some analysis on that and I'll let Doug share that with you.

K. Douglas Ralph

Yeah. I think your question fills specific to the September quarter is that there is the level of volume that we have right now and the product mix. We are little bit below our breakeven margin point, which is why we do expect to post a loss in the first quarter.

Unidentified Analyst

Okay. And....

K. Douglas Ralph

That line improves during the year, we would expect that would expect that to improve obviously.

Unidentified Analyst

And then and most of that, is I going to be in the advance metals operation just as it was in the June quarter as well?

K. Douglas Ralph

Yes. As Anne had mentioned, I think the production inefficiencies as we were driving in the second half lower demand levels on top of significant reduction in our inventories some of that will see improve between fourth quarter and first quarter.

Unidentified Analyst

Okay. Thank you, good luck.

K. Douglas Ralph

You're welcome.

Anne Stevens

Thanks.

Operator

Ladies and gentlemen this concludes the question and answer portion of today's conference. I will now turn the call back over to Ms Anne Stevens for her closing remarks. Ma'am.

Anne Stevens

Thank you, Carol. Thank all of you for the interest in Carpenter. Once again, we look forward to talking with you at our first quarter conference call. Have a good day.

Operator

Ladies and gentlemen, that conclude your presentation for today. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Carpenter Technology F4Q09 (Qtr End 6/30/09) Earnings Transcript
This Transcript
All Transcripts