Barnes Group Inc. (B) Q1 2022 Earnings Call Transcript

Barnes Group Inc. (NYSE: B) Q1 2022 earnings call dated Apr. 29, 2022

Corporate Participants:

William Pitts — Vice President of Investor Relations

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

Marian Acker — Vice President & Controller

Analysts:

Christopher Glynn — Oppenheimer — Analyst

Sam Struhsaker — Truist Securities — Analyst

Louis Raffetto — UBS — Analyst

Matt Summerville — D.A. Davidson — Analyst

Presentation:

Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Barnes Group Inc. First Quarter 2022 Earnings Conference Call and Webcast. [Operator Instructions] Thank you. Bill Pitts, Vice President, Investor Relations. You may begin your conference.

William Pitts — Vice President of Investor Relations

Thank you, Rob. Good morning, and thank you for joining us for our first quarter 2022 earnings call. With me are Barnes Senior Vice President, Finance and Chief Financial Officer and Interim Chief Executive Officer, Julie Streich; and Vice President, Controller, Marian Acker. [Operator Instructions]. Let me now turn the call over to Julie for her opening remarks, then Marian will provide a review of our first quarter financial results and our updated outlook for 2022. After that, we’ll open up the call for questions. Julie?

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

Thank you, Bill, and good morning, everyone. Before getting into the quarter’s details, I’d like to take a moment to address the humanitarian crisis continuing in Ukraine. Our thoughts and prayers go out to those affected by the ongoing violence and devastation. All of us at Barnes hope for a quick resolution of the hostilities or return to peace and the rebuilding of the many lives disrupted. Barnes begins 2022 with solid first quarter earnings performance, exceeding our February expectation in the face of some significant headwinds. While January started slowly, we saw a sequential sales growth each month ending with strong results in March. One of the quarter’s highlights was a book-to-bill ratio of 1.15 times, indicative of a supportive demand environment with both segments seeing a greater than one times ratio.

First quarter organic sales grew 6% from a year ago and adjusted earnings per share were up 8%. Our performance was driven by Aerospace, which generated strong revenue growth and margin expansion. Industrial saw several pressure points accelerate in the first quarter, which weighed on margin performance. While macro environmental headwinds will likely persist throughout 2022, we anticipate the pressure will moderate and with some — and with demand remaining healthy, we expect the first quarter to be the low point for the year for revenues, margins and EPS. With the ongoing conflict in Ukraine, we have examined potential impacts across our portfolio, including trade with Russia. For Industrial, our Russian exposure is minimal with annual revenue in the $1 million to $2 million range. However, we have seen delivery and other logistical challenges, including increased freight costs as a result of the conflict. For Aerospace, we do not sell into the Russian OEM market, so there is no direct impact. With respect to indirect OEM sales or with aftermarket sales, we anticipate minimal impact.

For Barnes, the watch item will be the continued availability of titanium through our Russian supplier. At this point in time, titanium has not been sanctioned by the U.S. government and procuring this material is not a current issue. We maintain buffer inventory for the components we manufacture and we are working to assess alternate titanium supply channels should the need arise. Barnes is complying with all global sanctions and have stopped shipping into impacted regions in accordance with such sanctions. Within our segments, Industrial’s organic orders declined 2% and organic sales declined 1% versus a year ago, though they were both up modestly on a sequential basis. From a macro standpoint, the first quarter proved to be a tough environment. Sales were impacted by supply chain challenges, lockdowns in China and weakness in certain end markets.

Operating margin was squeezed by broad-based inflation and costs associated with spikes in COVID-related absenteeism across our businesses. That said, our teams around the globe rallied showing great agility to rapidly adapt and mitigate much of the downward pressure. Across Industrial, we estimate approximately $2 million to $3 million in net absenteeism related costs in the quarter. While we expect a greater-than-normal level of absenteeism to continue, it has trended down since early in the first quarter. We forecast approximately $2 million to $3 million of similar net absenteeism costs over the remainder of 2022. In addition to the absenteeism costs, we saw $8 million in gross raw material freight and utilities inflation in the quarter. Through pricing and procurement actions, we were able to mitigate approximately $5 million, resulting in a net $3 million of inflation impact.

We also expect a $2 million to $3 million net impact in the second quarter. While we see growth inflation continuing at a high level in the second half of 2022, the momentum behind our pricing, procurement and productivity actions are anticipated to offset much of this impact. At Molding Solutions, organic orders were flat year-over-year. Automotive orders were positive, medical was flat, though up sequentially, and packaging and personal care, while at healthy levels were down compared to a year ago. That said, orders improved through the quarter, with March up significantly. Organic sales decreased 2% with personal care and general industrial down and medical and packaging solidly up. For 2022, we continue to expect Molding Solutions organic sales growth to be up mid-single digits. At Force & Motion Control, organic orders were up 1% and organic sales up 3%.

Our general industrial markets created a lift. We anticipate high single-digit organic sales growth for the year, up from our prior mid-single-digit expectation. Engineered Components saw organic orders decline 11%, while organic sales decreased 3%. Automotive production markets was a primary driver, though interestingly, both automotive orders and sales improved considerably on a sequential basis, up more than 20%. In the first quarter, we did see automotive revenue pushouts of $5 million, a bit less than the $6 million we expected and an improvement from the $8 million in Q4. We anticipate a further impact of $3 million in the second quarter. Full year organic sales growth is anticipated to be up mid-single digits, unchanged from our prior view. Within automation, organic orders were down 4% and organic sales were down 5%. We had anticipated a slow first quarter to begin 2022. Our full year view has not changed as we foresee organic sales growth in the mid-teens.

For the Industrial segment, we continue to forecast 2022 organic growth in the mid- to high single digits. However, with the macro headwinds I discussed, we have lowered our adjusted operating margin expectation to a range of 10.5% to 11.5%. Moving to Aerospace. The recovery continues as sales increased 23% over last year’s first quarter. Both original equipment manufacturing and aftermarket businesses delivered very strong growth. Adjusted operating margin improved 300 basis points from a year ago. In our OEM business, orders grew 21% in the quarter with a book-to-bill of 1.55 times and sales grew 18%. OEM backlog reached $716 million, up 5% from December and up 19% versus a year ago. We expect to convert approximately 45% of this backlog to revenue over the next 12 months.

We continue to anticipate high single-digit OEM growth in 2022, supported by increased production of narrow-body aircraft at both Airbus and the Boeing. For the aftermarket, we generated 34% sales growth with MRO and RSP businesses delivering strong year-over-year performance of 24% and 59%, respectively. The positive recovery should continue as airlines are showing strong demand and business travel looks to be returning. For the year, we anticipate sales growth for MRO to be in the high 20% range, with spare parts up in the low 20s, the latter an increase from our prior outlook. Aerospace adjusted operating margin is now forecast to be between 16.5% and 17.5%, a slight uptick benefiting from higher spare parts sales. To close my Aerospace comments, I’d like to take a minute to welcome Ian Reason as our new President of Barnes Aerospace.

Ian brings broad industry experience and understanding of the commercial and defense aerospace markets, making him the ideal person to lead this business through its next phase of profitable growth. I would also like to offer best wishes to Mike Beck in his well-deserved retirement. We thank Mike for his many years of service and dedication to Barnes. Shifting gears, I’d like to provide an update on our environmental, social and governance initiatives. Barnes is deeply committed to corporate responsibility and furthering ESG principles. In March of this year, we published our eighth annual ESG report, which addresses our processes, policies and products that benefit stakeholders, the environment and society. This month, we published our baseline metrics and progress for Scope one and two greenhouse gas emissions and water usage. Both documents can be found on our corporate website under “about ESG.” We remain committed to corporate accountability and are honored to have been recognized as one of America’s most responsible companies by Newsweek in 2021 and one of America’s most trusted companies by Newsweek in 2022.

Before concluding, I’d like to acknowledge Patrick Dempsey and his family. They are in our thoughts daily, and we wish them well. In closing, we performed well relative to our earnings expectation and our global team showed tremendous resilience in a highly dynamic environment. Aerospace results continue to be strong, and we expect their end markets to remain supportive. We also expect that pricing, procurement and productivity actions taken will gain traction improving Industrial margin performance. Clearly, the macro environment holds significant uncertainty. But with solid orders in the quarter and management squarely focused on driving the business forward, we anticipate improvement as we move through the year. Now let me pass the call over to Marian for a discussion of the financial detail.

Marian Acker — Vice President & Controller

Good morning, and thank you, Julie. Let me begin with highlights of our first quarter results on Slide five of our supplement. First quarter sales were $312 million, up 4% from the prior year period with organic sales increasing 6%. FX negatively impacted sales by 2%. Adjusted operating income was $31.8 million this year, down 2% from an adjusted $32.4 million last year. Adjusted operating margin of 10.2% was down 50 bps to the prior year period. Net income was $20.5 million or $0.40 per diluted share compared to $19.4 million or $0.38 per diluted share a year ago. On an adjusted basis, net income per share of $0.41 was up 8% from $0.38 a year ago. Adjusted net income per share in the first quarter of 2022 excludes $0.01 of restructuring charges from previously announced actions. In the quarter, interest expense was $3.6 million, a decrease of approximately $400,000 as a result of lower average borrowings compared to a year ago.

Other expense was $1.6 million, essentially in line with last year. The company’s effective tax rate in the first quarter was 21%, down from a rate of 28.1% a year ago. The primary drivers are an increase in projected earnings in low tax jurisdictions and the absence of additional tax expense related to the global intangible low income tax or GILTI recorded in last year’s first quarter. Now I’ll turn to our segment performance, beginning with Industrial. First quarter sales were $212 million, down 4% from a year ago. Organic sales decreased 1%, while unfavorable foreign exchange lowered sales by 3%. Operating profit was $14.7 million, down 31% from the prior year period, while operating margin was 7%, down 270 bps. Excluding $300,000 in restructuring charges this year, adjusted operating profit was $15 million, down 29% from a year ago, and adjusted operating margin declined 260 bps to 7.1%.

As Julie mentioned, there are several macroeconomic headwinds facing our Industrial segment. The decrease in operating profit was primarily due to broad-based inflation, including labor, raw material, utilities and freight, coupled with supply chain challenges and lower productivity due to COVID-related absenteeism and certainly was a difficult quarter. At Aerospace, sales were $101 million, an increase of 23% from a year ago, benefiting from the ongoing recovery in aerospace end markets. Original equipment manufacturing sales increased 18% and aftermarket sales increased 34% compared to the prior year period. Operating profit was $16.4 million, up 48%. Excluding approximately $400,000 of restructuring costs this year, adjusted operating profit of $16.7 million was up 51% from a year ago, benefiting from the contribution of higher sales volumes, offset in part by unfavorable productivity due to COVID-related absenteeism and supply chain challenges.

Adjusted operating margin was 16.6%, up 300 bps. With respect to cash flow performance, cash used by operating activities was $9 million versus cash provided from operating activities of $36 million in the prior year period. The primary drivers of the change are paid incentive compensation related to 2021 and increased working capital in the current year period. Free cash flow was a use of $17 million compared to a source of $28 million last year. Capital expenditures were $7 million, down slightly from a year ago. Regarding the balance sheet, our debt-to-EBITDA ratio, as defined by our credit agreement, was 2.4 times at quarter end and flat to where we ended 2021. On a net debt-to-EBITDA basis, we’d be at 2.1 times. In light of the rising interest rate environment, I wanted to mention that Barnes recently amended our revolving credit agreement, which favorably changes the interest spread pricing grid. This change is forecasted to benefit interest rates by 12.5 to 25 bps, depending upon the computed quarterly leverage ratio.

The amendment also adopts SOFR as the base rate replacing LIBOR, which will be expiring in June of 2023. You’ll note a reduction in our interest expense forecast for the year when we discuss outlook. Our first quarter average diluted shares outstanding and period-end shares outstanding were both approximately 51 million shares. During the quarter, we did not repurchase shares and approximately 3.6 million shares remain available under the Board’s 2019 stock repurchase authorization. Moving to Slide six of our supplement. Let me discuss our updated 2022 outlook. We continue to expect organic sales to be up 8% to 10% for the year, with FX having a 2% negative impact. Adjusted operating margin is forecast to be between 12.5% and 13.5%, down slightly from our previous expectation due to the ongoing pressures in our Industrial segment. Adjusted EPS is now anticipated to be in the range of $2.20 to $2.40, up 13% to 24% from 2021’s adjusted $1.94 per share. The updated EPS range was reduced by $0.05 at the high end of our previous range. For the year, we expect $0.03 impact on EPS for residual restructuring charges with a $0.01 forecasted for the second and third quarters.

We continue to forecast a 40% first half, 60% second half split in EPS. We realized this indicates a significant second half ramp, though with a good book-to-bill, pricing and other actions gathering steam and absenteeism pressure subsiding, we believe our forecast reflects achievable performance. Rounding out a few other outlook items. Interest expense is anticipated to be $13.5 million, about $0.5 million lower than our previous outlook. Other expense of approximately $4 million, an effective tax rate of 24% to 25%, capex of $50 million to $55 million, average diluted shares of approximately 51 million and cash conversion of greater than 100%. In closing, despite the first quarter’s challenges, we exceeded the high end of our earnings expectation shared on our February call. We expect macro headwinds to continue through 2022. However, we see the first quarter as the peak of those pressure points. Future quarters should benefit from the momentum of pricing and other actions taken to mitigate the impacts. Operator, we’ll now open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Christopher Glynn from Oppenheimer.

Christopher Glynn — Oppenheimer — Analyst

Thanks, good morning. Yes. I was curious on the titanium from Russia, potential impact if there’s a major issue, timing to set up alternative supply. Maybe if you could just ring-fence the extreme there.

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

Sure. Thanks for the question, Chris. So we have already begun working with alternative suppliers so that we have a backstop ready should something happen. And as I mentioned, we also do have many months’ worth of buffer stock in our inventory, and we’re partnering with our customers to talk to them about alternative sources and quality checks and what they would expect, I apologize, should something happen.

Christopher Glynn — Oppenheimer — Analyst

Okay. So would the overall failure ready to whether it with minimal follow-up if there’s a some sudden issue? What proportion of your titanium is from the Russian source?

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

It is our primary source.

Christopher Glynn — Oppenheimer — Analyst

Okay. And you think you have backfills, pretty good prospects there?

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

Yes. The open market has availability. It’s just — there’s a cost associated with it. So that’s the trade-off.

Christopher Glynn — Oppenheimer — Analyst

Okay. Great. And then for Industrial, just curious how to think about the progression sequentially of revenue and margin. Obviously, I think both increased through the year. We have our 40-60 EPS, but rather than leave it to triangulation, just curious if you could talk about kind of sequential cadence there, margin improvement you’re seeing in 2Q over 1Q.

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

So we would expect a gradual ramp throughout the year with the second quarter continuing to see impact of absenteeism at this point. So you should — from a modeling perspective, really look to see a pick up in the second half of the year.

Christopher Glynn — Oppenheimer — Analyst

Okay. Great. And any direct or indirect on the China lockdowns? I didn’t hear you mention that if you did.

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

So there’s been — part of the China lockdown has been contributing to some of the productivity issues. We started the year with lockdowns in our Tianjin facility. And while Suzhou has not been locked down thus far, there are impacts from the Shanghai lockdown that disrupt our customers’ ability to accept products. That disrupt are really the shift because of the port congestion, et cetera. So there is some impact of that factored into our second quarter forecast. And we, at this point, anticipate that sold impact would lessen in Q3 and Q4.

Christopher Glynn — Oppenheimer — Analyst

Great, that makes sense. Thank you.

Operator

Your next question comes from the line of, bear with me, Sam Struhsaker from Truist Securities.

Sam Struhsaker — Truist Securities — Analyst

Good morning guys, sorry about that. I’m on for Mike this morning. I was just curious about kind of — did you guys see any implications for Aerospace in terms of pricing and materials, kind of what your contracts might be structured like to be able to pass through some of that pressure?

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

Yes. Thanks for the question, Sam. From an Aerospace perspective, all of our long-term agreements have raw material pass-through. So we’re really not facing the same headwinds on the Aerospace side from inflation that we’re seeing on the Industrial side.

Sam Struhsaker — Truist Securities — Analyst

Okay. Great. And then you guys said you’re okay on titanium, at least with your current kind of planning. Are there any other kind of materials that you guys are all concerned about on the Aerospace side or Industrial to, I guess?

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

There’s been intermittent challenges with some of our basic supplies, nothing that’s alarming. And then there’s ongoing supply chain challenges with castings, but that’s nothing new. And as of late, our castings have been slowing in respectively. So I would offer that there’s really — no, we don’t have any major concerns that would disrupt our production at this point.

Sam Struhsaker — Truist Securities — Analyst

Okay. Great. And then just one last one here. It seems like there’s a possibility that would increase demand supply chain could be getting a little bit worse. So just kind of curious how you guys are viewing that in relation to some of the confidence for Industrial moving forward to address the year.

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

Can you repeat the first part of the question again, please?

Sam Struhsaker — Truist Securities — Analyst

Yes. Sorry. Just with the possibility, it looks like supply chain could be potentially worsening given increase in demand moving forward throughout the rest of the year. How do you guys kind of gauge that with your confidence in Industrial moving forward throughout the rest of the year?

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

Yes. No, we’re definitely keeping a close eye on what’s happening from a supply chain perspective as I think there’s a lot of dynamics at play. What we’re doing is increasing our buffer stock in some areas. We’re looking for alternate supply sources for parts that may be in areas that could be more significantly impacted by shutdowns as an example, if they were coming from China. And our logistics and procurement teams are just staying on top of everything as closely as they can to help mitigate that. That said, it’s a dynamic environment, and there is risk. We could have some impacts. But I think the team leveraging our enterprise system is staying on top of the challenging environment.

William Pitts — Vice President of Investor Relations

Yes. And Sam, some of the indirect impacts or direct impacts of that Marian referred to is the increase in working capital impacting cash flow in the month. You can see on our balance sheet, inventories have creeped up a bit, and part of that is in anticipation of what the supply chain may bring.

Sam Struhsaker — Truist Securities — Analyst

Great, makes sense. Thanks very much guys.

Operator

Your next question comes from the line of Myles Walton from UBS.

Louis Raffetto — UBS — Analyst

It’s Louis Raffetto on for Myles. Julie, Marian, Bill. I want to come back to the incentive comp. I just want to make sure, is there anything different about this year than prior years? Or that needs to spread it out? It’s all in one quarter? Anything going on, I guess, just with that number?

Marian Acker — Vice President & Controller

Lou, this is Marian. So on the cash flow, what you see is the payout of the prior year incentive comp. So we pay out in the first quarter. So 2021 was a much better year. The payout we saw in 2022, of course, was higher than what we saw a year ago coming off 2020, the first year of COVID.

Louis Raffetto — UBS — Analyst

Okay. Good. Just my question has not been [Indecipherable] there. And then if we switch over to Industrial. I guess, Julie, I appreciate the commentary about — you kind of had — I think you mentioned $8 million of sort of added costs and you were able to sort of offset that with $5 million, still having extra $3 million of the impact. I guess as we think about that sort of going forward, the rest of ’22 and even into ’23, does that make getting their margins up to that mid-teen level sort of incrementally more difficult? Is there anything else more you can do in that business?

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

So there’s a number of things we’re focusing on. Clearly, as long as the inflationary headwinds continue, we’re working to offset them, and it will have an impact. However, leveraging, again, the enterprise system, we’re looking at how we take costs. We’re focusing on what we can control. How do we take cost out of our system, how do we optimize, flow through our facilities, how do we seek different sources. At this point, we do anticipate, as I mentioned, that in H2, we’ll be at a net neutral position. And given the productivity we’re driving there, I have total confidence that the portfolio will get back to that mid-teen level, not in 2022, but going forward, without question, we have the potential to be there.

Louis Raffetto — UBS — Analyst

Okay. Great. And then just on the Aerospace side. Is there the pull from their customers? I guess, are you seeing anything out of the ordinary? Are they pulling as expected? Is there any — again, I understand your supply chain, but you going out into their supply chain. Is that sort of — it’s normal there in the OE side?

William Pitts — Vice President of Investor Relations

Yes. Lou, I haven’t seen any kind of variance to what our expectations have been on the Aerospace side, whether it’s timing, nothing out of the ordinary.

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

No. No.

Sam Struhsaker — Truist Securities — Analyst

Okay. Great. And then just one — so just want to make sure I heard you correct, Marian. You said the other income was going to be $4 million this year and $7 million previously?

Marian Acker — Vice President & Controller

Correct.

Louis Raffetto — UBS — Analyst

Thank you very much.

Operator

Your next question comes from the line of Sam Summerville from D.A. Davidson.

Matt Summerville — D.A. Davidson — Analyst

Yes. This is actually Matt. So I want to talk about the Industrial business, put a finer point on this with, I think, orders down to book-to-bill looked okay, but the guide up mid-single to high single digits. Help, give me confidence that we’re going to see that kind of ramp in this business through the remainder of the year with global auto still being heavily disrupted. I would assume at least through year-end, supply chain continuing to be challenging at least through year-end. So just help me get comfortable with that or organic view.

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

Yes. It’s a good question. And the first step is starting with where we are today. And the order book and the demand we saw a ramp in the first quarter supports the trajectory going into the second quarter. So that’s the first step. In addition, we are continuing to leverage our strategic marketing and sales initiatives to go after penetration of new markets grow outside of our traditional spaces. And the team is confident that they will deliver upon our expectations there, which allows us to ramp into the second half of the year as we forecast. That said, there’s not without risk, right? And anybody in this environment who would say there’s no risk hasn’t looked around very much. But our step one, do you have the orders to support your next quarter sales? And I would offer that, yes, that was our first piece of confidence, and we’re moving forward from there.

William Pitts — Vice President of Investor Relations

Yes. Matt, I’d add that January was a very difficult month, and a lot of our facilities with absenteeism associated with COVID. The good news is, as Julie mentioned, as we went through the quarter, things sequentially got better and better, and March was pretty strong.

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

Yes.

William Pitts — Vice President of Investor Relations

So we see the underlying demand environment remaining supportive, and that’s what gives us confidence in kind of maintaining our forecast for the year.

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

I think the one other thing that I might add — if I could just add one other thing on the inflation. We talked about the impact. We looked at the second half is being able to mitigate most of that given the pricing actions that are taking hold.

Matt Summerville — D.A. Davidson — Analyst

When I look at this business and kind of compare, it might not necessarily be a fair comparison, but I’m going to do it anyway. When I think about my broader coverage universe, the overwhelming majority of my companies are printing like record operating margins. And at 7%, this is the worst margin performance in Industrial in like 10 years. I guess I’m really just trying to understand structurally, given you’ve migrated into automation, given how that Molding Solutions platform has evolved over the years, how are we sitting here today at 7%?

William Pitts — Vice President of Investor Relations

Go ahead, Julie.

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

No, no, that’s okay. So it’s a fair question, and it’s certainly not where we would have hoped to be at this point in time. But how we are, where we are, has a lot to do with the volume we see coming through the facilities, the inflation impacts. We were hit heavily by absenteeism. There is a level, Matt, that I’m sure you can appreciate of lost productivity when you have perhaps an entire sell out. We had locations that had up to 25% of the population out for COVID during parts of the quarter, earlier in the quarter, which significantly impacted our January performance. And while we quantified it as $2 million, which is about 100 basis points of margin in the quarter, my estimate is it could be ballpark, a little bit higher than that. So we have the inflation that hit us, and the team did a great job with their recovery efforts.

I don’t want to underplay what the team did to offset our inflation. We had some absenteeism and there’s that other productivity that comes with having people doing jobs that they don’t normally do, having people out. And that’s how we landed where we are. That said, we see that we’re turning a corner in terms of absenteeism going down, which should have an immediate impact on productivity. We see volume coming up, which will also drop through to the bottom line in terms of productivity. Our inflation and surcharge efforts will continue to gain traction, offsetting more of the inflation. And we have our teams leveraging the operating system to double down our efforts in increasing our own internal productivity and focusing on what we control within our own four walls. So I’m not sure if that answers your question, but that’s where we’re at.

Matt Summerville — D.A. Davidson — Analyst

Understood. And then just one follow-up to make sure that I understand the titanium issue. I realize you source it from Russia. I’m sure that’s been the case for a long time. How much titanium inventory do you have on hand now? And if you are forced to resource that from another supplier, would the same pass-through mechanism still be valid under that scenario? Or would you be more open and susceptible to spot pricing in the market?

Julie K. Streich — Senior Vice President of Finance, Chief Financial Officer

Thanks, Matt. So we have a substantial amount of buffer stock for titanium. And as I mentioned earlier, many of our contracts have passed through raw material pricing. So should we need to shift to more costly sources of titanium, the vast majority of that would be able — would be passed through VR contracts.

William Pitts — Vice President of Investor Relations

Yes. There are protections in the long-term agreements that we have, Matt.

Matt Summerville — D.A. Davidson — Analyst

Okay, understood. Thank you guys.

Operator

And there are no further questions at this time. Mr. Bill Pitts, I turn the call back over to you for some closing remarks.

William Pitts — Vice President of Investor Relations

Thank you, Rob. We would like to thank you all for joining us this morning, and we look forward to speaking with you next on July 29 with our second quarter 2022 earnings conference call. Rob, we will now conclude today’s call.

Operator

[Operator Closing Remarks]