Q4 2019 Earnings Call
Ladies and gentlemen, good day and thank you all for joining this Haynes International Inc. fourth quarter fiscal 2019 earnings conference call. During today's meeting all telephone lines shall remain in a listen only mode, but instructions on how to submit a question will be shirt. After todays prepared remarks, and now for opening remarks introductions I'm pleased to turn the floor over to controller and chief.
Keep accounting officer Mr., David Vanbeber. Please go ahead Sir.
Thank you very much for joining us today with me today or make sure President and CEO Haynes International Indian modeling, Vice President and Chief Financial Officer.
Well, we get started like two to read a brief cautionary note regarding forward looking statements. This conference call contains statements that are forward looking within the meaning of the private Securities Litigation Reform Act of 1995 and section 20, Onee UBS Securities Exchange Act of 1930 for the words believe anticipate plan and similar expressions.
Intended to identify forward looking statements.
Although we believe our plans intentions and expectations regarding or suggested by such forward looking statements are reasonable.
Such statements are subject to a number of risks and uncertainties and we can provide no assurances such plans intentions or expectations will be achieved.
Many of these risks are discussed in detail in the company's filings with the Securities Exchange Commission in particular Form 10-K for the fiscal year ended September Thirtyth 2019, the company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.
With that let me turn the call over to Mike.
Good morning, everyone.
The close of fiscal 19, I'm pleased to say that we've moved from words, the actions and from plans to results.
Well, we have so much more that we believe we can do with volumes cost pricing cash generation of margins.
I'm very proud of our team and all that they have accomplished in fiscal 19.
We've gained significant momentum over the past year.
Our employees focused on our monthly metrics and the actions required to change this business have been excellent.
A few highlights related to both Q4 and fiscal 19.
The depth of thinking any actions underway to implement proactive safety initiatives throughout the entire company had been excellent.
We must continue to improve our safety performance and our employees actions are significant step into right direction.
Our cash flows from positive for eight of the last 12 months, we increase cash over $21 million in fiscal 19 of which 9 million was from Q4.
Inventory was reduced by 10.3 million in Q4.
Our fourth quarter gross margin finished at 16.4%.
As much improved result is despite the well documented cobalt price collapse and the cost and yield issues associated with the plan furnace rebuild <unk>.
Most of which are now behind us.
These numbers are also beyond anything we've seen in recent years.
As I stated last quarter. Our goal is to move from worst a first in gross margin percent in our slice of the industry. We continued to make progress towards that goal.
Our gross margin percentage increase in each quarter fiscal 19 from 10.6% in Q1 to 11.5% in Q2, 14.4% in Q3, and it's just noted 16.4% in Q4.
Our pricing actions and cost reductions are real and have had a significant impact on our bottom line.
Our price increases or.
Dangerous therefore, contributing to our improving margins on the cost reduction side very positive results are being seen across all of our manufacturing locations.
Our efforts to create competitive advantage within via the supply chain.
Excuse me our efforts to create competitive advantage read a supply of high value differentiated product has great focus and emphasis first and our R&D lives through alloy development next where their sales marketing and application staff, who worked closely with our customers to look for solutions to their materials related issues and finally in our does.
Attributions facilities, where we continue to grow our cut parts business.
Our company also made it back to the long talked about 20 million pounds in fiscal 19.
Despite the loss of 3 million pounds of large frame NIGC business from our 2012 peak.
As far as their backlog it did decrease this quarter, but we ended fiscal year 19 $19.2 million greater than at the beginning of our fiscal year.
We believe that there is some minor rebalancing of inventories occurring in some segments as supply chain. We all look forward to 737 Max issues being resolved.
We expect demand to strengthen once the build schedules are increased also impacting the backlog during the quarter are typically lighter bookings in the summer months, along with shipments of some specialty application projects into the chemical processing market, which were booked in prior quarters.
As for the details of the quarter.
Volume shipped in the quarter was 5.4 million pounds, our highest quarterly volume and four and a half years.
Strong quarterly shipment performance put volume for fiscal 19 at 20 million pounds alleviating the margin headwinds associated with lower volumes.
Prior three years volumes were at lower levels with each year being between 18 to 18.4 million pounds.
Net revenues were $129.6 million in the fourth quarter fiscal 19, and $490.2 million for the year net revenue for fiscal 19 was 12.6% higher than fiscal 18, each for three major markets of aerospace chemical processing and industrial gas turbines.
I had revenue increases of greater than 13% each.
Average selling price in fiscal 19 was $24.46 per pound inclusive of or other revenue up about 3.4% over last years $23.66 per pound.
This average selling price increase was led by the aerospace market, where the average selling price increased 8.9% in fiscal 19 as compared to fiscal 18.
With that let me move to our key markets sales to the aerospace market accounted for 53% of our revenue at $68.3 million in the fourth quarter fiscal 19. This represents an increase of 11.3% from 61.4 million in the same period last year due to a 5.9 per.
And increase in average selling price per pound combined with a 5.1% increase in volume.
We successfully initiated price increases in the aerospace market for both transactional business and with renewed customer agreements.
Looking at the full fiscal year volume and net revenue shift into the aerospace market during fiscal year, 19 was 10.3 million pounds and $258.1 million the highest in the company's history.
Backlog in aerospace decrease sequentially from Q3 to Q4 by 6.1%.
However, our aerospace backlog over the fiscal years up 10.6%.
Sales to the chemical processing market accounted for 21% of revenue at $27.8 million in the fourth quarter.
This represents a solid increase of 19.2% from $23.3 million in the same period last year due to a 14.3% increase in volume combined with a 4.2% increase in the average selling price per pound.
We'd improve shipments of specialty application projects as well as better based business shipments our backlog dollars and Cpis decreased sequentially from Q3 to Q4 by 32.2% primarily due to the shipment of special project orders from our backlog.
Sales to the industrial gas turbine market accounted for 12% of revenue at $15.8 million in the fourth quarter fiscal 19.
This represents an increase of 3.2% from $15.3 million for the same period of last year due to an increase in volume of 29.9% nearly offset by a decrease in average selling price per pound of 20.6%.
The decrease in average selling price is mix related.
The increase in volume is primarily attributed both to an increase in small and medium free mentioned builds combined with the resupply material into the supply chain.
Demand for the large frame turbines in the energy market continues to be week.
Our backlog dollars and industrial gas turbines decreased sequentially from Q3 to Q4.
By 2.9% however for the year the backlog has increased.
32.9% coming off a very low levels.
During the last quarter call I mentioned that we do see meaningful potential opportunities for market share growth for Hanes Interide gizzi market.
I'm pleased to report that we recently received an order November for roughly 100000 pounds in the IBG market, representing the start of market share growth for us.
Finally, our other markets and other revenue accounted for 14% of revenue at $17.7 million in the fourth quarter fiscal 19.
This represents a decrease of 20.4% from $22.3 million in the same period of fiscal 18, However, looking at the full fiscal year revenues increased 8%.
Primarily from an 11.5% increase in other markets pounds sold compared to fiscal 18.
Our backlog dollars and other markets increased sequentially from Q3 to Q4 by 14.4% during the quarter.
With that detail in the markets, Let me now I'll turn it over to Dan for more details in our financials.
Thank you Mike fiscal year, 2019 was a positive year financially ending the year with our highest quarterly volumes shipped in four and a half years as well as our highest quarterly gross margin percentage in three years old.
Overall volume shipped in fiscal 2019 increased 8.9% over last year.
Net revenues increased 12.6% and gross margin dollars increased 17.3% in spite of two significant margin headwinds the two I'm, referring to are the fall in the market price of cobalt, which had a significant margin compression in the third and fourth quarters.
And second the impact from the cold, finishing outage an upgrade.
Both of these headwinds are expected to be alleviated moving into fiscal 2020.
Positive impacts on gross margin dollars in fiscal 19 include one higher overall volume shipped achieving our goal of 20 million pounds to price increases beyond raw material changes primarily in the aerospace market and three cost reductions that include improved productivity.
[noise] better scrap management.
Reduced melt cost and many other manufacturing cost reduction initiatives.
A number for improved sales levels of the specialty application projects, which were 9.6 million in the fourth quarter.
Increasing from the 5.5 million in the third quarter fiscal 2019.
Our focus on increasing volumes improving profitability has gained traction and positively impacted results with gross margins improving each quarter sequentially over fiscal 2019 despite headwinds.
The fourth quarter gross margin as a percentage of sales was 16.4%.
These efforts are continuous and we expect to keep pushing our performance higher.
Moving down the piano SGN, eight including research and technical cost were 12.5 million in the fourth quarter fiscal 2019.
This is 1.2 million higher than the same period of last year, which related to incentive compensation that included a prior year expense reversal from stock comp forfeitures, and it's also related to foreign currency changes.
We expect SGN, a including research and technical costs in fiscal 2020 to be approximately 49 to 51 million.
Nonoperating retirement benefit expense in the PNM was $879000 compared to last year's Q4 of 1.9 million driven by the prior year favorable valuation at 932018.
As I mentioned last quarter, we were concerned about the lower discount rates to be used in the valuation of 932019, which determines the 2020 expense levels. This concern was warranted as the discount rate declined which significantly increased our liability on the 932019 balance sheet and is expected to end.
Increase fiscal 2000, twentys expense by $4.8 million as compared to fiscal 2019.
Approximately 3.4 million of this increase is expected to be reflected in nonoperating retirement benefit expense in the piano and the remaining 1.4 million increase is expected to impacts cost to sales.
Well on the subject of fiscal 2020 expense. Let me also mentioned another significant item that is expected to increase.
The market for property insurance has tightened dramatically there is much less capacity available, which is resulting in an additional amount of expense of $2 million on less coverage and is expected to be recognized primarily in cost to sales in fiscal 2020.
Now back to fiscal 2019, our effective tax rate for this quarter was 22.1%, which is lower than last quarter, primarily due to reversing valuation adjustments on foreign tax credits.
Partially offset by the tax impact of certain types of stock compensation forfeitures that occurred in Q4 and adjustments to our accrual for global intangible low tax income or guilty tax.
Last year, we incurred several tax adjustments stemming from the tax Reform Act and the tax impact from special items to see these details I refer you to the reconciliation of non-GAAP measures table in the back of the press release.
And to finish off the PNM net income this quarter was $6 million or 48 cents per diluted share.
In the full year fiscal 2019, net income was 9.7 million or 78 cents per diluted share.
Backlog decreased 7.7% over the fourth quarter coming off the June Thirtyth 2019 levels that were the highest level since 2012.
Over the fiscal year backlog increased 8.9% to 235.2 million at September Thirtyth 2019.
This is the highest fiscal yearend backlog since September Thirtyth 2011.
Outlook for next quarter as we look into fiscal year 2020, we see strong momentum stemming from the continued implementation of our focus initiatives. We are optimistic about improved results in the long term.
This optimism remains in spite of the uncertainty related to the 737, Max and global trade attentions as well as expected higher pension costs due to low interest rates and higher cost of property insurance.
The first fiscal quarter. The year is typically seasonally impacted by holidays planned maintenance outages and customers managing their calendar year and balance sheet.
Based on that we expect revenues and earnings in the first quarter fiscal 2020 to be lower than the fourth quarter fiscal 2019.
However, revenue and earnings in the first quarter fiscal 2020 are expected to be better than the prior year first quarter of fiscal 2019.
Moving onto a liquidity, we have zero borrowings on our credit facility at September Thirtyth, 2019, and cash was $31 million, representing a 21 million increase over fiscal year over the fiscal year.
Net cash provided by operating activities was 43 million in fiscal 2019, driven by stronger profitability combined with lower costs and inventory in a period of rising sales volumes normally rising volumes would increase inventory and consume cash. Thus I believe it is a notable point that we.
Generated cash this fiscal year.
Also contributing to cash generation was controlling capital expenditures capital spending was 10 million in fiscal 2019 as compared to our depreciation level of 18.9 million.
The forecast for capital spending in fiscal 2020 is $12 million.
In conclusion, we remain committed to continuing to push profitability higher as we focus on the execution of our strategic improvement initiatives.
New headwinds are expected in fiscal 2020 as noted earlier, but also new opportunities are expected to further implement these initiatives focused on improving volume product mix pricing and cost.
Mike with that I will now turn the discussion back over to you. Thanks Dan.
It has been an exciting years, we have launched and implemented our series of focused initiatives designed to unlock the potential of our company.
Our goal is to grow this business by increasing revenues profitability and cash flow, while continuing to be our customers provider of choice for high performance alloys technical support and value added processes with that Jim Let's open the call up the questions.
Gentlemen, thank you for your remarks onto our audience. Joining this morning, if you would like to ask in life question over your telephone simply press star and one on your telephone keypad pressing star in one will place your line into a Q and a friendly reminder, that if you're joining us today on a speakerphone. Please return to your handset to ensure that your signal does reach our equipment once again, ladies and gentlemen that is star and why.
And if you would like to actually live question, we'll hear first this morning from Edward Marshall with Sidoti and company. Please go ahead.
Hey, guys. Good morning, how are you add pointing it.
Hey, So I wanted to first touch on the Max.
Some of the engine suppliers are talking about finally ramping down to 42 from 52 I know, it's hard I know, it's hard for you guys to see that in your and your volumes as I look at backlog is I think about kind of the performance you've had in aerospace do you think that at least for the first quarter or two you'll start to see that impact.
And your material pour.
Any comments around arrow sure.
As you know we spent a lot of time on discussing the 737 maxi spend less time with our customers going through it.
The research.
Recertification process continues to move along.
We all know that if there is not good news that is significant issue for the supply chain as we move forward, but with that said honestly, we've not seen a significant change in our order book related to 737 Mac situation.
This was emphasize I had a series of customer meetings, both airframe and engine.
In late October and the conversations continue to be very positive in the conversations continue to be about making sure. We continue to supply with that said, obviously if there is.
News in the industry, which is going to either keep at low or even reduce it further that's something we're going have to deal with but we're not dealing with that right now.
We feel good about where we are.
The backlog.
We typically when you look at our Q4 versus our Q3, we've looked at the last five years and in each of those five years, we've reduced our backlog. So don't look at that as unusual and continue to get comments from customers that in the current state of events they want us to keep pushing forward.
And staying on aerospace for a second I think in your prepared remarks, you talked about.
Pricing above base raw material pricing and I'm curious if you can attribute any of that says you know the freed up capacity within your aerospace cold finish.
Yes, I think part of it said, but I really believe.
That from the aerospace perspective.
Haynes provides a high value differentiated product that's in the technical support.
That's in the inventory we supply that's in the small quantities that we're able to deliver it's even in the cut parts. So I think.
Big part of our ability to get prices, we truly believe in aerospace, which as you know is 53% of our mix that we have high valued differentiated product and we feel very strongly we need to be paid for that and we're very.
Comfortable in talking to our customers about that so that's a big part of it.
I also look forward to win the Max does come back in there is a pole transactional pull that hopefully we can continue to drive our lead times down and take advantage of that not only from the volume Stanford point, but from the pricing standpoint.
So just if I understand you correctly it sounded like it was more about the initiatives that you set the price the product appropriately as opposed to maybe just having the available capacity.
So I think part one is is pricing for value part two is as we've expanded our tube and our cold finish line our plate capacity, it's allowed us to secure more so yes.
Combination.
Got it.
The.
The R&D swell in the quarter I mean, there's there's something unique thats going on in this particular quarter at I mean, it was up.
Looks like 25% or so sequentially.
It's funny.
We spent a lot of time talking about cost reduction and what we need to do but I'm much more interested in were much more interested in variable cost reduction.
Over the last couple of years in research and development. We've lost a couple of our high end engineers and quite frankly, some of our technicians and the drop that has occurred in the past has been been because the loss of those people and our drive has been to pull that number backup so what you're seeing now is approaching what should be.
More typical force I have been amazed both as an outsider now as an insider by the technical development capabilities of this company is the backbone and what we do and this is one area I want to spend more than less and continue to go to that.
Sounds good.
Could you could you quantify the impact maybe from cobalt and the higher production costs in the quarter.
And just higher cobalt or the change I'm, sorry, the changing and call will also impact your volumes as well as customers kinda.
Assess.
Yes, I can start with the first part of that I mean the.
It's a bit of a difficult number to quantify so what we would say is really a roughly 1%.
I have an impact on our margin and Thats the combination of both cobalt and the driever higher costs impacting the fourth quarter. So we would say rough roughly 1% maybe slightly higher.
Right around that range.
I don't think the cobalt pricing dropped impacted volume I think these are items, our customers' needs I really don't think theres any material change to volume requirements and as I mentioned going into 2020, the this headwind really alleviate.
Everything seems to be more neutral on on.
On cobalt and the costs that we see from the Driever outage those are pretty much flushed through the system. So those headwinds alleviate we have new headwinds coming up that I outlined but.
Moving on to 2020.
And if I do the math quickly I mean, it looks like the new costs offset by the by the by the.
Since of these two.
Our next Q in Q4.
Roughly roughly I mean the.
The insurance will be mostly on cost of sales.
Which is a 2 million increase over the whole year.
So just a quarter that if you're looking at a quarter, but also the.
The the pension and postretirement most of that is below operating income, but there was a portion that is above.
That will squeeze the margin event.
Right final one for me is just kind of what you you know as as operations improve.
You are obviously generating more cash you pretty good comments about that it's not a lot of need for major Capex I'm curious, what's the what's the focus of the balance sheet now as you start into kind of put that cash back on the balance sheet in a pretty decent some.
Well as far as capital allocation, we're always talking about that at the board level. So we certainly.
Think about improving gross margins and generating more cash and then what we do with that we certainly continue to fund our pension plan and we think about what other capital allocation opportunities are out there. So really the you know the table everything's on the table as far as options at the board level Im thrilled, we're generating crash and Im thrilled net.
Come as is leading to cash generation.
Makes a lot of sense and then from that point forward, we'll do whatever makes most sense for shareholder value.
Perfect guys. Thanks, Thanks, very much appreciate your comments thanks, Ed Thanks, Ed.
Once again that is star and Wonder if you would like to ask a question, we'll move next to Chris Olin with Longbow Research.
Hey, guys. Good good morning, Hi, Chris how are you.
Got it thanks, Mike I'm, a little bit of.
Question is on the contracts and the transactional pricing increases that you talked about I was wondering if you could put a little bit more color around that may be in terms of what.
Type of realizations, you guys are getting and maybe how much of the aerospace business is going to be reset for 2020.
As far as pricing, we feel very strongly that the overwhelming majority of the product that goes in aerospace is or high value differentiated product. We started last year and if were 53% that's roughly 10 million pounds and we're going after all of that as the contracts mature or both.
Last year and this year.
To increase surprise, but again my point of emphasis here is we're talking about price increases beyond raw material pushes. These are pure bottom line increases. We also on the transactional cider are doing the same thing and our enter pushing that and continue to push that we've had some cost pushes for example, refractories and molds and and our goal.
It is not only to offset those through transactional and contract price increases, but with the go beyond just offsetting that.
Is the component Oh, the transactional business moving higher.
Well when we do measure what we consider transactional is.
We get an order and we can ship that order within a month or two so it's less than a mill lead times.
So I would not say, it's moving higher we do track that it was about $23 million this quarter, which is around 18% or so approximately 18. So it's been holding pretty steady across the year. If you look back a few years ago that was a higher number so we have shifted a bit more into the LTAC.
Non transactional, but it's holding pretty steady this year.
Okay, Chris Martin Marty Losch and his team over the last couple of years, just following up the within said.
Look to tie up more and more business in LTAC and so thats why the numbers down from where it was but I really think if we do see the 737 Max come back and start to approach 57 that we'll have the opportunity for more transactional business and in my mantra here is the shorter lead time.
The higher the price can go so it can be good for us.
Okay. Good.
You guys did pretty good job talking about the Max net rash or impact is there any overlap with the 77 or maybe the triple Sevenx I was thinking maybe there's some.
Issues with Arcadia, or any kind of tubing.
Sure.
No.
Right now.
We have fairly steady demand theres, obviously puts and takes in the industry.
I will tell you that Arcadia on the titanium side their lead times much to my chagrin are continuing to push out which means demand is extremely strong for titanium which is all airframe.
And so that's going well and we've seen.
No pull back whatsoever as far as the demand for titanium.
Tubing for us.
Okay and my last question, just and I realize it's not a one to one relationship but we've been watching the rig fall now or.
Number of months I'm wondering if that has any type of impact or any does that change your visibility at all on terms like CP business.
Well, we are somewhat tied to kind of an end or indirect.
Connection to the oil industry, so that could have an impact on chemical companies if they.
If they see rig counts going down and the oil prices weakening we did have that impact us a few years ago.
When the oil market collapsed and that had a we called it a spillover impact on our CPI business.
So it's not direct and it's not significant at this point, even with the rig count going down slightly and Chris what tends to move the needle for us and Cpis or special projects and we're anticipating continued growth this year and our.
Special project business.
Okay. Thanks, guys. Thank you.
And once again to our audience that is star and one if you would like to ask a question gentlemen will allow just for another moment to give everyone a chance to signal.
And we have no signals coming from the phones I'll turn it back to our leadership team and Mr shore for any additional or closing remarks.
Thanks, Jim. Thank you everyone for your time today and thank you for your interest in support of Haynes, We look forward to updating again next quarter.
The Thanksgiving.
Ladies and gentlemen, this does conclude today's earnings conference and we do thank you all for your participation. You may now disconnect your lines and we hope that you enjoy your weekend.
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