Q3 2021 Haynes International Inc Earnings Call
Yeah.
[music].
Good day, ladies and gentlemen, and welcome to the Hany's International incorporated third quarter fiscal 2021 financial results conference call.
All lines have been placed on a listen only mode and the floor will be opened for questions and comments following the presentation.
If you should require assistance throughout the conference. Please press Star zero.
On your telephone keypad to reach of live operator.
At this time and it's my pleasure to turn the floor over to your host controller and Chief Accounting Officer, David Vanbebber, Sir the floor is yours.
Thank you very much for joining us today with me today are Mike Shor, President and CEO of Haynes International.
Zero, and Dan Maudlin, Vice President and Chief Financial Officer.
Before we get started I would like 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 the 1995 and section 21 E of the Securities and Exchange Act of the 19th.
The 34, the words believe anticipate plan and similar expressions are 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.
Internet, such plans intentions or expectations will be achieved.
Many of these risks are discussed in detail and the company's filings with the Securities and Exchange Commission and particular form 10-K for the fiscal year ended September 32020.
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.
Thank you Dave good morning, everyone.
The results continued to improve this quarter and our momentum is building the <unk>.
Details are as follows.
We returned to profitability and our third quarter.
And so it's quite shipping just $3.7 million pounds.
The end of quarter cash balance was $74.2 million representing.
Representing an increase of cash since March 31, 2020 of $51.8 million and an increase of $4.3 million over the past year.
Our gross margin.
<unk> to improve despite our direct charges related to low volume and despite the lack of meaningful incremental aerospace shipments to date.
And we finished the quarter at 15, 5% gross margin.
This represents a 530 basis point improvement sequentially and the 1220 basis point improvement.
From last year's Q3.
As I've stated in the past we look at the 18% gross margins achieved in early 2020 as our starting point once our aerospace volume returns.
The results of Q3, and our improving gross margins confirm what we said for the past year.
That is our cost.
And we should and price and work I've had a significant positive impact on our business driving a breakeven point from roughly 5 million pounds shipped the quarter 2 as shown on our Q3.
Quarter 4 million pounds or less.
Our cost and price improvement initiatives that have driven our margin improvement are continuing.
The street on our current and future price and cost efforts should continue to have a meaningful incremental improvement impact on the future of Haynes.
As noted in our May 27 press release, we've increased transactional pricing by 7% and 10% on the cost side of our efforts to improve material yields and refine our processes.
Are also expected.
To continue to have a meaningful impact on our variable cost of manufacturing.
EBITDA was positive for each month of the quarter and totaled $7.3 million for the quarter.
Our backlog increased for the first time since the 2019 issues with the 737 Max.
Backlog dollars improved by $10 million and the quarter incur.
The increasing 2.4% and aerospace, 22% and CPI and 19% and IGT.
We're seeing the impact of our share gain and IGT the improvement in capital spending and the CPI market and the initial signs of renewed.
Pro activity.
Our book to Bill in dollars was 1.1 with arrow at 1.1, and both CPI and IGT at 1.2.
In addition, our focus on maintaining a competitive advantage through industry, leading lead times and providing just in time inventory.
The era of near net shaped from our company owned service centers has resulted and satisfied customers and incremental price increase opportunities.
To support this we've continued to place highly flexible intermediate inventory into stock and our facilities to keep our lead times for our high volume alloys below what is typical for the industry.
And this can create a competitive advantage as the recovery progresses.
Our team continues to internally track over 40 key measures on a monthly basis.
The focus commitment accountability and energy shown by our entire team have resulted and innovative alloy and application offerings.
Laurie cost reductions yield increases price improvements margin expansion initial volume growth lead time improvements significant process improvements and safety and inventory reductions.
As a result of our actions and significantly improved performance along with the current level.
With cash on our balance sheet, the overall expected business recover and the horizon and the current favorable pension valuation information the Dan covered and our last earnings call, we've announced and a separate press release, a multi step capital allocation strategy.
This includes the share repurchase plan as we believe our current share price.
<unk> is well below its intrinsic value of the adoption of a glide path for our U S pension along with the U S pension plan and accelerated funding strategy.
These actions show our optimism about the future of our company and our reference to strive to eliminate the largest liability on our balance sheet.
Dan will provide additional details.
Now as.
As far as our markets or IGT market improved by over 49% and pounds shipped this quarter versus last year's third quarter.
Our IGT growth continues beyond market growth rates because of 3 factors.
And share gain and an OEM share gains by 1 of our customers within the IGT.
The GT supply chain and the additional continued application of the Haynesville proprietary alloy Haynes 282 alloy and both newbuild designs and replacement components.
Our CPI market is showing positive signs both with increased revenues and increasing backlogs did occur and oil prices.
And which impact capital expenditures in our CPI market, the restart of significant projects and the industry that had been delayed over the past year and are very competitive lead times.
And our aerospace market, we are seeing a significant pickup and activity starting with customer calls to us related to supply capability and lead times.
By inquiries on available finished product and our Haynes distribution facilities and now the beginning of ordering activity.
It's very important and note that aerospace shipments are still well below steady state levels.
As a point of reference pounds shipped into the aerospace and space market this quarter or 47, 5%.
So what they were 2 years ago in June of 2019.
The significant growth opportunities are still ahead of us.
The news from Boeing Airbus and the single aisle engine manufacturers continue to be very positive we expect.
And increase in Aero ordering by the end of this calendar year.
Summarizing Q3, the efforts from our team have resulted in increased sequential revenue and of returned to profitability.
Revenue for the quarter was $88.1 million exceeding Q2 by 7.4%.
We achieved profitability despite shipping just $3.7 million pounds proving that our breakthrough.
And even has been reduced by over 20% gross margin was 530 basis points above Q2 of fiscal 'twenty, 1 driven in part by cost controls cost reductions outstanding customer and technical service and incredible innovation at both of the alloy and application levels.
And I'm very proud of our entire team and have shown with focus and accountability and a relentless drive to improve can mean to company performance.
We believe that significant incremental business improvement can occur once the anticipated upcoming aerospace orders turn into shipments.
We are seeing the first.
As a market and backlog improvement while excited about what can be we do not expect to see a significant increase and our commercial aerospace orders until later this calendar year. Given this we expect our Q4 results to be slightly better and our Q3 performance.
The close out my comments I want to again.
First site, 1 of our key business Differentiators, and specifically, our innovative alloy and application development efforts.
Last quarter I highlighted our role with the Mars Rover this quarter I'd like to highlight what we are best debt developing innovative alloys for unique applications in our markets.
Today I'll touch on our aerospace market, we now have proprietary alloys flying on the Pratt and Whitney of 1100 on the <unk> hundred 20 Neil.
With the 500 on the 820.
And on the Pratt Whitney and 1900 for the Embraer E..195, we also of 2 alloys specced into the GE 9 X on.
On the 777.
In addition, Haynes 233 alloy is and the advanced stages of property and specification Finalization with a major Aero OEM I'm proud of the work of our team now let me turn it over to Dan for more details on our financial results.
Thank you Mike returning.
Profitability is an exciting milestone as we are emerging from what we believe of the early stages of the recovery or.
And our continued focus on initiatives to increase margins from price increases and cost reductions have successfully reduced our breakeven point.
This quarter, our total volume shipped was $3.7.
Millions of pounds, resulting in positive net income as compared to our prior breakeven of roughly 5 million pounds.
These improvement efforts are expected to continue to gain momentum.
First as volumes increase.
And as more orders are shipped to that are priced with our recently announced price increases.
And third as our cost reduction efforts related to improved yields and productivity and process improvements are realized with higher mill production levels.
Mike already covered a discussion of each market, but here's a bit more detail on the numbers.
The quarter sales to the aerospace market accounted for 38.
5% of our revenue of $34 million.
This is an increase of 11% sequentially from Q2, but a decrease of 16% from the same period last year.
This year over year reduction and aerospace demand continues to be the main cause of our overall low volume levels.
Compressing our margins.
As Mike mentioned earlier, our volume decreased by 48% from the third quarter 2 years ago and fiscal 2019.
These margin challenges alleviate as aerospace volumes improve.
<unk> dollars and aerospace increased.
<unk> from Q2 to Q3 by 2% but of decreased year over year by 27% from the pandemic impact on the aerospace industry.
Sales to the chemical processing market accounted for 19% of our revenue at $17 million. This is up 13% sequentially from Q2 and up.
40% from the same period last year.
Special project revenue most of which is reflected and chemical processing was $4.6 million, which is 211000 lower than the second quarter and 743000 lower than the same period last year.
Backlog dollars and.
And CPI increased by 22% Q3 versus Q2 and is up 19% year over year.
Sales to the industrial gas turbine market accounted for 20% of our revenue at $17.8 million. This is an increase of 8.5% sequentially from Q2 and up 30% from the.
The same period last year.
Backlog dollars and industrial gas turbines increased sequentially by 19% and its flat year over year.
Sales to other markets accounted for 16% of our revenue at $13.7 million. This is a decrease of 12% sequentially.
But an increase of 22% from the same period last year.
Backlog dollars were flat sequentially, but up 18% year over year.
Other revenue accounted for 6% of our revenue was $5.6 million. This is an increase of 28% sequentially and an increase of 77%.
And the same period last year.
The sequential improvement and overall volume from $3.5 million to $3.7 million pounds and contributed to the 530 basis point gross margin expansion and the third quarter to 15, 5%. This is accurate and 880 basis point improvement.
<unk> essentially last quarter.
This improvement includes a reduction and the direct charge from $2.8 million and the second quarter to $2 million and the third quarter of fiscal 'twenty, 1 with better absorption of overhead costs.
Also contributing to the margin expansion was our continued diligent focus on cost.
So I mentioned earlier and our price actions related to price it prior actions related to pricing increases.
Raw material cost increases for both nickel and cobalt and provided a moderate tailwind of margins this quarter of roughly $1.5 million.
SG&A, including research and technical.
A reduction of expense was $12.3 million and the third quarter, which was similar to the second quarter's $12.1 million, but higher than last year's third quarter of $10.7 million.
This year over year increase was mainly due to incentive compensation accruals as last year had zero accruals in Q3.
Non.
Technically and retirement benefit expense on the P&L was lower by $1.3 million as compared to the same period last year due to our favorable actuarial evaluations, we have discussed before.
I will have more comments on pension activities and a moment when discussing our recently announced capital allocation strategy.
Our effective tax rate was high at 39, 6% and the third quarter of fiscal 'twenty, 1 primarily related to valuation allowances recorded on a certain foreign operations net loss carryforwards, not likely to be realized.
All of this resulted in net income for the quarter of 422000.
Compared to a net loss of $8.1 million and last year's Q3, and a net loss of $3.6 million sequentially last quarter.
Profitability and improving financial results are a welcomed the outcome as we continue to execute our improvement initiatives.
Backlog.
We have begun.
And to experience and increase in order entry over the past quarter, though still below pre COVID-19 levels backup.
Backlog was $150.9 million at June 32021, and increase of $10 million of 7.1% from the $140.9 million at March 31.21.
As far as of our outlook for next.
We are seeing the first signs of demand and backlog of improvement in our core markets. However, we do not expect to see a significant increase in order entry and the commercial aerospace market until later this calendar year.
We expect revenue and earnings to be slightly better and the September quarter.
Quarter or fourth quarter of fiscal 'twenty, 1 as compared to the third quarter.
The company continues to believe it is favorably positioned as the recovery progresses.
Capital spending during the first 9 months of 'twenty, 1 was $4.2 million, we lowered our estimates for capex for the full year 2.
<unk> awesome only $7 million.
Liquidity cash.
Cash on the balance sheet with $74.2 million at June 30 of 'twenty, 1 with an increase in cash of $4.3 million in the third quarter of fiscal 'twenty, 1 resulting in a total net.
Net cash increase of $51.
8 million since March 31, 2020.
Strong total liquidity continues at 170 to $174.2 million with $100 million available on the Undrawn credit facility.
Capital allocation.
We announced Wednesday, and a separate press.
Press release, a multifaceted and capital allocation strategy that we are very excited about it includes first a share repurchase plan of up to $20 million as we believe that repurchasing our stock at current market prices represent an attractive capital allocation strategy for the company.
We feel this is a unique.
<unk> opportunity to repurchase shares well below the intrinsic value of of the company given the outlook of our markets, particularly the anticipated recovery and commercial aerospace.
Combined with our gross margin expansion strategies.
Second the recent adoption of a glide.
<unk> of our U S pension plans to help secure improvements and our funding percentage realize this fiscal year.
This is driven by better than expected return on assets combined with higher interest rates and is expected to reduce our roughly $100 million pension liability by potentially 50%.
In addition, the strategy includes a customized liability driven investment strategy that is expected to substantially reduce the plan's future interest rate risk.
And in asset allocation designed to reduce the plans equity risk both of which are expected to reduce the volatility of pension expense going forward.
Pat and third of U S pension plan accelerated funding strategy with the intention of fully funding the plan with the zero net liability and approximately 3 years.
The strategy entails and additional $15 million and planned contributions this year and addition to our current 6 million funding.
So $21 million and total.
Additional.
Future funding will be determined based upon market conditions and our financial position.
These steps represent significant actions to derisk, the plan and strive to eliminate the largest liability on our balance sheet.
Funding and decided to begin this capital allocation strategy.
In conclusion, it is encouraging to see the milestone of a return to profitability.
And it's interesting to think of what is still in the future still ahead of us includes and expected recovery and the commercial aerospace market.
Expected.
We are of better fixed cost absorption with normalized volumes.
More traction and our manufacturing process improvement strategies when volumes recover.
And the realization of recent price increases favorably impacting our bottom line.
We believe all of this combined with executing our value.
The creating capital allocation strategy will create value for our shareholders.
And Mike with that I will turn the discussion back over to you.
Thank you Dan.
Our team continues to be encouraged by both the direction and the potential for our business I want to thank all of you for your continued interest.
And Haynes.
With that Kat, let's open the call up the questions.
Certainly and thank you.
And I will now open for questions. If you do have a question you May press star 1 on your telephone keypad at this time.
The question has sort of answered you kind of move yourself from the queue by pressing 1 again, ladies and gentlemen.
I wanted to ask a question and answer.
The first question comes from Michael Alicia from Keybanc Capital markets go ahead and Michael.
Hey, guys good morning.
Hey, Mike Good morning.
So and as we look at the third quarter. It was it was much better than where you guided to.
Volume.
And we're only up a bit the $3.7 from the from $3.5 of the prior quarter I just wanted to know what drove that profitability and the corridor I know there was some benefit from raw materials, but.
And how much did mix play of the factor and is that something that's sustainable as you look into <unk>. Thanks.
Let me, let me address of the next.
And then looking all day and I'll touch on the inventory side of this and the raw materials side on this but what we're very excited about is what we believe can continue to happen in the future since you brought up mix.
We see opportunities from mix improvement as Arrow comes back so as we look at mix, we saw minor mix improvement.
Next day like from Q3 versus Q2, but that was mainly because of a reduction of some of our higher volume orders that we took at the depths of the pandemic and try to work through and address the direct charge. These orders were good for the company, but they were very low margin and so Q3 did not have some of the Q.
Ed but to me a very key point as we look at mix and what can happen and the future. We saw year on year as what I. Just gave you of sequential year on year, we saw a fairly significant deterioration and mix. So Q3 fiscal 'twenty 1 versus Q3 fiscal 'twenty.
And it makes sense, we've been very open that.
Q2 of space business as the majority of our high value differentiated products and when you look at the year on year stats, we had IGT up a good thing CPI up a good thing, but aero down year on year. So we were missing that component of the mix. So as we look forward, we see great opportunities for mixed of further improve and.
Beyond that.
And right before the pandemic hit US we had 18% gross margin in January and February 2020, So our work on pricing our work on cost not only was done back then but it can be continued through the pandemic and we think Morris come debt.
And let me just hit on the the inventory build.
And the raw material and it was very moderate and actually starting with raw material nickel and cobalt increase so we estimated net to be about of 1.5.
Millions of favorable benefit, but last quarter. It was about $1 million. So just slightly above what it was last quarter, so nothing too significant and the.
Then on the inventory.
Tori build side, we did them and build inventory of about $3.9 million. So you'd think about that and what that may do to margins and what kind of contribution that kind of would.
It would have but still that's even less than or right around about a 1 million dollar impact on the month and that would be about of 1.1 point change and.
Gross margin I think the 1 thing that surprised us.
And on profitability more than anything is what Mike kind of mentioned and that is the.
The the initiatives to reduce breakeven the initiatives to increase prices and reduce cost.
That.
It's realized as volume start to go up.
And I think we got some great traction on those initiatives and it's really starting to show up and the margin and we really are excited as we look forward that continuing and and that momentum building and expanding margins further let me just add.
1 more thing to it that's the special projects, which Dan touched on and his and his script.
And we've been in the trough of spending by our customers and the industry. So with that there's not been a lot of money left to start some of these projects. So we're down year on year, and we were even down sequentially and special projects and Red.
As that begins to come back that offers us future potential also as far as improving continuing.
With the performance of the company.
Got it Thats helpful.
And then on the cost side of the business what have you seen or do you expect to see going forward in terms of the inflationary pressures and.
And maybe how much of the cost you took out during the downturn are structural in nature versus what what portion might.
And 1 of them back.
We when you look at the during the pandemic on on the people side.
We took out a significant portion of our workforce I think of it was.
18% of our workforce combined variable.
And fixed side of this thing and.
And at this point the.
Come overwhelming majority of our variable workforce and a production maintenance work force has been called back and we're obviously going to drag our feet as best we can on the salary side and we spent money to unfortunately removed positions and we want to be very cautious about bringing back but we are doing it and we're trying to continue to reinforce what our core competencies our bi.
The barring people that fit and those jobs and make the most sense force.
I think we are continuing to gain momentum on the cost side on the variable cost of manufacturer we've done a great deal to improve yields to improve our processes and to enhance the way and we make our products for our customers and.
<unk> had great momentum going in and the pandemic you don't get as much of an impact on your volume goes as low as ours is gone, but we continue to work on those projects and as we see higher volume, we're going to see additional cost reduction going forward.
And then Capex was basically zero in the quarter in right now you are kind of running.
Below your base maintenance level of $7 million, if we call it 8 to 10 maintenance roughly.
We should should we expect the meaningful uptick there and capex in 2022, if if there is any maintenance you might be deferring, yes, we were.
We're deferring no maintenance, what we find with capital and I found.
And this my entire career and I should learn from and already.
I never spend as much as I think youre going to spend so we actually havent talk we're going to have to start budgeting more than we are.
And then we're actually going to spend because theres always carryover, there's always an occasional delay here and there.
I don't like being at $7 million, and we expect to start approach and depreciation.
And I'm going over but approaching it for the next 3 or 4 years, plus or minus so well.
We will get back on the capital Bandwagon and that was not and intentional pull down that's just timing of projects.
Got it that's helpful. Thanks, guys.
Thank you Michael.
Okay.
<unk> and gentlemen to ask a question on the phone and star 1 please.
Please hold while we poll for questions.
And our next question comes from Marissa Hernandez from Sidoti and co head and Marissa.
Thank you and good.
So on.
And ladies and Danny if you could.
Morning. So wondering if you can comment on the outlook for gross margin and the second half of the calendar year. It seems to me that there's a number of.
Moving pieces here with the.
And the mix of the aerospace and the other segments.
At the same time, you have a cost saving effort, but you're having to put in more resources to the zika.
Hum.
Takes place and at the same time you know.
This.
The decline in Asp's. The then the 2 rigs.
All of it in this quarter for both aerospace.
And and.
The chemicals segment. So if you could put all of those and context for me that'd be great I'm sure we'd love to.
And first I've got to start because we've got an entire team that have been working on this for.
3 years plus.
We're thrilled with the team's efforts to fundamentally improve our business with a focus on driving our gross margin up significantly.
Secret of our goal has been and our slice of the industry to be the best as far as gross margin.
The focus Marisa on cost reduction price increase salary and application of innovation.
Innovation, which by the way it can significantly help our gross margin.
And the best in class sales and technical service to drive improvement.
And what I'm really encouraged about not it's great that we hit 15, 5%, we just loved it but what I'm really encouraged about is what the future can hold for us related to gross margin.
And before that the 18% we hit immediately before the pandemic is of great starting point for as our volume comes back and when you take a step back and think about it we've raised price on transactional business not just on aerospace, but across the board and 7% to 10% and we're just beginning to see the impact of that and then contracts will.
After that we are working as Dan said to eliminate the direct charge, we still incurred.
$2 million and the past quarter on direct charge.
We will have a significant impact as volume comes back and general just because of the margin on that volume when the Aero orders comes back debt.
Typically is our highest margin product.
Followed and so that will help our mix, we've got an enormous number of of alloys, and applicator or we of alloys and applications and our pipeline that will help as we get those products going as I mentioned the special projects are.
Poised to come back and then in general we have a relentless focus on yield and variable cost reduction.
Reduction so while.
And Dan stairs of made and make sure I don't give a number which I will not.
I will I will tell you that we have high confidence that we can continue to grow our gross margin sorry from the long answer.
Great.
Okay.
Got it and just kind of mentioned and you also brought on average selling price ESP.
Product line down and really what that's reflecting isn't price decreases by any means it's just the mix as Mike referenced earlier the mix this quarter was not optimal without aerospace and.
And.
We looked at the future and we see you with aerospace recovering later this calendar year with the orders.
And you'll see where that goes and 22 that should only.
Help us as far as Mexico, and average selling prices go.
That's helpful and.
Are you expecting any of improvement already in the September quarter in the mix of aerospace I understand that youre not looking for a huge increase.
And volume yet but on on.
On the mix side, how quick shop here or not yet.
But what we've seen is sort of sequentially our aerospace.
Revenue, obviously did go up and the past quarter and we are beginning to see an uptick and aerospace, but we're beginning.
The C.
Of our customers talk about orders and begin the let some orders, but we really don't expect to see the orders come in a little later this calendar year in full force and then once we get those orders we have to manufacture them. That's why we're only expecting slight improvement quarter on quarter.
Thank you.
Can I squeeze 1 more.
Yes, absolutely.
Thank you.
Can you give me a flavor of what your utilization rate is at this time and I understand that may vary a hum.
Across our sites.
And what.
And if any the you need to make answer the question yourself for the expected recovery.
As far as positioning ourselves for recovery of the number 1 thing that we've done is.
And we're well into the process of bringing our production and maintenance workforce is back to full force.
And so we're doing that and then what I believe is very important for us is taking the step back and understanding what our competitive advantages are and 1 of our major competitive advantages of speed.
And what we've highlighted and what we focused on for over a year now is keeping our lead times.
Low.
And our response time quick and and.
And we keep talking about this supermarket that we put in place for high volume grades and as we.
As we come out of this the short of the lead times and the more orders, we can get and to be Frank the shorter lead times and more price flexibility, we have so bringing our people back and making sure.
Low train and making sure they understand what we need to do from a safety perspective and positioning our inventory on.
To me the things that we're focused on now to come back and I would even say.
Net back a little bit and you talk about investments for the recovery keep in mind, we spent a significant amount of capital and prior years.
Ears to increase capacities and certain areas.
So we have significant headroom.
The 2 increased capacities beyond where we were 2019, what I believe and volume was a record year for us and aerospace and we have additional capacity beyond that with the investments. We have made previously so we're not.
Sure there too to invest significant above our and.
Depreciation levels and the future and we will be able to grow.
And the topline beyond where we were before.
Thank you.
Thank you thanks for the questions.
And ladies and gentlemen of Star 1.
And eating.
And then the appears we have no further questions at this time I would now like to turn it over to management.
Okay. Thanks Curt.
Thank you all for your time today and thank you for your interest and support of our company we look forward.
Hitting you again next quarter.
Have a good weekend.
Thank you. This does conclude today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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