Q1 2022 Haynes International Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by and welcome to the Haynes International Conference call. At this time, all participants are in a listen only mode.
After managements prepared remarks, there will be a question and answer session I would now like to turn the call over to controller and Chief Accounting Officer, David Van Bibber. Please go ahead.
Thank you very much for joining us today with me today are Mike Shor, President and CEO of Haynes International 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.
Conference call contains statements that are forward looking within the meaning of the private Securities Litigation Reform Act of 1095 and section 21 E of the Securities and Exchange Act of $19 34.
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.
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 and Exchange Commission in particular Form 10-K for the fiscal year ended September 32021 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.
Dave Good morning, everyone.
<unk> had an excellent quarter and we believe that we will continue to gain momentum throughout fiscal year 'twenty two.
Our improved results reflect the significant fundamental changes that we've made to our business. Our team believes that the results to date for a good start and then additional business performance improvements across all aspects of our business will continue.
The key safety operational balance sheet and financial performance highlights are as follows.
First we finished the year with an osha recordable rate of approximately 25% below the prior year.
Thanks to the continued companywide focus on process improvement and safety leadership, and our ongoing efforts related to Covid.
Next our reference to be best in class in gross margin percentage in our slice of the industry have become reality.
Knowing to drive pricing higher based on the high value differentiated products and services, we offer and we continue to significantly reduce our variable cost of manufacturing.
Our Q1 gross margin improved 40 basis points sequentially, and 1650 basis points year on year.
17, 9% gross margin achieved represents great progress and more as possible.
We've also implemented numerous ESG initiatives and are currently installing our first solar installation, which is expected to provide an estimated 50% of our energy demand at our wire facility and mountain home North Carolina.
As far as earnings we earned $4 $7 million this quarter on just $3 9 million pounds sold.
Previously struggled to be profitable at 5 million pounds sold a quarter.
The results of the last three quarters confirm that we've lowered the breakeven point of three years ago by approximately 25% based on the current mix.
To show the significant impact of the lower breakeven point in providing the following example, comparing similar volume quarters four years of parts.
Our volume sold in Q1 of fiscal 'twenty, two with similar to the volumes sold in Q1 of fiscal 2018, when comparing the net income of both we improved net income by $7 $6 million driven by our gross margin improvement from seven 8% in Q1 of fiscal 2018 to 17, 9%.
Sent this past quarter.
I should note that these numbers exclude an adjustment for a tax law change in fiscal year 18.
Continuing on availability of labor has been an issue across our industry and many others in recent periods. However, our facilities are now nearly fully staffed.
To the incredible work done by our human resource team to recruit the new employees required to handle the increase in bookings.
We added 93 production and maintenance employees over the past seven months across all of our manufacturing facilities.
Next our raw materials and work in process inventories have grown to support the improved bookings, but our finished inventory has not materially increased as we continue to focus on improving finished inventory turns we are managing cash carefully, but we realize that the accelerated topline growth that we're expecting.
Wires and investment in raw material and work in process inventory.
<unk> made that investment as you can see by our cash balance as cash deployment in response to the surge in our backlog is designed to enable top line revenue growth in subsequent quarters.
Our balance sheet is clean and our pension glide path is in place as of the end of the quarter. Our U S. Net pension liability was approximately $24 $2 million, meaning the liability is now $81 million below the $105 $2 million with carried at the beginning of fiscal year 'twenty one.
<unk>.
If you add in the retiree healthcare and UK pension the net liability decrease is $94 million since the beginning of fiscal year 'twenty one.
Continuing on our innovative alloy and application development activities continued to generate significant interest among our customers and the end users of our products. We believe that our culture of innovation is a core strength and provides in conjunction with our sales and technical service a true competitive advantage.
Each quarter on these calls I'll review a segment of our innovative alloy and application development work today I'll talk about some of our alloys for the chemical processing industry.
Haynes has invented and developed a number of corrosion resistant alloys for this market has to see $2 76 seat 20 to seek 2000 b.
<unk> and several others are very well known in the chemical agrochemical pharmaceutical and other industries, where corrosion resistance to highly complex corrosive media is required.
In addition, <unk> 35, a haynes proprietary alloy has had tremendous success in many diverse chemical industry applications.
One of the most noteworthy applications as it's continued and increasing use in the agrochemical industry for processing of fertilizers used in food production.
Finally related to CPI, one of our latest proprietary corrosion resistant alloys as deploy hybrid D. C. One is in the advanced stages of being specified by a major process development for our proprietary refinery technology using next generation catalysts. This technology is expected to help refineries in <unk>.
Safety efficiency.
And the environmental impact of their operations.
I would now like to transition and provide comments on our backlog and our markets.
Our backlog is up sequentially across aerospace CPI, and IGT with aerospace up 28% CPI up 26% and IGT up 36%.
Our total backlog dollars are up sequentially, $42 2 million or 24%.
We believe the aerospace backlog increase shows the beginning of the supply chain actions required to support the estimated record levels of leap engine builds for 2023.
We're also encouraged by the build rate projections for the 777 X, which uses the GE <unk> engine that will contain two of our proprietary alloys.
Alright, our aerospace revenue was up 97% year over year and up 24% sequentially.
Aerospace order entry during Q1 was $75 million in backlog for Q1 was $121 million up 28% sequentially and 42% year over year.
We believe our aerospace market is poised to once again become our strongest market.
The industrial gas turbine Q1 revenue was sequentially down due to the timing of some shipments to certain customers, but we expect a strong rebound in Q2 and the balance of the year driven by our market share gains and an uptick in market demand.
Order entry during Q1 was $23 million and our backlog was $36 million up 36% sequentially and 105% year over year.
Chemical process in Q1 revenue was up 14% year over year and up 10% sequentially.
Order entry during Q1 was $25 million and our backlog for Q1 was $39 million up 26% sequentially and 106% year over year we.
We continue to see opportunities for alloys and unique CPI applications.
This is where our technical marketing team are experts at discovering applications and engaging in the development of special projects for innovative alloys.
Our other markets category includes products used in were SGD, which is flue gas to sulfur <unk> electronics ceramics, automotive renewable energy oil and gas and waste incineration applications.
This segment experienced a 10% sequential decline led by decreased shipments into the <unk> market.
As I also noted last quarter, our business conditions continue to improve in the aerospace IGT and CPI markets.
As that continue to happen as we are seeing a reduction in <unk> shipments as we utilize our manufacturing capacity on higher value products.
Other revenue.
Was it $4 $4 million sequentially lower by 25% this quarter and 21% year over year. Other revenue contains various items, but mostly our conversion work.
As I wrap up my comments I again want to thank the entire Haynes team for all that they have done to improve our business fundamentals their hard work and accountability for results have changed our company.
Our focus on providing high value differentiated products and service and services on getting paid for that value provided on relentlessly pursuing improved yields and lower lower variable cost to manufacturing on significantly reducing our pension liability and on helping provide more innovative product and service solutions have all resulted in a.
A company with impressive earnings potential and a strong transformed balance sheet, both of which provide a foundation for growth and continued improving profitability.
With that I'll hand, the call over to Dan to provide more details of our financial results.
Thank you, Mike we had a solid financial performance for the quarter to start the fiscal year, the pricing and cost initiatives that we've been working on since well before the pandemic has lowered our breakeven point by 25% with current mix. This is significant and this enables us to be profitable and volume levels that previously.
It resulted in losses.
We shipped $3 9 million pounds, and made $4 7 million and net income when historically, we would struggle to even be profitable at 5 million pounds.
It is also notable that our first quarter is typically a seasonally lower quarter with a sizable dip in revenue and profit with holidays maintenance outages and customers managing their calendar year end balance sheet, but not this year and.
In prior calls we mentioned our expectation that aerospace order entry would rise at the end of the calendar year, which definitely happened in a very strong way.
As demand begin to increase we were able to invest cash into inventory and increase our production staff to enable the mill to increase production levels, especially for aerospace products.
This put our volume at about even with last quarter in revenue sequentially above last quarter by nearly $4 2 million and above last year's first quarter by $27 3 million.
In addition, we further expanded our gross margin percentage to 17, 9% as we continue to see the benefits of both pricing actions and cost reductions.
And remember that these cost reductions are related to improved yields productivity and process improvements, which are expected to be further realized with continued higher mill production levels.
Our production level this quarter was high enough to eliminate the direct charge as you may remember in the second half of FY 'twenty and across FY 'twenty, one volume levels drop so low that fixed cost absorption was a significant issue and we directly charged to expense. These costs as the cost per pound was too high too.
Capitalized into inventory.
This action has now helped eliminate and avoid that high cost per pound drag on our earnings.
As the product is sold had we not direct charge. These costs as incurred it is good to see the direct charges behind us.
Raw material market price increases for nickel and cobalt provided a moderate tailwind to margins this quarter of roughly $1 $7 million similar to last quarter.
And with more recent increases in raw materials. We believe this is likely to continue to be favorable next quarter as well.
We've diligently manage through challenges with increasing our production labor supply chain issues and inflationary cost pressures.
These have been significant industry wide issues to manage through.
And as Mike mentioned, we increased our production head count recently, which is very beneficial to our future volume growth.
Regarding inflation, we have seen elevated cost for freight and supply cost. However, we have been striving to cover this with our escalators for the consumer price index in our customer contracts or price increases in quoting spot type business or mill direct business with the goal of margin protection.
As I mentioned, the resulting gross margin was 17, 9%, which we believe can continue to expand and with increased volumes as aerospace more fully recovers, we expect favorable profitability leverage resulting in growing gross margin dollars.
SG&A, including research and technical expense was $12 3 million in the first quarter or 12, 3% of net sales, which was higher than last year's first quarter by $1 7 million the.
The year over year increase was mainly due to last year's pandemic cost savings measures that were in place such as head count reductions furloughs reduced executive salaries reduced board fees et cetera, which are largely no longer in place this year.
Below SG&A as operating income of $5 5 million this quarter, which represents sequential growth of 15, 4% compared to the fourth quarter of fiscal 'twenty one.
Further down the P&L as non operating retirement benefit income of $1 1 million, which was favorable to last year's quarterly expense by over $145 million.
We took the largest liability on the balance sheet. The U S pension plan and with the help of strong asset returns and favorable interest rate movements.
Down $81 million from $105 2 million at the beginning of FY 'twenty to 'twenty, one excuse me to $24 2 million at 12 months to $31 21.
You also include the retiree healthcare and U K pension liability decrease goes from $81 million to $94 million a significant reduction.
The pension plan is approximately 93% funded currently.
This funding level allowed us to implement a customized liability driven investment strategy, which means we have to some degree locked in or secured this funding game.
This reduced our interest rate risk significantly where our plan was previously extremely interest rate sensitive and it reduced our equity risk as well.
It also reduces our expected pension and postretirement expense by $6 million. This fiscal year compared to last year, we are happy with the progress on our pension plan strategy.
Our effective tax rate was 26, 1% in the first quarter of fiscal 'twenty, two reflecting the increased statutory tax rate in the UK.
We're currently projecting the full year effective tax rate to be roughly at that level for fiscal year 'twenty two.
Our net income this quarter of $4 $7 million represents an 81% sequential improvement our diluted earnings per share of 37 represents an 85% sequential increase which is a slightly higher percentage than the net income increase due to the effect of fewer shares outstanding.
Following the share repurchase program.
While on the topic of the share repurchase plan.
An additional 142000 shares at a cost of $5 7 million during the first quarter of fiscal 'twenty, one 'twenty two.
Since adoption to the plan, we have repurchased 255000 shares at a total cost of approximately $10 million.
We discontinued the share repurchase plan at the end of the calendar year due to the 24% increase in our backlog.
Our capital allocation process includes continually evaluating different cash deployment opportunities with our backlog surging, we seized the opportunity to invest cash into inventory that enabled us to sequentially grow revenues this quarter and drive expected topline growth in future quarters.
Order entry and backlog are.
Our backlog increased 24% over the quarter and 50% year over year to $217 5 million at December 31, 21% driven by strength in aerospace order entry.
Aerospace order entry for the quarter was $75 $2 million with a book to Bill ratio of one six which is impressive.
We had strong book to Bill in our other core markets as well with CPI at one four.
At 1.6 and other markets at 1.0.
Total product order entry for the quarter was $138 million.
As far as our outlook for next quarter, we expect a volume revenue and profitability to improve throughout fiscal year the physical year.
We currently anticipate that revenue in the second quarter will be approximately 10% higher than the first quarter of fiscal 'twenty two.
We also currently believe that the sequential earnings growth rate will be greater than the growth rate of revenue due to the profitability leverage based upon anticipated increased volumes, along with continued pricing and cost improvements.
Capital spending was $3 3 million in the first quarter of fiscal 'twenty two.
We're planning to spend $17 7 million in fiscal 'twenty, two a sizable increase from last year and approaching our depreciation level.
Liquidity.
We had cash on the balance sheet of $14 3 million at December 31, 21, and 3 million borrowed on the company's credit facility as a result of investments in working capital made as backlog grew and production levels have increased our.
Our liquidity is strong at $111 3 million with $97 million available on our credit facility at December 31, 21.
In conclusion, it is exciting to see the recovery gaining traction with profitability growth and strength in order entry as backlog levels increase.
Led by our largest market aerospace.
Yet our aerospace volumes sold this quarter was 27, 5% below the pre pandemic levels of the average quarter of fiscal 2019.
And as Mike mentioned, we expect monthly aerospace shipping levels to be at pre pandemic levels by the end of this fiscal year.
This is encouraging and as these volume levels improve at our gross margin level, we expect to create profitability leverage and solid net income growth going forward.
Mike with that I will now turn the discussion back over to you. Thank you Dan.
Our entire team here at Haynes is continues to be encouraged by the progress and the future potential of our business I want to thank all of you for your continued interest in our company.
With that Kelly, let's open the call up to questions.
Certainly the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we ask that while posing your question. Please pickup your handset is listening on a speaker phone to provide optimum sound quality. Please hold a moment, while we poll for questions.
Yes.
Your first question is coming from Melissa Hernandez at Sidoti <unk> Company. Please pose your question. Your line is now.
Hi, Good morning, Thank you and congratulations on the results.
Thank you.
Morning.
So.
It looks like.
The expected recovery.
<unk> is playing out I am curious to know how.
The latest.
13, COVID-19 cases, the omicron variant.
Impacting.
Or the outlook, how are you and your clients.
Thinking about that in terms of the risk of a potential or the push out from OEM.
Sure.
First I'll talk about Covid in our workforce and our employees.
Something we certainly are paying a great deal of attention to and continuing to work with our employees to make sure. We're following all the appropriate guidelines.
These days typically have between 60 and 80 people out because of quarantine, but we have our manufacturing people and across the board have done a wonderful job of making sure that we backfill and get out to our customers. What we've committed to get out now as far as the aerospace industry itself, we've probably seen.
On the TSA numbers of 15, plus or minus percent drop from where they had peaked but what I find very very interesting about this market. It's truly a long lead time market by the time, we make at all.
It's probably nine months to a year before it's into a completed engine. So we've not seen any hesitation whatsoever, and what you hear from from the engine manufacturers and for that matter from the airframe manufacturers.
Is the full steam ahead, and keep going and I've talked about the leap engine a lot we're facing between 2021 and 2023, a doubling of leap engines to rebuild and we continue to hear keep going last point I'll make it was interesting I heard the Boeing CEO recently talk about when they're going to move to 42.
Would not commit to it and one of the reasons. He said he would not commit to it.
The main reason is he is worried about metal through the supply chain. So I don't see an issue at this point at all it's something we watch carefully something we talk to customers about all the time, but.
Not been an issue at this point.
That's great. Thank you for that color.
Moving on to the price decrease in the very fluid.
Cost environment that we have.
I understood from your press release that you've been able to.
Pretty much.
<unk> or the cost pressures that you've seen so far and how is that.
Playing out in your view in the future.
Now that you have contact with the unions.
Related to wages.
Until one of those.
Do you have do you see any need to renegotiate those and if you could also talk about the.
The price hikes that are.
That youre planning for this year, you have a lot of contract business.
Let's see.
Significant price increases now in the January timeframe. Thank you.
As far as our employees.
We have long term agreements with the unions. They continue as is and no real change there whatsoever.
As far as pricing, it's a very very interesting time.
When we talk about pricing you got to take a step back and look what's happening in the industry lead times are extending.
Competitors.
One of our competitors remains in a work stoppage and there's obviously concern about inventory that exist in supply chain and yet on our side.
We've added the employees that we need to address the volume that's coming we have finished stock in our customer service centers and we supply these high value differentiated products and services all of that Marissa in my mind results in a really good pricing environment for US I think we're doing a really good job of keeping up with the rising.
<unk> cost rise at the rate increases in freight costs, and obviously raw material costs and we are both on the transactional side and on the contract side raising prices not only to address inflation, but also to find ways to improve our margins.
I just want to point out what's happened.
With LTA, so I know you're interested in that in January .
Our lta's, we continue to raise our contract pricing we had in January probably about $50 million and our base Kokomo product.
Come due and probably half of that in our tubing product come due we were successful with price increases. These are real bottom line price increases not related to raw material. This is on top of that we were successful across the board with these price increases ranging from 3% to over 10% based on the product.
<unk>.
So is that effective January Mike.
That would be effective January thats correct Thats as of January one we continue both on the transactional side, Andy LTA side to continue to push the fact that we have significant value that we're providing again, we're different because of our service centers.
We can do just in time inventory, we can do cut pieces for customers and with all the innovation. So yes. We continue to go after price increases that's the LTA on the transactional side, it's really interesting.
We are in the past I've talked about transactional increases on the top half of our mix. The Richard part of our mix. We are now going after price increases and have been across our entire product form across all alloys and we've been successful.
Alright, that's speaking Precip and so if you look at your breath of Charlotte.
You see because then I'll make sure I understand you see price increases across the board effective January .
Yes, we do.
For the LTA business, what we have done about $50 million on the nickel side and about half of that on the titanium side on the LTA.
<unk> side and in the transactional side, we are reacting to the demand thats coming in by continuing to raise prices to offset inflation to offset raw materials and again to be honest to increase margins, where we can.
And those LTA is that don't come due this year.
Still have those escalators in place.
In most cases quarterly or maybe semi annually that will adjust for any raw material change and most have a CPI consumer price index factor in there as well so general inflation will get covered as well for all of the LTA is not just the ones that came due this January .
Thank you and I left that one plus one and then I'll come back into queue and that's regarding capacity you.
Or maybe let some volume from your FTB products.
Aerospace <unk> and <unk>.
CPI picks up.
What is your capacity constrained right now and could you be looking at expanding that down the road.
It's less capacity constrained.
And more are concerned with lead times, we don't want the FTP is has been an excellent product for us, but it in essence fills in when we need volume and we've been very honest about that all along.
We are probably only running our facilities between 70, and 80% were bringing the new employees in and getting them trained what we just don't want to have is for our core customers in particular in aerospace.
<unk>.
The lead times go out too far which is why we tend to pare back our high volume lower margin products like our flue gas this authorization product and if you recall MRSA.
Back a few years ago, we spent a lot of capital with.
Spending our capacities. So we still believe overall, we have some headroom to grow with those investments we've already made.
Great. Thank you I'll jump back into queue.
Okay. Thank you Marissa.
Your next question is coming from Michael Lusaka Keybanc capital markets. Please pose your question your line is live.
Hey, Mike and Dan Good morning, Good morning, Michael Hey, Mike how are you.
Good first day I just wanted to ask on the raw material benefit in the quarter, maybe I missed it but did you give the approximate benefit you saw from raw pricing in <unk>.
And then as we look into <unk>.
What would you expect that benefit to be at least relative to the magnitude that you saw.
And this prior quarter.
Yes, I mentioned.
Our benefit that we estimate to be one 7 million tailwind this quarter, which was.
Pretty similar last quarter and Thats both.
Rising nickel and rising cobalt so both of those are driving part of that one seven and certainly we've seen nickel continue to go up so we're expecting some favorable tailwind into next quarter, how much will that be I'm not sure I wouldn't I would estimate either similar to or maybe slightly less than the.
The tailwind that we had this quarter.
Got it Thats helpful.
Obviously, your profitability will ebb and flow with the price of nickel, but I wanted to get your take on what's been driving the price movement in that market and any other new dynamics youre seeing there because the EV push it looks like it's here to stay so I'm just wondering if theres any reason to think that this pricing cycle Morris.
Stable than than one path.
Yes.
Thing.
We will not do.
Because I'm, usually wrong as estimate where the price of nickel is going we know what has happened <unk> stocks. They are 50% of what they were not too long ago, obviously, there's interesting dynamics with supply and demand out there also because of the EV market, because the stainless steel and because of nickel beginning to come back so.
They are all pieces of the puzzle, but at the same time there are other sources of nickel theres more capacity in mind, so really.
When our customers asked when I got asked as recently as two days ago, where is it going.
Don't know really don't that's an honest answer.
And if you remember in the past when nickel really started picking up nickel pig iron was created and took away some of the demand for the nickel sulphate and.
I think something similar to that is happening now to what degree will that impact the market I'm not sure and Thats with nickel mat nickel mat being produced as well may be a similar.
Takeaway from demand that nickel pig iron was so we'll see where it goes nobody really knows right.
Got it that's helpful and.
And then there was a strike at one of your competitors in the quarter.
Did that impact you.
You're able to pick up any of that business as a result and.
If you did what the likelihood you're able to maintain that new share gain.
Certainly there's been a reduction in capacity because of the strike that are still ongoing it had no impact as far as our results in Q1.
And what we were looking at in Q2, when we take a step back and look at it first of all on our Aero business No impact our business. There is LTA business, and so really little impact there or the IGT side, where we're seeing increased demand and it typically came to us.
In December so the last month of the quarter and if the strike continues we will expect to continue to see it it's on the commodity side of the CPI business.
Our best view and this is not an exact science to determine these numbers somewhere in the range of $5 million to $7 million.
In December of our bookings, so obviously, a small part of our bookings, but it's meaningful for us was more on the transactional side.
That business came to us at prices that we would want and so that's one of the reasons why CPI was as strong as it was in the quarter because of that so if it continues yes, but this is more transactional versus LTA type business. So we'll just have to take this one month at a time and one quarter at a time.
To view what happens next with us.
Got it I appreciate the detail there thanks guys. Thank.
Thank you. Thank you.
Once again, if there are any remaining questions or comments. Please press star one on your phone at this time, please hold a moment, while we poll for any additional questions.
Your next question is coming from Chris Olin of Tier four research. Please pose your question your line is live.
Okay.
Good morning.
Chris I was wondering Chris.
Gratulation and another quarter that's better.
Better than expected could see thank you appreciate it thank you.
I'm going to start with an apology because I did jump on the call we can.
Hopefully I don't ask about a topic that was already addressed.
Bear with me.
Defense It just won't stop snowing in Cleveland catheter.
Constantly shoveling snow stopped.
It's not really my fault, but.
Sure.
Don't worry we're good.
Okay.
I wouldn't focus on that.
The demand strength that we've been seeing over the past few months at your company.
And backlog improvement.
Thank you.
If you have a sense on how much of the relative strength is related to this kind of weird competitive environment and maybe some supply panic purchases out there, but you get a sense of your market share is moving.
Related to that.
Sure the environment I would say that the aerospace is real pull and a real need to begin to fill the supply chain through aerospace both on the airframe side and on the engine side. So demand is real and as Dan pointed out.
What's really interesting about where we were were still I can't remember the number 29% plus or minus 27% to 27 and a half below the average quarter in 2019. So we still have a long way to go. So there's that's just pure and our opinion as far as power generation, we did have a quarter.
That was obviously down we've had.
The last three quarters, though they've been up year on year, which is the way I like to look at this and we brought in more in our backlog over the last quarter in IGT than we have in many many years so that share gain.
It's our alloy $2 82 being substituted for for some older alloys.
That's MRO business.
I'm sorry, the repair business beginning to come back so we're beginning to see.
Real demand there.
You've heard of.
Everyone talk about IGT for a while where there was an oversupply that's gone so we're seeing a real pull there. So these are good CPI same thing on the special project side, we're just beginning to see more inquiries come in which hopefully will turn into orders on a special product side. So we see good things happening with that going forward and as I.
As I talked about in response to Mike's question.
The bottom end of our CPI market, we're seeing some of that because of lack of supply because of one of our competitors not currently in the market.
Hit your question Chris.
Yes.
There is two competitors are having problems and I was just wondering.
If you could take on that aerospace business, if needed going forward and how much you've already.
On the.
I think I've got your question, but on the aerospace business remember. This company has spent a lot of money between 2012 and 2018 to significantly increase both our titanium tubing for airframe and our nickel coal finished flat business. So we've got significant capacity available.
One of the things that concerned me when I got here three and a half years ago was that we start seeing note aerospace customers theyre going to find somebody else to go to.
So.
<unk> expansion for our company the money, we spend and tubing and cold finish flat so as to not only protect our core but find ways to expand our business.
Okay, that's very helpful.
Hey, Jim.
And I was wondering if the.
The supply chain has started to fill in inventory.
Have you seen the sourcing benefit from that program yet.
Youre talking about the leap.
Your line is.
<unk>.
Yes, it's interesting.
You read what we read related to the <unk>, we're seeing the good news for US we're seeing one of our proprietary alloys, which is called Haynes 244 goes into the Nymex and we are seeing more activity than we've seen in quite a while for the product to go into the Nymex for the 777, So we're beginning to see pause.
Those signals there.
Awesome.
Question.
Regarding that tubing plant there dominate.
Our caveat.
Can you give me a sense.
Which way titanium inventory has been moving I guess over the past quarter, given whats going out 77 kind of though.
The market.
And I can only really talk about the.
Titanium inventory for tubing for hydraulic applications for the airframe beyond that and that's really where we're involved with titanium and what we have seen.
Is a lag.
From talk about demand improvement on the airframe titanium tubes side versus the nickel side, but I would say over the last couple of months, we've seen a significant increases in.
Communication and even demand in that supply chain getting thinned out and us beginning to have to refill that.
And that's what the business could could inflect in 'twenty two.
And that's probably based on some demand in the 737 correct further titanium tubing yet thank you.
Got it.
Thanks, guys I appreciate it thanks, Thanks, Chris careful shoveling okay.
You have a follow up question from Marissa Hernandez at Sidoti and company. Please pose your question. Your line is open.
Thank you for taking my follow up so wanted to ask about the working capital buildup. So obviously you made an investment in the first quarter.
How do you see that evolving through the rest of the.
How much more is needed then your thoughts on.
Free cash flow for the year.
Whether that will be positive. Thank you.
Sure.
Let me just start we obviously had a significant cash usage during the quarter I'll really start with my last comment or to me. The most important comment once we achieve a more steady state and our business levels. Our company. We believe has significant cash generation.
Ability going forward, however, before we get there you've seen what we've talked about with our bookings, which are backlogs growing between 26% to 30% I think the most telling number is the book to bill about one and a half I havent seen that since I've been here I don't think we've seen in a while and the backlog increase so that.
For us to keep our lead times down and to satisfy our customers. We've got to invest in relatively high cost nickel and cobalt and bring that and of course the customers are paying for it and we've got a significantly increase our whip inventory to get product through here.
Think an important point by the way as we continue to focus on not increasing our finished inventory. This is about increasing width and increasing raw material in fact during the quarter our finished goods.
Inventory actually decreased about 5% so as we go through this year as we continue to see we believe bookings that are greater than what we are shipping for that period of time, we will continue to invest in the inventory necessary to match up with the customer backlogs that will likely need some incremental borrowing on our credit.
Really over the next few quarters, but still a very low utilization of our line.
Thank you.
Any thoughts or preliminary thoughts on what it means for free cash flow for the year.
I mean with this investment in inventory and working capital as that topline.
Grows significantly that's going to require cash as we've already seen in Q1 now what we're expecting in Q2, maybe not that significant but still an investment in cash. So when you look at it across the full fiscal year. It will probably be a usage of cash as what we're expecting.
And then we will get back to those pre pandemic levels.
<unk> will.
Generate some cash going forward, probably in FY 'twenty three.
Thank you.
Youre welcome.
There appear to be no further questions in queue. At this time I would now like to turn the floor back over to Mike shore for any closing remarks.
Thanks, Kelly. Thank you everyone for your time today and thank you for your interest and support of Haynes.
We will talk to you next quarter. Thanks, everyone.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.