Q1 2023 Haynes International Inc Earnings Call
Good morning, and welcome to the Haynes International first quarter fiscal 2023 financial results conference call at.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments. After the presentation. If you would like to enter the queue at any time to ask a question you May press star one on your phone.
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It is now my pleasure to turn the floor over to your host David Van Bibber Controller, and Chief Accounting Officer, David the floor is yours.
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. This 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 1934, 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 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 32022.
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 work of our Hanes team has resulted in significantly improved performance.
I'd like to talk about this improvement over three time periods fiscal <unk> to fiscal 'twenty two.
Current quarter Q1 of fiscal 2003.
And what we continue to expect from this point forward.
My point of emphasis here is that yes, our team has accomplished a great deal.
But also that we believe based on the markets, we serve and the actions. Our team continues to take the best is yet to come for us.
We continue to forecast sustained growth in revenues and earnings over the next three years.
First looking into fiscal 18 to fiscal 'twenty, two time period, our improvement journey has resulted in fundamental and sustainable changes to our business.
Review the impact of our significant year on year and quarter on quarter improvements in my comments last quarter.
Our team's focus dedication and accountability for results has resulted in improved 25% reduction in our breakeven point.
We've been able to accomplish this by maintaining and even enhancing our competitive advantages.
Pricing for the value provided.
By reducing our variable costs.
And by accomplishing market share gains, resulting in above average key market segment growth rates.
25% breakeven reduction has resulted in a gross margin that is now consistently been over 20% when removing both the positive and negative impacts of raw material fluctuations.
Achieving steady state gross margins over 20% has quickly moved from a stretch goal to an expected result every quarter based on the efforts of each of our approximately 1225 employees around the world.
Next as I transition to talk about our recently completed first quarter of fiscal 'twenty three I.
I'd like to start with safety.
Our entire team continues to relentlessly communicate the need for ongoing improvement in safety and all of our facilities through leadership.
Interaction and communication and where needed process change.
Safety continues to be our core and our overarching principle.
As far as our financial results for the first quarter of fiscal 'twenty three we.
We were able to overcome an estimated $5 $6 million unfavorable impact and raw material headwinds related to the drop in both nickel and cobalt price.
And achieved a gross margin of 17, 4%.
Leading to a net income of $7 $7 million.
When we remove the negative estimated impact of the raw material headwind from our first quarter.
Our adjusted gross margin calculates to be 21, 6%.
The results of our first quarter when compared to Q1 of fiscal 2002 was.
33% higher than revenue.
47% higher than adjusted EBITDA, and 66% higher than net income.
Our seven major takeaways from the quarter are as follows.
First related to continue to alloy and application development, our research and technology technology teams are continually developing data to help promote our proprietary alloys into new applications for us.
One important hurdle to clear for new alloys is the need to be included in industrial codes and standards.
Such inclusion often requires a considerable amount of testing.
<unk> and <unk> or American Society of mechanical Engineers Covid case has been approved for Haynes HR 235 alloy.
Sally was developed by our team at Haynes for use in the petrochemical industry, especially syngas production and in the processing of ammonia methanol hydrogen and liquefied natural gas.
The new coat case will open doors for at four of our HR $2 35 alloy to a number of high temperature high pressure applications.
Another approach to developing new applications for our proprietary alloys is by developing alternative alternate processing routes to optimize properties, which are key to a particular application.
Recent example is the invention of a new heat treatment for Haynes 282 outlet, which results in a significant improvement in intermediate temperature ductility.
This new patented heat treatment enables our 282 alloy to be considered for several new applications, including turbine cases.
And other components, requiring a combination of high strength and ductility.
Second on our list of takeaways for the quarter our efforts on our variable cost reduction initiatives continue we continue to see significant bottom line results related to yield improvement projects and process changes to improve variable costs on our key products.
Next we continue to find opportunities to price for the value that we're providing to our customers our competitive advantages related to alloy and application development, providing high quality products typically in relatively small quantities.
No one company owned service Center combination.
Our outstanding customer technical and customer service allow us to continue to differentiate ourselves in the market segments, we serve.
We have now had favorable updates to our calendar year 'twenty three contracts and based on that we are.
We're anticipating a positive margin impact across fiscal 'twenty three despite many inflationary issues, we all face.
As far as market performance.
Aerospace volume increased 17, 3% along with a 13, 5% increase in aerospace average selling price, resulting in a 33, 2% aerospace revenue increase compared to the prior year.
This increase was primarily driven by the single aisle recovery.
We continue to see solid demand in the aerospace market driven by both consumer demand and the need for more fuel efficient engines using more advanced alloys.
Volumes into the chemical processing industry slightly decreased 1%, however, CPI average selling price increased 31, 5%, resulting in a 32% CPI revenue increase compared to the prior year.
Continuing industrial gas turbine volumes were up 61, 3% along with a 10, 5% increase in the IGT average selling price, resulting in a 78, 3% ITT revenue increase compared to the prior year.
Other markets revenue increased by one 6% and other revenue increased by five 7%.
We continue to remain bullish on the demand we're seeing in all of our markets going forward.
Continuing with our takeaways from the first quarter of 2003.
As far as backlog and book to Bill our backlog is now at a company record $408 million.
Our book to Bill ratio calculated from revenue dollars was one three for the quarter with aerospace at 1.3 and industrial gas turbines at one seven.
Both our CPI and other markets backlogs declined slightly with book to Bill ratios at <unk>, 9% driven in part by our mixed management initiatives.
Next I'll cover our investment in inventory in response to a record backlog levels. We've deployed cash to work in process inventory to drive higher top line revenue.
Given this occurred at the same time as increases in raw material prices this required and draw on our revolver, which at the end of the quarter was $88 million.
We believe this temporary investment will yield a solid return.
With the growth of our business in particular in the second half of the year.
And finally on ESG, we continue to make significant progress.
Recent highlights include Haynes alloy and application development to support customer and end market carbon reduction programs.
Social programs to support our employees and our communities.
Our ongoing ESG related disclosures by our ESG and sustainability program manager.
Supplier audits of supply chain partners and the initiation now of our second solar project. This one being planned as our.
Rooftop solar array.
At our two facility in Arcadia, Louisiana.
Now transitioning and what's next for Haynes based on our current performance and our ongoing improvement actions. We continue to anticipate excellent growth opportunities with improved year on year financial performance.
Specifically.
As far as improving margins are calculated Q1, adjusted gross margin percent when removing the nickel and cobalt related raw material headwinds was 21, 6%.
We expect to incrementally improve on that assuming neutral raw materials for the balance of fiscal 'twenty three despite the inflationary pressures we face.
This is because of the benefit of increased volumes, along with our ongoing work on costs and providing high value differentiated products and services to our customers.
Next we expect to set a revenue record within our aerospace market in fiscal year 'twenty three despite the industry supply chain issues and the slow ramp up of twin aisle builds.
As far as full year performance, our current bookings and book to Bill level supports our current anticipated growth rate of 15% to 20% year on year for both revenue and earnings.
We're also projecting operating cash flow to turn positive beginning mid fiscal year 'twenty three as our higher levels of order entry turn into higher shipments and raw material purchases are more in line with our order entry.
Finally on the pension we are currently near 94% funded for the U S pension plan with a net liability as of December 31, 2022 of $19 6 million.
Compared to $106 $8 million, just 27 months ago.
We continue to be pleased with the stability of our funding percentage even in volatile market conditions. In addition, we will continue to keep the pension funding and our capital allocation considerations as we pursue 100% funding of the plan.
Okay I'll now hand, this over to Dan for additional comments and perspectives on our first quarter.
Thank you, Mike we had a solid start to the new fiscal year with year on year revenue up 33, 4% and strong revenue growth in our three major end markets compared to last year's Q1.
We had a moderate sequential drop in revenue of just under 8%.
However, Q1 is typically sequentially lower due to holiday schedules planned maintenance outages and customers managing their calendar year end balance sheets.
Historically this Q1 sequential drop has generally been larger than 8% in many cases.
Net income was $7 7 million and an EPS of <unk> 61, which is consistent with the company guidance we provided.
This was achieved even though the raw material headwinds related to nickel and cobalt was higher than expected.
The estimated gross margin impact from nickel and cobalt price fluctuations is derived from our model developed by the company to measure how the commodity price changes flow through net revenues and cost of sales.
This incorporates a revenue flow across each different type of pricing mechanism and the timing of how the cost of nickel and cobalt flow to cost of goods sold including the impact of the commodity price exposure on our scrap cycle.
Our model calculated a headwind of $5 6 million.
Compared to our assumption at the beginning of the quarter of $4 5 million.
The difference was primarily driven by the headwind created by the price drop and cobalt.
If we look at our gross margin of 17, 4% and exclude this estimated $5 6 million impact.
The gross margin, excluding this headwind would calculate to 21, 6%.
That's 21, 6% compares to 21, 5% sequentially last quarter in Q4, FY 'twenty two for the same methodology.
And compares to last year's Q1 of 16, 2%.
See our analysis of the impact of raw material tailwind and headwinds.
The effect on gross margins in our press release contained in schedule six which describes this non-GAAP measure.
We are expecting this headwind to neutralize over the next quarter, but of course, this will depend on where raw material prices actually move over that time period.
This gross margin was accomplished.
At lower at a lower volume level of $4 million 552000 pounds shipped we have described in prior calls our successful efforts to lower our breakeven point by 25%.
This has now provided us with a profitability leverage to enable a solid net income result, even at Q1 volume was below 5 million pounds, plus a heavy raw material quarterly headwind.
This lower breakeven is expected to be an ongoing financial benefit as volumes grow.
Like every industrial business, we continue to encounter inflationary pressures such as electricity rates, a tough labor market and supply chain delays. Our team continues to successfully navigate our way around these issues and find successful solutions were offset.
Our goal continues to be offsetting inflationary pressure with price increases and <unk> cost reductions such as improving yields productivity enhancements and process improvements.
Our efforts to increase melt rates and product flow driven by our continued investment in inventory combined with our increase in production employees and a strong backlog.
Provide an optimistic forward outlook, especially in the second half of fiscal 2023.
As this process takes some time, we expect product flow to gain traction and meaningfully increased shipping volumes in Q3, and Q4 driving increased second half topline sales and earnings.
Our leverage on SG&A costs continued to improve with SG&A, including research and technical expenses $11 9 million in the first quarter or 9% of net sales as compared to last year's Q1 of 12, 3%.
Operating income was $11 $1 million this quarter, which is double last year's first quarter.
Nonoperating retirement benefit income was <unk> 4 million, which was less favorable favorable to last year's quarterly benefit of $1 $1 million due to the actuarial valuation at 930 <unk> 'twenty two.
A portion of this change was offset by a favorable service cost change within our cost of sales.
The U S pension funding percentage strengthened to nearly 94% even during recent market volatility due to our customized liability driven investment strategy.
Our U S. Net liability at 12 31, 'twenty two is at $19 6 million a significant improvement from the $106 million at 932020, not that long ago.
Our effective tax rate for the first quarter was 22, 5%.
Current estimates for the remaining quarters of FY2023 are moderately higher in line with federal and state statutory rates.
What are entering backlog continued to be at high levels backlog again set a company record at $408 2 million up $34 4 million or nine 2% over the quarter and up $190 7 million or 87, 7% from the first quarter of fiscal.
'twenty two.
This represents 22 months of growing backlog and strong demand signals.
This growing backlog level continued to drive our cash deployment into inventory.
Inventory increased $33 million over the quarter with about 80% of that from inventory pounds increasing.
This increased our utilization of the credit facility with the balance on the revolver at $88 million at 12 31 'twenty two.
Looking across at fiscal year 'twenty, three we estimate that with our improved profitability combined with our milk rates continuing to be come in more aligned with shipping levels.
They're growing utilization of the revolver should ease and free cash flow is expected to turn positive mid year fiscal 2023.
We expect to be using this positive cash flow in the back half of the year to begin to pay down the revolver.
Our expanded $160 million credit facility provides strong liquidity moving forward.
Capital spending was $3 3 million in the first quarter of fiscal 'twenty three similar to last year's first quarter.
We are forecasting to spend $20 million to $24 million in fiscal year, 'twenty, three which puts the remaining quarters of this year's capital spending at a higher pace than Q1.
Outlook for next quarter and full fiscal 2023.
Given the strength of our record backlog along with the manpower and work in process inventory being put into place we expect revenue and earnings in the second quarter of fiscal 2023 to be higher than both the first quarter of fiscal 'twenty three as well as the second quarter of last year.
Further the company expects full year fiscal 'twenty three to be 15% to 20% higher in fiscal 'twenty two for both revenue and earnings.
In conclusion, Q1 was a solid start to the year, even with the higher than expected raw material headwinds, we believe that our cash investment into inventory and our increase in production head count will provide a solid return on investment with increased revenues and earnings in the second half of the fiscal year.
Demand in our primary markets remained strong as reflected in our backlog growth.
These factors along with strong management team execution provide an optimistic forward view of growing shareholder value.
Mike with that I will now turn the discussion back over to you.
Thank you Dan.
Wrapping up I want to thank our workforce for a job well done.
I would match this entire team against any out there. They are hard working focused on being best in class and have the expertise to continue to expand the gap versus others related to our core competencies competitive advantages level of innovation.
And business performance.
At this point I'll ask our operator, Tom to please open the call up to questions.
Certainly.
The floor is now open for questions. If you would like to enter the queue to ask a question. At this time you May press star one on your telephone keypad.
Once again, ladies and gentlemen, that'll be star one on your telephone keypad at this time, if you'd like to enter the queue to ask a question and we do ask if lithium on speaker phone. This morning. So please pickup your handset while asking your question to provide optimal sound quality. Please hold a moment, while we poll for questions.
And the first question. This morning is coming from Steve <unk> from Sidoti <unk> Company.
Your line is live please go ahead.
Good morning, Mike morning, Dan. Thanks for taking my questions I just wanted to start with the commodity headwinds you clearly had had.
So this impact this quarters, you were very slightly off but you expected this quarter, specifically to be where you would see the impact and you were you were you expected more neutral.
In the remaining three quarters, given what we've seen in nickel recently any shift in your view on that.
We believe that by the time, we get to the end of the second quarter.
He will neutralize these headwinds obviously it continues to depend on what happens to the price of these elements.
What we were qualified by the way Steve before.
This current quarter as the <unk>.
Huge drop in cobalt, which was more than we had.
Estimated which is why we were off in our original estimate versus where we are now, but we expect these to subside.
Towards the as we get through this quarter and then turn positive in the back half of the year and I concur with that the model that I mentioned in my prepared remarks kind of calculate what we believe the estimated actual impact is over a quarter and it also we use that for some forecasting as well and that works pretty well with nickel we forecasted.
Four three or actually we forecasted $4 5 million for nickel in it came in at four three so quite close.
It was the cobalt side of the forecast that we that we had a problem with that was a headwind calculated to be $1 3 million and that's where it was unexpected.
And Steve is the key for US is what happens with nickel price for making these assumptions based on assuming nickel will level out and the only thing I can guarantee is to never level, it's going to move on.
Understood understood.
In terms of you talked last quarter about resource allocation, particularly pricing out of potentially lower margin business, given how strong backlog was and demand. It looks like we saw some of that in chemical processing. When we look at volume and pricing is that what we're seeing and would you expect given that your backlog continues to grow.
To continue those efforts.
We'll continue to manage mix and we will continue to look at higher volume opportunities.
Our lower margin opportunities to determine if we want to do that.
Got it correctly, our volume was down 1%.
By shipments, but our revenues were up in CPI, 30% and the main reason for that is because we have something we've talked about on and off which is very high volume very low margin business called flue gas <unk> and when you look three months the three months versus prior year, our FTE deep participation.
It was down almost 81% so yeah, we're certainly going to pick and choose and we're certainly going to make sure that.
Our customers that are long term critical customers.
<unk>.
The head of the queue there.
Great just last one for me in terms of you're talking about.
Turning to cash flow positive in the second half of the year, obviously raw material prices have leveled off but as your orders continue to build that would indicate continuing needs to grow inventory.
Given the strength of your backlog.
Are you still confident you can go cash flow positive second half we are confident as long as raw materials remain neutral we look at the back half of this year, given our bookings which are consistently over $50 million a month, we look at the back half of the year is extremely strong for us. So we are melting for that now.
Now so we are still melting at an elevated level.
As compared to what we are shipping as this product begins to get through the employees that are now in and are being trained or getting ready to processes. So we expect the second half of the year based on the bookings we have and based on the manpower we have in place and the training that is ongoing right now to be very strong and so yes. The answer is we're already melting for that week.
Just wanted to get to the point, where we're leveling out our shipments with what we're currently building.
Thanks, Mike Thanks, Dan.
Thank you.
Thank you.
And your next question. This morning is coming from Michael <unk> from Keybanc capital markets. Michael Your line is live. Please go ahead.
Hey, guys. Good morning, good morning, Mike Good morning.
I wanted to start off on Capex.
You had mentioned it was lower this quarter and your guidance implies an increase throughout the remainder of the year are you still seeing some constraints there to get the work done or is that easing now and then maybe secondly could you talk about some of the projects that you have underway you better plan for the balance of the year.
Sure.
As far as.
Constraints the constraints that we have are really getting what we need in for each of the components of our capex projects. So we it's not at this point any longer any type of internal constraint. Our plan would be when we take equipment down to upgrade it we would build in inventory after that.
From there.
It will be able to do these outages that we need so our issues right now in Capex are clearly related to getting the equipment and we obviously had a very light first quarter and capex to.
To be Frank that wasn't intentional it's just that we're not getting what we need to get into our company.
As far as equipment and components to put things together for us.
And then on.
Go ahead Sir.
I was going to mention some of the projects I think we've mentioned some of the.
Reliability of equipment and alleviating some of the bottlenecks as it goes through the process.
And <unk> for example, where we're spending a sizable amount of.
Capex around $5 million, so we're going to be upgrading that line as well. So just to just to give you a list of what we've got going on right. Now we've got what was in process of recently completed is our solar field at the wire facility. We're now beginning work on the solar field in our tube facility with <unk>.
Water jet cutting incremental waterjet cutting into our Laporte service Center, we've completed our hanes wire cleaning we've done some control upgrade work for manufacturing for security purposes of our systems some grinders.
In the process of putting the final touches on what's called the automatic gauge control system at the <unk> most critical piece of equipment, that's truly the brain to the operation.
And some other grinders and and of course, our big upgrade coming is our A&P line and that's Mike in between the four mill and finishing and that we've got about $5 $5 million in the budget. We're just waiting for the equipment to come in so beyond that cranes tow motors.
Some equipment for our cold finish flat area, a little of everything really just to keep us moving forward.
Got it Thats really helpful.
Then I wanted to ask on other market I know, that's a smaller market for you but.
Given the ASP at nearly double the rest of your markets can have a meaningful swing to earnings so.
I wanted to ask what the driver has been there over the last couple of quarters and are there any trends that are sustainable that could maybe maintained pricing around these current levels.
One of the things I talked about in the script was some of our new alloys and cold cases in getting material in with.
With some of our new alloys, but in other markets number one what helped us as flue gas <unk> going down so much but the other thing that helped us as we continue to drive.
Our metal, our new alloys into the oil and gas market and oil and gas year on year was up almost 62%. So yes, we're going to continue to look we review on a monthly basis with our application engineering team.
What we're driving in and where were driving into but as you know our business. Our key is getting to the end users and creating a pull from the end users through these products and Thats. What we saw this past quarter in oil and gas and we certainly youll look at the average selling price in other markets $50 77, this quarter, which was fantastic.
Last quarter was 47% so still quite high compare that to a year ago was more like 30 between 35% to 40. So you see a lot of volatility in here because theres a lot of different applications a lot of different alloys, so as Mike mentioned.
Little mixed management to get out of the flue gas <unk> side of it really makes a big difference as far as it being a bigger earnings mover I mean, yes, we certainly love.
Higher end.
Alloys into these applications, but keep in mind it was 290000 pounds for the quarter.
Out of the $4 five so it's still a smaller part of the pie than say aerospace industrial gas turbines in CPI.
Yes.
And then lastly on the labor environment is it the hiring side of things or the training that's the biggest constraint right now and again.
Maybe if you could give an update on where you are at on the hiring front and how much more head count is there left to go.
Sure it depends on the location.
In Kokomo, we're nearly fully staffed we've brought in over 100 people in fact next Monday.
Have another 12 that are being hydrogen and being brought in so we feel great in our largest operation in Kokomo, where we are it's just from a safety perspective and from a quality perspective, making sure that people are fully trained on their operation before we let them loose and that's we're going through right now and quite frankly, making very good progress.
So that so feel good about on the production side being fully staffed I think also in kokomo, everyone in the world.
Having some issues related to the trades and we're aggressively pursuing making sure that we have long term stability in our in our key trades in Kokomo now in our other facilities.
That being that the major ones being our wire facility or two facility and our Laporte, Indiana distribution facility, a little tougher to have access to talent they've done a great job of making sure. They hit their forecast on a monthly basis, but it's a little more difficult there than it's been in Kokomo.
Thanks, guys.
Thank you. Thank you.
Thank you and once again, ladies and gentlemen, if you would like to ask a question. At this time you May press star one on your telephone keypad to join the queue.
Once again, please press star one at this time, if you would like to join the queue to ask a question.
And there are no further questions in queue at this time I would now like to turn the floor back over to management.
To our shareholders and our audience on the call today.
We really appreciate your ongoing interest in Haynes and for being part of our ongoing improvement journey. We look forward to talking to you again next quarter. Thank you.
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.