Q4 2023 Haynes International Inc Earnings Call
Right.
Speaker 1: Greetings welcome to the Haynes International Inc. fourth quarter fiscal 2023 financial results conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your telephone keypad.
Greetings and welcome to the Haynes International Inc. Fourth quarter fiscal 2023 financial results Conference call.
At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Speaker 1: Please note this conference is being recorded. I will now turn the conference over to your host, Controller and Chief Accounting Officer, David Van Biber. You may begin.
Please note this conference is being recorded.
I will now turn the conference over to your host controller, and Chief Accounting Officer, David Van Bibber, you may begin.
Speaker 2: Thank you very much for joining us today. With me today are Mike Schor, President and CEO of Hanes International, and Dan Motland, Vice President and Chief Financial Officer.
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.
Speaker 2: 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 1995 in Section 21e of the Securities and Exchange Act of 1934. The words believe, anticipate, plan, and similar expressions are intended to identify forward-looking statements.
The format of $19 95, and section 21 E of the Securities Exchange Act of $19 30 for 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.
Speaker 2: 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.
Subject to a number of risks and uncertainties and we can provide no assurances such plans intentions or expectations will be achieved.
Speaker 2: 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 30, 2023. 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.
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 32023.
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.
Speaker 2: The highlights of our fiscal 23 performance include six consecutive quarters of an adjusted gross margin of approximately 21% or better.
The highlights of our fiscal 'twenty three performance include six consecutive quarters of adjusted gross margin of approximately 21% or better.
Speaker 2: a normalized EBITDA of approximately $99 million when adjusting for both the impact of the third quarter cyber issue.
Normalized EBITDA of approximately $99 million when adjusting for both the impact of the third quarter cyber issue.
And the raw material headwinds.
Speaker 2: record full fiscal year revenues in both our aerospace and industrial gas turbine markets, and book the bill levels consistently at or over 1.0 in both our Arrow and IGT markets.
Record full year full fiscal year revenues in both our aerospace and industrial gas turbine markets and book to Bill levels consistently at or over 1.0 in both our arrow and IGT markets.
Speaker 2: Based on this performance and our ongoing improvement initiatives, we believe that we have positioned Haines very well for the future.
Based on this performance and our ongoing improvement initiatives. We believe that we are position Haynes very well for the future.
Speaker 2: Our focus through both our operations and our company-owned distribution facilities is on producing and providing the alloys, products, and just-in-time quantities that others in our industry struggle to provide, and by providing technical and sales service levels that are difficult to duplicate. Our formula for success...
Our focus for both our operations and our company owned distribution facilities is on producing and providing the alloys products and just in time quantities that others in our industry has struggled to provide and by providing technical and sales service levels that are difficult to duplicate.
Our formula for success remains the same we.
Speaker 2: continue to work to at least offset inflation through our relentless focus on variable cost reduction.
We continue to work to at least offset inflation to a relentless focus on variable cost reductions.
Speaker 2: combine this cost reduction work with providing the high value differentiated alloys products and services that our customers and end users value and are willing to pay for.
Combined with cost reduction work with providing the high value differentiated alloys products and services that our customers and end users value.
Going to pay for.
Speaker 2: We anticipate that our ability to continue to reduce costs and provide exceptional value will continue, leading to incremental gains in what is already top-tier gross margins in our slice of the industry.
We anticipate that our ability to continue to reduce costs and provide exceptional value will continue leading to incremental gains in what is already top to your gross margins and our slice of the industry.
Speaker 2: We're just beginning to show what our employees and our company are capable of related to safety performance, revenue growth, gross margin percent, net income, and EBITDA.
We're just beginning to show what our employees and our company are capable of related to safety performance revenue growth gross margin percent net income and EBITDA.
Speaker 2: In addition, as we begin fiscal 24, we believe that we have the backlog, people, inventory, and lead times in place to begin to generate operating cash flow in fiscal year 24.
In addition, as we begin fiscal 'twenty four we believe that we have the backlog people inventory and lead times in place to begin to generate operating cash flow in fiscal year 'twenty four.
Speaker 2: With that as my introduction, I will now provide the highlights of our Q4 performance, provide comments on our full fiscal year 23, and then follow that with some thoughts on what we believe is next for our company.
With that as my introduction I will now provide the highlights of our Q4 performance provide comments on our full fiscal year 'twenty three and then follow that with some thoughts on what we believe is next for our company.
Speaker 2: The key points of our fourth quarter are as follows. First, on safety.
The key points of our fourth quarter are as follows first on safety.
We had a significant reduction in our Osha recordable rate in our fourth quarter, including no recordable injuries throughout our company in September.
Speaker 2: It was great to see our safety improvement initiatives result in improved performance in the quarter.
It was great to see our safety improvement initiatives resulted in improved performance in the quarter.
Speaker 2: Next, revenue was $160.6 million, the highest of our fiscal year. Our revenue per pound was $33, highlighting our differentiated high-end products and services.
Okay.
Next revenue was $166 million the highest of our fiscal year.
Our revenue per pound was $33, highlighting our differentiated high end products and services.
Speaker 2: We achieved these results despite incurring significant unplanned equipment downtime in September in our cold finish lab production area.
We achieved these results despite incurring significant unplanned equipment downtime in September and our cold finish flat production area.
Speaker 2: Next, you're all aware of our ongoing focus and emphasis on gross margin.
Next you're all aware of our ongoing focus and emphasis on gross margin.
Speaker 2: For the quarter, gross margin was 18.5%. Our calculated raw material neutral gross margin was 20.9%. Our fourth quarter is now the sixth consecutive quarter where our calculated raw material neutral gross margin was approximately 21% or better.
For the quarter gross margin was 18, 5% are calculated.
Raw material neutral gross margin was 29% our fourth quarter is now the sixth consecutive quarter, where our calculated raw material neutral gross margin was approximately 21% or better.
Speaker 2: Our work on margin improvement is not done. We continue to work to raise prices where possible, along with our focus on variable cost reductions, both of which we believe should lead to incremental improvement in this critical business metric.
Our work on margin improvement is not done.
We continue to work to raise prices where possible.
Along with our focus on variable cost reductions both of which we believe should lead to incremental improvement in this critical business metrics.
Speaker 2: Our net income for the quarter was $13.1 million, despite raw material-related headwinds of $3.7 million pre-tax for the quarter. This resulted in a net income per pound of $2.71, again, despite the impact of declining nickel and cobalt in the quarter.
Our net income for the quarter was $13 $1 million, despite raw material related headwinds of $3 $7 million pre tax for the quarter.
This resulted in a net income per pound of $2 71.
Again, despite the impact of declining nickel and cobalt in the quarter.
Speaker 2: Our fourth quarter, excuse me, our fourth quarter EBITDA when adjusting for raw material headwinds was over $25 million. In addition, our normalized fiscal 23 EBITDA when adjusting for the impact of the cyber issue and raw material headwinds was just under $100 million.
Our fourth quarter excuse me, our fourth quarter EBITDA when adjusting for raw material headwinds was over $25 million. In addition, our normalized fiscal 'twenty three EBITDA when adjusting for the impact of the cyber issue and raw material headwinds was just under $100 million.
Speaker 2: It's important to note that this was achieved at a shipment level of 18.5 million pounds.
It is important to note that this was achieved at a shipment level of $18 5 million pounds.
Speaker 2: As we look to the future, we're projecting higher volumes led by aerospace and IGT, improved absorption, lower variable cost of manufacturing, and higher pricing for certain key high-value products.
As we look to the future, we're projecting higher volumes led by aerospace and IGT improved absorption lower variable cost manufacturing and higher pricing for certain key high value products.
Speaker 2: As far as cash, we believe that our fourth quarter represented an inflection point for cash flow. We expect positive cash flow from operations in fiscal year 24. We have the backlog, inventory, and manpower position to begin to reduce inventory and, therefore, generate cash. With that, we believe our credit facility has peaked and we expect positive operating cash flow in fiscal 24, especially in the second half.
As far as cash we believe that our fourth quarter represented an inflection point for cash flow.
We expect positive cash flow from operations in fiscal year 'twenty four.
We have the backlog inventory and manpower position to begin to reduce inventory and therefore generate cash.
With that we believe our credit facility has peaked and we expect positive operating cash flow in fiscal 'twenty for especially in the second half of the year.
Speaker 2: From a market perspective, the news in Q4 continues to be positive.
From a market perspective, the news in Q4 continues to be positive.
Speaker 2: Our largest market, aerospace, was 50.9% of Q4 sales.
Our largest market aerospace was 59% of Q4 sales.
Speaker 2: Our airspace revenues grew 20.9% versus Q4 of last year, 5.6% sequentially, and 26.3% for the full fiscal year. Average selling price increase in Q4 increased 14.7% versus the same period last year.
Aerospace revenues grew 29% versus Q4 of last year, five 6% sequentially and 26, 3% for the full fiscal year <unk>.
<unk> selling price increase in average selling price in Q4 increased 14, 7% versus the same period last year.
Speaker 2: The $290.4 million in aerospace sales in fiscal 23 was the highest level of annual aerospace sales on record.
The $294 million in aerospace sales in fiscal 'twenty three was the highest level of annual aerospace sales on record.
Speaker 2: The news for us out of the aerospace market continues to be very good, with commercial, airplane, and engine builds projected to grow through this decade, and our proprietary alloys continuing to gain market acceptance.
The news for us out of the aerospace market continues to be very good with commercial airplanes and engine builds projected to grow through this decade, and our proprietary alloys continuing to gain market acceptance.
Speaker 2: Overall, aerospace demand is still very strong and the supply chain is showing no significant signs of excess inventory.
Overall aerospace demand is still very strong and the supply chain is showing no significant signs of excess inventory.
Speaker 2: As I've mentioned on previous calls, Hanes 282 and Hanes 244 alloys have been specced into various aerospace engine programs, while one of our newest alloys, Hanes 233, is in the final stages of testing by a major aero engine manufacturer for the next generation of engines.
As I've mentioned on previous calls Haynes 282, and Haynes 244 alloys have been specced into various aerospace engine programs well one of our newest alloys. Haynes 233 is in the final stages of testing by a major Aero engine manufacturer for the next generation of engines.
Speaker 2: Our IGT market grew to 21.3% of Q4 sales, revenues grew 20% versus
Or IGT market grew to 21, 3% of Q4 sales.
Revenues grew 20% versus Q4 of last year 21, 9% sequentially and 31, 4% for the full fiscal year.
Speaker 2: 21.9% sequentially and 31.4% for the full fiscal year.
Speaker 2: Q4 revenues of $34.2 million are the highest quarterly sales on record into the IGT market.
The Q4 revenues of $34 $2 million are the highest quarterly sales on record into the IGT market.
Speaker 2: Average selling price in Q4 increased 5.6% versus the same period last year.
Average selling price in Q4 increased five 6% versus the same period last year.
Speaker 2: Our ITT story remains consistent, the supply of high-value differentiated products and services leading to share growth, along with the continued and increasing application of Hanes 282 alloy into turbines to improve performance.
<unk> story remains consistent the supply of high value differentiated products and services, leading to share growth along with the continued and increasing application of Haynes 282 alloy and the turbines to improve performance.
Speaker 2: Our CPI market was 14.3% of Q4 sales.
Our CPI market was 14, 3% of Q4 sales.
Speaker 2: Within this market, there are two important points to make.
Within this market there are two important points to make.
Speaker 2: First, as mentioned in last quarter's call, we are flexing our constrained capacity away from the more commoditized portion of our CPI business to the more profitable aerospace and IGT business.
First as mentioned in last quarters call. We are flexing, our constrained capacity away from the more commoditized portion of our CPI business to the more profitable aerospace and IGT business. In addition over the quarter, we've been successful in reducing our lead times by about 50%.
Speaker 2: In addition, over the quarter, we've been successful in reducing our lead times by about 50 percent for the majority of this business. Because of this lead time reduction, customers can place orders later based on our much shorter quoted delivery dates. With that as background, revenues declined 15.4 percent versus Q4 of last year, increased 30 percent sequentially, and increased 0.4 percent for the full fiscal year.
For the majority of this business.
Cause of this lead time reductions reduction customers can place orders later based on are much shorter quoted delivery dates with that as background revenues declined 15, 4% versus Q4 of last year increased 30% sequentially and increased <unk>, 4% for the full fiscal year.
Speaker 2: Within CPI, we continue to focus on growing the high margin alloys and special projects.
Within CPI, we continue to focus on growing the high margin alloys and special projects.
Speaker 2: Based on our mix and value initiatives within CPI, the Q4 average selling price increased $5.71 per pound or 19.3% versus the same period last year.
Based on our mix and value initiatives within CPI.
Q4 average selling price increased $5 71 per pound or 19, 3% versus the same period last year.
Speaker 2: Some examples of our high-value differentiated corrosion-resistant alloys include Hastelloy Hybrid BC1, Hastelloy C2000, and Hastelloy G35, all for various types of heat exchangers, reactor vessels, agitators, and pipelines.
Some examples of our high value differentiated grocery assistant alloys include has toy hybrid BC. One has to wait see 2000 and has to like G. 35 offer various types of heat exchangers reactor vessels agitators and piping.
Speaker 2: These alloys are specified due to their unique and superior corrosion resistance to the highly corrosive media used in the production of specialized chemicals.
These alloys specified you did their unique and superior grocery assistant resistance to the highly corrosive media used in the production of specialized chemicals.
Speaker 2: Finally, our other market revenue in Q4 was below last year's Q4 by 2.3%, but up 8.8% sequentially and up 12.3% for the full fiscal year.
Finally, our other market revenue in Q4 was below last year's Q4 by two 3%, but up eight 8% sequentially and up 12, 3% for the full fiscal year.
Speaker 2: Our other revenue in Q4 increased 26.1% versus Q4 of last year, was down 3.9% sequentially, and increased 14.3% for the full fiscal year. Now, on the book...
Our other revenue in Q4 increased 26, 1% versus Q4 of last year was down three 9% sequentially and increased 14, 3% for the full fiscal year now on the book a book to Bill.
Speaker 2: Based on revenue, our book the bill was.9 for the quarter. Aerospace was 1.0, IGT was 1.1, and CPI, because of the two major reasons already noted, was.7. We continue to be encouraged by the level of interest and demand for our alloys, products, and services. Now..
Based on revenue our book to Bill was <unk> nine for the quarter.
Aerospace was 1.0, IGT was 1.1 and CPI because of the two major reasons already noted was <unk> seven we continue to be encouraged by the level of interest and demand for our alloys products and services now.
Now.
Looking into the future as.
Speaker 2: As far as our major markets, significant investments continue to be made in aerospace and next-generation power systems, including fuel-efficient engines and the use of sustainable aviation fuel, hydrogen fuel cells, and hybrid-based systems.
As far as our major markets significant investments continue to be made in aerospace in next generation power systems, including fuel efficient engines and the use of sustainable aviation fuel hydrogen fuel cells and hybrid based systems with expectations for these to be available for use on a commercial scale around.
Speaker 2: with expectations for these to be available for use on a commercial scale around the mid-2030s. These will most likely create even more new opportunities for our unique proprietary hours.
Mid twenties thirties. These will most likely create even more new opportunities for our unique proprietary alloys.
Speaker 2: In addition, the future outlook for single-aisle and wide-body aircraft deliveries remains strong. Year-on-year growth rates for single-aisle aircraft are expected to be 25 percent in 2024, 16 percent in 2025, and 9 percent in 2026.
In addition, the future outlook for single aisle and wide wide body aircraft deliveries remained strong year.
Year on year growth rates for single aisle aircraft are expected to be 25% in 2024, 16% in 2025 and 9% in 2026 overall.
Speaker 2: Overall, air passenger demand has made a strong recovery over the past year, which brought global passenger traffic close to pre-pandemic levels.
Overall.
Air passenger demand has made a strong recovery over the past year, which brought global passenger traffic close to pre pandemic levels.
Speaker 2: Next, the industrial gas turbine market is also expected to grow at a steady pace through the 2030s.
Next the industrial gas turbine market is also expected to grow at a steady pace through the 20 <unk>.
Speaker 2: due to the growing worldwide demand for increased energy, higher efficiency, and improved reliability. The IGT growth rates are anticipated to exceed 3% compound annual growth rate through 2030.
Due to the growing worldwide demand for increased energy higher efficiency and improved reliability. The IGT growth rates are anticipated to exceed 3% compound annual growth rate through 2030.
Speaker 2: Continuing to look with our look to the future, our ongoing pricing actions based on the hourly product and service value we provide along with their continued drive to improve yields and variable cost of our products are projected to continue to incrementally improve our top tier raw material neutral gross margin.
Continuing to look to with our look to the future our ongoing pricing actions based on the alloy product and service value. We provide along with our continued drive to improve yields and variable cost of our products are projected to continue to incrementally improve our top tier.
Our excuse me our top tier rah.
Raw material neutral gross margins.
Speaker 2: One concern that we do have for at least the first quarter of fiscal 24 is the continuing drop in nickel prices.
One concern that we do have for at least the first quarter of fiscal 'twenty four is the continuing drop in nickel prices.
Speaker 2: As the decline in the price of nickel continues, we project that this will lead to additional and increasing raw material headwinds.
As the decline in the price of nickel continues we project that this will lead to additional and increasing raw material headwinds.
Speaker 2: We are now projecting the impact of headwinds in our first quarter to be well above the $3.7 million pre-tax that we saw in Q4 of fiscal 23.
We are now projecting the impact of headwinds in our first quarter to be well above the $3 $7 million pre tax that we saw in Q4 of fiscal 'twenty three.
Speaker 2: As you know, we had very favorable raw material tailwinds in fiscal 22 as nickel and cobalt prices increased, followed by unfavorable headwinds through fiscal 23 as raw material prices decreased. We will continue to highlight on a quarterly basis both the positive and negative impact of the movement in the price of raw material.
As you know, we had very favorable raw material tailwind in fiscal 'twenty, two as nickel and cobalt prices increased followed by unfavorable headwinds through fiscal 'twenty three as raw material prices decreased we will continue to highlight on a quarterly basis, both the positive and negative impact of the movement.
The price of raw materials.
Speaker 2: Moving on, as far as EBITDA, as previously noted, we achieved just under $100 million in calculated EBITDA in fiscal 23 when adjusting for the impact of the raw material headwinds and the cyber issue we faced.
Moving on as far as EBITDA as previously noted we achieved just under $100 million and calculated EBITDA in fiscal 'twenty three when adjusting for the impact of the raw material headwinds and the cyber issue we faced our.
Speaker 2: Our collective focus is on continuing to improve EBITDA, increasing volumes, value and application development, supplying high-value differentiated products and services, and of course our variable cost reduction.
Our collective focus is on continuing to improve EBITDA.
Increasing volumes elegant application development supplying high value differentiated products and services and of course, our variable cost reductions.
Speaker 2: Next, we believe we are at an inflection point for cash generation.
Next we believe we are at an inflection point for cash generation.
Speaker 2: We have done our homework, a near record backlog, manpower trained, inventory in place and with that we expect to generate cash with cash generation momentum growing significantly in the second half of our fiscal year. Given our forecast, we expect to significantly pay down a revolver in fiscal year 24.
We have done our homework.
Your record backlog manpower trained inventory in place and with that we expect to generate cash with cash generation momentum.
Growing significantly in the second half of our fiscal year, given our forecast, we expect to significantly pay down our revolver in fiscal year 'twenty four.
Speaker 2: One more point worth noting about the future. Although no market downturn is in sight for us, if a downturn does occur in one or more of our markets at some point in the future, we continue to be very prepared with a break-even point down by 25% from where it was when our improvement journey began. Finally, wrapping
One more point worth, noting about the future although no market downturn is in sight for us if a downturn does occur in one or more of our markets at some point in the future. We continue to be very prepared with a breakeven point down by 25% from where it was when our improvement journey began.
Finally, wrapping up I want to thank our employees.
Speaker 2: They collectively are creating a safe work environment.
They collectively are creating a safe work environment.
Speaker 2: a company that has leading gross margins in our slice of the
A company that has leading gross margins and our slice of the industry.
Speaker 2: I calculated EBITDA of approximately $100 million, along with a company that has the alloys, applications, products, processes, near net shape capabilities, just-in-time shipment capabilities, and customer service that customers and end users want and are willing to pay for. To my co-workers, well done.
Related to EBITDA of approximately $100 million.
Along with a company that has the alloys applications products processes near net shape capabilities, just in time shipment capabilities and customer service that customers end users want and are willing to pay for it.
To my coworkers well done and thank you.
And then I'll hand, this over to Dan for his comments on our business and our financial results.
Thank you Mike.
Financially this was a strong finish to the year fourth quarter revenue at $160 9 million adjusted gross margins neutral of raw material headwinds at 29%.
And net income at $13 2 million.
Our average selling price per pound in total including conversion revenue was $33 a pound shipped this quarter.
This clearly reflects the high value products, we provide and the differentiation of our product mix from others in our peer group.
We finished the year with the underlying fundamentals of the business still intact solid execution of our improvement strategy, a strong customer backlog and a focus on increasing output volume from our operations.
This is a strong position going into fiscal 2024.
Looking at the full fiscal year 2023, we achieved revenue of $590 million with company record revenue shift in the aerospace and industrial gas turbine market.
In addition, we had adjusted gross margins neutral of raw material headwind at 27% and net income at $42 million.
We talk a lot about this raw material impact, which helped us last year and hurt us this year.
Raw material price fluctuations can impact our results more sharply than others in our peer group given our product portfolio being solely high end nickel and cobalt based alloys as reflected in that average selling price of $33 a pound.
The raw material impact of falling nickel and cobalt unfavorably impacted our results by approximately $3 7 million in the fourth quarter.
We estimate that the full fiscal year impact was $12 6 million unfavorable.
One thing that is interesting is the headwind is mostly cobalt.
The breakdown is a cobalt headwind of $8 1 million of the $12 six and nickel was $4 5 million of the $12 six.
Thankfully the cobalt headwind is moderating as the cobalt price has stabilized whoever nickel is still falling.
<unk>, causing an increasing headwind.
As Mike mentioned this is concerning and we are now projecting the impact of this headwind in our first quarter of fiscal 2004 to be well above the $3 7 million pre tax we saw in Q4 of FY2023.
Looking at the full year FY 'twenty, three raw materials and comparing to FY 'twenty two we saw a significant swing.
We highlighted last year that we had a positive tailwind for the year of $9 4 million favorable.
This year flipping to a headwind of $12 6 million unfavorable is it $22 million swing in the raw material impact.
When looking at gross margin dollars year on year. This is an important factor to consider.
Let's walk through a bridge.
Last fiscal year gross margin dollars were $106 3 million if.
If you remove the favorable tailwind that it is adjusted gross margin dollars neutral of raw materials of $996 9 million.
Do the same math for fiscal 'twenty, three with gross margin of $109 8 million and adjust for both the $12 $6 million raw material headwind and the third quarter Cyber security incident of $6 9 million gross margin impact result in adjusted gross margin dollars of 102009.
$3 million.
So 96 point.
$96 9 million in FY 'twenty, two to $129 3 million in FY2023 is an increase of $32 4 million, representing an improvement of 33, 4% improving our gross margin dollars by one third is solid.
And that is still with volumes that are expected to improve in fiscal 'twenty, four and provide additional profitability leverage with our lower breakeven point.
This puts us in a favorable position as we look to the future.
Our SG&A, including research and technical expense as a percentage of net revenues continues to favorably decline and was eight 5% of net sales in the fourth quarter as compared sequentially to Q3 of eight 9% and was eight 8% for the full fiscal year as.
Third to last fiscal year of 10, 4%.
Gross margin dollars were $13 6 million for Q4, and $52 2 million for the full fiscal year.
Operating income was $16 1 million this quarter, which is a sequential 22, 1% increase keeping in mind last quarter cyber security incident.
Yeah.
Our effective tax rate for the fourth quarter was 11, 5% and 19, 1% for the full year, reflecting a favorable qualification for the high tax exception for some of our foreign sourced income.
We expect our effective tax rate going forward to be 21% to 22%.
All of this resulted in fourth quarter net income at $13 1 million and a diluted earnings per share of $1 <unk> and full year net income of $42 million and $3 26 earnings per share.
A few additional points regarding our financial position our revolver balance was $114 8 million an increase of $16 2 million during the fourth quarter of fiscal 'twenty three.
We believe fiscal 'twenty four to be a year that we generate cash and begin to pay down the credit facility, especially in the second half of the year.
Our year end valuation of our U S pension plan was favorable and our funding percentage continues to be solid at approximately 94% with a long term liability on the balance sheet at approximately $14 million and the retiree healthcare liability at approximately $49 million.
We continue to make progress to reduce our U S pension and retiree medical net liabilities with an overall reduction over the past 36 months of $133 million knocking the liability down by two thirds.
Our backlog was $460 4 million as of September 30, 23, an increase of $86 6 million from the same period last year.
Our controllable working capital was $449 4 million as of September 30th 23, an increase of $71 1 million since the beginning of the fiscal year the.
The increase was driven by inventory representing a 56.
$5 million increase this fiscal year as we grow production levels in topline revenue.
Accounts receivable increased $11 4 million in accounts payable and accrued expenses changed by $3 2 million.
Our capital investment in fiscal 'twenty, three was $16 4 million, we are still evaluating fiscal year 2000 and for capital expenditures, but expect it to be in the range of 25% to $35 million.
Outlook for the future.
Looking at the full fiscal year 'twenty four we expect continued volume and revenue growth incremental improvements in gross margin.
And positive cash flow from operations.
We expect the revolver balance to decline in fiscal year 'twenty for gaining momentum as we progress through the fiscal year.
Revenue and earnings in the first quarter of fiscal 'twenty four are expected to be higher than the first quarter of fiscal 'twenty, three but lower compared to the fourth quarter of fiscal 'twenty three.
First quarter results are typically lower due to the impact of holidays planned maintenance equipment maintenance outages and customers managing their calendar year end balance sheets.
In addition, we are planning a three week upgrade to the Kokomo and Neil and choline line in the quarter, which may impact efficiency and the mix of products sold in the first quarter of fiscal 'twenty four.
In conclusion.
As we head into fiscal 'twenty, four we remain optimistic with our improvement initiatives still in focus along with our strong backlog, a strong inventory position and improving production momentum.
We have provided we are positioned well to continue to execute and achieve our goals in fiscal 'twenty four with improving financial results.
Mike with that I'll now turn the discussion back over to you. Thank you Dan.
Our team continues to be encouraged with the progress we've made.
I want to again, thank all of you for your continued interest in our company with that Holly, let's open the call up for questions.
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Your first question for today is coming from Mark Reichman with noble capital markets.
Good morning, I was just curious what percent of your.
What percent of the orders that were delayed because of cyber security event.
<unk> are included in the order backlog of $464 million.
Including the first quarter, but as we go forward, including the fourth quarter, we have basically feather that in through the balance of the year. Our lead times are out there because the volumes, we have and so that's pretty much rather than over the next 12 months, yes, and just for everybody listening, we estimated $818 million to $20 million of revenue.
Shortage in the third quarter. So we do know that stays in the backlog because it wasn't shipped and that'll be as Mike mentioned feathered in the next several quarters.
Okay. So the addition of production of head count and the inventory that has allowed you to increase your shipping levels. So do the historical trends of kind of 50% of the backlog shipping within six months and 90% within 12 months well that's still hold in 2024.
Yes, maybe slightly longer I think we have some disclosures in the 10-K about that it's slightly longer just because a lot of customers are kind of getting their place in line.
And that's included in the backlog as well.
Okay and then just my last question.
If you could just maybe explain the delta between 2023 and expected 2020 for Capex.
Sure.
First as we have always found ourself, while at least for the past year, a little bit behind on Capex.
Because of the supply chain and getting the components that we need in and so part of where we finished the year. That's ended now.
Is about delays in getting the equipment, we need to be successful in implementing the capex as we look into this current fiscal year. It's increased for some of that makeup and its also increases we continue to look to expand our capacity and address our constraints and so we want to make sure we're doing that in the key areas and that's why the extra capex is in there.
Well that's great. Thank you very much very helpful. Thanks.
Thanks, Mark Thanks.
Your next question is coming from Steve <unk> with Sidoti <unk> Company.
Good morning, Mike Dan and thanks for all the detail on the call.
A little surprised by the flat year over year volume I think you mentioned an outage at Kokomo can you give us a little a little more color on that.
Yes, we've had.
Some processing issues as we hit the fourth quarter, where we continue to look for ways to expand our capacity and bringing more V. I am melting from the outside so we're working through that we have great faith as we move forward for continuing to increase our volume as we move into this year.
The impact of the unplanned outage.
The impact that we had in some issues that we had in our in our last quarter.
We.
A lot of that was in the cold finish flat area. We made a lot of that up by other product shipping so from a volume standpoint. It didn't have a significant impact on us from a margin impact it had more of an impact than it did related to volume and sometimes that will spill into the next quarter production and especially at the end of the quarter like in September.
Can spill into the next quarter shipments as well.
Okay. There's some of the upgrades planned in Q1 is that people are lacking focused are you outside of excusing third parties is the expectation some of this has to do.
We're able to get volume increases.
Yes, as we talked about one of our big initiatives as we are in this quarter now is shut.
Shutdown and a built rebif.
Rebuild a part of what's called or a N. K line and that is a critical piece of equipment between our four high Hot Rolling mill in our finishing operations that equipment has been around for decades. It is not as reliable as it needs to be which is why we're undertaking that so that will allow us to promote more steady flow through our operations.
In addition to that we continue to look at what the future bottlenecks are six months 12 months down the road and understand what makes the most sense as far as what we do in house versus what we do via conversion.
Okay. When we think about your mix and obviously continued efforts to to push down towards the lower margin more commoditized chemicals.
Is your expectation that your gross margin tax raw materials can trend up towards healthily healthy above 21% given your volume mix in backlog.
The X raw materials.
It's all a matter of how you define certain words I'll say incrementally improve okay. Yes, we are proud of where we are to be six quarters in a row.
With ramp at raw material neutral levels at 21%.
As a number that we're very very proud of but we believe there is still more incremental opportunities both on variable cost reductions throughout all of our operations and through taking advantage of where we kind of the value, we're providing therefore, increasing our prices where appropriate so we would say.
Incremental increases or are the best way to describe what we think we can do but I meant in my script I said, we're not done with gross margin.
And keep in mind too with higher shipment levels, we expect higher shipment levels.
<unk> wise in FY 'twenty four versus 23 to get back over into the 5 million pounds, a month or better that's going to be helpful for absorption related costs as well and some of Thats production. Although we are planning to reduce inventory levels, but also to some of those fixed costs that are in the cost of goods sold area, we're going to get better.
But our absorption of those fixed costs that'll be helpful and one more thing I Wanna add Steve you talked about the CPI business, we really look at that as two separate businesses. Okay. We've got some of the more commoditized alloys, that's where we look at can we positively substitute some of our Aero and power Gen in for that but we're full steam ahead on.
The more unique CPI alloys that go into what we call special projects and continuing to find new applications with our new alloys for that.
When we think about working down the revolver and part of that's working down the backlog I assume in bringing down working capital a bit.
That means either you continue to ship.
Shifting your mix by playing down the Commoditized products, obviously, the tailwind and aerospace does not seem to be slowing so I'm just sort of trying to put all the pieces together, how you got there and how you're thinking about it Brooks is how I sort of just laid it out.
The most fun I have talking about cash flow is looking at how we increase our earnings in this company. Okay that certainly is a part of that the other thing that has happened though is we have been able now to balance out what we are melting versus what we were shifting we'd been melting, especially in V. I N.
Add capacity, but we're shipping levels have just been coming up so as they come up that will more even out which will allow us to do that in addition.
We have a significant amount of inventory that inventory is positioned right and that will be able to ship in the short term since the significant portion of that is finished inventory.
Okay.
Thanks, Mike Thanks, Dan.
No.
Your next question is coming from Michael the Shack with Keybanc capital markets.
Hey, Mike and Dan Good morning.
Hey, Michael.
I wanted to start off just following up on the unplanned outage at Kokomo. You had said is the critical piece of equipment there that was down.
Could you give any details on which asset it was in when did it occur sure we have.
First of all we have hundreds of pieces of equipment. So reality is we are dealing with outages on a regular basis and we normally don't talk about those however in September we had a piece of equipment, Mike you've heard of before it's called the dream for furnace. Okay. It is a key piece of our cold finish flat business and we had really two significant issues with the dream.
In September and it's not only fixing it. It's when you have to get in that furnace you have to take it down very slowly to temperature or to room temperature effect address it and then bring it back up so we had a significant amount of issues with that furnace in September. The good news is it's running very well right now.
Got it and then following up on that Cold finished flashed opportunity.
Could you talk about maybe the magnitude of what that could be as it relates to volumes and margins.
And where do you think you can get from there and maybe in what time period can you can you get that business to where you think it could be.
As we have those issues in September it affected absorptions, so that will affect what we have in the upcoming quarter as far as absorption and some margin hits. The other side of that is is we'll be able to ship more coal finished flex which is a good thing obviously, the first quarter as Dan pointed out and as I pointed out in my script.
Nickel continuing to drop is a concern.
Obviously.
I've already said it once I will say it again, the 21% gross margin for six quarters in a row, that's raw material neutral so as raw materials begin to create even additional headwinds that's going to be off the top as far as margin.
And one thing about the.
The upgrade that we're talking about in Q1, two <unk>. So that's part of what feeds into cold finish flats as well that's going to provide some better reliability and that's kind of a key component of when we talk about getting back to that 5 million pound plus.
Shipments per quarter, that's kind of a key component of that.
And on the Triple Seven X program I know there are some proprietary Haynes alloys on there have you started to see activity. There ahead of Boeing starting to produce and should we expect that to benefit overall A&D pricing next year.
It's a slow start.
If by dependent on what I've heard about that engine and that playing the last couple of years I would've told you years ago. It was going to start to benefit us. So it's a good it's good news for US is to proprietary alloys, which we're very proud of you know theres not going to be that many engines built but it gives us great exposure to the engine manufacturers for our future.
Generation of engines also.
Then just lastly for me I wanted to ask on other markets pricing momentum that youre seeing there.
I know, it's a smaller part of the business, but it was up meaningfully again.
No the pricing can swing quarter to quarter, but is there any level of sustainability to that strong pricing there.
Yes, I mean as you look at what goes in there there is a lot of very different applications and we are as Mike mentioned doing mixed management in the CPI market. We're also doing it in the other markets as well so as we go.
Maybe back away from some of the lower end commodity type of business for example.
This authorization FG.
<unk> flue gas this authorization that we've talked about in the past as we backed away from that what's left in there is going to be a higher average selling price now this average selling price. We just did this quarter of $54 27, that's pretty rich will that vary from that number probably you can see if you look quarter to quarter, it bounces around quite a bit and thats.
Great number will it be sustainable we'll have to see.
What.
What we have remaining in that in that other market category and what that ASP is going to be.
I appreciate all the detail thanks, guys.
Thank you Mike.
Your next question is coming from Richard Evans at narrow River capital management.
Hi, guys.
Good evening.
On the mixed management within chemical what kind of problems roughly.
Roughly.
I value versus the Commoditized. So it got some idea how much.
Chemical amongst chip.
But overall when we look at what is kind of the volume alloys versus proprietary and specialty maybe it's a roughly 60 40, maybe a little higher on the volume type alloys now if you segregate that down to just CPI. It may even be a bit more we kind of we kind of view it as two pieces half of it is.
City type alloys half of it is more specialty alloys and in some cases proprietary so we're certainly not getting out of the commodity alloys completely but just some of those very low end commodity alloys that.
Is highly competitive and really difficult too.
To make much money on we'll focus our production capacity on the higher end products across the board.
Okay, and then just on the inventory sort of headwind that you've you're flagging, so sort of bigger than you saw in Q4.
Given cobalts flattened out.
Looking at the price of nickel.
It's clearly still going down, but it doesn't seem to be dropping at a particularly high rate than it has done for all of 'twenty three.
So I'm just wondering why are we getting.
Incrementally higher and higher headwinds from nickel.
Given the rate of decline doesn't seem to have massively increased.
Yes, its been interesting as I mentioned, you know this past year.
Because theres a lag impact of this as well keep in mind. So this past year. The headwind that we had $12 6 million was mostly cobalt there was a little bit of nickel in there, but mostly cobalt cobalt moderated because as you mentioned that price has stabilized but.
But nickel has continued to fall so theres always a lag impact so what we're expecting here in Q1 to be worse than Q4 is really the price decreases you saw even last quarter, leading all the way up through this quarter. Even this month nickelize dropped into the sevens. So for us, it's particularly a sharp impact because.
We are all high end nickel and cobalt based alloys. So we do feel this in my opinion much stronger than some of the other <unk>.
Companies with lower in nickel or even stainless steel type of metals that they sell.
So we really see a very acutely and and Theres a lag impact so what youre seeing in Q1 of 'twenty for what we expect to see will be kind of the fall that we have already experienced in nickel and that could even spill into Q2, we will see where nickel goes from here.
Yeah, I mean, that's what I get that but I mean, maybe it's something you have to cut about Oklahoma. If you look at it.
The start of 'twenty three nickel was what maybe $30000 a ton now it's you know and by the end of this your reporting you had already dropped trading thousand builds upon.
Suddenly dropped to 17, you know I'm just I'm just confused why it's getting so much worse incrementally.
Yes. It is.
Just a lag impact it peaked way back when about a year ago, maybe here recently at $12.80 a pound and it's really just continued to fall. Since then so we started feeling that incremental impact, but as that continues to fall that will continue to build and that's the flip kind of from the cobalt impact now were feeling it on the on.
The nickel impact so $12 down into the sevens that significant and remember our six months.
Approximate manufacturing lead times on VA and product and what we're really dealing with here is the value of the scrap stream and what the value is now versus what the input cost was when it went in so it does have something also to do with the lead times, we have on our richest products.
Okay. So if we see nickel prices flatten out it would be about six months from now flattening out till when we see.
So in theory, no more headwinds.
Yes, that's fair.
Definitely more than one quarter, but probably a six months it would be a good estimate yes.
Okay.
And just in terms of backlog I mean, if I look back to 2018 2019, your backlog as a percentage of annual sales with more like 60% 65% of annual sales.
Now, it's now into the mid to high Eighty's of annual sales.
As we move forward and things normalize should we expect that backlog to trend back down towards sort of most 60% of sales as sales grow.
Maybe people become more comfortable not needing to order as far as the bumps.
I think what's happening here and I use aerospace as an example, okay.
There is such an increase coming in they will take the 737 approximately 290 planes in $2023, 660% in 2026, and then I'll just jump to the leap <unk>.
<unk> hundred leap engines built in 2023 projections are 2400 2025. So what we have is customers continuing to focus on getting in line in particular in our long lead time items particular VM products. So I believe the backlog will be in.
<unk> terms, where it is now because of the desire to make sure that the super cycle in aerospace everyone's got the metal they need within the supply chain.
Okay.
And then the more exposed to Boeing or Airbus in terms of end market customers.
I would say.
The engines, it's about the same.
In airframe, though which is our titanium tubing, it's more Boeing.
Okay.
And you'll narrow body versus wide body do you I guess, you just have more content on wide body because the entrance of that much bigger.
More content per engine, but far less engines.
Yes.
Okay. Thank you.
Thank you.
We have reached the end of the question and answer session and I will now turn the call over to Mike shore for closing remarks. Thank.
Thank you Holly. Thank you for your time today, everybody and thank you for your interest and your ongoing support of our company. We look forward to talking to you again next quarter.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
Yes.