Haynes International, Inc. (HAYN) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen, and welcome to the Haynes International, Inc., Second Quarter Fiscal 2021 Financial Results Call. All lines have been placed on a listen-only mode and the floor will be opened for questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, David Van Bibber. Sir, the floor is yours.
David Van Bibber : 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 1995 and 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.
Mike Shor : Thanks, Dave. Good morning, everyone. The pandemic's impact over the last twelve months has been difficult on our business and on our families. I am proud of our entire team. They have worked together to guide us through the challenges we faced and to position Haynes very well for the future. We believe better times are ahead for our company. We now believe that for Haynes, Q1 of Fiscal 2021 appears to be the bottom as far as the pandemic's impact on us and that Q2 represents the beginning of our recovery. Our key metrics showed good progress when comparing Q2 to Q1. The most intriguing part of the progress we've made to-date is that the commercial aerospace market has not yet recovered and will most likely not have a significant incremental improvement impact on our business until late this calendar year. This means that the improvement shown in Q2 has been based on our continued relentless focus on cost reduction, on maintaining our prices for our high-value products throughout the downturn and on sequential growth in the quarter, led by market share gain in our IGT business. We look forward to seeing the rebound in Aerospace and the incremental impact that a return of meaningful Aerospace market growth is expected to have on our business. I'd like to now highlight the progress that our team has made in the second quarter. First, our revenue for the quarter was $82.1 million, exceeding the revenue of Q1 by $9.9 million or 13.7%. Our share gain in IGT came through loud and clear in the quarter with sequential IGT volume increasing 33% and sequential IGT revenue increasing 17.7%. Our gross margin was 10.2%, up 880 basis points from Q1. This was accomplished despite shipping just 3.5 million pounds in our second quarter. As noted previously, our costs are down; coverage of our fixed cost has improved; our selling prices are stable; and we've grown our IGT market share.
Dan Maudlin : Thank you, Mike. Our total volume shipped of 3.5 million pounds this quarter was the best quarterly volume since the pandemic began in the U.S. roughly one year ago. Volume in all four of our market segments improved sequentially with total volume improving 26.1%. It seems we may have come off the bottom of this COVID-driven downturn from a volume perspective and we welcome the start of a recovery. As a reminder, our volume at the beginning of the pandemic was already being impacted by the Boeing 737 MAX production halt. If you go back and look at the second half of fiscal 2019, prior to both the pandemic and the 737 MAX production halt, we did $255.7 million in revenue and volume of 10.5 million pounds. That's an annualized run rate of $511 million in revenue and 21 million pounds. Returning to that type of runrate would likely required support by a meaningful recovery in the aerospace market, which we believe will begin late in calendar year 2021. This quarter, sales to the aerospace market accounted for 37% of our revenue at $30.6 million. This is an increase of 25% sequentially from Q1, but a decrease of 48% from the same period last year. This significant year-over-year reduction in aerospace demand continues to be the main cause of our low overall volume levels, which lowers our margins. These margin challenges are expected to continue to alleviate when aerospace volumes improve. Backlog dollars in aerospace decreased sequentially from Q1 to Q2 by 5% and down 44% year-over-year.
Mike Shor : Thanks, Dan. Our team is encouraged by both the direction and the potential for our business. I want to thank all of you for your continued interest in our company. With that, operator, let's open the call up to questions.
Operator: Our first question comes from Steve O'Hara with Sidoti & Company. Please state your question.
Steve O’Hara : Yes. Hi. Good morning. Thanks for taking the question.
Mike Shor : Sure. No problem.
Steve O’Hara : I guess just quickly on the – it looked like prices declined in the quarter, average pricing, I guess, sequentially. And I am just – when I think about raw material costs, you noted higher raw material cost, I think was a benefit to margin and raw material cost, I think, have gone up kind of across the board. How does that – I guess I am just trying to do that how that jives with the pricing going down in the quarter.
Mike Shor : Steve, pricing is not necessarily an indication of mix or for that matter of profitability. What happened obviously, is we were being hit with significant direct charges because of our fixed cost and our lack of volume. We continue to go after some business, which would allow us to absorb some of those costs in our plants. So we - to me, it's more of a mix than anything else, which is what caused the price to go down. But overall, we feel really good about what's happening. And in fact, when you look at the gross margin, given the lack of aerospace, we feel real good about where that's going.
Dan Maudlin : Yes. And I can add on to that, as well. If you look at kind of the detail by market, you can see that our other market is really where there was a pretty large decrease in the average selling price. And there is really mix related within that other markets category. There is some flue gas desulfurization projects for example, that we had shipments on this quarter, which that's a certain alloy that has a lower average selling price. So, from a mix point of view, certainly, the incremental increase in volume that we got, which was very beneficial obviously, to revenue and to margins with better absorption. From a mix point of view, that was a bit of a headwind just related to that incremental volume being slightly lower-valued alloys in some cases.
Mike Shor : I am sorry. Let me just add back in. What we were very cautious of and what we did very well in my mind through the downturn is in the high-value portion of our mix there were no reductions in our selling prices through this. So what we did to pursue volume is obviously more on the CPI side, get aggressive on some transactional business when needed. But overall, as far as pricing going forward, we feel great about where we are LTAs and what the capability is going forward.
Dan Maudlin : Yes. And I'll also mention, you had brought up raw materials, raw material, nickel, obviously up and cobalt, but nickel being the bigger impact and that was kind of a moderate tailwind for us. We have escalators and de-escalators on our contracts and try to offset that as much as we can. But it was a tailwind to margins of around $1 million, roughly. And I think I mentioned in my prepared remarks that nickel has come back down. So that's probably going to neutralize next quarter. But it was a small, maybe $1 million, improvement in margin. The big thing is the volume and the lower direct charge and the better absorption of those fixed costs.
Steve O’Hara : Okay. That's very helpful. Yes, very. Just maybe on the out-of-period costs, I mean, they came down a lot in the quarter, volumes ticked up. Is there an expectation going forward for those? And then, does that help cost of goods sold going forward and make kind of margins a little bit better than they normally would be or does that keep margins kind of where they should be going forward, because of these costs?
Dan Maudlin : The direct charge is going to keep margins where they should be. What it is, it's not really out-of-period cost at all. It's fixed related costs that we incur in the quarter and normally that maybe capitalized them into inventory and as the inventory is sold, it's recognized in cost of sales. However, when your volume is so low, you can't capitalize that much per pound. So, those have to be kind of direct-charged to the P&L rather than capitalized in inventory. So it's not out-of-period cost necessarily, and it's not unusual cost. It's kind of normal related, mostly fixed type cost that you can't vary with volume. So that is expected to reduce as volume improves. The more volume we get, the more that goes down and diminishes until it goes to zero.
Steve O’Hara : Okay. And then lastly, yes very, very much. And then lastly, just would you guys – with the potential infrastructure build, is that’s something that you guys would benefit from or not really? In what parts of your industries might benefit?
Mike Shor : I think the benefit is an indirect benefit with the infrastructure build more jobs, more travel, more energy use and the ability for obviously, us to take advantage as commercial aircraft travel continues to move forward. So, to us, because of the nature of our alloys, which are for severe corrosion applications and high-temperature applications, not necessarily directly, but I would say indirectly, I think everyone will benefit.
Dan Maudlin : And especially, things like the base chemicals going into housing and different things like, our applications for acetic acid, that goes into adhesives, that goes into paints, that goes into things that a general improvement in the economy and infrastructure will be helpful for us. So, an indirect impact, for sure.
Steve O’Hara : Okay. Thanks. I’ll jump back in queue.
Mike Shor : Thanks, Steve.
Operator: Our next question comes from Michael Leshock, with KeyBanc. Please state your question.
Michael Leshock : Hey, Mike and Dan. Good morning.
Mike Shor : Good morning, Mike. How are you?
Michael Leshock : Good. First, I just wanted to ask on labor. Wanted to get your take on how much of the headcount reductions you expect to bring back when volumes improve. And do you have a rough ballpark of maybe where volumes need to be before you start bringing some of that labor back?
Mike Shor : Sure. On the salaried side, when we went through the reductions, we went through they are obviously always extremely difficult to go through and we will do our best to make sure that when we bring back, it will be at a relatively slow pace on the salaried side. We've right-sized and we feel very good about that. On the production side, in particular, in Kokomo, we have begun to bring back production and maintenance employees. We have seen great activity in our backlog both or – bookings, excuse me in February and March and in fact, also in April. And so, with that, we want to be prepared. I believe one of the keys in this industry going forward is short lead times. Customers don't want excessive inventory and so, what we are doing is we're bringing back the people that we need in particular, in our primary operations to ensure that we can maintain shorter lead times and maintain what we call our supermarket, which is our high-volume, high-moving intermediate stock of very popular grades. So, we don't have everyone back. But we have begun the process of bringing people back, my hope is that we get to the point we bring everyone back as our volume continues to improve.
Michael Leshock : Got it. That's helpful. And then what impact did you see from winter storms? I know your Arcadia facility was down for a bit. But did that cause anything to be pushed into the current quarter?
Mike Shor : No. It wasn't easy, in particular, in Arcadia with the ice and the storms that they felt, but our team did an outstanding job down there of making sure, number one; they kept our employees safe; kept them off the roads; and then brought them back to work and caught up. So, we feel very good about that. No real impact either from the customers we serve in that region. So, I would say not an issue for us.
Michael Leshock : Okay. Then lastly, just wanted to get your take what you've been seeing on the MAX platform in terms of order activity. Obviously, it's still early innings in the ramp, but have you seen any pickup, just given MAX is about 8% of normalized volumes?
Mike Shor : We have had a increasing amount of communication with our customers who, number one are beginning to slowly place orders; number two, getting their places in line; and number three; as I mentioned related to the LEAP, beginning to make sure that we've got the manpower and capacity we need. The statement that I made in my script is very significant. At this point, it appears by the end of 2022 calendar year that the 1B, obviously, the 737 engine from LEAP, the 1B engine will be back to 20 engines a month which is – yes, 20 engines a month which - a week – a week, excuse me, which is getting us back to 2019 levels. So, when you look at the TSA numbers, they are coming back very strong. I mean, I was always hoping to get over 1 million passengers a day through TSA and now we rarely see below 1.2 million or 1.3 million. So, we believe that engine production on the LEAP, which is obviously single-aisle will come back very strong and be back on a weekly basis to where it was in 2019 in 2022. And of course, we are at the beginning of this process. So we expect to see orders mid 2021 to support that. So, optimistic and thrilled. The customers are pushing us to make sure we've got the low lead times that we need to support them.
Michael Leshock : Great. Thank you.
Mike Shor : Thank you.
Operator: Okay. Our next question comes from Steve O'Hara. Please state your question.
Steve O’Hara : Yes. Hi. Thanks for taking the follow-up.
Mike Shor : Sure.
Steve O’Hara : I just want to see if I understood correctly, in terms of the volumes going forward, I mean, is it safe to assume where you stand right now, you should see volumes improve sequentially from here or at least not go down from here? And then, what about the cash on the balance sheet? What's the plan there? Or will that be used up as you invest in working capital?
Mike Shor : I'll talk first about the volume and then Dan will talk about the cash. Okay? As far as volumes, as we said in our guidance, we expect Q3 to be similar to Q2 as far as our results including our revenues. We do expect to see and we have seen some bookings increase and we expect that to continue to grow as we move forward. Remember, our Aerospace business year-on-year is down 48%. And so, we do believe that's going to start to improve as we hit mid-year and beyond. But remember, bookings have to turn into manufactured product to ship, which is why that will move out toward later in the year. Dan will cover that.
Dan Maudlin : And on cash, that's my favorite subject, we monitor this every day and very proud of our strategy of when we pivoted to cash, how much we've been able to generate, as I mentioned, since this pandemic began, we've generated $47.4 million. So, a number nearly $70 million on the balance sheet now. Now going forward, we are expecting, as we mentioned, kind of sequentially revenue in the same neighborhood as Q2. So, as we start to look beyond and we think about the Aerospace ramp up later in the calendar year, there is going to be some investment in working capital that will be required. We are going to do that very carefully and try to make that a pretty consistent cash across the quarters. But we want to grow with that top-line. We want to grow with demand and if that takes some investment of working capital to get there, then we can do that. But we'll be very careful about it and expect it to be pretty flat across the next couple quarters.
Steve O’Hara : Okay. Great. And then, I mean, you said, I think, 2019 levels by 2023 in terms of the production for the engines, and how - the LEAP engine. And how soon – so do you expect a recovery? Let's say, if we get back to 2019 levels in 2023, I mean, what's a typical time period for that to start to hit your books? And I mean, I think the inventory is pretty lean in the channel. Would that make it earlier than typical? Or are people maybe a little more cautious given what we've gone through?
Mike Shor : I think we've got to divide this into airframe, where we supply titanium tubing and then engine for us on the other side. Airframe there seems to continue to be and where we on airframe for us, it is single-aisle. But, there is excess inventory in that supply chain and we expect that to continue towards the - until towards the end of the calendar year. Given what we are seeing and hearing more than seeing from our customers, we do believe we'll begin to see improvements as we move throughout this year. Certainly, there will be some caution there, because of what we've all been through for the past year. But we have seen increased bookings in January – I am sorry in February and March. We've seen the same thing now in April and we expect that to continue to pick up. So mid-year and beyond we do begin to see that improve and start to chop into that 48% year-on-year decrease we saw in aerospace.
Steve O’Hara : Okay. Thank you very much.
Mike Shor : Sure.
Operator: Okay. It doesn't look like we have any further incoming questions. I would like to turn the floor back over to Mike Shor for closing remarks.
Mike Shor : Okay. Thank you. Thank you, everyone for your time today, and thank you, for your interest and support of Haynes International. We do look forward to updating you again next quarter. Stay safe. Thank you.
Operator: Thank you. This concludes today’s conference call. Thank you for your participation. You may disconnect your lines at this time and have a great day.
