Haynes International, Inc. (HAYN) on Q3 2021 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen, and welcome to the Haynes International Incorporated Third Quarter Fiscal 2021 Financial Results Conference Call. All lines have been placed on a listen-only mode and the floor will be opened for questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, Controller and Chief Accounting Officer, 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.
Mike Shor: Thank you, Dave. Good morning, everyone. Our results continued to improve this quarter, and our momentum is building. The details are as follows: We returned to profitability in our third quarter despite shipping just 3.7 million pounds. Our end of quarter cash balance was $74.2 million, representing an increase in cash since March 31, 2020, of $51.8 million and an increase of $4.3 million over the past year. Our gross margin continued to improve despite our direct charges related to low volume and despite the lack of meaningful incremental aerospace shipments to date. We finished the quarter at 15.5% gross margin. This represents a 530 basis point improvement sequentially and a 1,220 basis point improvement from last year's Q3. As I've stated in the past, we look at the 18% gross margins achieved in early 2020 as our starting point once our aerospace volume returns. The results of Q3 and our improving gross margins confirm what we've said for the past year. That is our cost reduction and pricing work have had a significant positive impact on our business, driving our breakeven point from roughly five million pounds shipped a quarter, to as shown in our Q3 quarter, four million pounds or less. Our cost and price improvement initiatives that have driven our margin improvement are continuing. Our current and future price and cost efforts should continue to have a meaningful incremental improvement impact on the future of Haynes.
Dan Maudlin: Thank you, Mike. Returning to profitability is an exciting milestone as we are emerging from what we believe are the early stages of the recovery. Our continued focus on initiatives to increase margins from price increases and cost reductions has successfully reduced our breakeven point. This quarter, our total volume shipped was £3.7 million, resulting in positive net income as compared to our prior breakeven of roughly £5 million pounds. These improvement efforts are expected to continue to gain momentum; first, as volumes increase; second, as more orders are shipped that are priced with our recently announced price increases; and third, as our cost reduction efforts related to improved yields, productivity and process improvements are realized with higher mill production levels. Mike already covered a discussion of each market, but here's a bit more detail on the numbers. The quarter sales to the aerospace market accounted for 38.5% of our revenue at $34 million. This is an increase of 11% sequentially from Q2, but a decrease of 16% from the same period last year. This year-over-year reduction in aerospace demand continues to be the main cause of our overall low volume levels, which is compressing our margins. As Mike mentioned earlier, our volume decreased by 48% from the third quarter two years ago in fiscal 2019. These margin challenges alleviate as aerospace volumes improve. Backlog dollars in aerospace increased sequentially from Q2 to Q3 by 2%, but have decreased year-over-year by 27% from the pandemic's impact on the aerospace industry. Sales to the chemical processing market accounted for 19% of our revenue at $17 million. This is up 13% sequentially from Q2 and up 40% from the same period last year. Special projects revenue, most of which is reflected in chemical processing, was $4.6 million, which is $211,000 lower than the second quarter and $743,000 lower than the same period last year.
Mike Shor: Thank you, Dan. Our team continues to be encouraged by both the direction and the potential for our business. I want to thank all of you for your continued interest in Haynes. With that, Kat, let's open the call up to questions.
Operator: Certainly, thank you. And our first question comes from Michael Leshock from Keybank Capital Markets. Go ahead, Michael.
Michael Leshock: Hey, guys. Good morning.
Mike Shor: Good morning, Mike.
Dan Maudlin: Good morning.
Michael Leshock: So, as we look at the third quarter, it was much better than where you guided to. Volumes were only up a bit, the 3.7 from 3.5 the prior quarter. I just wanted to know what drove that profitability in the quarter. I know there was some benefit from raw materials, but how much did mix play as a factor? And is this something that's sustainable as we look into 4Q? Thanks.
Mike Shor: Let me address the mix. Dan, will touch on the inventory side of this and the raw material side on this. But, what we're very excited about is what we believe can continue to happen in the future. Since you brought up mix, we see opportunities for mix improvement, as aero comes back. So as we look at mix, we saw minor mix improvement, Mike, from Q3 versus Q2. But that was mainly because of a reduction of some of our higher volume orders that we took at the depth of the pandemic to try to work through and address the direct charge. These orders were good for the company, but they were very low margin. And so, Q3 did not have some that Q2 had. But to me, a very key point, as we look at mix and what can happen in the future. We saw year-on-year, as what I just gave you was sequentially. Year-on-year, we saw a fairly significant deterioration in mix. So, Q3 fiscal 2021 versus Q3 fiscal 2020. And it makes sense. We've been very open that our aerospace business is the majority of our high-value differentiated products. And when you look at the year-on-year stats, we had IGT up, a good thing, CPI up, a good thing, but aero down year-on-year. So we were missing that component of the mix. So as we look forward, we see great opportunities for mix to further improve. And beyond that, remember right before the pandemic hit us, we had 18% gross margin in January and February 2020. So our work on pricing, our work on cost, not only was done back then, but it continued through the pandemic, and we think more is to come. Dan?
Dan Maudlin: Yes. Let me just hit on the inventory build and the raw material. And it was very moderate, actually, starting with raw material, nickel and cobalt increased. So, we estimated that to be about a $1.5 million favorable benefit. But last quarter, it was about $1 million. So just slightly above, what it was last quarter. So, nothing too significant. And then, on the inventory build side, we did build inventory about $3.9 million. So you think about that and what that may do to margins and what kind of contribution that kind of would have. But still, that's even less than or right around about $1 million impact on the month, and that would be about a one point change in the gross margin. I think the one thing that surprised us on profitability more than anything is what Mike kind of mentioned, and that is the initiatives to reduce breakeven, the initiatives to increase prices and reduce costs, how that gets realized as volumes start to go up. And I think we've got some great traction on those initiatives, and it's really starting to show up in the margin, and we really are excited. As we look forward, that continuing and that momentum building and expanding margins further.
Mike Shor: Let me just add one more thing to it and that's special projects, which Dan touched on in his script. We've been in this trough of spending by our customers in the industry. So with that, there's not been a lot of money left to start some of these projects. So we're down year-on-year. We're even down sequentially in special projects. So as that begins to come back, that offers us future potential also as far as continuing to improve the performance of the company.
Michael Leshock: Got it. Helpful. And then on the cost side of the business, what have you seen or do you expect to see going forward in terms of inflationary pressures? And maybe how much of the cost you took out during the downturn are structural in nature versus what portion might come back?
Mike Shor: When you look at during the pandemic on the people side, we took out a significant portion of our workforce. I think it was 18% of our workforce line variable and fixed side of this thing. And at this point, the overwhelming majority of our variable workforce, our production maintenance workforce has been called back. We're obviously going to drag our feet as best we can. On the salary side we spent money to, unfortunately, remove positions, and we want to be very cautious about bringing back, but we are doing it. And we're trying to continue to reinforce what our core competencies are by hiring people that fit in those jobs and make the most sense for us. I think we are continuing to gain momentum on the cost side on the variable cost to manufacture. We've done a great deal to improve yields, to improve our processes and to enhance the way we make our products for our customers. And we had great momentum going in the pandemic. You don't get as much of an impact when your volume goes as low as ours has gone. But we continue to work on those projects. And as we see higher volume, we're going to see additional cost reduction going forward.
Michael Leshock: And then CapEx was basically zero in the quarter. And right now, you're kind of running below your base maintenance level at $7 million, if we call it, $8 million to $10 million maintenance roughly. Should we expect a meaningful uptick there in CapEx in 2022, if there's any maintenance you might be deferring?
Dan Maudlin: Yes. We're deferring no maintenance. What we find with capital, and I found this my entire career, and I should learn from it already, is you never spend as much as you think you're going to spend. So we actually had to talk. We're going to have to start budgeting more than we're actually going to spend because there's always carryover. There's always an occasional delay here and there. I don't like being at $7 million, and we expect to start approaching depreciation, not going over, but approaching it for the next three, four years, plus or minus. So we'll get back on the capital van wagon and that was not an intentional pull down. That's just timing of projects.
Michael Leshock: Got it. That’s helpful. Thanks, guys.
Mike Shor: Thank you.
Dan Maudlin: Thank you, Mike.
Operator: Our next question comes from Marisa Hernandez from Sidoti. Go ahead, Marisa.
Marisa Hernandez: Hello, thank you, and good morning everybody.
Mike Shor: Good morning.
Marisa Hernandez: Good morning. So wondering if you can comment on the outlook for gross margin in the second half of the calendar year. It seems to me that there's a number of moving pieces here with the mix of aerospace and the other segments. At the same time, you have cost-saving efforts but you're having to put in more resources as the recovery takes place. And at the same time, there's this decline in ASP that you reported in this quarter for both aerospace and the chemicals segment. So if you could put all of those in context for me that would be great.
Mike Shor: Sure, we'd love to. First, I've got to start because we've got an entire team that have been working on this for three years plus. We're thrilled with the team's efforts to fundamentally improve our business with a focus on driving our gross margin up significantly. No secret. Our goal has been in our slice of the industry to be the best as far as gross margin. We have focused, Marisa, on cost reduction, price increase alloy and application innovation, which, by the way, can significantly help our gross margin and best-in-class sales and technical service to drive improvement. What I'm really encouraged about, it's great that we hit 15.5%. We just love that. But what I'm really encouraged about is what the future can hold for us related to gross margin. We said before that the 18% we hit before the pandemic is a great starting point as our volume comes back. And when you take a step back and think about it, we've raised prices on transactional business, not just on aerospace, but across the board, 7% to 10%. And we're just beginning to see the impact of that and then contracts will follow after that. We're working, as Dan said, to eliminate the direct charge. We still incurred $2 million in the past quarter on direct charge, we will have a significant impact as volume comes back in general, just because of the marginal net volume, when the aero orders comes back, that typically is our highest margin product. And so that will help our mix. We've got an enormous number of alloys and -- or we have alloys and applications in our pipeline that will help as we get those products going. As I mentioned, special projects are poised to come back. And then in general, we have a relentless focus on yield and variable cost reductions. So, while Dan stares at me to make sure I don't give a number, which I will not. I will tell you that we have high confidence that we can continue to grow our gross margin. Sorry for the long answer.
Dan Maudlin: Just going to mention, you had also brought up average selling price, ASP going down. And really, what that's reflecting isn't price decreases by any means. It's just the mix. As Mike referenced earlier, the mix this quarter was not optimal without aerospace. And we looked to the future and we see with aerospace recovering later this calendar year with orders, and then we'll see where that goes in 2022. That should only help us as far as mix goes and average selling prices go.
Marisa Hernandez: That’s helpful. And are you expecting any improvement already in the September quarter in the mix of aerospace? I understand that you're not looking for a huge increase in volumes yet. But on the mix side, have we tracked here or not yet?
Mike Shor: What we’ve seen is -- so sequentially, our aerospace revenue obviously did go up in the past quarter, and we are beginning to see an uptick in aerospace. But we're beginning to see our customers talk about orders and begin to let some orders. But we really don't expect to see the orders come in till little later this calendar year in full force. And then once we get those orders, we have to manufacture them. That's why we're only expecting slight improvement quarter-on-quarter.
Marisa Hernandez: Thank you. And can I squeeze one more?
Mike Shor: Yes, please.
Dan Maudlin: Absolutely.
Marisa Hernandez: Thank you. So, can you give me a flavor of what your utilization rate is at this time? And I understand that may vary across sites. But what investment, if any, do you need to make to position yourself for the expected recovery?
Mike Shor: As far as positioning ourselves for recovery, the number one thing that we've done is, we are well into the process of bringing our production and maintenance workforces back to full force. So we're doing that. And then, what I believe is very important for us is taking a step back and understanding what our competitive advantages are. And one of our major competitive advantages is speed. And what we've highlighted and what we focused on for over a year now is keeping our lead times low and our response time quick. And we keep talking about this supermarket that we put in place for high-volume grades. And as we come out of this, the shorter the lead times, the more orders we can get. And to be frank, the shorter the lead times, the more price flexibility we have. So, bringing our people back, making sure they're trained, making sure they understand what we need to do from a safety perspective and positioning our inventory are, to me, the things that we are focused on now to come back.
Dan Maudlin: And I would even say, if you step back a little bit and you talk about investments for the recovery, keep in mind, we spent a significant amount of capital in prior years to increase capacities in certain areas. So we have significant headroom to increase capacities beyond where we were. 2019, what I believe in volume was a record year for us in aerospace. And we have additional capacity beyond that with the investments we had made previously. So, we're not needing to invest significant above our depreciation levels in the future, and we'll be able to grow the topline beyond where we were before.
Marisa Hernandez: Thank you.
Dan Maudlin: Thank you. Thanks for the questions.
Operator: And it appears we have no further questions at this time. I would now like to turn it over to management.
Mike Shor: Okay. Thanks, Kat. Thank you all for your time today, and thank you for your interest and support of our company. We look forward to updating you again next quarter. Have a good weekend.
Operator: Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
