Haynes International, Inc. (HAYN) on Q1 2022 Results - Earnings Call Transcript
Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.:
Operator: 00:02 Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Haynes International Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] 00:15 I would now like to turn the call over to Controller, and Chief Accounting Officer, David Van Bibber. Please go ahead.
David Van Bibber: 00:22 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. 00:31 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 and 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. 00:54 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. 01:11 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, 2021. 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. 01:31 With that, let me turn the call over to Mike.
Mike Shor: 01:34 Thank you, Dave. Good morning, everyone. Haynes had an excellent quarter and we believe that we will continue to gain momentum throughout fiscal year 2022. Our improved results reflect a significant fundamental changes that we’ve made to our business. Our team believes that the results to date are a good start and that additional business performance improvements across all aspects of our business will continue. 01:59 The key safety, operational, balance sheet and financial performance highlights are as follows. First, we finished the year with OSHA recordable rate approximately 25% below the prior year. Thanks to the continued company-wide focus on process improvement and safety leadership, and our ongoing efforts related to COVID. 02:19 Next, our efforts to be best in class in gross margin percentage in our slice of the industry have become reality. We are continuing to drive pricing higher based on the high value of differentiated products and services we offer. And we continue to significantly reduce our variable cost to manufacturing. 02:37 Our Q1 gross margin improved 40 basis points sequentially and 1,650 basis points year-on-year. The 17.9% gross margin achieved represents great progress and more as possible. We've also implemented numerous ESG initiatives and are currently installing our first solar installation, which is expected to provide an estimated 50% of our energy demand at our Wire facility in Mountain Home, North Carolina. 03:08 As far as earnings, we earned $4.7 million this quarter on just 3.9 million pounds sold. We've previously struggled to be profitable at 5 million pounds sold a quarter. The results of the last three quarters confirm that we’ve lowered the breakeven point of three years ago by approximately 25% based on the current mix. To show the significant impact of the lower breakeven point, I'm providing the following example comparing similar volume quarters, four years apart. 03:40 Our volumes sold in Q1 of fiscal 2022 was similar to the volume sold in Q1 of fiscal 2018, yet when comparing the net income of both, we improved net income by $7.6 million driven by a gross margin improvement from 7.8% in Q1 of fiscal 2018 to 17.9% this past quarter. I should note that these numbers exclude an adjustment for a tax law change in fiscal year 2018. 04:09 Continuing on, availability of labor has been an issue across our industry and many others in recent periods. However, our facilities are now nearly fully staffed, thanks to the incredible work done by our human resource team to recruit the new employees required to handle the increase in bookings. 04:28 We've added 93 production and maintenance employees over the past seven months, across all of our manufacturing facilities. Next, our raw materials and work-in-process inventories have grown to support the improved bookings, but our finished inventory has not materially increased as we continue to focus on improving finished inventory turns. 04:50 We are managing cash carefully, but we realize that the accelerated top line growth that we are expecting requires an investment in raw material and work-in-process inventory. We've made that investment as you can see by our cash balance. This cash deployment in response to the surge in our backlog is designed to enable top line revenue growth in subsequent quarters. 05:13 Our balance sheet is clean and our pension glide path is in place. As of the end of the quarter, our U.S. net pension liability was approximately $24.2 million, meaning the liability is now $81 million below the $105.2 million would carry at the beginning of fiscal year 2021. If you add in the retiree healthcare and UK pension, the net liability decrease is $94 million since the beginning of fiscal year 2021. 05:45 Continuing on, our innovative alloy and application development activities continue to generate significant interest among our customers and the end users of our products. We believe that our culture of innovation is a core strength, and provides in conjunction with our sales and technical service, a true competitive advantage. 06:05 Each quarter on these calls, I review a segment of our innovative alloy and application development work. Today, I'll talk about some of our alloys for the chemical processing industry. Haynes has invented and developed a number of corrosion-resistant alloys for this market. HASTELLOY C-276, C-22, C-2000, B-3, and several others are very well-known in the chemical, agrochemical, pharmaceutical, and other industries where corrosion-resistance to highly complex corrosive media is required. 06:39 In addition, HASTELLOY G-35, a Haynes proprietary alloy has had tremendous success in many diverse chemical industry applications. One of the most noteworthy applications is its continued and increasing use in the agrochemical industry for processing of fertilizer used in food production. 06:59 Finally, related to CPI, one of our latest proprietary corrosion-resistant alloys HASTELLOY HYBRID-BC1 is in the advanced stages of being specified by a major process developer for a proprietary refinery technology using next generation catalysts. This technology is expected to help refineries improve safety, efficiency, and the environmental impact of their operations. 07:26 I'd now like to transition and provide comments on our backlog and our markets. Our backlog is up sequentially across aerospace, CPI, and IGT, with aerospace up 28%, CPI up 26%, and IGT up 36%. Our total backlog dollars were up sequentially $42.2 million or 24%. 07:50 We believe the aerospace backlog increase shows the beginning of the supply chain actions required to support the estimated record levels of leap engine builds for 2023. We're also encouraged by the build rate projections for the 777x, which uses the GE9X engine that will contain two of our proprietary alloys. 08:13 Our aerospace revenue was up 97% year-over-year and up 24% sequentially. Aerospace order entry during Q1 was $75 million and backlog for Q1 was $121 million, up 28% sequentially and 42% year-over-year. We believe our aerospace market is poised to once again become our strongest market. 08:38 Industrial gas turbine Q1 revenue was sequentially down due to the timing of some shipments to certain customers, but we expect a strong rebound in Q2 and the balance of the year, driven by our market share gains and an uptick in market demand. 08:53 Order entry during Q1 was $23 million and our backlog was $36 million, up 36% sequentially and 105% year-over-year. Chemical processing Q1 revenue was up 14% year-over-year and up 10% sequentially. Order entry during Q1 was $25 million and our backlog for Q1 was $39 million, up 26% sequentially, and 106% year-over-year. 09:22 We continue to see opportunities for our alloys and unique CPI applications. This is where our technical marketing team are experts at discovering applications and engaging in the development of special projects for innovative alloys. 09:37 Our other markets category includes products used in wear FGD, which is Flue Gas Desulphurization, electronic ceramics, automotive, renewable energy, oil and gas, and waste incineration applications. This segment experienced a 10% sequential decline led by decreased shipments into the FGD market. 10:00 As I also noted last quarter, our business conditions continue to improve in the aerospace, IGT, and CPI markets. As that continue to happen, we are seeing a reduction in FGD’s shipments as we utilize our manufacturing capacity on higher value products. 10:18 Other revenue was at $4.4 million, sequentially lower by 25% this quarter and 21% year-over-year. Other revenue contains various items, but mostly our conversion work. 10:32 As I wrap up my comments, I again want to thank the entire Haynes team for all that they have done to improve our business fundamentals. Their hard work and accountability for results have changed our company. Our focus on providing high value differentiated products and services on getting paid for that value provided, on relentlessly pursuing improved yields and lower variable cost to manufacturing, on significantly reducing our pension liability, and on helping provide more innovative product and service solutions have all resulted in a company with impressive earnings potential and a strong transform balance sheet, both of which provide a foundation for growth and continued improving profitability. 11:15 With that, I'll hand the call over to Dan to provide more details of our financial results.
Dan Maudlin: 11:20 Thank you, Mike. We had a solid financial performance for the quarter to start the fiscal year. The pricing and cost initiatives that we've been working on since well before the pandemic has lowered our breakeven point by 25% with current mix. This is significant, and this enables us to be profitable at volume levels that previously would have resulted in losses. 11:43 We shipped 3.9 million pounds and made $4.7 million in net income when historically, we would struggle to even be profitable at 5 million pounds. It is also notable that our first quarter is typically a seasonally lower quarter with a sizable dip in revenue and profit with holidays, maintenance outages, and customers managing their calendar year and balance sheets, but not this year. 12:07 In prior calls, we mentioned our expectation that aerospace order entry would arise at the end of the calendar year, which definitely happened in a very strong way. As demand begin to increase, we were able to invest cash into inventory and increase our production staff to enable the mill to increase production levels, especially for aerospace products. This put our volume at about even with last quarter and revenue sequentially above last quarter by nearly $4.2 million and above last year's first quarter by $27.3 million. 12:43 In addition, we further expanded our gross margin percentage to 17.9%, as we continue to see the benefits of both pricing actions and cost reductions. And remember that these cost reductions are related to improved yields, productivity, and process improvements which are expected to be further realized with continued higher mill production levels. 13:08 Our production level this quarter was high enough to eliminate the direct charge. As you may remember in the second half of FY 2020 and across FY 2021, volume levels dropped so that fixed cost absorption was a significant issue, and we directly charged to expense these costs, as the cost per pound was too high to be capitalized into inventory. 13:31 This action has now helped eliminate and avoid that high cost per pound drag on our earnings as the product is sold, had we not direct charge these costs as incurred. It is good to see the direct charges behind us. 13:47 Raw material market price increases for nickel and cobalt provided a moderate tailwind to margins this quarter of roughly $1.7 million similar to last quarter. And with more recent increases in raw materials, we believe this is likely to continue to be favorable next quarter as well. 14:07 We've diligently managed through challenges with increasing our production labor, supply chain issues, and inflationary cost pressures. These have been significant industry wide issues to manage through. And as Mike mentioned, we increased our production headcount recently, which is very beneficial to our future volume growth. 14:28 Regarding inflation, we have seen elevated costs for freight and supply costs. However, we have been striving to cover this with our escalators for the consumer price index and our customer contracts or price increases in quoting spot type business or mill direct business with the goal of margin protection. 14:49 As I mentioned, the result in gross margin was 17.9%, which we believe can continue to expand and with increased volumes as aerospace more fully recovers, we expect favorable profitability leverage resulting in growing gross margin dollars. 15:07 SG&A including research and technical expense was 12.3 million in the first quarter or 12.3% of net sales, which was higher than last year's first quarter by $1.7 million. The year-over-year increase was mainly due to last year's pandemic cost savings measures that were in place such as headcount reductions, furloughs, reduced executive salaries, reduced board fees etcetera, which are largely no longer in place this year. 15:37 Below SG&A is operating income of 5.5 million this quarter, which represents sequential growth of 15.4% compared to the fourth quarter of fiscal 2021. Further down the P&L is non-operating retirement benefit income of 1.1 million, which was favorable to last year's quarterly expense by over $1.45 million. 16:02 We took the largest liability on the balance sheet, the U.S. pension plan and with the help of strong asset returns and favorable interest rate movements, knocked it down $81 million from 105.2 million at the beginning of FY 2021 to 24.2 million at 12/31/2021. 16:23 If you also include the retiree healthcare and UK pension, the liability decrease goes from 81 million to 94 million, a significant reduction. The pension plan is approximately 93% funded currently. This funding level allowed us to implement a customized liability driven investment strategy, which means we have to some degree locked in or secured this funding gain. This reduced our interest rate risk significantly where our plan was previously extremely interest rate sensitive and it reduced our equity risk as well. 17:02 It also reduces our expected pension and post retirement expense by $6 million this fiscal year, compared to last year. We are happy with the progress on our pension plan strategy. Our effective tax rate was 26.1% in the first quarter of fiscal 2022 reflecting the increased statutory tax rate in the UK. 17:23 We're currently projecting the full-year effective tax rate to be roughly at that level for fiscal year 2022. Our net income this quarter of $4.7 million represents an 81% sequential improvement. Our diluted earnings per share of $0.37, represents an 85% sequential increase, which is a slightly higher percentage than the net income increase, due to the effect of fewer shares outstanding following the share repurchase program. 17:54 While on the topic of the share repurchase plan, we purchased an additional 142,000 shares at a cost of $5.7 million during the first quarter fiscal 2022. Since adoption of the plan, we repurchased 255,000 shares at a total cost of approximately $10 million. We discontinued the share repurchase plan at the end of the calendar year, due to the 24% increase in our backlog. 18:23 Our capital allocation process includes continually evaluating different cash deployment opportunities. With our backlog surging, we seize the opportunity to invest cash into inventory that enabled us to sequentially grow revenues this quarter and drive expected top line growth in future quarters. 18:42 Order entry and backlog. Our backlog increased 24% over the quarter and 50% year-over-year to 217.5 million at December 31, 2021, driven by strength in aerospace order entry. Aerospace order entry for the quarter was $75.2 million with a book-to-bill ratio of 1.6, which is impressive. 19:06 We had strong book-to-bill in our other core markets as well with CPI and 1.4, IGT at 1.6, and other markets at 1.0. Total product order entry for the quarter was $138 million. As far as our outlook for next quarter, we expect volume, revenue, and profitability to improve throughout the fiscal year. 19:33 We currently anticipate that revenue in the second quarter will be approximately 10% higher than the first quarter of fiscal 2022. We also currently believe that the sequential earnings growth rate would be greater than the growth rate of revenue, due to the profitability leverage based upon anticipated increased volumes along with continued pricing and cost improvements. 19:57 Capital spending was 3.3 million in the first quarter of fiscal 2022. We're planning to spend 17.7 million in fiscal 2022, a sizable increase from last year and approaching our depreciation level. 20:12 Liquidity, we had cash on the balance sheet of 14.3 million at December 31, 2021 and 3 million borrowed on the company's credit facility as a result of investments in working capital made as backlog grew and production levels increased. Our liquidity is strong at 111.3 million with 97 million available on the credit facility at December 31, 2021. 20:39 In conclusion, it is exciting to see the recovery gaining traction with profitability growth and strengthen order entry as backlog levels increase, led by our largest market aerospace, yet our aerospace volume sold this quarter was 27.5% below the pre-pandemic levels of the average quarter of fiscal 2019. 21:02 And as Mike mentioned, we expect monthly aerospace shipping levels to be at pre-pandemic levels by the end of this fiscal year. This is encouraging. And as these volume levels improve at our gross margin level, we expect to create profitability leverage and solid net income growth going forward. 21:21 Mike, with that, I will now turn the discussion back over to you.
Mike Shor: 21:24 Thank you, Dan. Our entire team here at Haynes continues to be encouraged by the progress and the future potential of our business. I want to thank all of you for your continued interest in our company. 21:37 With that, Kelly, let’s open the call up to questions.
Operator: 21:40 Certainly. [Operator Instructions] Your first question is coming from Marisa Hernandez at Sidoti & Company. Please pose your question. You line is live.
Operator: 30:37 Your next question is coming from Michael Leshock at KeyBanc Capital Markets. Please pose your question. Your line is live.
Operator: 35:17 [Operator Instructions] Your next question is coming from Chris Olin at Tier4 Research. Please pose your question. Your line is live.
Operator: 41:23 You have a follow-up question from Marisa Hernandez at Sidoti & Company. Please pose your question. Your line is live.
Operator: 44:19 There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Mike Shor for any closing remarks.
Mike Shor: 44:26 Thanks, Kelly. Thank you everyone for your time today and thank you for your interest in support of Haynes. We'll talk to you next quarter. Thanks, everyone.
Operator: 44:36 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.
