Haynes International, Inc. (NASDAQ:HAYN) Q2 2023 Earnings Call Transcript

Haynes International, Inc. (NASDAQ:HAYN) Q2 2023 Earnings Call Transcript May 5, 2023

Haynes International, Inc. misses on earnings expectations. Reported EPS is $0.96 EPS, expectations were $1.02.

Operator: Greetings. Welcome to the Haynes International Incorporated Second Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. 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.

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. Although, we believe our plans, intentions, and expectations regarding or suggested by such forward-looking statements are reasonable, such statements are subject to a number of risks and uncertainties, and we can provide no assurances such plans, intentions or expectations will be achieved.

Many of these risks are discussed in detail in the company’s filings with the Securities and Exchange Commission in particular, Form 10-K for the fiscal year ended September 30, 2022. 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.

Michael Shor: Thank you, Dave. Good morning, everyone. I’ve also noted that we’ve made fundamental and sustainable changes to our business. I’ll start off with my comments today highlighting those changes and talking through the positive impact they’ve had on this organization. First, we are distinctive in the combination of products and services we offer provide our customers with a value. That we believe is difficult to be delivered consistently by others in the industry. Our value proposition includes our meal and service intercommentation, our outstanding people providing technical and sales service, our deep and in many cases long-term relationships with our customer base. Our excellent alloy development and application engineering expertise, our ability to produce and ship small volumes of unique alloys and sizes.

Our consistent product quality, our ability to ship cut pieces and near net shapes out of our service centers and our just in time inventory capability, because our customers truly need and value these services and product attributes, we have been able to continue to price our products based on the value we provide. Next, our alloy and application development capability give us a valuable access to engine developers and plan engineers will provide uncommon and in many cases proprietary alloy solutions to the current and future needs of the end users of our products. Our technical capabilities help us work with our customers and the end users so they can identify high quality, the long term and cost effects effective solutions for their processes.

As I’ve stated on previous calls, the best news here is that our current pipeline of new alloys and applications under development is as strong as it’s ever been and involves new potential alloys across all of our major markets. Continuing on, our effort related to variable cost reductions through process change and yield improvement continue at all of our facilities. We are often asked if we are near the end of our cost reduction initiatives or collective view is that we have so much more that we can do. We all believe that we have the technical engineering and operations talent to continue to increase our yields and improve our process efficiency and cost. Including my intro, our financial goals for almost five years ago were to significantly improve both our gross margin and our breakeven point and establish the fundamentals to allow our company to be consistently profitable.

We have now accomplished what we set out to do via alloy and application development, product mix enhancements, variable cost improvement and pricing for the high value differentiated products and services we provide. I’m proud of our team for performing very well and for achieving our goals. Our gross margin has gone from high single digits and very low double digits to at neutral raw materials now consistently being over 21% and our breakeven point is now confirmed to be 25% below where it was when we started our improvement journey. Now transitioning to our second quarter performance. Year-over-year our revenue increased 30.5% with strong gains in each of our markets. In addition, our water entry was close to $190 million for the quarter which drove our backlog to a record $446.7 million up over 59% from last year.

Our book-to-bill based on revenue was 1.3 plus quarter led by aerospace and IGT which were both 1.4. Our gross margin was 20.2% and when removing the raw material headwind impact our calculated raw material neutral gross margin was 21.3%. This all resulted in net income for the quarter of $12.3 million up 45% year on year. From a market perspective in our aerospace market, our second quarter year-on-year revenue improved by 25.9% with volume up 9.6% and our average selling price up $4.34 per pound or 14.8%. For the first six months of the fiscal year, our year-on-year revenue increased 29.4%.with volume increased 13.5%. In addition, aerospace backlog increased, increased 11.5% as I said, a book-to-bill of 1.4 over the quarter. Our backlog now stands at $277 million in our aerospace market.

We continue to believe that we will set a revenue record for aerospace in fiscal year 23. A few other points worth noting here. Single-out bill schedules remain high with leap engine bills projected to set a new record in 2023. In addition, we are beginning to see demand increases for the components. We supply for multi aircraft engines. Finally, we believe the majority of the aerospace product being shipped by Haynes today is being consumed immediately. A little to no safety stop being built at this time. For our IGT market, our second quarter year-on-your revenue improved by 30.8% with volume up 1% and average selling price increasing $5.16 per pound or 29.5%. For the first six months of the fiscal year, our year-on-your revenue increased 48.4% and volumes increased by 22.8%.

Our share gain and new alloy initiatives had a significant and long-lasting impact on this market. It’s important to point out that according to the U.S. energy information administration, as coal and nuclear generating capacity continue to be retired natural gas is projected to remain one of the most consumed sources of energy in the United States through 2050. For our CPI market, our second quarter year-on-year revenue increased by 25.2% with 2.9% lower volumes, but a $7.59 per pound or 28.9% increase in average selling price. These numbers confirm our strategy of supplying high-value differentiated products and services, selling less of the commoditized portion of our mix, and focusing on the sale of high-value specialty alloys and products within this market.

A significant component of this involves sales of our special project orders based in our continued strong applications development efforts. Wrapping up my comments, I’ll touch on additional components of our business that are worth noting. As far as safety, our leaders and teams are working to continuously improve our safety performance within all of our facilities. Some of our current activities include enhancing our safety suggestion system, pre-shift safety meetings, on-going monthly safety type of training, new employer orientation on safety, continuing work to audit and update our safety procedures, safety-related capital spending, and a continued emphasis on accountability for actions. Next, as far as manpower, I’m focusing my comments today on our cook operations, where we have added 113 production of maintenance employees over the past year, including 10 maintenance apprentices, which represents 20% relatively new employees in our Kokomo operations workforce.

We now believe we are nearly fully staffed at our Kokomo facility to handle the unprecedented demand coming in from our customers. These new hires are now trained on both of their manufacturing processes and the safe work practices required in our plans. With these employees in place, we are now beginning to hit our stride as far as volume improvements required to meet the needs of our customers. As an example, in March, we produced over 1.25 million pounds of cold finished flats, our core error-space product form, which is 22% higher than the average volume produced over the prior six months. In addition, we have now increased our vacuum induction melting or VIM capacity by over 10% via utilization of outside conversion VIM melting. Based on our team’s efforts, our momentum with an operations is clearly increasing.

Next, as far as monthly shipments, our revenue was over 50 million dollars in March. That’s only the third time in the last decade that we’ve exceeded 50 million dollars in revenue in a month. We now expect to average over 50 million in sales over the second half of our fiscal year. Part of this increases obviously help by the impact of raw materials, but the most significant part of this story is that we believe we will achieve this level of revenues of being at a gross margin level assuming neutral raw materials consistently at or above 21%. Related to our most recent ESG initiatives, we continue to provide and complete ESG-related surveys and collect and report additional ESG data. In addition, our second solar installation, a 300 megawatt rooftop installation at our Locate Arcadia, the Louisiana 2 plant, is now operational.

Next, Haynes Innovative Alloys and Applications are at the heart of our company and represent both the core competency and a long-term differentiator. We develop and bring the market niche, highly differentiated products that are the result of long-term research and applications development efforts. Four of our newest alloys are at different stages of commercialization and have shown clear signs of market acceptance. They are for your information. Haynes 233 Alloy Haynes 244 Alloy, Asteroid, Hybrid BC 1 Alloy and Haynes HR-235 Alloy. I would do our Alloy and Application Development efforts at this service but didn’t also mention Haynes 282 Alloy. Haynes 282 has had tremendous success in many aerospace space, industrial gas turbine, automotive and power generation industry applications.

Most recently, an improved newly patented heat treatment for Haynes 282 Alloy has resulted in greater intermediate temperature toughness, opening the door to new potential applications for hot gas bad engine components and other power generation applications. In addition, due to the acceptance of 282 Alloy into the American Society of Mechanical Engineers or ASME Code, the Alloy is on the verge of getting specified in clean emerging technology such as supercritical CO2 and waste recycling projects. One final point on our Alloy and Application Development efforts. You’ve heard us mentioned that we have our proprietary alloys already specified into the Pratt & Whitney1,000 series engine and in the GE-9X engine that powers the 777X. Wrapping up my comments as an example of what our team can accomplish.

On April 4, the south side of our Kokomo plant was hit with what we call a severe wind event during the storm. We lost much of the roof on one large manufacturing building and much of the sighting on a second building. The very good news is that nobody was injured. In addition, our team pulled together and the operations impacted were back in full operation one week later by Tuesday April 11. Thanks to our team, we expect no impact on quarterly shipments because of this event. Okay, I’ll now hand this over to Dan for his comments on our business and our financial results.

Daniel Maudlin: Thank you Mike. We continued to see strong profitability leverage as our volumes and average selling prices grew. This quarter’s pound ship to 4.7 million pounds with an overall average selling price per pound of $32.74 translated into a gross margin as the percentage of sales of over 20% and solid net income of $12.3 million. Volume ship to 4.7 million pounds was at a level that we previously would have struggled to make money. Now with our lower breakeven point, 4.7 million pounds resulted in a 12.3 million net profit. That’s a big change. And we expect this profitability leverage to continue as volumes increase over the balance of the fiscal year. When we look at the potential impact of higher volumes on our gross margins, we view this from a contribution margin or incremental margin perspective.

Depending on product mix, our incremental margin is roughly 40% before considering any fixed costs. Of course, as we continue to grow, we likely will experience some step up of fixed costs along the way. But regardless, the profitability leverage on higher volumes is certainly a favorable driver. As Mike mentioned with production employees in place, we are now just beginning to hit our stride as far as the volume improvement. The example he provided of the month of March cold finish flats production being 22% higher, the average volume produced over the prior six months, is significant. He specially combined with a future utilization of outside conversion, then melting to help. The momentum with an operation is increasing and is expected to dry up higher production and sales volumes in the second half of the fiscal year.

Our investment in inventory combined with this increase in production rates provide an optimistic forward view, especially given our record high backlog level. Next we have talked a lot about the volatile raw material prices for nickel and cobalt and the impact it has had on our results. Last year was a significant benefit which we pointed out during each of those quarterly calls. This year was the opposite with Q1 a significant unfavorable headwind of $5.6 million and Q2 a more moderate headwind of $1.7 million. We were forecasting Q2 to be neutral by the end of the quarter, however cobalt continued to fall causing the $1.7 million headwind. Nickel was neutral for the quarter. These estimates were derived from a model developed by the company to measure how the commodity prices change and how those flow through net revenues and cost of sales.

Our press release schedule 4 shows the result of this raw material impact on gross margins and describes this non-GAAP measure fully in schedule 6. The key takeaway is our adjusted gross margins which are neutral of this raw material impact have been greater than 21% for the past four quarters showing our core margins are solid. This margin strength combined with the projected higher second half volumes and revenue is expected to drive improving second half earnings. This is expected even in light of significant cost inflation in items such as electricity, water, natural gas, property insurance and labor cost. Our goal continues to be offsetting inflationary pressure with price increases and or cost reductions such as improving yields, productivity enhancements and profit improvements.

Our solid margins show that it’s working. Our SG&A including research and technical expense was 9% of net sales for the quarter as compared to last year’s Q2 of 10.9%. SG&A dollars were a bit higher than expected with an uncollectable receivable from a small U.K. customer and sequentially higher foreign currency costs. Operating income were $17.1 million this quarter which is over 50% higher than last year’s second quarter. Our effective tax rate for the second quarter was 21% driven slightly down due to stock compensation investing and option exercises. Current estimates for the remaining quarters of fiscal 2023 are moderately higher in line with federal and state statutory rates. All of this resulted in net income of $12.3 million up 45.6% from the same period last year.

I would also like to provide a status of our U.S. pension plan strategy. As we previously commented, our net liability and funding percentage has improved significantly over the past few years. A couple years ago in early fiscal year 2021 our net liability was 166 million with a funding percentage of 68%. Over the course of fiscal 2021 both investment returns and interest rates were favorable at that point we implemented a customized liability driven investment approach which matched the duration of individual bonds with cash flows coming out of the plan. Therefore our bond assets now move in tandem with liabilities this helps secure the funding percentage. Today that previous $106 million liability is now about $18 million and the funding percentage which was 68% is now 93%.

This funding percentage has held up well during significant market volatility. We continue to evaluate additional actions to make progress towards a fully funded plan. As mentioned earlier, the company experienced continued high levels of order entry over the past quarter. Backlog with at a record $446.7 million at March 31st 2021, an increase of $38.6 million or 9.4% from the first quarter of fiscal 2023 and then increase of $166.1 million or 59.2% from the same period last year. Given this higher backlog we continue to melt at high levels to meet demand. We are now beginning to achieve the higher revenue numbers that better match with our investment inventory that we have made over the past year. We believe that our 108 million in borrowings against the revolver has reached its peak and should begin to moderately decline over the second half of the fiscal year.

Therefore cash generated from operations is expected to meet or exceed our projected capital expenditures and dividend payments. We believe our expanded $160 million credit facility, our on-hand cash of $16.9 million and increasing cash flow provides strong liquidity moving forward. Capital spending during the first six months of fiscal 2023 was $7.3 million and total planned capital expenditures for fiscal 2023 are expected to be between $18 million and $22 million. Outlook for next quarter and full fiscal year 2023. Given the strength of the company’s record backlog along with the workforce additions and work and process inventory investment, the company expects revenue and earnings in the third quarter of fiscal 2023 to be higher than the second quarter of fiscal 2023.

Further the company continues to expect the full year of fiscal 23 to be 15 to 20% higher than fiscal 22 or both revenue and earnings. In conclusion, it is exciting as we transition into the second half of fiscal year with three notable significant factors. Number one, improving production momentum including expanded VIM capacity. Number two, strong demand that our primary markets as evidenced by our 190 million order entry and our record backlog and three, pricing and gross margins strength. These factors fuel our optimistic view of continued growth and are expected to continue to provide the return on invested capital higher than our cost of capital which is a key driver in shareholder value creation. Mike with that, I will now turn the discussion back over to you.

Michael Shor: Thank you, Dan. Our team continues to be encouraged by both progress we’ve made and the future potential of our business. Thanks to all of you for your continued interest in our company and with that Holly, let’s open to call to questions.

Q&A Session

Operator: Certainly. [Operator Instructions] Your first question for today is coming from Mark Reichman at Noble Capital Markets.

Operator: Your next question is coming from Steve Ferazani at Sidoti.

Operator: Your next question for today is coming from Samuel McKinney at KeyBanc Capital Markets.

Operator: Your next question for today is coming from Chris Olin at Northcoast Research.

Operator: [Operator Instructions] Your next question is a follow-up question coming from Mark Reichman. Mark, your line is live.

Operator: We have reached the end of the question-and-answer session and I will now turn to call over to Mike Shor for closing remarks.

Michael Shor: Thank you Olle. Thanks everyone for your time today and thank you for your on-going interest and support of our company. We’ll talk to again in a quarter. Thanks everyone.

Operator: This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.