Haynes International, Inc. (NASDAQ:HAYN) Q4 2023 Earnings Call Transcript

Haynes International, Inc. (NASDAQ:HAYN) Q4 2023 Earnings Call Transcript November 17, 2023

Operator: 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. [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 Michael 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, 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.

Michael Shor: Thank you, Dave. Good morning, everyone. The highlights of our fiscal ’23 performance includes six consecutive quarters of an adjusted gross margin of approximately 21% or better, a normalized EBITDA of approximately $99 million when adjusting for both the impact of the third quarter cyber issue and the raw material headwinds, 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 aero and IGT markets. Based on this performance and our ongoing improvement initiatives, we believe that we have positioned Haynes very well for the future. 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 remains the same. We continue to work to at least offset inflation through our relentless focus on variable cost reductions. We 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. 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’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. 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.

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. 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. It was great to see our safety improvement initiatives resulted in improved performance in the quarter. 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. We achieved these results despite incurring significant unplanned equipment downtime in September in our cold finish flat production area.

Next, you’re all aware of our ongoing focus and emphasis on gross margin. 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. 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 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 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. It’s important to note that this was achieved at a shipment level of 18.5 million pounds. As we look to the future, we are 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 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 positioned 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 of the year. From a market perspective, the news in Q4 continues to be positive. Our largest market, aerospace, was 50.9% of Q4 sales. Our aerospace revenues grew 20.9% versus Q4 of last year, 5.6% sequentially and 26.3% for the full fiscal year. Average selling price increased — average selling price in Q4 increased 14.7% versus the same period last year. The $290.4 million in aerospace sales in fiscal ’23 was the highest level of annual aerospace sales on record. 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.

Overall, aerospace demand is still very strong and the supply chain is showing no significant signs of excess inventory. As I’ve mentioned on previous calls, HAYNES 282 and HAYNES 244 alloys have been specked into various aerospace engine programs, while 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. Our 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. The Q4 revenues of $34.2 million are the highest quarterly sales on record into the IGT market. Average selling price in Q4 increased 5.6% versus the same period last year. Our IGT story remains consistent with supply of high-value differentiated products and services leading to share growth along with the continued and increasing application of HAYNES 282 alloy in the turbines to improve performance.

Our CPI market was 14.3% of Q4 sales. Within this market, there are two important points to make. 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. In addition, over the quarter. We’ve been successful in reducing our lead times by about 50% 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% versus Q4 of last year, increased 30% sequentially and increased 0.4% for the full fiscal year. Within CPI, we continue to focus on growing the high margin alloys and special projects.

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. Some examples of our high-value differentiated corrosion-resistant alloys include HASTELLOY HYBRID-BC1, HASTELLOY C-2000 and HASTELLOY G-35 all for various types of heat exchangers, reactor vessels, agitators and piping. These alloys are specified due to their unique and superior corrosion-resistance to the highly corrosive media used in the production of specialized chemicals. 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. 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-to-bill. Based on revenue, our book-to-bill was 0.9 for the quarter, aerospace was 1.0, IGT was 1.1 and CPI, because of two major reasons already noted, was 0.7. We continue to be encouraged by the level of interest and demand for our alloys products and services. Now looking into the future. 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 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 alloys. In addition, the future outlook for single aisle and wide-body aircraft deliveries remained strong.

Year-on-year growth rates for single aisle aircraft are expected to be 25% in 2024, 16% in 2025 and 9% in 2026. Overall, air passenger demand has made a strong recovery over the past year, which brought global passenger traffic close to pre-pandemic levels. Next, the industrial gas turbine market is also expected to grow at a steady pace through the 2030s 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. Continuing to look — with our look to the future, our ongoing pricing actions based on the alloy products and service value we provide, along with the continued drive to improve yields and variable cost of our products are projected to continue to incrementally improve our top-tier — excuse me, our top-tier raw material neutral gross margins.

One concern that we do have for at least the first quarter of fiscal ’24 is the continuing drop in nickel prices. As the decline in the price of nickel continues, we project that this will lead to additional and increasing raw material headwinds. 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. 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 materials. 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.

Our collective focus is on continuing to improve EBITDA, increasing volumes, alloy and application development, supplying high-value differentiated products and services, and of course, our variable cost reductions. Next, we believe we are at an inflection point for cash generation. 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 our revolver in fiscal year ’24. 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. They collectively are creating a safe work environment, a company that has leading gross margins in our slice of the industry, a 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 coworkers, well done and thank you. And I’ll hand this over to Dan for his comments on our business and our financial results.

Daniel Maudlin: 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 20.9% 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 markets. In addition, we had adjusted gross margins neutral of raw material headwind at 20.7% and net income at $42 million. We talked 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 $12.6 million and nickel was $4.5 million of the $12.6 million. Thankfully, the cobalt headwind is moderating as the cobalt price has stabilized. Moreover, nickel is still falling, thus still 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 ’24 to be well above the $3.7 million pre-tax we saw in Q4 of FY ’23. Looking at the full year FY ’23 raw materials and comparing to FY ’22, 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 a $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 you remove the favorable tailwind, that it is adjusted gross margin dollars neutral of raw materials of $96.9 million, with the same math for fiscal ’23 with gross margin of $109.8 million and adjust for both the $12.6 million raw material headwind and the third quarter cybersecurity incident of $6.9 million gross margin impact, results in adjusted gross margin dollars of $129.3 million. So $96.9 million in FY ’22 to $129.3 million in FY ’23 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 ’24 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 8.5% of net sales in the fourth quarter as compared sequentially to Q3 of 8.9%. And was 8.8% for the full fiscal year as compared 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’s cybersecurity incident. 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 $1.02 and full year net income of $42 million and a $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 ’23. We believe fiscal ’24 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 30, ’23, an increase of $71.1 million since the beginning of the fiscal year. The increase was driven by inventory, representing a $56.5 million increase this fiscal year as we grow production levels and top-line revenue. Accounts receivable increased $11.4 million and accounts payable and accrued expenses changed by $3.2 million. Our capital investment in fiscal ’23 was $16.4 million.

We are still evaluating fiscal year ’24 capital expenditures, but expect it to be in the range of $25 million to $35 million. Outlook for the future. Looking at the full fiscal year ’24, 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 ’24, gaining momentum as we progress through the fiscal year. Revenue and earnings in the first quarter of fiscal ’24 are expected to be higher than the first quarter of fiscal ’23, but lower compared to the fourth quarter of fiscal ’23. 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 Anneal and Kolene line in the quarter, which may impact efficiency and the mix of products sold in the first quarter of fiscal ’24. In conclusion, as we head into fiscal ’24, we remain optimistic with our improvement initiatives still in focus along with a strong backlog, a strong inventory position and improving production momentum. We are providing — we are positioned well to continue to execute and achieve our goals in fiscal ’24 with improving financial results. Mike, with that, I will now turn the discussion back over to you.

Michael Shor: Thank you, Dan. Our team continues to be encouraged with the progress we’ve made. We want to again thank all of you for your continued interest in our company. With that, Holly, let’s open the call up to questions.

See also 20 Countries With the Cheapest Electricity in the World and 30 Countries with the Best Economy in the World Right Now.

Q&A Session

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

Mark Reichman: Good morning.

Michael Shor: Good morning, Mark.

Mark Reichman: I was just curious, what percent of the orders that were delayed by the cybersecurity event are included in the order backlog of $460.4 million?

Michael Shor: Including the first quarter — as we go forward, including the fourth quarter, we have basically feathered 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 feathered in over the next 12 months.

Daniel Maudlin: Yeah. And just for everybody listening, we estimated $18 million to $20 million of revenue shortage in the third quarter. So we do — now that stays in the backlog because it wasn’t shipped and that will be, as Mike mentioned, feathered into the next several quarters.

Mark Reichman: Okay. So the addition of production headcount and inventory that has allowed you to increase your shipping levels. So do historical trends of kind of 50% of the backlog shipping within six months and 90% within 12 months? Will that still hold in 2024?

Michael Shor: Yeah, 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.

Mark Reichman: Okay. And then just my last question, if you could just maybe explain the delta between 2023 and expected 2024 CapEx?

Daniel Maudlin: Sure. First is, we have always found ourselves, well, 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 increase for some of that make-up. And it’s 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.

Mark Reichman: Well, that’s great. Thank you very much. Very helpful.

Michael Shor: Thanks, Mark.

Daniel Maudlin: Thanks.

Operator: Your next question is coming from Steve Ferazani with Sidoti & Company.

Steve Ferazani: Good morning, Mike, Dan. Thanks for all the detail on the call. I’m little surprised by the flat year-over-year volume. I think you mentioned an outage at Kokomo, can give us a little bit more color on that?

Michael Shor: Yeah. We’ve had some processing issues as we hit the fourth quarter. We continue to look for ways to expand our capacity and bring in more VIM 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.

Steve Ferazani: The impact of the unplanned outage?

Michael Shor: The impact that we had and some issues that we had in our last quarter, 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.

Steve Ferazani: Okay. Some of the upgrades planned in Q1 is that debottlenecking focused? Are you outside of using third-parties? Is the expectation some of this is to be able to get volume increases?

Michael Shor: Yes. As we talked about, one of our big initiatives as we are in this quarter now is shut down and rebuild of part of what’s called our A&K line and that is a critical piece of equipment between our four high hot rolling mill and 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.

Steve Ferazani: When we think about your mix, and obviously, continued efforts to push down to lower margin, more commoditized chemicals, is your expectation that your gross margin ex-raw materials can trend up towards healthy above 21% given your volume mix and backlog? Obviously, ex-raw materials.

Michael Shor: It’s all a matter of how you define certain words. I’ll say, incrementally improve, okay?

Steve Ferazani: Yeah.

Michael Shor: We proud of where we are. To be six quarters in a row with — at raw material neutral levels at 21% is 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 our operations and through taking advantage of where we can, the value we’re providing, therefore, increasing our prices where appropriate. So we would say, incremental increases are the best way to describe what we think we can do. But I meant in my script what I said, we’re not done with gross margin.