Haynes International, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Nov 2020

[Operator:]

Hello, everyone, and thank you for joining us today for this Haynes International, Inc. Fourth Quarter Fiscal 2020 Financial Results Conference Call. To get us started today with opening remarks and introductions, I am pleased to yield the floor to Controller and Chief Accounting Officer, Mr. David Van Bibber. Good morning, sir.

[David Bibber:]

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.

[Mike Shor:]

Thanks, Dave. Good morning, everyone. As our team leads our company through the impact of the pandemic, I thought I would start this call by highlighting some of the positives from this past quarter. While this has been a difficult period, we have executed well and I'm proud of our team's accomplishments. First, starting in late March, we prioritized cash generation. After generating $13.1 million in cash in our third quarter, we generated an additional $11.7 million in Q4 for a total of $24.8 million in the second half of our fiscal year. We have also developed plans for positive cash generation to continue throughout fiscal '21. Next, we have strong liquidity, no debt and $47.2 million in cash in our balance sheet. Due to our high level of confidence in operating cash in fiscal '21, we paid off the $30 million precautionary draw on our revolver in September 2020. Many years of tightly managing our balance sheet have set us up well to manage our way through the pandemic. In addition, our team is strategically positioning our company to exit this downturn with a competitive advantage by leveraging our mill direct and service center routes to market. We are building flexible intermediate inventory in the mill to allow for consistently shorter lead times in the future for our high-volume alloys, while our service centers are targeting stock for even shorter lead term requirements and smaller order quantities. We also plan to continue to invest in value-added cutting capacity to provide high-value differentiated products and therefore build additional competitive advantage. Throughout this pandemic, we have stayed in close contact with our customers, continuing to provide what they need when they need it and to gain their insight into current business conditions and future demand requirements.

[Dan Maudlin:]

Thank you, Mike. Let me start with a look back at our quarterly volumes. At the end of last year, fiscal 2019, our fourth quarter volume was 5.4 million pounds, which was the company's highest quarterly volume in 4.5 years. Moving into fiscal year '20, the first half was impacted by the grounding and production halt of the Boeing 737 MAX, lowering aerospace volumes, combined with weak oil prices, which lowered volumes in our chemical processing market.

[Mike Shor:]

Thanks, Dan. This has been a stressful time, obviously, for the world, our country, our families and our businesses. I again, want to thank our employees. They all continue to push forward, initially to protect the health of our employees, and obviously, that's ongoing, and then to jointly lead Haynes through these turbulent times by pivoting the cash generation, focusing on what differentiates us from the competition and implementing the actions required related to our key metrics for success. With that, Jim, let's open the call for questions.

[Operator:]

We'll hear first from Steve O'Hara with Sidoti.

[Steve O’Hara:]

I guess, if you look at -- you mentioned the inventory levels and where they are right now in the channel. Can you just talk about have they improved at all? Or are they still kind of high? And do you need kind of a real pickup in demand for that to improve? Or are things kind of maybe progressing where inventories are getting cleaned up a little bit here and there as we progress?

[Mike Shor:]

Okay, Steve, sure. We obviously spend a lot of time talking about this both internally and getting insight from our customers. We believe that inventory reductions throughout the supply chain are going to go on for another few quarters. Said another way, based on a lot of customer feedback, there's still probably 6 to 12 months of inventory in many areas of the supply chain. Obviously, there's going to be exceptions to this. We're seeing some exceptions. So we could see a modest uptick in '21, but that will just be the first step, in our opinion, to the recovery. Our view, and I really think a great way to look at this, is to look at the LEAP engine because I think what happens with LEAP engines tells us what's going to happen with the aerospace industry. You all know the story

[Steve O’Hara:]

Yes. No, that's very helpful. And then maybe just on the cost cuts, I think you mentioned kind of a $14 million annualized cost savings. Is that something that is kind of a true pickup in -- starting in 2021? And maybe how much of that kind of is incremental in '21 maybe? And then is the $5.6 million that you mentioned, I think, on the pension, is that included in that $14 million?

[Mike Shor:]

Okay. I'll let Dan address the pension after I talk about the cost. I think when we look at costs, you got to look at it from 3 points of view. First is the SG&A and salary cost reduction that we've went through. Those obviously were very difficult to implement. Not something that any of us look forward to, but there's certainly there and will move throughout our upcoming fiscal year. At some point, obviously, when business returns, you're going to have to bring some of that back. But given the pain we went through to get to these levels, it'll take some time. On the variable cost side, there's really a couple of ways to look at this. First, when -- what we have done to get to our high point pre-pandemic of 18% was not only price increase, but significant variable cost reduction, and that work continues, both on yield improvement and overall variable cost reduction. I'm very proud of those efforts. One of the things that happens, though, if you've reduced cost on a per pound basis, you don't get as much cost reduction with 2.9 million pounds as you did with 5.4 million pounds, obviously. So that hurt. So as we move forward, some of our past cost reduction is muted until our volume comes back. But also on the variable side, we continue to focus on all of our facilities in driving costs down. Dan, you want to cover the $5.6 million Steve asked about?

[Dan Maudlin:]

Sure. Yes. The pension reduction and the retiree health care reduction really has -- is not part of that $14 million that I referenced. That was only related to the permanent reductions that had occurred over the course -- that occurred somewhat in -- mostly in 2020, a little bit spilled into 2021 because I mentioned to you the October number. But that was majority of that number has already been realized and some of the numbers we're seeing for the fourth quarter and even a little bit in the third quarter of FY '20, but unrelated to the pension. And I will say this, too, it's also unrelated to other cost reduction measures that we've taken, like the unpaid furloughs is not part of that $14 million number. The 10% reduction in the executive staff salaries is not part of that as well. That's just 1 piece of a bigger cost reduction strategy. Does that help?

[Steve O’Hara:]

Yes. Very helpful. And then maybe last one. You noted CPI remains, I think, kind of low given the economy, et cetera, I mean what were the biggest markets there? I mean it seems like homebuilding tends to be one of the bigger drivers of chemical and then auto seems to be the other big one. Are there other markets that we should think about in terms of getting that market back to maybe improvement other than just general GDP?

[Mike Shor:]

Yes. The oil prices have a significant impact. So when oil prices are down, there's less spending in the CPI market. So that's significant large pipeline projects, we're not out there. In general, we are seeing many chemical processing projects on hold, specifically related to COVID and everyone being a bit conservative with their spending. So that's one side. The other side is our special project side. We actually finished our fiscal year '20 in a pretty good spot related to year-on-year staying plus or minus about even on our revenues on CPI. We're actually going -- on special projects within CPI, we'll see that drop somewhat because there's very few projects being lead. But I would say, in addition to what you said, it's oil price, it's large pipeline projects in general and it's our special projects.

[Operator:]

Our next question will come from Chris Olin at Tier4 Research.

[Christopher Olin:]

Mike, you referred to order rate improvements, although they were from a low level, I was curious if there was a specific end market that's driving that? Or was it a broad based improvement?

[Mike Shor:]

Yes. Let me get some facts here, Chris. The best way that I like to look at this is our book-to-bill and it's kind of interesting. When you look at pounds on what we book versus what we bill in Q1, obviously, pre-pandemic, it was at 1.0, I'll get to the markets in a second, Q2 was 0.7, Q3 was 0.6, Q4 bounced back a little, which obviously gives us some hope, it was at 0.9. And to specifically answer your question on the book-to-bill arrow, we're still down. It was at 0.7 book-to-bill for the quarter, but CPI was slightly over 1, IGT was slightly under 1, and other was over 1. So it's -- arrow was lagging as we would expect, as we talked about with inventory, but the others are coming back. Again, we've got a long, long way to go. We say we're in the road to recovery, but it's from very low levels,

[Christopher Olin:]

Okay. And then just want to make sure I understood what you said there on the special project pipeline -- or revenues. What was the actual number? I wasn't sure I caught that. And then I was just curious. Did you talk about the pipeline, like any prospects in terms of what it could look like for the next fiscal year?

[Mike Shor:]

Yes. We -- the special projects were approximately $25 million in fiscal '19 were probably plus or minus $1 million over that in fiscal year '20, because the lead times on these very complex products are very long, so a lot of what we had in there was things that have been ordered before the pandemic hit us. I'd expect a drop in our current -- now current fiscal year. Don't know the level yet. We have some numbers, but we're always pushing for more. So I would say year-on-year, that's going to be down. But we -- what we like is where the margin is and what's coming in. It's been a fairly rich mix over the past year, plus or minus. Dan, anything you want to add to that?

[Dan Maudlin:]

No. I think you nailed it. To give you a specific number in FY '20, special projects, $26.3 million; where in FY '19, $25.5 million. So you're right on in your numbers, Mike.

[Mike Shor:]

See that, Chris, I'm generalizing and Dan comes and cleans it up, gives the actual numbers. Thank you, Dan.

[Christopher Olin:]

Perfect. You guys have done a great job on the cost reduction side. I'm just trying to think about the normalization of volumes when we start looking out to like '22 and such. When you think about the 183 positions that were removed, would a lot of those jobs need to come back to increase production? Or is there a way to think about how much of the cost reductions would stick going forward?

[Mike Shor:]

I think it was obviously very painful to remove people, both on the production side and through the salaried side of our business. I think it was also fairly expensive for our company to do that. So certainly, as volume comes back, there will be a lag, but there will be a need to bring back some of our production workforce in our facilities, but we will do that very slowly. And on the salaried side, we're going to have to be after spending money to have to remove them to bring them back. Certainly, there will be some that have to come back, but it will be a very slow process to bring them back.

[Operator:]

Next, we'll hear from Michael Leshock at KeyBanc.

[Michael Leshock:]

First, just on your internal inventory destocking. I know you said you're looking to destock more inventory into 2022. But looking at the fiscal 1Q, how should we expect the magnitude of the destock to be versus the sequential change that we saw this quarter?

[Mike Shor:]

We've seen what -- in the second half of last year, we aggressively removed about 2.8 million pounds of inventory. This is a real balancing act for us because we have to keep some metal flowing through our plant. Obviously, our shipment level is not as high as it's been in the past. So -- and Q1, by the way, is typically a tough quarter for us to reduce inventory. So I don't know, to be honest with you, the spread across the year, but we do expect to continue incrementally quarter after quarter to find ways to reduce inventory. Dan?

[Dan Maudlin:]

Yes. I think that's a good way to look at it. I mean, obviously, when we reduced inventory originally in FY '20, just volume itself going down, is going to reduce what's in work in process, what additional raw materials you're buying. So that's a bit of a somewhat natural reduction with volumes overall going down. I think we -- as we get into FY '21, it shifts a little bit in that the pace may not be quite as strong. And it'll shift a bit more to the -- maybe the finished goods side of it, where we're reducing more out of the finished goods side rather than whip and raw materials. But we're looking at really every pocket of inventory, looking for any kind of stranded inventory, you might say, and work in process and trying to clean it up as best we can. We have an inventory steering committee that studies this quite heavily, and we report to senior staff, inventory levels, at least weekly, if not more often than that. So it's a big push for FY '21. We're confident we can continue to reduce inventory. As I mentioned in my prepared remarks, our inventory level as compared to sales is still quite high. Our turns could certainly go up. So I think we have a lot of room to improve, and that will generate cash.

[Michael Leshock:]

Got it. That makes sense. And then on the 737 MAX, given the recent news we've heard there, I know that's about 8% of normalized volumes for you. How is the supply chain gearing up for the return to service? I know you mentioned the LEAP engines, but any other color you could add there on the MAX?

[Mike Shor:]

I think when you look at best estimates out there for MAX production in 2021, actual planes built, it's only probably 120 planes to be built. So I still believe there's significant inventory out there. Obviously, we went from the high levels in the 50s, down to 0 and now probably plus or minus at the current time for a month. So there is still significant inventory out there. So I think a return and a bounce back in demand will be very gradual. We're looking, hopefully, at 31 a month starting in 2022, and as they begin to for that is when, I think we'll begin to see a pull.

[Michael Leshock:]

And then just lastly for me. You mentioned the new IGT customer. Anything you can tell us in terms of the magnitude, how we should think about that customer and then your expectations for more share gains in the near term?

[Mike Shor:]

Sure. I don't think I want to get into the actual volume for us in a company that only shipped 2.9 million pounds last quarter. It is certainly significant volume. It's a key piece in our puzzle. It's something we targeted and went after, and we feel really good about that. By the way, on IGT, the other thing that we really like about this market is we're finally seeing the supply chain at steady state. So instead of talking about all the inventory in the IGT supply chain, which we've been talking about forever, there's no more inventory reduction. When there's demand, we're seeing a pull forward. So we feel good about that in general and what's happening with that specific customer. And for us, it is significant. As far as other share gain, I believe the value that we provide with our service centers, with our just-in-time inventory, with our technical service, with our alloy development, I think there's opportunities everywhere in which we can find ways to outservice others out there, and that's what we're focused on doing. This is the one which is -- that has happened. So it's good to talk about. But we're certainly focused on others, whether it's here, aerospace, other areas.

[Operator:]

And gentlemen, we do have a follow-up coming in from Chris Olin once again at Tier4.

[Christopher Olin:]

Sorry, I had a couple more. I thought I'd just knocked it out here. Wanted to ask about Arcadia for 2 reasons. One, I know there's been a little bit of disruption in the titanium supply situation. I was wondering

[Mike Shor:]

Chris, we may have lost you.

[Dan Maudlin:]

We lost you, Chris. We can't hear, Chris.

[Operator:]

Mr. Olin, are you reconnected, sir?

[Christopher Olin:]

Hello?

[Operator:]

Gentleman, I believe, I , I do apologize.

[Christopher Olin:]

Okay. To be clear, I am online, right?

[Mike Shor:]

Yes, you are. We can hear you.

[Christopher Olin:]

Yes, not sure where I got knocked out there. I wanted to ask about Arcadia. There had been some changes in the titanium supply situation here over the past few months. I was wondering if that was an issue for that business on the quarter as well as the issue with COVID and how Louisiana getting hit. Just kind of see, maybe you can give me an update there?

[Mike Shor:]

Sure. As far as the starting stock for Arcadia, for titanium tube supply, not an issue at all. It's a very controlled process in which if processes change incoming, we are deeply involved in our end-use customer is deeply involved with that. So we don't see anything there. It'll be a very controlled change over our people and our supplier are all over that one. So no issue at all. COVID, significant issue, Chris, not only in Arcadia, but in all our facilities. We're doing everything we can, social distancing, staggered shifts, ending shifts early, whatever we need to do to try to protect our people, but it's very difficult. So yes, we have significant issues in Arcadia. Our team is doing a great job of keeping things going. And I could say that about every facility we have our offices, the plant in Kokomo going through similar items. It's not just what happens in the plant, obviously. It's what happens when people go out in the public or with families, who are all worried about what happens over Thanksgiving. But so far, team has done a very good job in keeping things going well, working to protect all our employees.

[Christopher Olin:]

Okay. And Dan, you mentioned the COVID-related cost, does that continue into the next year? Did you mention that?

[Dan Maudlin:]

Yes, I think those would. I said $250,000 to $300,000. That's related to staggered shifts and teams cleaning different areas, as Mike was just kind of referencing there. I think that cost would continue as we continue to try to keep everyone safe and keep everyone separated. And anything we can do to help and protect their health, we're trying to do. So that will have a cost to it, but pretty manageable.

[Christopher Olin:]

Okay. And then the last question I had was, I thought I recalled GE talking about increasing production of the turbines or maybe the outlook getting less negative. Have -- has that helped your business there? Are you thinking about that marketing any different at all?

[Mike Shor:]

On power generation, I'd say on the mid and small-sized turbines, as Dan said in his prepared remarks, a lot of that's going into oil and gas. So that's certainly down. We finally see nice projections for the large frame engines. And our alloy content in those is good and continues to grow, especially on the proprietary side. So that's good. So we will see that coming. And as I noted, I think in one of my responses along here, we no longer see a supply chain full of inventory there. So when they start to build, we will feel it. Has it come yet? Not necessarily, but we do believe it will come, not certainly in huge quantities, not to where it was when we peaked in this market many years ago, but it certainly will begin to improve.

[Operator:]

And ladies and gentlemen, that does conclude our Q&A session for today's conference. I'm happy to turn the floor back to Mr. Mike Shor for any additional or closing remarks.

[Mike Shor:]

Okay. Thanks, everybody. We appreciate everyone's time. Thank you for your interest and support. Please be safe for thoughts with you and your family and this incredibly unusual time we live in. Look forward to talking to you again next quarter. Thanks, everyone.