Haynes International, Inc. (NASDAQ:HAYN) Q4 2022 Earnings Call Transcript November 18, 2022
Haynes International, Inc. beats earnings expectations. Reported EPS is $1.3, expectations were $1.28.
Operator: Good morning, ladies and gentlemen, and welcome to the Haynes International, Inc. Fourth Quarter 2022 and Fiscal Year-End Financial Results. At this time, all participants have been placed on a listen-only mode. And the floor will be open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. David Van Bibber, Controller and Chief Accounting Officer. David, 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. 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.
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Mike Shor: Thank you, Dave. Good morning, everyone. I’d like to begin my comments today by making you aware of the heartbreaking and devastating news of the death of a Haynes employee one week ago from injury sustained, while working at our Kokomo, Indiana plant. As we more in the loss of our coworker, Seth Badger, who was 32 years old from Logansport, Indiana. We ask that everyone keeps Seth’s family in your thoughts and prayers during this extremely difficult time. To our Haynes team, we will support and lean on each other and find the strength to together, work through our sadness and grief. Although not easy, I’ll now transition to my comments on our financial performance for our fourth quarter and the full fiscal year. With fiscal 2022 behind us, we would like to take a quick look back and compare fiscal 2022 to fiscal year 2021.
Revenues improved by $153 million or approximately 45%. Gross margin almost doubled from 11.8% to 21.7% and despite inflationary pressures. SG&A, including research and technology, dropped from 13.9% of revenue to 10.4% and was 9.1% in Q4. Net income went from a loss of $8.7 million in fiscal 2021 to a profit in fiscal 2022 of $45.1 million, which was the best net income for our company in a decade despite shipping just Â£17.6 million. Our backlog finished at a company record level of $373.7 million, which is more than double last year’s $175.3 million. Our employees have driven this improvement. My sincere thank you for both their efforts to get us to this point and the relentless focus on the actions that will drive will safely drive the additional volume and profitability improvements that we anticipate in the future.
We were asked regularly how we were able to improve our business performance so rapidly. The quick answer is that this happened because of the excellent people, differentiated products and services, relentless focus on variable cost reduction and unique processes that we have at Haynes. More specifically, I’d like to now highlight six items that are driving our significant business performance improvement. First, our alloy and application development is second to none in our industry. Two significant statistics to back this statement up. Approximately 60% of our revenue is from alloys Haynes invented and about 30% of our product margin is from alloys still under patent or alloys others are unable to produce. The best part of this, our future continues to look bright with new alloys and applications under development within our research and marketing groups, including in our aerospace market.
Second, our high-value products and services, including the combination of our mill and company-owned value-added service centers truly differentiates us. Third, the manufacturing of small quantity orders made to the highest quality levels in the industry provide us a niche that we believe leads to a competitive advantage. Fourth, we have outstanding sales and technical service, which our customers and end users truly value and create strong customer retention and loyalty. Fifth, we have unique niche-oriented manufacturing capabilities including the combination of our four high hot rolling mill and cold finishing capabilities for flat products, along with our high-value tube and wire capabilities. And finally, we continue to have a relentless focus on variable cost reduction throughout our operations via efficiency gains, CapEx improvements, yield increases and process changes, all of which have resulted in a significant and sustainable improvements improvement.
The result of all this work is evident in our financial performance, with our gross margin percentage continuing to lead our slice of the industry. We’ve moved from single and low double-digit gross margins in fiscal year 2016, 2017 and 2018 to 18% gross margins immediately prior to the impact of the pandemic. We have since emerged from the pandemic with margins now at about 22% without the favorable impact of raw material tailwinds. In addition, our breakeven has been reduced by approximately 25% from the 5 million pounds per quarter level in the past to now about 3.7 million pounds per quarter. Diving deeper to confirm the significant impact of the 25% reduction in breakeven, we’ve compared our quarterly results of this current — the year that just ended to prior year’s quarters with similar shipped volumes.
Here are the details. In our quarter one of fiscal 2022, we had similar ship volumes to Q1 of fiscal 2018, yet net income improved by about $7 million. Q2 of fiscal 2022 had similar ship volumes to Q1 of 2019 and yet net income between the quarters improved by approximately $10 million. Q3 of fiscal 2022 had similar volumes to Q3 of fiscal year 2017 and net income improved by approximately $19 million. And finally, Q4 of fiscal 2022 had similar volumes to Q2 of fiscal 2017 and net income improved by approximately $18 million. We’ve made fundamental changes that are leading to excellent financial performance. The best part of the story is that we believe so much more is possible. Now some comments on our markets, and our recently completed Q4 and fiscal year.
Our fiscal year 2022 revenue improved by over 45% versus fiscal 2021, led by a 79.6% increase in CPI, and a 37.6% increase in IGT. Our Q4 revenues of $143.8 million were the highest quarterly revenues in a decade. Sequentially, revenue in each of our core markets increased by double digits, with Aerospace up almost 11%, CPI up over 12% and IGT, up almost 19%. In addition, our fourth quarter aerospace revenue was $67.6 million, representing 47% of total sales. Even with these high Q4 shipment levels, our book-to-bill based on revenue remained strong at 1.3% overall with Aerospace at 1.4%, IGT at 1.3%, other revenue at 1.4% and CPI at 0.6%. The CPI reduction was expected and directly related to our current mix management initiatives on the more commoditized portion of our CPI business.
Our view of our largest market, Aerospace remains very bullish with commercial Aerospace, single-aisle build rates continuing to show momentum. The growth in this market is expected to accelerate further with double our recovery expected in late 2023 and into 2024. Our exposure to Commercial Aerospace is strong in both new builds and in the aftermarket MRO business. As far as the new build, Haynes proprietary alloys are specified into next-gen fuel-efficient engines like the Pratt & Whitney 1000 series and the GE9X, as we’ve talked about before. Our strong financial performance for the quarter reflected the impact of increased volume and revenue, along with our ongoing improvement efforts. Our Q4 gross margin was over 22%, and our net income achieved in both our Q3 and Q4 were each greater than the full year net income of any year going back to fiscal year 2015.
Finally, we continue on a run rate of approximately $100 million in adjusted EBITDA. Now, a couple of additional points worth noting on the quarter, as you know, each quarter, we call out the component of our earnings that is related to raw material fluctuations. In our third quarter, we noted that, our gross margin percent without the previously reported raw material tailwind of $4.1 million was 22.4%. In Q4, based on price changes of nickel and cobalt, combined with our mix of shipments against each type of pricing mechanism are calculated tailwind for Q4 was reduced to $1 million. In fact, in September, we actually incurred an unfavorable raw material headwind. And despite that, our September gross margin remained at approximately 22%. We now expect a raw material headwind of roughly $4.5 million in the December quarter, then neutralizing for the balance of the fiscal year, assuming flat raw material prices.
I’ll cover this in more detail shortly when I talk about our current view of fiscal 2023. Next, our tax rate for the quarter was favorable, and Dan will provide more comments and more detail on this in his comments. Continuing, I’d like to talk for a second about ESG. Haynes continues to gain momentum with tangible results. We now have our one-megawatt solar array fully operational at our wire manufacturing facility in Mountain Home, North Carolina. The project finished on budget and is now generating electricity from a renewable source. We’re now preparing for our next solar project at our manufacturing facility in Arcadia, Louisiana. We also continue to increase the amount of ESG public disclosures as we develop additional metrics. The process of developing metrics and goals while making investments in reducing our carbon footprint will continue as a high priority for Haynes.
As I do on every call, I now want to provide you with additional insight on our alloy and application development work. Today, I’ll focus on the CPI market, specifically a Haynes proprietary alloy HASTELLOY HYBRID-BC1 alloy. Over the years, Haynes has invented and developed a number of corrosion-resistant alloys for the chemical process industry. HASTELLOY C-276, C-22, C-2000, B3, G35 and several other alloys are all very well known in the chemical processing industry. One of our latest proprietary corrosion-resistant alloys, HASTELLOY HYBRID-BC1 alloy has been accepted for the construction of a heat exchanger and a production step for crop protection chemicals. Corteva Agriscience was experiencing accelerated corrosion attack in a C-276 alloy heat exchanger, which had to be replaced on an annual basis.
A HYBRID-BC1 Alloy heat exchanger was fabricated and the heat exchanger has provided significantly higher life cycle cost advantage by minimizing downtime for repairs and replacement. Based on this work, I’m very proud to say that MTI, the Materials Technology Institute, has recognized Haynes and Corteva Agriscience with a 2022 MTI value award for our collaboration on this HYBRID-BC1 alloy project. It’s important for us to go through these type of accomplishments with our application and alloy development. This is just another example of the outstanding work done by our application — I’m sorry, our alloy and application development teams. Wrapping up my comments, I’d like to cover our current view of fiscal year 2023. We believe that our future is bright and is in line with our past projections.
Specifically, our current bookings and book-to-bill levels, support our anticipated top line growth rate of 15% to 20% year-on-year. Our average gross margin in the second half of fiscal 2022 when removing the impact of raw material tailwinds averaged approximately 22%. We expect to slightly improve in that in fiscal 2023 in spite of the expected Q1 headwind, because of the benefit of increased volumes along with our ongoing work on costs and providing high-value differentiated products and services to our customers and end users. We expect to set a revenue record within our Aerospace market, despite the industry supply chain issues and lack of twin aisle builds at this time. We’re projecting positive operating cash flow to begin mid fiscal year 2023 and as our higher levels of order entry turn into shipments and raw material purchases are more in balance with our order entry.
With the anticipated 15% to 20% growth in revenue along with our ongoing improvement initiatives, we anticipate the fiscal 2023 earnings growth to be approximately 20% when compared to fiscal year 2022. Finally, our first quarter revenue was typically lower due to holidays, planned maintenance projects and customers managing their calendar year-end balance sheets. In addition, in our first quarter of fiscal 2023, as I noted previously, raw materials are projected to turn into an unfavorable headwind of approximately $4.5 million and then neutralized for the balance of the year assuming relatively flat raw material prices for the balance of the year. Given these factors, earnings per share is projected to be roughly $0.55 to $0.70 in the first quarter of fiscal year 2023, which would represent the best first quarter in a decade and compares favorably to the $0.37 achieved in the first quarter of fiscal year 2022.
The bottom line is that the actions of our employees have resulted in fundamental and sustainable changes to our business. The future is bright for Haynes, because of the efforts of all of our employees. My sincere thanks to everyone on our team. With that, I’ll turn the call over to Dan to review the financial highlights.
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Dan Maudlin : Thank you, Mike. We finished the year with impressive fourth quarter financial results that included revenue at $143.8 million, which is double-digit sequential revenue growth and over 50% higher than last year’s fourth quarter. Gross margin as a percent of revenue was 22.2% in Q4. This revenue strength, combined with margin strength drove our adjusted EBITDA to $24.2 million, which was 16.8% of revenue and net income to $16.3 million, which is 11.4% of revenue. This was accomplished at a volume level of 4.9 million pounds shipped. Our successful efforts to increase the melt rates driven by our continued investment in inventory have driven increasing shipments and strong profitability as well as an optimistic forward outlook.
Gross margin was impacted this quarter by raw material tailwinds neutralizing faster than we expected. The estimate raw material impact this quarter from nickel and cobalt was favorable by only $1 million, compared to $4.1 million in Q3 and $1.8 million in last year’s Q4. If we remove the raw material impact out of this quarter’s results and last year’s Q4 results, the gross margin improved 580 basis points. This was driven by our price and cost improvements, combined with higher production and sales volumes. Looking forward, we expect Q1 FY 2023 raw material impact to flip to an unfavorable headwind estimated at $4.5 million, that neutralized for the balance of the year depending on where raw material prices go. It’s tough seeing this impact to go from a tailwind to a headwind.
Nickel started in fiscal year 2022 at about $9 a pound, then hit roughly $15 a pound about mid-year driving this tailwind. Then it’s come back down to around $10 to $11, causing the headwind. Trends are similar with cobalt going from $25 to $39, then back down. This is expected to neutralize assuming prices stabilize. We continue to encounter inflationary pressures, a tight labor market and supply chain delays like every industrial business has. Our team continues to successfully navigate our way around these issues. Our goal continues to be offsetting inflationary pressure with price increases and/or cost reductions, such as improving yields productivity enhancements and process improvements. Continuing down the P&L, SG&A, including research and technical expense was $13.1 million in the fourth quarter, or 9.1% of net sales.
Operating income was $18.8 million this quarter, which is $14 million higher than last year’s fourth quarter. Sequentially, operating income declined $1.6 million, mainly due to the raw material tailwind neutralizing faster than we expected. Non-operating retirement benefit income was $1.4 million and was favorable to last year’s quarterly expense of $1.8 million and a $6.1 million improvement for the full year. The US pension funding percentage remained relatively stable, holding at 91% even during recent market volatility due to our customized LDI strategy. Our year-end valuation resulted in the US pension net liability at September 30th, 2022, dropping to $20.6 million, which is a $5.5 million decrease over the year and our retiree health care liability dropping to $64 million at 9/30/2022, which is an $18.9 million decrease, both combined, representing a $24.4 million liability reduction.
Our effective tax rate for the fourth quarter was 15.3%. The lower fourth quarter rate includes a higher utilization of tax credits and deductions as well as discrete tax benefits related to stock compensation. The effective tax rate for the full fiscal year was 21.7%, and current year estimates for next year’s effective tax rate are moderately higher, in line with federal and state statutory rates. All-in, our net income this quarter was $16.3 million with a diluted earnings per share of $1.30 compared to $1.24 in the third quarter and $0.20 in last year’s fourth quarter. To summarize our full fiscal year results, we had revenue at $490.5 million, a 45.3% increase or $152.8 million over last year. Gross margin was 21.7%. Operating income, which was negative last year, was $55.4 million this year, an improvement of $62.6 million.
Net income for fiscal year 2022 was $45.1 million, an improvement of $53.8 million over last year’s COVID-driven net loss of $8.7 million. The second half of this year represented over 70% of the net income, showing the current trends of profitability are strong and we look forward to FY 2023 with more normalized volumes with our lower breakeven point. Order entry and backlog continued to be at extremely high levels. Backlog ended the fiscal year at $373.7 million, up 10.5% over the quarter and 113.2% year-over-year. And to look one month into the new quarter of FY 2023, October backlog ended at $388.7 million. October order entry represented our 11th straight quarter of order entry over $50 million per month, clearly strong demand signals.
A few comments on cash flow and the utilization of our revolver. The primary item, which drove our cash deployment this fiscal year was inventory increasing driven by our backlog strength and the inventory cost per pound rising. The pace of this inventory increase is slowing. Inventory rose $13.5 million over the fourth quarter and roughly 87% of that was the average cost per pound rising. Other components of our controllable working capital increased over the quarter such as accounts receivable with higher revenues. Looking into FY ’23, we estimate that with our improved profitability, combined with our melt rates more in line with our shipping levels, the utilization of the revolver will ease and free cash flow is expected to turn positive in midyear ’23.
We expect to be using the positive cash flow in the back half of the year to begin to pay down the revolver. We had cash on the balance sheet of $8.4 million at September 30, ’22, and $74.7 million borrowed on the company’s credit facility. This represents a net debt change over the quarter of $29.2 million. Controllable working capital increased by $38.9 million, with inventory increasing $13.5 million, AR increasing $15.5 million and accounts payable and accruals decreasing by $10 million. In early October, we expanded the size of our credit facility from $100 million to $160 million, which is better aligned with our borrowing base and provide strong liquidity moving forward. Capital spending was $15.1 million in fiscal ’22, and we’re forecasting to spend $20 million to $24 million in fiscal ’23, which is slightly higher than our depreciation rates.
Outlook for next quarter and fiscal 2023. Current full year expectations for fiscal ’23 include revenue growth of 15% to 20% and earnings growth at approximately 20% compared to fiscal year 2022. The company’s record backlog and fourth quarter performance provide the foundation for these estimates. The first fiscal quarter is typically our lowest revenue and earnings quarter due to the holidays, planned maintenance projects and customers managing their calendar year-end balance sheets. In addition, in our first quarter of fiscal ’23, the impact of raw materials is expected to turn into an unfavorable headwind estimated at $4.5 million, then neutralized for the balance of the fiscal year, assuming relatively flat raw materials. Given these factors, earnings per diluted share is projected to be roughly $0.55 to $0.70 per share in the first quarter of fiscal ’23, which would represent the best first quarter results in a decade and compare favorably to the $0.37 in the first quarter of fiscal ’22.
In conclusion, continuing our strong financial performance in the fourth quarter and our expectations for a high-growth fiscal ’23 provides us enthusiasm and great evidence that our strategy is working. While utilizing our revolver to enable investments in working capital, we or these were required for this growth, it is projected to set us up nicely to generate positive cash flow, starting around the midpoint of fiscal ’23 and strengthening over FY ’24 and ’25. Combine this with expectations of growing EBITDA, which the second half of fiscal ’22 was at $100 million annual run rate, provide an optimistic view of our growing shareholder value. And Mike, with that, I will now turn the discussion back over to you.
Mike Shor: Thank you, Dan. Wrapping up, I’m proud of the Haynes team and all that they are doing for our company. The best part of our story is that further improvement is truly possible in everything that we do. At this point, Jenny, please open the call up for questions.
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