Good day, ladies and gentlemen, and welcome to the Haynes International First Quarter Fiscal 2019 Earnings Call. All lines have been placed on a listen-only mode. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, David Van Bibber, Controller and Chief Accounting Officer. The floor is yours..

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 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.

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 assurance that 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, 2018. 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..

9.9%, 10.1%, 12.3%, 13.6%, and 14.6% in our fourth quarter of 2018. We’re reporting 10.6% today, breaking our trend of sequential increases. But given the well documented planned outage and upgrade, I am pleased with these results. Our focus moving forward remains clear and is discussed on a daily basis throughout our company.

We are pursuing the initiatives required to continue incremental improvement in gross margin. This should be possible in large part due to first incremental cold finished flat production with our now complete capacity expansion. Second, higher volumes of plate.

As noted last quarter, while it’s true that our plate products are the lower – are at the lower end of our product profitability is a product that turns quickly, and most importantly, allows us to have a steady base of business that should impact utilization and absorption.

We continue to be at the early stages of this effort, but have seen some recent success. Third, our special project volumes are improving and the outlook remains positive for the foreseeable future.

While we don’t have the volumes in this area that led to our high watermarks in gross margin in 2012 and 2015 the volumes have increased from last year’s levels. Fourth, we are seeing excellent efforts related to bottom line aerospace product price increase and manufacturing related cost reductions.

And finally, fifth, we’re beginning to make incremental progress, improving our tubular operations in Arcadia, Louisiana with increases in production rates and a focus on costs, delivery performance, pricing levels and profitability. Now moving to the results of the first quarter.

As you recall from last quarter, I mentioned at the planned outage would mean short-term earnings pain for long-term gain. The earnings pain was felt this quarter, but now we expect to begin to see the gains.

Our shipping volume in the first quarter of fiscal 2019 dropped as previously mentioned to 4.3 million pounds as compared to our fourth quarter volume of 5 million pounds. However, compared to last year this volume level was a 10.5% improvement from the 3.9 million pounds in the first quarter of last fiscal year.

First quarter net revenue was $107.1 million, up 19.4% from last year’s $89.7 million. Average selling price in the quarter was $24.73 per pound inclusive of our other revenue, up about 8% over last year’s $22.89 per pound. With that, let me move to our key markets.

Net revenue in the aerospace market for the quarter was $54.6 million representing approximately 51% of our total revenue. Sales were up about 16.6% from last year’s $46.8 million. Volume shift into the aerospace market was 2.1 million pounds, up 4.4% over last year’s 2 million pounds, despite the outage involving the cold finished flats.

Average selling price in the first quarter was up 11.7% to $25.86 per pound from last year’s $23.15 per pound. We’ve increased prices in the aerospace market including our contract business as these contracts come up for renewal. We saw our backlog in aerospace increased sequentially from Q4 to Q1 by 7% during the quarter.

We remain optimistic regarding demand in aerospace, primarily driven by new generation engine sales. We’ve proprietary and specialty niche alloys specified in new grade aircraft engines, including the GE9X engine and Pratt & Whitney 1000 series new engines. Our aerospace business is a core strength for us.

And combined with the additional capacity from cold finishing, it is expected to drive profitability moving forward. Net revenue in the chemical processing market for the quarter was $18.9 million, up 41.7% from last year’s $13.4 million. CPI accounted for 17.7% of our revenue, volume was 898,000 pounds, up 30.7% from last year’s 687,000 pounds.

Average selling price was $21.07 per pound, up 8.4% from last year’s $19.44 per pound. Backlog in CPI increased 9.9% sequentially over the quarter. We continue to see better levels of specialty application project shipments that utilize our proprietary and specialty materials compared to last year.

The base business side of chemical processing has improved and we have more opportunity to improve volumes from this base level. We’ve initiated strategies intended to meaningfully increase our plate volumes much of which relate to the chemical processing market. Moving to the industrial gas turbine market.

Our sales in the quarter totaled $14.1 million, up 4.9% from last year’s $13.4 million. IGT accounted for just 13.1% of our sales during the quarter. Volume shift in this market was down 7.4% to 811,000 pounds from last year’s 876,000 pounds. However, volume was up sequentially by a 11.4%.

Average selling price per pound in the quarter was $17.36 per pound, up 13% from last year’s $15.32 per pound. Backlog and industrial gas turbines increased 16.4% in the quarter. We continue to see demand weakness in the large and medium frame turbine markets.

We clearly see this weakness in our shipping levels and it will likely continue at least into the next few quarters. As we stated last quarter, we still believe in the long-term demand in this market. However, patience is required as the demand remains at low levels.

Finally, our other markets and other revenue accounted for $19.5 million during the quarter, up 21% from last year’s $16.1 million. This area was roughly 18.2% of our revenue. Other markets increased $5 million with higher levels of specialty applications projects hitting this market associated with flue gas desulfurization.

This was partially offset by a $1.7 million decline in other revenue related to a decrease in total processing. With that, let me turn it over to Dan for more details on our financials..

Q1 last year, $1.1 million; Q2, $6.7 million; Q3, $8.2 million; and Q4, $8.7 million. While this quarter’s results are a sequential decline of $2.8 million from Q4 of last year, it is a solid improvement from last year’s Q1 increasing $4.8 million.

We remain focused on special projects and new applications and we remain optimistic about the outlook for our specialty application projects going forward. SG&A costs combined with research and technical costs were $12 million in the first quarter of fiscal 2019.

This is $327,000 higher than the same period last year, driven by an increase in our allowance for bad debts on a foreign customer account and higher tax consulting fees. We expect fiscal 2019 SG&A for the full year including research and technical costs to be approximately $48 million to $50 million.

The tax rate of 5.9% this quarter was impacted by a discrete item related to vested stock options that were not exercised but forfeited. Beyond this discrete item in the first quarter, we expect the effective tax rate for the balance of fiscal 2019 to approximate 25% to 26%.

Net loss for the first quarter was $1.6 or a negative $0.13 per diluted share. Turning to backlog. Backlog was $237.8 million at December 31, 2018, an increase of $21.8 million or 10.1% over the quarter.

Backlog pounds increased during the first quarter of fiscal 2019 by 15.6%, primarily due to higher customer orders as well as the upgrade of the furnace previously noted, which delayed production in the cold finishing area.

Customer order entry levels and backlog levels were higher in all markets in the first quarter of fiscal 2019 as compared sequentially to the prior quarter. Outlook for next quarter. Having completed the cold finishing line upgrade, we expect to resume the revenue and earnings growth trend for the balance of fiscal 2019.

We anticipate revenue in the second quarter of fiscal 2019 to be higher than the first quarter and we expect positive net income. Liquidity. Cash was $11.6 million at December 31, 2018 representing a $1.8 million increase during the quarter. Net cash provided by operating activities was $7.1 million, which includes a tax refund of $5.5 million.

Controllable working capital increased by $900,000 with inventory increasing $8 million, accounts receivable decreasing $8.5 million and accounts payable and accrued expenses decreasing $1.4 million. During the quarter, we did borrow from our credit facility, but paid it back down to zero by quarter end.

Our revolver had a zero balance at December 31, 2018. With the size of the untapped credit facility at $120 million with an accordion to $170 million. Capital spending was $1.2 million in the first quarter of fiscal 2019, with the forecast for capital spending in fiscal 2019 at approximately $16 million.

In conclusion, we continue to focus on execution and accountability to successfully implement our improvement initiatives. These initiatives are expected to drive higher volumes, favorable pricing and cost reductions going forward. We believe this will drive meaningful growth and profitability and shareholder value.

Mike, I will now turn the discussion back over to you..

Thanks, Dan. The new focus and spirit of optimism exists at Haynes in light of the many opportunities we are taking to improve our processes, our performance and our cost. One final point worth noting, Dan and I just returned from our three locations in Asia, which are in China, Japan and Singapore.

We met with all of our employees and reviewed our focus improvement initiatives and heard about our staff’s concerns and improvement ideas for the company. I continue to be very impressed with the talented people that work for our company.

Together, I believe we can successfully grow this business profitably to the benefit of our shareholders, our employees and our customers. With that, let’s open the call to your questions..

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from Edward Marshall with Sidoti Company. Edward, go ahead..

Good morning, Mike and David.

How are you guys?.

Good Ed, how are you?.

Good..

I’m great. Thank you. Good. I guess I’ll start where you finish and talk about maybe Asia, China specifically. I know that’s – there are some sales that go in that direction. I’ve heard mixed results this quarter thus far from the impact maybe from a raw material price and also from a demand perspective.

Can you just kind of elaborate on what – China and slowdown in China might mean for Haynes?.

Ed, obviously, first thing we’re dealing with China is the 5% tariff on all of the nickel goods that we ship into China. So far, obviously, that’s had a minimal effect on us. In the past, as we have across our Company, we’ve been hurt by some power generation business or lack thereof, but we see continued strength.

Our team is very enthusiastic about the demand they see and what’s coming forward for us. As we continue to focus on the plate initiative we’ve talked about, that also helps..

And if you look back at last year, our sales into China, if you look at our 10-K was about 4% of our revenue. We’re actually a bit ahead of that percentage this quarter in sales into China. It is slightly off our plan, but we were expecting some very nice growth in China. Slightly off our plan, but ahead of last year..

Got it. And then, switching to the equipment upgrade and the fact that it ended in the end of January, I assume in a seasonally stronger quarter in 2Q there’ll be somewhat of an impact.

Are you going to be able to make up that difference that would have been in 2Q with that, I guess almost month of last revenue from that time?.

Ed, we expected to start really right after the first of the year. We had a variety issues on the back end of that furnace that caused us to start January 23. Let me just throw a little plug in here. I’m proud of the people that we had working on that. They worked day and night to try to figure out their issues and they did that.

Taking that much time out of one of three furnaces, obviously, could have a potential impact on our volume. We’re not giving up one on the quarter, obviously, but we’re pushing as hard as we can on that. And the other thing is it doesn’t help our absorption when you’re down for 23 days extra..

And just one reminder, Ed, as well, yes, typically, our fourth quarter is seasonally our strongest quarter of the year. So keep that in mind when we’re looking at Q2..

I’m sorry, you said seasonally strongest.

You meant 4Q is seasonally weakest?.

No, our fourth quarter ending September is typically our strongest..

Got you. I was thinking December. Okay.

How much volume was the impact in 1Q from, say, the loss of the equipment for that time period?.

Yes, we estimate, from a production point of view, about 400,000 pounds. Now that yields down a bit. When we’re talking sales pounds, it’s going to be lower than that because it could go to a service center and be cut into a cut piece or something like that. So from a sales pound point of view, just a bit off of 400,000 pounds.

But we estimate revenue, if we were to sell everything that we would have produced had we not been down, our revenue impact in the quarter of about $8 million to $10 million..

Got it. And then finally, Mike, your assessment of backlog, how much of the backlog increase might have been as a result of having less capacity available for customers? How much of it was potentially from the excitement from customers to, hey, you know what? We can get in line. You’ll have added capacity 2 Q.

And then, ultimately, how much of that might have been from just true pickup in demand?.

We – Ed, I think the best way to answer that, obviously, only shipping 4.3 million pound has an impact on the backlog. However, I will tell you that we had very, very strong order entry in November and December.

Obviously, we’re just closing out January now so we don’t have final numbers on that, but we also were very pleased with what we saw in January..

Got it. Thanks very much guys. Appreciate your comments..

Thank you..

Our next call comes from Phil Gibbs with KeyBanc Capital.

Phil?.

Good morning..

Good morning, Phil..

Dan, look like D&A for whatever reason, I think we had $4.6 million. Last year, it was $5.8 million.

Any reason why that was inordinately low? And what are you expecting for the year?.

Yes, it declined from last year. And I’m going to push you way back to 2014 during the restructuring and fresh start, that was 14 years ago, and at that point, a lot of those items were amortized over 14 years and even the expected service life on some of our assets were reset to 14 years. So that ended at the end of August last fiscal year.

So this quarter is a bit lower in depreciation. I would expect the full year to be around $20 million, maybe slightly less than $20 million..

Okay. That’s helpful. And Mike, I thought I heard you talk about the GE9X some things that you may have on that.

I think that’s not the expert here on this, but I think it’s on the 777X or it’s linked to be – do you think those have largely been settled already, or in terms of the share shifts and expectations on that? And am I thinking about the right thing?.

We – obviously our goal with the higher temperatures and – in these engines is to continue to push and educate on our proprietary alloys. And we do have PW 1100 series, PW 1500 series proprietary alloys there, mainly because of high temperature strength, and also two alloys specified on the GE9X..

And as the GE, you know this more than I, as the GE9X something that’s going to be produced or is in current production right now..

It’s in current production now. So it is something – it’s the new generation of the GE90. So we’re making some very good headway on the applications development side of that, as well as other new generation engines Mike mentioned Pratt & Whitney, but also we have some specialty alloys on the CFM LEAP as well..

Okay. And then I call at the commentary on the sales impacts from the outage and the gross margin impact.

How should we be thinking generally about gross margins and revenue in the second quarter? Do we effectively think you pick up all that – pick up all those lost sales and then you get 120 basis points of margin expansion? Or is that just the baseline? I just don’t want to get expectations to out of balance on the margin side, because you obviously have more visibility than we do..

Yes. I mean, obviously, the seasonality is a bit different from Q1 to Q2. And then as I mentioned earlier to Ed, Q4 is seasonally much stronger in all the other quarters as well. So keep that in mind as you’re kind of pushing forward.

We don’t give guidance on margin, but I certainly would expect the 120 basis points that we estimated, it impacted us in the quarter that to be made up with this – the caveat that Mike mentioned with, starting up a bit later than we expected.

So that could have an impact on absorption, and that could have an impact on how much we get out over the quarter. We’re certainly very focused on executing this quarter and getting that caught up, if we possibly can and we hope to do that..

Thank you..

Thank you..

[Operator Instructions] And we do have another question from Edward Marshall with Sidoti & Company. Go ahead, Edward..

I just wanted to follow-up with one more on CapEx. You’re estimating $16 million for the year, that assumes that you’ll double what you did in this most – in this quarter here of $2.3 million for each quarter going forward, so about $4.6 million a quarter.

I’m curious with the main upgrade behind you, where does that capital go? What’s your intention there with the remainder of the year?.

At this point, I’d call $16 million the max that we will spend. And error capital right now is going to be all maintenance capital. We’ve got a wonderful mix of new equipment as we’ve documented over the last couple of years and what’s in there, but it’s very important to make sure we maintain all the other equipment we have.

So it’s really maintenance capital..

Yes. And some of the capital spend on the Drever outage may be very well spill into January from a CapEx point of view. So keep that in mind as well. But yes, I think $16 million is a max. We’ve historically struggled to spend as much as we forecast in this area. So I would suggest $16 million is the max..

Got it. And anything discussed with Arcadia? I know, Mike, you mentioned some stuff in your prepared remarks. I know that’s been a focus of yours.

Any additional comments that you can talk about at Arcadia, may be is that something we’ll discuss further? Do you think the – any issues that you might have been having there are now behind you just any comments?.

We spent approximately $37 million on capital. Our goal is to significantly increase our titanium tubing capability. That plant has both titanium tubing and nickel tubing capability.

We are working to make sure that they achieve the commitments that was out there for the CapEx as far as volumes in titanium, but we’re also working across the board to understand what it’s going to take to significantly lower our costs and, where appropriate, increase our prices there.

On top of all that, blocking and tackling like on-time delivery, inventory management, we’re working through all of it. Dan and I spent an extensive period of time down there few months ago and we’ll be back in the not too distant future. So I’m pleased that we are gaining momentum, but we are not where we need to be yet..

When you say reduce costs is that something that’s – and I know it’s probably premature and you don’t want to get into it.

But does that include things like sourcing or further efficiency upgrades? I’m just trying to think about maybe what capital might be allocated towards, what further capital might be up?.

There’s – we’re not talking about any significant capital. What we’re talking about is the blocking and tackling of trying to make sure that we’re as cost competitive as anybody out there..

Got it. Okay, thanks guys..

Thanks, Ed..

Thank you. I’d like to turn the floor back over to Mr. Shor..

Okay. Thank you, everyone. Thanks for your time today. Thank you for your interest and support of Haynes. We look forward to updating you again next quarter. Have a good day..