Good day, ladies and gentlemen and welcome to your Haynes International, Inc. Second Quarter Fiscal 2020 Financial Results Conference. [Operator Instructions] At this time it is my pleasure to turn the floor over to David Van Bibber, Controller and Chief Accounting Officer. Sir, 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 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, 2019, and Form 10-Q for the quarter ended March 31, 2020.

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..

Good morning. We are living through the most unique time that I have experienced in my lifetime. I sincerely hope that all of you and your families are safe and healthy. Our team at Haynes continues to work to make the best decisions possible to protect both our workforce and the company in these unprecedented times.

As many of you read in our press release, we have made proactive decisions to operate with only skeleton crews in most of our manufacturing facility for three weeks and also to close our offices, allowing most to work from home, if possible.

These are not easy decisions, but we felt they were required to protect the health and safety of our employees as the coronavirus was coming in all of our lives. Many of our employees returned to work during the week of April 13. Where possible, employees who are able to work from home continue to do so.

Where not possible or if an employee feels uncomfortable coming to work, we established a process of voluntary layoffs. We also continue to follow all CDC guidelines related to cleaning, social distancing, staggered shifts and protective equipment for our employees.

Now I will move on to reviewing both the performance of our business and to provide a few thoughts on what’s in front of us. As far as our second quarter business performance, we are proud of our employees’ focus and actions along with our bottom line results.

Our Q2 results show the power of our collective focus on gross margin and profitability improvement. As you are aware, our focus over the past 18 months has been to significantly reduce our cost of manufacturing, improve our yields and increase our prices for our high-value differentiated products.

These actions have resulted in a significant year-on-year increase in our gross margin percentage and a significant decrease in our overall volume breakeven point.

These actions are critical for our company moving forward given the pandemic and its significant impact on the overall economy and its significant impact on the aerospace industry as well as our other markets. Our team has truly moved from words to actions and from plans to results. I will now review a few key results to highlight our progress.

Compared to last year, we have had a step change in our gross margin performance. To refresh everyone’s memory, our Q1 gross margin was 670 basis points higher than our prior year Q1 despite similar revenues and shipping just 4.2 million pounds.

As you can see in this quarter’s results, this trend continued in our second quarter, where we were 580 basis points higher than our prior year Q2, driving a $4.3 million year-on-year quarterly improvement in operating income despite a 12.5% reduction in revenue and a 16.2% reduction in pounds sold.

Our Q2 gross margin percentage was even with Q1 at 17.3%. However, we achieved this Q2 gross margin despite significant costs that were incurred within the quarter associated with our proactive coronavirus plant shutdowns in March.

Our gross margin percentage averaged over 18% in the first 2 months of the quarter before we began dealing with the coronavirus-related shutdown issues as well as demand reductions due to the global pandemic in March. In addition, our cost, yield and pricing per value focus has also had an impact by significantly reducing our breakeven point.

As many of you know, over the past 3 years, we have had difficulties being profitable at shipped volumes below 5 million pounds per quarter.

Based on our success with gross margin improvement, we have now lowered our breakeven significantly from approximately the 5 million pounds we have talked about many times in the past to now below 4 million pounds per quarter. This is shown by comparing the results of the first two quarters of this year to the prior 3 years.

I think that it’s important to note that our work on cost reduction is nowhere near complete. We have built much momentum and we still have much more opportunity. However, today, it’s obvious that our momentum string of improved quarters will be halted by the worldwide economic and health issues that we are all now facing.

The good news is that we have made fundamental changes to our price and cost structure, and once our volume begins to return, we will aim to continue on our path to further gross margin improvement. Now as far as our view into the future, our team’s short-term focus has shifted to cash generation.

We must acknowledge the changes to the world and to our business and react appropriately. Some facts and thoughts, first, from a baseline volume perspective, fiscal year 2019 averaged 5 million pounds shipped per quarter for our company. In Q2 of fiscal 2020, we shipped 4.3 million pounds, representing a 14% reduction from last year’s average volume.

While the worldwide reaction to the coronavirus began to impact us in March, volumes were also impacted throughout the quarter due to other issues. Some of which were similar to what we encountered in Q1.

This includes the ongoing issues with the 737 MAX, the general commercial aerospace supply chain inventory reductions across many platforms and ongoing lower demand within chemical processing due to weakening oil prices and the impact and that impact on capital spending and the CPI market.

Looking forward, we are working with customers to roughly estimate what industry and specific customer demand might look like over the balance of the year.

We continue to gather the facts, but we now estimate that volumes in the second quarter of our fiscal year could be at least 15% below Q2 levels due to the growing worldwide economic issues, including significant reductions versus what had been very robust era demand.

We’ve also looked at scenarios that assume demand lower by up to 30% from our Q2 levels. As you can imagine, it’s very difficult to forecast forward in this unprecedented economic environment.

The aerospace industry has been particularly impacted, resulting from temporary shutdowns of the Boeing manufacturing facilities and the lower aircraft production targets announced by Airbus. The effects of this have moved throughout the supply chain.

As we experienced decreases in volume, we will encounter volume-related mill absorption issues, leading to some cost inefficiency and, therefore, margin reductions. This is very typical in our industry with significant and sudden drops in volume.

However, we plan to continue to address our cost of manufacturing and continue to take the short-term actions required to match the anticipated volume reductions.

As part of this, as noted in our press release of April 7, our management team and our Board have implemented a temporary 10% reduction in the salaries of our executive team and the Board of Directors.

With that being said, a very important point to make in these times is that we currently feel comfortable with the potential cash generation capability of our company over the next 6 months. The basic principle here is for Haynes to use reductions in inventory as a major source of cash.

Our team is focused on responsible inventory reduction throughout our company from raw materials to finished products in our distribution facilities. We now have monthly inventory reduction targets in place and currently continue to believe given what we know today that we will be cash positive over the balance of our fiscal year.

Now, let me move on to details of the quarter. Volume shipped in the second quarter of fiscal 2020 was 4.3 million pounds, which was 100,000 pounds higher sequentially than the first quarter of fiscal 2020 and 900,000 pounds or 16.2% lower than last year’s second quarter of 5.2 million pounds.

Net revenues were $111.6 million in the second quarter of fiscal 2020, which was 12.5% lower than last year’s second quarter. Average selling price in the second quarter of fiscal 2020 was $25.79 per pound, inclusive of our other revenue, up about 4.5% over last year’s second quarter. With that, let me move on to our key markets.

Sales to the aerospace market accounted for 53% of our revenue at $59.2 million in the second quarter of fiscal 2020. This represents a decrease of 14.1% from the same period last year due to a 20.9% decrease in volume partially offset by an 8.6% increase in average selling price per pound.

The decrease in volume is primarily attributable to the impacts on aerospace supply chain from the 737 MAX production halt and the beginning of COVID-19. Volumes going forward in aerospace are expected to decline significantly due to these continuing issues.

The pandemic has had significant effects across the aerospace industry with announced industry-wide shutdowns and reduced production levels. Sequentially, revenue in the aerospace market increased slightly by 0.6% in the second quarter of fiscal 2020 compared to the first quarter, which was impacted by seasonality.

Backlog dollars in aerospace decreased sequentially from Q1 to Q2 by 16.6%. Moving on to sales to the chemical processing market accounted for 14% of our revenue at $15.8 million in the second quarter of fiscal 2020.

This represents a decrease of 27.2% from the same period of fiscal 2019 due to a 29% decrease in volume, slightly offset by a 2.5% increase in average selling price per pound.

Volume was lower due to global economic uncertainty, resulting from COVID-19, continued trade tariffs and the chemical industry’s reaction to the significant drop in the oil prices. This was slightly offset by increased special projects shipments.

Sequentially, revenue in the chemical processing market declined 5.3% in the second quarter of fiscal 2020 compared to the first quarter of fiscal 2020. Backlog dollars in CPI decreased sequentially from Q1 to Q2 by 5.4%. Sales to the industrial gas turbine market accounted for 15% of revenue at $16.7 million in the second quarter of fiscal 2020.

IGT represented our bright spot for the quarter. IGT increased 22% from the same period last year due to an increase of 30.8% in volume partially offset by 6.7% decrease in average selling price per pound, driven by change in product form.

The increase in volume is primarily attributable to an easing of inventory de-stocking in the industry, the initial impact of our share gain initiatives and a slight improvement in demand for large frame turbines.

Sequentially, revenue in the industrial gas turbine market increased 21.3% in the second quarter of fiscal 2020 compared to the first quarter. Backlog dollars in industrial gas turbines decreased sequentially from Q1 to Q2 by 7.4%. We continue to see meaningful potential opportunities for continued market share growth in IGT for us.

Other markets accounted for 11% of revenue at $12.8 million in the second quarter of fiscal 2020. This represents a decrease of 24.7% due to a 33.4% decrease in volume partially offset by a 13.1% increase in average selling price compared to the same period in fiscal 2019.

The decrease in volume was primarily due to lower sales to the flue gas desulfurization market. Sequentially, revenue in the other markets increased 7.5% in the second quarter of fiscal 2020 compared to the first quarter. Backlog dollars in other markets decreased sequentially from Q1 to Q2 by 5.2%.

Other revenue accounted for 7% of revenue at $7.1 million in Q2. This represents an increase of 14.2% from the same period of fiscal 2019. The increase was due primarily to increased toll conversion. Sequentially, other revenue decreased 2.3% in the second quarter of fiscal 2020 compared to the first quarter. Okay.

With all of that detail on the markets, let me now turn it over to Dan for more details on our financials..

Thank you, Mike. We had a good start to the quarter with the average gross margin in January and February of over 18%, showing continued momentum from our focus initiatives.

However, the month of March began to feel the impact of the COVID-19 situation with slowing demand and the concerns for the safety of our employees, which led to the decision to shutdown a majority of the operations for a total of 3 weeks, spilling into April. We resumed production at reduced levels with crews coming in on a voluntary basis.

We are currently running at roughly 40% production staffing levels in our main Kokomo location with the remaining continuing to be laid off. Employees are not being paid by the company while laid off, although enhanced unemployment insurance is now available from the government.

Given the reduced operating levels due to the shutdown, revenue was impacted as well as unfavorable fixed cost absorption, which compressed margins in the month of March by an estimated $1.5 million. On the favorable side, a note on specialty application projects this quarter.

Special projects were $6.5 million compared to last year’s second quarter of $4.3 million and compared sequentially to Q1 of FY 2020 of $8 million. We have achieved a better margin percentage in these special projects, both in Q1 and Q2 than any than was achieved in any quarter of last fiscal year.

All in for the quarter, we achieved a gross margin percentage of 17.3%, which was the same as the first quarter of fiscal 2020. And if you recall, was our highest gross margin percentage in 16 quarters going back to fiscal 2015, which was a year with many special projects.

Gross margin dollars this quarter exceeded last year’s second quarter by $4.6 million representing an increase of 580 basis points in spite of lower revenue of $15.9 million.

We believe this momentum achieved by our focus on improved pricing, improved yields and reduced costs, have lowered our current volume breakeven point and is expected to be an important point as we navigate forward through this challenging time ahead.

Moving on to SG&A, including research and technical expense, which was $11.8 million in the second quarter of fiscal 2020. This is $0.6 million lower than the first quarter this year primarily due to foreign currency, lower accruals for management incentive plans and some salaried layoffs.

We expect SG&A in the second half of fiscal year 2020 to trend lower due to the 10% temporary reduction in executive salaries and Board of Directors’ cash compensation as well as other reductions in travel costs, consulting costs and other discretionary spending.

Non-operating retirement benefit expense on the P&L was $1.7 million, which was nearly doubled compared to last year’s Q2 of $0.9 million due to the lower discount rates we discussed last quarter. Interest expense was slightly higher this quarter due to the draw on the revolver, which occurred in mid-March.

Our effective tax rate for the quarter remained at 26% with net income at $4.1 million or $0.32 per diluted share compared to last year’s second quarter net income of $1.5 million. Backlog was $204.7 million at March 31, 2020, a decrease of $32.9 million or 13.9% from the $237.6 million at December 31, 2019.

The company has experienced lower order entry levels attributable to the grounding of the Boeing 737 MAX, the uncertainty from the global COVID-19 pandemic with its unprecedented impact on the economy, significant supply chain inventory reductions, continued trade tariffs and a significant drop in oil prices.

Outlook visibility with respect to the remainder of fiscal 2020 and beyond is limited due to the uncertainty surrounding the ultimate impact of COVID-19 and the mitigation measures that are pursued by governmental authorities.

We are anticipating increased challenges in the third quarter of fiscal 2020 with elevated uncertainty and lower demand due to COVID-19 global pandemic and many customers announcing shutdowns and reduced production levels.

As we manage through these unprecedented issues, our focus will be on cash flow, especially generating cash through decreasing inventory levels. The company expects revenue and earnings in the third quarter of fiscal 2020 to be well below those of the second quarter of fiscal 2020.

As Mike mentioned, we now estimate the quarterly volumes in the second half of the fiscal year could be at least 15% below Q2 levels, and we’ve also looked at scenarios that assume volume lower by up to 30% of our Q2 levels. It is very difficult to forecast with any accuracy in this unprecedented economic environment.

Moving on to liquidity, obviously, in times like these, liquidity becomes very important, and we are proud that Haynes has strong liquidity. Our cash on the balance sheet and $120 million credit with an accordion option to increase to $170 million puts us on solid footing to handle this crisis.

We recently drew $30 million on the revolver only as a protective measure to have the cash in our bank account readily available. At March 31, 2020, we had total cash of $52.4 million and roughly $90 million available on our credit facility, giving us total liquidity at over $142 million.

Our credit facility is an asset-based lending agreement and our borrowing base made up of primarily accounts receivable and inventory currently exceeds the facility maximum. Therefore, we currently have plenty of collateral to keep the $90 million available.

Borrowings at our current level, bear interest at either prime rate per annum or if declared for a certain time period the adjusted euro-dollar LIBOR rate plus 1.5%. Our current borrowing of $30 million is at the rate of 2.55% until mid-June.

I also wanted to mention that our ABL is covenant-light with the primary financial covenant being a 12-month rolling fixed charge coverage ratio requirement of 1.0, and we are currently over 2.7, well above the requirement.

In addition, this covenant does not even apply until we are within 85% of our borrowing capacity or a borrowing level of roughly $100 million versus our current borrowing of only $30 million.

Also, as Mike mentioned, it is our strategy in the second half of our fiscal year to reduce our inventory levels and increase our cash flow from operations resulting in our expectation of an increasing cash balance in Q3 and Q4 of fiscal 2020.

In previous times of significant volume decreases, we have been able to generate cash from reducing inventory. As an example, after the great recession of 2008 and 2009, we had over $100 million in cash on the balance sheet.

Also contributing to our expected cash balance increase is our utilization of the CARES Act provision to defer the employer portion of FICA tax payments for calendar year 2020, expected to be roughly $900,000 per quarter.

Capital spending was $4.1 million in the first half of fiscal 2020 as compared to our depreciation level of $9.6 million for the 6-month period. The forecast for capital spending in fiscal 2020 is between $10 million and $12 million.

In conclusion, looking forward, we see significant demand challenges ahead which are expected to impact our second half fiscal 2020 volume levels. Our team is carefully managing through this period of lower demand arising from these unprecedented challenges.

We believe that we have taken proactive actions to protect our employees and manage the financial well-being in the company.

We are currently positioned with a lower volume breakeven point, a diligent focus on both spend management and inventory reduction, and most importantly, our liquidity position is solid, stemming from our diligent historical focus on a clean balance sheet.

While challenging quarters are ahead, we are carefully positioned to weather the storm and see positive growth opportunities on the other side. Mike, with that, I will now turn the discussion back over to you..

Thank you, Dan. A few final thoughts from me on the current situation, we have been working to protect our employees, meet our customers’ requirements and keep our financial position strong. The decision we’ve made of temporary lay offs was not an easy one or a decision that I or we took lightly.

There’s no playbook here, and there is certainly no perfect answers. I’ll tell you, I’m proud of our entire team and how they have worked together to find our path forward. With that, Melinda, let’s open the call up to questions..

[Operator Instructions] And it looks like our first question is from Edward Marshall with Sidoti & Company. Please go ahead..

Good morning. Good morning, Mike, Dan, David. Hope you guys..

Good morning, Mike..

Hope you guys doing well and your families as well are. I hope Thank you. I wanted to see if I can isolate special projects. I know that they tend to have pretty chunky margins.

And I wanted to look at maybe this specific quarter and anything that you could provide, might talk about a kind of benefit tailwind that you might have gotten from special projects in Q2. And then taking at a step further, maybe looking at the backlog and maybe what’s in there for the balance of the year? Thanks..

Okay. As far as special projects, we had, in Q2 as well as we did in Q1, a good quarter related to special projects, doing this from memory, but I believe the last three quarters, we’ve exceeded revenues from same year or prior year same quarter. So we’ve done well with special projects.

We also have been very pleased that the mix of products in there has been much higher year-on-year. So it has helped us, no doubt about it. It’s a big contributor. But beyond that, it’s also the pricing that we’ve been able to pull in and certainly the cost reduction throughout our plants. So they’re the three big contributors..

And we do isolate these and look at our product margins based on these special projects. And that’s one point that I wanted to highlight in my prepared remarks is that we’ve seen a nice step-up in margins this quarter.

Both quarters, product margins well over 30% compared to last year, where we had all four quarters in the low 20% for those items that we categorize as special projects, so a very nice bump in the margin percentage of the projects that we are getting. So it is helpful..

As far as go ahead, Ed, I’m sorry..

No, that’s okay. Go ahead. I think you are going to address the backlog..

Yes. As far as backlog, obviously, we’ve seen a drop in our backlog, $237 million on 12/31 and $204.7 million in 3/31.

When you look at our book-to-bill, when overall, obviously, we’ve dropped on a book-to-bill and I will tell you, on the aerospace side, based on revenue, our backlog came down in Q2, 16.6% or what’s that about, $30 million, a little less than that actually.

So we’re certainly seeing the effects of aerospace and what’s happening in the aerospace market. We’re right in line with what we’re reading with everybody. Our job continues to be what we’ve talked about before.

What are we going to do to continue to make sure we can be faster and have the ability to supply smaller quantities to customers to continue to provide value to get the orders, which are in our wheelhouse..

Got it. You have had several initiatives, you talk about price, you talk about volume and it’s unfortunate those are maybe more macro kind of controls there that might be kind of working against you right now.

But these sort of things you didn’t have control over the reduced cost? Have you been able to accelerate some of the cost takeouts that you had originally planned for maybe later in the year or even into next year? The lead times, the on-time deliveries, kind of how are you working and progressing toward those goals that are kind of controllable as opposed to maybe some of the volume and the prices that might be going on?.

I think on the cost side, you are right. On the pricing side, we are doing our best to hold our own on that. We believe in the value we provide. So we are not budging, especially on the high-value differentiated products.

On our cost, we have had amazing success, not just in Kokomo, but across all of our plants with costs, and that obviously shows in our breakeven coming down from where we were to what I talked about on the call, and we will continue that work.

Obviously, we’ve got a team here that is working to make sure we are keeping our employees safe with all the actions taken because of COVID-19. But there is a variety of fundamental projects that we were moving on with speed related to figuring out how we are going to reduce our costs and they will continue. There are offsets.

Absorption is the word I hate in this industry, but it’s real. And when you have less product going through, there is going to be offsets, but we do continue to focus on what it’s going to take as far as cost. Lead time, I heard Dave Strobel, our VP of Operations, say to Marty Losch, our VP of Sales, don’t lose an order because of the lead time.

We are getting very aggressive. Obviously, we have less volume in our plants, and we’re getting very aggressive there as we are in our tubing facility. So we are pulling down our lead times. As far as on-time delivery, it’s been a significant focus for us over the last, I’d say, 6-months or so, to continue to find ways to improve that.

I will tell you the decision that was made by me and our team to shut down a plant for safety reasons didn’t help our on-time delivery. And that we heard about it for some customers, which is a good thing. And now as we continue to bring our workforce back, we will bring that back into focus.

But I can’t tell you we’re doing great with on-time delivery as we shut down the plant for a couple of weeks. But we did it for the right reasons, tough decisions. And now as we come back, continued focus on on-time because bottom line is, as we improve on-time delivery, we can reduce our finished inventory.

So it’s all of those all the above are focus areas for us..

Got it. We booked a lot about what some what the MAX is doing this year. I kind of wanted to zero in on maybe inventory in the channel and where we might be? Because as we step into 2021, Boeing is getting some good color on their shipsets, you anticipate the ship and that’s upwards of 70% growth on the shipset.

So what is the – I mean, that is there a potential restocking that might occur as we kind of move into later? And I know the visibility is really difficult right now. It’s funny that I’m asking, kind of looking at the other side of this.

But as we start to kind of ship that aircraft again, how do you think the inventory is? Are we going to be able to digest that in near term and so forth, just trying to get a help..

Sure. Obviously, our ability to forecast the extent of the demand drop is going to be very difficult. What I can tell you and what we hear pretty much across the board, whether it’s on the airframe side or the engine side in aerospace, is everyone has excessive inventory right now.

It is the inventory supply chain this thing came on so suddenly first with the 737 and now obviously with COVID-19, that for years, it was just get me the metal. And so I think people were aggressive in building inventory, but we’ve heard across the board. Obviously, there is some military applications, which are pulling nicely.

But we’ve heard across the board on those that are commercial applications, that there is a lot of inventory in the supply chain. So this is not going to be quick. Obviously, the Boeing CEO talked about two to three years for travel to return to 2019 levels. So we’re in this for the long run.

We realize this is not going to bounce back quickly, but feel very comfortable with how we’re positioned..

Okay, guys. Thanks very much. We navigate a challenging environment thus far..

Thanks. Appreciate it..

[Operator Instructions] Next, we go to Michael Leshock with KeyBanc. Please go ahead..

Hey, guys. Good morning..

Hi, Michael.

How are you?.

Doing well. So first, I wanted to talk about the strength you saw in gas turbines. You’re seeing some really encouraging momentum there. I just wanted to hone in on what’s driving that? And do you view a longer-term recovery in that market, because in your prepared remarks, you called out an easing of the destocking in IGT.

How do you view customer inventory levels here? And obviously, there’s a lot of uncertainty with COVID.

But when would you expect a shift to restocking, assuming a gradual reopening of the economy over the next quarter or two?.

I think the fundamental issue with IGT for us because there is so much weight with the large frames is the absolute significant reduction over the past many years and builds of large frame, number one. And number two, the conservative nature of everyone because there weren’t many builds and not restocking.

So there has been quite a bit, again, where the volume is which is the large frame. There’s been quite a bit of inventory reduction and just doing their best to keep the or to drain the supply chain.

We are now and through that, we have talked about this in prior quarters, we are probably on power generation, not probably, we are about half the volume that we were at, at its peak. And with renewable, we don’t expect to get back there, but at this point, there is two things that are going to drive this forward for us.

We are hearing across the board. I am hearing it from our sales force, our application engineers that the large frame inventory is gone and now when there is a need, there is a pull as opposed to just taking inventory out. So that’s a really good thing for us.

The second part of that is we have worked very hard it’s going to be a smaller pie because of renewables, and we’ve worked very hard to figure out what it’s going to take to increase our market share. And we’ve had targeted market share focus. And we I’ve talked about it for two quarters and we are now being successful.

We have gained significant volume for us going forward. We have begun to see that volume. We began to see the beginning of that in our second quarter results, and it should continue and quite frankly, grow. So large frame, no more inventory in the supply chain, that’s a good thing.

And that’s when there is a pull we will see demand for our products and number two, share gain..

Got it. That’s helpful.

And then could you go into a little more detail just on what it means to reopen your facilities on a voluntary basis and maybe if you could talk about what you’ve seen at those facilities reopening mid-April thus far, just in terms of workers coming back in, utilization rates as you’re ramping back up depending on how some of the your customers’ facilities are reopening as well?.

Sure. I will start. At the beginning, six weeks ago, one of the tougher decisions I’ve been involved with were shutting down the facilities, just having a skeleton crew. There were just too many unknowns in my mind to say, okay, we can early on, keep our employees safe. So we felt very strongly that we had to take a break, and we did that in two weeks.

Obviously, you don’t a steel mill doesn’t go cold. So you’ve got a skeleton crew here. And then as we were getting ready to bring everyone back, which would have been the third week of this for us, Indiana was pretty much at the height, as was Louisiana, of infections. So that was a big issue for us, so extended to the third week.

As we brought people back, I wanted people be comfortable. To me, safety is the name of the game, and we need everyone to keep their eye on the ball. And we have some very unique situations with people, whether it’s child care or caring for elderly parents or whatever it may be. And it just didn’t feel right.

Oh, by the way, obviously, we don’t have the volume we had before. So this could work to our advantage. So we brought people back. We were probably in the range for not this week, but the two weeks prior to that when we started this. On a voluntary basis, we had in the range of 50% to 60% of our employees that came back on a voluntary basis.

So we had their heads in the game. And from a safety perspective, I was comfortable. We did what we needed to do. We had the social distancing in place, staggered shifts and everything else. So we had ourselves very well organized with that. And I am very, very pleased with that. This week and next week, it’s going to be a lower number.

My guess, it’s in the 30% to 40% range, 40% plus or minus range and that will go on for 2 weeks, but we are beginning to flow material very nicely back through our facility. And then we meet daily as a staff and have since this thing first started and we will figure out what we are going to do after next week related to what we are doing.

So we have excuses for flow issues for the first few weeks. But now as we bring people back we are going to remove those excuses and we won’t be back to 100%, but we will have enough to flow the material through..

Got it.

And what was the impact of nickel prices on a lag in the quarter and if you could talk to some of your internal assumptions for nickel prices going forward in fiscal 3Q?.

We actually found that nickel was pretty neutral for us in this quarter. If you look back at the nickel prices, they were quite high at the end of last fiscal year and then kind of came down a bit. But it’s been relatively stable in the mid-50s, maybe low-50s. So we have been able to $5, I am sorry, $5.

And we have been able to see that being pretty neutral to our gross margin. So we don’t see it as a big impact at all. Going forward, we’ll see what happens.

Obviously, lower demand for stainless steel, I would assume won’t have an impact, but we have – and we have also heard of easing some restrictions in Indonesia, which could also have an impact maybe going the other way. So we will see what nickel does, but right now, it’s pretty neutral..

Okay, great.

And then could you talk about how you expect margins to shake out in fiscal 3Q? Are the lower volume levels that you’re anticipating? Does that allow you to focus more on mix in any certain markets or is there any color you could provide around that?.

I don’t think we would really focus on mix. I think the issue there is whatever orders we can get out, we will get out. So when you’re kind of hungry for volume, certainly, we’ll take whatever orders. As Mike mentioned, don’t let lead time be an issue. We will get the order and we’ll get the product out the door.

We have found sometimes that when volumes drop, it’s typically in the commodity side of the business. So our margin percentage, what’s left of what we are shipping, sometimes can be a little richer than normal. So that’s one thing.

But certainly, as we look forward and we’re looking at volumes being lower, that’s going to continue to compress the gross margin percentage. And we’re definitely going to see a squeeze on that gross margin percentage, and you’ll see that in our gross margins and operating income lines going forward.

How much will that be? I mean, we don’t exactly know. We are not sure what volumes are going to do, but we certainly expect it to get compressed..

Okay.

And then just lastly for me in terms of capital allocation, specifically as it relates to your dividend, would you make any changes there as you shift your focus to cash generation and liquidity?.

Good question. Thank you. We are currently committed to continuing with our dividend at the current level. We realize the importance of our dividend to our shareholders. We see no change at this point in the dividend policy, but obviously, we don’t have all the answers as far as where COVID-19 and the economy is going.

So we will continue to evaluate the changing economic environment. And if conditions warrant us to reconsider this at some point, we will leave that door open, but right now, we are committed to continuing it..

Great. Thanks for the color..

Thank you..

Thanks..

There are no further signals at this time. The floor will return to Michael Shor..

Thank you, Melinda. Thank you for your time today, and thank you for your interest and your support of our company. Please be safe, and our thoughts are with you and your families in this very unusual time. We look forward to talking to you next quarter. Thanks, everybody..

Thank you. This does conclude today’s teleconference. We thank you for your participation. You may now disconnect your line at this time. Have a great day..