Good day, ladies and gentlemen and welcome to your Haynes International, Inc. Third Quarter Fiscal 2020 Financial Results Call. All lines have been placed in a listen-only mode, and the floor will be opened for questions and comments following the presentation.

[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 June 30, 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..

first, commercial aircraft builds in 2020 are projected to drop 40% to 50% versus 2019; next, LEAP engines, the workhorse engine for single-aisle commercial aircraft were mid last year projected at over 2,300 engines to be shipped in 2020. That number for 2020 is now estimated to be less than 900 engines, a drop in short-term builds of at least 60%.

In addition this rapid drop in short-term demand has resulted in excess inventory throughout the aerospace supply chain. We are estimating that six to 12 months of excess inventory may exist in some areas of the supply chain.

Finally, in addition to the significant changes in demand, we are also seeing our customers show very conservative ordering patterns for cash management reasons even where demand does exist. As far as our results, the volume drop is causing a significant impact on our margins.

Direct charges are hitting the P&L from expenses incurred related to under absorption. This concept is simple. Despite our success in significantly dropping our breakeven point at these abnormally low volumes we simply cannot spread the fixed cost load we have over significantly less produced pounds and remain profitable.

We can overcapitalize inventory with these costs and therefore they are required to be directly expensed as period cost. It's important to note that these direct charges are not additional or unusual charges but are normal operating costs, most of which are fixed that were put in place to support the projected higher production volumes.

Dan will provide further details on this in his financial update. In addition to the significant changes in demand, we are responsibly reducing inventory as we prioritize significant cash generation during this time. This strategy further decreases the mill volumes in all of our facilities.

We reduced inventory by 1.7 million pounds in Q3, which is very significant when compared to our volume shipped of 3.2 million pounds in the quarter. This added to our absorption fixed cost coverage issue.

Beyond the direct charges noted, we are encouraged by the positive impact that our price and cost work have had in driving down our projected breakeven point. In addition, we continue to work to lower our expenses to minimize the impact of our unabsorbed costs but we are facing a difficult period due to historically low production volumes.

Our produced pounds in our Kokomo mill in Q3 declined 33% from the pounds produced in Q2 and declined 40% from the pounds produced in last year's Q3. We have quickly responded to this downturn. One of our first actions was a 10% reduction in executive team and Board of Director cash compensation.

We have also offered incentives for a voluntary separation program for employees, gone through a salary reduction in force and implemented reduced hours at certain locations. Our team is taking the actions design – the actions designed to reduce our year-on-year SG&A expense by at least 20%.

We have also continued layoffs in our operations and continue to work on our variable cost reduction throughout all of our facilities. We want to be prepared whenever volume does return to reignite the positive margin and earnings momentum that we have generated over the past year. A few final thoughts.

Our company, our industry and our country are encountering very difficult times. At the same time, I'm encouraged by what the future may hold for Haynes.

My experience in this industry tells me not to draw negative conclusions about a company at the low points or to think that the good times will never end when at periods of peak demand both can lead to false conclusions and actions..

first, we have strong liquidity; next, we are projecting positive cash flow for the balance of the year, despite very low revenues; in addition, pre-COVID-19, we took our gross margin from high single or low double-digits to 18% and we see even more potential for profitable growth once our volume returns; our past price and cost work are real and we proved how they could result in bottom line improvement; we've invested what we needed to, to position this company for the projected long-term aero demand future CapEx needs will likely be below depreciation for at least the next three years to five years.

In addition, I believe that our alloy and application development work is second to none in our industry. We continue to focus on bringing in orders for high-value differentiated applications and products.

We remain very, very close to our customers, I continue to be impressed with the depth of our customer relationships; also our business model is very well suited for recovery.

We plan to continue to provide customers with the smaller quantities they need as we come out of this tough period and we will continue to perform the value-added operations for our customers such as piece cutting and just-in-time inventory. Finally, the past aero growth was steady and very strong. It took a pandemic to stop the momentum.

Revenue pass-through miles will eventually begin to improve. When it does I'm expecting the same pre-pandemic fundamentals to drive aero growth in our future. Now let me turn the call over to Dan for more details on our specific markets and on our financial results.

Dan?.

first, we have strong liquidity; next, we are projecting positive cash flow for the balance of the year, despite very low revenues; in addition, pre-COVID-19, we took our gross margin from high single or low double-digits to 18% and we see even more potential for profitable growth once our volume returns; our past price and cost work are real and we proved how they could result in bottom line improvement; we've invested what we needed to, to position this company for the projected long-term aero demand future CapEx needs will likely be below depreciation for at least the next three years to five years.

In addition, I believe that our alloy and application development work is second to none in our industry. We continue to focus on bringing in orders for high-value differentiated applications and products.

We remain very, very close to our customers, I continue to be impressed with the depth of our customer relationships; also our business model is very well suited for recovery.

We plan to continue to provide customers with the smaller quantities they need as we come out of this tough period and we will continue to perform the value-added operations for our customers such as piece cutting and just-in-time inventory. Finally, the past aero growth was steady and very strong. It took a pandemic to stop the momentum.

Revenue pass-through miles will eventually begin to improve. When it does I'm expecting the same pre-pandemic fundamentals to drive aero growth in our future. Now let me turn the call over to Dan for more details on our specific markets and on our financial results.

Dan?.

number one, implemented 10% reduction in salaries of all members of the executive team and cash compensation of the Board of Directors; discontinued monthly accruals for management incentive compensation, in addition implemented a global hiring freeze and eliminated annual merit increases for all salaried employees.

Number two, furloughs implemented for certain production, maintenance and salaried employees. Number three, offered voluntary separation programs, implemented involuntary reductions in force, and decisions not to replace open positions.

all of which eliminated roughly 162 positions both in salaried and production positions which represents roughly $12.6 million in annual salaries. wages and fringes. Number four, requiring salaried employees to take one week of unpaid time off during the fourth quarter of fiscal 2020, this represents a roughly 8% reduction in that quarter.

And number five, significant focus on reducing discretionary spending, as well as reviewing and prioritizing capital expenditures, focused on reducing inventory which has and is expected to continue to generate cash. We will continue to evaluate cost reduction initiatives going forward.

Backlog was $174.6 million at June 30, 2020 a decrease of $30.1 million or 14.7% from $204.7 million at March 31 '20.

Outlook for the quarter, the company continues to see elevated uncertainty across all its markets especially in the aerospace market with announced reductions in commercial aerospace build schedules combined with higher inventory levels in the supply chain.

The company expects revenue in the fourth quarter of fiscal 2020 to be comparable to the third quarter of fiscal '20 and the company expects to continue to generate cash from cost reduction initiatives along with inventory reductions.

Earnings for the fourth quarter cannot be reliably estimated during this time of unprecedented market and economic conditions caused by COVID-19.

Further adverse market conditions may result in additional charges to earnings in future periods, including expenses for unfavorable fixed cost absorption, impairment charges and valuation reserves on inventory or taxes. Moving on to liquidity, cash increased by $13.1 million over the third quarter driven by inventory reductions.

Total liquidity was approximately $155 million with cash at June 30, 2020 at $65.5 million and approximately $90 million available on the credit facility. Our strategy continues to be cost reduction initiatives and reducing inventory levels in order to increase our cash flow from operations.

This strategy is driving our expectation of an increase in cash balance in Q4 of fiscal '20. Capital spending was $7.1 million compared to our depreciation level of $14.6 million in the first nine months of fiscal '20.

The forecast for capital spending in fiscal '20 is between $9 million and $10 million to allow for maintaining reliability within our operations. In conclusion, looking forward we continue to see significant demand challenges ahead which are expected to result in comparable revenue levels next quarter.

Despite these challenges, we continue to feel that we are well positioned to weather this potentially prolonged downturn because of our ongoing efforts to reduce cost and reduce our breakeven point, our expected continued inventory reduction leading to cash generation and our solid liquidity position.

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

Thanks Dan. Short term these are tough times for everyone in the aerospace industry. However, we gain confidence as we look at the long-term view and as we see our core competencies leveraging future value such as developing new alloys and new applications, our unique mill manufacturing capabilities, and our value-added service center processing.

Seeing beyond this pandemic is important and we are well positioned to get there. With that Christie, let's open the call for questions..

[Operator Instructions] And our first question will come from Steve O'Hara with Sidoti. Please go ahead..

Hi, good morning. thanks for taking my question.

How are you?.

Good..

So I guess obviously a tough quarter with volumes dropping and things like that. I guess -- and you talked about revenue being in line with 3Q and 4Q.

Would you see the same types of margins or maybe margin impacts as you had in the third quarter? Or is the third quarter adjustment and things like that do they kind of help smooth that process out? Or do you have to do it again in the fourth quarter based on the volumes?.

Steve a couple of things, we are looking for the bottom of the aerospace decline and we're looking for improvement in -- whenever it may come in CPI and IGT. So this is a business right now as many in the aerospace or almost all in the aerospace are that is going to be with very low volumes, and with low volumes is going to come direct charge.

What we've been encouraged by and when you look at our pricing, we're year-on-year still up in pricing. So our team has done a very good job with that. And we're also encouraged by our efforts on the cost reduction side and Dan detailed that.

That being said, the low volume is going to lead to direct charges, and therefore, we will continue to encounter a difficult time at least for the next quarter, and then we'll see beyond that.

Dan anything you want to add?.

Yes. I mean, it's obviously quite a challenge with -- variable costs are a bit easier to manage, as you can imagine, but the fixed cost are what's quite challenging and many of our costs were kind of semi-fixed as well. So when volume drops this significantly spreading those fixed costs over those low volumes can be challenging.

So as time goes on, we'll do what we can to reduce those fixed costs as best we can, but it's really tough to keep up with volume reductions at this level. But I'm pleased with the traction that we have gotten so far on our cost reductions, and we'll just keep pushing that as the quarters go forward..

Okay. And then maybe just a follow-up on the inventory.

So do any of these actions change any of the cost of goods sold profile in future periods? Or is this something that's just kind of a one-time thing? I guess I'm just wondering would it lower the cost of inventory as you sell it in future periods?.

No. It would not. I mean, this is -- the fact that the costs cannot be overcapitalized in inventory. So what is capitalized in inventory is kind of normal levels or normal amounts. So as that inventory gets sold that will look like a normal cost of goods sold. So that's what we're obviously avoiding is overcapitalizing.

So, later when that inventory is sold, you've got a real squeeze on the margin. We're getting the squeeze on the margin now which is the proper way to do it so that when the product is sold it will look like a normal gross margin when it's sold..

It's an interesting time for us, because obviously our volumes are way down. But we feel very strongly we can responsibly also reduce inventory as our business levels are down, which further complicates the issue with absorption in our plants. But it's obviously the right thing to do as we focus on generating cash..

Okay. And then maybe just one last follow-up. If you -- in terms of the cuts and the adjustments you've made so far, what types of volumes are you kind of ready to deal with next year? I understand fixed costs are fixed, I guess in the short run, but in the long run, I think a lot more costs are variable, I guess.

So can you just talk about the cuts you've made so far? And, I mean, I know you don't want to cut too much or too deeply, but how that prepares you for the potential outcomes next year and going forward? Thanks..

At this point, for the short-term, we've got to consider revenues about where we are now. So what we are doing both on the salary side and on the variable side is making the cuts. We have to try to squeeze the difference between our volume drop and our cost drop to try to improve that as much as possible.

And so we are continuing to look at what our volumes are and then we meet daily to try to match up what those volumes are with what our cost structure is and try to improve that going forward.

The other thing that we want to make sure we're prepared for is, one of these days there -- we don't know when obviously there will be improvement in this market as the vaccine comes and we want to make sure we'll be prepared for the upturn. So we're always looking at that also..

Okay. Thank you very much..

Thank you. Thanks for the question..

[Operator Instructions] And our next question comes from Michael Leshock with KeyBanc. Please go ahead..

Hi, Michael..

Hey, guys. Good morning..

Good morning..

I just wanted to get your take on what you're hearing within the aero supply chain in light of some of these cuts from Boeing and Airbus this week, specifically on wide-body platforms? But was the supply chain were they anticipating some of these cuts? Or could this drive activity even lower?.

it's not only a two-thirds cut in the number of engines being built, but it's inventory that exists within the supply chain. So certainly, we're looking for the first bit of good news Michael, but we certainly haven't seen it yet..

Yes. That makes sense. Thank you. And on the share gain initiatives, you touched on those.

Are these longer-term negotiations where you'll recognize the increased share in the future? Or are you actually seeing this in the near-term more in the expense of price -- at the expense of price?.

No, not at the expense of price. The share gain that we have talked about and focused on is in power generation in IGT.

And what's really interesting in our IGT numbers is even though our volume and our revenues are down year-on-year and sequentially our backlog in IGT is up I don't have the number in front of me between 25% and 30% year-on-year backlog.

And what we're seeing with that is not only finally land-based gas turbines demand equals supply as opposed to taking it out of inventory, but we're seeing positive growth because of share gain that we have begun to experience we have begun to ship.

It's with a significant company out there and it will help us not only now but as we go into the future..

Okay. And then just lastly for me. We've seen some of your customers and peers cut their dividends.

I'm just wondering if that's something you might be considering to adjust your dividend given the uncertainty in lack of visibility in the near-term?.

I'll start by talking about where we are in cash generation. Obviously, we reduced our inventory in the past quarter by $16 million despite the very low sales and generated cash of about $13 million. And our plan is to continue our cash generation well into next year or through next year.

That being said, we're committed to our dividend and we realize the importance of it to our shareholders. So, at this point, no change in the policy. Obviously, given the market we are continually evaluating at the Board level this ever-changing economic environment and if conditions warrant us to reconsider, we certainly leave that door open.

You can be confident that we'll make thoughtful decisions regarding all capital allocation during this impressive environment. So, we need to continue to understand where this market is.

We need to continue to understand where the market is going how long it will take to begin to see a recovery and how successful and I believe it will be very successful our cash generation capability will be..

Got it. Thanks..

Thank you..

Thank you..

And we have a follow-up question from Steve O'Hara with Sidoti. Please go ahead..

Yes, thanks for taking the follow-up.

I guess just kind of on the lines of the inventory in the supply chain and potential recovery, so, I guess, I'm just wondering what the industry's recovery might be and what the timeline for your recovery would be? Given the inventory in the supply chain does that delay your recovery? I guess if we get back to kind of let's say 2019's volumes in 2022 which seems like a long shot I'm not saying that would happen but I guess how long before you could get your margins back to where they kind of should be based on the way you've kind of started running the business?.

First thing I think that has to happen Steve is we've got to understand where bottom is. And we believe we're approaching the bottom. But we also think based on all the news out there, we've taken on is look we're not going to see an uptick for at least another six months.

All the airframe manufacturing pulling down the production rates and again we're all waiting for the first piece of good news and we haven't seen it yet. And we're expecting, obviously, with that a slow recovery in our revenue passenger miles. We believe the sector will be down for at least 24 months, more likely 36 months.

And I'll go back to something Dave Calhoun from Boeing said recently, where he said it will take two to three years for travel to return to 2019 levels and additional few years beyond that for the industry's long-term growth trend to return. So, this is tough. It is still a bit hazy.

I think it's aversion and I think we have to continue to understand what's happening in the world related to vaccines and what -- how that will drive revenue passenger miles. So, I think it's a question we've got to continue to ask as we go forward. But we certainly don't see anything short-term that says there's going to be an uptick anytime soon..

Okay. No, that's fair.

And then I mean if there's any -- let's say the recovery -- maybe would it be fair to say that you guys have additional levers to pull if necessary either if the slow environment kind of drags on continues to drag on or gets worse over time? I mean are there additional levers you guys can pull to kind of preserve cash and liquidity and things like that?.

Sure. And again, you've seen our inventory levels as we went into this. So we have got a significant amount of inventory. And what we continue to work on is in shortening our lead times and improving our reliability.

And so the number 1 lever for us is becoming very reliable and significantly shrinking our lead times which will allow us to continue to generate cash given the amount of inventory that we have.

In addition to that -- in addition to the positions Dan talked about in the $12 million or $13 million in costs from people, we continue to work on our variable cost to manufacture.

We were last quarter somewhere between 500 and 600 basis points better in gross margin and that was pricing and it was cost momentum, variable costs momentum doing things differently.

Obviously, I'd be a little foolish to talk about, we're in a good pricing environment now but we still have an enormous opportunity on the variable cost side to continue to focus on improving yields and improving our cost to manufacture. So yes, there are definitely levers out there both on the cash side and on the cost side. .

And one thing I was just going to say -- one thing I might add to that is just our structure with a mill and service centers. Having service centers in an environment like this when customers, as things start to get better they're going to order more and then they order smaller quantities and be very conservative in their ordering patterns.

When we have product in the service center, we can ship those smaller quantities versus the mills who will ship just full mill quantity. So it's a bit of an advantage for us as we're coming out of a downturn. So we'll be well positioned for that when it occurs. .

I think Dan that is a great point. As you look at coming out of this whenever that may be I think our customers are going to be very conservative continue to be very conservative on the cash side and we are a mill that has our own distribution centers that can cut pieces for customers it can provide just-in-time inventory.

So it really our business model works well as far as short lead time out of the distribution center, cut pieces doing things for the customers that otherwise they may have done and limiting the amount of metal for customers to buy. So it really helps us. Great point, Dan. Thank you. .

Okay. And then just maybe -- sorry one more follow-up. I think you guys had some shutdowns in the quarter and I mean I would assume there wouldn't be any shutdowns in 4Q, unless maybe there's an outbreak or something like that. I mean obviously maybe you're not producing enough so you have to shutdown to preserve costs I don't know.

But what's the -- is there a beneficial impact of not having to shutdown for some period of time going into the fourth quarter that wasn't in the third quarter at all?.

Yes. Thanks for the question. We shutdown at the end of March because there seem to be so many unknowns and we were concerned about our employees' health and safety and we wanted to get a handle on this and that's what we did. And obviously that shutdown extended into the quarter, we're now reporting on.

Taking down steel mills and then bringing them back up is not the best thing in the world but we did put safety first. We do not anticipate another shutdown.

However, I will say that when we look at what's happening in the country right now, our tubing plant is in Louisiana and I believe I heard yesterday the highest per capita infection rate right now is in Louisiana or at least one of the highest. So we're watching it very carefully.

We have no shutdowns planned, but we'll continue to look at what's best for our employees as we go forward..

Alright. Thank you very much for the color..

Thank you. .

[Operator Instructions] And I'm showing no questions from the phone lines at this time. So I'll turn it back over to Mike Shor for any closing comments. .

Thanks, Christie. Thanks to all of you for your time today and thank you for your interest and your support of Haynes. Please be safe and we mean that sincerely and our thoughts are with you and your families during this very unusual time that we live in. We look forward to updating you again next quarter. Take care. Be safe everybody. Bye-bye. .

And that does conclude today's teleconference. We thank you for attending. You may disconnect your lines at this time and have a great day..