Good morning ladies and gentlemen. And welcome to Haynes International Inc First Quarter Fiscal 2021 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation.

It is now my pleasure to turn the floor to your host David Van Bibber. 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 the 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, 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..

safety, speed, agility, quality, alloy and applications, engineering, differentiated products and outstanding customer service. This is what will continue to separate us from the competition. With that, I'll now hand the call over to Dan..

the start of the vaccine rollout and its impact on people's confidence to fly again combined with the recertification of the Boeing 737 MAX to fly. As Mike mentioned, it's expected to still take time to get back to pre-pandemic aerospace levels. Backlog dollars in aerospace decreased sequentially from Q4 to Q1 by 11% and down 51% year-over-year.

First quarter sales to the chemical processing market accounted for 21% of our revenue at $15.3 million. This is a decrease of 18% sequentially from Q4 and a decrease of 9% from the same period last year. Demand in this market continues to be impacted by COVID-19 and generally lower oil prices causing chemical companies to delay their CapEx spending.

The commodity side of this market is highly competitive, with many producers seeking volume. Special project revenue, most of which is reflected in chemical processing, was $4.4 million, which is $1.5 million lower than the fourth quarter and $4.1 million lower than the same period last year.

Backlog dollars in CPI increased slightly by 2.4% in Q4 to Q1, but is down 7% year-over-year. First quarter sales to the industrial gas turbine market accounted for 19% of our revenue at $14 million. This is an increase of 12% sequentially from Q4 and an increase of 1.5% from the same period last year.

Our share gain initiative continues to help volumes. However, volumes can still be lumpy quarter-to-quarter, and this market was impacted by the pandemic. We expect modest growth in industrial gas turbines as conditions slowly improve. Backlog dollars in industrial gas turbines decreased sequentially from Q4 to Q1 by 10% and down 25% year-over-year.

First quarter sales to other markets accounted for 18% of our revenue at $12.8 million. This is an increase of 38% sequentially from Q4 and an increase of 8% from the same period last year. This increase was driven by flue-gas desulfurization applications this quarter.

Backlog dollars in other markets increased sequentially from Q4 to Q1 by 22%, and were also up 22% year-over-year. First quarter other revenue accounted for 8% of our revenue at $5.6 million. This is a decrease of 9% sequentially from Q4 and a decrease of 23% from the same period last year.

The decrease was due to total conversion, including total customers that have exposure to the aerospace industry. The overall low volume of 2.8 million pounds resulted in significant compression of gross margins in the first quarter of fiscal '21 to 1.4%.

The company continues to face the industry-wide challenge of reducing spending commensurate with reductions in production volume in this current environment.

In addition to low volume shipped during the quarter, the company also reduced inventory by $9.8 million or 4% during the quarter, which further reduced production volume in our plant and reduced the utilization of our equipment.

In the first quarter, the company charged $5.9 million directly to cost of sales for excess fixed cost overhead per pound incurred due to at normal low production levels that could not be capitalized into inventory.

This direct charge of $5.9 million compares to 0 in the first quarter of fiscal '20 and $4 million sequentially in the fourth quarter of fiscal '20. We are continually and diligently striving to reduce our cost to better align our cost structure to these lower volumes. This effort is balanced with keeping employees safe related to COVID-19.

Last quarter, we reported COVID-related costs at roughly $250,000 to $300,000 that were for staggered shifts, quarantine pay, cleaning tasks and cleaning supplies. This quarter, this is up moderately due to some additional precautionary quarantine cases that we had this quarter in an effort to keep everyone safe.

SG&A, including research and technical expense, was $10.5 million in the first quarter as compared to last year's first quarter of $12.4 million or a reduction of 15%. Just a reminder that sequentially last quarter, SG&A in Q4 of '20 was reduced by $1.2 million due to the reversal of incentive compensation accruals.

Excluding this reversal, SG&A was $10.3 million in Q4 similar to this year's Q1. Two additional points to finish out the P&L. First, the nonoperating retirement benefit expense on the P&L was $1.3 million lower in the first quarter as compared to the same period last year.

As I reported last quarter, our actuarial valuation was favorable due to lower retiree health care spending as we have been actively managing our retiree health care costs and higher-than-expected return on plan assets of the pension plan.

And secondly, our effective tax rate was 21.2% in the first quarter of fiscal '21 compared to 26% in the same period last year. This lower effective tax rate is unfavorable due to our pretax loss.

All of this resulted in a net loss for the quarter of $8 million which, as Mike put it, is difficult for us to see and reflects the full weight of the pandemic. As far as our outlook for next quarter, we continue to experience market uncertainty due to the COVID-19 global pandemic.

While visibility is still unclear, conversations with customers as well as recent order entry trends lead us to believe that our first quarter volumes and revenue are at or near the bottom of this unprecedented downturn.

Earnings for the second quarter cannot be accurately estimated during this time of market and economic unpredictability, low volumes and unfavorable fixed cost absorption. We expect to continue our solid liquidity throughout fiscal '21 and to be favorably positioned for the recovery. Moving to backlog.

Backlog was $145.1 million at December 31, '20, a decrease of $8.1 million or 5.3% from the $153.3 million at September 30, 2020.

Backlog dollar -- I'm sorry, backlog pounds increased sequentially during the first quarter by 2.2% as compared to September 30, offset by a decrease in average selling price reflected -- reflecting a change in the product mix. Liquidity.

As we -- we increased cash $14.1 million this quarter, driving total balance sheet cash to $61.3 million at December 31, 2020, compared to $47.1 million at September 30, '20. Our increase in cash was largely attributable to reducing our inventory by $9.8 million to $236.3 million at December 31.

Additionally, there were 0 borrowings against the line of credit. As we mentioned in our last earnings call, we refinanced our credit facility to a three year agreement and now have $100 million of borrowing capacity if needed.

Capital spending during the first three months of fiscal '21 was $1.1 million, and total planned capital expenditures for fiscal '21 are expected to be approximately $10 million to allow for maintaining reliability within our operations.

In conclusion, these are challenging times, but they are temporary, and we believe that we are at or near the bottom of this unprecedented time period. Since pivoting to cash, we have generated $38.9 million. That's $24.8 million in the second half of fiscal '20 and an additional $14.1 million this quarter.

We believe our liquidity is strong with the ability to weather this period, and we are well positioned for the expected future improvement in demand in our markets. Mike, with that, I will now turn the discussion back over to you..

Thank you, Dan. I want to thank all of you for your continued interest in Haynes and your patience as we weather these unprecedented times. I, again, also want to thank our employees.

Together, we continue to work on protecting the health of our workforce on enhancing what differentiates Haynes to competition and on implementing the actions required related to our key metrics for success. With that, Matthew, let's open the call up for some questions..

[Operator Instructions] Your first question is coming from Stephen O'Hara. Your line is live..

I mean, I know this is a challenging period for you guys, and it seems like you guys have done a really great job kind of maintaining the balance sheet, generating cash. And you talked about kind of the previous gross margin work that you've done.

Can you talk about maybe -- is there a way to frame kind of without that work done in the past and where we'd be today? I mean, it would seem like that work would be a lot more difficult, maybe a lot more painful in the face of a downturn, obviously necessary.

But I mean, is there a way to kind of think about that where we'd be today?.

I mean, I know this is a challenging period for you guys, and it seems like you guys have done a really great job kind of maintaining the balance sheet, generating cash. And you talked about kind of the previous gross margin work that you've done.

Can you talk about maybe -- is there a way to frame kind of without that work done in the past and where we'd be today? I mean, it would seem like that work would be a lot more difficult, maybe a lot more painful in the face of a downturn, obviously necessary.

But I mean, is there a way to kind of think about that where we'd be today?.

Well, let me just put it in perspective for you. We were -- again, we could -- all through '17 and through '18, we couldn't make money unless we hit 5 million pounds shipped a quarter. And when you look at our history, 5 million pounds is not that common, which is why we're losing money through '17 and '18.

We obviously focused on price, and we focused on our relentless cost reduction. And I think the most telling signal for us is once the 737 issue hit before the pandemic hit, our volume dropped from 5 million pounds to about 4.2 million pounds a quarter. And even with that, we were wrapping up pre-pandemic times at about 18% gross margin.

So a significant difference from where we were when we started this thing and obviously, when we look back at where we could be if we had not made those improvements there be a concern..

Okay. No, that's helpful. And then just -- I don't think this is the case. But I mean, you guys haven't received -- I mean, again, I think the cash flow is pretty significant. And obviously, I think that you guys have done a great job there.

I mean, there's no -- I mean, there's no government stimulus in there anything like that or CARES Act benefits or anything? Is that kind of -- is that the fact?.

Okay. No, that's helpful. And then just -- I don't think this is the case. But I mean, you guys haven't received -- I mean, again, I think the cash flow is pretty significant. And obviously, I think that you guys have done a great job there.

I mean, there's no -- I mean, there's no government stimulus in there anything like that or CARES Act benefits or anything? Is that kind of -- is that the fact?.

That's correct..

That's correct. We did not take any kind of PPP loan or anything like that. I mean, there is a little bit of deferral of payroll taxes, paying those, but that's not significant..

The team's done, Steve, I think a real good job of not only reducing inventory, but very closely monitoring our payables and receivables. And obviously, that's led to real nice cash generation since this thing began..

We literally look at cash flow every day..

Okay. No, that's helpful. And then maybe last one, and I'll jump back in queue. But just -- I mean, if you listen to the airlines, it sounds like they expect capacity to be kind of well above where demand is, their liquidity is -- I think United was about 3 times what it was in March as of 4Q.

And I'm just kind of curious, I mean, does that help it? I mean, are you starting to see maybe some more positivity there just based on the capacity coming back? And then maybe that's kind of the precursor to getting some of these MAXs back in fleets and getting that production started again? Or is that kind of just maybe wishful thinking at this point based on what you're hearing from customers?.

Okay. No, that's helpful. And then maybe last one, and I'll jump back in queue. But just -- I mean, if you listen to the airlines, it sounds like they expect capacity to be kind of well above where demand is, their liquidity is -- I think United was about 3 times what it was in March as of 4Q.

And I'm just kind of curious, I mean, does that help it? I mean, are you starting to see maybe some more positivity there just based on the capacity coming back? And then maybe that's kind of the precursor to getting some of these MAXs back in fleets and getting that production started again? Or is that kind of just maybe wishful thinking at this point based on what you're hearing from customers?.

I think it's going to take a little while for inventory in the supply chain to come down. I mean, when you -- I love the positive comments we've all read about pent-up demand and all the rest of that. But I also check, as we all do almost every door, every day, the number of flyers going through TSA checkpoints, and that is continuing to be very low.

And the facts are the airlines were a little below 50% fewer flights in '20 versus '19. Passenger traffic is down 67% in 2020. The number of flights operated in 2020 was the lowest level since 1999.

So you put those things into account and then you look at what was supposed to happen with the LEAP engine for the A320 and the MAX and the amount of material in the supply chain. Bottom line is people need to start flying again. And my view is we're certainly in the early stages of the vaccine.

But as the vaccine comes and as people start flying again, then obviously, there's going to be great interest in starting to build aircraft. And the only advantage of having -- being on this end of the supply chain, one of the advantages is when they believe the demand will come, we'll feel it very quickly because of lead time.

So it's going to take some time. We're expecting probably plus or minus 6 months to start seeing aerospace orders come in based on what we see in the inventory supply chain, but it is going to take some time to get there..

And one thing I might add to that is we talk about how we're positioning ourselves for the upturn.

And just our basic business model, as Mike mentioned in his prepared remarks, being a mill and a service center, having inventory on the ground in a service center will allow customers to order smaller lots if they want to start slow in this demand recovery, but that will help us immediately through the service centers.

So we're prepared for the upturn and can't wait for it to be here. Obviously, the vaccine and MAX flying again, I think, are very positive things. But it'll take some time..

Your next question is coming from Michael Leshock. Your line is live..

So you said you're at or near the bottom, you think.

That said, I just wanted to get your take on how you're thinking about potentially bringing back some of the headcount in terms of your hiring cadence over the next several quarters if we get a recovery here? And if you could provide any color as well on the cost cuts you've taken during the pandemic in terms of how much will be coming back versus being structural? That would be helpful..

Sure. First, I got to look at where we are capacity-wise or volume-wise. We're down in our wire facility, 1/3 were down in Kokomo. Our produced pounds are down about 50%. And in our tube facility, they're down either more. So when you look at that in the January to November time period, we took out 211 people, which is 17% of our overall workforce.

So two points on that. Number one, we will be slow to bring people back because we want to make sure what we begin to see is real. So we are going to make sure, both on the production side and on the salary side, that we take full advantage of the employees we have and be very careful when we bring people back.

Again, the key here for me, especially in aerospace, is the slope. We're not sure how fast this will happen. We read everything that everyone else reads, so we're going to take this a little bit time.

On the salary side, we'll certainly continue to bring people in that are going to help us on continuing to promote our high-value differentiated products, but it will be slow to bring many salaried people back..

I wanted to get your take on the recent pushouts by Boeing and Airbus, specifically on the slower-than-expected ramps on the MAX and A320 and you talked about the LEAP engine. But also on the 777X, I know you have proprietary alloys there on the GE9X.

So how -- to what extent did you anticipate some sort of slowing here based on what you've heard from the supply chain? And are you seeing any hesitancy within customers from -- because of these announcements?.

We've done -- as we've talked about before, the LEAP engine for single-aisle is really the key metric for us. And watching the LEAP, and what happens with the LEAP, and what happens with the build there is significant. And I think many in the industry are seeing somewhere in the range of about 850 LEAP engines being built in the year we're in now.

And it's interesting when we've done the math multiple times, if you assume that there is no change whatsoever in current build there is no change whatsoever in is no change whatsoever in schedule, said another way, 40 Airbus, 40 A320s and 10 Boeing planes, that 797 plains plus spares.

If you think -- if you go with the -- what I now would say is an aggressive look, which is Airbus getting to 47 within 6 months, which none of us think is going to happen. And Boeing getting to 17 within 6 months, which anyone could take a bet on that, that's 929, so plus spare.

So the 850 is a most likely level for us, and that's what we're planning on. And that's why we think there's still 6 to 9 months in the supply chain. As far as 777 and the GE9X, it's disappointing. We -- our whole fundamental business model is all about proprietary alloys.

And as we've talked about, and I'm sure everyone is tired of hearing, we have two proprietary alloys in the GEnx GE9X engine. And that's significant for us. And that being pushed out to 2023 is a concern, but we continue to go after the other business and continue to look for ways to develop new alloys for next-generation engines elsewhere..

Got it. That's really helpful. Then just lastly for me, on CapEx, it was pretty low in the quarter. I think of your base maintenance is around $8 million to $10 million annually.

Is that a fair range? And how do you see that trending?.

Yes. Well, as far as long-term trends, we've spent the money we need to spend, in particular in the aerospace business with our $120 million we invested between 2012 and 2018, plus or minus. So we believe and we've said next 3 to 5 years in that range, we'll be well below depreciation in that $10 million plus or minus range.

And what we said publicly is about $10 million this year. So we're going to stick to that for now. Got off to a slow start, but there's plenty of people banging on my door and Dan's door as far as money that they need to spend. So I think 10 is a good maintenance number for us. I think below that is a concern, but I don't think we'll get above that.

get above that..

Your next question is coming from Chris Olin. Your line is live..

So Dan, I was wondering if you, maybe I missed it, provided any information regarding special projects where we're at outlook? I guess, just to tie on to that, should we assume that those numbers are going to stay low for a couple of quarters until CapEx budget come back up start?.

Yes. I mentioned special projects. This; quarter we're about $4.4 million, a little down from Q4 by about $1.5 million. And if you look at last year, we had a really good quarter last year in Q1, had about $8.5 million last year. So the delta, Q1 to Q1, is a little over $4 million in special projects..

Chris, let me add some additional color to that. In these times, we're all looking for some positives. And when we built in the special projects, the numbers that Dan is talking about, what we really found is that there's really two components in there.

There is the lower end, more commoditized alloys that are in there, that we are helping our customers get into applications and are upgrades for them, but they're relatively high volume and to be honest they're relatively low margin. So we decided between Dan and Venkat Ihswar and myself that we would take a second slice of special projects.

So by the way, just to back up, special projects for us as we talk about our non-aerospace typically there, CPI and other. So what we did, and this is a different slice for you, is we looked at just the proprietary and specialty alloys, not the commodities that were in there that we did drive in applications.

And what's interesting in fiscal '20 versus '19, they were up 24%. And in fiscal '21 versus '20, they're about flat. So what is not in there, there's a lot of the more the products that we drove in applications but the more commoditized products.

So I feel good about our team continuing to drive the high-value differentiated products even in these tough times. Sorry for the long answer, but it's a different way to look at it..

And when we look at special projects without some of those commoditized alloys, the margin that we track on it definitely goes up. So what we're looking at here are the higher profitable special project..

Interesting. Okay. Mike, you're talking about market share wins on the IGT side and kind of your success there. We've seen some movement within your competitive space in terms of people targeting different products, different mixes.

I'm just wondering how you feel about protecting that market share going forward?.

Really good about it, Chris. And you really have to take it by a market. Okay? We've talked about power generation. Okay? And we have -- we obviously cannot name our customer, but we've gained, for us, significant share in that market. And I love it because Dan and I talked about it when it actually happened. So that was a real good thing.

Also, we've got an alloy called 282, one of our proprietary alloys within IGT, which is being spec-ed in to make engines more efficient, both the new engines in certain categories and will be eventually with some spare parts. So feel really good about our share growing in IGT. In aerospace, we follow it every customer, every contract we have.

And obviously, on the transactional side, there's going to be pluses and minus. There always is every day. But contract side, we renegotiated, in January, 10% to 15% of our contracts, which is all the high-value differentiated product. We did not lose anything there. So feel really good about where we are in aerospace.

Chemical processing, it's really the world of 2 different groups of products there. On the special project side, again, in this market to grow from '20 to '21 and stay stable '21 versus '20, so far we '21 and stay stable feel great about that.

On the commodity side, the C alloy side of this for us in CPI, we see people going after some larger or some intermediate-sized projects they hadn't gone over before. So I wouldn't be surprised on the CPI side, if temporarily, we've lost a few orders, but that is not unusual as companies get aggressive.

And I can tell you, based on history, they will be back to us..

Last question, just kind of tying into the inventory comments you made regarding aerospace. I was just wondering if you could separate it between the tubing -- the titanium tubing business and nickel alloys.

Is there a difference between how you see the inventory playing out or that you're seeing?.

Yes. Good question. We've seen as far as cancellations -- and I'll use that as an example. These cancellations typically go with what's going on with inventory and the backlog.

We've seen that most nickel and cobalt cancellations are behind us, but we're still seeing on the airframe side, cancellations, which we expect to go on for probably another 6 months, plus or minus. So my -- I also believe there was a real demand crunch pre-pandemic on titanium tubing.

So I think there was -- on the airframe side, there was a lot of inventory built beyond even everywhere else. So I see titanium tubing taking longer to come back than I see engine business coming back..

Your next question is coming from Stephen O'Hara. Your line is live. .

Just on the -- moving back to kind of trends in aerospace and things like that. I mean, if we think about the trend towards ESG and green technology, things like that, I mean, it seems like most industries, including airlines have made some pretty, you might say, grandiose projections about how little carbon limit within certain periods of time.

Does that trend -- I mean, the trend, obviously, I think is real, but I mean, does that trend benefit Haynes? As the technology needed to make engines more efficient, whether it's either to save money or to cut emissions, I mean, does that benefit you guys long term? Is that a long-term secular trend that benefits you guys?.

The answer is yes. And it's not only aerospace but it's power generation. The use of our 282 alloy, being spec-ed into a fair amount of power generation engines, is allowing for more efficiency.

So when we talk about ESG and the environmental side of ESG, we're not only talking about what we're trying to do within our company, but we're talking about the impact it has in aerospace engines being more fuel efficient, being able to burn hotter because of being able to use some of these unique alloys. So It definitely helps.

And it's also no different than what we've got going into the GE9X engine and what's happening there. So yes, I think it helps.

And then when you take a longer-term view of this thing and look at, "Okay, what's going to happen in 10 years? Is hydrogen going to play a bigger role in this?" We've got our technical people all over trying to understand the role of hydrogen in power generation technology and engine technology going forward and how we feel the need there.

So yes, we feel really good about that..

Then if you think about the hydrocarbon industry now, oil and gas, we have some slight exposure to that, but not a huge exposure for us. Oil and gas is not one of our major markets. So kind of to shift away from that is not going to be that big of a takeaway for us, but certainly see some gains on the other side..

Thank you. There are no further questions in the queue at this time. [Operator Instructions].

Okay. I don't see any questions in the queue. So with that, first of all, Matthew, thank you, and thank you all for your time today, and thank you for your interest and support of Haynes. Please be safe, and we look forward to talking to you again next quarter. Thanks, everybody..

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation..