Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Haynes International, Inc. Second Quarter Fiscal 2022 Financial Results. [Operator Instructions]. I would now like to turn the call over to your host, Controller and Chief Accounting Officer, David Van Bibber. Please go ahead..

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, 2021. 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..

our team working together to ramp up production volumes and navigate supply chain challenges; our ongoing excellent work on our innovative alloy and application development; our strategy regarding the high-value differentiated products and services that we provide; our continued relentless pursuit of variable cost reductions, along with increasing raw material prices and improving demand across our key markets.

In addition, our safety performance also continues to be an area of significant focus for all of us. I'm thrilled with the management intensity, leadership and ongoing communication that is the why behind our improving performance. As far as cash, our net cash balance was reduced by $20.7 million over the quarter.

Our use of cash in the quarter was driven in large part by the significant increases in order entry, backlog and raw material prices that we experienced. Order entry, including toll conversion was $180 million in Q2.

In addition, the cost per pound of our inventory, driven by the rising cost of nickel, cobalt, chrome and moly increased inventory by nearly $14 million in the quarter. Therefore, of the $20.7 million increase in total inventory, approximately 2/3 of the increase was due to raw material price increases.

Because of the rapid increase in orders received, we are currently melting significantly more than we are shipping on a monthly basis, which is obviously leading to a use of cash, but bodes very well for future anticipated shipped volumes. Taking a step back, I am very proud of our team for their recent accomplishments.

Today, I'll highlight our continued gross margin improvement, our backlog growth, our alloy and application innovation and our ESG initiatives. Our gross margin continues to climb. Our initial work on gross margin improvement resulted in a reduction in our breakeven volume of 25%.

Our formula is working, provide innovative, high-value, differentiated products and services, price for the value provided and relentlessly pursue reductions in our variable costs across all operations.

Our growing backlog is, of course, due to the growth in our 3 core markets, but it's also due to the excellent sales and technical service that we continue to provide to our customers. Our backlog and book-to-bill numbers are excellent.

Our overall backlog grew by 29% or $63.2 million in the second quarter, led by a $40.2 million or 33% increase in our Aerospace backlog. Our overall book-to-bill was 1.6 in the second quarter, with Aerospace at 1.8, CPI at 1.3 and IGT at 1.4. Next, we believe our application in alloy development is among the best in the industry.

Our alloy development pipeline is very promising with high potential alloys under development for multiple markets. Haynes has had a steady flow of new alloys introduced into the marketplace.

Since the introduction of the very successful HAYNES 282 alloy in 2005, Haynes has introduced HASTELLOY HYBRID-BC1 alloy, a corrosion-resistant alloy for the CPI market; HAYNES HR-224 alloy, a highly oxidation resistant alloy for emerging technologies and industrial applications; HAYNES 244 alloy, a low coefficient of thermal expansion alloy for gas turbine applications; HAYNES HR-235 alloy, a metal dusting resistant alloy for petrochemical applications; and HAYNES-233 alloy, an alloy with a unique combination of strength and oxidation resistance.

Our HAYNES-233 alloy is currently being considered for and is in the advanced stages of testing for an aerospace engine application. In addition, our research team is working on the next generation of high-potential alloys for multiple markets.

They include alloys for the next generation of aerospace and industrial gas turbines, for the chemical process industry, for emerging technologies and for nuclear power generation. Innovation truly is one of our cornerstone principles and a core strength of our company. We are also making significant progress related to ESG.

Our team has posted additional disclosures, updated our sustainability web page on numerous occasions, and we are now nearing completion of our 1-megawatt solar field in North Carolina. In addition, Haynes is in the process of hiring an ESG sustainability program manager who will focus on a goals and metric-driven enterprise strategy.

Finally, our engineering teams are currently determining what our next steps for CapEx investment will be with a high priority on carbon emission reduction in our operations. All of this work has resulted in Haynes becoming a significantly healthier company.

While it's comforting to look back at recent accomplishments, I'd like to now look forward to what the future may hold for our company. To set the stage, we need to first look at our performance and expectations in our key end markets. First, Aerospace.

As we've stated previously, by the end of our fiscal year, we expect our monthly aero volumes to be back at our average monthly aero volumes from fiscal '19, which was our best year in Aerospace. This is being driven by single-aisle airframes and both LEAP and Pratt & Whitney engine builds.

In addition, the industry is forecasting air traffic to grow by approximately 4% annually and the number of aircraft in service to grow by 37% from 25,900 in 2019 to 35,400 in 2030, and that's net of retirements.

We are also seeing lean supply chains with limited inventory, leading to the significant growth in both the shipments and backlog that we are reporting. In addition, to further paint the future demand and growth picture, as noted on past calls, Haynes will have 2 proprietary alloys on the new 777X of GE9X engines.

Finally, longer term, as increased fuel efficiency and reduced emissions drive new engine technology, hotter engine cores will require more of our advanced nickel-based alloys. Our Q2 and year-over-year results show support for this growth strategy. Our Q2 Aerospace revenues improved 9.2% sequentially and almost 73% year-on-year.

Simply stated, our Aerospace business is growing rapidly with not just a pandemic-related recovery, but also growing well beyond previous company record levels. We are also seeing significant growth and enthusiasm in the IGT market. Estimates are that coal is projected to only account for 10% of U.S.

power production by 2050, down from about double that today. However, while renewables continue to grow, natural gas is projected to still account for over 30% of U.S. power production in 2050. Putting that in a real-world terms, over the next 10 years, an estimated 8,600 gas turbines are forecasted to be built.

As we've discussed, we have a very strong presence in hot gas path parts for major OEMs. In addition, one of our proprietary alloys has been specified in the next-generation engines and another proprietary alloy is under consideration. Our monthly results support this growth story.

Our Q2 IGT revenues improved almost 70% sequentially and 50.8% year-on-year. We also currently see CPI as a growth market due in large part to pent-up demand from subdued spending during COVID-related shutdowns.

In addition, access to plentiful and affordable natural gas supplies is allowing the United States to capture an increasing share of the global chemical industry investment. This hasn't been said in a while, but the U.S. chemical industry has recently emerged as a growth industry.

Our Q2 results are encouraging with Q2 CPI revenues up 30.9% sequentially and 51.6% year-on-year. To say the least, it's an exciting time for our company.

Given our recent excellent performance and our enthusiasm for the future, we want to provide a projected future view of revenue, gross margin, cash flow and pension funding status out to fiscal year '25. Starting with revenue.

We believe that over the time period, fiscal year '21 to fiscal year '25, the compound annual growth rate for our revenues could be roughly 15%. This is driven by Aerospace with an estimated compound annual growth rate exceeding 25% over this time period with the highest growth from fiscal year '21 to fiscal year '22.

We estimate fiscal year '25 Aerospace revenue could grow to approximately 55% of net sales, a level beyond our prior peak of 53% in 2019. We are projecting that gross margins are estimated to stay above 20% and show incremental growth as we continue to innovate and improve all of our processes.

Our favorable gross margin drivers are expected to be partially offset by inflation and certain incremental revenue at lower than average product margins, but the net is expected to be incremental margin percentage growth. This projection assumes that raw materials remain relatively constant at their current levels.

Next, we see the potential for positive operating cash flow beginning in fiscal year '23 and continuing as long as this cycle continues, even with increasing revenue driven by earnings growth. And finally, on the pension, we expect that within 2 years, our U.S. pension plan could be at a 100% funding level with a 0 net liability on the balance sheet.

That's a true step change from the $106 million of pension liability at the start of fiscal year '21. Future funding from that point would only approximate service cost levels. Wrapping up my comments, I'm very thankful for and very proud of the team at Haynes.

I thank everyone at Haynes for their relentless efforts to achieve fundamental and sustainable changes to our business. With that, I'll hand this over to Dan to provide additional perspective on our business performance..

Thank you, Mike. Financially, this was an impressive quarter with a 20% gross margin and an 82% sequential increase in net income to $8.5 million. We are beginning to see significant profitability related to higher volumes on a lower breakeven point, driven by our business process improvements along with rising raw material price tailwinds.

As I've mentioned in prior quarters, this enables us to be profitable at volume levels that previously would have resulted in losses. We shipped 4.3 million pounds and made $8.5 million in net income, but historically, we would struggle to be profitable at 5 million pounds.

This is meaningful given the expectation of higher volumes in the second half of fiscal '22 with projected Aerospace monthly run rates back to pre-pandemic levels by the end of this fiscal year. As a comparison, the Aerospace volume level this quarter was still 30% below the pre-pandemic levels of the FY 2019 average.

Rising raw material prices have been a significant use of cash, which I will cover further during my liquidity comments in a moment. Rising raw materials also provided a margin tailwind this quarter estimated at roughly $2.5 million from rising nickel and cobalt prices. This is an increase of about $900,000 from last quarter's impact.

Obviously, the nickel LME market was extremely volatile earlier in the month of March. More recently, the market has somewhat settled, but still seems to be at a high price, with current prices roughly at the $15 level.

If nickel continues at this high price, we will see increasing tailwinds from raw materials in the third and especially the fourth quarter of this fiscal year.

We are long nickel, so rising nickel creates a margin tailwind when a portion of our service center inventory not associated to long-term pricing agreements and our large scrap cycle increases in value.

However, keep in mind if nickel were to fall this tailwind would neutralize and turn into a headwind causing margin compression, which could be significant. All of this is dependent on the speed of change and the duration of the elevated nickel. We will continue to be very transparent about the estimated impact on our results.

Haynes like every business has encountered inflationary pressures, a tight labor market and supply chain delays, but our team continues to successfully navigate our way around these issues.

We currently have some protection from escalating natural gas costs as we have locked in the cost of a large majority of our buy over the course of the next several quarters.

We also combat inflation with our escalators for the purchase price -- producer price index in our customer contracts or price increases, including spot type business or mill direct business. Our goal continues to be offsetting inflationary pressures.

As we have previously discussed, cost reductions such as improving yields, productivity and process improvements are expected to continue. Regarding labor, we have been successful at increasing our production headcount to enable higher mill production rates, and this is expected to be very beneficial to our future volume growth.

We have encountered supply chain challenges and delays in receiving materials that have been very proactive with the diligence to find a path forward. As demand begin to increase, we were also able to invest cash into inventory.

This, along with the increasing production rates is expected to enable us to convert our higher backlog into higher future revenue and earnings. Moving down to P&L. SG&A with research and technical expense was $12.7 million in the second quarter, which was slightly higher than last year's second quarter by $600,000.

This year-over-year increase was impacted by foreign currency and by certain pandemic cost savings measures last year, which are largely no longer in place.

Operating income was $10.7 million this quarter, which represents sequential growth of $5.2 million to the first quarter of fiscal '22 and $14.4 million growth from last year's second quarter, which was an operating loss. The operating income improvement on a year-to-date basis is $29.5 million.

Nonoperating retirement benefit income of $1.1 million was favorable to last year's quarterly expense by $1.5 million, a $6 million improvement expected for the full fiscal year. As Mike previously mentioned, the balance sheet net liability was significantly reduced and the U.S.

pension funding percentage is impressively holding at 93.5% even during the recent market volatility. Our effective tax rate for the first 6 months of fiscal '22 was 25.2%. Current estimates for the full year effective tax rate would be 25% to 26%.

All in, our net income this quarter was $8.5 million with a diluted earnings per share of $0.67, representing an 81% sequential EPS increase. Order entry and backlog. We experienced significant increases in order entry over the past quarter across each of our core markets, including Aerospace, which had $92.9 million in order entry.

Backlog was $280.7 million at March 31, 2022, an increase of $63.2 million or 29.1% from 12/31/21. Backlog pounds increased 19.3% during the second quarter to 10.7 million pounds, which is the highest level of backlog pounds in the company's history.

With our backlog growth, we continue to allocate capital to inventory, which has enabled us to grow revenue this quarter and is expected to drive top line growth in future quarters. This allocation decision is obviously a use of cash, especially when the price of raw materials have increased so significantly.

Our inventory dollars increased nearly $21 million over the quarter.

Of that, the inventory pounds increase impacted cash by $7 million, and the increase in raw material prices impacted cash by the remaining $14 million, meaning about 2/3 of the dollar inventory increase and the cash usage was raw material prices and 1/3 was inventory pounds increasing. Liquidity.

We had cash on the balance sheet of $12.2 million at March 31, '22 and $21.5 million borrowed on the company's credit facility. This represents a net cash change over the quarter of $20.6 million, nearly equal to the investment in inventory over the quarter.

Our liquidity remains strong at $90.7 million with $78.5 million available on the credit facility at March 31, 2022. We do expect additional borrowings on the revolver in the second half of the year, with the utilization rate anticipated to remain below 50% of the credit facility maximum.

Capital spending was $7.7 million in the first half of fiscal '22, and we are planning to spend $17.7 million for the full fiscal year 2022, slightly lower than our depreciation level.

As far as outlook for the next quarter, the significant increase in order entry rates over the past 2 quarters provides optimism for continued growth over the balance of the fiscal year.

Our successful efforts to increase production rates with workforce additions and continued investment in inventory is anticipated to drive increasing shipments in the second half of the fiscal year. We expect both revenue and earnings in the third quarter to be higher than the second quarter of fiscal 2022.

This includes additional earnings leverage from volume increases, ongoing pricing and cost initiatives, along with rising raw material tailwinds. In conclusion, we are excited to see our recovery continuing to gain traction and our gross margin at 20% and our growing revenue and profitability.

As Mike outlined, our projections out to fiscal year '25 showed solid revenue growth from fiscal '21 to '25 of a roughly 15% compounded annual growth rate with Aerospace leading the way over 25%, again, with the highest growth this year from FY '21 to FY '22.

We are projecting gross margins to not only stay above 20%, but show incremental growth over the period. This is estimated to set us up nicely to generate positive operating cash flow beginning next year, then within 2 years potentially having a 0 net liability for the U.S. pension plan, down from $106 million at the beginning of last year.

All strategies designed to grow this business and increase future shareholder value by earning a return higher than our cost of capital. Mike, with that, I will now turn the discussion back over to you..

Thank you, Dan. Our team continues to be encouraged by both the progress and the potential for our business. Thanks to all of you for your continued interest in Haynes. With that, Kelly, let's open the call to questions..

[Operator Instructions]. Your first question is coming from Michael Leshock with KeyBanc Capital Markets..

Mike, I appreciate the comments on the longer-term outlook. I just want to dial in on the gross margin comments. And are we supposed to interpret that as if we're in a stable raw material pricing environment, whatever the price of nickel or other raw materials is, that your gross margins will remain above 20% through the cycle.

Is that kind of your expectations here?.

It is. We believe -- and again, you've followed us for a long time. You know what happens when raw materials go down and what happens when they go up. And as Dan said, we'll continue to be very transparent. And as we look forward, there are puts and takes as we go forward. We're not done providing more high-value differentiated products and services.

We're not done with cost reduction. There's certainly going to be some offsets, but we are looking for incremental growth from here on gross margin, absolutely..

Okay. Great. And on the CPI business, you had called that out as a growth business, but wondering what your outlook is there for the year.

I know it's typically larger projects and was wondering if any supply chain constraints or inflation are deferring those projects into next year? Or has that -- has those deferrals already happened and the pent-up demand is set to come this year?.

We definitely see CPI as a growth market, as I said in my comments, we think there's significant pent-up demand related to COVID, and we think there's real strength and there's capital investment that's going to occur in this market.

So we see not only a boost on the special projects side of this, but we also see the general CPI market improving throughout the year. And again, this is different than the way we talked about the general CPI market in the past.

And the difference today is the market's access to plentiful and quite frankly, affordable natural gas supplies is allowing the U.S. to capture an increased share of the investment here. So we feel great about the market.

We feel great about how we're positioned and also the value that we're providing, meaning based on that value we can get more price..

And one thing I'll throw in there too, just to quantify some of the special projects that Mike is referring to this quarter, we estimate $6.6 million was revenue related to special projects. That's about $2.4 million higher than Q1 and about $1 million higher than a year ago.

But also exciting about that is the margins on that are a little better than we were seeing last year. So special projects definitely in play..

And then in the past, you've talked about some of the share gains you had within gas turbines. I wanted to ask you on that if you see further room for additional share gains.

And then also within the Aerospace business, are there any opportunities to take share or have you taken share on any platforms recently?.

On the IGT side, we have continued -- we had, I think, a home run when we started talking about share gain. And since then, I'll call them share gains that are smaller in nature, but still significant for us. And again, on IGT, the market with this 8,600 turbines been built, a lot of them fairly large for electrical generation.

We have a significant opportunity [Technical Difficulty] good about where we are and where we're going with this market..

Okay. Great. And just lastly for me, following up on the Aerospace side of things. I'm not sure I caught everything there at the end. But if we look at your commoditized alloys within aerospace versus the proprietary Haynes alloy, where is that split today? And then maybe if you could talk to where you see that split being 5 years in the future..

I think the majority of what we sell into Aerospace, I would say is high value and differentiated product. I think it's a little different than what our CPI market has historically been. I think right now also, in addition to HAYNES 282, which has done great things in this industry.

We now also have HAYNES 233 and HAYNES 244 being considered for hot gas path parts for engines. So we see in our minds, this continuing force. And again, I won't bring up the GE9X again, but GE9X is going to help us going forward also. So I feel great about how we're positioned.

And then I'll just add one thing, and that's more in the service side than the alloy side. We've got our own distribution system and we've got our ability to cut parts for that. And that, to me, really helps us continue to show the customers the value..

[Operator Instructions]. There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Mike Shor for any closing remarks..

Thanks, Kelly. Thank you, everyone, for your time today, and thank you for your interest and support of our company. We will talk to you again next quarter. Thanks..

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..