Haynes International Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 17, 2023

There are 8 speakers on the call.

Operator

Welcome to the Haynes International Inc. 4th Quarter Fiscal 2023 Financial Results Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, are Controller and Chief Accounting Officer, David Van Bibber. You may begin.

Speaker 1

Thank you very much for joining us today. With me today are Mike Shore, President and CEO of Haynes International and Dan Motland, 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 in the Securities Litigation Reform Act of 1995 in Section 21E of the Securities and Exchange Act of 1934. With the words believe, anticipate, plan and similar expressions are intended to identify forward looking statements.

Speaker 1

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, 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.

Speaker 2

Thank you, Dave. Good morning, everyone. The highlights of our fiscal 'twenty three performance include 6 consecutive quarters have an adjusted gross margin of approximately 21% or better, a normalized EBITDA of approximately $99,000,000 are in a position to be in a position when adjusting for both the impact of the 3rd quarter cyber issue and the raw material headwinds. Record full year full fiscal year revenues in both our aerospace and industrial gas turbine markets and book to bill levels consistently at were over 1.0 in both our aero and IGT markets. Based on this performance and our ongoing improvement initiatives, We believe that we have positioned Haynes very well for the future.

Speaker 2

Our focus through both our operations and our company owned distribution facilities are on producing and providing the alloys, products and just in time quantities that others in our industry struggle to provide will be in line with the financial results and by providing technical and sales service levels that are difficult to duplicate. Our formula for success remains the same. We continue to work to at least offset inflation through our relentless focus on variable cost reductions. We combine this cost reduction work with providing the high value have differentiated alloys products and services that our customers and end users value and are willing to pay for. Anticipate that our ability to continue to reduce costs and provide exceptional value will continue, leading to incremental gains in what is already top tier gross margins are in our slice of the industry.

Speaker 2

We're just beginning to show what our employees and our company are capable of related to safety performance, will be in the range of $1,000,000,000 of

Speaker 3

revenue growth,

Speaker 2

gross margin percent, net income and EBITDA. In addition, as we begin fiscal 'twenty four, We believe that we have the backlog, people, inventory and lead times in place to begin to generate operating cash flow in fiscal year 2024. With that as my introduction, I will now provide the highlights of our Q4 performance, provide comments on our full fiscal year 'twenty three and then follow that with some thoughts on what we believe is next for our company. The key points of our 4th quarter are as follows. 1st, on safety.

Speaker 2

We had a significant reduction in our OSHA recordable rate in our Q4, including no recordable injuries throughout our company in September. It was great to see our safety improvement initiatives result in improved performance in the quarter. Next, revenue was $160,600,000 the highest of our fiscal year. Our revenue per pound was $33 are in the range of $1,000,000 highlighting our differentiated high end products and services. We achieved these results despite incurring significant unplanned equipment downtime in September in our coal finished slat production area.

Speaker 2

Next, you're all aware of our ongoing focus and emphasis on gross margin. For the quarter, Gross margin was 18.5%. Our calculated raw material neutral gross margin was 20.9%. Our 4th quarter is now the 6th consecutive quarter where our calculated raw material neutral gross margin was approximately 21% or better. Are working on margin improvement is not done.

Speaker 2

We continue to work to raise prices where possible along with our focus on variable cost reductions, both of which we believe should lead to incremental improvement in this critical business metric. Our net income for the quarter was $13,100,000 play raw material related headwinds of $3,700,000 pretax for the quarter. This resulted in a net income per pound are in the range of $2.71 again despite the impact of declining nickel and cobalt in the quarter. Are in the range of $1,000,000 Our 4th quarter EBITDA, when adjusting for raw material headwinds, was over $25,000,000 In addition, are normalized fiscal 'twenty three EBITDA when adjusting for the impact of the cyber issue and raw material headwinds was just under $100,000,000 It's important to note that this was achieved at a shipment level of £18,500,000 As we look to the future, were projecting higher volumes led by aerospace and IGT, improved absorption, lower variable cost of manufacturing and higher pricing

Speaker 4

are in the position of the company for certain key high value products.

Speaker 2

As far as cash, we believe that our Q4 represented an inflection point for cash flow. We expect positive cash flow from operations in fiscal year 2024. We have the backlog, inventory and manpower position will begin to reduce inventory and therefore generate cash. With that, we believe our credit facility has peaked and we expect positive operating cash flow in fiscal 'twenty four, especially in the second half of the year. From a market perspective, the news in Q4 continues to be positive.

Speaker 2

Our largest market, aerospace, was 50.9 percent of Q4 sales. Aerospace revenues grew 20.9% versus Q4 of last year, are in the range of 5.6% sequentially and 26.3% for the full fiscal year. Average selling price increase in Average selling price in Q4 increased 14.7% versus the same period last year. The $290,400,000 in aerospace sales in fiscal 'twenty three was the highest level of annual aerospace sales on record. The news for us out of the aerospace market continues to be very good with commercial airplane and engine builds projected to grow through this decade and our proprietary alloys continuing to gain market acceptance.

Speaker 2

Overall, aerospace demand is still very strong and the supply chain is showing no significant signs of excess inventory. As I've mentioned on previous calls, Haynes 282 and Haynes 244 Alloys have been specked into various aerospace engine programs, while one of our newest alloys, Haynes 233, is in the final stages of testing by a major aero engine manufacturer for the next generation of engines. Our IGT market grew to 21.3 percent of Q4 sales. Revenues grew 20% versus Q4 of last year, are now in the range of 21.9 percent sequentially and 31.4% for the full fiscal year. The Q4 revenues of $34,200,000 are the highest quarterly sales on record into the IGT market.

Speaker 2

Average selling price in Q4 increased 5.6% versus the same period last year. Our IGT story remains consistent The supply of high value differentiated products and services leading to share growth, along with the continued and increasing application of Haynes 282 Alloy into turbines to improve performance. Our CPI market was are in the range of 14.3 percent of Q4 sales. Within this market, there are 2 important points to make. 1st,

Speaker 4

will be available on

Speaker 2

the call. As mentioned in last quarter's call, we are flexing our constrained capacity away from the more commoditized portion of our CPI business to the more profitable Aerospace and IGT Business. In addition, over the quarter, we've been successful in reducing our lead times by about 50% for the majority of this business. Because of this lead time reduction, customers can place orders later are in place based on our much shorter quoted delivery dates. With that as background, revenues declined 15.4% versus Q4 of last year, have increased 30% sequentially and increased 0.4% for the full fiscal year.

Speaker 2

Within CPI, will continue to focus on growing the high margin alloys and special projects. Based on our mix and value initiatives within CPI, The Q4 average selling price increased $5.71 per pound or 19.3% versus the same period last year. Have some examples of our high value differentiated corrosion resistant alloys include Hastelloy Hybrid BC1, in the past, the company's C2000 and the company's G35, all for various types of heat exchangers, reactor vessels, agitators and piping. These alloys are specified due to their unique and superior corrosion resistance to the highly corrosive media used in the production are in the range of specialized chemicals. Finally, our other market revenue in Q4 was below last year's Q4 by 2.3%, were up 8.8% sequentially and up 12.3% for the full fiscal year.

Speaker 2

Our other revenue in Q4 increased 26.1 percent versus Q4 of last year, was down 3.9% sequentially have increased 14.3% for the full fiscal year. Now on the book to bill.

Speaker 5

Are in the

Speaker 4

range of $1,000,000,000.

Speaker 2

Based on revenue, our book to bill was 0.9 for the quarter. Aerospace was 1.0, IGT was 1.1 and CPI because of the 2 major reasons already noted was 0.7. We continue to be encouraged by the level of interest and demand for our alloys products and services. Now looking into the future, As far as our major markets, significant investments continue to be made in aerospace and next generation power systems, including fuel efficient engines and the use of sustainable aviation fuel, hydrogen, fuel cells and hybrid based systems. With expectations for these to be available for use on a commercial scale around the mid-twenty 30s.

Speaker 2

These will most likely create even more new opportunities are ready for our unique proprietary hours. In addition, the future outlook for single aisle and wide body aircraft deliveries remains strong. Year on year growth rates for single aisle aircraft are expected to be 25% in 2024, are 16% in 2025% and 9% in 2026. Overall, Air passenger demand has made a strong recovery over the past year, which brought global passenger traffic close to pre pandemic levels. Next, the industrial gas turbine market is also expected to grow at a steady pace through the 2030s are

Speaker 4

in the

Speaker 2

range of worldwide demand for increased energy, higher efficiency and improved reliability. The IGT are continuing to look to with our look to the future, our ongoing pricing actions based on the alloy product and service value we provide, along with their continued drive to improve yields and variable cost of our products are projected to continue to incrementally improve our top tier are top tier raw material neutral gross margins. One concern that we do have for at least the Q1 of fiscal 2024 is the continuing drop in nickel prices. As the decline in the price of nickel continues, we project that this will lead to additional and increasing raw material headwinds. We are now projecting the impact of headwinds in our Q1 to be well above The $3,700,000 pre tax that we saw in Q4 of fiscal 2023.

Speaker 2

As you know, We had very favorable raw material tailwinds in fiscal 2022 as nickel and cobalt prices increased, followed by unfavorable headwinds through fiscal 'twenty three as raw material prices decreased. We will continue to highlight on a quarterly basis both the positive and negative impact are in the position of the movement in the price of raw materials. Moving on, as far as EBITDA, as previously noted, achieved just under $100,000,000 in calculated EBITDA in fiscal 'twenty three when adjusting for the impact of the raw material headwinds and the cyber issue we faced. Our collective focus is on continuing to improve EBITDA, the increasing volumes, evaluate application development, supplying high value differentiated products and services, and of course, our variable cost reductions. Next, we believe we are at an inflection point for cash generation.

Speaker 2

We have done our homework, a near record backlog, are in place. And with that, we expect to generate cash with cash generation momentum are currently in the second half of our fiscal year. Given our forecast, we expect to significantly pay down our revolver in fiscal year 'twenty four. One more point worth noting about the future. Although no market downturn is in sight for us, If a downturn does occur in 1 or more of our markets at some point in the future, we continue to be very prepared with a breakeven point down by 25% from where it was when our improvement journey began.

Speaker 2

Finally, wrapping up, I want to thank our employees. Are actively creating a safe work environment, a company that has leading gross margins in our slice of the industry, have calculated EBITDA of approximately $100,000,000 along with a company that has the alloys, applications, will be available on the call to questions. Our first question comes

Speaker 4

from the line of Robert W. Baird and Company.

Speaker 2

Please go ahead. That customers and end users want and are willing to pay for. To my coworkers, well done and thank you. And I'll hand this over to Dan for his comments on our business and our financial results.

Speaker 6

Thank you, Mike. Financially, this was a strong finish to the year. 4th quarter revenue at $160,900,000 adjusted gross margins neutral of raw material headwinds at 20.9 percent and net income at $13,200,000 Our average selling price per pound in total, including conversion revenue was $33 a pound shipped this quarter. This clearly reflects the high value products we provide and the differentiation of our product mix from others in our peer group. We finished the year with the underlying fundamentals of the business still intact, solid execution of our improvement strategy, a strong customer backlog and a focus on increasing output volume from our operations.

Speaker 6

This is a strong position going into fiscal 2024. Looking at the full fiscal year 2023, We achieved revenue at $590,000,000 with company record revenue shift in the aerospace and industrial gas turbine markets. In addition, we had adjusted gross margins neutral of raw material headwind at 20.7% and net income at 42,000,000 We talk a lot about this raw material impact, which helped us last year and hurt us this year. Raw material price fluctuations can impact our results more sharply than others in our peer group, given our product portfolio being solely high end Nickel and cobalt based alloys, as reflected in that average selling price of $33 a pound. The raw material impact of falling nickel and cobalt unfavorably impacted our results by approximately $3,700,000 in the 4th quarter.

Speaker 6

We estimate that the full fiscal year impact was $12,600,000 unfavorable. One thing that is interesting and nickel was $4,500,000 of the $12,600,000 Thankfully, the cobalt headwind is moderating As the cobalt price has stabilized, however, nickel is still falling, thus still causing an increasing headwind. As Mike mentioned, this is concerning and we are now projecting the impact of this headwind in our Q1 of fiscal 2024 to be well above the $3,700,000 pretax we saw in Q4 of FY2023. Looking at the full year FY2023 raw materials and comparing to FY 'twenty two, we saw a significant swing. We highlighted last year that we had a positive tailwind for the year of $9,400,000 favorable.

Speaker 6

This year, flipping to a headwind of $12,600,000 unfavorable There is a $22,000,000 swing in the raw material impact. When looking at gross margin dollars year on year, this is an important factor to consider. Let's walk through a bridge. Last fiscal year gross margin dollars were 106,300,000 If you remove the favorable tailwind that it is adjusted gross margin dollars neutral of raw materials of are in the same math for fiscal 2023 with gross margin of $109,800,000 and adjust for both The $12,600,000 raw material headwind and the 3rd quarter cybersecurity incident of $6,900,000 gross margin impact results in adjusted gross margin dollars of $129,300,000 So are in the range of $96,900,000 in FY 2022 to $129,300,000 in FY 2023 is an increase of 32 point are $4,000,000 representing an improvement of 33.4%. Improving our gross margin dollars by 1 third is solid And that is still with volumes that are expected to improve in fiscal 2024 and provide additional profitability leverage with our lower breakeven point.

Speaker 6

This puts us in a favorable position as we look to the future. Our SG and A, including research and technical expense, as a percentage of net revenues continues to favorably decline and was 8.5% of net sales in the 4th quarter as compared sequentially to Q3 of 8.9% and was 8.8% for the full fiscal year for the full fiscal year. Operating income was $16,100,000 this quarter, which is a sequential 22.1% increase, are in line last quarter's cybersecurity incident. Our effective tax rate for the Q4 was 11.5% and 19.1% for the full year, reflecting a favorable qualification for the high tax exception for some of our foreign sourced income, we expect our effective tax rate going forward to be 21% to 22%. All of this resulted in 4th quarter net income at $13,100,000 and a diluted earnings per share of $1.02 and full year net income of $42,000,000 and a $3.26 earnings per share.

Speaker 6

Will be in line with our financial position. Our revolver balance was 114,800,000 have an increase of $16,200,000 during the Q4 of fiscal 2023. We believe fiscal 2024 to be a year that we generate cash and our funding percentage continues to be solid at approximately 94% with the long term liability on the balance sheet at approximately 14,000,000 and the retiree healthcare liability at approximately $49,000,000 We continue to make progress to reduce our U. S. Pension and Retiree Medical net liabilities with an overall reduction over the past 36 months of 133,000,000 are knocking the liability down by 2 thirds.

Speaker 6

Our backlog was $460,400,000 as of September 30, 23, An increase of $86,600,000 from the same period last year. Our controllable working capital was $449,400,000 as of September 30, 23, an increase of $71,100,000 since the beginning of the fiscal year. The increase was driven by inventory, representing a $56,500,000 increase this fiscal year as we grow production levels and top line revenue. Accounts receivable increased $11,400,000 and accounts payable and accrued expenses changed by 3,200,000 Our capital investment in fiscal 'twenty three was $16,400,000 We are still evaluating fiscal year 'twenty four capital expenditures, are expected to be in the range of $25,000,000 to $35,000,000 Outlook for the future. Are looking at the full fiscal year 2024, we expect continued volume and revenue growth, incremental improvements in gross margin and positive cash flow from operations.

Speaker 6

We expect the revolver balance to decline in fiscal year 2024, gaining momentum as we progress through the fiscal year. Revenue and earnings in the Q1 of fiscal 2024 are expected to be higher than the Q1 of fiscal 2023, will be lower compared to the Q4 of fiscal 2023. 1st quarter results are typically lower due to the impact of holidays, planned maintenance, equipment maintenance outages and customers managing their calendar year end balance sheet. In addition, we are planning a 3 week will be able to upgrade to the Kokomo and Neil and Colleen line in the quarter, which may impact efficiency and the mix of products sold in the Q1 of fiscal 'twenty four. In conclusion, as we head into fiscal 'twenty four, we remain optimistic with our improvement initiatives still in focus along with a strong backlog, have a strong inventory position and improving production momentum.

Speaker 6

We are positioned well will continue to execute and achieve our goals in fiscal 2024 with improving financial results. Mike, with that, I'll now turn the discussion back over to you.

Speaker 2

Thank you, Dan. Our team continues to be encouraged with the progress we've made. I want to again thank all of you for your continued interest in our company. With that, Holly, let's open the call up to questions.

Operator

Certainly. At this time, we will be conducting a question and answer session. Are ready to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Speaker 4

Will be available.

Operator

Your first question for today is coming from Marc Breitman with Noble Capital Markets.

Speaker 3

Good morning. I was just curious what percent of the orders that were delayed by the Cybersecurity event are included in the order backlog of 460,400,000

Speaker 2

Including the Q1, well, as we go forward, including the Q4, we have basically feathered that in through the balance of the year. Our lead times are out there because the volumes we have and so that's pretty much furthered in over the next 12 months.

Speaker 6

Yes. And just for everybody listening, we estimated $18,000,000 to $20,000,000 of revenue shortage in the 3rd quarter. So we do that stays in the backlog because it wasn't shipped. And that will be, as Mike mentioned, feathered in the next several quarters.

Speaker 3

Okay. So the addition of production headcount and inventory, That has allowed you to increase your shipping levels. So due to historical trends of kind of 50% of the backlog shipping within 6 months and 90 Within 12 months, will that still hold in 2024?

Speaker 6

Yes, maybe slightly longer. I think we have some disclosures in the 10 ks about that. It's are slightly longer just because a lot of customers are kind of getting their place in line and that's included in the backlog as well. Okay.

Speaker 3

And then just my last question. If you could just maybe explain the delta between 2023 and Expected 2024 CapEx.

Speaker 2

Sure. First is, we have always found ourselves, well, at least for the past year, are a little bit behind on CapEx because of the supply chain and getting the components that we need in. And so part of where we finished the year that's ended now is about delays in getting the equipment we need to be successful expand our capacity and address our constraints. And so we want to make sure we're doing that in the key areas and that's why the extra CapEx is in there.

Operator

Your next question is coming from Steve Farazani with Sidoti and Company.

Speaker 5

Good morning, Mike, Dan, thanks for all the detail on the call. A little surprised by the flat year over year volume. I think you mentioned an outage at Kokomo. Can you give us a little more color on that?

Speaker 2

Yes. We've had some processing issues as we hit Q4, we continue to look for ways to expand our capacity and bring in more BIM melting from the outside, so we're working through that. We have great faith as we move forward for continuing to increase our volume as we move into this year.

Speaker 5

The impact of the unplanned outage?

Speaker 2

The impact that we had in Some issues that we had in our last quarter. We a lot of that was in the cold finish flat area. We made a lot of that up by other product shipping. So from a volume standpoint, it didn't have a significant impact on us. From a margin impact, it had more of an impact than it did related to volume.

Speaker 6

And sometimes that will spill into the next quarter production and especially at the end of the quarter like in September, can spill into the next quarter shipments as well.

Speaker 5

Okay. Did some of the upgrades planned in Q1, is that debottlenecking focused? Are you outside of using 3rd parties? Is the expectation some of this is to be able to get volume increases?

Speaker 2

Yes. As we talked about, one of our big initiatives as we are in this quarter now is shutdown and a rebuild a part of what's called our A and K line, and that is a critical piece of equipment between our 4 high hot rolling mill and our finishing operations. That equipment has been around for decades. It is not as reliable as it needs to be, which is why we're undertaking that. So that will allow us to promote more steady flow through our operations.

Speaker 2

In addition to that, we continue to look at what the future bottlenecks are 6 months, are in the range of 12 months down the road and understand what makes the most sense as far as what we do in house versus what we do via conversion.

Speaker 5

Okay. When we think about your mix and obviously continued efforts to push down the lower margin more commoditized chemicals. Is your expectation that your gross margin ex raw materials can trend up towards healthy above 21% given your volume mix in backlog, are obviously ex raw materials.

Speaker 2

It's all a matter of how you define certain words. I'll say incrementally Okay. We are proud of where we are to be 6 quarters in a row with raw material neutral levels at 21% It is a number that we're very, very proud of, but we believe there is still more incremental opportunities, are in the range of $1,000,000 both on variable cost reductions throughout all of our operations and through taking advantage of where we find the value we're providing, therefore increasing our prices where appropriate. So We would say incremental increases are the best way to describe what we think we can do. But I meant in my script what I said, we're not done with gross margin.

Speaker 6

And keep in mind too with higher shipment levels, we expect higher shipment levels volume wise in FY 2024 versus 2020 3 to get back over into the £5,000,000 a month or better, that's going to be helpful for absorption related costs as well. And some of that's production, Although we are planning to reduce inventory levels, but also just some of those fixed costs that are in the cost of goods sold area, we're going to get Better absorption of those fixed costs. That will be helpful.

Speaker 2

And one more thing I want to add, Steve, you talked about the CPI business. We really look at that as 2 separate businesses. Okay, we've got Some of the more commoditized alloys, that's where we look at can we positively substitute some of our aero and power gen in for that. But we're full steam ahead on the more unique CPI alloys that go into what we call special projects, and continuing to find new applications with our new alloys for that.

Speaker 5

When we think about working down the revolver and part of that's working down backlog, I assume, and bringing down working capital a bit, That means either you continue to shift your mix by playing down the commoditized products. Obviously, the tailwind in aerospace does not seem to be slowing. So I'm just sort of trying to put all the pieces together to how you get there and how you're thinking about it This is how I sort of just laid it out.

Speaker 2

The most fun I have talking about cash flow is looking at how we increase our earnings in this Okay. That certainly is a part of that. The other thing that has happened though is we have been able now to balance out What we are melting versus what we are shipping. We've been melting, especially in VIM at capacity, but where our shipping levels have just So as they come up, that will more even out, which will allow us to do that. In addition, We have a significant amount of inventory, that inventory is positioned right and that will be able to ship in the short term, since a significant portion of that is finished inventory.

Speaker 5

Thanks, Mike. Thanks, Dan.

Speaker 2

Thank you.

Operator

Your next question is coming from Michael Leshak with KeyBanc Capital Markets.

Speaker 7

Hey, Mike and Dan. Good morning.

Speaker 6

Good morning, Mike. Hey, Michael.

Speaker 7

I wanted to start off just following up on the unplanned outage at Okomo, you had said it's a critical piece of equipment there that was down. Could you give any details On which asset it was and when did it occur?

Speaker 2

Sure. We have first of all, we have have hundreds of pieces of equipment. So reality is we're dealing with outages on a regular basis and we normally don't talk about those. However, in September, we had a piece of equipment, Mike, you've heard of before. It's called the Drever furnace, okay?

Speaker 2

It is a key piece of our cold finish flat business. And we had really 2 significant issues with the Drever in September. And it's not only fixing it, it's when you have to get in that furnace, you have to take it down very slowly to temperature or to room temperature affect address it and then bring it back up. So we had a significant amount of issues with that furnace in September. The good news is It's running very well right now.

Speaker 7

Got it. And then following up on that cold finish blast opportunity, Could you talk about maybe the magnitude of what that could be as it relates to volumes and margins? And where do you think you can get from there? And maybe in what time period can you get that business to where you think it could be?

Speaker 2

As we have those issues in September, it affected absorption. So that will affect what we have in the upcoming quarter as far as absorption And some margin hits, the other side

Speaker 6

of that is, is we'll be able

Speaker 2

to ship more gold finish flats, which is a good thing. Obviously, the Q1, as Dan pointed out and as I pointed out in my script, nickel continuing to drop is a concern. Obviously, I've I already said it once, I'll say it again, the 21% gross margin for 6 quarters in a row, that's raw material neutral. So as raw materials begin to create even additional headwinds that's going to be off the top as far as margin.

Speaker 6

And one thing about The upgrade that we're talking about in Q1 to the ANK line, that's part of kind of what feeds into cold finish flats as well. That's going to provide some better reliability. And that's kind of a key component of when we talk about getting back to that £5,000,000 plus shipments per quarter, that's kind of a key component of that.

Speaker 7

And on the 777X program, I know there are some proprietary Haynes Alloys on there. Have you started to see activity there ahead of Boeing starting to produce? And should we expect that to benefit overall A and D pricing Next

Speaker 2

year. It's a slow start. If I depended on what I've heard about that engine and that plane The last couple of years, I would have told you years ago, it was going to start to benefit us. So it's good news for us. It is 2 proprietary alloys, which we're very proud of.

Speaker 2

You know there's not going to be that many engines built, but it gives us great exposure to the engine manufacturers for future generation of engines also.

Speaker 7

Then just lastly for me, I wanted to ask on other markets pricing momentum that you're seeing there. It's, I know it's a smaller part of the business, But it was up meaningfully again. I know the pricing can swing quarter to quarter, but is there any level of sustainability to that strong pricing there?

Speaker 6

Yes. I mean, as you look at what goes in there, there's a lot of very different applications. And we are, as Mike mentioned, doing mix management in the CPI market, we're also doing it in the other markets as well. So as we maybe back away from some of the lower end commodity type of business, For example, desulfurization, FGD, flue gas desulfurization that we've talked about in the past, as we backed away from that, what's left in there are going to be a higher average selling price. Now this average selling price we just did this quarter of $54.27 that's pretty rich.

Speaker 6

Will that vary from that number probably. You can see it, if you look quarter to quarter, it bounces around quite a bit and that's a great number. Will it be sustainable? We'll have to see What we have remaining in that other market category and what that ASP is going to be.

Speaker 7

Appreciate all the detail. Thanks, guys.

Speaker 6

Thank you, Mike.

Operator

Your next question is coming from Richard Evans at Marrow River Capital Management.

Speaker 4

Hi, guys. Hi, Richard. Just wondering On the mix management within chemical, what kind of pounds roughly are the high value versus the commoditized, so we've got some idea of how much

Speaker 6

Well, overall, when we look at what is kind of the volume alloys versus proprietary and specialty, Maybe it's a roughly sixty-forty, maybe a little higher on the volume type alloys. Now if you segregate that down to just CPI, it may even be a bit more. We kind of view it as 2 pieces. Half of it is commodity type alloys, half of it is more specialty alloys and in some cases proprietary. So We're certainly not getting out of the commodity alloys completely, but just some of those very low end commodity alloys that is are highly competitive and really difficult to make much money on.

Speaker 6

We'll focus our production capacity on the higher end products across the board.

Speaker 4

Okay. And then just on the inventory sort of headwinds that you're flagging so sort of bigger than you saw in Q4. Given cobalt's flattened out, looking at the LME price of nickel, it's clearly still going down, but it doesn't seem to be dropping at a particularly higher rate than it has done for all of 2023. So I'm just wondering why we're getting incrementally higher and higher headwinds from nickel, Given the rate of decline, it doesn't seem to have massively increased.

Speaker 6

Yes, it's been interesting. As I mentioned, this past year, Because there's a lag impact of this as well, keep in mind. So this past year, the headwind that we had $12,600,000 was mostly cobalt. There was a little bit of nickel in there, but mostly Cobalt. Cobalt's moderated because as you mentioned, that price has stabilized, but nickel has continued to fall.

Speaker 6

So there's always a lag impact. So what we're expecting here in Q1 to be worse than Q4 is really the price decreases you saw even last quarter leading all the way up through this quarter, even this month, nickel has dropped into the 7s. So for us, it's particularly a sharp impact because we are all high end nickel and cobalt based alloys. So we do feel this, in my opinion, much stronger than some of the other Companies with lower end nickel or even stainless steel type of metals that they sell. So we really see it very acutely and there's a lag impact.

Speaker 6

So what you're seeing in Q1 of 2024, what we expect to see will be kind of the fall that we've already experienced in nickel. And that could even spill into Q2. We'll see where nickel goes from here.

Speaker 4

Yes. I mean, I sort of get that, but I mean, maybe it's something we have If you look at the start of 2023, nickel was what, maybe $30,000 a ton. Now it's down and by the end of this Your reporting year has already dropped to $18,000 a ton. It's only dropped to $17,000 now. I'm just amused why it's getting so much worse incrementally.

Speaker 6

Yes. It's really just a lag impact. It peaked way back when about a year ago, maybe are here recently at $12.80 a pound and it's really just continued to fall since then. So we've started feeling That incremental impact, but as that continues to fall, that will continue to build. And that's the flip kind of from the cobalt impact.

Speaker 6

Now we're feeling it on the nickel impact.

Speaker 2

So $12 down into the 7s, that's significant. And remember, our 6 month approximate manufacturing lead times on VIN product. And what we're really dealing with here is the value of the scrap stream And what the value is now versus what the input cost was when it went in. So it does have something also to do with the lead times we have on our Riches products.

Speaker 4

Okay. So if we see nickel price flatten out, it would be about 6 months from that flattening out till when we see, in theory, no more headwind.

Speaker 6

Yes, that's fair. Definitely more than 1 quarter, but probably 6 months would be a good estimate.

Speaker 4

Okay. And just in terms of backlog, I mean, if I look back to 2018, 2019, Your backlog as a percentage of annual sales was more like 60%, 65% of annual sales. And now it's Into the mid to high 80s of annual sales. As we move forward and things normalize, should we expect that backlog trend back down towards sort of more 60% of sales as sales grow, maybe people become more comfortable not needing to order as far in advance.

Speaker 2

I think what's happening here and I use aerospace as an example, okay. There is such an increase coming I'll take the 737, approximately 290 planes in 2023, 660 in 2026. And then I'll just jump to the LEAP, 1600 LEAP engines built in 2023, projections are 2,400 in 2025. So what we have is Customers continuing to focus on getting in line, in particular in our long lead time items, particular VIM products. So I believe the backlog will be in general terms where it is now because of the desire to make sure that the Supercycle and Aerospace, everyone's got the metal they need within the supply chain.

Speaker 4

Okay. And then are you more exposed to Boeing or Airbus in terms of end market customers?

Speaker 2

I'd say on the engines, it's about the same. I would say in airframe though, Which is our titanium tubing, it's more Boeing.

Speaker 4

Okay. And your narrow body versus wide I guess you just have more content on Widebody because the engines are that much bigger?

Speaker 2

More content per engine, but far less engines.

Speaker 4

Yes. Okay. Thank you.

Speaker 2

Thank you. Thank you.

Operator

We have reached the end of the question and answer session. And I will now turn the call over to Mike Shore for closing remarks.

Speaker 2

Thank you, Holly. Thank you for your time today, everybody, and thank you for your interest and your ongoing support of our company. We look forward to talking to you again next quarter.

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Earnings Conference Call
Haynes International Q4 2023
00:00 / 00:00