Haynes International Inc (HAYN) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Haynes International, Incorporated Second Quarter 2007 Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Francis Petro, President and CEO for Haynes International, Inc. Thank you, Mr. Petro, you may now begin.

Thank you, very much. Well, good morning. It's certainly a pleasure to be with all of you this morning. Certainly, we're pleased with the progress at Haynes International. As you saw from our press release and the 10-Q, our quarterly sales set a record. Our margins continue to improve, as well as our earnings.

And on top of that, our markets remain very strong, our order backlog continues to increase, and one of the best things, which is a favorite of mine, is that we went through the entire quarter without a single lost-time accident in any of our facilities anywhere in the world, and we're extremely proud of that.

A few other notes about the business, and then I will turn it over to Marcel, our Chief Financial Officer, to go into a little more detail about the finances, but we continue to make progress with our recapitalization and our CapEx projects. Our quality costs continue to improve, as well as our delivery performance. Our sales through our service centers and our value-added business that I mentioned to so many of you when I was on the road with the stock offering continues to grow and expand, and we're very pleased with that progress.

On top of that, one of the topics on the road was our wire business in North Carolina. And that business is starting to make very significant progress in the sale and delivery of high-performance wire, and we're very pleased with that. Our Arcadia facility, our pipe and tube facility, continues to get better and better, and their capability to constantly meet their commitments has been excellent.

So I think as we go forward, our mission, our plans, our strategic outlook is still the same. The aerospace market remains strong, the land-based gas turbine market remains strong, and the CPI products, or chemical, oil, and gas business, remains strong. We see and are experiencing excellent business results and sales in Europe and North America, and certainly in China and in Asia.

So I believe that all the things that we are doing, that all the things that we shared with you when we were on the road, we are definitely following and will not deviate from that plan. Our intention is to be the premiere supplier of high-performance alloys and provide the best service that we can to all our customers and end users.

So on that note, I'd like to turn this over to Marcel Martin, and he will go into a little more detail about the actual financial results.

Thank you, Francis. Good morning, everyone. I'd just like to hit on, initially, just touch on some of the highlights of the quarter. On March 19, we had an equity offering. We sold 1.2 million new shares of stock and had options -- sales of $450,000 for a total of 1.65 additional shares. Now, the offering price was $65 per share. That generates, for the company, net proceeds of 72 -- almost $73 million, and plus the option moneys associated with that.

Of the 6.1, we had additional cash with the company, $78.9 million. And when you look at our P&L, our earnings per share, you're going to see a slight skew because of the equity offering coming on late in the quarter. The proceeds were primarily used to reduce our revolver, reduce our debt. And our revolver balance at the end of March was zero, in fact. And what this ultimately does for us is create the flexibility to continue our growth, to accelerate our CapEx programs, and thus continue to build value for the future.

In addition, through the quarter, we reviewed our revolver in the UK for another year at a lower cost, so we'll do well there. We don't expect to be borrowing against that line of credit. We want the flexibility there. On February 20, we had our shareholder meeting, and the two key elements there were the reelection of the directors, and we increased the authorized shares from 20 million to 40 million.

Specifically for the quarter, relative to our financials, inventory went up through the course of the quarter. Actually, from September 30 to March 31, inventories went up almost [$65 million], or 30%, and that was primarily driven by the rising cost of nickel, which went from [367] on the LME to [2101], which is almost a 54% increase in the cost of nickel, which is a primary raw material that we have in our product. The revolver debt, as indicated, is zero, the equity offering. And equity for the six-month period went up 80%, primarily due to earnings and the equity offering.

From a P&L perspective, the trend continues that we established in the prior period. The revenue dollars for the first six months of last year on a comparable basis were $205 million versus $258 million for the first six months of this year, which is an increase of $52 million. That's about 25%, 26%. Operating income for that time period went from $26 million to $54 million, or increased $28 million. It went up 110%.

Net income went from $13.3 million for the first six months of last year to $30.6 million for the first six months of this year, or a $17.3 million increase. That was an increase of 130%. And the reasons continue to be just very good markets, our value-added products that we continue to sell, and the reducing costs via the CapEx programs. Earnings per share for the period, last year, for the first six months, were $1.30. For the first six months of '07, $2.91, for an increase of $1.61, or an increase of 124% between periods.

So, in summary, our message continues to be we're going to continue to grow the company toward our 23.5 million pounds of our high-performance alloys, while they continue the upgrade in the facility, and expand our operations worldwide through our service centers. The key thing to remember is that Haynes has one product, high-performance alloys, and our focus continues to be the expansion into our traditional market, but in addition to that, expanding into the other markets.

Last year's volume in the first six months of the year of high-performance alloys was 9 million pounds. For the first six months of '07, we were at 10 million pounds. That's a 1 million pound increase between periods, or over 11%. And primarily in our traditional market, and overall, the markets were very good. We were up in all markets.

We were down slightly in the aerospace. But on the year-to-year basis, I think it's important to recognize that for aerospace in '03, fiscal 2003, we sold 4.7 million pounds of aerospace product. In '04, 5.5 million. In '05, we sold 6.1 million pounds. And last year, we sold 7.1 million pounds, and we're averaging something close to that for this year.

As I previously noted, the key thing for us is not only to service our traditional markets, but also to begin to grow into other markets. In our other category of high-performance alloys, we're up 49%, six months to six months. Essentially, last year, we sold almost 800,000 pounds of high-performance alloys into those markets. This year, we're almost 1.2 million pounds, and that's primarily FGD, automotive, and pharmaceutical.

So, overall, although quarterly fluctuations are important, our effort is to grow year-to-year volumes and achieve our goal of 23.5 million pounds some time within the next three to five years. The key items supporting that process is from 12/31/06, our backlog was $207 million. At 3/31/07, our backlog was $237 million. It was up over $30 million, or almost 14%.

In addition to that, our CapEx programs continue on track. We're going to spend $15 million this year, $15 million in '08, and probably average between 2.5 to 3 million -- between 2.5% to 3%, of revenues on a prospective basis. So, overall, you have the message. We continue to grow the business, we continue to add value, and we continue to focus on our CapEx programs to increase capacity and reduce cost.

At this point, I'll turn it back over to Francis.

Yes, the only other comment I would like to make, I mentioned when we were on the road, our new product development. And I can tell you that the reception for the 282 alloy, the high-temperature alloy, both in the aerospace and the land-based gas turbine business, is still receiving tremendous, tremendous amount of interest. And the number of applications and trials and inquiries we are getting is very, very high, and we're very, very pleased with that progress. And I wanted to make sure that I share that with you, because that was a specific topic of discussion when we went on the road.

So at this time, I would like to turn this over to the operator so she could set us up to have any questions you might have.

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question is coming from Eli Kantor of Weeden & Co. Please proceed with your question.

Good morning. Congratulations on a great quarter.

Thank you.

My first question revolves around the metals that you guys have in the sales and service centers. It looks like your backlog represents about two quarters' worth of revenue. And I'm wondering if the metals in your sales and service center is already spoken for, or if it's available for any potential customer to come in and purchase?

Both, about 30% of it, 30% to 40% of it, is there for to be made into parts and stuff. It goes through the process for the customers. And then, generally, in any given month, about the other 50% or a little more is for in-out business, where an order comes in today, we take it out of stock, and then we will cut it or package it or whatever we have to do to ship it. So it's both.

Okay. I'm trying to get a handle on at what point in the production price, in the production process, you price the metal that you sell.

We generally price the metal that we sell per -- I guess, I would phrase it differently. That's not quite how we work the process. One of the things that we do in our -- we've got a very complex pricing model. And what we're doing is adjusting our prices daily relative to the changes or the rising cost of nickel on the LME.

So, for example, probably a third of our product is sold on the spot, and therefore we can change the pricing today to accommodate that increase in raw material cost. About a third of our product is sold through contracts. So again, that's (inaudible) escalators build in. And about a third of our product is sold via purchase orders, and those prices are set when the order is placed.

So a purchase order generally requires delivery within, it could be today or it could be within six to 12 weeks, just depending on what the product is that the customer ordered. So we really don't price the metal. What we do is aggressively price our product based on what the customer wants when he wants it.

Okay. Now, looking at your stock prices for the last two years, the stocks went up quite a bit. I'm wondering if you guys have thought at all about splitting the stock to increase the liquidity of the shares.

The answer to that is yes, we have had some discussions about it at the last board meeting, but we're still, you know, we're not prepared to say we're going to do that or not do that. We're certainly looking at it and we certainly had discussions about it, but we haven't made any decisions yet.

Okay. Thank you, very much.

Thank you. Our next question is coming from [Bo D. Sassa] of [Sassa Security]. Please proceed with your question.

Good morning, gentlemen.

Good morning.

Great quarter.

Thank you.

My question has to do with in your press release, there was discussion about a capacity increase, primarily around the titanium business. Can you give us some color as far as how much of this business would be incremental? And then when we're actually going to see some flow-through of that into the earnings statement?

The titanium increase in business that we have is relative to the supply of titanium hydraulic tubing from our Arcadia facility. We have purchased a new machine to accommodate the increase in orders, mainly from Boeing, but for aircraft military and everything else. That equipment is ordered, but it won't be here until late next year.

And is that, the increase that you're talking to, is that the increase of the prepayment from Titanium Metals?

No. Titanium Metals is a conversion agreement where they paid us $50 million up front to reserve capacity for a 20-year period. And all that involves is every week, they bring in basically slabs. We heat them and then roll them in our (inaudible) mill, and then we return them the next day to them. That's strictly a conversion agreement.

We don't buy the material and then sell it back to them. It's their material, they bring it here, we convert it, and we charge them so much a pound to do that. And the $50 million is that we reserve the capacity for them within a scheme, which you can read in the agreement that's published.

That $50 million will be amortized income over 20 years. So that's -- it'll be approximately $2.5 million a year. In addition to that, we'll have the toll conversion revenue also on top of that.

Correct.

Right. So are we already seeing the impact of that conversion agreement into your revenue?

Yes, you are.

If you compare last year to this year, you'll see the increase in conversion or toll type revenues.

And I guess the last question on this is can we expect that that revenue will increase as we go through 2007 and beyond?

To the extent that we begin to ramp up the toll conversion, you'll see increasing revenues relative to that, yes.

Great. And one last question. As far as modeling for tax rate, is the tax rate that we just saw for the last quarter indicative of what I should be inputting into my models going forward?

I would approximate 40%. That's a good rate to use, yes.

Great. Great execution, guys. Thanks.

Thank you.

(OPERATOR INSTRUCTIONS)

Thank you. Our next question is coming from Mark Parr of KeyBanc. Please proceed with your question.

Thanks. Good morning.

Good morning.

Wow, what a quarter. Hey, that was terrific. Congratulations.

Thank you.

One thing I was curious about, and I apologize for missing the first ten minutes of your commentary, but could you give us a little color on the SG&A number? I mean, I know -- I realize that you had a $600,000 reduction in your bad debt expense. That was in the release. But does that compare to last year, or compare to the first quarter?

I think, overall, what you'll see is that the first quarter was about -- I think, about $10.1 million, $10.2 million, and this quarter was about $9.6 million, and that was primarily due to the SG&A -- the bad debt reserve reversal. And I think what you'll actually see is probably something approximating $10.1 million, $10.2 million for the next quarter through the balance of the year. So there's a representative of what we expect to incur.

Okay. But I'm looking at the earnings that you've got -- seem to be, I would call it, probably toward the higher end of your expectations. And I'm just wondering if we should have some additional, say, incentive compensation assumption built into the SG&A line for the second half of the year. And you're suggesting that that's not necessary.

No, what our expectation is is to do the best we can. I think, overall, we take into account all those aspects of that expectation.

Okay, terrific. And I don't know if you made any comments related to gross profit margins, but I was wondering if you could, other than the color that you gave in the release, is there any benefit in the margin? I mean, it was up about 150 basis points from the first quarter. Is there any benefit there from pricing, just pure price realizations?

I think what you have is essentially the same, it's a carry forward we've been experiencing for the past year and a half.

Okay.

What we're getting is the improvement relative to pricing in our product. We're getting improvement in our margin due to our improvements in our cost structure, because of our CapEx projects. And, we're getting improvement relative to volume. So we continue to experience benefits from all three of those items through the process.

Okay, but the volume number in the quarter was not up very much on a consolidated basis.

Well, I think if you look year -- if you look six months this year compared to six months last year, we're up 1 million pounds between, on high-performance alloys. And that's the key. So that's over 11%. So from our perspective, that's the product that gets produced in our facility.

Okay, all right. So -- all right. Any way that you could give us some color on the impact of the capital projects, and how much of a benefit you realize from that?

I think, overall, I think you're seeing that benefit -- we're not going to break it down into any segment. I think the fact is that, we know we're getting benefits. You're seeing those benefits occur through the process. We have a array of projects we have undertaken. We've got a array of projects currently in process, and we'll undertake other projects on a prospective basis.

So again, it's difficult to take a number just because of the constant movement in raw material cost, the constant movement in just improving issues relative to our CapEx programs, and the improvement relative to our volume. So we're really just trying to do better across all those elements. And so at the end of the day, what we measure is the gross margin. I think that's the key, because the other thing we do is make and sell high-performance alloys.

Right, and the whole thing is a franchise. I mean, at the same time, we're also expanding our value-added business out of our service centers and everything else, so it's all those things added together. And we focus on every single one of those. There is some executive in charge of every one of those that is driving the improvement in every one of those areas. And I can tell you this, that every single one of those are improving.

Okay. I was wondering -- you have a very nice increase in your backlog levels. I was wondering if you could break that down between pricing and volume. If you're up 11% on volume, year to date, is it -- ?

It's a combination of both. I think if you want to look to, if you want to peg it to volumes, you need to take a look at our average selling prices, and that'll give you an indication what the volume effect is, but it's both volume and pricing.

Okay, terrific. And just one last question if I could. On the service center side, how -- did you make -- was there any progress made as far as profitability in the domestic service center arena in the March quarter?

You mean relative to separating that out? Or, do you mean -- they certainly, they've had record sales in North America. And they are continuing to grow and expand the parts business, if that's what you're referring to. So, I don't know exactly what the question is.

Well, I was just trying to look at the service center as a standalone operation, I guess.

That's the one thing we don't do. I mean, in the context that we measure performance of our service centers, period to period, in an endeavor to improve them so we can continue to improve their performance, we don't look at them as a standalone because we do have three in Europe, we've got four in the U.S., got one in China.

So again, they're all unique in some way, shape, or form. As we've talked in the past, this is a franchise. It starts [at] the beginning with the tech support and the development of new alloys, all the way to the end to our distribution systems process to our customers, down to the cut parts we deliver.

Okay. No, I realize. I'm totally onboard with all that, I guess. But, that was something, I guess the productivity of the service center was something that you had indicated was an opportunity, and I'm just wondering if there was any significant progress made. You know, again --.

It's steady progress. As we discussed, we're in the early, or the embryonic, part of our development of our cut parts program. Some service centers are further along than others, but we look to grow that business over the longer term. You're not going to have any dramatic silver bullet effect through any quarter. It's really quarter-to-quarter, over a longer term process as we grow the volumes.

Okay. All right, terrific. Well, hey, congratulations on a great result. Thanks for the color too.

Thank you, very much.

Thank you. Our next question is coming from Mary Gilbert of Imperial Capital. Please proceed with your question.

Yes, good morning. I wondered, in talking about the 282 alloy, when you expect to take that into production and start shipping on that and --?

Well, it is in production, Mary, and we have shipped some production orders that are being used in trials.

Right. It's in trial, but when does it go to like final production?

Well, actually, we have some orders where people are actually going to -- where they're rebuilding turbines, particularly some land-based gas turbines, where people are actually ordering the material to rebuild the turbine. Now, that's the next step. I think the question you're really asking is, when will they change the special occasions to put this in the turbine? And my guess is that's going to happen -- that's starting to happen, and my guess is we'll start to see those kind of orders some time next year.

Okay, great. And then, what do you think the potential growth factor would be associated with that business, and how big could it get?

Well, that's really hard to answer at this time, Mary, because that alloy has the capability of replacing a whole family of alloys.

Right.

And so, it could be -- it all depends on how we end up with the end users, and where they [spec] it and whatever. So we don't have enough information yet. We know there's a tremendous amount of interest, a tremendous amount of trials. We know what the capability of it is, and we know it could replace, theoretically, four or five different alloys from different types of engines that use different types of alloys. So, we just don't even have enough information to even answer that.

Okay, because that's something that's going to kind of evolve over time, basically.

It'll evolve. And once they start specing it, it'll unfold very quickly.

Okay. The other thing I wanted to find out is, is there a way, and I know this is kind of difficult to quantify or even guess at, but where do you think we are in the cycle through all of your end markets, like in the aerospace cycle? If you were to say that this is live a five- to ten-year cycle, where are we at that point? And the same with LBDT and CPI?

Well, Mary, the only thing I'm going to tell you is the exact same thing that I told everybody when I went on the road -- I truly believe that the phenomena that's occurring in the world today is very similar to what happened after the second world war, that we're in a worldwide manufacturing economic expansion because of all the infrastructure aircraft need for power, need for chemicals, need for fertilizer, need for plastics, because of the tremendous demand of another 2.5 billion, 3 billion people coming into the market, which is ultimately what drives the demand for everything.

And I believe there will be economic ups and downs, and I'm not even going to comment. I can't predict terrorism or wars, but assuming, set that aside, that the overall demand for these materials, in my opinion, over the next 20 years, is going to dwarf what happened in the last 20 years, and it's because of this tremendous demand being driven by the upswing in technology. But more importantly, the demand of 2.5 million to 3 million new people, who ultimately all want cars, all want to fly someplace, all want a home, all want TVs, all want iPods, all want whatever.

And it's very similar to what happened after the second World War when you had to rebuild Europe, you had to rebuild Japan, and all the soldiers came home, you hadn't built any cars in five years, and all of a sudden, you converted the aerospace industry from propellers to jets, so you had that tremendous goal.

So now, you've got, for all these different reasons, but the same kind of long-term economic expansion. And I believe, and I'll say something else which a lot of American executives won't say, I think there's going to be a rebirth of very sophisticated manufacturing in the United States and in North America and in Europe.

Interesting.

Now that I've said all that, Mary -- tomorrow, they'll probably close the borders. But I don't know.

Okay. Thank you, very much.

Thank you, Mary.

Thank you.

(OPERATOR INSTRUCTIONS)

Gentlemen, I'd like to turn the floor back over -- we do have one additional question come in, if you would like to take it.

Yes.

Thank you. Our next question is coming from Evan Claar of CBI Capital. Please proceed with your question.

Good morning, gentlemen. Could you discuss the impact of nickel on your business and the cost?

Sure.

Thanks.

I think if you take a look at our S-1 and our Qs, our historical 10-Ks, I think we're pretty clear as to what nickel does for us. It comprises -- it's 50% of our raw material cost, it probably comprises 30% of our product cost, as we say in the Q and our S-1. So the reality is it comprises a significant portion. And you can track what the LME has been doing over the last several years. Nickel has gone up substantially, several times, 200%, 300%. So, again, it impacts us directly. It drives our selling price. We, in turn, pass those costs onto the customers.

What we endeavor to do to manage nickel, we do a number of different things. I think I mentioned earlier about our pricing model. We're very aggressive relative to that model so that we modify, change prices daily depending on what happens with nickel, so we're passing that rising cost on immediately, and that actually enables us to charge a price that we've yet to incur.

We do have contracts that have escalators incorporated in them, so that we know that we can cover ourselves from that perspective. And we also buy nickel forward on 90-day contracts. Again, because of the [backwardation] that's in effect, we're buying nickel forward at lower costs. We have been for the past several quarters. So, again, those are the things that we do.

I think, overall, what we've been endeavoring to do as a company is to decouple the cost of the commodity relative to the product we make. Again, I think when we do -- we manage nickel, the raw material -- as I mentioned, but in addition to that, what we really do is add value. We have a significant technical support process going on here at the company. We've got R&D programs. We invent new alloys, have had several new alloys. Francis has talked to one, specifically.

We also, through our service centers, add value in the context that the materials there when the customer needs it. But more importantly, it's providing a product closer to the end form than we've have in the past. What I mean by that is, for example, historically, five years ago, we would sell patterned sheet and patterned plate.

Well, today, we sell a cut part, or (inaudible) to sell more and more cut parts to the customers, we want to become the supply chain manager for the customer, closer to form, add value, decouple from the raw material cost. Although that will never be totally possible. We [endeavor to] move away from that.

In addition to that, our CapEx program, we're changing our cost structure. We're reducing our -- the cost to make the product. So, again, it's broadening out the margins to all these items. So, again, we don't really manage nickel although we do specific things to maintain as low a cost as possible. What we do is sell high-performance alloys at the high end in the market, trying to add as much value to the process as we can. We're not in the nickel business. We're in the high-performance alloy business.

Okay. Thank you, very much. And also, looking at Note three on your Q about inventory, most of the increase in inventory seems to be from work-in-process and raw material, so I assume that's not at service centers.

That's exactly right.

That's just implying strength in the backlog.

Yes.

Thanks a lot, guys.

Gentlemen, I will now turn the floor back over for any closing comments.

Well, thank you very much. I'm sure I met a lot of you when I was on the road. And I can say that Marcel and I, although we were tired when we were done, we certainly enjoyed that process, and we certainly enjoyed meeting so many new people. It's really -- we're really pleased that we have generated, that Haynes has generated a lot of interest.

This was a very, very important step for Haynes International and we were very pleased with the reception we got. And you can all rest assured that the message we carried when we went on the road, and the message that we have been carrying every time that we have one of these conference calls, is that we are very, very focused on our end users.

We are very, very focused on the development of our new alloys, the continuing improvement of our manufacturing processes, were extremely oriented toward our safety and environmental programs, and our employee development, and we are very, very pleased with the progress and we're really, really pleased that we have such a broad spectrum of shareholders now. And we will do everything humanly possible to continue to enhance the value of your shares. So thank you, very much.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.