Haynes International Inc (HAYN) 2009 Q4 法說會逐字稿

Greetings and welcome to the Haynes International Incorporated fourth quarter 2009 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms Stacy Knapper, Vice President and General Counsel for Haynes International incorporated. Thank you, Ms Knapper, you may now begin.

Thank you, Chris. As Chris noted this is the Haynes International Inc conference call for the fourth fiscal quarter and fiscal year-ended September 30, 2009. This call is also being broadcast over the internet. With me today are Mark Comerford, President and Chief Executive Officer of Haynes, and Marcel Martin, 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 could contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1933 and section 21-e of the Securities 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 reflected or suggested by such forward-looking statements are reasonable, such forward-looking statements are subject to a number of risks and uncertainties.

And we can provide no assurance that 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 in its form 10-K for the fiscal year ended September 30, 2009. 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. In addition, we will discuss certain non-GAAP financial measures on this call. In accordance with applicable SEC regulations reconciliations of the difference between these non-GAAP financial measures and the most directly comparable financial measures calculated and presented in accordance with GAAP, are -- were included in our press release and are available on our website at www.haynesintl.com under the investor relations tab. I will now turn the call over to Mark.

Thank you, Stacy. Good morning, everyone, and thank you for joining us. By now I believe you have all seen our earnings release for the fourth quarter and fiscal year-end and had a chance to review the information. I will briefly recap the results, touch on some key points for the year and then get into what kind of activity we're seeing in the marketplace today. I will then turn it over to Marcel for a more detailed view into the numbers. Our fourth quarter and fiscal year-end results included revenue of $85.6 million in the quarter, down 46.8% from Q4 2008's $160.8 million. Sequentially the $85.6 million is down 12.9% from the third quarter fiscal '09 revenue of $98.3 million. For the fiscal year revenue finished at $438.6 million, down 31.1% from fiscal '08's $637 million. Sequentially the fourth quarter loss of $3 million compares to the third quarter loss of $10.9 million. We made progress in the quarter, especially taking the fourth quarter's lower revenue into account.

However, we still have quite a bit of work in front us as fiscal 2010 is likely to continue to be impacted by reduced absorption of fixed cost due to the economic and competitive environment. Finally, as we mentioned in the release, we managed to reduce our revolver balance from $11.8 million in the beginning of the year to zero and we finished the year with about $105 million in cash. Needless to say, fiscal 2009 was extremely challenging. Our financial results were disappointing, however, I think there were some bright spots during the year. We recognized the falling demand early in the fiscal year. We adjusted our operations to keep material moving. We cut spending and conserved and eventually built our cash position. We also plotted the supply chain maps for several key market opportunities like alternative energy. We then mobilized and worked to convert those ideas into revenue. This is something our technical marketing group excels at doing.

You have heard me talk about our alloys, exploring new growth in the solar and nuclear supply chains and we are continuing to develop new applications and broaden our exposure in new markets and new geographies. In fact, we recently received some good news from some customers. They are a group that received D.O.E. funding for new higher efficiency steam turbines called advanced ultra super critical steam turbines. And they are requesting more characterization work on some of our materials. Obviously, this is very early stage but it represents how our people are resourced to the technical community and it keeps us involved in early design decisions. We have also expanded the use of key metrics across our business, focusing on cost reduction initiatives and extending our lean and Six Sigma programs.

During the year we were also nominated for the 2009 Indiana Governor's award for environmental excellence and we were recognized by Indiana Lieutenant Governor Becky Skillman for environmental stewardship. Furthermore, working with Purdue University and the U.S. Department of Energy we have taken on initiatives in our plants, which we estimate will result in savings of approximately $300,000 in annual energy costs. We have also continued Haynes commitment to safety. To date we have surpassed 1 million man hours worked without a lost work day case at our Kokomo facility. That is an epic milestone for a manufacturing environment like ours. In fact, it is almost a full year. It is also a tribute to the employees who know that working safely is our highest priority. Worldwide we have only had one lost work day case in all of calendar 2009. And just to frame it for you, I think the number was about 15 in 2008.

A year-ago we committed to our employees, customers and shareholders that we would focus on operational excellence, innovation, service and financial strength. I think you will find that the items I listed above all fit neatly into those four concepts. It is about getting organized, measuring our progress and fixing things when we go off track. Finally we announced a quarterly dividend of $0.20 per share and our intention to invest $65 million over the next five years to enhance equipment capabilities in our plants. This will help us reduce operating costs, improve cycle times and improve delivery performance so we become a better more reliable supplier for our customers. We're also committing greater effort to our technical marketing presence here in the U.S. as well as in southeast Asia, reallocating resources where they are most valuable and we will also be doing so in Europe in January. Now let me move to the marketplace and what we're hearing and seeing from our customers.

Overall the business climate remains very slow. We have moved off the lowest levels, but as we said in our last call, we expect the current low demand business climate to continue through at least the first half of fiscal 2010. Being tied mainly to large capital projects and late-stage markets, we have positioned the business to operate in this down market. That said, we're not sitting on our hands. We're out fighting for market share in our core markets. And as I've mentioned before we're seeking new opportunities in new markets and new geographies. With respect to our specific business in aerospace, which represents about 37% of our revenue, Boeing and Airbus build schedules held up well over our fourth quarter, which is a tribute to their backlogs. Their order entry also looked a bit better than last quarter, but it is still well off their prior high levels.

On the engine side, as we've discussed previously, the engine makers have been cleaning out their supply chains aggressively in the past year. Notable in the quarter, the engine makers saw significant reductions in commercial engine deliveries. For example, I think -- I believe it was GE commercial deliveries were off about 16% in the quarter and Pratt Canada, which handles things like business jets, reported deliveries off I think it was more 20%, 25%. Compared to the fourth quarter of fiscal '08 we have also seen shipments down approximately 42%, but as you saw in our 10-K, sequentially our fourth quarter shipment level was just slightly below third quarter. Our order entry levels in aerospace are a bit stronger, but nothing that I would yet call significant. On the land-based gas turbine side, which represents roughly 22% of our revenues, volumes held up well during the fiscal year, off only 8.3% from fiscal '08.

Meetings we have had in recent months with OEMs and tier 1 manufacturers indicated that this business is slowing. The MRO side reports great backlogs but a slowing of reorders. Also if you take a look at our sequential business in land-based gas turbine, this confirms that. Our volume was down significantly in the quarter. Longer term there remain very positive prospects for this industry. Power demands worldwide will increase. In meeting with some of the alternative energy people we asked about what they see happening to this industry and they reminded us that many alternative energy platforms require back-up power, which will most likely benefit this market. Another positive note that we'll probably see in the year, I believe I heard the GE F class turbines will be coming in for maintenance. So there are some potentials for increased volume in the upcoming year.

Moving to the chemical process market, this segment accounts for about 25% of our revenue and both volume and pricing were hit hard in fiscal '09. We believe this market will remain very competitive for traditional products as the business level turns more transactional meaning more MRO business. We are, however, seeing some new design activity and new applications involving higher corrosives, which may require Haynes alloys. These types of applications are still in the incubator phase and they are unlikely to materially impact fiscal 2010. Also of note, sequentially in this market you saw our volume pick up quite a bit. In our other markets category, which comprises 16% of our revenues, business has been slow in the industrial heat treating and automotive, as you might expect.

On the flue gas desulfurization side, the discussions I have had with customers indicate that there are projects being quoted and planned, but many of the instances have been slowed until the broader economic picture becomes more clear. I think the situation there, like in a lot of places, is it is a bit of a cash conservation play right now. Overall, order entry has increased since our last call. In the fourth quarter the backlog dropped in dollars, but held relatively firm on volume. Since September 30th we have seen small increase in order activity. We're still operating at levels well below acceptable and the recent bounce in order entry is nothing like 2008 or 2007 levels. We still have a lot to do and a long way to go. With that I will turn it over to Marcel so he can give you a deeper dive into the numbers.

Thank you, Mark. I will briefly review our fourth fiscal quarter and fiscal year-end results compared to last year's performance as well as our outlook for fiscal 2010. Net revenues in the fourth fiscal quarter were $85.6 million, a 46.8% decline from a year-ago. This $75.2 million decline is the result of a 31.8% decline in volume, which accounted for $51 million of reduced revenue and a 22% decline in average selling price per pound, which accounted for $24.2 million of reduced revenue. The economic downturn continues to have an unfavorable effect on our top-line results as demand in our three primary markets continues to slow, impacting volume and pricing. In addition, the pricing has also been impacted by increased competition in the market place and lower raw material prices. Gross profit margin in the fourth fiscal quarter was $4.9 million compared to $34.4 million a year-ago, which was a reduction of $29.5 million.

Our gross margin profit as a percentage of revenue was 5.7% in the period compared to 21.4% last year. A 5.7% gross profit margin for the fourth fiscal quarter was in line with our expectations. The items that contributed to the reduction in gross profit margin between periods were reduced revenue cost by significantly lower volumes and selling prices, which reduced the gross profit margin by approximately $16.1 million, and lower fixed cost absorption due to reduced volumes, particularly that of sheet compared to last year, which reduced gross profit margin by approximately $13.4 million. For the fourth quarter, for the fourth fiscal quarter there was a pretax loss of $4.3 million, which included a severance charge of $1 million associated with the August 6, 2009 reduction in force. For the fourth fiscal quarter there was a pretax -- there was a tax benefit of $1.3 million, which was primarily a result of a loss from the operations.

The effective tax rate for the quarter was 30.2%, which included a one-off tax charge of $400,000 representing a change in the state apportionment factor, which lowered the blended state tax rate resulting in an unfavorable reduction of our deferred tax asset in the fourth fiscal quarter. The items noted resulted in a net loss for the quarter of $3 million or $0.25 per diluted share versus net income of $16.3 million or $1.35 per diluted share in last year's fourth quarter. Net revenues for the year were $438.6 million, a 31.1% decline from a year-ago. This decline in revenue of $198.4 million is due to lower volume and selling prices between years, which occur for the same reason as noted in the quarterly comparison. For the year, the volume decrease of $20.6 million -- the -- excuse me. For the year the volume decrease of 20.6% accounted for $131.1 million of the reduced revenue, while a decrease in average selling price of 13.3% accounted for $67.3 million of the revenue reduction.

Gross profit margin for the fiscal year was $22.5 million compared to $144.7 million a year-ago, a reduction of $122.2 million between years . Our gross profit margin as a percentage of revenue for the fiscal year was 5.1% compared to 22.7% last year. The items that contributed to the reduction in gross profit margin were -- reduced revenue as a result of significantly lower volumes and selling prices between periods, which reduced the gross profit margin by approximately $45 million; flow of the higher cost material from inventory through costs of goods sold compared to last year, which reduced gross profit margin by approximately $36.2 million; and lower fixed cost absorption due to reduced volumes, particularly that of sheet compared to last year, which reduced gross profit margin by approximately $41 million. For the fiscal year there was a tax benefit of $8.8 million, which was primarily the result of a loss from operations. The effective tax rate for the fiscal year was 14.4%.

The rate was reduced by the impairment of goodwill in the second fiscal quarter, which for the most part is not tax ductible. The effect of the goodwill impairment was to reduce the effective tax rate by 23.6%. Net loss for the fiscal year was $52.3 million or $4.36 per diluted share, compared to net income of $62.8 million or $5.22 per diluted share in fiscal 2008. Excluding the goodwill impairment charge our net loss was $9.5 million. A key measure of performance to note is the gross profit margin percentage trend from the last quarter of fiscal 2008 through the fourth quarter of fiscal 2009. The gross profit margin percentage in the last quarter of fiscal 2008 was 21.4% and declined through the first, second and third quarters of fiscal 2009 to be 14%, 5.8%, and a negative 8.3%, respectively, for each quarter and then improved to 5.7% in the fourth quarter of fiscal 2009.

The improvement in gross profit margin percentage from the third quarter of fiscal 2009 to the fourth quarter of fiscal 2009 was achieved despite a reduction in revenue of $12.7 million between quarters and reduced absorption of fixed manufacturing costs, primarily due to lower production of sheet product between quarters. As a result of continued low demand and challenging economy, the Company expects that revenues for at least the first two quarters of fiscal 2010 will be below the revenue in the fourth quarter of fiscal 2009. Management believes the Company's performance in the next two quarters will range from breakeven to small losses in each quarter. It is expected that the weakest results will occur in the first quarter of fiscal 2010, because typically this quarter is impacted by fewer ship days and extended customer shut downs. As of September 30, 2009, backlog dollars declined 5.9% from June 30, 2009 and 53.5% from September 30, 2008.

Backlog continues to be a very good indication of a level of future revenue. The decline by individual markets of the U.S. backlog dollars from September 30, 2008 to September 30, 2009 and from June 30, 2009 to September 30, 2009, are as follows. Percent decline 9/30/08 compared to 9/30/09, our aerospace backlog was down 60%, chemical processing was down 57%, land-based gas turbines was down 57%. There was no change in the other market category. Percent change from 6/30/09 to 9/30/09, aerospace was down 11%, chemical processing was up 5%, land-based gas turbines was down 35%, other market's was up 47%. Our cash flow performance, particularly the inventory reduction, was clearly the most rewarding aspect of our performance in the fourth fiscal quarter and fiscal 2009. The combined result has been to reduce inventory dollars for fiscal 2009 by $122.1 million or 40%, while reducing aggregate (inaudible) by $4.5 million or 26%.

As anticipated, inventory was reduced in the fourth fiscal quarter by $16 million and 1 million pounds with inventory at September 30th of $182.8 million and 12.9 million pounds. Our key focus has been to position ourselves so that the inventory build required to support the eventual economic upturn will not be as demanding as it was in fiscal 2008 and 2009. Inventory and cost reduction efforts continue to be a high priority within the organization. Our goal is to be cash neutral in fiscal 2010, that will depend on selling prices, cost of raw material and our continued success in reducing costs. We finished the year with controllable working capital, which consists of inventory, AR, AP, plus tax AR and AP as a percent of sales of 59.4%. The goal is to reduce the ratio to 45%, which is equal to the percentages of fiscal 2006 and 2007. If that can be achieved, assuming that raw material costs remains steady, the Company will be able to increase sales without any additional cash requirement for working capital.

We continue to maintain a strong and conservative balance sheet. We have a strong liability -- liquidity position and our minimal debt covenants give us good financial flexibility with access to potential $120 million of borrowings. We closely monitor our accounts receivable and other areas of financial exposure and intend to effectively manage our cash position in order to be prepared to take full advantage in the eventual upturn in business. In addition, we have the flexibility available to deal with any unforeseen challenges or opportunities, such as -- a series of large commercial project orders across markets we serve; a spike in raw material costs, which is passed through to customers and ultimately recovered but on delayed basis; a possible decision to accelerate capital spending noted in the previous discussions; or an opportunity to make an acquisition in support of our current business.

Significant progress has been made at Haynes over the last five years. We're focusing on the current environment to optimize our position and, most importantly, we are planning out the next five years in order to continue the process of creating value for our share holders. Company has generated significant cash in recent years and it is management's opinion that, despite the current challenges, the Company will continue to generate significant recurring earnings and cash flow to support the payment of the dividend and also fund all other corporate requirements, including working capital, CapEx spending and pension funding on a prospective basis. With that I will turn it back over to Mark.

Thanks, Marcel. As I mentioned, we're committed to operational excellence, innovation, service and financial strength. We think these four core objectives will provide our employees with a safe enjoyable strong work environment, our customers with the quality reliability and value they need to grow, and our share holders with a rewarding investment for the long-term. I'd also like to say I am very proud of the team here at Haynes for taking action and forging ahead in a very difficult 2009. We have more to do. We're applying metrics across our business units and everyone has accepted their role in accountability.. We've generated cash, but we also have to get back to sustained profitability. We started the process of getting our equipment back to operable and reliable and we have to build on that. We have to keep developing new applications and new materials. That will be our key to finding broader markets and serving our core markets better.

Aerospace, land-based gas turbines, and chemical process are tough core markets in today's environment, but long-term the prospects for growth are strong and the performance of Haynes alloys are keys in growing the technology in these markets. With that let's open the call to questions.

(Operator Instructions) Our first question comes from the line of Edward Marshall with Sidoti and Co. Please proceed with your question, your mic is now live.

Good morning, everyone.

Good morning.

Hi, Ed.

So my first question centers around kind of what your anticipation or what your expectations are for inventory levels in the channel. I know it is important for the stainless steel which seems to have a lot of inventory in the channel. What can you kind of share with me on your individual segments, what looks stuffed, what looks kind of lean at this point.

Just taking a look at things, Ed, and looking at our core markets, like we said the aerospace business we're seeing a little bit of a bounce. Things are stabilizing a bit and I think the expectation from a lot of people is that that is going to start to bounce soon. I don't have the order book to support that today. But we do have a flattening out order book with a little bit of increase, as we said, since September 30. If you look at the land-based gas turbine side of the business we finally -- we have been talking about it for the last couple of quarters how we expect slowing in that. If you take a look at the fourth quarter results you saw slowing in our shipments into that market place.

Now some of that is timing, but obviously, more importantly, is I think that market is now starting to clean out its supply chain the way the aerospace guys started doing it, gosh, I think the engine guys started doing it as soon as I joined the Company 12 months ago so. We still think there is some pain to go through in the land-based gas turbine side of the business. Chemical process guys, that's -- the OEM side of it is always timed to new projects and things like that. Money has been getting freed up in that area and we saw it through shipments in the fourth quarter. And a lot of it being China we talk a lot about. I think that's going to be a market that is going to kind of be a sawtooth. It is going to be up and down and up and down for the next few months depending on timing of new projects and the MRO business. The MRO business is still pretty decent. A lot of pricing pressure, though, in that market. That help you out, Ed?

It does. So maybe I could talk about kind of as a follow-up to that the trends that you're seeing. With the exception of the seasonally weaker December quarter kind of guidance that you have already given us, and thank you for that, can you kind of speak directionally about the trends that you're seeing? Are we bottomed? Are we still continuing to weaken or are we kind of just stabilized at this point with recovery as a question mark?

Well, from our perspective, you look at our backlog and that is really always the first thing we focus on. We had about 4.5 million pounds in the backlog at the end of June. And we had that at the end of September. And look at October, we have got the same 4.5 million pounds, again,. So I think from a order entry perspective, we're probably at the bottom. There is some ups and downs between the market segments. Aerospace isn't down as much. We're seeing some -- a slight improvement in the chemical processing order entry rate and also in the other market categories, which references some of the things that Mark spoke to relative to solar, nuclear energy related aspects in the other category for us. So overall I would have to say that I think from a pound perspective we're probably at the bottom and looking forward to those improvements to come in the future.

Yes, Ed, if you notice we're a little bit more conservative than some of the other guys in the materials industry that maybe you have spoken to. And I think if we had a large of 300 series stainless steel product line or a tool steel product line or even a electronics, a copper-based alloy product line, those tend to be the things that lead the market. The consumer side of the business seems to be doing a lot better. So the copper guys, I think, are starting to see a little bit better volume come through their plants. You're starting to hear some of the guys that are supporting the automotive talk about their tool steel business picking up a little bit and you're starting to hear guys in the stainless side of the business start talking about restocking and things.

And it is going hand in hand with things like the housing and if you notice the appliance guys are really starting. Whirlpool, et cetera, seem to be doing pretty well. If we carried one of those product lines I think we would probably be more firm talking about a bottom. But I think what you're seeing out there is a lot of the guys that are in the high performance alloy sector are still saying, look, things are flattening out and we're seeing an increase in order entry. Things look pretty good, but we don't have the order book sitting there right now to say that this is going to be a sustained recovery for us. So we're probably just a little more conservative than most people right now.

You generally lag a couple quarters, the recovery in these other markets.

I'm sorry I didn't hear that Ed.

Do you generally lag the recovery in these other markets by maybe a couple quarters or so.

Yes, if you think about it, I think the rule of thumb you usually hear about guys in the high performance alloys sector, especially someone as tied to -- we are aerospace, land-based gas turbine and chemical process. Those are big plants and big pieces of equipment. The general term is late-stage. I think a lot of people tend to say, you know what, we're going to lag things by 9 to 12 months.

Okay. That's fair enough. Thank you guys very much.

Yes.

Thank you. Our next question comes from the line of Tim Hayes with Davenport & Company. Please proceed with you question, your mic is now live.

Good morning,.

Good morning, Tim.

Two questions. First on the chemical side. You had a big upturn or a nice rebound in the volume side, but the selling prices came down a lot. I want to understand that better. I don't want to read in that the mix deteriorated because the volumes were up quite a bit. Did you just get a lot of new orders for or new business for lower-end type of businesses? If you could just go into more color on that, please.

Yes, that is pretty much exactly it, Tim, is what we saw is and it is still specialty alloy, but for someone like Haynes it is down toward the commodity end of the spectrum of alloys that we produced. The volume of those types of materials was pretty strong for shipments in the quarter.

And is there any specific applications that those go into that we should be aware of?

I think just a normal market cycle, we're talking about chemicals, fertilizers, sulphuric acids.

Yes, it is mainly acids. Phosphoric acid and things like that are a lot of these types of products.

Okay. And then the second question on your sales to China you had a nice -- a big increase in fiscal '08 and then that came back down in fiscal '09. I was kind of curious, what was really driving the reduced sales? Was that China sourcing, doing more of their products internally domestically or was some other of your competitors taking business, be more aggressive in China? Just more color on that if you could?

I think if you look at what happened in China, the early part of the year, when the recession really took hold, everybody stepped back and just said we need to figure out what exactly is going to be happening. What is going to be impacted. So on the CPI side of the business, particularly, there was a drawback and people put off projects that had been on the drawing boards and postponed those projects and I think that you will begin to probably see some of that activity reassert itself later in the year. But I think that was the driver relative to our CPI business in China, in the whole Asian area.

Yes, a lot of our business, Tim, is -- let's take fiscal 2008 and prior to that, and even this year, a lot of our business is China is tied to OEM activity, new plants. Now the nice thing is that is going to create a nice MRO market in three or four years from now, but a lot of it is OEM big plants, building materials types of business. And as you can imagine, gosh, October through March of this year, you couldn't get a letter of credit out of China. At least we couldn't.

Right. Sure. And in the last couple of months have you seen an upturn in the sales to China.

Well, I think what we have seen is overall if you look at the statistics coming out of China relative to their growth rates, we haven't seen a lot yet, because these are very large projects. However, what you've seen is a increasing rate of activity in China. And they are talking about, at least the authoritative literature I have seen, is talking about that rate of growth continuing into 2010 and '11. So I like to think that we will follow along in that respect.

Yes, Tim, just to let you know, too. The landscape in China is definitely changing, as you mentioned in your question a little bit, too. It is becoming very, very competitive over there for what I'll call the lower-end spectrum of the materials we manufacture.

Okay. Very good, thank you.

Yes.

Thank you. (Operator Instructions) Excuse me, everyone, there are no further questions at this time. I would like to turn the floor back over to you for any additional comments you may have.

Chris, thanks very much. In closing just want to say thank you to everybody for your support of Haynes. Also, just want to drop you a line to enjoy the holidays and please stay safe. We will look forward to talking to you again in the near future. Thanks very much.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time a And we thank you all for your participation. Have a wonderful day.