Haynes International Inc (HAYN) 2011 Q1 法說會逐字稿

Greetings and welcome to the Haynes International, Incorporated, first-quarter 2011 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, Dan Maudlin, Controller and Chief Accounting Officer. Thank you, Mr. Maudlin; you may now begin.

Thank you and good morning. With me today are Mark Comerford, President and CEO of Haynes International, 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 21E of the Securities and Exchange Act of 1934. The words believe, anticipate, plan, and similar expressions are intended to identify forward-looking statements. Although we believe our plans, intentions, and expectations reflected 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 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 SEC in particular in its Form 10-K for the fiscal year ended September 30, 2010. 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.

Thank you for listening, and I will now turn the call over to Mark.

Thank you, Dan. Good morning, everyone, and thanks for joining us today. Hopefully you have all seen our press release and had a chance to review it. We will follow our standard agenda in today's call. I will open with comments about the business and our end markets; and Marcel will give you greater detail on the financial results.

The optimism and momentum we discussed in the last update continued into the first quarter of fiscal 2011, especially on the order entry side of the business. As mentioned in the press release, our backlog expanded to $167 million at the end of the quarter from $148 million at the end of the prior quarter, and today our backlog is in excess of $200 million.

Previously we indicated that transactional activity was strong but we had not yet seen longer-term commitments from our customers and very little in the form of large project-related commitments. That has changed.

Transactional activity remains strong; but as you can imagine, the growth in our backlog also includes longer-term blanket commitments from customers as well as an increase in project-related items. These blankets and projects will ship over the balance of the next 12 months.

Moving to our quarterly results, the first quarter of fiscal 2011 had net revenue of $106.4 million, an increase of 31.3% over last year's $81 million. Net income in the quarter increased to $5.3 million, up from last year's loss of $1.3 million.

Our sales into the aerospace market were $44.5 million, accounting for 42% of our net revenues in the quarter. That figure is up 57% from the first quarter of fiscal '10.

In addition to the increased revenue in the quarter, we also saw the aerospace backlog increase 13% by the end of the quarter. The primary drivers in this area are increased activity throughout the supply chain to replenish depletions of the past two years and increased pull activity from engine manufacturers to meet the increased activity at the top of the supply chain.

I am sure you have heard by now from many of us in the specialty alloy side of the business about the increased demands we are seeing in the supply chain as a result of better order activity in commercial aerospace and increased production plans on platforms like the 737, A320 and the 777; and I think many of you probably saw the increase announced recently on the A330 as well.

Moving to our land-based gas turbine market, our net revenue in the quarter was $21.5 million, accounting for roughly 20% of sales. This was up 44% over last year's $15 million. Our backlog in this area decreased during the quarter 11%, due to the timing of some key requirements and projects from customers.

The energy side of this business remains very competitive, and material on hand seems to be how to win the requirements for quick turnaround business. At the top of the supply chain, GE reported better activity in their business in comparing the third to the fourth quarters, and they expect bookings and billings to move into balance in 2011 and possibly see book-to-bill exceed 1 in 2012.

On the pipeline side of this business we are seeing very strong activity. Our revenue in this market has varied dramatically from quarter to quarter, depending on project timing, inventory adjustments in the supply chain, and our ability to respond to quick demand.

Just to give you an example of the timing sensitivity of this market, I mentioned that the backlog at the end of the quarter was down 11%; but as of today the backlog compared to September 30 is actually up. Meaning in January this is one of the areas where we saw very good order activity -- order entry.

In the chemical process industry our revenues were $20.6 million in the quarter, accounting for about 19% of our quarterly net revenue. This was down about 1% from the prior-year sales. However we saw strong order entry in this area during the quarter, with the backlog growing 55%.

As we mentioned last time, project activity is coming back to life. Capacity utilization and capital spending in this segment is increasing, and our customers are reporting better quote activity and better order activity.

Finally, our other markets had sales of $15.2 million, up 16% from the prior year. Backlog in this area fell 3%. New application activity and trials remained very strong, and we are seeing more requests for trials with our advanced corrosion and heat-resistant materials.

Our traditional markets, principally flue gas desulfurization and industrial heat treating, are also starting to improve, although order activity and price levels remain very competitive in those markets. Let me turn it over to Marcel now for more details on the financials.

Thanks, Mark. I will start with a year-to-year comparison of revenues and gross margin in the first quarters of fiscal 2010 and '11. Net revenues in the first quarter of fiscal 2011 were $106.4 million, a 31.3% increase from the same quarter a year ago. This $25.3 million increase in net revenues is the result of a 12.3% increase from product volume, which accounted for $9.5 million of the revenue increase. A 16.9% increase in average selling price accounted for $15.3 million of the revenue increase, and an increase of $706,000 of other revenue in the nonproduct category.

The year-over-year improvement reflects improvement in the economic environment, primarily driven by the aerospace market and the end of the supply chain destocking process that started during the economic downturn. Net revenues for the aerospace market were up by 57% between the first quarter of last year and the first quarter of this year, primarily driven by a 38.2% increase in aerospace volume.

Cost of goods sold in the first quarter of fiscal 2011 was $88.5 million, a 19.3% increase from the same quarter a year ago. The $14.3 million increase is the result of a 12.3% increase in product volume which accounted for $9.1 million of the cost increase, and a 6.2% increase in average cost of goods sold per pound which accounted for $5.2 million of the cost increase.

The combination of the noted revenues and cost changes between quarters resulted in a gross profit margin in the first quarter of fiscal 2011 of $17.9 million compared to $6.8 million in the same quarter a year ago, an improvement of $11 million between quarters. Gross profit margin as a percentage of net revenues was 16.8% in the current quarter compared to 8.4% a year ago.

SG&A including R&D for the current quarter was $9.9 million, an increase of $1 million compared to the prior-year fiscal first quarter. Factors contributing to higher SG&A cost in the first quarter of fiscal 2011 included an additional 13 SG&A employees between quarters, and increased marketing costs due to the increased level of activity, plus the return to full salaries in the second quarter of fiscal 2010. Looking forward, fiscal 2011 SG&A including R&D is forecasted at approximately $42 million for the year.

For the first fiscal quarter of this year pretax income was $8 million compared to a pretax loss in the first quarter of last year of $2 million. For the first fiscal quarter of 2011 there was tax expense of $2.8 million versus a tax benefit of $700,000 in the first quarter of fiscal 2010. The effective tax rate for both quarters approximated 35%, and it is anticipated that the rate for the full year will approximate 35%.

Net income for the first fiscal quarter of 2011 was $5.3 million or $0.43 per diluted share, compared to a net loss of $1.3 million or $0.11 per diluted share in last year's first fiscal quarter.

From the fourth quarter of fiscal 2010 to the first quarter of fiscal 2011, gross profit margin declined by $2.1 million or 10.4%. The items that contributed to the reduction in gross margin dollars were a $500,000 charge to close the warehouse portion of our Paris service center; additional employee costs of $600,000 in the quarter for 30 additional production workers required to meet the increasing level of demand from customers; and reduced absorption of $1 million due to lower production days in the quarter due to holidays, vacation, and capital and maintenance projects.

As of December 31, 2011, backlog dollars increased 12.8% as a result of backlog pounds increasing 15.2%, offset by a decline in average selling price of 2.1% compared to September 30, 2010. As noted in the past we believe that backlog continues to be a very good indication of the level of future revenue.

The increase in the order entry in the first quarter of fiscal 2011 was primarily driven by strong aerospace order entry of $54.2 million and represents a continuation of aerospace activity, similar to the latter part of fiscal 2010. In addition there was a resurgence in the first quarter of order entry for chemical processing equaling $33.6 million. However, the order entry in the first quarter of fiscal 2011 for land-based gas turbine and other market categories was slightly lower than the respective sales for each category in that quarter.

Over the past two fiscal quarters, order entry activity has averaged 1.7 million pounds and $40 million per month. This rate of order entry activity will begin to impact revenue in the latter part of the second fiscal quarter of 2011.

Order entry in January was strong, resulting in a significant increase in backlog levels. The backlog at January 31, 2011, was $212 million, an increase of $45 million from December 31, 2010. It is not anticipated that the order entry rate will continue at the January level through February and March; however, we do expect backlog levels to continue to increase quarter-over-quarter through the second and third quarters of fiscal 2011.

Although the marketplace continues to be competitive, the Company's backlog continues to improve. And it is anticipated that revenues and sales volume will also continue to improve over the course of fiscal 2011. We expect sequential improvement in net revenue, volume, and net income for the second and third quarters of fiscal 2011.

The Company continues to focus on improving working capital management with the emphasis on inventory through initiation of pull and lean manufacturing techniques. However the inventory balance did increase by approximately $12.5 million during the first quarter due to an increasing demand from customers, as reflected by the increasing backlog.

Depending on the order entry rate and mix, inventory is likely to increase further during fiscal 2011. We believe this redeployment of working capital is required in order to increase sales for the remainder of the fiscal year.

In summary, significant progress continues to be made at Haynes and we continue to plan for the future. The economic environment is getting better. The order entry rate continues to improve, and earnings continue to increase.

Although we may be challenged in the short term, we expect cash flow over the intermediate and long term to be sufficient to support our corporate requirements, including working capital, CapEx spending, pension funding, dividend payments, and also generate excess cash. With that let me now turn things back over to Mark.

Thanks, Marcel. We are pleased with the direction of the overall economy and our end markets. We had several employee meetings at various locations in the past quarter, and in those meetings we cover the usual topics -- safety, cost containment projects, benefits, capital projects. And we also cover the commercial side of the business.

Our employees know I spend quite a bit of time with customers, and what I am trying to convey to the people here at Haynes is that it is clear our customers and the design engineering community view Haynes differently today than in the '80s or '90s or even the earlier half of the past decade. Customers have made it clear that the way we weathered the downturn proved to them that Haynes is a different company today -- a more financially capable company and one that is clearly reinvesting in its own growth.

As a result, instead of being relegated to the role of a secondary supplier or being used as overflow capacity in the market, Haynes has become a primary supplier and there is certainly greater confidence in designing-in our materials in new applications for long-term platforms.

What I tried to convey to our employees is that we are a different Company now. We are reinvesting, adding capabilities, finding greater capacity in our processes and equipment. We are finding more applications for our materials, and we are finding better ways to get into our customers' supply chain, meet their current needs, and also helping them with their designs for next-generation products.

In short, our customers have relayed their views on who and what Haynes has become; and now they have backed up their comments with orders. Everyone here at Haynes is pleased with the confidence our customers are showing in us, and we are keenly aware that we now have to take our performance up a notch to deliver the products that got us here. We have to deliver on time, and we have to deliver best-in-quality service.

With that let's open up the call to your questions.

(Operator Instructions) Dan Whelan, CapStone.

Great, thank you. First of all, can you tell me what the capacity utilization rate was in the quarter?

I'm sorry; could you repeat that?

The capacity utilization in the quarter.

We are probably running in that 70% range.

Is that a little lower than last quarter or about the same?

It is about the same. I think you ought to be careful when you look at capacity. We have got a net capacity based on a certain product mix.

Right.

(multiple speakers) time that product mix changes, it utilizes a bit more capacity. Since we are more oriented toward aerospace right now, that particular product mix -- although you may produce less pounds it requires more capacity. But on average we are probably running in that 70% range right now.

Okay, great. Then from the backlog, the 2.1% decline in the pricing, I am assuming that is a mix issue as well.

Absolutely. Again it is a matter of we had a significant amount of order entry on the chemical processing side of the business, more project-oriented billet-type business. It had a tendency to pull the average pricing down.

Okay. Then just based on your end-market commentaries, is it fair to assume you're going to continue to bring -- increase your staffing levels?

Yes, that is definitely happening right now, Dan, especially the production and maintenance people out in the plants.

Okay, and we should probably use assumptions of maybe another -- from a cost perspective about the same amount next quarter?

I think about right. That sounds about right. From a cost perspective the mix has been relatively stable over the past quarter, two quarters. Raw material price has been relatively consistent, stable, typically rising a bit; but overall cost will remain about the same.

Okay, great. I will get back in the queue. Thanks a lot.

Mark Parr, KeyBanc Capital Markets.

Thank you very much. Mark, thanks for all the color and congratulations on the progress. One of the things that you said that really intrigued me was your comments about making a shift from being kind of -- call it a secondary supplier to being a primary supplier or a supplier of choice. I was just curious if you could provide a little more color.

What end markets in particular have you noticed the shift? And how would you expect this to impact your growth rate over the next several years? I am assuming it is positive, but is there any expectations that you have, based on what you are seeing that you could share with us at this point?

Yes, most of that comes from -- I spend a lot of time talking to customers and it is sitting down talking with them, and what were your patterns. And just in general industry comments that I hear as well.

I think what you saw is you saw a company -- and I have discussed this in prior calls -- where Haynes had a bit of a financial burden on it for about 20 years and making a bond payment. The restructuring that Haynes went through five, six years ago released them from that level of a financial strain; and now the money has gone back into the equipment and gone back into developing other areas of the Company too.

I don't want you to think it is just equipment. It is product development. It has been the expansion overseas, expanding the footprint, things like buying the wire company and buying the overseas, the Asian operations that we have over there from a sales and marketing point of view.

In general, what customers are saying is -- 10 or 15 years ago we worried about the financial viability of Haynes. It seemed like there was always a strain. Our engineers would come in and walk through the plant, and it was one of those things where -- hey, these guys have great alloys, but we are not absolutely certain they are going to be here.

And that is over. People see where we came through this last downturn. In fact, Mark, I would almost say that I bet you some people out there were betting on whether or not we would get through the last downturn, let alone put $100 million on the balance sheet.

So I think what customers have seen is -- wow, there is a renewed commitment from these guys. We had a lot of customers pick up their volume dramatically in the last four or five months, and a lot of them got a fair amount of material from Haynes because we had committed to the inventory that we said six months ago, to put on the ground and meet their demands.

To them that is a sea change in the way we do things at Haynes. So really what their point is -- boy, here is a company that is now reinvesting in its equipment; it is continuing to put these products out there that are pretty strong technical products and really making a name for itself.

And the big difference now is we know you are going to be here. We know you are going to be here five years from now, 10 years from now, 20 years from now.

I like to use that thing -- there were a lot of companies back in the '80s that were in this same boat, and they emerged from their financial issues back in the '80s and have grown to be just wonderful companies here in North America. I think Haynes maybe we were 20 years behind that curve; but I think we have that same potential in us.

That is the story I get from customers; and frankly it is one of the reasons I am here. I bid into and I believe fully in that story.

Okay. All right. I appreciate that. If I could ask one more question. Marcel, you had indicated you thought that the March and the June quarters would see upside in revenues from the December quarter. Can you get us give us a little more color on how much revenue or recovery you might be looking for based on -- given that you have got really strong backlog and good order momentum?

Well, I think in the past -- Mark, I am really reluctant to peg a number from a margin perspective exactly or a revenue number. There's still a lot of vagaries in the process. It is very competitive.

I think, though, that as I have always said, you just take a look at the backlog; that clearly is a strong indicator of the direction of the revenues. I did make the comment about the average for the last six months. When you are running $40 million a month, that ultimately will show up in the revenue sector.

It takes time to work through the process -- the production cycle, the order cycle. But that will begin reflecting seeing that kind of level of activity on a quarter -- when you roll out for a quarter, in the latter part of this and into the third and fourth quarters of the year.

So again, as to specifics I think it is very positive and you continue to look at the backlog. We talked about significant improvements in the first quarter continuing into January. So we look forward to that continuing. It is overall very, very positive.

I mean, again, without trying to put any numbers in your mouth, is there any parallel that you are seeing compared to other years that you have put together, say, over the last dozen or so?

I think if you go back and you look at where we were, it is information I provided. It is on our website and it is in the presentations we have made. Where we have averaged has been over 20% in gross margin. We were at 19% in the last quarter of last year.

We had our first quarter, and that first quarter is always a bit of a challenge for us. We are going to work our way back toward that historical average of 20%. Don't know quite when we will get there. But we will get back there, and we hope to exceed it and approach where we were back in fiscal 2007 and '08 where we were averaging 25% gross margins.

So we are working back toward those numbers -- those levels of performance I should say.

Okay, Marcel, thanks very much for that color and congratulations.

Thank you.

Thanks.

(Operator Instructions) There are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Thanks very much. In closing, thanks very much for your time today and your support of Haynes.

We had some visitors in from Asia last week, so I hope you don't mind I want to -- they mentioned they would be listening, so I wanted to wish them a very happy new year. Gong xi fa cai.

And thanks again, everybody. We will look forward to talking to you all again soon.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.