Haynes International, Inc.

Greetings. Welcome to the Hanes International Incorporated Second Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Controller and Chief Accounting Officer, David VanBuyber. You may begin.

Thank you very much for joining us today. With me today are Mike Shore, President and CEO of Hanes International, and Dan Wadland, Vice President and Chief Financial Officer. Before we get started, I would like to read a brief cautionary note regarding forward-looking statements. This conference call contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 in Section 21 of the Securities and Exchange Act of 1934. The words believe, anticipate, plan, and similar expressions are intended to identify forward-looking statements. Although we believe our plans, intentions, and expectations regarding or suggested by such forward-looking statements are reasonable, such statements are subject to a number of risks and uncertainties, and we can provide no assurances such plans, intentions, or expectations will be achieved. Many of these risks are discussed in detail in the company's filings with the Securities and Exchange Commission, in particular Form 10-K for the fiscal year ended September 30, 2022. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. With that, let me turn the call over to Mike.

Thank you, Dave. Good morning, everyone. I've often noted that we've made fundamental and sustainable changes to our business. I'll start off my comments today highlighting those changes and talking through the positive impact they've had on this organization. First, we are distinctive in that the combination of products and services we offer provide our customers with a value that we believe is difficult to be delivered consistently by others in the industry. Our value proposition includes our mill and service center combination, our outstanding people providing technical and sales service, our deep and in many cases long-term relationships with our customer base, our excellent alloy development and application engineering expertise, our ability to produce and ship small volumes of unique alloys and sizes, our consistent product quality, our ability to ship cut pieces and near-net shapes out of our service centers, and our just-in-time inventory capabilities. Because our customers truly need and value these services and product attributes, we have been able to continue to price our products based on the value we provide. Next, our alloy and application development capability give us a valuable access to engine developers and plant engineers, where we provide uncommon and in many cases proprietary alloy solutions to the current and future needs of the end users of our products. Our technical capabilities help us work with our customers and the end users so they can identify high-quality, long-term, and cost-effective solutions for their processes. As I've stated on previous calls, the best news here is that our current pipeline of new alloys and applications under development is as strong as it's ever been and involves new potential alloys across all of our major markets. Continuing on, Our efforts related to variable cost reductions through process change and yield improvement continue at all of our facilities. We are often asked if we are near the end of our cost reduction initiatives. Our collective view is that we have so much more that we can do. We all believe that we have the technical, engineering, and operations talent to continue to increase our yields and improve our process efficiency and costs. including my intro, our financial goals from almost five years ago were to significantly improve both our gross margin and our break-even point and establish the fundamentals to allow our company to be consistently profitable. We have now accomplished what we set out to do via alloy and application development, product mix enhancements, variable cost improvement, and pricing for the high-value differentiated products and services we provide. I'm proud of our team for performing very well and for achieving our goals. Our gross margin has gone from high single digits and very low double digits to, at neutral raw materials, now consistently being over 21%. And our break-even point is now confirmed to be 25% below where it was when we started our improvement journey. Now transitioning to our second quarter performance. Year on year, our revenue increased 30.5%. with strong gains in each of our end markets. In addition, our order entry was close to $190 million for the quarter, which drove our backlog to a record $446.7 million, up over 59% from last year. Our book to bill, based on revenue, was 1.3 last quarter, led by Aerospace and IGT, which were both 1.4. Our gross margin was 20.2%, And when removing the raw material headwind impact, our calculated raw material neutral gross margin was 21.3%. This all resulted in net income for the quarter of $12.3 million, up 45% year-on-year. From a market perspective, in our aerospace market, our second quarter year-on-year revenue improved by 25.9%, with volume up 9.6%. and our average selling price up $4.34 per pound, or 14.8%. For the first six months of the fiscal year, our year-on-year revenue increased 29.4%, with volumes increased 13.5%. In addition, our airspace backlog increased 11.5%, with, as I said, a book-to-bill of 1.4 over the quarter. Our backlog now stands at $277 million in our aerospace market. We continue to believe that we will set a revenue record for aerospace in fiscal year 23. A few other points worth noting here. Single aisle build schedules remain high with LEAP engine builds projected to set a new record in 2023. In addition, we are beginning to see demand increases for the components we supply for multi-aisle aircraft engines. Finally, We believe the majority of the aerospace product being shipped by Hanes today is being consumed immediately. Little to no safety stock being built at this time. For our IGT market, our second quarter year on your revenue improved by 30.8% with volume up 1% and average selling price increasing $5.16 per pound or 29.5%. For the first six months of the fiscal year, Our year-on-year revenue increased 48.4% and volumes increased by 22.8%. Our share gain and new alley initiatives had a significant and long-lasting impact on this market. It's important to point out that according to the U.S. Energy Information Administration, as coal and nuclear generating capacity continue to be retired, natural gas is projected to remain one of the most consumed sources of energy in the United States through 2050. For our CPI market, our second quarter year-on-year revenue increased by 25.2%, with 2.9% lower volumes, but a $7.59 per pound, or 28.9% increase in average selling price. These numbers confirm our strategy of supplying high-value differentiated products and services, selling less of the commoditized portion of our mix, and focusing on the sale of high-value specialty alloys and products within this market. A significant component of this involves sales of our special project orders based on our continued strong applications development efforts. Wrapping up my comments, I'll touch on additional components of our business that are worth noting. As far as safety, our leaders and teams are working to continuously improve our safety performance within all of our facilities. Some of our current activities include enhancing our safety suggestion system, pre-shift safety meetings, ongoing monthly safety topic training, new employee orientation on safety, continuing work to audit and update our safety procedures, safety-related capital spending, and a continued emphasis on accountability for actions. Next, as far as manpower, I'm focusing my comments today on our Kokomo operations, where we have added 113 production and maintenance employees over the past year, including 10 maintenance apprentices, which represents 20% relatively new employees in our Kokomo operations workforce. We now believe we are nearly fully staffed at our Kokomo facility to handle the unprecedented demand coming in from our customers. These new hires are now trained on both our manufacturing processes and the safe work practices required in our plans. With these employees in place, we are now beginning to hit our stride as far as volume improvements required to meet the needs of our customers. As an example, in March, we produced over 1.25 million pounds of cold finish flats, our core aerospace product form, which is 22% higher than the average volume produced over the prior six months. In addition, We have now increased our vacuum induction melting, or VIM capacity, by over 10% via utilization of outside conversion VIM melting. Based on our team's efforts, our momentum within operations is clearly increasing. Next, as far as monthly shipments, our revenue was over $50 million in March. That's only the third time in the last decade that we've exceeded $50 million in revenue in a month. We now expect to average over $50 million in sales over the second half of our fiscal year. Part of this increase is obviously helped by the impact of raw materials, but the most significant part of this story is that we believe we will achieve this level of revenues while being at a gross margin level, assuming neutral raw materials consistently at or above 21%. Related to our most recent ESG initiatives, we continue to provide and complete ESG-related surveys and collect and report additional ESG data. In addition, our second solar installation, a 300-megawatt rooftop installation at our Arcadia Louisiana 2 plant is now operational. Next, Haines innovative alloys and applications are at the heart of our company and represent both a core competency and a long-term differentiator. We develop and bring to market niche, highly differentiated products that are the result of long-term research and applications development efforts. Four of our newest alloys are at different stages of commercialization and have shown clear signs of market acceptance. They are, for your information, Hanes 233 alloy, Hanes 244 alloy, Hastelloy Hybrid BC1 alloy, and Hanes HR-235 alloy. I would do our alloy and application development effort to disservice if I didn't also mention Hanes 282 alloy. Hanes 282 has had tremendous success in many aerospace, space, industrial gas turbine, automotive, and power generation industry applications. Most recently, An improved, newly patented heat treatment for Haines 282 alloy has resulted in greater intermediate temperature toughness, opening the door to new potential applications for hot gas path engine components and other power generation applications. In addition, due to the acceptance of 282 alloy into the American Society of Mechanical Engineers, or ASME code, The alloy is on the verge of getting specified in clean emerging technologies such as supercritical CO2 and waste recycling projects. One final point on our alloy and application development efforts. You've heard us mention that we have our proprietary alloys already specified into the Pratt & Whitney 1000 series engine and in the GE 9X engine that powers the 777X. Wrapping up my comments. As an example of what our team can accomplish, on April 4th, the south side of our Kokomo plant was hit with what we call a severe wind event. During the storm, we lost much of the roof on one large manufacturing building and much of the siding on a second building. The very good news is that nobody was injured. In addition, our team pulled together and the operations impacted were back in full operation one week later by Tuesday, April 11th. Thanks to our team, we expect no impact on quarterly shipments because of this event. Okay, I'll now hand this over to Dan for his comments on our business and our financial results.