Haynes International, Inc.

Greetings. Welcome to the Haines International Inc. Fourth 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 Van Bibber. 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 Motlin, 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, 2023. 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. The highlights of our fiscal 23 performance include six consecutive quarters of an adjusted gross margin of approximately 21% or better, a normalized EBITDA of approximately $99 million when adjusting for both the impact of the third quarter cyber issue and the raw material headwinds, Record full year, full fiscal year revenues in both our aerospace and industrial gas turbine markets and book to build levels consistently at or over 1.0 in both our aero and IGT markets. Based on this performance and our ongoing improvement initiatives, we believe that we have positioned Haynes very well for the future. Our focus for both our operations and our company-owned distribution facilities is on producing and providing the alloys, products, and just-in-time quantities that others in our industry struggle to provide, and by providing technical and sales service levels that are difficult to duplicate. Our formula for success remains the same. We continue to work to at least offset inflation through our relentless focus on variable cost reductions. We combine this cost reduction work with providing the high value differentiated alloys, products, and services that our customers and end users value and are willing to pay for. We anticipate that our ability to continue to reduce costs and provide exceptional value will continue, leading to incremental gains in what is already top tier gross margins in our slice of the industry. We're just beginning to show what our employees and our company are capable of related to safety performance, revenue growth, gross margin percent, net income, and EBITDA. In addition, as we begin fiscal 24, we believe that we have the backlog, people, inventory, and lead times in place to begin to generate operating cash flow in fiscal year 24. With that as my introduction, I will now provide the highlights of our Q4 performance, provide comments on our full fiscal year 23, and then follow that with some thoughts and what we believe is next for our company. The key points of our fourth quarter are as follows. First, on safety, we had a significant reduction in our OSHA recordable rate in our fourth quarter, including no recordable injuries throughout our company in September. It was great to see our safety improvement initiatives result in improved performance in the quarter. Next, Revenue was $160.6 million, the highest of our fiscal year. Our revenue per pound was $33, highlighting our differentiated high-end products and services. We achieved these results despite incurring significant unplanned equipment downtime in September in our cold finish lab production area. Next, you're all aware of our ongoing focus and emphasis on gross margin. For the quarter, gross margin was 18.5%. Our calculated raw material neutral gross margin was 20.9%. Our fourth quarter is now the sixth consecutive quarter, where our calculated raw material neutral gross margin was approximately 21% or better. Our work on margin improvement is not done. We continue to work to raise prices where possible, along with our focus on variable cost reductions, both of which we believe should lead to incremental improvement in this critical business metric. Our net income for the quarter was $13.1 million despite raw material related headwinds of $3.7 million pre-tax for the quarter. This resulted in a net income per pound of $2.71. Again, despite the impact of declining nickel and cobalt in the quarter. Our fourth quarter EBITDA when adjusting for raw material headwinds was over $25 million. In addition, Our normalized fiscal 23 EBITDA when adjusting for the impact of the cyber issue and raw material headwinds was just under $100 million. It's important to note that this was achieved at a shipment level of 18.5 million pounds. As we look to the future, we're projecting higher volumes led by Aerospace and IGT, improved absorption, lower variable cost of manufacturing, and higher pricing for certain key high-value products. As far as cash, we believe that our fourth quarter represented an inflection point for cash flow. We expect positive cash flow from operations in fiscal year 24. We have the backlog, inventory, and manpower position to begin to reduce inventory and therefore generate cash. With that, we believe our credit facility has peaked, and we expect positive operating cash flow in fiscal 24, especially in the second half of the year. From a market perspective, the news in Q4 continues to be positive. Our largest market, aerospace, was 50.9% of Q4 sales. Our aerospace revenues grew 20.9% versus Q4 of last year, 5.6% sequentially, and 26.3% for the full fiscal year. Average selling price in Q4 increased 14.7%. versus the same period last year. The $290.4 million in aerospace sales in fiscal 23 was the highest level of annual aerospace sales on record. The news for us out of the aerospace market continues to be very good with commercial airplane and engine builds projected to grow through this decade and our proprietary alloys continuing to gain market acceptance. Overall, aerospace demand is still very strong and the supply chain is showing no significant signs of excess inventory. As I've mentioned on previous calls, Hanes 282 and Hanes 244 alloys have been specced into various aerospace engine programs, while one of our newest alloys, Hanes 233, is in the final stages of testing by a major aero engine manufacturer for the next generation of engines. Our IGT market grew to 21.3% of Q4 sales. Revenues grew 20% versus Q4 of last year, 21.9% sequentially, and 31.4% for the full fiscal year. The Q4 revenues of $34.2 million are the highest quarterly sales on record into the IGT market. Average selling price and Q4 increased 5.6% versus the same period last year. Our IGT story remains consistent. The supply of high-value differentiated products and services leading to share growth, along with the continued and increasing application of Haines 282 alloy into turbines to improve performance. Our CPI market was 14.3% of Q4 sales. Within this market, there are two important points to make. First, as mentioned in last quarter's call, we are flexing our constraint capacity away from the more commoditized portion of our CPI business to the more profitable aerospace and IGT business. In addition, over the quarter, we've been successful in reducing our lead times by about 50% for the majority of this business. Because of this lead time reduction, customers can place orders later based on our much shorter quoted delivery dates. With that as background, revenues declined 15.4% versus Q4 of last year, increased 30% sequentially, and increased 0.4% for the full fiscal year. Within CPI, we continue to focus on growing the high margin alloys and special projects. Based on our mix and value initiatives within CPI, the Q4 average selling price increased $5.71 per pound, or 19.3%, versus the same period last year. Some examples of our high-value differentiated corrosion-resistant alloys include Hastelloy Hybrid BC1, Hastelloy C2000, and Hastelloy G35, all for various types of heat exchangers, reactor vessels, agitators, and piping. These alloys are specified due to their unique and superior corrosion resistance to the highly corrosive media used in the production of specialized chemicals. Finally, our other market revenue in Q4 was below last year's Q4 by 2.3%, but up 8.8% sequentially and up 12.3% for the full fiscal year. Our other revenue in Q4 increased 26.1% versus Q4 of last year was down 3.9% sequentially and increased 14.3% for the full fiscal year. Now, on the book to bill. Based on revenue, our book to bill was 0.9 for the quarter. Aerospace was 1.0, IGT was 1.1, and CPI, because of the two major reasons already noted, was 0.7. We continue to be encouraged by the level of interest and demand for our alloys, products, and services. looking into the future. As far as our major markets, significant investments continue to be made in aerospace and next generation power systems, including fuel efficient engines and the use of sustainable aviation fuel, hydrogen, fuel cells, and hybrid-based systems, with expectations for these to be available for use on a commercial scale around the mid-2030s. These will most likely create even more new opportunities for our unique proprietary allies. In addition, the future outlook for single aisle and wide-body aircraft deliveries remains strong. Year-on-year growth rates for single aisle aircraft are expected to be 25% in 2024, 16% in 2025, and 9% in 2026. Air passenger demand has made a strong recovery over the past year, which brought global passenger traffic close to pre-pandemic levels. Next, the industrial gas turbine market is also expected to grow at a steady pace through the 2030s due to the growing worldwide demand for increased energy, higher efficiency, and improved reliability. The IGT growth rates are anticipated to exceed 3% compound annual growth rate through 2030. Continuing with our look to the future, our ongoing pricing actions based on the alloy product and service value we provide along with our continued drive to improve yields and variable cost of our products are projected to continue to incrementally improve our top tier raw material neutral gross margins. One concern that we do have for at least the first quarter of fiscal 24 is the continuing drop in nickel prices. As the decline in the price of nickel continues, we project that this will lead to additional and increasing raw material headwinds. We are now projecting the impact of headwinds in our first quarter to be well above the $3.7 million pre-tax that we saw in Q4 of fiscal 23. As you know, we had very favorable raw material tailwinds in fiscal 22 as nickel and cobalt prices increased, followed by unfavorable headwinds through fiscal 23 as raw material prices decreased. We will continue to highlight on a quarterly basis both the positive and negative impact of the movement in the price of raw materials. Moving on, as far as EBITDA, as previously noted, we achieved just under $100 million in calculated EBITDA in fiscal 23 when adjusting for the impact of the raw material headwinds and the cyber issue we faced. Our collective focus is on continuing to improve EBITDA, increasing volumes, value and application development, supplying high-value differentiated products and services, and, of course, our variable cost reductions. Next, we believe we are at an inflection point for cash generation. We have done our homework, a near-record backlog, manpower trained, inventory in place, and with that, we expect to generate cash with cash generation momentum growing significantly in the second half of our fiscal year. Given our forecast, we expect to significantly pay down a revolver in fiscal year 24. One more point worth noting about the future. Although no market downturn is in sight for us, if a downturn does occur in one or more of our markets at some point in the future, we continue to be very prepared with a break-even point down by 25% from where it was when our improvement journey began. Finally, wrapping up, I want to thank our employees. They collectively are creating a safe work environment, a company that has leading gross margins in our slice of the industry, a calculated EBITDA of approximately $100 million, along with a company that has the alloys, applications, products, processes, near net shape capabilities, just-in-time shipment capabilities, and customer service that customers and end users want and they're willing to pay for. To my coworkers, well done and thank you. And I'll hand this over to Dan for his comments on our business and our financial results.