Haynes International Inc (HAYN) Q4 2020 Earnings Call Transcript

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Haynes International Inc (NASDAQ:HAYN)
Q4 2020 Earnings Call
Nov 20, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, everyone, and thank you for joining us today for the Haynes International Inc. Fourth Quarter Fiscal 2020 Financial Results Conference Call. [Operator Instructions]

To get us started today with opening remarks and introductions, I am pleased to yield the floor to Controller and Chief Accounting Officer, Mr. David Van Bibber. Good morning, sir.

David Van BibberController and Chief Accounting Officer

[Technical Issues] conference call contains statements that are forward looking within the meaning of the Private Securities Litigation and Reform Act of 1995 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 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, 2020. 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.

Michael L. ShorPresident and Chief Executive Officer, Director

Thanks, Dave. Good morning, everyone.

As our team leads our Company through the impact of the pandemic, I thought I would start this call by highlighting some of the positives from this past quarter. While this has been a difficult period, we have executed well, and I’m proud of our team’s accomplishments.

First, starting in late March, we prioritized cash generation. After generating $13.1 million in cash in our third quarter, we generated an additional $11.7 million in Q4 for a total of $24.8 million in the second half of our fiscal year. We’ve also developed plans for positive cash generation to continue throughout fiscal 21. Next, we have strong liquidity, no debt and $47.2 million in cash in our balance sheet. Due to our high level of confidence in operating cash in fiscal ’21, we paid off the $30 million precautionary draw on our revolver in September 2020. Many years of tightly managing our balance sheet has set us up well to manage our way through the pandemic.

In addition, our team is strategically positioning our Company to exit this downturn with a competitive advantage by leveraging our mill direct and service center routes to market. We are building flexible intermediate inventory in the mill to allow for consistently shorter lead times in the future for our high-volume alloys while our service centers are targeting stock for even shorter lead time requirements and small order quantities. We also plan to continue to invest in value-added cutting capacity to provide a high-value differentiated product and therefore build additional competitive advantage. Throughout this pandemic, we have stayed in close contact with our customers, continuing to provide what they need when they need it and to gain their insight into current business conditions and future demand requirements.

Next, we are pursuing market share gains and have moved from talking about it to achieving it in our industrial gas turbine market segment where we began shipping increased volume to a new customer in Q4. In addition, we continue to focus on our value-based pricing for our high-value differentiated products while at the same time seeking to be competitive on the commodity alloy portion of our CPI mix in order to drive volume. Our average selling price, both sequentially and year-on-year, has held up well despite the drop in volume. Our entire team continues to emphasize the value that we provide via our unique proprietary alloys, our quality, our technical and sales service and our just-in-time inventory.

Next, we reacted swiftly after the pandemic began in the US to take costs out of the organization with salary reductions, unpaid furloughs, headcount reductions and other actions to reduce our costs as we managed through the pandemic. While it’s difficult to reduce cost in full proportion to our volume reductions because of the many — many of our costs are fixed, we analyzed all discretionary spending and made very difficult but necessary decisions. Although the work on SG&A and volume related cost reductions is very important, also important for the long-term health of our business is the ongoing work to improve yields and lower manufacturing costs. Our cost and yield initiatives in Q4 are expected to further benefit us as our volume comes back. After the pandemic, these actions should keep us on track to improve our gross margin percent which reached 18% in the two months prior to the pandemic.

In addition, sequentially, our gross margin improved in the fourth quarter compared to the third quarter, going from 3.3% to 4.9% in spite of volume and revenue declines. This shows our ongoing commitment to reducing costs in this low volume environment. Dan will have additional details on this in his financial update.

A couple more positives. Our alloy and application work continue to provide high-value opportunities for us in unique applications. We’re currently working on opportunities involving both new alloys and new applications for existing alloys. I continue to believe that innovation is a core strength for our Company and the foundation of Haynes.

Our safety rate has continued to improve throughout the year. Our process improvement initiatives keep safety front of mind for everyone in our Company. I’d like to take a moment to congratulate our Arcadia, Louisiana, tube facility which completed a full year without a recordable incident in September.

I’m very proud of our team. This has been a difficult eight months for everybody. We’ve continued to effectively focus on the health and safety of our team while also dealing with the significant business implications of the virus. Our team has continued to show focus, termination and leadership.

Now a few final summary comments from me on revenue, cost reduction and cash generation before I hand it over to Dan. Our very low business levels in the second half of 2020 — fiscal 2020 were challenging and resulted in an unprecedented step-down in revenue levels. We continue to monitor — monitor the respective markets and look for favorable signs of the recovery. I’ll point out that our order entry has begun to improve and move in the right direction from the very low levels we saw in May and June to a slightly higher level in Q4. While we have a long way to go, it is certainly a step in the right direction. On the cost and margin side, our past price and variable cost work led to significant gains in year-on-year gross margin percent in Q1 and Q2 and a reduction in our breakeven point from the much talked about 5 million pounds per quarter to less than 4 million pounds a quarter.

Our January and February gross margins of 18% show what we are capable of. However, with our Q4 sales volume being just 2.9 million pounds, we are incurring losses, the majority of which can be attributed to the unfavorable fixed cost absorption resulting in direct charges. In addition to the significant reductions in pounds sold from lower demand, we also reduced inventory levels by another 1.1 million pounds in the fourth quarter. This combination of lower sales levels and inventory reduction led to a sizable reduction in pounds produced in our Kokomo mill in the fourth quarter. That reduction was 49% year-on-year. We simply cannot spread the fixed costs we have over 50% less produced pounds.

As discussed, we have successfully increased our cash balance since we pivoted to a cash generation focus as the pandemic began to impact all of us. I’d like to talk about the fact that our inventory reductions were done responsibly, meaning that we have our customers’ needs as our priority even as we reduce inventory. As an example, despite reducing inventory by 2.8 million pounds in Q3 and Q4 combined, we actually built a modest amount of strategic work-in-process inventory in our high-volume alloys, allowing for lead time to be reduced to more quickly support our customers when business levels do improve.

I’ll now turn it over to Dan who will provide more details on our specific markets and on our financial results.

Daniel W. MaudlinVice President-Finance, Chief Financial Officer, Treasurer

Thank you, Mike.

Let me start with a lookback at our quarterly volumes. At the end of last year, fiscal 2019, our fourth quarter volume was 5.4 million pounds, which was the Company’s highest quarterly volume in four and a half years. Moving into fiscal year ’20, the first half was impacted by the grounding and production halt of the Boeing 737 MAX lowering aerospace volumes, combined with weak oil prices, which lowered volumes in our chemical processing market. Volumes in the first and second quarters were 4.2 million pounds and 4.3 million pounds respectively. The second half of fiscal ’20 was then significantly impacted by the COVID-19 global pandemic, which lowered volumes in Q3 and Q4 to 3.2 million pounds and 2.9 million pounds respectively. The fourth quarter volume of 2.9 million pounds represents a 46% reduction from the 5.4 million pounds in last year’s fourth quarter.

Net sales in the fourth quarter of fiscal ’20 was $79.9 million.

Looking at each of our major markets for the fourth quarter, sales to the aerospace market accounted for 42% of our revenue at $33.6 million. This is a decrease of roughly 17% sequentially from Q3 and a decrease of 51% from the same period last year. The pandemic has had significant effects across the aerospace industry, with announced reductions in commercial aerospace build schedules, combined with reductions in repair, maintenance and overhaul activity. Complicating the demand situation continues to be the elevated amount of inventory throughout the aerospace supply chain. Destocking is expected to continue in fiscal year ’20. Backlog dollars in aerospace decreased sequentially from Q3 to Q4 by 16% and down 46% year-over-year.

Fourth quarter sales to the chemical processing market accounted for 23% of our revenue at $18.5 million. This is an increase of 52% sequentially from Q3, but a decrease of 33% from the same period last year. The sequential increase from the very low level relates to a pickup of shipments into Asia. It is also reflective of our approach to seek higher volumes from commodity CPI transactional business with more competitive pricing. This market will continue to be impacted by COVID-19 and an environment of low oil prices causing chemical companies to delay their capex spending. Backlog dollars in CPI were flat sequentially from Q3 to Q4, but down 13% year-over-year.

Fourth quarter sales into the industrial gas turbine market accounted for 16% of our revenue at $12.4 million. This is a decrease of 9% sequentially from Q3 and a decrease of 21% from the same period last year. Shipments into this market can be lumpy quarter to quarter. The decrease is attributable to conservative purchasing methods due to COVID-19, combined with small and medium-frame engine builds slowing down due to the weakness in the oil industry. Our share gain initiative continues. However, given the current economic conditions, the shipments are not yet consistent quarter to quarter. Backlog dollars in industrial gas turbines decreased sequentially from Q3 to Q4 by 15%; however, are up 11% year-over-year.

Fourth quarter sales in other markets accounted for 12% of our revenue at $9.2 million. This is a decrease of 17% sequentially from Q3 and a decrease of 16% from the same period last year. Again, demand was impacted from the effects of the COVID-19 pandemic. Decreases were largest in the flue-gas desulfurization, automotive and oil and gas markets. Backlog dollars in other markets increased slightly from Q3 to Q4 by 2% and 1% year-over-year.

Fourth quarter other revenue accounted for 18% of our revenue at $6.2 million. This is a solid increase of 94% sequentially from Q3, but a decrease of 8% from the same period last year. Solid toll conversion sales drove the sequential increase both on our four-high rolling mill but also conversion work in our melt shop.

Overall, fourth quarter volume was 2.9 million pounds. While this low volume compressed gross margin significantly this quarter, the compression alleviated somewhat from the third quarter by 160 basis points. Gross margin in the fourth quarter was 4.9% compared sequentially to the third quarter’s 3.3%. This margin expansion occurred even though volumes declined.

The amount of fixed overhead costs that we charge directly to cost of goods sold as opposed to capitalizing into inventory as our plant capacity was underutilized decreased this quarter compared sequentially to last quarter. Last quarter’s direct charge was $5.9 million in Q3, but favorably declined in Q4 to $4 million. We are continually and diligently striving to reduce our cost to better align our cost structure to these new lower volume levels. This quarter was also challenged with heavy costs in three different categories: first, increases in inventory reserves of $1.5 million, which was about $500,000 higher than Q3 and about $1.1 million higher than last year’s fourth quarter; second, costs of roughly $250,000 to $300,000 of COVID-related costs such as for staggered shifts, quarantine pay, cleaning tasks and cleaning supplies; and third, additional severance-related cost of approximately $300,000 in the fourth quarter.

In total, we have reduced headcount by roughly 183 as of October 31, 2020 or 15% of our global workforce. This equates to approximately $14 million in annualized salaries, wages and fringes. In addition, during the fourth quarter, the executive team and the Board of Directors continued their 10% pay reduction and salaried employees continued their one-week unpaid furloughs.

SG&A, including research and technical expense, was $9.1 million in the fourth quarter. SG&A was reduced this quarter due to the reversal of incentive compensation accruals of $1.2 million, which was accrued in prior quarters, but fully reversed in the fourth quarter. Excluding this reduction, SG&A was $10.3 million as compared to last year’s fourth quarter of $12.5 million or a reduction of 18%.

Three additional points to finish out the P&L. First, non-operating retirement benefit expense on the P&L was $1.7 million, which nearly doubled compared to last year’s numbers as we have talked about previously. But we have some good news for fiscal ’21. In a moment, I will further discuss our new valuation and next year’s expense. The second item to finish off the P&L, interest expense in the fourth quarter, was slightly lower as we repaid the precautionary draw on our revolver, which occurred mid-March. And third, our effective tax rate was adjusted lower this quarter to 21.2% as we finalized our year-end tax provision. All of that resulted in a net loss for the quarter of $5.7 million, which sequentially improved by $2.4 million.

Let me circle back to the topic of our recent valuation at September 30, 2020, of our pension and retiree medical plans. The actuarial valuation was favorable. Although the valuation included a reduction of the discount rate used to measure the plan liabilities, which is unfavorable, it was offset by favorable items, including higher-than-expected return on plan assets for the pension plan and favorable retiree healthcare spending as we have been actively managing our retiree healthcare costs. This is expected to significantly reduce non-cash expense in fiscal ’21 by $2.2 million for the pension plan and $3.4 million for the retiree healthcare plan. This combined $5.6 million will be reflected primarily as a reduction of non-operating retirement benefit expense in the P&L in FY ’21.

Moving to backlog. While we have experienced low order entry levels, primarily due to the pandemic, order entry rates slightly increased in the fourth quarter of fiscal ’20 compared to the third quarter but still below shipment rates. Backlog was $153.3 million at September 30, 2020, a decrease of $21.3 million or 12% from the $174.6 million at June 30. For the full fiscal year, backlog decreased $81.9 million or 35% from the $235.2 million at September 30, 2019.

Capital spending was $9.4 million in fiscal ’20, and the forecast for capital spending in fiscal ’21 is $10 million, which continues to represent a level well below our depreciation levels.

Liquidity. The Company had cash of $47.2 million and zero borrowings against the credit facility as of September 30, 2020. The Company repaid the $30 million precautionary draw on the revolver in September, due in part to generating $24.8 million in cash in the last six months of the fiscal year, primarily from inventory reductions and the Company’s confidence in its ability to generate future cash and its overall liquidity position. In addition, subsequent to year-end, in October of 2020, the Company replaced the $120 million credit facility set to expire in July of ’21 with a new $100 million credit facility expiring in three years. The new credit facility contains an accordion feature that permits an increase up to $170 million at the request of the borrower if certain conditions are met. You can find the details of our new credit facility in our filings with the SEC.

Outlook for next quarter. We continue to experience market uncertainty driven by the COVID-19 global pandemic. We expect revenue in the first quarter of fiscal ’21 to be lower than the fourth quarter of fiscal ’20 due to the ongoing impact of the pandemic as well as the typical end-of-year holiday-related business slowdown, maintenance schedules and customers managing their calendar year-end balance sheets. Earnings for the first quarter cannot be estimated during this time of unprecedented market and economic conditions, low volumes and unfavorable fixed cost absorption. We expect to continue to generate cash from inventory reduction in fiscal ’21, and we continue to position the Company favorably for the recovery.

In conclusion, looking forward, we continue to see significant demand challenges ahead. Despite these challenges, we continue to feel that we are well positioned to weather this period driven by our ongoing efforts to align our cost structure and inventory levels to current demand levels. With inventory levels at $246 million at September 30, 2020, which is 65% of FY ’20 sales, we believe additional inventory reduction is achievable. The strategy is expected to yield an increase in cash balance over fiscal year 2021.

Mike, with that, I will now turn the discussion back over to you.

Michael L. ShorPresident and Chief Executive Officer, Director

Thanks, Dan.

This has been a stressful time, obviously for the world, our country, our families and our businesses. I again want to thank our employees. They all continued to push forward, initially to protect the health of our employees, and obviously that’s ongoing, and then to jointly lead Haynes through these turbulent times by pivoting to cash generation, focusing on what differentiates us from the competition and implementing the actions required related to our key metrics for success.

With that, Jim, let’s open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] We’ll hear first from Steve O’Hara with Sidoti.

Stephen Michael O’HaraSidoti & Company — Analyst

Hi, good morning.

Michael L. ShorPresident and Chief Executive Officer, Director

Good morning, Steve.

Daniel W. MaudlinVice President-Finance, Chief Financial Officer, Treasurer

Good morning.

Stephen Michael O’HaraSidoti & Company — Analyst

Thanks for taking the question. I guess if you look at — you mentioned the inventory levels and where they are right now in the channel. Can you just talk about have they improved at all or are they still kind of high? And do you need kind of a real pickup in demand for that to improve or are things kind of maybe progressing where inventory is getting cleaned up a little bit here and there as we progress?

Michael L. ShorPresident and Chief Executive Officer, Director

Hey, Steve. Sure. We obviously spend a lot of time talking about this both internally and getting insight from our customers. We believe that inventory reductions throughout the supply chain are going to go on for another few quarters. Said another way, based on a lot of customer feedback, there is still probably six to 12 months of inventory in many areas of the supply chain. Obviously, there’s going to be exceptions to this. We’re seeing some exceptions. So we could see a modest uptick in ’21, but that will just be the first step, in our opinion, to the recovery.

Our view, and I really think a great way to look at this is to look at the LEAP engine, because I think what happens with the LEAP engine tells us what’s going to happen with the aerospace industry. You all know the story. 1,736 engines in ’19; initial forecast of 2,300 [Phonetic] in ’20 [Phonetic]; down to 800 this year and somewhere between 800 and 1,000 next year. So what we’re still dealing with is inventory in the supply chain to make over 2,300 engines initially projected in 2020 and that dropped to 800. So, still inventory out there. It’s a good news for us. Projections are for the LEAP back to over 2,000 a year as people start flying again starting in 2023, meaning that we believe the supply chains will be cleaned out and metal will start to flow in large quantities to support this late ’21, early ’22. Makes sense?

Stephen Michael O’HaraSidoti & Company — Analyst

Yeah, no, that’s very helpful. Thank you. And then, maybe just on the cost cuts. I think you mentioned kind of a $14 million annualized cost savings. Is that something that is kind of a true pickup starting in 2021 and maybe how much of that kind of is incremental in ’21 maybe. And then is the $5.6 million that you mentioned I think on the pension, is that included in that $14 million?

Michael L. ShorPresident and Chief Executive Officer, Director

Okay. I’ll let — I’ll let Dan address the pension after I talk about the cost. I think when we look at costs, you got to look at it from three points of view. First is the SG&A and salary cost reduction that we went through. That was obviously very difficult to implement. Not something that any of us looking forward to. But they’re certainly there, and we’ll move throughout our upcoming fiscal year. At some point, obviously, when business returns, we’re going have to bring some of that back, but given the pain we went through to get to these levels, it will take some time.

On the variable cost side, there’s really a couple of ways to look at this. First, when — what we have done to get to our high point pre-pandemic of 18% was not only price increase but significant variable cost reduction, and that work continues, both on yield improvement and overall variable cost reduction. I’m very proud of those efforts. One of the things that happen, though, if you’ve reduced cost on a per pound basis, you don’t get as much cost reduction with 2.9 million pounds as you did with 5.4 million pounds, obviously, so that hurts. So, as we move forward, some of our past cost reduction is muted until our volume comes back, but also on the variable side, we continue to focus in all of our facilities in driving cost down. Dan, you want to cover the — the $5.6 million Steve asked about?

Daniel W. MaudlinVice President-Finance, Chief Financial Officer, Treasurer

Sure. Yeah, the pension reduction and the retiree healthcare reduction really has — is not part of that — that $14 million that I referenced. That was only related to the permanent reductions that had occurred over the course — that occurred somewhat in, mostly in 2020; a little bit spilled into 2021 because I mentioned to you the October number, but that was — the majority of that number has already been realized in some of the numbers we’re seeing for the fourth quarter and even a little bit in the third quarter of FY ’20, but unrelated to the pension. And I will say this too. It’s also unrelated to other cost reduction measures that we’ve taken like the unpaid furloughs, is not part of that $14 million number. The 10% reduction in the executive staff salaries is not part of that as well. That’s just one piece of a bigger cost reduction strategy. Does that help?

Stephen Michael O’HaraSidoti & Company — Analyst

Yes, very helpful. Thank you. And then maybe last one. You noted CPI remains I think kind of low given the economy, etc. I mean, what are the biggest markets there? I mean, it seems like homebuilding tends to be one of the bigger drivers of chemical and then auto seems to be the other big one. Are there other markets that we should think about in terms of getting that market back to maybe improvement other than just general GDP?

Michael L. ShorPresident and Chief Executive Officer, Director

Yeah, the oil prices have a significant impact. So when oil prices are down, there is less spending in the CPI market. So that’s — significant large pipeline projects are not out there. In general, we are seeing many chemical processing projects on hold, specifically related to COVID and everyone being a bit conservative with their spending. So that’s one side. The other side is our special project side. We actually finished our fiscal year ’20 in a pretty good spot related to year-on-year, staying plus or minus about even on our revenues, on CPI. We’re actually going to, on special projects within CPI, we’ll see that drop somewhat because there is very few projects being let. But I would say in addition to what you said, it’s oil price, it’s large pipeline projects in general and it’s our special projects.

Stephen Michael O’HaraSidoti & Company — Analyst

Okay. Thank you very much. I’ll jump back in queue.

Michael L. ShorPresident and Chief Executive Officer, Director

Thank you, Steve.

Operator

Our next question will come from Chris Olin at Tier4 Research.

Chris OlinTier4 Research — Analyst

Hey, good morning.

Daniel W. MaudlinVice President-Finance, Chief Financial Officer, Treasurer

Hey, Chris.

Michael L. ShorPresident and Chief Executive Officer, Director

Good morning, Chris.

Chris OlinTier4 Research — Analyst

Hey, Mike, you referred to order rate improvements, although they were from a low level. I was curious if there was a specific end market was driving that or was it a broad-based improvement?

Michael L. ShorPresident and Chief Executive Officer, Director

Yeah, let me — let me get some facts here, Chris. The best way that I like to look at this is our book-to-bill. And it’s kind of interesting when you look at pounds on what we book versus what we bill. In Q1, obviously pre-pandemic, it was at 1.0. I’ll get to the markets in a second. Q2 was 0.7; Q3 was 0.6; Q4 bounced back a little, which obviously gives us some hope; it was at 0.9. And to specifically answer your question on the book-to-bill, Aero was still down; it was at 0.7 book-to-bill for the quarter. But CPI was slightly over 1. IGT was slightly under 1. And other was over 1. So aero was lagging as we would expect as we talked about with inventory, but the others are coming back. Again, we’ve got a long, long way to go. We — we say we’re in the road to recovery, but it’s from very low levels, Chris.

Chris OlinTier4 Research — Analyst

Interesting. Okay. And then just want to make sure I understood what you said there on the special projects pipeline — or revenues. What was the actual number? I wasn’t sure I caught that. And then I was just curious — did you talk about the pipeline like any prospects in terms of what it could look like for the — for the next fiscal year?

Michael L. ShorPresident and Chief Executive Officer, Director

Yeah, we — the special projects were approximately $25 million in fiscal ’19. We’re probably plus or minus $1 million over that in fiscal year ’20 because the lead times on these very complex products are very long, so a lot of what we had in there were things that had been ordered before the pandemic hit us. I’d expect a drop in our — current — in our current fiscal year. Don’t know the level at. We have some numbers, but we’re always pushing for more. So I would say year-on-year, that’s going to be down. What we like is where the margin is and what’s coming in. It’s been a fairly rich mix over the past year, plus or minus. Dan, anything you’ll add to that?

Daniel W. MaudlinVice President-Finance, Chief Financial Officer, Treasurer

No, I think you nailed it. Just to give you a specific number. In FY ’20, special projects, $26.3 million, where in FY ’19, $25.5 million. So you were right on in your — in your numbers, Mike.

Michael L. ShorPresident and Chief Executive Officer, Director

See that, Chris, I’m generalizing and Dan comes in, cleans it up, gives the actual number. Thank you, Dan.

Chris OlinTier4 Research — Analyst

Perfect. You guys have done a great job on the cost reduction side. I’m just trying to think about the normalization of volumes when we start looking out to like ’22 and such. When you think about the 183 positions that were removed, would a lot of those jobs need to come back to increase production or is there a way to think about how much of the cost reductions would stick going forward?

Michael L. ShorPresident and Chief Executive Officer, Director

I think it was obviously very painful to remove people both on the production side and through the salaried side of our business. I think it was also fairly expensive for our Company to do that. So certainly, as volume comes back, there will be a lag, but there will be a need to bring back some of our production workforce in our facilities. But we will do that very slowly. And on the salaried side, we’re going to have to be very careful after spending money to have to remove them to bring them back. Certainly, there will be some that have to come back, but it will be a very slow process to bring them back.

Chris OlinTier4 Research — Analyst

Okay. Thanks a lot.

Michael L. ShorPresident and Chief Executive Officer, Director

Thank you, Chris.

Operator

[Operator Instructions] Next, we’ll hear from Michael Leshock at KeyBanc. Please go ahead.

Michael David LeshockKeyBanc Capital Markets — Analyst

Hey, Mike and Dan, good morning.

Michael L. ShorPresident and Chief Executive Officer, Director

Good morning, Mike.

Daniel W. MaudlinVice President-Finance, Chief Financial Officer, Treasurer

Good morning.

Michael David LeshockKeyBanc Capital Markets — Analyst

So first just on your internal inventory destocking. I know you said you’re looking to destock more inventory into 2022. But looking at the fiscal 1Q, how should we expect the magnitude of the destock to be versus the sequential change that we saw this quarter?

Michael L. ShorPresident and Chief Executive Officer, Director

We’ve seen what — in the second half of last year, we aggressively removed about 2.8 million pounds of inventory. This is a real balancing act for us because we have to keep some metal flowing through our plant. Obviously, our shipment level is not as high as it’s been in the past. So — and Q1, by the way, is typically a tough quarter for us to reduce inventory. So I don’t know, to be honest with you, the spread across the year. But we do expect to continue to incrementally, quarter after quarter, to find ways to reduce inventory. Dan?

Daniel W. MaudlinVice President-Finance, Chief Financial Officer, Treasurer

Yeah, I think that’s a good way to look at it. I mean, obviously when we reduced inventory originally in FY ’20, just volume itself going down is going to reduce what’s in work in process, what additional raw materials you’re buying. So that’s a bit of a somewhat natural reduction with volumes overall going down. I think we — as we get into FY ’21, it shifts a little bit in that the pace may not be quite as strong. And it will shift a bit more to the — maybe the finished goods side of it where we’re reducing more out of the finished goods side rather than WIP and raw materials.

But we’re looking at really every pocket of inventory, looking for any kind of stranded inventory, you might say, in work in process and trying to clean it up as best we can. We have an inventory steering committee that studies this quite heavily, and we report to senior staff, inventory levels, at least weekly, if not more often than that. So it’s a big push for FY ’21. We’re confident we can continue to reduce inventory. As I mentioned in my prepared remarks, our inventory level as compared to sales is still quite high. Our turns could certainly go up. So I think we still have a lot of room to improve, and that will generate cash.

Michael David LeshockKeyBanc Capital Markets — Analyst

Got it. That makes sense. And then on the 737 MAX, given the recent news that we’ve heard there, I know that’s about 8% of normalized volumes for you. How is the supply chain gearing up for the return to service? I know you mentioned the LEAP engines, but any other color you could add there on the MAX?

Michael L. ShorPresident and Chief Executive Officer, Director

I think when you look at best estimates out there for MAX production and 2021 actual planes built, it’s only probably 120 planes to be built. So I still believe there is significant inventory out there. Obviously, went from the high levels in the 50s down to zero and now probably plus or minus at the current time for a month. So there is still significant inventory out there. So I think a return and a bounce-back in demand will be very gradual. We’re looking hopefully at 31 a month starting in 2022 and as they begin to need material for that is what I think we’ll begin to see a pull.

Michael David LeshockKeyBanc Capital Markets — Analyst

And then just lastly for me, you mentioned the new IGT customer. Anything you can tell us in terms of the magnitude, how we should think about that customer and then your expectations for more share gains in the near term? Thanks.

Michael L. ShorPresident and Chief Executive Officer, Director

Sure. Don’t think I want to get into the actual volume for us. In a company that only shipped 2.9 million pounds last quarter, it is certainly significant volume. It’s a key piece in our puzzle. It’s something we targeted and went after and we feel real good about that. By the way, on IGT, the other thing that we really like about this market is we’re finally seeing the supply chain at steady state. So instead of talking about all the inventory in the IGT supply chain, which we’ve been talking about forever, there is no more inventory reduction. When there is demand, we’re seeing a pull-forward. So we feel good about that in general, and what’s happening with that specific customer and for us, it is significant.

As far as other share gain, I believe the value that we provide with our service centers, with our just-in-time inventory, with our technical service, with our alloy — or alloy development, I think there is opportunities everywhere and which we can find ways to out-service others out there and that’s what we’re focused on doing. This is the one which has — that has happened, so it’s good to talk about, but we’re certainly focused on others, whether it’s here, aerospace or other areas.

Michael David LeshockKeyBanc Capital Markets — Analyst

Got it. Thank you.

Michael L. ShorPresident and Chief Executive Officer, Director

Thanks, Mike.

Operator

And gentlemen, we do have a follow-up coming in from Chris Olin once again at Tier4.

Chris OlinTier4 Research — Analyst

Hey, sorry, I had a couple of more I thought I’d just [Indecipherable] here. I wanted to ask about Arcadia for two reasons. One, I know there has been a little bit of disruption in the titanium supply situation. I was wondering [Technical Issues]

Daniel W. MaudlinVice President-Finance, Chief Financial Officer, Treasurer

Chris, we may have lost you.

Michael L. ShorPresident and Chief Executive Officer, Director

We lost you, Chris. We can’t hear Chris.

Operator

Mr. Olin, are you reconnected, sir?

Chris OlinTier4 Research — Analyst

Hello?

Operator

Gentlemen, I believe I did that on my end. I do apologize.

Chris OlinTier4 Research — Analyst

Okay. To be clear, I’m online, right?

Daniel W. MaudlinVice President-Finance, Chief Financial Officer, Treasurer

Yes, you are.

Michael L. ShorPresident and Chief Executive Officer, Director

You are.

Chris OlinTier4 Research — Analyst

Okay. Yeah, I’m not sure where I got knocked out there. I wanted to ask about Arcadia. There had been some changes in the titanium supply situation here over the past few months. I was wondering if that was an issue for that business on the quarter as well as the issue with COVID and kind of Louisiana getting hit. Just kind of see maybe can you give an update there.

Michael L. ShorPresident and Chief Executive Officer, Director

Sure. As far as the starting stock for Arcadia for titanium tube supply, not an issue at all. It’s a very controlled process in which if processes change in coming, we are deeply involved and our end use customer is deeply involved with that. So we don’t see anything there. It will be a very controlled changeover. Our people and our supplier are all over that one. So no issue at all.

COVID, significant issue, Chris, not only in Arcadia but in all our facilities. We’re doing everything we can: social distancing, staggered shifts, ending shifts early, whatever we need to do to try to protect our people. But it’s very difficult. So yes, we have significant issues in Arcadia. Our team is doing a great job of keeping things going, and I could say that about every facility we have. Our offices — the plant in Kokomo going through similar items. It’s not just what happens in the plant, obviously. It’s what happens when people go out in the public or with families. We’re all worried about what happens over Thanksgiving. But so far, team has done one heck of a job in keeping things going while working to protect all our employees.

Chris OlinTier4 Research — Analyst

Okay. And, Dan, you mentioned the COVID-related cost. Does that continue into the next year? Did you mention that?

Daniel W. MaudlinVice President-Finance, Chief Financial Officer, Treasurer

Yeah, I think those would. I said $250,000 to $300,000 that’s related to staggered shifts and teams cleaning different areas, as Mike was just kind of referencing there. I think that cost would continue as we continue to try to keep everyone safe and keep everyone separated, and anything we can do to — to help and protect their health, we’re trying to do. So that will have a cost to it, but pretty manageable.

Chris OlinTier4 Research — Analyst

Okay. And then the last question I had was, I thought I recalled GE talking about increasing production of the turbines or maybe the outlook getting less negative. Has that helped your business, and are you thinking about that market any different at all?

Michael L. ShorPresident and Chief Executive Officer, Director

On power generation, I say on the mid and small size turbines, as Dan said in his prepared remarks, a lot of that’s going into oil and gas. So that’s certainly down. We finally see nice projections for the large-frame engines, and our alloy content in those is good and continues to grow, especially on the proprietary side. So that’s good. So we will see that coming in. As I noted, I think, in one of our responses along here, we no longer see supply chain full of inventory there. So when they start to build, we will feel it. Has it come yet? Not necessarily, but we do believe it will come. Not certainly in huge quantities, not to where it was when we peaked in this market many years ago, but it certainly will begin to improve.

Chris OlinTier4 Research — Analyst

Thanks, again.

Michael L. ShorPresident and Chief Executive Officer, Director

Thank you, Chris.

Operator

And ladies and gentlemen, that does conclude our Q&A session for today’s conference. I’m happy to turn the floor back to Mr. Mike Shor for any additional or closing remarks.

Michael L. ShorPresident and Chief Executive Officer, Director

Okay. Thanks, everybody. We appreciate everyone’s time. Thank you for your interest and support. Please be safe. Our thoughts are with you and your family in this incredibly unusual time we live in. Look forward to talking to you again next quarter. Thanks, everyone.

Duration: 44 minutes

Call participants:

David Van BibberController and Chief Accounting Officer

Michael L. ShorPresident and Chief Executive Officer, Director

Daniel W. MaudlinVice President-Finance, Chief Financial Officer, Treasurer

Stephen Michael O’HaraSidoti & Company — Analyst

Chris OlinTier4 Research — Analyst

Michael David LeshockKeyBanc Capital Markets — Analyst

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