Haynes International Inc (HAYN) 2007 Q4 法說會逐字稿

Greetings and welcome to the Haynes International Incorporated fourth-quarter 2007 earnings conference call.

At this time, all participants are in a listen-only mode. Our 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, Mr. Marcel Martin, Chief Financial Officer. Thank you. Mr. Martin, you may begin.

Thank you. I would like to start off by reading a cautionary note regarding forward-looking statements. This conference call will contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Act of 1934. The words believes, anticipates, expects, plans, and similar expressions are intended to identify forward-looking statements. Although we believe that 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 assurances that such plans, intentions or expectations will be achieved. Many of these risks are discussed in detail the Company's filings with Securities and Exchange Commission, in particular in its Forms 10-K for the fiscal year ended September 30, 2007. You should carefully read these risk factors. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. All forward-looking statements speak only as of today and the Company does not undertake and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements which reflect the occurrence of anticipated or unanticipated events. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as results new information, future events or otherwise. Thank you.

I would like now to introduce Francis Petro, President and Chief Executive Officer of Haynes International. Francis?

Thank you, Marcel. Good morning. I want to talk about both the fourth quarter and the year in total, about some of the major things that we accomplished and some of the issues that we faced and then when I am through -- and of course our markets. When I am through, I will turn it over to Marcel, who will walk you through the specifics of the finances and then we will open it up to questions and answers, as described.

Both the fourth quarter and the fiscal year set records for revenues and earnings and we're very, very proud of that. We continue to grow to expand and all of our markets remain strong. They have been strong; they remain strong. We anticipate and see nothing on the horizon that is going to change that.

There were many other milestones and significant accomplishments and things that are in progress which I would like to just review. One, we continued -- as you know, we're a very, very safety-oriented organization and we once again set a new standard for Haynes International in safety. Simultaneously, we were certified for both ISO 14000 and 18000 in all of our domestic facilities, plus China, with the exception of our wire plant in North Carolina, which will be done in February of 2008. These certifications fold our safety and environmental programs into our entire quality management system of the organization. We feel and are quite proud of that, that significant step forward. It takes a lot of effort by all of our people and demonstrates the commitment and focus which is necessary to perform at an effective level in all aspects of our business.

Most of you know that we keep talking about our plans for the upgrade of our annealing furnaces. We did complete the Drever furnace. The next one up is the electric furnace; I will talk about that schedule in a minute. We did finish our ESRs and we continue to work our way through there. We are on our schedule to open up our capacity to the 23.5 million that we committed to in our secondary offering. We see nothing that will, at this point in time, nothing of significance that will stop us from achieving that level. All our plans are being made with that in mind.

The pilger mill, which will dramatically expand our capability to produce titanium tubing at Arcadia is on schedule and will be in operation next month. As most of you know by now, we are a significant supplier of titanium hydraulic tubing to Boeing and so this is just the next step in that growing aircraft market and our agreement with Boeing.

Our new alloys, the 282 that you have heard us talk about and our hybrid alloys, our dusting alloys and G-35 continue to grow and are receiving tremendous interest in the marketplace. We now have actual production orders for 282 and are working very closely with both land-based gas turbine and aircraft engine manufacturers. This alloy will be and is gaining spec into various applications. It's already in operation in several land-based gas turbines and there are trials being run with aircraft engines.

Our TIMET agreement, which we don't talk about much any more, which is a very significant thing to us, continues to grow. The volume of material that we will do this year continues to grow. That agreement is proving quite beneficial for both TIMET and Haynes, and we are very pleased that we have it.

We also successfully completed our union contract in June with some significant benefits. One of them is that we now have closed our defined pension plan to all employees. If you remember, a little over two years ago, we closed it to salaried employees. We have now, through successful negotiations with United Steelworkers, closed that plan entirely to all new employees and substituted an enriched 401(k) plan for our employees as we continue to do everything we can to manage our balance sheet and our operating costs as effectively as possible.

I do want to talk a little bit about the furnace schedule. The electric furnace, which is a much more significant rebuild than the Drever furnace, we will take that furnace out of operation on December 19. It will be down and we will do all -- I won't go into a litany of everything we are going to do but we will do two complete shutdowns. The first shutdown will involve all of the feed equipment and everything at the front end of the furnace. We will start December 19. We have already done a lot of work on the foundations and everything that we can do prior to shutting down. We have already staged material and done everything appropriately that we should and could. It will be down until February. We will then put it back up in operation until April so that -- because you can't run every single material through each furnace. The furnaces have different characteristics and some of our alloys have different characteristics, so you need -- for certain things you have to use one of the other furnace. So we will then run that electric furnace until April 1, when we take it down again for six or seven weeks. We will actually do the complete replacement of the furnaces themselves. The rest of this stuff is all the handling equipment, the feeding equipment, etc., etc. We have already fabricated -- the contractors have already fabricated the shells of these furnaces. We will install these actually prefabricated with the refractory in them to minimize the amount of downtime, or even preheating them to dry them out as quickly as possible so that we can profile them and get them in operation as quickly as possible. This is a very, very significant step forward for us, but it is also -- as we shut these furnaces down, it puts a tremendous amount of pressure on our manufacturing people as to how we flow our material and stage it and work around all of these issues.

I'm just going over all of this to let you know that we are still on that schedule. We're still in that process and that is a significant step is because we can't get to the 23.5 million level of flat products until we complete this. We anticipate everything being completed and in full operation no later than the beginning of June. We feel good about that. Most all of us wish it was done now but our people have stayed very, very focused and have done a very, very good job. We review this schedule constantly. We review our commitments to our customers constantly because we have to do a lot of planning and shuffling to accommodate the marketplace the best we can and still grow and improve our revenues while we are simultaneously operating and rebuilding equipment.

I think, all in all, there is one last thing that I think is important for me to say as the Chief Executive is that the people at Haynes International have, through very difficult times, the reorganization and everything else these people have been through, plus now an expanding market plus rebuilding the facilities, a lot of the facilities and expanding our routes to market and installing laser cutters and waterjet cutters and changing how we go to market with our value-added and our service centers -- have gone through tremendous significant changes. They have adapted very effectively and simultaneously improved operating cost, safety and quality. I think that is important for me to say that to investors or existing shareholders so that you get a feel for -- you know, you hear people like me talk and whenever but at my age, I don't do much work anymore. It's the people out in the plant that have to fight through this stuff and make it happen every day. I think it's important that you know that we have a very, very committed workforce that performs in a very effective manner and I'm very proud of them.

At this point in time, I would like to turn it over to Marcel to go over the financials and some other forward-looking statements.

Thank you, Francis. Good morning, ladies and gentlemen. I appreciate the opportunity to speak with you this morning about Haynes International.

As you just heard from Francis, fiscal 2007 was a very good year, a challenging year with more challenges to come in fiscal 2008. I will briefly speak to the overall year-to-year comparison and improvements made, comment on how performance was impacted by significant items, good and bad, in fiscal 2007 and how several of those items will impact fiscal 2008. I will finish up by briefly commenting on our backlog position.

On a year-to-year basis, the Company has continued its growth in high-performance (inaudible) sales volumes primarily as stated by Francis because of the continued strength of the markets we serve. Total volume increased to 22.7 million pounds in fiscal 2007 compared to 21.6 million pounds in fiscal 2006. That is an increase of 4.5%. But what is key to that increase is the growth of high-performance alloy pounds, which increased to 20.5 million pounds from 18.4 million pounds in fiscal 2006 for an increase of 11.5% between years. That increase in high-performance alloy pounds is the result of the strength of our three traditional markets -- Aerospace, CPI, and land-based gas turbine-- that we service. In addition, the Company's growing and expanding into markets which have not traditionally been significant to the Company over the past five years, such as FGD, flue gas desulfurization, and automotive.

Another key strategy that is part of our process which supports this growth is the CapEx programs which have focused upon improving equipment reliability, quality, reducing cost and ultimately increasing capacity. These CapEx enhancements, along with the continued expansion of the service centers and their value-added capabilities, has enabled the Company to continue to grow the high-performance alloy volumes. This process has not only enabled the Company to increase volumes but also has enabled the Company to expand the gross profit percent from year-to-year.

On a percentage basis, gross profit for fiscal 2007 increased 27% from 25.1% in fiscal 2006. This improvement is the result of many factors, including good markets, improved operating performance related to the process, expanded volumes, and an improved product mix primarily related to sheet product sales.

As we have discussed in the past, the key objective of the CapEx program is the debottlenecking of the sheet finishing operations which will be completed in fiscal 2008. With the completion of the electric annealing line in fiscal 2008, the Company's sheet capacity will increase by over 50% from 9 million pounds to 14 million pounds annually, which will enable the Company to continue to expand to the 23.5 million pounds of high-performance alloys sales target. When we started the process, we provided guidance and we would achieve this goal sometime between fiscal 2009 and 2011. Based on the progress to date, it is our opinion that we should achieve that level of sales pounds in fiscal 2010, barring any unforeseen problems.

When you equate this performance to dollars on a year-to-year basis, revenues increased by 28.9% between years from $434.4 million in fiscal 2006 to $559.8 million in fiscal 2007. The gross profit increased by 38.8% from $108 million -- 108.8 million in fiscal '06 to $151.1 million, or by $42.3 million. That equates to a gross profit per pound amount of $6.65 in 2007 versus $5.08 in fiscal 2006. This improvement in gross profit is attributable to a combination of the following factors -- improved product pricing combined with overall improvement in volume, which resulted in the increased of absorption of fixed manufacturing costs; reductions in manufacturing costs resulting from the capital improvement program; and a decrease in energy costs, primarily natural gas. These positive factors were partially offset by higher raw material costs and a bonus payment to the union employees upon ratification of the collective bargaining agreement of $2.2 million.

Looking at SG&A and R&D spending in the aggregate, the amount spent between years is relatively constant. That is because fiscal 2006 included a $1.1 million charge related to the process of evaluating strategic alternatives that did not repeat in fiscal 2007. The reduction in interest expense is due to the debt reduction affected by Haynes for the TIMET transaction and the sale of stock.

Fiscal 2007's tax rate of 36.8% is approximately 2% lower than the previous year due to the filing of amended returns and the utilization of certain tax credits which will not be repeated in fiscal 2008.

As good as fiscal 2007 was, there are several items which unfavorably impacted fiscal 2007 and will continue to unfavorably impact fiscal 2008. First, as Francis indicated, fiscal 2007 was an ambitious year for CapEx projects. With the last quarter seeing the completion of several key projects, including the cold rolling mill, remelt furnaces and the completion of the upgrades at the first of two annealing lines. These projects challenge the Company. However, we were able to complete the projects and continue to grow the volume of high-performance alloys.

In fiscal 2008, we're looking to complete the second annealing line, starting with the first phase of this project kicking off the first quarter of 2008. The first outage on the electric annealing line will begin in December and go until February of 2008. A second two-month outage will begin in April and continue to June.

Although we feel confident the year-to-year performance will show growth in high-performance alloy volumes, the trend from quarter to quarter may not be as smooth as in fiscal 2006 and 2007. Also, the rate of increase between years may not equal the 2006 to 2007 rate of growth of 11.5% for volumes. As Francis noted, this is something we have to do to continue the process. However in the short-term, particularly in the first quarter fiscal of 2008, operating performance will be unfavorably impacted through production disruption and potentially a less favorable sales mix. This impact would be reflected in a reduction of gross profit percent because of less available volume and less attractive product mix, lower absorption and production efficiencies.

Another issue which started to affect the Company in the second and third quarters was the slowdown in the stainless activity. This impacts Haynes in the form of capacity substitution by our competitors to keep the volumes in their mills as full as possible. This creates margin compression for us through an increased level of competition. In addition, because this represents immediately available capacity, our competitors are able to follow shorter lead times, counting the competitive situation.

From fiscal 2006 to 2007, the gross profit percent between years increased and for the most part the quarter-to-quarter trend has been upward. However, in the third and fourth quarters, as well as in our first quarter of fiscal 2008, we experienced and are continuing to experience a compression in margin due to the capacity substitution from competitors. The gross profit from the second to fourth quarters of fiscal 2007 declined from 29.4% in the second quarter to 25% in the fourth quarter.

In the first quarter of fiscal 2008, it's likely that the gross profit percent will decline further from the last quarter of fiscal 2007 before returning to a level comparable to that of the first three quarters of fiscal 2007 later in the year. The issue of competition as it relates to this capacity substitution will diminish for Haynes over time as we complete our annealing line project and are able to substantially reduce our delivery time. In addition, the increasing amounts of value-added processing that Haynes does, which our competitors cannot do, continues to improve our competitive position. In time, we believe the issue will be diminished significantly.

In addition to the CapEx anneal line product and the additional competition for capacity substitution, the first quarter of our fiscal year, October, November, and December, is typically our weakest performance quarter due to the holidays and the positioning by our customers to dress up their balance sheets. We expect this historical trend to hold true for the first quarter of fiscal 2008.

Thinking in terms of the top line, I would expect that revenue for the first quarter 2008 to be less than the last quarter of fiscal 2007 with the gross profit as a percent of revenue down from the fourth quarter of fiscal 2007 by several percent for all the reasons noted. I expect the gross profit performance to improve from the second quarter through the end of the year, subject to the effect of the CapEx program and the overall business environment with an approximate gross profit percent for all of fiscal 2008 slightly lower than that of fiscal 2007. I also expect the year-to-year topline performance to improve depending upon the success of the CapEx programs, product mix and general economic conditions.

In fiscal 2008, it is our goal to reduce our revolver balance depending upon raw material prices and CapEx costs, which would reduce interest expense over the course of the year. Although the tax rate for fiscal 2007 was 36.8%, as I previously noted, the effective tax rate for fiscal 2008 will approximate 38.5%, a percent approximately equal to that of fiscal 2006.

(inaudible) want to clarify for fiscal 2008 is the projected number of fully diluted shares by quarter for the year. This is always a difficult amount to forecast, particularly after issuing new shares. Fiscal 2008, I've estimated the fully diluted number of shares by quarter will be 12 million in the first quarter with 12.1 million being the average fully diluted share amount for the year. For fiscal 2007, the fully diluted number of shares outstanding was 11.2 million, ranging from 10.4 million shares in the first quarter to 11.9 million shares outstanding in the last quarter.

The last item I want a comment on is the backlog. The year ended at $236.3 million, which was up from the previous year-end by approximately $29.3 million, or an increase of approximately 14%. However, the year-end backlog was down for the third quarter ending backlog of $258.9 million or lower by $22.6 million. This reduction occurred essentially because, starting in the third quarter and continuing into the fourth quarter, was a situation where there was a run of the nickel costs where in which time customers reduced their purchases and they rundown in nickel costs, during which time customers reduced their purchases. Therefore, the backlog declined due to the lower order entry. At the same time, Haynes was having a record shipping quarter. Over the last two months, the pace of order entry has improved to a level equal to that prior to the third and fourth-quarter nickel fluctuations.

I thank everyone for their time. I will now turn back it over to Francis for questions. Thank you.

Okay. We will now entertain questions.

(OPERATOR INSTRUCTIONS). Kevin Starke, Weeden & Co.

Good morning, gentlemen. The color that Marcel just gave on the effective nickel fluctuation on bookings is very helpful but I was wondering if you could give any color on how it affected the way you managed your business and perhaps on gross margin as well?

Relative to the -- I think -- the comment we will make about nickel fluctuations is that we don't like them. No one likes nickel fluctuations. The comment -- the reality is that when nickel prices are stable, when all raw material commodity prices are stable, I think everyone performs much much better because they know what is happening. The fluctuations we saw were severe but short-term in nature. The reality is that we are going to buy nickel no matter what the cost is because that's what we do. We are a high-performance alloy producer and the major part of our product cost is related to commodities, primarily nickel. Again, for the most part, we're very successful, have been and we hope to be continue to be successful in the future in managing that cost successfully. I think our results show that.

I have a lot of questions but I am really going to stick to two. Boeing and Sikorsky both made some pretty exciting announcements this morning. I'm wondering if you have any sense to whether you might participate in that and if you do alloys that typically go into rockets and helicopters, respectively.

We do make materials that go into helicopters and we certainly make a lot of material that go into airplanes. I'm not familiar with the two announcements that they were making because, as you might suspect, I was getting ready to talk about Haynes. But certainly, anything -- we are heavily involved in various aspects of helicopters and we are extremely heavily involved in anything that has to do with aircraft with the engines and so any news right there is good news for us.

Can you give me a sense of what parts of helicopters Haynes alloys typically go into?

Yes, we get involved in stuff that goes into the rotors and things like that that have to be very, very strong and stuff like that, and have for a long period of time.

Michael Gambardella, JP Morgan Chase.

Good morning. I have a question on your distribution side and the service centers side. Can you give us an update on how you are proceeding in terms of going closer to the customers in terms of not just selling sheets but selling parts?

Sure, we continue to make progress. As a matter of fact, we just approved another waterjet cutters for Lebanon. For those of you who have been to Lebanon, we have existing -- we have a laser cutter there and two waterjet cutters and now we're going to have three. Two years ago, we weren't doing hardly any cut parts in North America. Today, one-third of what goes through our North American distribution is cut parts already and we are expanding that very rapidly.

We continue to grow our cut parts business in Europe. France is increasing their output of cuts parts every single month. The United Kingdom, which has really led the way with this with Rolls-Royce and now with Simmons, is doing phenomenal.

We now are looking at the timing of what should we be doing in China at what period in time? We have a very defective service center there which we just moved. We moved from one location to another because of some lease issues, but when we moved, it actually turned out to be a good deal because we got a better building with better facilities, better frames and everything we needed and it's all set up so that we can install waterjet cutters or lasers or whatever we need. So it's only a matter of time before we transition that service center into that kind of service.

There is a big demand for value added services. You know, these people, all of them, are looking at every way that they can reduce their costs and so it's moving along very, very well. It's a very, very key part of our strategy and we have people devoted solely to this function.

Okay, a second question -- did I hear you correctly? Did you say that now your backlog is back up to around like 258 level?

Well, what I indicated was that the backlog is improving because the order entry over the last several months is no longer impacted by the nickel fluctuation, so it would return to a more normalized order entry pattern.

Mark Parr, KeyBanc Capital markets.

Thanks very much. Good morning. Congratulations on the results. I had two questions. First of all, looking at your working capital in the September quarter, you did see a significant increase in inventories relative to the June quarter. I was wondering if you could give us some color on that. Is there any internal building of inventory that you have done in anticipation of the annealing furnace upgrades or --?

The answer to that question is yes. Because of the nature of what these two furnaces do -- they have different personalities. You can do intermediates in one and not in the other. For a certain alloy, you can do final anneals in one but not the other of other alloys. So what this forces us to do is, when we know what period of time we're going to shut the furnace down like we know when we're going to shut the electric furnace down, then we have to stage certain things and run all the stuff that we have to run before we shut it down. Then while we're doing that, then we have to stage the other stuff that we're going to run while we do that, so there's no question it impacts our working capital.

Thanks for the color on that, Francis. Another question on working capital your receivables also look like they bumped up quite a bit at year end. I guess I'm also looking for some color on that. Are you beginning to see a reacceleration of aerospace related momentum or does -- or should we view the increase in receivables as just more of a timing issue in terms of quarterly shipments?

For that quarter, it was more of the timing issue related to just the capital projects being completed and the September month actually having a significantly higher level of sales versus the previous two months. It was more oriented toward timing issues.

As to the market performance, those markets have been relatively consistent in their performance when you look at particularly the quarterly data we provided in the K. You can see that the aerospace market, as with all the other markets, has continued to perform at good levels.

Terrific. Will you let me sneak one more in here on you?

Okay, just one.

I was curious. First of all, I wanted to just acknowledge that the average value of your backlog in June was $28 a pound, about. The June quarter was when nickel peaked out at around $21 a pound average for the quarter. As you look at what's happening over the last couple of quarters, your average selling price has continued to increase. The average selling price in backlog, as well as your average selling price of your reported shipments, despite nickel coming down dramatically. I'm curious. Does that reflect a higher value mix of business that you are addressing or does it reflect higher average selling prices that you're getting on the same mix?

Two things -- and Marcel is going to answer half this question and I'm going to answer half. Nickel isn't the only raw material we buy. Cobalt has gone from the $12, $15 up into the $30s and it is approaching $40. Now, the people that sell chrome have figured out, if everybody else is raising their price, why don't we? So they are doing it. [Moly], which is very high-priced, has gone up again. So we still have to arrive -- we still have to arrive at the right pricing model for the alloys and the composition of the alloy makeup of those. Since the corrosion business is very strong and we use a lot of moly and stuff like that in some of these alloys, you know, some of that can be reflected in there.

So Marcel, you answer the second half.

I think, in answer to that question, Mark, part of the reason why we were continuing to see an increase in the average selling price is because we're moving toward a richer mix. In the context of sheet for example, which is one of our key is our key product form but again part of that sheet product has been going into higher specialty type alloys like B-3 for chemical plant processing in China for example. Again, you also have the transition from untouched coils and plates to where we do the processing in the service centers. We're adding value. We are moving more and more up the value added chain and that gets you more bang for the buck. So it's just a richer mix in the form of the product form, sheets and the alloys, but it's also related to the form, the cut part, the value we add to the product over time.

Okay. Is it fair to say, Marcel, that we could expect to see the richness of that mix or that mix continue to improve over the next 12 months?

I think the next 12 months are going to be a challenge for us in the context of what we talked about from the annealing line project. Our effort clearly is always to move up that value-added chain. That is a process we started. It may not be as apparent; it may not be as smooth in fiscal 2008 because of some of the challenges we're going to face, but clearly that is our intent. Again, we want to get more sheet product through the facility because the sheet enables us to add value to that form. That's what our customers are looking to, so it's a combination. That is the objective. It won't be quite as smooth as it has been in the past. We do have this annealing line project to deal with. That's going to be a challenge but the overall effort will be to do that which you indicated.

Okay, terrific. Well, congratulations on the progress and look forward to the next quarter.

John [Flanagin], Fundamental Equity.

Have you fellas gotten any indication from Boeing that they would like you to slow down your shipments because of the 787 situation?

No. The reason for that is we don't have 100% of the business for the 787. We have a very, very significant higher amount of the business for all the other aircraft. All the input we're getting from Boeing is to ship more material quicker. We are now, because they are having a lot of trouble getting lined up to get all the material for that. As you can see by -- they are going to announce or have some delays in the 787. But they are talking to us very seriously about what amount of material can we make for them because they are not -- they must be having some kind of problems with one of the main suppliers because right now, until we get that other pilger mill in, we're at 100% of capacity with a 50 week lead time on that product.

What is that product?

Hydraulic titanium tubing.

Vladimir Jelisavcic, Longacre.

Good morning, Francis and Marcel. Thanks a lot for the hard work and solid numbers. I just wanted to get a better understanding of what the financial impact might be of the electric furnace reconfiguration, you know, sort of the outage that starts in December, ends in February, restarts in April and then ends in June again. Can give us an idea of the gross margin impact of the turnaround?

Well, the one thing we're not going to give you is the gross margin impact because we don't know that ourselves.

We don't even know.

I think the issue is that anytime -- we are a manufacturing facility and the annealing lines are sheet oriented and anytime you have descriptions of two months, that's going to create some disruption in the product mix potentially, the product flow. It increases inefficiencies in the production process. It's not a favorable impact and I think, at this point, that's all we're going to do from a quantification perspective.

See, the issue -- the risk is pretty simple. We have two of these furnaces and normally we run them both at the same time. We have already rebuilt one of them and it's running very well. But when you shut one down and it's down and then you have a maintenance problem with the other one, then you don't have any. When you are operating at the volumes that we're operating at and you are trying to expand your output, any amount of downtime that we have is almost, in that particular short time frame, is almost impossible to make up. So we do the best we can by staging the material and doing all the stuff to get ready for this. We know exactly what we're going to do and how we rebuild it. That won't be an issue; we will get it rebuilt and we will meet all those schedules.

What we can't predict is the risk of any outage on equipment that's running to do everything while the other one is being rebuilt. We have very, very good maintenance people and we do a very good job, but we can't predict everything.

Understood, but just sort of by way of comparison, can you give us an idea of what you thought was the gross margin impact in the September '07 quarter (multiple speakers)?

Again -- for example, last year, we had a number of things going on last year that would've impacted the gross margin. We have talked about it from the perspective of a whole array of capital projects through the course of the year were going on and three of them came to conclusion in the fourth quarter. So clearly, there was some disruption relative to that process. We did have the fluctuations in raw material costs. We are seeing price compression. So overall there were a number of factors impacting the gross profit line, again to the extent that quantifying each of them individually that's very difficult to do and I'm not sure it would be of value going forward. We're going to have a number of those same things going on in fiscal 2008.

Early in the first quarter, we have already talked about the fact that we will have an annealing line outage. That's always a very difficult quarter for us because of the holidays, dressing up of balance sheets by our customers and the issue of the pricing compression relative to the capacity substitution. Then through the course of the year, the outages will affect obviously the gross profit line. These things are unfavorable in nature.

I think the one thing you can see is that, if you look back over the eight quarters and you then look preceding, go back to 2003, 2004, you see a significant improvement in the gross profit line. That is due primarily because of all the projects we have undertaken, the value-added, the service center work we do. So I think, overall, the direction -- we know which we way we're going. Unfortunately, as to any growth that anyone undertakes, you're going to have some bumps in the road. I think that is about all the color we're going to provide.

We're really not going to endeavor to quantify it because if I told you what I thought it would be, I would be wrong. So, we will just have to wait and see. When the quarter is over, we will know for sure.

Understood. Can you give us an idea what your capacity utilization was in the September quarter?

The last quarter?

The question -- the capacity utilization -- well, on flat products, it's 100% or more because we are running overtime seven days a week and everything else. We do have some available capacity in some other forms like billet to bar or some people that order an ingot that they would forage. We do have very little capacity in the pipe and tube plant but we do have capacity in the wire plant. But in the cold rolled flat product, we have none.

Understood. Just the last question, you know, Marcel, you made a point earlier (technical difficulty).

Stefan Mykytiuk, Pike Place Capital.

Good morning. I guess my first question is, if the second part, the second project finishes in June next summer, how long do you think it will take before you can start bringing inventories back down to kind of more normalized levels.

It will take that whole quarter.

The June quarter or the September quarter then?

No, the June, July August type of --

Exactly. We would look to begin reducing inventories in that fourth quarter of fiscal 2008. It will probably take through the first quarter of 2009, only because, if you think about the product we make, right now, you're talking about production times of 12 to 16 weeks. So you know, we make a product that the most part takes over the quarter to make. I think that is part of the process. I think offsetting that will be just the additional growth we will be looking for, relative to the commercialization of that capacity. So again I think we will begin to see the effects of these projects starting in the fourth quarter of '08 and it will travel through the first two quarters of '09 probably.

Okay. When do the costs saves -- when I was out there in August, you had completed some debottlenecking projects. This is another big chunk of debottlenecking. What are the last steps to get you to the 23.5 million pounds? Is it going to be FY '09 when we really start to see kind of the higher efficiency levels show up in the P&L?

I would think that's probably an accurate representation.

Yes, it is.

You think in terms of the annealing line will be finished in the third quarter of '08. That's fundamental to achieving the 23.5 million pounds. As I indicated, we look to be running at that sales level in fiscal 2010, so essentially what you would begin to see is that ramp-up from a volume perspective and an improvement in the cost performance in 2009.

Okay, but you're saying, from an internal point of view, you will have the 23.5 million pounds of capacity?

It will be available.

It will be available this year.

Right, and it's up to the market to pull it through then in FY '09?

Yes, because we're not going to -- you know, we cannot go out now and enter orders at that kind of rate and compound the issue that we're already facing. So as we finish that then we will start, because we know what business we are going after. Of course, we will have to assess where everything else is in the marketplace in aerospace, land-based gas turbines and all the primary flat products that we do. And then we will simultaneously be running, catching up and reducing the working capital but at the same time increasing our order input to take advantage of that available capacity. So you will have that transition.

I think I understand. Okay, so FY '09, we start to see more progress on the gross profit per pound and then (multiple speakers).

I think that's accurate.

Thank you very much.

Dan [Wayland], Bear Stearns.

Last quarter on the call, we talked about possibly a second service center going into China and possibly a new one going into India.

Well, we have a sales office in India. We have all the probably 80% of the planning done for our service center in India. We will probably make a decision on that sometime in 2008 as to the timing. There is no doubt in my mind that, at some point in the future, we are going to have a service center in India. It's just a question of the timing. We will probably finalize that decision.

We are, right now, in the process of evaluating all of the expansion and everything we are doing and the expansion of the business and everything we are doing in China to determine -- we're almost positive that we will have to have, at some point in time -- and by some point in time, I don't mean five years from now, I mean less than that -- an additional service center more into the mainland of China where there are some tremendous industrial complexes. Right now, we're looking at -- there's two huge areas that we're looking at and we're taking a look at how that business is growing and how that ties in with not only the OEMs but the anticipated growth in the maintenance business, which is also a significant part of what we do through our service centers -- is supply people material to maintain facilities, be it chemical plants or rebuild engines. So we will probably finalize that decision also in 2008.

Then if I could ask a follow-up of an earlier question asked, just one the backlog and how things are progressing? Is it fair to say that the backlog will return to or exceed the levels in Q3 '07?

Well, I don't know if it will return to those levels or not or exceed them, but clearly we are taking -- the order entry for the last several months is higher than what it was in the third quarter. So again, I don't know the answer to but it's clearly back on a trend proceeding what happened in the fourth quarter of this fiscal 2007.

Luke Folta, Longbow Research.

Good morning. I was hoping to drill in a little deeper on the aerospace story here for a second regarding your nickel-based alloy sales both in the U.S. and Europe. Can you talk about what you're seeing regarding channel inventory levels as well as leadtimes and current order rates?

I think, if you look at the information we provided in our 10-K, you can see the quarterly data as it relates to the volume. We'll just speak to the volumes on aerospace. That continues to be good, pretty steady. I think that you look at the plane of the order book, that is solid through 2010 and it's beginning to fill up after that. You'll have a little dip in 2011 and it picks right back up again.

Overall, the fundamentals are there. The order book is strong. New orders are being placed continuously. I think that Boeing and Airbus have had -- may have had record years again from an order entry perspective. Overall, there is no, I think, diminishing of that level of activity for us. It's really a matter of leveraging off of our capacity. What we've managed to do is continue to support our three fundamental markets, primarily aerospace but, for us, the challenge, and it was alluded to earlier -- they were for to utilize that 23.5 million commercialization of that capacity. We have party started that. It's a matter of taking that capacity which is available to us today and spreading it around such that we begin to develop new markets like the FGD. Last year, we sold about 360,000 pounds of -- I say last year 2006, we shipped about 360,000 pounds of FGD product. This year, we shipped over 800,000 pounds. So we're developing that market so that when we get into 2009, we already have an exposure; we've got a commercialization process; we've identified the customers that grow into that 23.5, which will be primarily sheet. We're doing the same thing on the automotive side. So, for us, the markets are good; we see those diminishing at this point. That's how we view the market today. It's just not about the aerospace market, although it's very, very nice to have that market perform like it has -- it's to know that order book is there. It's not the only market we address.

I guess I was just trying to get more color on the current inventory levels of your customers and maybe what their inventory plans are over the next, say, two to three quarters.

It's difficult for us to say. I know that the business in Europe is robust. I know that the final orders and stuff that we're getting from not only China but now other parts of Asia, it continues to grow and the activity in North America is very strong. We have very extensive -- we don't deal so much with the actual engine manufacturer. We deal with all of the people that fabricate for them. Do you see what I'm saying? They may have more than one fabricator or whatever. What we see is continued strength in that market with our customer base.

I think, leveraging off of that, I think it's an interesting question, the more I reflect on it. Where we are being -- I can't tell you exactly what their inventory levels are but what I can comment on is that they want those inventory levels to be lower. They will achieve part of that through the parts programs that we offer them. One of the reasons why our cut parts program is growing is because the fabricators don't want to have to carry any excess inventory. What they want is the part delivered to a point of production on a weekly or daily basis, so they are working to reduce their inventories, obviously. But that really plays in as a strength that we can provide them in terms of service centers, quick deliveries and closer-to-form products. So I think I can't tell you what their inventory levels are but I clearly know they want less of it.

Okay, just one more -- regarding the raw material market, mainly for nickel scrap, can you talk about price and availability of last year?

We have no problem in buying nickel.

We have no problem in buying nickel scrap either. See, people get confused about -- our business, this high-performance alloy business doesn't drive the price of nickel. Stainless steel does. The stainless steel market is down from where it has been, and so there is scrap available and there's nickel available. Even when the price of nickel was very, very high, we didn't have any trouble getting the nickel but we had trouble getting scrap.

Vladimir Jelisavcic, Longacre.

Hi, thank you. Marcel, earlier in your commentary, you made some comments regarding capacity substitution. Could you repeat your gross margin guidance?

Sure. It's an interesting concept. Let me give you some additional color. What I indicated was that what we saw starting up in the third quarter, in the fourth quarter, and we will see some of this in the fourth quarter, is some margin compression due to a slowdown in the stainless market. They have capacity substitution; they have got available capacity; they can promise short leadtimes. They're going to want to fill their mills.

What's interesting about that processes is that, if you go back ten years to the mid '90s when we had a situation like we have today where there was a slowdown in the stainless markets in the economy, we were severely impacted by this process. We were less severely impacted in 2003 by that process. 2002/2003 were pretty severe times in the metal market but we weren't nearly as impacted by that situation where our competitors who I want to keep their mills (inaudible) available to produce the commodity end of the high-performance selling market. What we have seen is that same phenomenon today but in an even less impact on us. That is because of -- obviously the overall markets are much larger but it's fundamentally because of what we do to our product today and what we continue to do on a prospective basis to that product.

The advantage that a mill would have, one of our competitor mills, is that they have got that excess capacity, they can form the shorter leadtimes. Once we are through this project on our annealing line, we will have essentially eliminated that opportunity for other -- for our competitors because our leadtimes should be equal to or probably better than anybody else's in this respect.

In addition to that, what we're doing is adding value to our product. We're just not selling a coil or a plate. Again, we're adding value. Over time, I see that opportunity for these other mills diminish significantly even from where it is at today. But it's a phenomenon that, over the past 15 years, you can literally track it as it has impacted us. Over time, it impacts us less and less and less just because of what we're doing to change the Company and perform in the niche markets that we do.

Understood. But I believe you were giving some gross margin guidance?

No. I think all I said was that it would reduce the gross margin. It impacted unfavorably the gross margin. I didn't give any specific numbers.

Right. For what periods, for any historical period?

We saw it in the fourth quarter negatively impact our margin and we will see some of that same impact in the first quarter of fiscal 2008.

Right. What about the second quarter of '08?

We would hope that, based on what we're seeing, relative to the stainless market, which is firming up and improving, we are also seeing in the marketplace that -- I would hope that (inaudible) it looks to diminish starting in our second quarter.

Understood. Just really quick, are any of your competitors adding the type of capacity that you are adding?

I know of no flat-roll capacity being added in the industry.

No, they're all adding stuff for -- what do you call -- BARs and stuff like that which are for (inaudible) billet products which are for the rotating applications of aerospace. We don't participate in that. In other words, we're mainly 70% or we think 70% to 73% of everything we do is a flat product. Our materials are used in the stationary part of an engine and everything else. People like Allegheny and Carpenter and PCP participates a lot in the rotating part business and we don't. So what you are seeing happening with all the people you guys normally compare us to is that they are adding capacity for either titanium type things or for VARs or stuff like that for the rotating part, which is mainly VAR and billet type production, which is completely different than what we do.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you very much. As I mentioned earlier, we're pleased with the results. You can rest assured that we are committed to follow the course of action that we have laid out. There's no doubt that we will get our projects done and that we will get to the 23.5 million and that we will successfully, in appropriate time, fill that capacity and continue to grow. You can rest assured that we are committed to that. Other than that, I just want to wish everybody a very very Merry Christmas and a safe holiday and a very happy new year. Thank you very much.

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