Haynes International Inc (HAYN) 2008 Q1 法說會逐字稿

Greetings and welcome to the Haynes International Incorporated first-quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Francis Petro, President and CEO. Thank you, Mr. Petro, you may now begin.

Thank you very much. Good morning.

First of all, Marcel will go over some legal things he reads at the beginning of our meeting. Then I will go over a summary of our first-quarter performance, followed by Marcel, our Chief Financial Officer, who will go through the financial results and projections. At the end of that, we will entertain questions and certainly do our best to answer any question you have. So, Marcel?

Thanks, Francis.

Good morning, ladies and gentlemen. We appreciate the opportunity to speak with you this morning. I would like to start by reading a cautionary note regarding forward-looking statements.

This conference call could contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27-A of the Securities Act of 1933, and Section 21-E of the Securities Act of 1934. The words believe, anticipates, expects, plans, and similar expressions are intended to identify forward-looking statements. Although we believe our plans, intentions, and expectations reflected or suggested by such forward-looking statements are reasonable, such forward-looking statements are subject to a number of risks and uncertainties, and we can provide no assurance that such plans, intentions or expectations will be achieved. Many of these risks are discussed in detail in the Company's filings with the Securities and Exchange Commission, in particular in its Form 10-K for 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 to date as of today, and the Company does not undertake and specifically declines any obligation to publicly release 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, or to reflect the occurrence of unanticipated or anticipated events. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Thank you. I would now like to turn it over to Francis Petro, President and Chief Executive Officer of Haynes International.

Thank you, Marcel. Good morning. I want to talk about our performance for the first quarter, including the status, certainly something about the financials but also the status of our upgrade of our annealing furnace, and then basically cover what we see in the marketplace.

Now, first of all, our gross profit margin as a percent of revenue doesn't reflect the levels we believe and have operated in the past. I mean, our past performance is indicative of that. The bottom-line performance in the quarter was indicative of many of the issues that we discussed in our last call, and let me just take a second and remind you of those.

We spoke about the increased competition as a result of the soft stainless-steel market, where people utilize their facilities to move into some of the nickel and high-performance alloy products. We talked about some of the things going on with our planned outages of our annealing line upgrades, and then also mentioned that, historically, our first quarter is usually our weakest and it has a lot to do with the Christmas holidays and Thanksgiving and just the way people order material and the types of industries that we are involved in.

Well, certainly, in addition to these anticipated changes, we had two unplanned outages which had a very significant effect on us. One was that the Drever furnace, which we had already rebuilt, we had some issues with it. The unfortunate part is, when we had the issues, we had already shut down the electric furnace, so we didn't have any viability or capability to make up any lost production. That's unfortunate. We got it repaired as quickly as possible and got it back into operation.

The second issue which occurred is what we call a diffusion problem. Now, we faced diffusion problems before, and historically -- and I won't go into a long metallurgical definition because they give me a headache when I have to listen to them, so I will save you that. But normally, they are caused by carbon, which gets a pickup of dirt or something in the oil, and you roll it into your rolling process. Never before -- and I've been in manufacturing for 50 years -- never before had we experienced a diffusion problem that was caused by bacteria and actually ended up being nitrogen diffusion instead of carbon diffusion. It took a very special lab test with some very unique equipment, thank God that we had just purchased, for us to figure this out. Unfortunately, it caused a lot of rework problems and we ended up not being able to ship a significant amount of material which otherwise would have been turned into revenue.

Marcel is going to give you the details about the financial outlook, but there's no doubt in my mind and we certainly believe that the balance of the year should improve. We certainly have the orders. We also have the inventory in place and now the issue is to flow the material through the plant. I will talk a little bit more in specific about the status of where we are at on that because I have some positive things to share with you and actually believe we're going to make up much of the ground that we've already lost.

On the good side, our backlog, our order backlog, increased substantially in the first quarter. In addition to that, our January order entry continued to be very strong. Both the backlog and the order entry, as well as what I see in the marketplace -- and I will discuss that a little more about my ten days I spent in China -- tell me that everything that we see bodes that our original thoughts about the market are still fundamentally sound.

Now, I want to talk a little bit about our CapEx program. I promise you, at some point in my career, I'm going to get to talk to you about capital projects without talking about annealing furnaces. But we did -- the Drever annealing furnace now is running extremely well. As a matter of fact, in the month of January, it operated at over 85% efficiency, and we've never attained those kind of levels before, so now we're starting to benefit from that rebuild.

In addition to that, our second annealing line, the electric annealing line -- we completed that work nine days ahead of schedule, and as of last Wednesday, it went back into reduction. So we are operating two complete annealing lines now, and we will operate both of those lines until April 22. On April 22, we will shut the electric furnace down again and do the second phase of it, which is the actual structural furnace housings and all of that stuff. That will take about six or seven weeks. So, this gives us an opportunity, an excellent opportunity to catch up on some of the material that we are behind and put ourselves in a good position so we don't run at higher risk when we take the last shut down.

In addition to that, the pilger mill in Arcadia, if you remember that's the mill that's going to help with its titanium airpack tubing, will be completed and in operation by late May. This thing gives us the opportunity to actually increase our tubing revenue by about a third. So we are pleased with progress of that.

There's one other project I'd like dimension, and that's our third waterjet cutter will be delivered and installed in our Lebanon service center in April and as our value added parts cutting business continues to grow.

I'd like to talk a little bit about my thoughts on the market and some of my observations on China. I just recently spent ten days in China, which was very, very interesting. You know, I was in Shanghai; I was in Beijing; I was in the northern part visiting [Lieming], which is a huge aircraft parts fabricator. Just some of the things I saw there and learned there -- number one, they are building 39 nuclear power plants, 39. To my knowledge, we're not building any in the United States. When I stayed in Beijing, I stayed in a hotel on Tiananmen Square. I looked out the back window and they were working on three skyscrapers 24 hours a day, seven days a week. All night long, they had huge spotlights out there, and there must have been close to 1,000 men working. I don't know how many cranes I saw, but in one couple-mile strip, I counted 137. Then I was informed that 60% of the construction cranes in the world are now being utilized in China.

Every major city that I went to, everywhere I went, there was construction. I went to the new Olympics site and looked at all the new things they had built. Then when I got to [Lieming], which is 300 miles away, I saw the soccer stadium brand-new that they had built, and they even built a brand-new stadium to play table tennis in. I mean, this is the kind of stuff they are doing over there.

When I got to the [Lieming] plant, I wanted into at least see as much as they would allow me to see, which they were very accommodating. They were telling me they are rapidly becoming a very significant supplier of airplane parts and fabrications, but they are also now becoming and embarking on fabrications and work for the chemical and oil and gas processing industry. This facility, at one time, when it was owned -- it is still owned by the government but prior to the kind of work they are doing now, they employed 30,000 people doing miscellaneous stuff for the government. Now they employ 15,000 people, and they are doing this kind of work. When I got out to one of their fab shops, I wanted to see the kind of equipment they were utilizing, because a lot of times, we think that, in China, the reason people move there is because they only pay everybody $5 a day and etc., etc. So I took a look at the equipment they had. I remember telling myself when I got back, I was looking at [C&C] machines and they had, in one department alone, 48 brand-new machines. I mean, these are the state-of-the-art in the world. So you know, these people are changing extremely, extremely rapidly. Their capability and the magnitude of what's going on over there is immense.

In meeting with some of the people over there, I also found out that it's not just China. The opportunities -- and I sat with Helen Wang, who is a marketing salesperson that we have an agreement with, who is very, very effective -- and we discussed the opportunities that we have in Shanghai, Korea, Indonesia, Singapore and Thailand. Just in reviewing Korea, Singapore and Taiwan, we discussed $450 million worth of opportunity the we had significant opportunities for us to grow in, that we hardly participated in, and obviously now we are changing our structure so we can participate in those.

In addition to that, I very quickly, in some chats with some people, figured out we have a difficult time making fittings, flanges and things like that for some of the pipe and tubing and total big projects that we do for -- particularly for chemical plants and some oil and gas units.

It became very clear that I could ship the commodity grades of our material pipelines over there and get fittings and flanges and stuff made much, much cheaper certainly, but also much quicker, which is very good because the vast majority of projects that are going on are going on in China. Sometimes I have a difficult time -- they won't let you ship all the sheet plate and pipe and tube unless you've got all the flanges to go with it, and that's the most difficult thing for us to get done on time. So this is a very significant step forward for us, and ultimately long-term, it may even prove is something we want to use for projects that are done in North America and Europe.

Incidentally, when you -- right now, to date, our sales in China in the first quarter were $10.3 million that we shipped to them. The present backlog is $35.5 million and growing. There are numerous, numerous projects that we are preparing and are in the process of bidding on, so the growth potential in China, plus the rest of Asia, is enormous.

Our business in Europe remains very, very strong. We have made contacts and are now doing business with additional land-based gas turbine rebuilders. Our value-added business, both in Europe and in North America, continues to grow. From what I can see, we are not halfway there yet; that's why we are adding the waterjet in Lebanon, and we have tremendous opportunities yet.

If you look at our markets by aerospace, the chemical markets, the oil and gas, land-based gas turbine, yesterday or the day before, Airline Manager was out talking about the engines in aircrafts all the way out through 2011 is still very, very strong. The chemical business and oil and gas business, even though they are more competitive for us right now, still there's a significant amount of opportunities rebuilding and new construction going on throughout the world. Land-based gas turbine business remains very, very strong.

I think sometimes, when people watch television or read the paper, whatever, whether we have a recession or don't have a recession or whatever, as they say, is going on, the facts are that our markets and what's going on relative to the consumption of high-performance alloys, because of the infrastructure and things that are going on in the world, remains very, very strong.

I think, in closing, what I'd like to share with you is that in March, when Marcel and I went on the road to meet many of you and to do our secondary offering and IPO, we shared with you the vision of Haynes International that our markets, long-term, are very, very strong. Our markets, in fact, are very, very strong and remain strong for the foreseeable future. This is a phenomena, as I've mentioned before, similar to what happened after World War II. The amount of infrastructure that has to be built in the world is mind-boggling. The more I see it, I'm beginning to think even I didn't have a large enough grasp about what was going on and how long it would take.

We mentioned that Haynes International had the strengths in its new product development but that we had been undercapitalized and that we had to embark on a recapitalization program that not only would rebuild the equipment but allow us to enhance our capacity, improve our cost structure and our quality, and at the end of that would increase our flag product, which is work core product, to 23.5 million pounds. Well, we are exactly one that schedule. As a matter-of-fact, we are a little bit ahead of that schedule.

I'm really pleased that the electric furnace is done ahead of time. This is going to give us an opportunity to make up some of the ground that we've lost. We are committed to finishing this; we will finish it. At the completion of that, we will have the capability of 23.5 million pounds. If you remember, our original plan was to get up to that level by 2010. I think now we have the opportunity with the demands that we had in the world, plus how fast we're going to complete this, that we have an opportunity to approach those kind of levels sooner. I don't know when and I haven't got it all detailed, but certainly now we at least have that opportunity, and we are committed to that.

Our employees continue to stay very, very focused. Our safety performance for that quarter again allowed us to set another new standard for safety for that calendar year, and we are very proud of that. That's a reflection of the commitment.

In spite of the issues that we face and the problems we face, all our employees, all of us, know that we're doing the right thing for the right reason. We are working our way through these, and sometimes the impact is more than others, but the fact remains now we're going to get a breathing spell and get ready for the last phase of this. Hopefully by the end of the year, I won't have to talk about annealing furnaces any more.

So at this point in time, I'd like to turn it over to Marcel and he's going to go over the financials and some of our thoughts about the future.

Thank you, Francis.

I'll get right into the comparison. Comparing the first quarter of fiscal 2008 to the first quarter of fiscal 2007, net revenues increased by 21.3% to $146.1 million from $120.5 million. Although total volume for all products decreased by 4.6% to 5.2 million pounds in the first quarter of fiscal 2008 from 5.5 million pounds in the same period of fiscal 2007, we are pleased to report that the volume of high-performance alloys increased by 4.9% to 5 million pounds in the first quarter of fiscal 2008 from 4.8 million pounds for the first quarter of fiscal 2007. The decrease in total volume is a result of our strategy to reduce sales and production of stainless steel wire. This growth in high-performance alloy volumes was led by the volume growth of 21% in our Aerospace market.

CPI and land-based gas turbine are down slightly in volume quarter-to-quarter, as a result of ingot project shipments that did not repeat in the first quarter of fiscal 2008. Reduced levels of project ingot shipments are also partly partially accounted for the increase in average selling price between the quarters, which I will discuss in a moment. The decline in the aggregate pounds of the other markets category reflects the reduction of almost 0.5 million pounds of stainless wire.

In addition to growth in the high-performance alloy volume, the other factor driving revenue growth was an increase in the aggregate average selling price of 28% to $28.27 per pound in the first quarter of fiscal 2008 from $22.08 per pound in the same period of fiscal 2007. Over half of the increase in average selling price between quarters is the result of these lower amounts of stainless wire and ingot. The balance of the increase in average selling prices is attributed to a higher percentage of sheet product, a higher percentage of (inaudible) cobalt-bearing alloys, an increase in service center sales versus mill-direct on a percentage basis, and the pass-through of cost increases, both material and non-material.

Although the nickel price was down over the period, the price increases in cobalt, [mauling] and chrome more than offset the nickel price decline. While we saw growth in revenue and volume of high-performance alloys, our gross profit as a percent of revenue declined. As we discussed in our last conference call and which was also noted by Francis, we expected the trend of erosion in the gross profit percent which began (technical difficulty) quarters of fiscal 2007, to continue into the first quarter of fiscal 2008. Gross profit as a percent of revenue was 23.4%, which reflects the favorable effect of a one-time pension adjustment curtailment of $3.7 million, which decreased cost of sales and impacted the gross margin percent by 2.5%.

Both increased competition which compressed the selling price by limiting our ability to raise the selling price on certain products, and planned and unplanned outages, which lowered shipments and productions in the quarter, unfavorably impacted revenues and the gross profit percentages. The largest contributing factor to the decline in gross profit as a percent of revenue is the intensified competition. As we discussed on our last call, starting in the third quarter of fiscal 2007, we have been experiencing increased competition from the competitors who produce both stainless steel and high-performance alloys. Because they slow down in the stainless market, these competitors have diverted their production and sales capacity to high-performance alloys. Their aim is to fill their open capacity in their mills. Because of this open capacity, they are able to offer very competitive delivery times and prices.

In response, we've been limited in our ability to raise our selling prices on certain products. We've faced similar price competition in 1990 and in the early 2000s, when demand in the stainless market weakened, but we are in a better position to respond to the competition then we were at those times as a result of our increased capability in service centers and our enhanced value-add services.

Based on industry journals, we believe that the stainless markets are going to improve over the course of fiscal 2008, which should begin to alleviate the pricing pressure felt by the Company in recent quarters. Additionally, management believes, as noted, that the competition -- that the completion of the upgrade for the second annealing line in the third quarter of fiscal 2008 will allow the Company to compete effectively on delivery times and reliability and will further reduce the effect of this increased competition.

Another effect which has negatively impacted gross profits as a percentage of revenue is the downtime as a result of equipment upgrades and, in the first quarter of fiscal 2008, two unplanned outages. Planned and unplanned outages reduce the amount of pounds produced and shipped by the Company, lowering revenues and compressing margin. The fact that these outages occurred all at the same time made it more difficult to recover as quickly as we believe we could from the unplanned outages because we also were experiencing the planned downtime on the annealing line.

The final item affecting the gross profit was the normal seasonality experienced in the first quarter of our fiscal year -- October, November, December -- from the holidays and the positioning by our customers of their year-end deliveries. This trend held true for the first quarter of fiscal 2008 and reduced the gross profit by an amount similar to that in the first quarter of last year.

For the remainder of fiscal 2008, as noted by Francis, it is our objective to not only stay on track in the second quarter with pounds shipped but to begin to regain some, if not all, of the ground lost in production and shipments in the first quarter. Although we feel confident that the year-to-year performance will show growth in revenue and high-performance alloy volumes, the rate of increase in high-performance alloy volumes between years will depend on how quickly the competitive environment improves as demand for stainless steel increases, and will also be somewhat constrained by the downtime of our second annealing line -- and may not be equal to 2006 to 2007 growth rates of 11.5% for volumes.

We expect gross profit performance to improve from the first quarter through the end of the year within an appropriate -- within an approximate gross profit percent for the last quarter of the potentially at 25%, depending upon the success of the CapEx program, product mix and recovery of the stainless market and general economic conditions.

Looking ahead and subject to the same conditions, we believe it is possible that Haynes will return to a level of gross profit percentages equal to those generated in the first and second quarters of fiscal 2007, which approximated 28.5%, sometime in fiscal 2009.

On the issue of the strength of the order book, we feel that the backlog is a very good metric in determining the direction of our business, and we're pleased with this growth in the first quarter of fiscal 2008. Consolidated backlog increased by $11.5 million or 4.9% to $247.8 million at December 31, 2007 from $236 million at September 30, 2007. In comparison, backlog on September 30, 2007 was down by $22.6 million from the June 30, 2007 backlog of $258 million. We believe the reduction we saw during the fourth quarter was primarily the result of fluctuating nickel costs beginning in the third quarter, which caused customers to reduce their purchases until (technical difficulty) moderated.

In the first quarter, the pace of order entry improved to the levels in the first and second quarters of fiscal 2007. At this point, the trend of a strong order entry continued into January 2008 supports this position.

As Francis mentioned, we had unplanned outages and a planned outage in the first quarter, which caused our shipments to be not quite as high as we anticipated. Even when you adjust for this adjustment or increase in not shipping the product we had planned, we still would have had a very robust growth or movement upward in our backlog.

SG&A and R&D spending in the aggregate increased from $10.2 million to $10.9 million, or about 7.7% over last year. This is primarily due to increasing sales and marketing costs due to higher sales activity, normal inflationary increases, and a bifurcation of manpower costs during a period of transition due to retirements. It is anticipated that the SG&A and R&D costs in the aggregate for the year will increase approximately 6% between years for the reasons previously noted. The reduction in interest expense between quarters is due to the debt reduction affected by Haynes due to the time of that transaction in November of last year, and it is anticipated that interest expense will decline through the balance of the year.

In fiscal 2008, it is our goal to continue to reduce our revolver balance (inaudible) upon raw material prices and CapEx spending, which will in turn reduce interest expense over the course of the year.

It is expected that our tax rate for fiscal 2008 will approximate between 38% to 39%.

From 9-30-07 to 12-31-07, the inventory balance increased from $286.3 million to $304 million at the end of the year, at 12-31. This 6.2% increase is attributed primarily to increased pounds. The increase in inventory in the first quarter is specifically related to the equipment unplanned outages. However, inventories will continue to be high until the third quarter, due to a planned annealing line outage.

Starting in the third quarter of fiscal 2008, we look for inventory to start to decline, which will continue throughout fiscal 2009. As a result of the capital program, improvements to the inventory management process that are being made and of raw material costs remain flat, the reduction in inventory that is expected at the low end is approximately $50 million, and at the high-end approximately $75 million by the end of fiscal 2009.

One item that I want to remind everyone of is a projected number of fully diluted shares by quarter in fiscal 2008, which is 12 million in the first quarter with 12.1 million being the projected average of fully diluted shares for the year. For fiscal 2007, the fully diluted number of shares outstanding was 11.2 million, ranging from 10.4 million shares outstanding in the first quarter to 11.9 million shares outstanding in the last quarter.

In summary, although the gross profit percentage was what we anticipated, it was still disappointing. We do believe that the gross profit percent will improve over the balance of the year. In addition, the backlog of order entry continued to be strong and continues to support the increased revenue run-rate.

Pricing is likely to improve with the improvement in the stainless steel market. Volume continues to also increase. As noted by Francis, the markets we serve are good and China continues to be robust. We continue to believe that we will achieve our objective of 23.5 million pounds of sales of high-performance alloys by fiscal year 2010.

I thank everyone for their time and will now turn it over for questions. Thank you.

Thank you. We will now conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). Luke Folta, Longbow Research.

I had a couple of questions. I am sorry if a touch on something you've already mentioned, but Marcel talked so fast I could hardly write down (LAUGHTER). But let me see. First off, how much of the shipments that you said were pushed into the next quarter due to the unplanned outages -- can you quantify that at all?

We've probably had at least 200,000 pounds of product that got pushed out into the next quarter, somewhere at the low-end 200,000, possibly as much as 250,000 pounds.

Yes. That's right.

So the increase in backlog is far (multiple speakers).

(inaudible)

This increase in the backlog is substantial, even when you compare -- even though we didn't ship that product.

Okay. Regarding the backlog, can you talk more about which end-markets you're seeing the increase in order activity?

I think, overall, we see a good mix. In this last quarter, what we had was additional bookings into the CPI and land-based gas turbine markets, particularly because of large products that were booked for ingot and slabs. You know, those projects, they are not booked every quarter. They are intermittent through the course of a year, as the shipments are.

Overall, the mix of the backlog is relatively consistent with our sales pattern. Again, this last quarter was a bit skewed to the CPI land-based gas turbine areas just because of these large ingot orders that were booked.

Given that the nickel surcharges for February are likely to kind of dip and then increase in March again, are you seeing strong buying patterns for stainless and nickel-based alloys there?

Well, always what I do is rely on the American Metal Market's various periodicals. I think based on what those periodicals are saying, it clearly looks like the stainless market is going to increase over calendar 2008. Again, that's what I'm reading in the periodicals.

Okay, thank you very much.

Stefan Mykytiuk, Pike Place Capital.

Good morning. A couple of things -- first off, can you quantify what the gross margin impact was, just from the outages, both the planned and unplanned?

Well, I think, if you think in the context of the fourth quarter, our gross margin percent was about 25%, and taking into consideration the pension adjustment, we had a decline of about 4% in the gross margin percent for the quarter. That's compared to the fourth quarter. I would split that or at least approximate that over half or a majority of the reduction in the margin was attributable to the competitive environment, and something less than half of that is attributable to the outage situation, both planned, unplanned and the normal effects of our first quarter.

Okay. The competition -- I guess it's hard for us as outsiders to kind of parse this data and understand where the impacts lie, but I mean your average selling price was kind of up in all of these different end-market categories. So I guess what you are telling us is it would have been up even more if you had --

If we had not have had that competition, I think, all things being equal, we would have done better on the pricing side.

Okay. You would have done better on pricing, and it sounds like also you would have done better on volumes because, in some cases, you weren't getting the order because you couldn't turn it around quickly enough?

(multiple speakers)

That's true.

That's typically the case, but when you -- we look at it from the perspective of we are competing for an order and the delivery time is the issue, the only thing we can do is be a bit more competitive from a pricing perspective.

Yes, the position we face is that even though we've had some problems, that we got some things we have to make up, is we haven't lost any business from the standpoint of anybody canceling business, but because of -- we are not at that higher capacity level that we will be, that 23.5 million. When you look at certain types of particularly commodity flat business, like C276 or C22 or a nominal high-temperature alloy like 625 -- when you get into any high-volume job like that and somebody has open capacity, they can give and they are absorbing their costs over stainless steel and everything else -- they can give a very, very competitive price with a quicker leadtime.

So the issue we face is losing business or, if we're going to take the business, then our prices are compressed. Because then the other people that are booking business, they are aware of the general price in the marketplace. But you know, it's a phenomenon that occurs. But as we finish this equipment and we free up this capacity plus the associated cost reductions and everything that go with this equipment, we're going to be in a much, much stronger position.

Okay. How much of your business do you -- you know, is kind of the lower -- I don't want to say quality but kind of the lower-end alloys where people compete more with you?

I would probably say that, right now, that's maybe 60% of our business.

Yes, 60%, yes.

And 40% is the more -- either proprietary or special alloys or very difficult alloys that other people don't make.

Okay. Then last question -- just in terms of when you talked, Marcel, I think what you said is gross margin improving such that by the fourth quarter of this fiscal year you get back to around 25. Is that --?

Yes, that's our estimate.

Okay, and the next year you try and get back to the high 20s?

We like to think that, through the course of this year, with the adjustments we're making, the improvement in the competitive environment, that we will be back to the same -- to the gross margin levels that we experienced in the first and second quarter of '07.

Okay. Is there any way that you can translate that to gross profit per pound? Because it just seems like the gross margin percentage is -- you know, it's so much a factor of where the metals prices go as opposed to -- I mean, when I was out there, it sounded like maybe you guys do look at it as a gross profit per pound, because at end of the day, that's what we should all care about, is how many dollars per pound of output you're getting.

Well, we do look at it that way, but I like to think that we have provided, either through our 10-Qs and Ks, substantial information as to the trends, the selling prices, the gross margin percentage. I think that couples with the dedication by market, and that couples with information we are provided today, as it relates to growth in volume and particularly since we are targeting and have indicated that we are looking at selling at a rate of 23.5 million pounds by fiscal 2010, that we provide I think enough information for individuals, like yourself, to do their own projections.

You know, part of our challenge is always there are a number of things going on; that's why we are selective in the guidance we provide. So I'm kind of [joshing] around your answer specifically. I think that is there for you to at least do a very reasonable estimate.

Okay, but taking that just one step further, should we -- I mean holding metals prices constant, it would seem like there is a trend here where your average selling price is migrating up as you provide more service and also as you move towards the higher-end alloys. Is that fair?

(multiple speakers) yes, that's fair.

Okay, thank you very much.

[John Flanigan], Fundamental Equities.

I had recently read an analyst comment about -- he suggested the word to use was "slippage" in order flows in aerospace, specifically, and I wanted to -- (multiple speakers).

You mean because of the push out of the 787?

I think he meant in general. The business has kind of slowed in general, in commercial aerospace, and I wondered if you guys had seen that.

We have not seen that. You know, obviously we keep tremendous -- and have a lot of contact with the aerospace business. The Boeing 787 and of course the big Airbus both have been delayed.

My understanding is their delays are not associated with the type of thing -- see, we get involved in the engines, and that's where our materials go. A lot of the delays and things they are having, at least the information that I have, have to do with all of these composites and all of these other things that they're doing with the structural part of the plane. We have seen no requests for any push-out of any delivery of any material, not from a fabricator or from anyone.

What I can see is I truly believe that the engine builders want to make sure -- they know how many engines have to be built for all of the planes that are on order, and I think they want to make sure that -- because these engines are so expensive and so valuable -- that they are definitely, definitely on time and are delivering to get their money back as quickly as possible. So unlike some things that have happened in the best, the demand for the aircraft is still enormous. They keep entering orders. So we have seen no change in the order pattern for our aerospace materials.

Can I ask also, Francis, when you were in China, do you have sufficient marketing or (multiple speakers) distribution relationships over there to move your product into the market?

You know, that's a great question, and I'm really glad you asked that because that's something I should have explained. So, thank you. We have a relationship with a lady named Helen Wang who has her own marketing and sales company. Plus, if you remember, we opened a service center in Shanghai. We also have a sales office in Singapore and have had for about ten years. They are very professional; they are very thorough. Helen probably has some of the most effective relationships with major people that deal with oil and gas or like [Lieming] that are aircraft. I think probably -- and this is my opinion -- of all the companies in the high-performance alloy business, we probably have the best relationships, contacts, and strongest selling and marketing organization in China of anyone. I think part of that is because, one, we started it before other people. I had experience of dealing with Asia when I was at (inaudible) so I have been on and off dealing over in Asia for almost 20 years. I've known Helen for many, many years, and she is Chinese, as are all our people over there, and has an infinite knowledge. Her parents were both very well-respected doctors of metallurgy at the most prestigious technical institution in China and these are the kind of things that we build on and these are the kind of things that help open doors for us. So what we do is whatever Helen needs, whether it's me or doctors of metallurgy or whatever she needs, we just keep sending it over to her to help her open more doors and secure more orders.

I'm confident, absolutely confident that, within a very short period of time -- and short period of time in China is a couple of years. It took them 1800 years to build the Wall so -- that we will have our cutting equipment in our service center, that we will be servicing other countries in Asia from our service center in China. We will probably be doing that by the end of this year, and that this is going to become a very, very substantial part of our whole marketing and selling operation.

So if you have Helen, you have the market covered?

Yes.

Mark Hoffman, MLK Investment Management.

Good morning, gentlemen. On the last call, you mentioned results were going to be somewhat lumpy like oatmeal (LAUGHTER) and I just want to try and extrapolate on that.

Looking at your CapEx project planned for the next three quarters or I guess 2.5 quarters at this point, is it fair to assume that, right now, you're in this second fiscal quarter, there's really nothing major planned and so that this quarter might show a little more strength, let's say, than the third quarter, you fiscal third quarter, when you're up, you know, (inaudible) working on that annealing plant begin?

It's a fair observation (multiple speakers).

(multiple speakers) that's fair.

So by the fourth quarter of this year, I guess you're going to start to be I guess maybe having the wind at your back. Is that fair to say as far as (multiple speakers) --?

Yes, and I'm all for that. I'm ready for that to happen.

Okay. One other question if you could? If you could comment what you're seeing out of your Indian business.

Well, our Indian business continues to grow. We have, as we've mentioned before, we have a sales office there; we have had that now for about 2.5 years. It continues to grow. I don't know the exact numbers of it, but it's growing at the rate of like all of the stuff over in Asia, like 100% a year (LAUGHTER), and we have a very good sales manager over there. We anticipate -- it's not growing as fast as China, although I think, at some point in time, that's going to accelerate.

I don't think they have all of their -- you know, once the Chinese government decides what they're going to do, the way their government is structured, being a communist government, and they vote however they vote -- it looks like essentially they vote one to nothing and then everybody carries out the orders. India is a much more democratic -- and being democratic, the have to argue about everything for eight weeks or ten weeks, or whatever they do. But we see it changing rapidly; we see that change growing.

My personal opinion is I watch India -- is that India is going to become, other than the United States, the most significant producer of pharmaceuticals in the world. They are right now the second-largest intermediate producer, intermediate meaning the intermediate stage of pharmaceuticals, in the world. I believe it's only a matter of time -- by that matter of time I mean the next five to ten years -- that they will transition into being one of their core things they are going to be doing over there is pharmaceuticals. You know, they have a much -- many, many more educated -- China has a lot of educated people, but as a percent, India has more. Now, they are staying in India, and so we're starting to see those things happen.

We anticipate very significant growth. We believe that, within the next, oh, 18 months or so to 2 years, that we will have an operating service center in India. We expect nothing but good things in the future.

Gregory Macosko, Lord Abbett.

Yes, thank you. I was wondering about the -- you mentioned the added services that you are putting in and I guess you mentioned waterjet cutting, etc. Could you just give us, if you wouldn't mind, a better idea of the extent of those and where you kind of expect to be within a year or two, what kind of additional things you will be adding?

Okay. Basically, when you look at our routes to market, you have four service centers in North America, in Lebanon ,which is essentially Indianapolis, Houston, Texas, Anaheim and Windsor, which is Hartford, Connecticut. We have three in Europe, in Manchester, England, outside of Paris, and in Zurich, Switzerland. And we have one in Shanghai.

Presently, what we have -- and let me do Europe first, because a lot of the growth now is occurring in the United States. We have two waterjet cutters and a laser in the United Kingdom. We have a laser cutter in France. What these things do is they actually make the parts; they will actually laser cut and waterjet parts that we can deliver to a fabricator or in some cases directly to Rolls-Royce or (inaudible), which we do a tremendous amount of in France. They just take that right onto the job and these parts are [spec-ed] and certified. You have to go through (inaudible) certification. And they go right into the fabrication process.

The beauty of that is that you're not competing on selling somebody a sheet; you're actually selling somebody a specific part. Unless your competitor has that kind of stuff, which none of our competitors, manufacturing competitors have -- there are other service centers that have it -- you know, you differentiate yourself from your competitor. Then you charge for this value-added service.

Now, in the United States, we have a plasma cutter in Houston, and Houston is highly oriented towards the oil, gas and chemical market. So you don't need to supply laser-cut parts and stuff like that. So that suffices, although we are in the process of going to upgrade the head so that we can do multiple cuts and kind of double our efficiency there.

If you look at Lebanon, which is really more a processing center today, this waterjet cutter that's coming will be our third waterjet cutter. We already have two, and we also have a laser in operation down there.

Who is supplying you with the waterjet cutters?

Well, I don't have the names of these -- there's two different ones and I don't have them right here.

Okay, but are you going beyond the cutting? I mean, is the point to become more of a service center?

Oh, absolutely. I mean, if you look at the -- we actually supply almost -- of course you know, you actually know something about waterjet cutters, so the waterjet cutters supply something that's almost (inaudible). A laser cutter supplies something that they can fabricate as they get the part. Waterjet, they usually have to do some nominal machining or whatever they're going to do with it, but it's almost like a [near-net] shape. It's either a circle or whatever, and in some places, we cut water called windows for combusters and then they do the machining and drill the holes and whatever. But the answer to that is yes.

But is the point -- I guess my final point is, is the idea -- is there concern with regard to your service center customers that you are competing with them?

Well, we don't have hardly any service center customers. You know, supplying other service centers is not a big business of ours. We are much more interested in fabricators and whatever. We are not a big supplier to like [Castle] or Vincent Metal Goods or any of those kinds of people.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS). [Don Krugel], Perella Weinberg.

Good morning. Thank you very much. I have just a basic accounting question if you could clear up for me. You talk about the pension curtailment credit that you had in the cost of goods sold. I'm wondering. Is that actually included in your 111872 number? Because I see, on the Q, it's also included -- 2701 is included as income for pension curtailment under comprehensive income. So I guess the question is, is it below the line or were above the line, and was it actually (technical difficulty) cost of goods 111872 number?

The $3.7 million that we're talking about is a portion of the total adjustment to the liability. The liability adjustment is $8.2 million, and there's two pieces to the offset to that. One flows through the cost of goods sold -- $3.7 million -- and the remaining piece, $4.5 million I think, flowed through other comprehensive income. It offsets the prior-period unamortized losses that were generated from an actuarial perspective. So that's the pieces.

That's above the line and below the line, two little pieces?

Yes, from a balance sheet perspective.

Vladimir Jelisavcic, Longacre.

Good morning, Francis and Marcel. Thank you very much for the additional clarity and all of the background on the call. It was very, very useful.

Just a couple of questions -- just regarding quantifying the effects of the planned and the unplanned outages, (technical difficulty) to what you said but I'm just a little bit sort of off in my numbers. So rather than just talking in terms of comparable gross margins, can you just give us a dollar effect of the planned and unplanned?

No, we're going to -- I think we've provided -- I think the issue that we talked about what was there was a 4% effect, and I think we've quantified it to the extent we feel is appropriate, that more than half or a majority of the costs were associated with -- of that 4% associated with the competitive environment. And less than half of that cost is associated with the unplanned, planned and the normal first-quarter issues we deal with every year. So that's the level of quantification that we're going to go to. I think you just need to do the math then.

Okay. Then just can you give us some guidance regarding the effect of the capacity upgrades on your March '08 and June '08 quarters?

Could you repeat that, please (multiple speakers)?

You know, you sort of you know attempted to partially quantify the effect of the planned and unplanned on the December '07 quarter. Could you give us some guidance as to what the effect of planned outages as a result of your capacity expansion will be in the March '08 and June '08 quarters?

Well, I think, to the extent that we talked about returning to a level of -- you know, we look to be at that 25% gross margin level in the last quarter of this year. I think what we're going to see obviously is the diminishing of those items that occurred in the first quarter through that, so that if you think in terms of what will ultimately happen in the last quarter, we will have gone through the issue and using (inaudible) the issue of outages. We should be, in that last quarter, through that process; there shouldn't be any of that residual negative affect occurring.

Then also, if you think the terms of what's happening with the competitive environment, as has been talked or spoken to, is that the stainless market looks to improve over the course of the calendar year. So I think, starting in the first quarter or the first (inaudible) where we finished at 21% standard or gross margin percentage, we look to improve that to 25%. So that's going to obviously be reduced over the course of the next three quarters.

Yes, and I think, in further clarifying, if I understood your question, right now, we're running both furnaces (multiple speakers).

Right, understood.

We will continue to run both furnaces right up until April 22. So the probability -- even if we have an unplanned outage at one furnace or the other, we will have another furnace to run. That wasn't a luxury that we were afforded of our own making of course, in the first quarter. When we had a problem with the furnace that we were running, the other furnace was being rebuilt and we couldn't make anything up.

Understood. So just (multiple speakers).

-- much better position, one, we have a much lower risk of unplanned outages having a dramatic effect on us -- not that there can't be one that I haven't figured out yet; but two, we're also in a position to make up some of that stuff that we lost and hopefully put ourselves in a better position, relative to where our material is in the process, for when we shut down in April 22.

Understood, so I appreciate that. So just to maybe ask the question in a little bit more targeted way, so the quarter ending June '08, when you have the six to seven shut down (multiple speakers) annealing line that starts April 22, you know, what do you think the effect will be on your gross margin for that particular shut down?

That's probably -- that's something that --

I don't know.

You know, it's difficult to forecast, looking out that far. There's a number of elements that come into play. Obviously, it's not -- it won't be favorable, but to the extent that we know we will be moving toward that 25%, again I think that's the length of the guidance I think we're going to provide, or forward-looking information, at this point.

Again, these things are difficult to quantify. However, it certainly is -- it will be rectified by the end of the third quarter. That will cease to be an issue for us.

Understood. So after that, that's it; it's pretty much smooth sailing after June 30 (multiple speakers)?

I think we will have the annealing line projects complete. Clearly, with the additional reliability and increased capacity provided by the projects that upgraded the Drever last year, our one annealing line and the electric this year, the second annealing line, we will have substantial ability to accommodate any kind of planned or even unplanned outages relative to those operations. So that will cease to be an issue for us.

Understood, understood. Then just given the fact that Haynes is an extremely well-positioned company with undisputed leadership in the flat-rolled products with very, very good prospects on the one hand -- on the other hand, your stock is trading at a very low valuation relative to peers, approximately 5.3 times trailing EBITDA. Have you given any thought to any type of strategic alternatives to act as a catalyst to increase the stock price?

I think our primary objective today and going forward, at least for the next three quarters, will be to improve the operations of the business, focusing on our CapEx projects. The first order of business is we need to make sure we get these projects completed. The second order of business is to make sure we commercialize the additional capacity we are providing. So think it's a matter -- for us it's a matter of performance, is to continue (multiple speakers).

Well, it's to do what we told people we were going to do.

Understood but you guys are extremely good at the engineering aspects of your business, so maybe just to ask the question differently, when you complete your capacity upgrades, let's say now just looking forward to sort of your fourth fiscal quarter in September '08, if the stock is still trading around $50 a share, which is a pretty low valuation, would you start some type of strategic process at that point?

You know, at this point, we're really not prepared to address (multiple speakers) question. I really can't give you an answer because that's something that we have to work through internally, we need to work through with our Board, worked with our consultants (multiple speakers) so this point, that's really not a question we can answer.

We can't even comment.

I would just, in conclusion, just strongly advise you to work with your Board to address that, because it's a great company but the valuation gap is very, very large currently between Haynes and its peers. So I think something needs to be done to address that valuation gap.

Write good things about us!

There you go! All right, thank you.

Thank you.

Mark Parr, KeyBanc Capital Markets.

Thanks for taking the call. Good afternoon or good morning, guys.

Yes, my question was really around the strategic issue as well. I just want to -- I'd just like to follow on about the potential value to shareholders from something like a share buyback plan or something that takes some of the -- you know, you guys are going to have a tremendous amount of free cash flow unfolding here in the next several years, and just suggesting one possible use of that would be to look at repurchasing the stock to support it and close that valuation gap. So I also would encourage you to work with your Board to come up with a plan to address that opportunity.

We've, you know, had various discussions about these things, and Mark not only an option like that but other kinds of things and you know --.

I think, for us right now, as I indicated before, our first order of business is the operation.

Right.

We've got to get that working; we've got to get that right; we've got to get these projects completed. Secondarily, we need to make sure we commercialize our capacity. So until we get those things done, we will begin to take on some of the other, more traditional [tasks] the Company has public companies for long time.

So we do appreciate the comment, but we're not at this point prepared to address those issues or answer them.

Okay, well anyway, just good luck on converting this continued growth in backlog into solid earnings momentum.

Thank you, thanks.

There are no further questions in queue at this time. I'd like to turn the floor back over to management for closing comments.

Well, thank you for joining us today. You can rest assured that we are committed to doing exactly what we told you back in March, and we have not deviated from that plan, nor will we. I'm pleased that we are actually a little bit of ahead of schedule with these furnaces. As I mentioned before, I can't wait until I have a call with you people when I don't have to talk about furnaces. But we're doing everything we can to make up some of the losses in our output from the first quarter. You can rest assured we will do that; we will maximize our output and we will do exactly what we committed to do. Thank you very much.

Thank you.

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