Haynes International Inc (HAYN) 2008 Q2 法說會逐字稿

Greetings and welcome to the Haynes International Inc. second-quarter 2008 earnings conference call. At this time all participants are in a listen-only mode and 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, Mr. Francis Petro, President and Chief Executive Officer for Haynes International. Thank you. Mr. Petro, you may now begin.

Thank you very much. Good morning. First, I would like to -- before I speak I would like to introduce Marcel Martin, our Chief Financial Officer, to go over the legal statements that we have to make when we make these presentations. Marcel?

Thank you, Francis. Good morning, ladies and gentlemen. I appreciate the opportunity to speak with you this morning. I would like to start off 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 27A of the Securities Act of 1933, and Section 21E 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 assurance that such plans, intentions, or expectations will achieved. Many of these risks are discussed in detail in the Company's filings with the Securities and Exchange Commission, in particular, it its Form 10-K for the fiscal year ended September 30, 2007 and 10-Q for the fiscal quarter ended March 31, 2008. You should carefully read these risk factors.

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 introduce Francis Petro, President and Chief Executive Officer of Haynes International. Thank you, Francis.

Thanks, Marcel. Before I get started into the results, I just wanted to take a second to thank all those people that sent me cards or called about my health, and just briefly bring you up to speed. I have successfully completed all my cycles of chemotherapy and I am into the third week of my radiation treatment. I am scheduled to be completed with all my treatment in June, about the same date that the furnace, which is also being rebuilt, will be done. So the furnace and I are going to be done about the same time.

So far, the treatment has gone very, very well. I haven't had any nausea or it hasn't required that I go in the hospital or miss any work. And I actually feel pretty good. My hair, compared to what it used to be, leaves a little bit to be desired, at least I feel that way. But I am doing fine. But I did want to take a second and thank all the people who sent me cards or called, and I do appreciate that very much.

Now down to business. Basically, I am satisfied with the progress that we made in this quarter. Both our sales and our product shifts represent records for the Company, as we start to move this material through the plant, as we get more and more reliability from our furnaces. Our net income was substantially improved from the first quarter of fiscal 2008, and gross profit as a percent of revenue increased from the quarter-to-quarter, after you adjust for the favorable pension item in the first quarter.

And I am proud of that progress during this quarter, and I believe our performance can still be improved and will be. If you look at the gross profit for the second quarter, that is substantial improvement for us when you discount the pension adjustment, and now we're starting to move in the right direction.

We did start the final phase of the electric furnace on schedule in April. I am personally going out there every Friday and looking at the progress of the project, which is coming along very, very well. It will be completed in June, but the plant is operating very well. So far, we haven't experienced much downtime relative to everything else, but that can change in a minute. But the project is going very, very well.

And this is a critical project for us. We have talked about the increase in the capacity of our sheets operations. But it is also to substantially reduce our manufacturing costs, improve our working capital and improve our quality of our products and our delivery performance. And that is a significant positive impact, when you look at how we utilize this additional capacity.

Because right now our order backlog is still growing and our order input is still strong in all our markets. And if you look at when we do lose an order, it generally has nothing to do with price; it has more to do with the time of our delivery -- not our delivery performance per se, but the length of how long it takes us to get a product to somebody. So this is a very substantial project for us and finally -- finally in June, that will be done.

There are two other significant projects I would like to bring you up to speed on. I know you have heard about our pilger mill that we are installing in Arcadia. I am pleased to tell you that that mill is in place and it is in the start-up mode. We are debugging it right now and we will be in full production by the end of May.

If you remember, the purpose of this mill is to dramatically increase our titanium aircraft tubing. And the capacity of his mill will just allow us at this time to meet the tremendous demand we have for the products already. So there is substantial opportunities in revenues for us and profitability with the installation of this.

Our people at Arcadia have done an outstanding job. At one point in time, due to the manufacturer of some gears in Germany, this project was actually about six weeks behind. After a few visits to Germany and some pretty unique thinking, really, where they shipped parts of the machine and then other parts later so that we could get the base and everything installed, they came up with a unique plan to get this thing back on schedule. And then finally got the gears, which we have now. So I was very pleased with how they handled that.

Also, if you ever get a chance to visit our Lebanon service center, our third waterjet cutter, which is a four-head type, which will dramatically increase our ability, particularly on parts where we have a whole lot of the same kind of part to make -- this will free up the other two machines that can do the smaller orders, and this is going to be a tremendous benefit to us. This machine will be running by the end of this month. It is there now and it is in various stages of being installed, plus with all the auxiliary equipment that goes with it.

As it looks now, this will give us three waterjet cutters plus a laser cutter. And I was just talking to Marty Losch, who runs our domestic sales, and it looks like we are about ready to start looking at another laser, that our value-added business is growing substantially.

I would also like to take a minute and report that finally we're starting to make some progress in our working capital. As these machines operate better, as the furnaces are stabilized, which now the Drever is running well us, we're starting to move some of this material that has been backlog and set aside, so that we could do this work. And we are starting to move that material through the plant. Our pounds produced are at very, very high levels and people in the plant, in operations, are doing a very, very good job.

We still believe that by the fourth quarter of this year, that we can achieve a gross profit of 25%. We are confident that we can do that. We see things moving in the right direction in operations. Our markets remain strong, and we see no reason at this time with the order backlog we have, the progress that we are making in the plant, that we can't attain this.

We also believe that by the end of fiscal 2009, we will be approaching gross margin levels similar to what we achieved during 2007, as we stabilize everything and continue to benefit from the reduced operating costs and improved reliability, unplanned outages, the combination of all of these things that we have been facing. But in my opinion, have faced fairly well when you consider that we are essentially a one-plant operation, with one operation depending on a previous operation, that the people have worked their way through these issues very, very well.

It is unfortunate -- it is not unfortunate, but ironically, it seems like every time you have to do something of magnitude with a capital project, it is always occurs when your business is booming. Because you never, for whatever reason, spend the money -- at least it has been my experience over the last 50 years -- when the markets are way, way down, when you have a time and it wouldn't be such an inconvenience.

But be that as it may, the people have done it. We're going to finish this one on time; there is no question in my mind, and we will get all the benefits of this that we said and I am very pleased with that.

I am also extremely pleased that in spite of what you read in the paper and see on Bloomberg about financially the world is about to end in the next 15 minutes, that our markets remain very, very strong. If you look at -- there was a recent article in American Metal Market that they expect aerospace raw materials to increase at a rate annually of 4.1% over the next 20 years. I actually think it may be a little bit higher than that, because I don't know that they have really factored in some of the stuff that is going to go on in the rest of Asia, and some of the stuff that is going to go on with defense and things that I'm starting to gather information about.

Our other market, land-based gas turbines market, is very strong. And if you look at the demand for power, we are going to face brownouts and everything in the United States if winter ends and summer ever gets here. But we will face is. But the real demand is going to come from Asia and Southeast Asia. I mean, it is growing so fast and they need so much power that we are the order input in our land-based gas turbines improve substantially. From what we see from the publications, right through 2011, the number of units that they are going to produce and ship is growing at record levels.

Even the chemical industry, which grew by 13.2% last year, is forecasted to grow again by 8.1% this year. Those are substantial figures, when you go back 5, 6 years when that industry wasn't even growing at 1%. You know, there is tremendous opportunities in our corrosion alloys. There's also a lot of opportunities in oil and gas. If anybody can't say it is economically feasible to drill for oil and gas right now, I don't know when it is going to be. And so there is significant opportunities there.

And I believe that as we finish the furnace and we finally get our 5 million extra pounds of capacity, that some of these markets -- that these markets that I just mentioned are going to be significant players in how we utilize this capacity.

From a market standpoint, some of our smaller markets are also changing. We are seeing some increase in certainly the flue gas desulphurization, and we selectively go in and out of that market, depending on the application and the alloy that is used. I believe that we will garner a bigger share of that market once we have the capacity.

I would like to talk a little bit briefly about China. Our sales to China in the first half of the year were $27.6 million, and we have a backlog right now of $30.2 million. Our business there continues to grow substantially. And I would like to point out that it is not just China, but if you look at the rest of Southeast Asia, we believe we have a market potential there in excess of another $250 million.

We are doing some restructuring, which I'm not going to discuss at this point in time, until we get it all in place. We do have an office in Singapore; we do have relations in Korea and Taiwan and etc. But we are going to really also focus on the rest of Southeast Asia, because we think there are substantial opportunities for Haynes International relative to this $250 million that we see right now.

And right now -- and I would like to point out -- generally I start with safety, and I always should. Our safety performance isn't as good at this point in time as it was a year ago. However, compared to national standards and everything, it is excellent. But compared to our standards, I am a little bit disappointed in how we got off the ground. But we're working on that. The last few months, we have gotten better and I am confident that we're going to continue to focus on that and get better.

It is a pleasure to tell you that all our American operations, domestic operations, and China, ISO 14,000 and 18,0000 approved for both safety and the environment. And I think that is important, when everything is switching now to green and people are becoming much more aware of environmental things. We will, by the end of this fiscal year -- the only operations we have that aren't certified are in Europe, and they are scheduled in July and August. And by the end of this fiscal year, all the operations of Haynes International, every service center, every manufacturing plant, will be certified certainly in ISO 9001 and all of those obvious things; but also in safety and environmental.

I think what is really important to know is that from day one, from the time we went on the road and we met with so many of you and we talked about what our strategy was, which was to improve our market share, to recapitalize this business which had been starved for many, many years, we have, without exception, followed those plans. We have not deviated from that strategic plan nor will we.

We said we would go through a tough period of time as we rebuilt the furnaces, and we have. But now we are at the end of that, and we are looking forward to our ability to compete more effectively in the market, with the capacity plus the improved costs and working capital and all of the benefits that we're going to get out of this. And are very confident that you will see continued improvement in our operating performance and, most importantly, obviously in our earnings per share.

At this point, I would like to turn the meeting over to Marcel and he will go certainly through our financial performance in much more depth. Marcel?

Thank you, Francis. I will spend just a few minutes commenting on several key items. In the press release and in the 10-Q you'll find additional information about each of these items.

Comparing the second quarter of fiscal 2008 to the second quarter of fiscal 2007, net revenues increased by 19.2% to $163.8 million from $137.3 million. Total volume for all products increased by 6.2% to 6.1 million pounds in the second quarter of fiscal 2008 from 5.7 million pounds in the same period of fiscal 2007.

We are pleased to report that the volume of high-performance alloys increased by 16.3% to 6 million pounds in the second quarter of fiscal 2008 from 5.2 million pounds for the second quarter of fiscal 2007. This growth in high-performance alloy volumes was led by volume growth of 28.7% in our aerospace market.

For the first six months of fiscal 2008, net revenues increased by 20.2% to $309.8 million from $257.8 million. Volume for all products increased by 0.9% to 11.3 million pounds in the first six months of fiscal 2008 from 11.2 million pounds in the same period of fiscal 2007. The real key is, however, that the volume of high-performance alloys increased by 10.9% to 11 million pounds in the first six months of fiscal 2008 from 10 million pounds in the same period of fiscal 2007.

In addition to growth in high-performance alloy on a quarterly and year-to-date basis, the other factor driving revenue growth was an increase in the aggregate average selling price of 12.3% to $26.94 per pound in the second quarter of fiscal 2008 from $23.99 per pound in the same period of fiscal 2007.

The same trend applies for the six-month comparable period between years. The aggregate average selling price increased 19.1% to $27.45 per pound in the first six months of fiscal 2008 from $23.06 per pound in the same period of fiscal 2007.

Over half of the increase in average selling price between the quarterly and six-month periods is a result of reduced amounts of stainless wire. The balance of the increase in average selling price for comparable periods is attributable to higher percentage of sheet product, a higher percentage of moly- and cobalt-bearing alloys, and increase to service center sales versus mill direct on a percentage basis and the pass-through cost increases, both material and nonmaterial.

Although the nickel price was down over the period, the price increases in cobalt, moly and chrome more than offset the nickel price decline. While we saw growth in revenues, volumes of high-performance alloys and average selling prices for both the three- and six-month comparable periods, our gross profit percentage between the comparable three- and six-month periods declined period-to-period.

Based on the increased competition in the marketplace, which I will discuss in more detail, and our planned outage, we did expect that the trend of erosion in the gross profit which began in the third-quarter fiscal of 2007 would continue in the second quarter of this fiscal year as compared to fiscal 2007. We believe, with some slight improvement, that trend will also hold in the third quarter of this year as compared to the prior year.

However, in the fourth quarter of fiscal 2008, we expect gross profit potentially to be 25% of net revenues, depending upon the success of the CapEx program, product mix, recovery of the stainless market, and general economic conditions.

Our belief in our ability to improve gross profit performance was bolstered, we felt, by the fact that the gross margin percentage in this quarter recovered some ground over the first quarter of fiscal 2008, taking into account the positive impact in the first quarter of a favorable pension adjustment.

As we discussed in our last call, starting in the third quarter of fiscal 2007, we have been experiencing and continue to experience increased price competition from the competitors who produce both stainless steel and high-performance alloys, which has negatively impacted gross profit performance. Because of their overcapacity and due to the slowdown in the stainless market, they are able to offer very competitive price and delivery times. This has limited our ability to raise our selling prices on certain products.

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 with the completion of the upgrade to 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 the increased competition. The planned outages to complete our upgrade also unfavorably impacted revenues and the gross profit percentages.

For the remainder of fiscal 2008, as noted by Francis, it is our objective not only to stay on track in the third quarter with pounds shipped, but as we did in the second quarter, continue to regain some if not all of the ground lost in production in shipments in the first quarter. We feel confident that our year-to-year performance will show growth in revenue and high-performance alloy volumes.

However, 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 we will also be somewhat constrained by the downtime of our second annealing line during the third fiscal quarter, and may not equal the 2006 to 2007 growth rate of 11.5% for volumes, although the rate of growth for the comparable six-month period between years is pretty good at 10.9%.

As I have discussed in the past, we feel that the backlog is a very good metric in determining the direction of our business, and we are pleased with this growth from the first to the second quarter of fiscal 2008. Consolidated backlog increased by $6.7 million, or 2.7%, to $254.5 million at March 31, 2008 from $247.8 million at December 31, 2007. In addition, the backlog has increased from September 30, 2007 to March 31, 2008 by $18.2 million, or 7.7%. The trend of solid order entry continued into April of this year.

SG&A and R&D spending for the second quarter of fiscal 2008 in the aggregate increased from $9.6 million to $10.9 million, or about 13.1% over last year. This is primarily due to increasing sales and marketing costs, including commissions, due to higher sales activity, normal inflationary increases and a duplication of manpower costs during a period of transition due to retirements.

On a year-to-date basis, aggregate SG&A and R&D costs for the first six months of fiscal 2008 was $21.8 million, or a 10.3% increase from the comparable period last year for the same reasons. It is anticipated that SG&A and R&D costs in the aggregate for fiscal 2008 will increase approximately 6% between years for the reasons previously noted.

Reduction in interest expense between both the quarter comparison and the year-to-date comparison is due to the debt reduction affected by Haynes through the Company's application of proceeds from the equity offering that occurred near the end of the second fiscal quarter of fiscal 2007, 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, depending upon raw material prices and CapEx spending, which in turn reduce interest expense over the course of the year. We expect that tax rate for fiscal 2008 will approximate between 38% to 39%.

From 9/30/07 to 3/31/08, the inventory balance increased from $286.3 million to $304.2 million. The majority of the 6.3% increase is attributable to increased cobalt, moly and (technical difficulty) raw material costs, with the remaining portion of the inventory increase specifically related to the equipment upgrades and required safety [star].

Inventory will continue at these higher levels until the end of the third quarter due to the annealing line outage. Starting in the fourth quarter of fiscal 2008, we look for inventory to start a decline, which should continue throughout fiscal 2009. As a result of the capital program and improvements to the inventory management process that are being made, if raw material costs remain flat from this point on, the reduction in inventory that is expected at the low end is approximately $50 million, and at the high end is approximately $75 million by the end of fiscal 2009.

The number of fully-diluted shares in the second quarter of fiscal 2008 was 12 million shares compared to 10.7 million shares in the comparable period last year, primarily due to the equity offering. Fully-diluted shares on a year-to-date basis was almost 12 million compared to 10.5 million for the same period last year. The estimate of fully-diluted shares for both the third and fourth quarters was 12.1 million shares.

In summary, we believe that the gross profit percentage for quarter can be improved over the balance of a year to approximately 25% in the fourth quarter. In addition, the backlog (inaudible) continue to be strong and continue to support the increased revenue run rate. Volume also continues to increase.

As noted by Francis, the markets we serve are good, and China continues to provide us with growth opportunities according to published sources. The stainless steel market should also improve this year; however, the timing continues to be uncertain. We continue to (technical difficulty) our objectives of 23.5 million pounds of sales of high-performance alloys in fiscal 2010, along with improved gross profit percentages.

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

In order to make sure that we get everyone's questions answered, we'll limit everyone to just two questions initially, and then let anyone ask additional questions at the end of the process. Thank you very much. Francis?

We are ready for questions.

(OPERATOR INSTRUCTIONS) Luke Folta, Longbow Research.

First of all, let me say I'm glad to hear that you're doing well, Francis, and it is good to have you on the call.

Thank you.

I guess first off, can you go through your backlog in a little bit more detail and tell us which markets you're seeing the increased order rates?

I think for the most part, we're seeing good performance in all of the markets relative to our backlog. Obviously, aerospace continues to be the best; it does represent the largest portion of our business. But again, I think at this point, we are seeing the performance across all our markets.

So how much of this are you expected to realize in the OA period?

Typically, our backlog -- about 75% of our backlog ships within six months, with approximately 90% shipping within one year. That has typically been our performance record.

Okay. And just a second question. Regarding your forecast for operating margins of 25%, I see that it is contingent on improvement in the stainless steel market. If we don't see that, are you likely to remain around the current level, say 15%, where you are for the next couple of quarters?

What percentage did you --?

At current market --.

Again, that is somewhat problematical, because we are working to improve the operation. Again, I think as we improve our ability to deliver product more reliability and reduce our lead times, we will make progress. So again, there's a lot of uncertainty in that whole area of how the stainless markets are going to do, how our products are going to come along. So again, I think we are confident about getting to where we need to be by the end of the fourth quarter.

I think the practical answer is we have improved the margins while they are doing what they are doing, and we are making progress with the furnaces and we're making progress with the operations and whatever. We will make nominal progress if the market -- this is my belief -- if their market stays the way it is. And if their market strengthens, then we will make progress with our margins quicker. But in either event, our margins are going to get better and are getting better because our operations are getting better. They would improve faster if their markets would improve.

Okay, thanks.

Matt McGeary, Sentinel Asset Management.

Good morning. Could you just remind me what your current mix is stainless versus the high-performance alloys, etc.?

Sure. The only stainless that we make is a nominal amount at our wire plant. We make no stainless pipe and tubing, we don't make any stainless sheet or plate or billets or bars. The only stainless that we make -- and we don't even make it -- we buy it from the outside as rod coil, and we make it into wire. And I think that is less than 1 million pounds now, isn't it?

I think if you go back and look at where we were the last two quarters, we had about 50,000 pound shipments of stainless wire in the second quarter and approximately 200,000 pounds in the first quarter of this year. That compares to the first and second quarters of last year at 677,000 pounds first quarter of last year and 541 the second quarter.

Now, where we are going to be is, to Francis's point, we want to -- we're not going to abandon the stainless steel wire market, but what we will become is more selective and probably grow the volumes from where we currently are to probably between [8] to 1 million pounds per year of stainless type product.

But it will be very specifically oriented, basically toward the medical market for surgical needles and a lot of stuff like that.

So what does that translate -- those pounds you just mentioned in the second quarter, just so I get a feel? What does that mean in terms of percentage of your revenue?

It is not much at all.

Stainless wire, I think if you go back and look at our Qs, we do talk about those -- those affect also the pounds and revenues. But stainless steel wire is certainly -- depending on if you just resold wire feedstock, like most companies do, and that's several dollars a pound, and it could go as high as $10 or $12 a pound for the specialty-type wires, lower gauge for the medical industry. So again, it is a mix; however, it is not a very -- it is a good vehicle to absorb overhead. It is not a big part of our business.

Okay. I was just curious because you had mentioned it when you were talking about pricing. I guess maybe if you could talk a little bit more about pricing competition -- any more specificity as to where you are seeing that and how long do you think that goes on. Are you seeing that concentrated in any specific markets, etc. -- it might be helpful.

It is interesting how pricing goes. On the one hand, you see certainly we get impacted because have the capacity, especially on large orders, like a NET TV job, where they order a lot of material -- 100,000 pounds or 60,000, 100,000, 150,000 pounds -- we see somebody like an Allegheny or DDM or (inaudible), we see those kind of people on those jobs.

The smaller ones and whatever, we are very competitive at. And jobs where the entire job involves not just the sheet, but the plate, the couplings, the pipe, the tubing, which these people don't make and we do. So we have an advantage there and we have an advantage with our service centers. But certainly, there is price pressure. Because they do supply that material also through other service centers, which we ultimately compete with. So we see that.

But it is interesting too that with the price of nickel kind of stabilizing, you would think that raw material costs have gone down. And the truth of the matter is our raw materials costs have actually gone up, because cobalt has gone over -- it has been as high as $54 a pound, and moly is in the $35, $36, been as high as $40, and now chrome is going up. They are all taking their turn. So actually our raw material costs in total our actually up, not down.

And certainly, our energy costs are up and our shipping costs and our warehousing, because we are processing so much more material through our service centers, that our freight cost and our handling costs and our service centers and stuff like that are up; and our energy costs are up.

So we are being as aggressive as possible selectively in the markets with the alloys, where we can, to continue to increase our prices. And as you can see, in the second quarter, we did increase our prices. And we continue to focus on that all of the time and we will.

But it isn't easy, because you know, 50% of everything we do is nickel, so our customers look at the price of nickel and they think that is the price of all of our raw materials, and that is what they focus on. So we have a lot of work to do with them and a lot of communication, which we are very good at, and we have a very good rapport with our customers, on what is actually happening to the price of raw material and everything else. And then when you walk them through it, they say, oh yes, okay, I understand. They don't necessarily like it, but they understand.

So we just recently announced another price increase, based on raw materials and energy costs. And I noted today that we just got a copy of an e-mail which Jim Laird, the head of marketing gave me, that Allegheny also announced price increases, which made me very happy. So we will see how that plays out. But we are aggressively pursuing prices as much as we can.

Thanks, guys. Good job.

Mark Parr, KeyBanc Capital Partners.

Good morning. Francis, I'm glad to hear you are on the mend. Anybody who works through what you went through deserves a metal or something -- or hey, you could come work here anytime you want.

Don't tell the employees that, because they have been a little disappointed that I haven't taken time off.

That is a hell of an example you're setting for all of us. I wanted to ask a couple of questions. First, have you guys ever quantified the potential impact of the new pilger mill?

Not yet.

Can you give us some color on what that might mean, say, over the next two to three years?

I really can't yet, but on the next call -- I will make a note of that, and on the next call I'll do that. Because there has been so much change in who's trying to do what with the titanium tubing, and we've made a lot of progress. We do so much business with Boeing. But we never did business with Airbus. Here they are, standing right in front of me, and I can't even think of their name. Airbus. And now, Airbus is coming to us.

So we know we have tremendous potential there. But we really haven't quantified it, because it is not only -- we are going to shift to certain titanium products to that machine and then the other machine that we do it with. But that frees up some other machines to do more of our nickel alloy and high-performance alloy seamless tubing. So we have to put the whole package together, because it is not just the impact on titanium tubing; it's freeing up the capacity of a 1-inch machine and another machine relative to some opportunities we also have. So we need to do a little work on that.

All right. But I think that is something that is probably incremental to most everybody's outlook at this point, wouldn't you think?

Probably is -- and it is not small, either.

All right. Another thing. I had two other questions. I something you will bear with me on that, and I'm happy to get back in line if you want me to. But first, you had mentioned Chinese opportunity of somewhere in the neighborhood of 250. I just was curious --

No, that is not China. That is everything in Southeast Asia outside of China.

Just let me clarify a little bit on that one, Mark. That $250 million -- it is our internal estimate of the total market available in the Asian area, excluding Japan, China and India. Currently, we have got about 3% of that market. So we feel there is an opportunity for us to grow in that market.

This $250 million is a recurring run rate opportunity, then, right?

At this point in time.

That's what we have seen over the last several years.

Okay. So that is tremendous upside. Is the market mix there any different than what you are seeing with your current mix?

It is different from the standpoint that initially, it is more oriented toward chemical and land-based gas turbines. And then as the country develops and then people say, well, we not only could make this stuff in China; we could make it in Malaysia, we can make it in Viet Nam; we can make it in Thailand. One of the biggest turbines repair plants was just in the operation in Thailand.

And so, it will occur -- chemical and welding stuff first; land-based gas turbines maybe simultaneously, but a little bit behind; and then it will go into the aerospace and the other, more sophisticated things.

Appreciate it. That is really helpful. Last, real quickly, if you could talk about the profitability momentum in your service center operations, both in Europe and domestically. And I will get off then and just say congratulations for a solid quarter, and it is really encouraging to see a very robust outlook for you guys.

Thank you.

If you looked at our service centers, I think the fact is we continue to move more product through the service centers and internally move more product overseas. I mean, that is where the markets are growing. But through this whole process, we have talked about really doing -- over the past year or so, we've focus on the increase in volume, high-performance alloy growth.

But I don't want us to lose sight -- and I'm glad you've brought this up, Mark -- the fact is not only are we growing our volumes, but we are also adding value to the product we produce and moving up that value-added chain. And we feel that we are still in the very early part of that process.

And typically now when we move something through a service center, approximately 50% of that material gets some added value done to it. Now, that ranges from everything from just trimming and cutting to length to actually cut parts. And we are moving further and further up that cut part process.

And we still have a ways to go, so it is really a matter of, at this point, not being able to quantify it specifically. But clearly over time, we will continue to see more and more value, more and more margin go that direction. That is ultimately our objective, is to become supply chain managers for our customers, and that's how you add value. And that is the direction we keep focusing on. That is why Francis talked about the waterjet cutter, the laser cutter. Those kinds of things are what we are pursuing and we will continue to pursue that through every service center we have.

Terrific. Thanks for all of that color and congratulations again.

Stefan Mykytiuk, Pike Place Capital.

Good morning. I guess my first question is the volume growth this quarter kind of ticked up sequentially from the previous quarter. And I am wondering -- in high-performance metals. And I am wondering is that a function of what is going on in the end markets or is it just that your capacity -- as you increase capacity, you're just better able to serve it and capturing more of it.

Part of the problem with the first quarter was if you remember in our call we had a lot of operating problems. We had the fusion problems, we had all kinds of problems with the furnaces. And so we just couldn't get material through the plant. Simultaneously, the markets are strong, and they continue to grow and our backlog continues to grow. So it is a combination of both.

So during the second quarter, we made significant progress with our operational issues, and we continue to do that. And our market continues to grow and expand and our output is increasing accordingly. And as we put the last furnace to bed in June, you will see continued progress in that, assuming that the market conditions are what we forecast.

Okay, so just taking that one step further, I kind of missed -- I think Marcel Martin might have said something in his commentary about your expectations for volumes for the rest of this year, and so I kind of missed that. I am wondering will volumes continue to grow through the end of the year, and --?

I think right now, as I talked about, the first half of this year, we were up over last year by 10.9%. Now, that is pretty substantial. And I think part of what -- I guess we have to be careful when we talk about growth -- part of what, as Francis alluded to, we are making up for some of the shortfalls of our first quarter.

Overall, year-to-year, we will have growth. But keep in mind that we are still going through a major upgrade on one of our annealing lines in this quarter. So we've finished one we've started and we're going to complete it. So again, we will have growth year-to-year; again, it is going to be somewhat choppy. We are making up from the first quarter. But overall, we will have growth year-to-year.

I think the point Marcel was trying to make is we will grow our volume this year in spite of all of our problems. We will. But it won't be the same growth rate that we experienced in 2007. I think that is the point we're trying --.

Year-to-year will be up.

Year-to-year will be up.

Right. And it sounds like in this June quarter, we're going to take a step back probably, as you complete these projects, and then hopefully take a step forward in the fourth quarter?

We will know when we are done. We will know when we are done.

I am sorry, what?

We will know when we are done.

Okay. All right, terrific. Thanks very much.

Vladimir Jelisavcic, Longacre.

Good morning, Francis. Great quarter. Glad to hear that you are feeling better and doing well. I just wanted to also thank you for many, many good years of exceptional management. Happy to see that we are close to the end of the tunnel on the capacity turnaround.

Not as happy as I am.

I bet, I bet. Two questions. Number one, could you quantify the effects of raw material? Because obviously, the gross margin declined year-over-year in an environment where, although it is not clear because of your FIFO accounting convention, but obviously nickel prices are down sharply year-over-year on the one hand. On the other hand, cobalt, moly and chrome, as you mentioned, are up.

So can you sort of quantify how much your gross margin was helped by lower nickel and how much it was hurt by the other materials?

We will speak to the issue in the aggregate. I think the reality is that although nickel was down, and I think if you take any kind of chart, you can see if you compare that to the same time period year-to-year and you compare the moly, cobalt and chrome, the increases as compared to nickel, you will see that the net is up. And so the net material costs are up, but you also have to keep in mind is how we bring that through in the context of spot pricing, contract pricing and purchase orders.

So again, it is a process where we just continue to aggressively price our product. As Francis mentioned, we have had a number of price increases through the course of the first quarter. We continue to do that. And that is what we want to make progress on. So again, it is a very difficult thing to quantify, and we really haven't endeavored to do it at this point in time. So that is really the answer. We haven't done that.

Okay. As a shareholder, I'd just like to say, I think you would be advisable to have those figures available to report to your shareholders, because I'm probably not the only one on the phone that would like that information.

Then, with the gross margin declining roughly 7.5 points or so year-over-year, how much of that is attributable to the outages versus raw materials, collectively?

The primary reason for the reduction in the margins is the competitive environment. We have never attributed it to raw materials; it is primarily attributed to just competitive environment. That is why the margins are compressed; it is the competition we are facing. I think that represents the majority of the reason for the decline in margins, but there is a portion -- and I think we talked about this last time -- that slightly more than half is attributable to price competition and something less than half is attributable to the outages we are experiencing, the plant outages.

Plus the one significant quality problem we had.

Understood. Then just had a couple of quick questions, just regarding strategic directions and alternatives as we get toward the end of this significant capacity upgrade milestone. Your balance sheet is obviously essentially unleveraged. The stock hasn't performed great. Would you consider putting a modest amount of leverage on your balance sheet to use for buying back shares?

One of the things that we haven't done yet, and we have had this conversation in the past, and our position today is we continue to focus on improving the business. We still have a lot of work to do. We still have a lot of requirements from a cash perspective. Again, it is about growing the business, improving the business, establishing a base from which we have recurring earnings and a recurring cash flow.

We have got obligations -- for example, we talked about it in the Q -- we have an $18 million tax payment coming due in December for the TIMET transaction. We have pension obligations over the next several years. And we want to continue to grow the business. So at this point, our focus in our discussions have been about the operating side of the business and fulfilling our obligations.

We have yet to discuss and lay out a strategy relative to the capital structure of the organization.

And I think it is imperative to remember that we have to do what we committed to do when we went on the road and told people what we were going to do with this Company. We're finishing the furnace now. We are getting into the point where we're going to have the capacity. We will flow the material through much better.

The appropriate time to start thinking about the capital structure and everything else is when we are generating the cash, when we have stabilized the operations. And at that appropriate time, we will look at the capital structure and make whatever decisions we think are in the best interest of our shareholders and Haynes International. But this isn't the appropriate time to think of this.

Right, so is that sort of more appropriate to do in the December quarter, Francis?

Probably, or later. Right after December and the first of the year. Kind of like -- you know, we just landed at Normandy; we have to get to Paris before we have a party.

I definitely appreciate the fact that you guys need to focus on your operations. But my operations are investing in equities, and so I would say my operational performance with respect to Haynes leaves a lot to be desired with the stock down 14%, when other comparable [companies], like Commercial Metals, are up --.

Well, you may have bought it at the wrong time.

Possibly.

No, I am only kidding.

What about a strategic combination or affiliation with a larger firm? Do you think you --?

You are addressing issues that -- those are our responsibility and when we have those discussions and we make decisions that need to be communicated, they will be.

We don't discuss that.

Okay. Thank you very much, guys.

Gregory Macosko, Lord Abbett.

Thank you. Just wondered about the working capital, if you could talk about that. You mentioned basically with regard to inventory, and what I think I heard was that you expect the inventory levels to improve and be lower by $50 million to $75 million by the end of fiscal '09.

Correct.

Is there any other objectives with regard to working capital?

I think that is a pretty significant one. I am not sure what else we can do. I think, obviously, we work very hard on our receivables. We've had improvements on our receivables over the course of this quarter compared to 12/31. Not quite as good as where we were at the end of September, but I think you have to recognize the fact that over time, what is happening is that we are -- in the first half of last year, we were about 36% or 37% of our shipments went overseas. That moved up in the second half of '07 and it is even higher this year.

Now, it is probably a bit choppy because of large projects, but if you look at this last quarter, we probably had 50% of our goods go overseas. Having said that, that lends itself to a longer term relative to our receivables. So we would expect our receivable DSOs to go up. We still work very hard to keep that under control.

As far as inventories go, again, I think we are probably at about $300 million or so right now; probably very comparable to where we were 12/31. And as I indicated in the Q, a substantial portion from the beginning of the year of the increase was associated with just the increase in raw material costs. So I think we have made improvement there.

If you look at cost of goods sold as a function of inventory, I think you're seeing an improvement in turns there. Probably went from [155] in the first quarter to [164] in the second quarter. We continue to work to improve that. And we will, once we get -- at an accelerated rate, once we get through the completion of the annealing line.

So that is our objective, to begin to operate the Company as efficiently as possible. Those are pretty substantial improvements.

Yes, and I think the most significant bulge in inventory that we have is work in process, that we have had to -- not only when you have a problem with a furnace does it build up backlog of stuff sitting there, waiting to be run. But simultaneously, we have had to stage inventory in anticipation of shutting equipment down. So we are carrying excess inventory by plan, and then when we have an additional problem, we get additional amount of inventory that is unplanned.

And I think it is also, as Marcel spoke about, where our sales are going. We are experiencing record sales in Europe, both out of our service centers and in direct shipments to Europe. And the fact that the euro is $1.56 is a big boon to us. So a lot more of our sales are going overseas, and of course the terms in Europe are different than they are in the United States. However, we very aggressively pursue DSO and do a good job. And I think compared to benchmarking to industry in those areas, we're probably pretty effective.

The biggest opportunity we have is obviously inventories. And assuming raw material prices stay the same, which they never have, but let's make that assumption, and that as the furnace is completed, you will see consistent, positive progress in that area and very significant progress in our next fiscal year.

Thank you very much.

Luke Folta, Longbow Research.

Can you quantify for us how much TIMET conversion revenues you had during the quarter?

We have an agreement with TIMET that we really need to be -- (multiple speakers) of confidentiality with that agreement.

All right. Lastly, are you able to offer any insight on what Airbus is doing with their a380 program review?

The only thin that I know is both of them have said it is a big surprise to everybody that their planes aren't coming out on time. I think the whole world anticipated that from day one. But we haven't heard anything in addition to that. I can tell you this though, Snecma, which is a huge supplier to them, their business is booming. And so --

Do you have business with them?

Tremendous amount, through our French operation. Our service center in Paris has a very significant long-term commitment to supply parts to Snecma.

Is the products you sell to them, is that fungible, generally speaking?

I didn't understand the question.

Are the products you sell to them fungible? Could they be used for other programs or do you even know what programs they're going into.

Well, we know what programs they are going through because we have all of the drawings and we have to know what the parts are. There are certain parts on some engines that are interchangeable, but most all of them are specifically for that specific engine.

Thanks a lot. Best of luck.

Thank you.

There are no further questions. I would like to hand the floor back over to management for any closing comments.

Thank you very much. Thank you for the questions. We will -- I did write down the question about the titanium tubing, and we will endeavor to provide some information about that on our next call.

I want to thank all of you for your interest and your support, and you can rest assured that the management here, all of the people here, are actively and constructively engaged and continuing to improve the performance of this Company.

And I am confident, extremely confident, that the things that we have discussed today, that we will achieve. And we will complete the furnace on schedule, there is no doubt of that in my mind, and we will get the pilger mill up and operating and the new waterjet cutter. Our business remains strong and it's a question of staying focus and doing what we committed to do. And I am confident that we will do that. So thank you very much.

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