Haynes International Inc (HAYN) 2008 Q3 法說會逐字稿

Greetings, and welcome to the Haynes International Inc. third-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, Mr. Francis Petro, President and Chief Executive Officer for Haynes International Inc. Thank you, Mr. Petro. You may begin.

Thank you. At this time just briefly like to introduce Marcel Martin, our Chief Financial Officer, to go over some information. Then he will turn it back to me to review the results of the third quarter. Marcel?

Thank you, Francis. Good morning, everyone. I would just like to read a brief cautionary note. 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 such, Section 207A of the Securities Act of 1933, and Section 201E of the Securities Act of 1934. The words believes, anticipate, expect, plan, and similar expressions are intended to identify forward-looking statements.

Although we believe that our plans, intention, 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 Security and Exchange Commission, in particular in its Form 10-K for 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 like now to turn it back over to Francis and thank you again. Francis.

Thank you, Marcel. Good morning. I'm not going to go into a tremendous amount of detail about the financial results since we have already put out a 10-Q, which is quite extensive. In addition to that the press release covers a lot of information.

But there are some significant things that I do want to review with all of you that I think are very, very important and discuss where we are at and how much progress that we are making. I think, first of all, the sales of $166.3 million is a new record for a quarter and that is up 17.9% from quarter-to-quarter and 19.4% from year-to-year. We now expect that our sales will pass $600 million for 2008, which will be another first for Haynes International.

What else is important is that the pounds of high performance alloys increased 6.3% quarter-to-quarter and have gone up 2.8% year-to-year. We expect that we are going to finish with about 22.7 million pounds of high performance alloy shipped in 2008, which means we are definitely on our plan to increase our output.

I think another great story, or one that I'm particularly fond of, is our continuous progress in our gross margin improvement. As you remember in the first quarter, we had a tough first quarter with diffusion problems and furnace problems. Our gross margin was 20.9% and then we improved it in the second quarter to 21.9%. In the third quarter we finished at 24.1%, which is consistent and along the path that we have conveyed to the market that we expect to be at 25% by the end of the fourth quarter. We are on that path and we feel confident about that.

We also feel that we can achieve levels similar to what we were in 2007 of 27.5% to 28% gross margins by the end of 2009. We believe that because as we stabilize our production now as the result of completing the furnaces, which we are now bringing into full operation plus some of the other things we have done with Pilger mills and other things and the production improvements that we are working on, that these are reasonable and attainable goals assuming that something dramatic doesn't happen to the market.

The earnings also showed continuous improvement from $13.8 million in the first quarter to $15.1 million in the second quarter to $17.6 million. Obviously our intent is to continue this progress and you can rest assured that every effort by everyone is working toward that end.

Our market conditions remain very good. Contrary to some of the stuff that has been put out about the aerospace market, airplanes, aircrafts have not been canceled. And from what I know, very few, if any, have been pushed out. That business remains very good.

Our land-based gas turbine business is very, very strong. The need for energy and all over the world is driving this. If you look out at the amount of units that are going to be built, this business looks very, very good for the foreseeable future.

Our CPI, or corrosion, business still very, very strong in China. Still good in the United States and Europe, but not as good as it was a year ago. That is because it's dependent on -- it's driven by GDP and houses and stainless steel sinks and everything else, whether or not they need more chemicals or where they stand on making a decision to take a unit down. But it's still good, it's not like it's -- it's not as strong as it was a year ago but it's still come very, very good according to historical standards.

Our backlog continues to increase. It has increased 6.9% to $252.6 million from September 30 of last year, which is just an indication to us. We aren't seeing cancellations and it's steady and it's good. Our selling price actually has increased year-to-year 10.9% to $26.75 versus $24.12.

Now while everybody is watching the price of nickel and assuming that because of the price of nickel has now dropped below $10 that all of these materials and prices would drop. The truth of the matter is in the third quarter, even though the price of nickel dropped, the elements that we buy, the other materials, cobalt, moly, and chrome, all went up and the summation of all the ups and downs is our overall material costs actually went up. So it's not just the impact of nickel.

People sometimes have a tendency to make projections on what is going to happen with pricing in these market solely based on the price of nickel. When you get into high performance alloys where you may have as much as 40% or 45% cobalt in an alloy and it's selling at $42 and $45 a pound, then those estimates are not going to be accurate unless you factor those kinds of things in.

Our competition, basically, you have all read a lot about it from other analysts. But the impact of the stainless steel market being down and incidentally, I'm talking to you from Europe right now. The stainless steel market in Europe is even worse than the United States; however, our market is still very, very good in Europe. But we still selectively are going to face pricing pressure, particularly on projects and jobs of any value. The dampening effect of that of course is our service center business.

There are several other items that I would like to share with all of you. Some of them have to do with the market and some have to do with things that will certainly affect our future performance. We did put out a press release that we entered into a long-term agreement with Helen Wang.

For those of you who have been following us, she is a lady that worked for me for a long time at Inco and then came to work for Haynes and then went out on her own. Well, now we have entered into a long-time marketing agreement where she is not only going to manage China, she is going to manage all of Asia for Haynes.

Certainly we have been quite successful in China. The potential, not counting Japan and Korea, but the potential in the other Asian countries is, in our estimate, is about $250 million. Our percent of that is very, very low. If we just over time get that percent up to our normal market share, this will have a significant impact on our revenues and our growth. I'm completely confident that Helen, with our support and with the excellent organization she has put together and the things she is doing over there, we will be very successful.

I'm glad to tell you that the construction of the electric furnace is complete. It was a question of whether it was going to get done before I died or retired. And it is done. We are now going through the -- when you complete a furnace like this, you have two dry it out. Then you have to get it -- because you are going to put hydrogen in it, you can't have water and hydrogen together so you have to heat it and dry it out and dry it out. That takes a while.

Then you start running what you call intermediates. Instead of -- we roll some of these materials two, three, four times to get them down to the right gauge. So we run the intermediate gauges but not the final gauges, because to run a final gauge we have to profile the furnace according to the specifications of that particular alloy. So we are just now getting to the point where we feel that we can have the profiling done by the end of August, because we have to profile each family of alloys that we run.

We are very pleased with progress of that and we are looking forward to the full and complete operation and capability of that furnace. The people did a great job of running the plant and meeting our production goals and in many cases exceeding them while we were going through all of this construction.

The water jet that we mentioned is installed and up and running in Lebanon. That is a big help to us because that offloads the other water jets and is going to make us much more efficient relative to the parts production that we supply from there.

The Pilger mill is up and running in Arcadia. That was a very excellent project. As a matter of fact, the day that they completed the construction of it that day they actually ran some tubes through it. And they cut off a piece of the tubing and airmailed it to my office to show me that it actually worked.

Recently, I went down there and it's an excellent installation. This is going to be a big help in helping us do more titanium hydraulic tubing, particularly we are already a major supplier to Boeing, but now we will be able to increase our business with Airbus and some other aircraft manufacturers.

As a result of a lot of this construction and what we are seeing and what we are finding from the capability and some things we have learned in the market by making some hot-rolled slabs and some other things, we now believe that our practical capacity is probably going to exceed 23.5 million. We are evaluating this potential, because when we talked about the 23.5 million we are mainly talking about the 5 million increase in cold-rolled [fire] products which we are certainly --. And we will attain that level in 2009, a year ahead of what we said of 2010.

Excuse me, Francis.

Yes.

Could you lean a little bit closer to the phone?

Yes. The potential we have for slabs and billets and bar product we believe, and we haven't quantified this exactly yet, could probably approach a 10% increase in our high-performance alloy output. Now along with that, simultaneously, we are working on quite a few process improvements to reduce our costs and dramatically improve our lead times. Certainly getting all of the furnaces running will allow us to start to flow the material and the stuff that we have had bottlenecked and backlogged because we were only running one furnace.

At the same time we are embarked on a very extensive working and capital reduction and improvement program. We believe the combination of all of these things is going to be going to bring excellent results as we move forward.

The last thing I would like to discuss is the CEO replacement. Certainly this has a very high priority with the Board of Directors. As of now there are some excellent candidates both internal and external and the Board is working very, very diligently with Spencer Stuart. As soon as that process is completed why an announcement will be made. In the interim, I'm still here. Yes?

You are getting soft on the volume.

Okay. Is that better?

That is better, a little better.

Spencer Stuart is working very closely with the Board. This is a serious decision and they are going through the process in a very deliberate, excellent way. I am confident that they will find and arrive at the right candidate.

The only other thing I wanted to say before we turned this over to questions is I think it's important for people to realize that the improvements that we made in this quarter were made by a whole bunch of very, very good employees who did a very good job while they were building equipment and starting up equipment in essentially all our facilities. For people that perform at that level and deal with those kinds of problems, it means that we have the nucleus, and we do, of a very committed excellent workforce.

I think it's important that as the Chief Executive Officer that I tell the shareholders that we have excellent employees who are very committed to performing. And I think the results indicate that.

At this time, I would like to go ahead and open up the discussion for questions. Both Marcel and I will be available to answer questions.

Thank you. (Operator Instructions) Luke Folta, Longbow Research.

Good morning, gentlemen. Congratulations on the results this quarter.

Thank you.

My first question regarding your value-added service centers -- services, are you able to break out for us what percentage of your shipments included some sort of value-added process?

Well, only approximately. We don't keep track of it that way. We keep track of what we do for each product and whatever, but we really don't track what percentage of it is. But it's approximately between 40% and 50%.

I guess I'm just trying to understand the impact it has on your average pricing?

Well, Marcel, maybe you could --

Francis, (inaudible).

We are having technical difficulties on it and we are trying to get Marcel to dial in on a different phone number. Maybe you can just pause the call for a just moment while he does that.

Okay. Did you have any other questions?

Yes. Regarding your capacity [ramp up], assuming you could get to a 23.5 million pounds or better in 2009, is there any contracts on that business yet that you are talking about? Can you give us an idea of what markets you are going to be targeting for that additional capacity?

Well, we are going to be targeting the same markets that we are targeting. One of the advantages of having that capacity plus the type of equipment we will have is some higher volume jobs where we are not competitive, because we didn't have all this equipment running, we are going to be much, much more efficient which is going to open us up to some opportunities that we will selectively take advantage of. And that is mainly where it will come from.

Because big FGD, flu gas desulfurization jobs, and some of the big chemical jobs we pass on because when they get up to a certain volume or whatever then that is into the Allegheny or Special Metals wheelhouse and not ours. Now with this -- with the upgrade to the MKW 100 and now the furnaces this is going to significantly change our cost structure and provide us with more opportunities to be effectively competitive in some of these markets.

Hello, Francis?

Yes, are you okay now?

I am back and I apologize to everybody on the phone. We had some technical issues and so again if there was some questions asked that I --

I was answering another question for him. But he asked the question, which I turned over to you --. I will let him ask it again so he asked it -- or you get the right question.

Very good, thank you.

Sure, Marcel. I am just trying to evaluate the price impact of some of the value-added services that you are providing. I understand it's becoming a greater mix of your business and I'm just trying to get an understanding of how much of the pricing that we are seeing is due to the services you are providing?

Overall, it's improving over the past year. To this point we haven't really taken the opportunity, although we do utilize it internally. We are really not at a point yet we want to disclose it or provide some guides. I think it's something that what we need to do is compile some information and particularly it has been key to get through this construction process, this upgrade programming.

We see it, it's clearly -- it's just not the services, it's obviously the service centers and the value-added work. But it's also with the effort of improving the forms, more sheet versus less sheet, defocusing on some of our less profitable products. It's really -- it's more of an overall strategy that I tried to describe in the Q that we have taken a position where we are going to look at our volume and put it in the best possible place. So again, that is an ongoing process and I think we are getting better at it.

What we also have is the additional aspects of the improving cost structure that we have garnered, added value and segmenting the markets. I know it's probably not what you would like to hear, but I would like to think that over the course of the next year that is something we are going to work on identifying so that we do have -- we will be in a position to describe more clearly what the impacts of these services, these value-added items are. I hope that satisfies, at least for the short term.

Yes, it does. Thanks a lot, Marcel. One more and I will turn it over. Can you talk a little bit about -- getting a little bit more specific on the cost initiatives that you are going to be working on moving forward?

Some of the things that -- we have gone through all of these programs over the past several years of CapEx. The first aspect of that is that we have some target volumes we were looking at. And we find ourselves in a position now where, and Francis references it, the 23.5 million was a target. We thought that was a good target for us. That is a practical level of capacity, say 85%, 90%.

Going through the process we find ourselves in a situation where we feel that we have additional volumes over and above that. We are going through the process right now, we are analyzing everything. We have updated or we are upgrading our planning decks, how we plan our production schedules. That has helped us tremendously.

As part of that process of how we increased volumes and identifying what that might be, we also have undertaken a process where -- and we are going back through and drilling down through the actual operations and a form of benchmarking scorecarding of individual operations at a very detailed level. That is going to have a significant impact on the cost (technical difficulty) impact on working capital.

So those are the kinds of things and it's (technical difficulty) debottlenecking certain areas where we can get efficient or more effective in what we do. I don't want to say it's this lean manufacturing concept, but it's something much like that. I mean people -- that is the buzz word today. It exists; I think people are very familiar with that the lean concept. This is much like that, but not exactly that.

Great, thank you.

Edward Marshall, Sidoti & Company.

Good morning, everyone. I'm curious if you can talk about the stainless market a little bit. We heard a little bit on it on Reliance's call. But I suspect that getting back to the 27% to 29% margins that you saw in early fiscal 2007 is going to be somewhat contingent on the stainless market as well as the efficiencies that you are putting in place now. Can you talk about what you see as maybe a turnaround for that market?

Well, I'm not so sure we can talk about a turnaround for that market. I don't think anyone knows for sure when that market is going to begin to firm up, but I like to think that what we have talked about is what we know we can do. Part of that is achieving our 27.5% to 28.5% gross margin by the end of 2009 is predicated on our ability to improve our operations, just like the improvement over the past year quarter-to-quarter has been predicated on our improvement, not waiting for the market to improve.

Again as we talked about with the strategy we have laid out we are very diligent in the pursuit of that. But in addition we have got all the improvements through the course of this year and even more so moving forward. It's also predicated on improvements we see in the high-performance alloy market.

For example, we hear a lot about the doom and gloom in the aerospace market. To Francis' point, there is a 7,000 plane backlog. There have been no cancellations to this point. The cost of oil is dropping, US carriers are raising fares. You look at that 7,000 aircraft in the backlog that is very little of those plans; less than 10% or 11% is US carriers. We know they are going to be needing to be placing orders at some point in time.

We know that ultimately the 787 and the A380 will come online at full production levels and that is probably what we would anticipate the end of 2009. It's -- again it's a matter of what we see happening with our high-performance alloy markets, improvements in those markets. You talk about -- so it's what is happening with us.

You talk about land-based gas turbines, for example. The production schedules for those deliveries -- those are increasing. This year probably 850 to 900 units will be delivered. Next year is the 1,000s forecast; maybe 1,100 in 2010. Our improvements are predicated on those things which we can control and the markets which we operate in, not so much the stainless market.

So I guess reading between the lines, regardless of what the stainless market does, your internal goals can get you to where that 27% to 29% margin that you saw early in fiscal 2007. Is that what you are saying?

I think a significant portion of our achievement of that goal is predicated on our performance in our markets, not the stainless market.

That is what I was hoping you would say.

That is what we -- we know about our markets. We don't know about the stainless market.

Well, I know what the guys are saying about the stainless market in Europe. They don't expect the stainless market in Europe to pick up before the end of 2009. But I haven't gotten -- I haven't had any discussions with any of the stainless guys in the United States, so I have no idea what they are projecting.

Now as far as the commentary in the Q that was released on the chemical processing and the erosion in the order entry, can you talk to that and see where you see that market going? As I know that is somewhat cyclical and orders tend to be lumpy from time to time.

It's a project oriented business and it's driven by GDP and consumers. Ultimately everything that happens in that market -- because all of that material goes into oil, gas, chemical plants, pharmaceutical plants, all of that stuff. Ultimately, it's driven by that.

Now the offsetting factor is the business in Asia remains very, very good. But it is slowing down somewhat in the United States or in North America and Europe. I know Marcel had some other information about it. You might want to comment.

When we look at the CPI, it is obviously for US and/or Europe. It's GDP driven. And we know those economies are slowing down, our economy is slowing down. When we look at our order entry over the past year, we are off our high or at least it comes down relative to the order entry. The good thing is that it has been offset by increases in the energy sector, the energy part of the backlog.

So we were offsetting -- this is slowed. At this time of the year typically what you do begin to see is some slowness just seasonality relative to what goes on in Europe at this time of the year. It hasn't slowed so much that there is any definitive determination could be made. It's still good. It won't be as good as it has been.

There are projects they are and we continue to aggressively pursue those projects. But at least I think at this point, we are seeing -- we have had a very good run of seven quarters of CPI. It's down a bit; it will probably slow down a little bit more, but what we also do is seeing it being offset by the energy side of the business.

The positive on the CPI side is what is going on in China and Asia. Francis talked about this before. I had the opportunity to visit China several weeks ago. I was there for 10 days, visited a number of customers. Even though their economy is slowing from 12% growth to 10% growth, you really can't notice it too much.

I did visit a number of customers who are in the pressure vessels business and these gentlemen aren't slowing down. They want us to participate at a higher level. They continue to expand their operations at facilities, increase their capacity to produce pressure vessels which service everything from pharmaceuticals to the oil and gas business. From that perspective that is one aspect of it.

I think Francis made a very good point. We talk about Asian market; we are very active in China, less so in the other parts of Asia. If you exclude from the population of the universe, China, Japan, India, the Asian market is probably $200 million to $250 million in revenue. A very small portion of that.

Part of our focus is to really grow into that market. The reason for the acquisition of the Helen Wang organization -- that really is an opportunity for us to step into these markets. And if nothing else, just garner what our typical market share typically is in markets that we participate in, which is 20%, 30% depending on specific markets. We look to really take advantage of what is going on in the Asian theater.

But to China to continue to grow that to participate, we are doing somethings internally within the organization, specifically service the Asian markets more effectively than we have in the past. Part of what you have seen is with the Helen Wang organization, part of that is what we are doing here in the US to make sure that we service that operation. We look for -- I think you will see some offsets hopefully, potentially, with the Asian growth on the CPI side versus slowdowns in Europe and in the US.

Okay. Last question, then I will get back in line as I took up a lot of the time here. The working capital continues to improve and that is good to see as far as cash flow is concerned. My question I guess is what we see inventory going. I think we have addressed this in the past, but now that the bottlenecks in the system are kind of being worked out and the extra safety stock on hand I assume will go through the system. Where do we expect inventories to go or maybe we can talk about the terms or something along that line that we can give us an indication on inventories?

I think in the past (technical difficulty) I have quantified it in the context of dollars. We knew we were at $300 million-plus; our effort was to reduce that by as much as $50 million to $75 million. I think another way, and probably a more appropriate way to look at that, is in the context of turns.

I believe that if I look at our turns probably a 175 number -- 1-6. We want to move that up to probably something approaching two, if not better. So that is probably the better way to look at the inventories, although it's easy to talk about dollars. They are both going the same direction.

Sure. Okay, thank you guys very much. I appreciate it.

John Flanagan, Fundamental Equities.

Francis, I have two questions. Number one, when you do pick a new CEO will you remain active as the director and will you have a voice in affairs?

I was elected to the Board of Directors until next February. My intent is to stay on the Board of Directors and then see how that plays out. But I don't really know how to answer that. Since I don't know who the person is, male or female, I can't say what kind of input I would have or what.

Certainly as a director I will perform all the fiduciary responsibilities as a director as long as I am a director. I will certainly do everything humanly possible to give Haynes International and its management the most positive constructive input, guidance, and/or constructive criticism I could.

Well, that is what I am looking for.

I would certainly try to do that, John.

Okay. Secondly, beyond this year, Marcel, you will be running to cash I would expect. Can you give us a feel of how the choice and use numbers might look in '09? And is it too early to start thinking about the next [act]?

Well, I think you have made a -- the latter part of your sentence is what I'm going to focus on. I think it's a bit early for us to start thinking about what we are going to be doing with any cash we generate. I think we have worked hard to get to where we are today. We are still working hard to make sure we continue to process it. This is something that I think comes into juncture with the election of the new or the appointment of the new CEO.

A lot of these are, I think, [hedge] is a key area. Certainly before we -- we are certainly looking at these aspects of it, we are considering various things. But clearly any communication of what we do will be through our new CEO. He is going to be the gentleman making these announcements, giving -- providing guidance to the market about what we are going to be doing on a prospective basis. So again, I appreciate the question. Unfortunately, I'm going to have to defer to the new guy.

He would know. Agree that you will build cash if you do nothing else?

Well, we know we will build some cash. Yes, that is true.

Okay, thank you.

Nat Kellogg, Next Generation.

Very nice quarter; most of my questions have been answered. But I just -- obviously just a little curious on the other markets revenue. Obviously that was down a little bit quarter-on-quarter and year-over-year. I know you in the Q you gave some nice color. It seemed like some interesting opportunities there. So maybe if you could just give us a little more color on some of the opportunities you see out there and a little bit of color on what it's in the quarter-on-quarter shortfall a little bit?

I think the shortfall is somewhat related to an FGD order. Didn't -- we didn't -- (multiple speakers) from year-to-year. That is the primary item.

Okay.

But overall when you look at the other mark, that is an area that we are in fact focusing on. You have FGD within that break; that is a very large market that we want to continue to participate in. But you also have within that pharmaceuticals, you have the automotive market. Even though the automotive market is significant -- there is significant pressure today, the aspect of what they put in cars relative to our products are very high end.

You are talking about first [build] high-performance alloys, talking about the nozzles on turbo chargers, very high end, very efficiency related. How do make an automobile more effective, efficient without heat and temperature (technical difficulty). But it's also -- there are heat treating, energy, other aspects other than land-based gas turbines. There is the oil and gas business, there is pharmaceuticals, automotive, heat treat, glass is becoming a more attractive area for us.

So there is a lot of different aspects -- there is fuel cells, another area that is garnering additional attention where our alloys have a significant opportunity. So it's just a whole array of different areas that lend themselves to the use of advanced materials. We are paying a lot of attention to those items.

Okay, that is great, that is helpful. Well, obviously, congratulations again on a nice quarter. And that is all it got. I will hop back in the queue, thank you.

Stefan Mykytiuk, Pike Place Capital.

Good morning. The first question I guess, during this past quarter was gross margin impacted by the work on the furnaces? And were either a direct cost or inefficiencies that were suppressing gross margin?

There were some, yes.

Well, sure.

You can't not run one of your furnaces and not have an impact.

Okay. So the -- did the improvement that you expect going into the September quarter is that just really -- most of that just getting rid of those kind of pressures and otherwise other things from (multiple speakers)

Getting rid of a lot of the unplanned outages and just the problems you have when you have to work around that kind of stuff. Just stabilizing your operation and let production run on a continuing basis without all these scheduled outages and unplanned outages and all the things that go on when you do this kind of massive construction. So, yes, part of it will happen from that.

I think part of what happened in the third quarter is that we obviously improved the margins. We did some unfavorable effects from the planned outages relative to the kneeling lines. We have actually -- we have also gotten pretty good at planning around these CapEx (inaudible), we have been doing it for a while.

We were actually, I think, from an operational perspective unimpacted by any unplanned outages much like we had in the first quarter with the fusion. That obviously was a significant unplanned even for us, but over the course of the second and third quarters those unplanned types of issues were minimal, if any at all. I think we have gotten better at that.

With the upgrades in all the equipment that we have taken and had the opportunity to begin to utilize, the issue of unplanned outages actually goes down significantly and that is becoming less and less of an issue for us because of the upgrades we have undertaken. That was obviously one of the reasons why we went through the CapEx program was to eliminate that and improve the reliability of the equipment, which reduces the cost but also improves the working capital managed. I hope that answers your question, Stefan.

Well, and it also gives you free capacity.

Yes, that is where I was kind of going with it. As you go into, and Marcel touched on this earlier, as you go into fiscal '09 it would seem you are going to start to pick up the benefits of having a more efficient plan.

Sure we are.

Right, plus you are going to have savings on a scrap and some other things that were issues before when you didn't have that process, wasn't as efficient.

That just goes back to how we are going to get to 27.5 (technical difficulty) the gross margin by the end of '09. Relative to the stainless question we had earlier --

Right.

It's not much about what the stainless market does, it's about what we do. And that is what that is predicated on. A part of it clearly is what you are speaking to and we will have (technical difficulty) better baked into those projections.

Then lastly, in terms of that selling the additional volumes it's sounds like what you are saying is you don't need the markets to really grow that much from where they are today, just because your ability to meet delivery forecasts and bid on other jobs alone sounds like it enables you to sell that at additional value.

I think it would be a tremendous help to us because right now there is jobs where we were excluded from because people were quoting 12 to 18 weeks delivery and we were quoting 36 weeks delivery. And we weren't even considered because we were only operating one furnace. So those opportunities will be there. Not only will they be there, because we will have the furnaces operating, but also we are going to be more effective and more efficient.

We are going to selectively -- the opportunities are there. We just have to decide exactly what our product mix is going to be.

I think to your question, Stefan, specifically about market share, obviously there is more competition in the US and Europe and Asia where I pointed out where we really don't participate as much as we would like to. And part of our effort -- there is an area where the market doesn't have to grow. The market is $200 million to $250 million in revenue.

Certainly with our small piece right now all we would like to do is grow into that market. We will have that advantage because we will have the capacity to do it, we will have competitive lead times, and an improved constructure and an organization that --

That's right.

-- put us in contact with those customers.

Okay, terrific. Thank you and thank you for excellent execution.

Greg Macosko, Lord Abbott.

Yes, thank you; certainly nice quarter. Could you talk just about the competitive environment a little bit? You mentioned it with regard to Europe, but with regard to the high-performance alloy area is there -- given the weakness in the stainless market, is there any likelihood that you would see more competition from others in your HPA markets as a result of weakness there?

Well, we certainly see it as a mentioned earlier. We certainly see more competition in our alloys in larger projects. The set up -- our major competitors are set up for much bigger volumes and much bigger production runs than we are. So their unit cost when they run at those levels are very, very good compared to what ours used to be.

Certainly FGD jobs and some 625 and some jobs that get involved in substantial volumes we certainly see more competition when the stainless steel business is down. We expect that and that has been the history of our industry. That is not going to significantly change.

But you have got to remember that it's not just -- we do other things than just compete with them. We do things they don't do like cut parts. The fact that we own and utilize and do an awful lot of our materials through our service centers, whereas the main people that compete with us actually supply independent service centers. It's not just a question of will they make it. You have to consider the whole route to market and everything else when you look at the whole competitive picture. I don't know if I have --

But just one final point -- have you seen them coming down from the lower volumes where they are less competitive just because of the pressure? Have you seen that recently in the last quarter or so in the last month or two?

Well, not really. We see them in the places that we always expect to see them in this kind of -- when the stainless steel business is down. They can't afford to run very, very small volumes. As a matter of fact, there is about 40% of what we do nobody else does. I mean they don't even make them to begin with. They are not going to set up to make 1,000 pounds or 10,000 pounds of something when they have 170-ton furnace. They would never do that.

Okay. Then one other point, regarding the inventory turns to the goal of two times. Is that with regard to once -- would that be the case once the service center strategy is fully rolled out?

Well, I think that is a philosophy or process that is going to develop over the course of the next several years.

It's a moving goal.

I think the effort here will be to look at the aggregate financial inflation we provide and then look at what does that mean. What can we apply from a guidance perspective, pull to the consolidated information. And so it's a matter of turning -- I guess at the end of the day, it's just a matter of turning all the pockets of the inventory more efficiently and effectively.

Some of that will be the mill, which is where the big part of the inventory is, but it's also turning it more effectively in the service centers. It's a combination of both.

Thank you.

Mark Parr, KeyBanc Capital Markets.

Thanks very much. Francis, just FYI -- or Marcel, I could hear Francis fine. You were the one that was having trouble coming through early in the call.

We finally figured that out, yes.

I knew it wasn't me, Mark.

That is right. Francis is the operator, Marcel. You are the numbers guy.

I will just sit back in the corner. I understand.

All right. I was wondering, Francis, if you could give us an update on the new aerospace alloys and just how that trial process is going?

You mean the 282?

Yes.

Well, it's going very well. We are giving presentations all over the world and we are actually selling some materials for application, particularly in the nonflying turbines, the land-based gas turbines. We are selling material to people that are rebuilding some and putting it in, but we also have with every major engine manufacturer various trials and certification programs going on with 282. The interest is extremely high and --.

Are you feeling better today than you were 90 days ago?

About the 282?

Yes.

I have always been very bullish about this alloy and I still am. I think, ultimately, this is going to be a very significant part of our product portfolio.

Okay. Terrific. I had a couple of other questions. I think there was some announcements regarding base price increases that you and some others had made in the last several months. Could you give us an update in how the market is accepting those base price increases?

I think on an overall basis we have seen acceptance of those increases. It's very difficult for people to ignore the fact that energy costs continue to rise. That certainly is part of what the pricing increases were tied to. Overall, I think a number of people have done it and they seem to be sticking.

We have seen no resistance. We obviously see resistance, but we seem to be passing them through and I think that is reflected in the improved gross margins also. So it's all part of that process.

Okay. Have the base price increases -- will they start to flow through the September quarter or does it really hold off until the first quarter of fiscal '09?

It is probably going into '09.

It takes four to six months if it's something like a billet or ingot it could happen quickly. But if it's cold-rolled sheet product, it's closer to six months.

Okay, terrific. You did a great job in the quarter. You are clearly making excellent progress and congratulations for that. Francis, good luck finding a good replacement for you. It's going to be tough shoes to fill.

Okay.

I would like to turn the call back over to Mr. Petro for closing comments.

Thank you very much and thank all of you. I want to thank you for the call and the continued interest that you have in Haynes International. I truly believe that with the work that we are doing that the future of our organization is very, very bright.

There is going to be some ups and downs, but the long-term demand for these materials over the next 20 years with what is going on in Asia and all over the world and with all of the technology changes that has occurred is phenomenal. I believe sincerely that Haynes International is now getting poised to play a very significant role in the growth of this market throughout the world.

I want to thank all of you for your interest and your support. You can rest assured that all of the people at Haynes are trying very, very hard to make Haynes the benchmark of the industry. Thank you very much.

Thanks.

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