Haynes International Inc (HAYN) 2008 Q4 法說會逐字稿

Greetings and welcome to the Haynes International Inc. fourth 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 Stephanie Kilian, Vice President and General Counsel for Haynes International Inc. Thank you Ms. Kilian you may begin.

Thank you, Rob. Good morning. Welcome to the Haynes International Inc. earnings conference call for the fiscal year ended September 30, 2008. This call is also being broadcast over the Internet. With me today are Mark Comerford, President and Chief Executive Officer of Haynes International, and Marcel Martin, Vice President and Chief Financial Officer.

Before we get started I would like to read a brief 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 and Exchange Act of 1934.

The words believe, anticipate, expect, plan, and similar expressions are intended to identify forward-looking statements. Although we believe our plans, intentions, and expectations reflected or suggested by such forward-looking statements are reasonable, such forward-looking statements are subject to a number of risks and uncertainties and we can provide no assurance that such plans, intentions, or expectations will be achieved.

Many of these risks are discussed in detail in the Company's filings with the Securities and Exchange Commission in particular in its Form 10-K for the fiscal year ending September 30, 2008. 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 and I will now turn the call over to Mark.

Thank you, Stacy. Good morning, everyone, and thank you for joining us. As many of you are aware, I joined the company on October 1. While I have certainly had easier months in my professional career, I am delighted to be part of Haynes and back home with a company where I started as a manufacturing metallurgist some 23 or 24 years ago.

In light of the economic turmoil we have seen since late summer, Haynes had a very solid fourth quarter to finish fiscal 2008. As we reported in the press release yesterday revenue was $160.8 million in the quarter. Gross profit was $34.4 million. Net income was $16.1 million. The balance sheet also remains strong and I believe that enables us to focus on long-term growth opportunities.

For the full fiscal year, revenue was a record $637 million. Gross profit was $144.7 million and net income was $62.8 million. In addition, we experienced several milestones in fiscal 2008. The upgrade to the sheet finishing operations in Kokomo was substantially completed, we entered into an agreement expanding our Chinese operations, and we saw advancements in the commercialization of HAYNES 282, HASTELLOY C-22HS, HASTELLOY G-35, and HASTELLOYHYBRID BC-1 alloys.

Overall, I believe very few companies in the specialty materials segment were able to turn in such strong results for the most recent quarter. Our financial results were similar to those achieved in fiscal 2007 and I believe fiscal 2008 was a much more challenging commercial environment.

Let me walk through a little bit of the highlights on our specific markets. Long-term we see positive demand drivers across all three of our primary end markets. This will be tempered by the current global economic uncertainties, especially in the first two quarters of 2009.

In Aerospace, our revenues in fiscal '08 increased 17.1% to $247.3 million. The industry continues to report strong backlogs for aircraft and engines for the long-term. The short-term view is clouded, but we have yet to experience material project postponements or cancellations in this market. The Boeing strike, however, among other things, has created uncertainty in the Aerospace supply chain making it more difficult to rely on previously published backlogs.

We do expect that in the first and second quarters of fiscal 2009 the Aerospace supply chain will have to work through inventory levels which were made worse by the Boeing work stoppages and the slowing economy.

In the Chemical Processing industry our revenue increased 12.3% to $166.1 million. This market is still holding up relatively well, yet as we discussed in prior calls, we continue to experience pricing pressure as our larger competitors become more aggressive in this market to compensate for lower volumes in their core products dedicated to automotive and housing applications.

In the land-based gas turbine market our revenue increased 20.5% to $124.1 million. Although the energy market overall is facing uncertainty in the face of declining oil prices, especially with respect to exploration projects and geographies, the power generation and energy delivery markets remain strong with industry publications reporting strong backlogs and good OEM and MRO activity. In the short-term we do expect volumes to lessen based on our current level of order entry.

These three core markets represent roughly 85% of revenue for Haynes and we are well-positioned worldwide with the right alloys, the right value-added capabilities, and the right service capabilities both technical and commercial to remain established as a critical link in these supply chains. While we expect demand in the short-term to be volatile, demand in these markets long-term remains strong as these markets provide for the very basic needs for improving quality of life worldwide.

Entering fiscal 2009 we are facing a challenging period in the high-performance alloy marketplace. I have heard several of our peers and customers discuss the times as unprecedented, especially with respect to the global aspects of our business and the depth of the effects of the credit and equity markets. How those factors will manifest themselves in our end-use markets is still unclear.

As the economic crisis worsened in our fourth quarter we expected to see some accounts have difficulty in opening letters of credit. We expected to see cancellations in the supply chain. We expected push outs and order rescheduling. However, in our fourth quarter these events were not as dramatic as we expected.

To date and in the first quarter of fiscal 2009 supply-chain cancellations have still been relatively spotty and seemingly related to adjusting schedules for the Boeing strike, which has since been resolved. Push outs and order rescheduling have not yet been significant and appear to relate primarily to customers in the supply chain, mainly second- and third-tier fabricators adjusting their order quantities and patterns to right-size inventories and wait for some stability in the commodity price levels, especially nickel.

New order entry has, however, slowed and we are seeing the supply chain smooth out its flow in preparation for the uncertainties that we are all seeing. We are continuing to see aggressive price competition from competitors who have seen their core business in housing, appliance, and automotive markets slow down. As stated previously, this has been most prevalent in the chemical process industry. The land-based gas turbine and aerospace markets are also seeing some price deterioration, but to a lesser degree.

Over the past six weeks I have spent quite a bit of time in front of our core customers and specifiers. I have been traveling quite a bit here in the States. I just returned from China and Singapore. I will be at PowerGen next week and I will be in Europe in early December. Across all markets there is concern for the tightened credit situation, but events such as China's announcement of an economic stimulus package have created a feeling that the current environment might be a time for infrastructure builds and investment.

We want to be ready for that upside. And we believe that our capital investments, our efforts to diversify our global footprint, our key markets, along with the flexibility afforded by our balance sheet, should give us an advantage during this slowdown.

Returning to the current economic situation surrounding us, we have already instituted a hiring freeze. We have also reduced overhead in the satellite facility by roughly 15%. We expect this type of cost discipline and cost-cutting activity to continue until we begin to see order entry levels increase. We are also undertaking a comprehensive review of our global cost and operational structure and reviewing our target markets, geographies, applications, and accounts to ensure that we are aggressively pursuing all opportunities for both revenue growth and cost control.

In addition, we are reviewing all expenditures, including the timing of our planned capital projects. At Haynes I believe there is significant opportunity for improvement in our results. We can implement a better process for serving our customers more reliably and more quickly which should result in better results at both the top and bottom line.

Before I turn over the call to Marcel, I would just like to state for you our objectives at Haynes. First, operational excellence. We have invested in our facilities. You have heard the people at Haynes discuss it in prior calls and presentations. Having worked here in the '80s I was concerned about the status of the plant.

When I saw the results of the recent investments, things like new controls in the melt shop, new furnaces in finishing, new lighting just about everywhere, and a clear commitment to clean and safe, etc., those types of things that is when I decided this is where I wanted to be. Haynes now has a foundation we can build on.

We have commissioned a consulting firm to aid us in developing statistical methods to benchmark our internal business processes. This is going to lead us down a path to lean manufacturing mentality and lean manufacturing results. Define, measure, analyze, improve, and control are the basic tenets of operating a safe, reliable, effective, and efficient operation. We are embarking aggressively on that path. We know we have to improve our reliability and our velocity and we are building on a new foundation to move in that direction.

Second is innovation. Haynes is synonymous with innovation. Five new alloys or materials were introduced in the '80s. Seven in the '90s; six have been introduced since the year 2000. We will continue on this path. Working with customers and specifiers to resolve their performance and fabrications issues is at the core of what Haynes does. Haynes creates materials that solve problems and Haynes creates materials that sell.

About 25% of fiscal 2008 revenues are the result of these materials that I have mentioned and have been introduced since the '80s. Many companies will talk to you about new products. Typically in specialty materials they are discussing new applications and new product forums. At Haynes new product forums and new applications are in addition to the new alloys that I have mentioned.

There is no company in my opinion in specialty metals that is as innovative as Haynes. I felt this way before I joined Haynes and I am committed to continuing on this path.

Third is service. As with innovation, our technical capabilities extend to serving customers and helping them with fabrication issues. Be it the right heat treatment or the right filler metal or the right fabricator to help them with their project, this is what Haynes does to serve the customer.

Service is also the ability to do this everywhere in the world. Technical staff in Asia, in Europe, and in the US ensure that we are the first call that a specifier makes when he or she needs to solve a technical problem. When we get that call we know we are achieving our objectives. When we get a customer a strong material solution at the lowest total cost that is when we all win.

Finally is financial strength. We are committed to growing our business by helping our customers to grow. Complexity is our niche and specialty materials are our vehicle. Our core competency is service and our ability to meet those needs necessitates that we commit to continuous improvement and develop a capability that is attractive for investment and growth. Those four basic strategies operational excellence, innovation, service, and financial strength will allow us to compete as a world-class supplier of material solutions.

I will now turn over the call to Marcel and he will review the details of our financial performance.

Thank you, Mark. Good morning, ladies and gentleman. I would just like to hit on a few items just very briefly. The first item I want to speak to is our fourth quarter performance as it relates to gross margin. One of the things we have done is anticipated a forecast at a gross margin of approximately 24.5% for the fourth quarter. What happened was that we were a bit optimistic in what we could achieve after the conclusion of our equipment installation on our annealing lines.

We ended up with the gross margin of approximately 21.5%, 3% short of our target. Two percentage points was associated with the shortfall we had relative to the commissioning of our in equipment in that quarter. And also the development of SOP, standard operating procedures, as related to that.

New equipment and the capabilities of that new equipment. For example, some of the issues we had were the programs related to run speeds, tension speeds, and also development of new programs, how to process new product forms on our new equipment. Again although we through the course of the quarter improved our performance from beginning to end, the overall performance that we were overly optimistic and that contributed, again, as I said, about 2% of our 3% shortfall.

The other item that we continue to be challenged by was the recurring competition and increasing competition during the fourth quarter in our product -- in our market segments. That contributed about 1% of our shortfall for the quarter.

The next item I would like to focus on is the trends relative to our backlog. As you can see in our 10-K, press release, our operating results relative to sales by quarter, volumes by quarter was very good, very solid. What we need to look to, and as I said in the past, it's the issue relative to our backlog and what that indicates.

For this past year, if you look at our backlog year-to-year, there was a significant change in the level of backlog. However, the more important trend to look at is what happened from June 30 to September 30 and from a revenue and pounds perspective were down about 9% with our volumes with our selling price being approximately flat.

When you look at what happens from a 6/30, June 30, to 10/31 or October, we were down approximately 13% during that time period. Again, I think this is a trend that we have experienced in the past, this is not unusual. The difference is that we do not expect the backlog to begin to pick up in the second and third quarters as they have done historically. It's uncertain as to how much impact the markets will have and the credit situations will have, but it's our feeling at this point that we will not see that return to the levels that trend up in the second and third quarters.

To provide a little bit more color relative to what has happened within that backlog by market segment, if you look at the Aerospace side of the business, our backlog between June and October was down about 13%. The land-based gas turbines was down about approximate 12% with CPI being down 24%, and the other category being essentially flat during that time period. So, again, I think it's important that we understand the backlog as it relates to our markets and what we have anticipated in the past.

The next time item I would like to speak to just very briefly is the renewal of our revolver in our -- subsequent to September 30. One of the things that we feel strongly is that we will be able to operate in the black or not utilize our revolver. However, because of the environment that exists today, we felt it was important to have that flexibility because of the uncertainty going forward.

What we view the revolver as is an insurance policy. We don't anticipate using it, however, we want to make sure it's there in case we do or are in need of it.

Another item I would like to focus on just very briefly is our working capital as a percent of sales. What has happened over the course of the last several years is that -- and if you look to the first quarter of '07, our working capital as a percent of sales was about 47%. Through the course of the year that deteriorated, primarily because of the working capital projects we had undertaken.

By the end of 2007 we were up to 52% with working capital as a percent of sales and we have reached a high in the first quarter of 2008 where it was 57.6%. Coming forward from that quarter we have continued to improve our position and we finished the year with our working capital of 53.2% of sales. So we have started the trend to improve our working capital position and the same holds true relative to our inventory turns.

What we have done over the past year is work to improve those turns through the course of the year and as we talk about we were hampered during this time period because of the capital projects that we had started and undertaken. So back in 2006 and '07 -- beginning of 2007, our turns have approximated almost two and during the course of, through '07, early part of '08 we dropped down to 1.47. And through the course of the year and particularly in the last quarter, we were able to improve our turns up to almost 1.7.

If you look at inventory '07 to '08, our inventory dollars went up about 6.5%, pounds were up about 2.5%, but the average cost of inventory increasing approximately to 3.9%. However, the key is to look at what has happened from the third quarter to the fourth quarter where we have begun to make these improvements and get the contribution of our inclusion of the equipment upgrades, plus the contribution of those equipment upgrades. During that time period, our inventories have declined by 5.3%, our pounds have gone down 2.2%, and the average cost of inventory has declined by 3.2% during that period.

Another item just to comment briefly on, through the course of 2008 we spent on capital additions approximately $18.7 million, half of which was related to the annealing lines and the pilgering mill in Arcadia. In addition to that we spent $3 million on acquiring a marketing company in China in Asia to expand our presence there. And we continue to leverage our strengths relative to the distribution.

For fiscal 2009, we anticipate spending approximately $15 million primarily on maintenance-type CapEx projects related to improving reliability of the equipment. Essentially, I think relative to the course of what has happened over the course of this past year, we are beginning to see the improvements in our operating working capital management relative to our capital projects. We look to push those projects and those improvements through fiscal 2009.

Thank you, ladies and gentlemen. I would like to return it to Mark.

Thank you, Marcel. In closing, thank you for your support of Haynes. Francis and the Board really have given us a good foundation to build on. As we are all aware, the current economic environment will be challenging for the foreseeable future. Our order entry patterns are being affected by the effect of the credit crunch on our customers and our ultimate end-users; slowing worldwide economic growth and to some extent falling commodity prices and in certain markets a need to clear out the supply chain.

Haynes serves markets that improve the quality of life for people worldwide which should positively impact long-term demand. Our balance sheet is strong, our service capabilities are better than ever before, our innovative materials are finding homes in our target markets, and our global footprint has taken hold. In short, Haynes is in better position today to manage this economic storm than ever before.

We have grown and improved our business without extensive use of debt and that will serve our customers, employees, and shareholders well going forward. Let's open the call for questions.

(Operator Instructions). Edward Marshall, Sidoti & Co.

Good morning. My first question is surrounding the equipment issues that you had on the annealing lines that you discussed earlier. Is it -- is that behind you or what have you done to put that behind you?

Fortunately, we can respond in the positive relative to that. What we anticipated in the fourth quarter was to complete some of this commissioning process much more quickly than we had and completing the SOPs much more quickly than we did. This was something that ran through the fourth quarter and actually ran through part of the fourth quarter.

But we are at a point now where all these processes relative to commissioning are completed. All the new SOPs relative to our products have been rewritten and so, again, we can say positively that is now completed and we are moving forward from here.

You said positively not completed or positively --

Is completed.

Is completed. Okay. I mean obviously the competition in the stainless market is going to continue. I am assuming when you say the competition of 1%, I mean that is from the stainless market?

Yes, it is.

Okay. Then in discussing inventories, you are on a FIFO basis. As the inventories that you have have worked off do you expect to see margins to continue to decline here through the first half of next year as you work off some of that old inventory?

Well, it's interesting. We find ourselves in a situation where -- you read the risk factors and it indicates that when raw material cost rises that is an unfavorable effect and when raw material drops that is a favorable effect. However, I think what has transpired over the past several months is the additional factors relative to the market and the price compression, but also how quickly prices have fallen.

So what I would expect for us to experience is not the traditional trend of unfavorable when raw material rises and favorable when it drops. What I would like to -- what we -- at least what I anticipate happening through the course of the upcoming year is that because of our improvements we are accelerating our turns. Because of our contracts we are able to pass on cost to our customers.

We have the opportunity to leverage off of our backlog, which is a relatively high average selling price, to match up against the higher cost inventory. And we have an opportunity to actually buy cheaper materials to fulfill orders that are in our backlog at higher average selling prices as compared to when they were originally placed.

So what we would like to think we can achieve over the upcoming next several quarters and clearly through the end of the years is matching where we are neither favorably or unfavorably impacted, trying to maintain a neutrality there.

So there is opposite forces working against each other, is what you are saying?

Exactly.

Okay. So the margin guidance that we kind of discussed in previous quarters of the first half of '07 or first half of fiscal '07 that is unlikely to be achieved in fiscal '09?

That is true.

All right. Any idea as far as the outlook for cash flow? Obviously, as inventories are coming down it seems to be improving. But can you kind of give us any commentary on where you think the cash flow for next year is going to be going?

Well, I think in the past we have talked about, again, generating a positive cash flow. We certainly did this past year. We started the year with our revolver at about $35 million. We ended the year at about $12 million with a slight improvement in cash. And that was through a very challenging year relative to the price compression and relative to the capital projects and the required investment in inventory.

As I have indicated, we certainly want to operate in the black and not utilize our revolver. Short of that I think the cash generation is no less impacted by the environment we find ourselves in and the uncertainties we have to face. But again we are doing all those things which we need to do to improve cash flow. We have seen it in the working capital improvement.

We will see it with, I think, the continued opportunity to focus on specific parts of the market as we have done in the past, looking to optimize what we do. And so specifically I think we will do the best we can and I think we will continue to the trends we have started in 2008.

Okay, maybe I can ask it another way then. And I know -- with respect to the fact that I know you don't give guidance and it's very difficult to look at the cash flow and give us an indication, but maybe we can look at it from an inventory perspective. We see inventories coming down; the capacity additions will increase the efficiencies. Do you have any idea as to the outlook for inventories on a year-over-year basis? Will they improve? Will they get lower? Kind of a general sense.

As we have talked about in the past we clearly look for inventories to come down. What we have said in past calls, and it's no less true today than it was then, we do look for inventories to come down anywhere from $50 million to $75 million.

Over the next year.

Over the next year.

That is good. Thank you. And then the backlog pricing has held up despite the lower levels of pounds that are in backlog suggesting demand has slipped a little bit. But my question is do you expect the prices to continue to fall?

And then further, the second and third quarter that you mentioned that you don't expect to see the year-over-year increases that you have seen in the past, do you expected to deteriorate farther or do you expect it to be flat from the current levels?

First of all, relative to the backlog what we have historically seen is that the backlog from the end of September through the end of December has remained relatively flat. However, then we have an uptick in the second and third quarters. What we don't anticipate is that uptick in the second and third quarters at this point in time. Beyond that I am not sure we can comment much further than that.

I see. Okay, thank you guys. I will get back in line.

Mark Parr, KeyBanc Capital Markets.

Hey, good morning. Mark, welcome to Haynes and, Marcel, good to talk with you again.

Thanks very much.

Look forward to seeing you in a couple of weeks. I had a couple of questions, and again we are all trying to get incremental color. Marcel, first of all, I just want to thank you for the magnitude of color that you have provided on the margin issue. I think it was really helpful and provides a lot of clarity.

I was just -- Mark, one thing I wanted to ask you, you have clearly got the operational strategies set. I think you articulated it very well and very succinctly and I thank you for that. Is there anything more that you can tell us at this point in terms of what your expectations would be for Haynes from -- how the strategy translates into operational upside over the next three to five years?

I recognize that we can't figure out exactly where this economy is going to go near term, but I mean if you look at the long-term what do you think the Company is really capable of based on your due diligence thus far?

Yes, Mark, just walking through if you just take the old-time way of doing things and you walk through the plant and I mentioned that I had concerns --

I like that.

Yes, I had concerns coming here having been a floor engineer 25 years ago and some of the equipment looked kind of old back in those days. But you clearly see the investments that have been made in the equipment here, so naturally my expectation is then to see an improved reliability. You have heard the conference calls and the presentations prior to this one, and even in this one where we talked about outages, be them planned or unplanned. I will expect to see a reduction in unplanned outages.

We are putting together some realize nice metrics now to talk about the efficiencies of the equipment, uptime of the equipment, and taking a look at where our bottleneck operations are and where our reliability is an issue, meaning unplanned outages. That will be then spots where we will have to continuously improve and continue to invest.

I think we are going to have to continue to invest in certain areas of the plant. There are some old analog controls out there that need to be upgraded and things like that, but if you -- how does that manifest itself in the business process? If you take a look at inventories, work in process, and things like that, Haynes has been forced to fight reliability issues with metal.

As we get more reliable equipment and we can improve the velocity through the plant and reliability through the plant, you can imagine that will allow us to take down not only work in process inventories but finished goods inventories. And that is really the target.

I appreciate that you put something like a five-year frame of reference around that. Obviously, we are going to continue and push as hard as we can to achieve these goals as quickly as possible. But I think what it does is it positions us much better for an upturn to take advantage of opportunities. You can imagine the less rework, the lower unplanned outages it's going to result in, not only higher quality and higher reliability, but also higher capacity.

So as you can imagine, my vision for it is to do what our customers want us to do from the point of view of getting them their metal when they want it in an efficient period of time.

Is it fair to say that given all the debottlenecking that has just been concluded that we are very early days as far as seeing the upside of this process?

My opinion is yes. We are still going through, as Marcel had mentioned, the commissioning of the furnaces and things like that. If you think about it, that is an absolutely vital critical piece of equipment. Everything runs through the furnaces not once, but several times. It's also at the endpoint of the operation or close to the endpoint of the operation. So all of your upstream materials and downstream capability to ship is affected by any kind of reliability issue you might have there.

So I am thrilled with the work that our manufacturing people have done in the last couple of months getting a lot of the SOPs put together. Frankly, cleaning up some of the bugs in the equipment as far as you know bridle system rolls and just hot zone issues and things like that. I think we are really starting to see the light at the end of the tunnel there.

Okay, terrific. Thanks very much. I will get back in the queue here. I have got a few more questions, but I will let somebody else come on. Thanks.

Michael Gambardella, JPMorgan.

Yes, good morning. I have a question. Could you give us some color on where you are seeing the most competition coming in from in say nontraditional players?

Historically, what we have seen is that that would come in the CPI are, chemical processing. Basically it's initially on projects in the flat products. What we are seeing and have seen over the last six months is actually the competition really entering all the product forms. We are talking about everything from slab and billet forging to two product wire product.

Again, it's really across all the forms. Still primarily in the CPI, but we are seeing some extension over into the Aerospace and land-based gas turbine, particularly on larger projects. So it's a wider array of competition today than we have ever seen before.

Okay. And then just two other kind of small questions. How much are you paying for this consultant to come in?

Well, I am not sure we are going to disclose what that is but I have got to tell you it's a relatively modest amount. It really isn't as significant as it might sound. I have been here on and off for the last 25 years and I have got to tell you this is the most efficient and the most productive consultant that I have seen. We have had consultants in here over the past several decades that we have paid a lot of money to and came away with very little.

These folks are very, very good. They are very, very focused. What we are paying them is a nominal amount for the return we are getting. So this is not a -- this isn't millions and millions of dollars kinds of thing.

Okay. Then last question, how should we think about the effective tax rate going forward?

I think the effective tax rate will probably range between 36% to 38%. That will be a function of the entity or the area generating the taxable income and also our apportionment factors here in the US relative to states. So I think that is the range, 36% to 38%.

Okay, thank you very much.

[John Flanagan], Fundamental Equities.

Mark, could you tell us how you found business generally in China and specifically how is your business over there? And is it holding up better than domestic business?

Yes, John. It was a real eye-opener. I have spent a lot of time in China. When I worked at Carpenter Technology I lived in Singapore for a couple of years and then when I moved over to Brush Wellman, again, I lived in Singapore for a couple of years. I spent five years in Singapore. During those five years I was in China at least every month, if not a couple of times per month.

You have heard the stories, just the massive building boom and cranes and concrete everywhere, as you can imagine. China is definitely experiencing a slowdown and you can see it. A lot of our business is tied to the chemical process industry over there so we have increased competition, as Marcel has mentioned a couple of times, from other competitors who are now willing to move into these smaller quantity type of business, which is our strong suit. So we are definitely seeing a lot of competition in China right now, more so than we have in the past.

Our business has backed off a little bit in China from prior levels. We are taking a look. That is a key area that we are taking a look at where we should be more aggressive in moving after business. But you can definitely see that China right now there is a heck of a lot of uncertainty, especially with respect to large capital projects. Until they begin to see the direction of their stimulus and things like that, I think this will be a continued period for the next still, I will say a couple of months, until we can get through this clouded picture.

Do you think, Mark, you will increase your investment in China this year and next?

I think as far as -- we have put a nice footprint on the ground with the acquisition of HW Limited over there and we have got some great people on the ground. The key is now to continue to support them, pick out the target markets we go after, and you can imagine then it's all a question of backwards integration. Find the customers, get them up and active.

Once we get into repeat business, start putting metal on the ground to support them more aggressively etc., etc. Keep adding value, eventually cutting, etc., etc. Follow the Haynes' business model that has worked extremely well in North America and in Europe and then essentially transplant that model over to Asia-Pacific.

Thanks.

(Operator Instructions). Nat Kellogg, Next Generation Equity.

Hi, guys, how are you doing? Just, Mark, again, welcome and congratulations on the CEO post. Just a couple of quick questions. Marcel, I mean you gave us some good color on sort of margins. I guess what I am trying to get a sense is I look at the pricing number for dollars per pound in the backlog and it seems to be holding up pretty well.

I am just wondering if, given the fact that we have not just seeing nickel, but also moly and chrome and some of the other inputs come in a little bit. But if you could help us understand how that is holding steady and maybe talk a little bit about how mix affects it versus competition and all the rest of it.

Well, relative to the average selling price in our backlog it has held up very well. Nickel has been coming down and the other raw materials that we utilize -- cobalt, chrome, and moly -- not so much chrome at this point, but clearly moly and cobalt are coming off their high. So we expect to see that impact the average selling price.

The good thing relative to -- good thing, if there is such a thing in this market -- moly and cobalt is the fact that it's not falling at the same rate that nickel declined. It's a more I think measured decline and that is what we really like to see. That helps us, I think it creates a good timing relative to producing orders, buying the material for those orders, and taking new orders, and how we manage that price.

So relative to that we will see a decline in the average price in our backlog with the decline in the materials. But will that impact us negatively? At this point if it maintains a steady pace and it's a measured approach like it has been, it should be minimal effect.

Okay, that is helpful. Then, sorry, I just missed it, but you guys said earlier you have $50 million of backlog reduction you expect over the next 12 months?

We were talking about reduction in inventory.

Sorry, sorry, that is what I mean. That is what I mean. That is what I mean, too. I'm sorry. And that is what you said, you said you expect to do $50 million --?

We have talked about this in the past with the upgrades. We look to reduce inventories at least $50 million to $75 million over the next year.

Okay. Then I guess just on that, obviously, because you guys have 85% of your business goes through your own service centers you need to keep probably a little bit more inventory than maybe guys who are just mills. So I am just wondering if you guys could give us a sense of how you look at that and how you manage that and where you sort of keep the inventory versus the mill and what the source sourcing level in.

What sort of is the upside and downside -- what sort of is the best you think you could possibly achieve, given the fact that I would assume you need to have a little bit more inventory just because, obviously, the service center fulfills that role of having inventory on the ground for customers?

Well, one of the things unique about Haynes is that we not only have a mill, which has one set of metrics as to how you measure inventory, but we also have service centers, not only domestically but in Europe. And that adds another element to the process. So I think, overall, one of the things we will achieve through the next year is clearly removal of safety stock relative to that which we had to build. That is already beginning to come out.

I think the improvement in reliability of the equipment will enable us to also reduce inventories further. What we are doing is evaluating how we stage our inventory. Part of what is taking place in this market is the ability to respond quickly to a customer's needs. So historically what we have done is probably carried a bit more inventory in the service centers than we have needed because of the projects over the past year and the less than acceptable liability -- reliability on equipment.

What we find ourselves is evaluating a process where we will probably carry less inventory in the service centers and probably stage it differently at the mill level, prepare or put slabs on the ground, put recoils on the ground so that we can respond more quickly to customer's requirements in our manufacturing process. That is part of what we are endeavoring to evaluate.

Now that we have completed our CapEx projects we are working with our consultants to evaluate that process to measure what is the best place and how do we stage our material. I think, again, we are still learning that process and we are still evaluating it, but clearly the trend is down. We will reduce inventories. But we are not certain to what extent over the course of the year except to fill levels we have already talked about.

Okay, that is helpful. And then just lastly, I noticed in your press release and you guys talking about the new credit facility you have, you did mention that this allows you to buy back stock and pay dividends. I realize over the next couple of quarters you guys definitely have some uses of cash as far as the tax payment and funding and pension and whatnot.

But I mean, I guess, is there anything to read into this? Is this something that you guys are now thinking a little bit more -- maybe as we get towards this time next year that a dividend or a buyback might be more part of the uses part of the thought process for uses of cash and rewarding shareholders?

I think that is always something we discuss and it's something that we discuss with the Board is the proper capital structure and the proper use of capital in the Company and ensuring that we have --. We look at the new agreement and things like that as really allowing us to have more options for improving shareholder wealth through growth, through any of these potential vehicles that we have mentioned and discussed here.

So they are constantly things that are on the mind of the management team as well as the Board. Currently, we are developing plans to review those types of things as we speak.

Okay, well thanks very much. I will hop back in the queue and as always I appreciate the color, guys. Thanks very much.

Stefan Mykytiuk, Pike Place Capital Management.

Yes, hi, good morning. Just a couple of comments, getting back to the gross margins. Marcel, I guess from what you said before we should expect the two points of gross margin that hit you in the fourth quarter due to the equipment issues should come back to us. Is that a fair statement?

Well, I think the issue related to the equipment certainly will come back to us. However, as we have seen over the past 18 months this issue of price compression and competition from some of the stainless producers who also produce high-performance alloys clearly has been occurring over the past 18 months. I think over the past several months, over the last six months it has intensified and now because of the credit issues that is taking place we will see more of that competition.

That is a significant uncertainty, so for us to provide -- we just don't know. I don't think anyone knows at this point. Again, it's a significant unknown how much more competitive the environment could become. We are seeing it across more product floors than we have ever seen it before. Certainly we are working to counter those issues, but as to how much it might be and how much we might get back that is clearly unknown at this point.

Okay. Then is there I think -- in terms of the backlog progression, I think what you were saying is historically the backlog increased sequentially in the second and third quarter. Now you are saying that you don't expect to see that increase sequentially?

We don't anticipate that increase.

Right. Okay. That is fair. How about -- in terms of recent order trends is there anyway to dissect how much of that weakening has been from the economic uncertainty or the Boeing strike or things like that versus destocking that is going on because of the declines in the raw materials?

Because it seems like some of the distributor companies and some of your what I would call, loosely define as your competitors, talked about the fact that as nickel comes down so dramatically a lot of the customers are starting to destock or kind of hold off hoping that they will get a better deal. Is there any way to kind of dissect what is going on in your order trends based on those factors?

Well, I did talk to or spoke to the -- and we do it in the K, relative to the backlog. That is where you need to look and we have seen the order trends slow for Aerospace, for land-based gas turbines about 12% over a four-month period; CPI was off the most. The other category remained relatively flat and that for us is the heat treating markets, the FGD markets, energy-related markets. Those are the trends we see in our backlog.

As to how much more, I think -- think about the individual, think about yourself. This environment -- the fact is that people want to conserve cash. There is so much uncertainty out there, probably a little less than there was a month ago, and so I think you are going to see some of this pullback on restocking. You are going to see service centers run their inventories down as low as they possibly can.

Fortunately I think everyone recognizes the fact that we are not leveraging off of the high inventories that you saw back in the '90s or even the early to 2000s. No one has gone back to those levels, so if anything it won't be as long a period before people need to restock. Again, there is a lot of things going on out there.

One of the things that we are -- we benefit by is the fact that a lot of our product is in support of the maintenance market. That is a recurring level of business; that is what our service centers support. So it's not OEMs so much that we are impacted by, although we certainly are, but the MRO provides a solid base. So again it's a complex environment today, it's a complex question, and I am not sure there is a simple answer. So I think I have talked around that one pretty much so --

Okay. Mark, any color to add to that based on the fact that you have been out on the road talking to customers?

Yes, a key factor right now and it's odd, it's really tough to get your hands around this. We talked a little bit earlier about service center inventories. Just anecdotally, we picked up a beautiful order day before yesterday or I should say Friday of last week. It was a transactional order because someone else in the supply chain had essentially destocked that item. So there is the type of thing where because we had some metal on the ground we picked up a very nice order, six-figure order, at very attractive price levels.

But at the same time as you enter the end of the calendar year and most people's fiscal year you have normal conservatism in purchasing materials. Add to that this thing where, God knows where the bottom is in nickel and some of the other commodities and people don't want to keep adding. More importantly a lot of people are trying to purge through and go through their high-value inventories quickly as possible right now. And add to that the economic situation.

My feeling is until we get into the first quarter of next calendar year, second quarter of next calendar year, we won't have a real good feel for exactly what the steady-state inventory levels or order levels are going to look like. It's that clouded right now. I think most of us in the industry, for instance, are waiting with bated breath to see the revised forecast from Boeing, which I think of the Wall Street Journal said is going to come out in December.

Okay, thank you. Then, Marcel, on this working capital reduction, you have talked about the $50 million to $75 million of inventory reduction. But that was a number you threw out; I think you first started talking about it a couple of quarters ago. Since then it seems like nickel prices have come down dramatically; some of the other raw material prices are coming down.

Shouldn't that actually create a larger dollar? I mean assuming the pounds you take out of inventory are the same as what you talked about a couple of quarters ago, shouldn't the dollars actually be larger now because the raw materials are much lower?

Well, they could be. We are not going to -- I don't think I am going to speculate further than what we have talked to. I think clearly if raw material cost comes down so will the average cost of inventory. But at this point we are going to be careful as to what we provide guidance on.

Okay. Fair enough. Thanks very much.

[Mark Kaufman], MLK Capital.

Good morning, gentlemen. Hypothetically, I know everybody has been talking about the inventory and someone else mentioned a share repurchase. If your cash flow dropped to $50 million and you could buy your stock here either through the reduction in inventory, tapping some of the new revolver you have that is a 33% return on investment. I don't know where else you are going to get that and that is just assuming that all you are going to make is $50 million in perpetuity.

So if you really believe that there is a future for this company in three years, five years, just for a few million dollars why not take advantage of that?

Well, I think it's a good point, good observation.

Thank you.

But, however, I think we have just come off a year where we have made significant progress, but we also find ourselves in a situation that there is significant uncertainty ahead of us. So I think we need to work through that. We are not good to over commit. Once we have an opportunity, if you believe that we are going to be around for three, five or put another way if you believe we are going to be around for another 100 years then I think we will come up with an opportunity to enhance shareholder value.

Clearly, what is on our agenda -- when we reflect on what we think about, what we are planning for is enhancing shareholder value. That is what the previous five years was about. There is a different approach to take going forward, but before we make any commitments we have to work through the next at least 12 months of the uncertainty of the future.

Mark has talked about it. He has indicated that it's part of the agenda or the thinking for the Board, for the management here so it's not going unattended. As to a timing or how much, that is going to be dictated by the economic environment we find ourselves in.

Well, I appreciate that, but $14 versus maybe $28 in the future is just something to think about.

We certainly do. We do think about that.

Okay. I appreciate it.

Jonathan Brolin, RLR Capital Partners.

Hi, good morning. Can you explain a little bit about how the competitive dynamics work in terms of the pressures that you are seeing on pricing versus the counterbalancing impacts of the MRO business on the one hand and the proprietary products that you have on the other hand, specifically the ones you have cited in the past at different times 45%-plus that have no real competitive offering out there?

I think it's important to look at it in this context, where were we 15 years ago, 10 years ago, five years ago, and today. If we were in -- if we had not altered what we do and how we do it through enhancing our service centers, adding value, and continuing to support our R&D program's new alloys, we clearly wouldn't be doing as well as we are today. We are significantly ahead of anywhere we have been in past downturns in the market and we are doing very well in that context.

However, we still do see competitive situations, particularly when you talk about the CPI market. That lends itself to the -- particularly the tubing aspects or valves and fittings, plate and sheet for vessels. Those are the kinds of places where we see the head-to-head competition at large project business and smaller project business or retrofit type business so we are seeing that now across the board. You are also seeing it creep into -- anywhere you have a large project we will see business or competition, very active competition and create price compression.

So it's pretty much what you find in an environment like this where if a company has the capabilities to two things, one of those things is taken away from him, he will look to do the other at a higher level to create utilization of his equipment. That is just -- that is the process and that is what we are facing.

Was the margin issue created by the commissioning issues and the standard operating procedure issues a factor that exacerbated the competitive pricing issue because you weren't able to sell products that you otherwise would have?

Through the course of '07 and '08 when we were going through the capital programs that certainly did make that process more challenging, exacerbated it to use your word. However, even though we have come through that now what has continued to occur over the past 18 months is the situation has become more competitive.

I mean look what has happened with the auto market, with the home market, the commodities markets; so this situation, all things being equal, we could have returned to a higher level of margin. However, that competitive environment intensified. It didn't remain status quo. It became more competitive and it's likely in the short-term and possibly the long term that it will become even more so.

Right. But taking out -- I mean you mentioned housing and auto, which are not parts of your big three specifically. Yes, of course, you have talked about the CPI pricing issues in the past but on this call you are talking also about Aerospace and land-based gas turbine pricing issues.

Can you explain why that has occurred and why the, again, the proprietary alloys that you are selling into those areas and in certain cases where you have been speced into, why would those be subject to the same type of price competition that you are seeing in other areas?

I think there is about four or five questions in there so I will try to pull them apart a little bit. Now you talk about, first of all, we talk about our comp or competitors or people who can make stainless steel products and they make high performance alloys. If their stainless steel markets have declined, like for example, for the housing market or for the automotive industry and for the CPI markets, because a lot of stainless steel product does get used in chemical processing facilities.

So when those markets decline they gravitate to the high-performance markets because those markets have remained a bit more robust. So that is where that competition comes into play.

Now like everything else, we do have some opportunities from our proprietary or specialty type products. They do retain their profitability or their margin better than the commodity type, high-performance alloys but that is not to say that they don't come under pressure to the extent that if a project is being considered for a retrofit or a new project there is a cost/benefit analysis done.

If somebody has a budget and they can get it done less expensively by using a commodity-type alloy or even a stainless steel type alloy, they may choose that because of their own budgetary constraints. So again, it's a complex process with a lot of factors to it. So I hope that clarifies the point a bit.

Let me ask you another question in terms of the competitive environment. Precision Cast Parts presented last week at the Credit Suisse conference. They gave some commentary that was actually very consistent with their last quarter as well in terms of the market that they are seeing for gas turbine and what is going on there.

Is there any reason why you should be seeing a different landscape than they are? Is there something different about the type of customers you are selling into, the type of alloy that you are selling that that would make the environment you have described different from the environment that they have described?

Well, to the extent that Precision Cast Parts is primarily a forging operation where we provide some product -- they are on a relatively small basis, where we provide product is in the plate and sheet form. So to that extent those markets still remain healthy. We have seen decline in the backlog or order entry, probably more so from the destocking process or cash conversion process than an actual decline in builds.

But we see competition in those products also from the likes of ATI or BDM or even Special Metals which is part of Precision Cast Parts. So we are not saying that market is -- but I'm not sure what you are referencing in the context of that market.

Well, I can tell you. They are specifically saying that they are continuing to see strong order strength there and they noted specifically that those types of projects are seeing an increasing level in the usage of high-performance alloys.

Again, when we can -- there is the issue of form. They are primarily a forger and it's the issue of what exactly high-performance alloy are we talking about. Again, there are different kinds of high-performance alloys in the context of titanium, zirconium, even high nickel type alloys. So I am not sure what they are doing. Again, I can't speak for them. I can just tell you about what Haynes is doing.

Okay, I appreciate it. I will jump back in the queue. Thank you.

Mark Parr, KeyBanc Capital Markets.

Thanks again. A couple of questions. I was wondering, Mark, do you have any expectations or color you can give us on a potential contribution from your Chinese acquisition over the next 12 months?

Essentially it's a marketing organization and a sales network and distribution network. We have seen slowing over there most recently, due to a lot of competition and some delay of some capital projects that we are seeing in China. Am I answering the question for you all along those lines?

I mean, essentially, what we are -- I believe our sales, our revenue into China in the last year were on the order of $60 million. So I mean we are looking at those types of numbers with possibly a little bit of an effect from this slowing that we are seeing right now.

All right. So the acquisition was basically bringing in independent reps in house and essentially just acquiring the marketing organization?

That is pretty much exactly it, yes.

Okay. Now I had another question. I was wondering and I don't know, Mark, if this is better for you or for Marcel, but, Marcel, are you seeing any differential in terms of the level of competition in the international order book versus the domestic order book?

Our foreign subs continue to perform very well, particularly in Europe. Again, we haven't seen nearly the level of -- although competitive, not to the extent that we have seen in the US. Decline in their backlogs have not been as significant or as much as in the US.

And it's more market-related and geography. It's easy to take a look at those buckets and break them out geographically. But if you think about our Asia-Pacific business it is still very heavily CPI-dependent whereas our European business is a lot of power generation and aerospace type business which the aerospace and power generation businesses are still doing very well. We have seen reductions in backlogs and things like that in order entry, as we see that people, I think, right-size their inventories and right-size the supply chain for concerns about the macroeconomic environment.

But, essentially, I think everywhere you look and we mentioned it earlier in the call, the land-based and gas turbine backlogs look real good. The Pratt & Whitney and Rolls-Royce and GE and everybody reporting in the aerospace side; the engine backlogs still look real good. I think a lot of it is second and third tier fabricators and the distribution network are just real concerned about inventories. I think that is really why we have seen any kind of a slowdown in those markets.

Okay. That is really helpful. I appreciate that. I had another question on your fixed costs or call it the non-raw material side your cost of sales, can you talk a little bit about the flexibility that you would have in moving say the fixed cost side of your operations up or down? Like say on a 5% or a 10% reduction in shipments in fiscal '09.

Well, to the extent that we are obviously taking steps to manage that cost as aggressively as we can through the consultants we have hired. We look to make improvements there. There is a certain amount of over time relative to our manufacturing operation that we can manage and it provides us with some flexibility to reduce that cost.

Okay.

-- (multiple speakers) and I think it's fair to say though that just in a very broad picture, if you take a look at our volume compared to the volume and tonnage or pounds compared to some of the big guys out there, you know we are a much more volume-sensitive operation.

Okay, all right. Then one last question I had, and again I appreciate this call. It has been really helpful. Mark, I was just curious to what extent you could give us your philosophy on executive compensation or management compensation. Would you expect to see the compensation become more or less variable as we go forward and what sort of incentives do you think are most important to make sure that your management teams get their eyes on the right ball, so to speak?

I think the objective when you are in a managerial role with a company, especially when you are in a strategic management role, is the shareholder value. I think that is the key component. Frankly, someone in my role or my direct reports and people on the Board I think it's pivotal that we be tied to that shareholder value over both short and long term.

Okay, terrific. Thanks again.

Edward Marshall, Sidoti & Co.

Thanks again for taking my call. As we talk about credit issues, it begs the question what risks do you see to your receivables going forward from your customers?

We are fairly aggressive from a -- we have got a very good credit process. We are very aggressive in our credit. For the most part, for example, when we deal in Asia we deal on LCs primarily. We do, in fact, have credit insurance for our export receivables. We haven't seen any deterioration up to this point. We are drawing a hard-line relative to our customers as to terms. So again, at this point we are fine and we are going to continue to be aggressive in our application of our credit policy.

Has there been any shift in the capacity that you assume that you can achieve? I believe in the last comment was 23.5 million pounds by fiscal 2010. Has that shifted to the right maybe a little bit?

I think what we are talking about, we have talked about capacity and we clearly have -- through the process we have the capacity to ship 23.5 million pounds. I think the issue is how do you fill that capacity. This is the environment which we find that that is a question we have and it's a difficult environment.

The capacity is there. Clearly for the long term we are well situated to deal with a lot of additional capacity, but in the short term it's a function of just beginning to operate the business end and continue to pursue orders.

Okay. Circling back to a cash flow question that has come up a couple of times throughout the call here, would you be surprised if cash flow wasn't stronger than it was this year or operating cash flow?

Stronger than --

Than fiscal 2008?

I think we did very well in 2008 in our cash flow.

Do you think it will be stronger next year?

I would like to think that depending on what happens, we should be able to at least match that. Absolutely.

Okay. Then the last question I have is -- understanding you made it perfectly clear there are uncertainties in the market. Which market would you think would be the first to show pockets of strength and which would be the biggest concern if it continued to deteriorate?

The market at this point that has shown the most deterioration is the CPI chemical processing industry. That clearly is the one that it has deteriorated or softened the most. I think what will be important for us to watch will be the Boeing Airbus forecasts. I think that is a function of what happens with the leasors, commercial carriers don't buy planes they lease them. Based on the credit environment that exists today that is a challenge and that is a significant unknown.

So if that can be resolved and the order book of 7,000 planes -- I am sure there will be some cancellations, some push outs -- but if that materially stays intact I think that bodes well for the Aerospace business in the long term.

Yes, if you remember the last time we went through this the first thing that seemed to get canceled were things like corporate jets and then private jets, executive jets, then regional jets, and then the big items started to go. So those are the kinds of things we are watching in the Aerospace industry.

As Marcel has referred, the CPI industry is probably our largest concern right now. That is where we are seeing the most softness. That is where we are seeing the most competition. Those are typically tied to very large capital projects, so it will be interesting to see how that changes in the next three to six months to see there if there are big project delays or not or if indeed the world takes this as an opportunity to invest in infrastructure.

Then on the land-based gas turbine business, long-term I don't think too many people are projecting decreased needs for energy. So I think it's going to become a question of what does the supply chain look like in that market. Energy needs have constantly been increasing, but I think most people will recall I think it was back in the 2001, 2002, 2003 timeframe that all of a sudden somebody open the garage door and there were a heck of a lot of land-based gas turbines in inventory everywhere and things shut down for a while.

So right now we are not seeing that situation. Aerospace and land-based gas turbines we think we are in pretty good shape. The CPI industry has a lot of concern for us right now, but again I think we are holding up a heck of a lot better than a lot of other people in the industry at this point.

So based on that commentary about the aerospace and land-based gas turbines, would you be surprised if the reduction in backlog is a temporary scare in those two markets based on the year-end inventory control from some of the customer bases?

Yes, and that is what we are really waiting to see what kind of clarity is offered by the new Boeing forecast and how that will affect the supply chain. Then we will keep our eyes on things like the backlogs for the land-based gas turbine business as well. That is going to be really the defining issue as to whether or not we have got a temporary supply chain issue or if we have a demand issue going forward.

Perfect. Thanks, guys. I appreciate it.

Ladies and gentlemen, we have reached the end of our allotted time for questions. I would like to turn the floor back over to management for closing comments.

Just want to thank everybody one more time for joining us and thank you very much for your support of Haynes. As I have stated previously, I am absolutely thrilled to be with the Company. The people I have met with in my first six, seven weeks be it customers, employees, the management team, board, etc., I am just delighted to be here.

So I know we are going through a pretty tough economic storm right now along with everybody, but again I think we have got a real strong product pipeline in place. I think we have got great relationships with our customers. I think the issues that we have, we have talked a little bit about reliability and things like that, I think we understand them. We are focused on them. We have certainly in the last few years put capital towards resolving those issues. I think we have got a real good story to tell in the next few years.

So again thanks very much for your support. I hope everybody has a great holiday season and we look forward to talking to you and meeting you all again very soon.

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