Haynes International Inc (HAYN) 2009 Q1 法說會逐字稿

Greetings and welcome to the Haynes International Inc. first quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator instructions)

It is now my pleasure to introduce your host Ms. Stacy Kilian, Vice President and General Counsel for Haynes International. Thank you Ms. Kilian. You may begin.

Good morning. Welcome to the Haynes International Inc. earnings conference call for the fiscal quarter ended December 31, 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 meanings of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of the 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 risk 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 ended September 30, 2008. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of the 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. I'll recap our financial performance for the first quarter and discuss some of the issues within our key markets, I'll then turn the call over to Marcel who will give us greater detail about our financial results and we'll finish up with your questions.

Hopefully, you've had a chance to review the information in our press release and quarterly report. Our first quarter results were disappointing and indicative of the economic environment and market conditions which began deteriorating in the August - September time frame and have since continued to worsen.

The economic outlook remains very cloudy. Our key customers report the same and the credit crisis and economic downturn appears to be putting many capital projects into question. In the first quarter, we recorded $4.5 million of net income or $0.38 per diluted share, compared to $13.8 million in net income or a $1.16 per diluted share for the first quarter of 2008.

During the quarter, we saw several issues affect our business. First, the economic downturn resulted in a more competitive environment and lower volume. Second, we saw a rapid decline in raw material prices from the commodity exchanges, triggering dramatic price changes in the market place. This factor, combined with our high cost inventory in our system results in compression of our gross profit margins.

We expect this compression to continue through the next two quarters, as we flush out our higher cost FIFO inventories and expect to achieve levels more in line with current commodity price levels and current market prices. Provided that such pricing stabilizes.

We have taken action to lower our cost structure to adjust to this new demand level. Most significantly we reduced our work force by over 10% in the quarter and we are continuing to sharply cut our cost and spending. However, we are continuing to reinvest in the business.

For example, several key CapEx projects will enable us to improve our reliability and quality which we believe will make us a better partner to several key accounts. And I think you have heard me talk on the prior call that in meeting with customers, quality and reliability are absolutely critical. Without fail, our customers talked to us about if we were more reliable, they would be able to place more business with us.

Likewise, we continue to pursue broadening our application development and marketing efforts. While we believe we can maintain profitability for the fiscal year, due to the conditions I described above, the base economy, our volume and costs of inventories flowing through. We expect our results will be well below those seen in recent years and we will have a substantial impact on the Company's profitability in the second quarter.

Turning to our key markets. In aerospace, first quarter '09 revenue was $49.7 million. A 16.4% reduction compared to the $59.4 million in the first quarter of last year. Volume was up 23.3% but partially offset by a 9% higher average selling price. The volume reduction is due to fabricator's in the supply chain leaning out their inventories along with the disruption due to the Boeing strike. We expect at least the next several quarters to continue to be at lower levels than seen in fiscal 2008.

Sales to the chemical processing industry were $30.9 million in the first quarter, compared to $40.8 million a year ago. This is a 24.3% reduction in revenue on a volume reduction of 27.8%. Higher average selling prices reflecting a higher mix of specialty product help offset the volume reduction.

Several key projects in this industry will close out in 2009 and funding in this industry for new projects remains unclear due to the credit crisis and falling demand in some areas of the chemical industry. Furthermore, MRO business in this market can be negatively impacted in times of financial distress as operators use cheaper materials, which must be replaced more frequently in order to preserve short-term cash.

Our business in China is heavily tied to this segment today and we have seen this market fall off precipitously since November. However, the Chinese stimulus program appears to have freed up some money and we are starting to see some releases of orders that have been on hold. We do expect this will continue to be a very challenging market through the fiscal year. Our revenue and land-based gas turbines increased 26% year-over-year to $32.1 million, an increased volume of 42.2%.

Our lower priced product mix, as well as increased competition resulted in an 11.3% reduction in the selling prices to this market. The increased volume comparison year-over-year is reflective of a timing issue which lowered shipments in the first quarter of 2008. However, we feel this market is holding up relatively well with current volumes similar to average quarterly volumes seen in fiscal 2008.

Our key MRO accounts report very strong steady backlogs. But we do feel OEM activity is slowing as OEMs are looking at their supply chains and proactively positioning their inventories in the event of cancellations or delays of capital projects.

Our sales into other markets, such as flu gas desulphurization, alterative energy, and industrial heating grew 1.5% to $19.2 million on a corresponding 1.5% growth in volume.

Finally, we are continuing to see improvements in our delivery performance metrics and velocity. Meaning shorter lead times through our plants, which allows our customers greater flexibility in their order entry patterns. Faster, more reliable, throughputs reduces our backlogs as we no longer require our customers to order so far in advance. And it therefore helps the entire supply chain to be more flexible and cost efficient.

We are continuing to forge ahead with our new alloy promotions and specification work. This will continue to create more niches for our products into the future. This is the life blood of Haynes and we are committed to expanding our presence in our core markets and creating better penetration in some of the smaller new market areas that we have in development.

We continue to meet the commercial and the technical needs of our customers and build a global foundation and road map. Almost 40% of our revenue is from outside of North America. Our model of service, innovation and reliability has allowed to us grow to this level, and we are continuing to develop new geographies and new avenues to broaden our global footprint.

Finally, we are weathering a storm right now as we push through higher cost inventories. Haynes's ability to absorb this blow and keep moving forward is due to the strength of the balance sheet we built over the past few years. We are committed to managing our cost structure and meet the needs of our customers and the expectations of our shareholders in this difficult period.

I will now turn the call over to Marcel.

Thank you, Martin. I will first speak to the comparison of the first quarter of '08 compared to the first quarter of '09 and comment on the fourth quarter of '08 compared to the first quarter of '09 with emphasis in both comparisons being the contributing factors for the decline in gross margin dollars between periods and finish with several comments on our cash flow, working capital and backlog.

First, gross margin for the first quarter of '09 was lowered by $15.4 million, compared to last year's first quarter. There were four primary contributing reasons for this decline with each cause having approximately the same effect on that gross margin reduction.

When you look to the first quarter, the revenues were down by $11.8 million with a volume reduction of a half million pounds. Primarily due to the global recession, the price competition, and the volume competition that we experienced in the quarter. That contributed about a quarter of our reduction in gross margin.

The second item, last year's first quarter was reduced -- the cost was reduced by $3.7 million for a favorable pension adjustment due to the salary succession of the accrual for benefits in that quarter. That was about a quarter of the reduction in gross margin.

The third item contributing to the reduction in gross margin for the quarter was unfavorable spending to reduction absorption, a higher cost structure year-over-year do to additional personal and wage increases, fringe costs going up, and a mix change to higher cost production product. Lastly, it was increased raw material costs due to the mix changes [of] specialty type alloys primarily cobalt and molly related.

From an SG&A perspective, the cost per quarter went up approximately a $0.5 million from $10.9 million in SG&A costs last year in the first quarter, compared to $11.4 million in this quarter. SG&A going from 7.5% of revenues to 8.5%. That primarily due to the reduction of overall revenues.

Interest was up -- our interest was down slightly quarter to quarter due to a lower average debt balance. Tax expense was down by $6.5 million due to lower pretax income compared to the prior year. At a rate of about 35% due to some amended returns filed in the quarter. On a go-forward basis, the tax rate will probably average between 36% to 37% over the balance of the year. That resulted in net income of $4.5 million, compared to $13.8 million in the prior year.

I would like to talk a little bit about the fourth quarter comparison of '08 to the first quarter of this year which I think is probably a bit more pertinent to the process that we find ourselves in having to remedy that situation.

Gross margin for the first quarter of '09 was lower by $15.6 million, compared to last year's fourth quarter. There were three primary contributing reasons for this decline with each cost contributing approximately 1/3 of the decline in gross margin of $15.6 million.

The first was obviously the continued issue of the competitive environment; the global recession. Volume was down by a million pounds quarter to quarter, with revenues being off by $26.5 million. That contributed approximately a third of that decline in gross margin.

The second item was unfavorable spending due to under absorption. Primarily because of the million pound reduction. Also contributing to that was the cost structure being higher year to year. And again, our product mix shift to a higher process cost product.

We had a significant shift in the first quarter as compared to that fourth quarter of this product or specially type product. Typically this runs at about an 18% mix to our product. The product mix in this quarter went up to 25% of our overall mix. It was substantial.

The third contributing item to this reduction in gross margins between quarters fourth to first was a material mismatch. Which is having to use higher cost raw material already in inventory to produce products for sale that are priced at current raw material costs.

Again, those are the three contributing factors to the overall decline in our gross margins, fourth quarter to first quarter.

Relative to solutions for our challenges related to these reductions. First of all, the competitive environment. There's very little we can do about the competitive environment. Except to stay focused on customers and markets and continue to look for opportunities. And real change will come with the market improvements.

The cost structure. Mark had mentioned that during this past -- during January, we announced a reduction in headcount that was about 12% of our total worldwide staff. It was 130 people. And this reduction in staff equates to almost $1 million per month in cost reductions.

In addition to that, we've taken steps across our footprint to reduce costs wherever we can. We are looking at everything we are doing. We are being aggressive going back to our suppliers; looking for rate reductions. Through the process, looking to manage our costs better and consolidate our efforts where we can.

So this is a process that we will undertake and I think have taken aggressive steps already relative to the headcount. And we will do things in the future to make sure that we bring our cost structure back in line.

The last item, the material mismatch, we are working through that process. And should be back in balance selling price matched to product costs or material costs by the end of the third quarter depending on what happens with sales volumes, costs and pricing. Again, this is a structural issue for which we are working through and we think will be remedied and be back in balance by the end of the third quarter.

Some comments on working capital. One of the things that we are focusing on and have been focusing on is initiatives to reduce inventory, operate more effectively and the challenge put to us over the last quarter is a synchronized customer requirements with production. This presents a challenging situation which we have been making progress on.

Over the course of the balance of the year, we looked to reduce our inventories by another 50 to 75 million pounds. This reduction will be split between a lower material cost and a pound reduction.

Mark commented on the CapEx program. Our program for this year is going to approximate $15 million. We are looking to continue to do those projects which provide benefit to the Company in the short-term and more importantly in the long-term for both Haynes and for our customers.

I want to talk a little bit about the cash flow or cash from operations for first quarter. It was $13.8 million for the quarter. And that was reduced by a tax payment of $15 million during the quarter for the time that monies we received two years ago; the $50 million payment. We made that tax payment this last quarter. So to adjust for that, we had a substantial cash from operations the first quarter.

The primary contributor to that was our AR reduction of $18 million, a source of funds. If you look quarter to quarter, our sales were down 16%, but our AR was down 27%. DSOs went from 56 days in the fourth quarter of '08 to 52 in the second quarter -- or the first quarter of '09. That's primarily due -- obviously, yes, we continue particularly in these times to focus on collections.

We are very aggressive from that perspective on our credit policies. In addition, there was a slight shift to domestic as a large percentage of the mix versus export. With domestics having terms typically in that 30 to 45 days and with exports typically in the 45 to 60 days. So that contributed partially to that.

As far as the liquidity and this is the thing that we feel is the most important thing for us going forward, we have prepared ourselves well. Our debt is down to zero. We've had cash at the end of December of $5 million. We look to improve upon this position over the balance of the year, depending on the environment through inventory and cost reduction efforts.

We put ourselves in good position. We renewed our revolver during the last quarter. We've got 120 -- we have an asset based loan with $120 million availability on that loan. We have got limited covenants -- actually only one covenant; a fixed charge coverage ratio. And that only comes into play if availability falls under $25 million.

So I think we have positioned ourselves well with the CapEx programs over the last several years, with the liquidity position we find ourselves in right now and with the aggressive approach we are taking to managing and improving upon our cost structure.

Thank you. Mark?

We will turn it over for questions if you would like now.

Thank you. Ladies and gentlemen, we will now be conducting the question-and-answer session. (Operator instructions.) Our first question is coming from Mark Parr with KeyBanc Capital. Please state your question.

Thanks a lot. Good morning, everybody.

Good morning, Mark.

One thing, just for clarification. Marcel, when you talked about your inventory reduction plans for '09, were you talking about pounds or dollars. I thought you said pounds.

I was talking about dollars. I may have misspoke. What I'm talking about -- I mentioned that we look to reduce our inventories over the balance of the year between $50 million to $75 million.

Okay. All right. Mark, you had talked about the improvements in the manufacturing process allowing you to move material through the backlog more quickly. Could you talk about what we might be able to expect or what we ought to be looking for as far as weeks of sales and the backlogs? Are they looking at fiscal '08 versus fiscal '09 versus fiscal 2010 in terms of what you would anticipate weeks of sales in the backlog to represent?

Yes, it's kind of a tough one, Mark. When I think about backlog and I think of essentially lead time;, queue time plus the actual manufacturing contact time. If you go back a year or so, Haynes was quoting somewhere on the order of 22, 26 weeks.

And then the reliability also comes into play as well. How reliable are you to that metric of hitting that 22 or 26 weeks? What we have seen in the past X number of months. A lot of the investment that we have made in the equipment; the furnaces and the things like that that you know about. As well as some help that we have been getting in some of the techniques that we are doing for measurement out in the plants. And frankly, also too the effort of the people in the plants has 1) cut the lead times down.

So we are not quoting on the area of some of the more common alloys that go through the plants. They are somewhere around 12 weeks. Occasionally less depending on a product form. As well as some of the more complex alloys, we are in the area of 16 weeks.

So, when I sit back and I look at targets for working capital and inventory and process in the plants. I immediately just start subtracting weeks of metal that I see going through the plants. And I think you can almost extrapolate that into the backlog as well.

If you are quoting 22 or 26 or 27 weeks and you might have a couple of weeks of shipping time in there. Your backlog better be roughly half a year's sales, essentially between queue time and contact time. But when you have the flexibility now to quote something like a 12 weeks, you are going to see more of a transactional environment. Items coming in and shipping right out.

And so your backlog -- backlog is always a nice thing to have there built up, but the real capability or the real benefit that someone like us gets or someone like our customers gets is in that velocity through the mill. The speed that we can react and get product out to them.

I had another question. Again, just on some of the language in the release. You had talked -- when you talked in the release about the headcount reductions in terms of what they will save. You talk about it net of severance. And does that mean that the reduction in expenses -- that expenses for the headcount will still be down even including severance or is this excluding severance?

Just to clarify. To the extent that I'm talking almost $1 million a month in reduced costs on an annualized basis. That's on a good forward basis. In January, when we released -- we talked about the savings for the balance of the year. That was reduced by the severance cost we paid in January for that, for those individuals.

Okay. So the say the $0.30 improvement that you talked about in January --

Yes.

I mean, that is after severance is included in the equation?

Yes. After severance.

Can you quantify what the level of severance charges that were taken in the March -- or in the December quarter? Or what you would expect to take in the March quarter?

Well, in this quarter, the total severance costs in the aggregate was approximately $700,000.

Okay.

Those are the charges we took and they have already been reflected.

The $700,000 that was the December quarter, or that was --

No, that was this quarter.

That's for the March quarter.

The March quarter, yes.

Okay. All right. So you are not taking any expenses related to pension or anything like that.

We are not. There were no curtailments there.

All right. Other thing, I'm just curious, Marcel, if you have any sense to how you would bracket potential mark-to-market charges on inventory that you have on the ground right now.

Well, I think the issue is -- you know, I talked to -- we talked about the first quarter. We bracket -- at least I spoke to the fact that this mismatch that we have approximately accounts for about a third of our reduction in gross margin.

On a prospective basis, again that's very difficult to do, just because of all the things that impact that calculation. Again, it's a matter of volume, selling prices, the cost of the commodity. Again, so that's a very difficult number to come up with or estimate.

We can say though, knowing how our product flows and how it's currently flowing, we clearly look to see being out from under this mismatch by the third quarter. All other things being equal that should be when we will move out of that problem.

Okay. So you had about a $5 million -- if that represented a third of the deterioration. It's a $5 to $6 million, $4 to $6 million raw material hit.

That's exactly right, Mark.

So you look for another couple of quarters. Would you expect that to increase? It probably increases in the March quarter or maybe comes back down a little bit in June by the time it finishes up?

That's a fair representation. Yes, knowing that this problem started in the first quarter and in looking -- knowing that our product moves through and flushes out within a six month period. You would expect to see the bulk of it in the second quarter with running out in the third quarter.

Okay. All right. So as far as actual charges or things you are going to identify separately. I mean, you are basically taking all this into the P&L on an as occurred basis?

This is a situation where we are just recognizing cost of sales as we go.

Okay. All right. Terrific. Thanks for that incremental color. That's very helpful.

Our next question is coming from Luke Folta with Longbow Research.

Hi, good morning.

Good morning.

First of all, thanks for all the detail you gave in this morning's presentation. That's really helpful. My first question was regarding the current competitive environment you spoke of. Can you give us kind of an idea of how this is impacting base prices and what your expectations are there going forward?

Yes, Luke, essentially what we are seeing right now, we are seeing -- I think by base you mean essentially net of metal value.

Correct.

What we really saw in the fourth quarter is a dramatic decline in metal value. And really, essentially prices resetting in the market place based on the metal value type of number. Where someone like Haynes is hurt is that we have the high cost metal flowing through the system, that Marcel mentioned. So we've got this higher cost material flowing through and then basis -- a lot of prices, contract prices and things like that. More importantly, market competitive prices, reset based on the new metal value.

And the steep decline and the timing of the decline. It was very quick decline as well as a very steep decline, adjusts those prices very dramatically, very quickly. So competitors and competition then goes out at those new price levels. That's where you get hurt tremendously.

The base price level change has more to do with the volume. We did surrender a little bit of volume in that first quarter, as Marcel said. About 4.8 million pounds versus 5.2 million pounds in the first quarter of last year. But it was timed to a large project that didn't continue. That's where we will see those type of differentials.

We are committed to maintaining our market share and looking for avenues for where we can grow it. So we are going to be aggressive in going after these things. We are seeing some base price deterioration but the real situation out there right now is adjusting to these new metal values that are out.

Okay. And on kind of the more commodity end, I know you don't do commodity-type products. But on the less complex product offerings that you have, are you seeing more competition from imports there?

Yes, a little bit. I think, we have a major competitor on that commodity end. Or it's commodity for us, it's specialty for other people. And as a lot of the larger mills have seen their stainless products go out.

Yes, there is a large competitor in Europe, they is benefiting through the economy but they are also benefiting through the change in the price of the Euro; the strength of the dollar in comparative terms. They do have the capability.

Do I think that's a very, very significant part of the competition that we are seeing? If you ask me in Asia, I would say yes. If you ask me in North America, I would say no.

Okay. And just one final one. On your -- you renewed your credit facility in November. And I noticed it's allowing for dividends and share repurchases. Should we consider that pretty much off the table at least for the next few quarters?

I would like to think that our emphasis needs to be on just managing the business like everyone else is faced with right now because there is still a significant amount of uncertainty going forward. We've put ourselves in a good position. We want to retain that flexibility to do all the things that we need to do or deal with any unforeseen challenges that come down the road.

I think in the short-term, we are making sure we do all the things to protect the business and prepare ourselves for growth in the future.

Great. Good luck. Thank you.

(Operator instructions.) Our next question is coming from Edward Marshall with Sidoti & Company. Please state your question.

Good morning.

Good morning.

My first question is centered around pricing. When do you guys set pricing? Remind me. Do you set the price at the order entry or do you set it at when you melt the material?

Typically our pricing is set when we take the order; order entry. That's all -- but we have multiple ways we take orders in that we have contracts and those contracts have adjusters. We take spot orders right out of the service center at that time. And then we have POs or purchase orders which fall in between the spot order -- and the longer term contract, which are maybe three to six months. But in that case, even though are sent when we take the order.

And how much is a spot a percent of your business?

It's probably about a third.

Okay. So I can assume -- I can understand how if we are setting prices at that point, I can see how the margin on a spot business. I could see the margin compression. But, did you have an excess build of inventory here of raw material inventory that was not claimed to any particular contract?

Not really. We have been trying to manage our inventory down over the course of the last six months. Remember, we finished our [kneeling] project in the third quarter of '08. And we had some additional work to do through the quarter; the fourth quarter and a little bit into the first quarter of last year.

We have been endeavoring to bring the inventories down. We had a very, very good fourth quarter. I mean it was a pretty healthy quarter from a shipment perspective. I believe it was approximately -- I want to say 5.8 million pounds in that fourth quarter. That's a pretty healthy quarter.

I think we had a good solid backlog. What we probably didn't anticipate, much like everyone else in the world is what happened in the first quarter, our first quarter. Just the economic downturn. So it wasn't anything specific that we were caught off guard or build inventory for. It was just the rapidity of the downturn. How quickly it happened.

Right. I'm looking at the mismatch and I would assume you are buying raw materials to fill certain contracts. And if you are filling that contract at a specific price at order entry, I would imagine that somewhat -- it would be mitigated through the --

It, in fact, it was. We have backlog and we have material on the ground for that backlog. This mismatch only applies to a certain portion and it relates to this spot order type of business.

So a third of your business basically is where the impact came from?

Right.

I see. Now, when prices and materials are back in lock and step. What should we expect as a margin that you guys could put up from a gross margin perspective?

Well, I think the challenge there is not knowing exactly what's going to happen over the balance of the next six, nine months. We are seeing pricing changing all the time. There's the pricing, the competitive environment. There's the cost of the raw materials.

What we were able to do, and what I try to do is at least identify those things that impacted our fourth -- the first quarter. Quantify those or at least compartmentalize them and indicate what we are doing to address those things. Those won't be issues going forward.

As to what the margins will look like in the third our the fourth quarter. Again, that's just -- there's significant uncertainty there. So, again, that's not a guide I think anyone can provide at this point.

Okay. Switching gears a little bit. On the inventory, you mentioned 50 to 70 million, that's not new. We discussed that before. Is that incremental on top of what we already saw in the first quarter?

No, I think it's -- it's on top of what you have seen in the first quarter. I think our inventory at the end of December was about $294 million, $291 million.

Right.

And we are talking about a reduction from that point.

So another 50 to 70 from $291 million?

Yes.

Okay. You also mentioned the DSOs in the quarter were relatively strong. Is there some seasonality, however, in the December quarter that you see with some improvements in DSOs?

Not really. I think we have always been very sensitive to collections here. Again, we were very aggressive and very aggressive credit policy, sometimes to the detriment of our salespeople. However, we stand by that policy. I think it's served us well.

What's happened with the things that began to happen in the last quarter. What we saw in this -- our first quarter. We got very aggressive from a credit perspective. So I think that focus -- that additional focus by everyone, I think helped us a bit. But we also had a bit of a shift to domestic versus export and that also helped our DSOs.

And last question is kind of a follow-up to Luke's question a few minutes ago. I think it was Luke's. The dividend reduction or the elimination of the dividend covenant and the revolver. I was wondering if that something that you pushed for or was it something that was just kind of granted as part of the deal?

Well, I think in the context of negotiating any agreement, you try to get the best agreement you can. You try to eliminate any kind of restrictions and I think in more in the context of covenants. We have worked hard to make sure that we minimize the covenants.

Eliminating the dividend restriction was just an element of sitting down and saying, we want the flexibility to do everything we want at some point in the future. So that was why we -- that's why it's out. It's just a matter of giving us flexibility to do the things that we need to do at some point in the future.

I see. Well, I guess extending that a little bit further. The inventory reduction alone should help you generate, pending on certain measures going into the cash flow statement, should give you some pretty good cash flow in the year. Can you kind of pinpoint one, two, three -- what you would be using for -- you know, what your order of priority would be on cash?

I think in the short-term, it's about just making sure that we have an insurance policy to make sure that we can deal with anything that might come up that's unforeseen. We still have got to continue to operate the business and buy inventory for operations.

We still have a CapEx program that we want to continue to fund. Because again, that has to be done to continue to pay benefits for us in the short-term and our customers in the long-term. It's the same issues; working capital, CapEx. Again, those are the short-term requirements that may get the focus.

Thank you very much.

Thank you.

Our last question is coming from Nate Kellogg with Next Generation Equity.

Hi, guys, how are you doing this morning?

Good morning, Nate.

Just a little bit going through the last caller's question. But I guess -- you guys have talked about it before. That about a third of the business is contract and then the third is PO and the third is spot.

I guess, just kind of drilling down a little bit more. I mean, were you seeing any price degradation on sort of the contracts or the PO business that you would expect? Historically, you match up the raw materials with the pricing when you get the order in and so that you shouldn't see much margin compression on that down the line as raw material costs have changed. Have you had to give back any price on sort of that two-thirds of the business or is this all really from the spot side?

We do have escalators in a number of the contract business that we have. You know, some of them are built in. So you do make some adjustments on price. Now, as Marcel said, pricing is set at essentially data order entry. But it is limited.

Essentially that price might be limited for a 12 or 13 week period as we see what's going to happen. So we have various types of contracts that are out there.

You know, as Marcel had mentioned, one of the key things that we saw in the quarter and we will continue to see going forward is this change in the mismatch, so to speak, of the metal value that we have in products flowing through our operations right now compared with the metal value that's being priced into either contract or transactional spot buys, things like that, the current metal value that's out in the competitive market place.

Great. No, that's helpful. I get that. And then on the CapEx, I think you guys originally said about $15 million for this year, but it sounded like in the press release that maybe that was up for negotiation. I'm sort of curious, whether there is sort of an update. Fifteen doesn't make sense or whether you would like to do a little bit less than that. Where that looks like that might shake out.

We will sit down and evaluate that. We do that with any CapEx program. But I think if you just think in terms of what that $15 million. That's still a relatively modest CapEx expenditure amount for a company of our size.

We have some key projects that we need to do, either beneficial for us and for our customers. They are quality related. They are capacity related. Again, yeah, we will probably do something in that vein. That's not a -- we may do a little bit less. We might do a little bit more.

If we find something that we get a benefit much quicker from, we might choose to do that. Again, so it's a 15 is where we start out, and it can go up or down. I mean, it's a relatively, you know, flexible process for us, but I can expect to spend something close to that this year.

Okay. And then you -- I think you are looking at about $3.50 to $4 million a quarter in pension expense. Is that right?

The pension expense is probably about $1.25 million. The cash funding is about 3 to 4 -- I think about $3 million a quarter.

Right and that's actually what I'm talking about. I'm talking about the cash flow side. I guess my question is you have CapEx you talked about and then the cash funding on the pension.

Those are of sort of the two biggest expenses you will have on the cash basis for the rest of the year going forward, correct?

Yes, I mean, those are the amounts you have spoken to from a cash -- the CapEx program, and the cash funding for the pension plan.

Okay. Okay, that's helpful. And then I know just trying to get a sense of seasonality. I know it's a little tricky with your business just because depending upon when orders hit and what not. But obviously with [back] the last couple of years.

Q1 does seem to be a little bit seasonal. Your first quarter -- the fourth quarter of the year, just because people get shut downs at the end of the year and what not. With the way the economy has unfolded, it makes it challenging.

Would you still expect that that Q1 -- do you still feel that there was some slowness seasonality wise in the quarter that you just reported? Or because of the way things are unfolding in the broader world, that sort of all bets are off as far as what the seasonal patterns look like.

If you look at our business we are very heavily project related. And we had a pretty strong Q1, as far as, volumes holding up pretty well. We made some real nice inroads into cutting back our past dues in the plants.

So Q1 was a fairly strong at 4.8 million pounds. It was fairly strong, as far as the volume flowing through. I understand where you are coming from though.

Normally, you think that fourth quarter of the calendar year just being naturally fewer shipping days. Like the first quarter of the calendar year with the lunar new year is always slower in the Asia Pacific region.

I think the real wild cards that are out there now are definitely the economy and timing of projects. There's a lot of just unclear and almost conflicting information coming out of the aerospace segment. Between here are the backlogs and here's what are they stand for.

I don't know if you saw it but Saturday night there was a nice article in the Seattle times, talking about the leasing companies and what they thought the demands would be this year, which was a little bit in conflict with the stability of some of the prior information. That's critical.

We mentioned things like the chemical process industry and dropping chemical commodity prices and what you are seeing in the chemical industry. And the timing of projects there and what will happen going forward.

And the land-based gas turbine business for us. Again you get conflicting reports. Some people have good quarters. We had a very good quarter shipping into land-base gas turbines and some other people mentioned they did not have very strong quarter shipping into there. A lot of it too, when you go out and talk to customers, it's the difference between the OEM and the MRO business.

The MRO guys seem to be doing extremely well with strong, steady backlogs. The OEM guys are still going pretty well but they speak to you a little more cautiously. I'm giving you a long answer to that, Nate.

But I think really when you think of our business going forward at least this year. I think it's critical to think from it from a project point of view. Capital projects that are out there. And just the basic, the timing of the economy that's out there. A lot of caution as we go forward.

Yes, no. Absolutely.

Our volumes are holding up very well though. We are very pleased with where the volume was the first quarter.

Yes, especially in the land-based gas turbine business. Obviously, that held up particularly well. A nice quarter for you guys. Listen guys, I appreciate the call and thanks for taking my questions and that's all I've got for now.

Thank you.

Again, everybody, thank you very much for your support of Haynes. It is a very cloudy environment that we are all dealing with. And you are seeing, I think across everybody in industry these days.

We are staying very aggressive out there. We are out in front of customers. We are doing a lot of great things in the plants too. The group in the plants are doing great jobs as far as velocity as well as getting the on-time delivery numbers up. It's very impressive.

A lot of good things to talk about but as we mentioned, we wanted to make sure on this call we gave you a very strong indication of what the challenges are that are going to face us in the upcoming quarters. So, again, thank you very much. We appreciate it and we'll look forward to talking to you again.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.