Haynes International Inc (HAYN) 2009 Q2 法說會逐字稿

Greetings and welcome to the Haynes International, Inc. second quarter 2009 earnings conference call. At this time all participants are in listen-only mode. A 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, Ms. Stacy Kilian, Vice President and general counsel for Haynes International, Inc.. Thank you, you may begin.

Thank you, Diego. Good morning. Welcome to the Haynes International Inc. earnings conference call for the second fiscal quarter ended March 31, 2009. This call is also being broadcast over the internet. With me today are Mark Comerford, President and Chief Executive Officer of Haynes, 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 1933 and section 21E of the Securities Exchange Act of 1934. The words believe, anticipate, 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 statement are reasonable, such forward-looking statements are subject to a number of risks and uncertainties and we can provide no assurance that such plans, intentions or expectations will be achieved. Many of these risks are discussed in detail in the Company's filings with the Securities and Exchange Commission, in particular in its Form 10-K for fiscal year ended December 31,2008. 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.

In addition we will discuss certain non-GAAP financial measures on this call. In accordance with applicable SEC regulations reconciliations of the difference between these non-GAAP financial measures and the most directly comparability financial measures calculated and presented in accordance with GAAP were included in our press release and are available on our website at www.haynesintl.com under the investor relations tab.

I will now turn the call over to Mark.

Thank you, Stacy. Good morning, everyone, and thank you for joining us. By now I believe you've all seen our earnings release for the quarter and had a chance to review information. I'll briefly recap the quarter's results, but I'll spend most of my time today discussing the current marketplace and largely the marketplace relative to Haynes. I probably won't cover a lot of the macros -- I think most of you have had quite a bit of that already -- but then I'll turn the call over to Marcel and Marcel will give you a deep dive into the numbers.

Briefly our second quarter results included revenue of $120.4 million, down 26.5% compared to the second quarter of fiscal 2008. Consolidated volume in the quarter was 5.4 million pounds, down 11.7% compared to the second quarter of fiscal 08. Excluding a $43.7 million noncash charge to reduce the carrying value of goodwill we had a net loss of about $20,000, that's less than $0.01 per share. Cash provided by operating activities in the first six months of fiscal 2009 was $43.2 million. The cash balance at the end of the second fiscal quarter was $30.4 million and we have a $0.00 revolver balance.

As expected our second fiscal quarter was negatively impacted by the high-cost inventories we're moving through our system, along with lower average selling prices in our markets and the volume softness as a result of the downturn. We expect that shipments, order entry and pricing in all of our markets will continue to soften through calendar 2009 at a minimum. We continue to believe that we will achieve profitability for the fiscal year, excluding the goodwill impairment charge, but we expect results significantly below those seen in recent years. The third-quarter results may be even further negatively impacted by high-cost inventory and continued reduced absorption as a result of the lower volumes. In light of an environment of both lower volume and lower pricing we took steps in second quarter '09 to reduce our cost structure by reducing our global workforce. We expect the full benefit of these reductions to be reflected in the third quarter. However, because we expect that markets are going to continue to soften we're making additional reductions in our cost and spending to align ourselves better to the current market demand. Specifically, we are reducing employment costs further and are adjusting production schedules. These reductions are being implemented in the current third quarter.

Until we have a clear sense that market demand is improving we will continue to conserve our cash. We do feel it is important, however, to balance our cost cutting measures with the long-term growth and success of the Company. That's why we're continuing to maintain our commitments to investing in R&D for new application and new products. In addition, we are also focused on critical capital projects to optimize the operational efficiency,focusing our on efforts on velocity, reliability and service. We continue to believe that these activities are key in positioning ourselves for the eventual upturn in our key end markets. All spending is being scrutinized, but we're not cutting investment in our future.

Although we will continue to conserve cash in the near term we're continuing to work on strategic plans for when markets begin to improve. We're looking for possibilities for growing the Company, which include offering our alloys and forms, other than our core sheet form; continued expansions in our service centers by adding value-added equipment and capabilities; strategically determining whether we're in the appropriate worldwide geographic locations; and finally, finding new applications and new markets for our core products.

Reviewing the outlook for our key markets, as reflected in build rates aerospace demand has slowed and our expectation is that this market will continue to soften until we see global economic recession begin to reverse. In general this is also the sentiment of our aerospace customers who manufacture components and engines. During recent customer visits they indicated to me that, although current backlogs are relatively strong they're concerned about engine demand in calendar 2010 and they're leaning out the supply chain in 2009. An April report by Aerostrategy Management Consultants forecast 2010 as the low point of large commercial aircraft deliveries. If that is the case we may see a pickup in demand for the Company's products sometimes during the course of our fiscal 2010. This assumes, of course, that the global economy begins to recover, positively impacting the aerospace industry.

Compared to our other key markets declines in the land-based gas turbine market are relatively mild and the MRO business, in particular, is holding up. We do believe that demand in this market is likely to decline further over the balance of the fiscal year. Looking forward a bright spot may be the recent pickup in the Chinese economy, which could offset some of the weakness in the western land-based gas turbine markets. I was in China last week and whereas things do, indeed, appear to have picked up over there I'd still be a little bit cautious about the level of that pickup and increased activity. In my opinion it's still well below the boom times of 2006 to 2008.

The chemical processing market has also been significantly impacted by competition and declines in demand in both construction and maintenance activity. Heightened level of competition is especially prevalent in China. We expect pricing to remain soft in the market in upcoming months due to overcapacity at the metal supplier level, as well as its fabricator level. Demand will continue to be spotty, as current construction projects begin to close out and fewer new projects come on line, at least foreign the next 12 months, in our opinion and we expect orders in this market to be weighted towards smaller MRO orders placed at service centers.

Looking to group of markets that we call other, volume has not been hit as hard due to our continuing efforts to increase sales into these markets which fall into this category and also to expand the number of markets we serve. For example, our new market development efforts have experienced increased business in products for construction of plants that poly -- that manufacture polycrystalline silicone for [photovotags]. This, along with several other efforts in the solar power area are continuing to move forward and we expect to see increasing orders for products we supply into these applications. As I mentioned earlier we continue to invest time and resources necessary to develop markets and applications for the Company's new proprietary alloys. In particular, our Haynes 282 alloy is being used in applications in both aerospace and land-based gas turbines. Moreover, the Company's new HASTELLOY G-35 and HASTELLOY hybrid VC-1 alloys are also being considered in several critical applications in the chemical processing industry. Also, kind of interesting, our G 35 was recently specified for some components in a new nuclear power application.

I'll now turn the call over to Marcel so he give you greater detail on the numbers.

Thanks, Mark. Good morning, ladies and gentlemen. I will briefly review our second-quarter results and the outlook for the remainder of the fiscal year. Net revenues in the quarter were $120.4 million, a 26.5% decline from a year ago. This decline in revenue of $43.4 million is due to lower volume and selling prices between quarters, primarily as a result of the economic downturn, which continues to have an increasingly unfavorable effect on our top-line results, as our three primary markets slowed. In the quarter the volume decrease of 11.7% accounted for $19.2 million of the reduced revenue, while a decrease in average selling price of 16.7% accounted for $24.2 million of the revenue reduction compared to last year. Reduced volume is clearly result of the economic environment, while the pricing decline is a combination of competition in the marketplace and lower raw material costs.

The second quarter gross profit was $7 million compared to $35.9 million a year ago, or a reduction of $28.9 million. Our gross margin percentage in the period was 5.8% versus 21.9% last year. The items that contributed to the reduced gross profit were reduced volumes in selling prices between periods leading to reduced revenues, which reduced gross margin by approximately $9.5 million. The flow of higher-cost material from inventory through cost of goods sold compared to last year reduced margin by approximately $10.4 million. The lower fix cost absorption, due to reduced volumes compared to last year, reduced gross margin by approximately $9 million.

Moving now to income statement, our SG&A expenses decreased by 17.6%, or $1.8 million in the quarter compared to last year. This is result of actions we've taken to reduce headcount and spending. But more fully disclosed in our 10-Q and press release we had a goodwill impairment charge of $43.7 million in the second quarter. While the goodwill impairment charge will reduce 2009 operating results under US Generally Accepted Accounting Principles the impairment is a noncash charge and will not affect our liquidity position, cash flows from operating activities or compliance with our debt covenants. Included the goodwill impairment charge there was an operating loss for the quarter of $45.8 million compared with $25 million in operating income in last year's second quarter. Excluding the impairment charge the operating loss for the quarter was $2.1 million.

For the quarter there was a tax benefit of $3.1 million, which was comprised of $900,000 from the pretax loss from operation. a $1.3 million tax benefit associated with the adjustment of tax expense associated with the undistributed earnings of foreign entities that are permanently reinvested and a tax benefit of $900,000 resulting from a portion of the goodwill impairment charge associated with the acquisition in 2008 of the Chinese marketing company, H. Wang. For the third and fourth quarters the effective tax rate is forecast at approximately 33%. The items noted resulted in a net loss of $42.9 million, or $3.58 per diluted share, versus net income of $15.1 million, or $1.25 per diluted share in last year's second quarter. If adjusted for goodwill impairment charge the net loss was $20,000, or less than $0.01 per diluted share in the second quarter. As Stacy noted at the beginning of the call reconciliation of our net income, excluding goodwill impairment charge, to the most directly comparable GAAP financial measures were included in the press release and are available on our website.

Looking forward in terms of our profit performance, we expect the declining volume and competitive environment to continue to put increasing pressure on our earnings in the second half of the year. In addition, our earnings in the third quarter will continue to be unfavorably impacted by the effect of high-cost inventory funneling through our cost of goods sold, however to a lesser degree than we experienced in the most recent two quarters. By the end of the third quarter the cost of our inventory will approximate our current cost and we expect that gross profit will not be materially affected by the issue -- by this issue after the third quarter, as long as our volume and pricing stabilize. In addition, we believe we will see further improvements in operating performance from our focus on reducing costs in the fourth quarter. Taken altogether we expect our gross profit margin percentage to move back up to the range of 10% to 15% in the fourth quarter. However, everything is dependent on the end market -- on our end market conditions not deteriorating beyond our current outlook.

As noted in the 10-Q and press release the backlog dollars have declined 23% from December 31, 2008 and 39.4% from June 30, 2008. The backlog continues to be a very good indication of our level of future sales. The decline by individual markets of the US backlog dollars from December 31, 2008, to March 31, 2009, and from June 30, 2008 to March 31, 2009 is as follows. The percent decline for our markets from 12-31 to 3-31 for aerospace was 22%; for chemical processing 39%; land-based gas turbine's backlog was down by 30%; and other markets were down by 21%. Percent decline from the period ending 6-30-08 through 3-31-09 were as follows: For aerospace our backlog was down 43%; chemical processing was down 57%; land-based gas turbines was down 44%; other markets were down 41%.

We continue to expect that we can achieve profitability for the fiscal year, excluding the goodwill impairment charge, but we expect that results will be significantly below those seen in recent years. We expect continued declines in volume and pricing to unfavorably impact results for the remainder of fiscal 2009 and into fiscal 2010. The third quarter will continue to be negatively impacted by our high-cost inventory and continued reduced absorption, which inflates our cost of goods sold.

Now I'd like to shift to cash. Our cash flow performance, particularly inventory reduction, was clearly the most rewarding aspect of our second quarter results. The thing which has made the reduction in production -- the thing that has made the reduction in production time and inventory possible has been the completion of our capital projects that were started in fiscal 2007 and the increased reliability of our equipment that resulted from those efforts. In addition, we have aligned our subsidiary and customer inventory requirements and initiated the application of Lean manufacturing techniques, all of which have assisted in our efforts to reduce inventory. Obviously the slow down in order activity is also contributing to the reduced inventory. The result of these actions has been to reduce inventory over the first six months of fiscal 2009 by almost $62 million. It is anticipated the reductions in inventory will continue and by the end of fiscal 2009 we expect that inventory will be reduced by another $23 million to $220 million, in line with our previous estimate of an annual reduction for fiscal 2009 of between $55 million to $70 million.

The key focus of our efforts in the process is to position ourselves so that when business improves the inventory build required to support the upturn will not be as demanding as it has been in the past. Inventory and cost reduction efforts continue to be a high priority within the organization and it is our objective to replicate in the second half of the year improvement in our cash position similar to the first half. Inventory reduction is the -- obviously key to this process, supported by continued cost reduction efforts. We started the year with $7 million in cash and improved that by $23 million to finish at $30.4 million in cash in 3-31. We believe that we can match that increase in the second half so that we finish the year with cash between $50 million to $55 million. In addition, we continue to evaluate capital projects and expect to finish the year at or below the $15 million we forecasted earlier. Beyond this year, should the downturn continue CapEx is one of the areas that we will continue to evaluate in light of our cash flow. We continue to maintain a strong and conservative balance sheet. We have strong liquidity position and our minim -- and minimal debt covenants give us a good financial flexibility. We are closely monitoring our accounts receivable and other areas of financial exposure.

With that let me turn things back to Mark.

Thank you, Marcel. In closing, our objective in this downturn is to optimize our corporate structure worldwide and prepare for the upturn while preserving our strong balance sheet and conservatively managing cash. We're pretty focused on cash generation during this period and we recognize right now that we have to intensely manage the day-to-day business until our customers start to see light at the end of the tunnel. With that being said let's open the floor to questions.

Thank you. (Operator Instructions). Our first question comes from Edward Marshall with Sidoti & Company. Please state your questions.

Good morning, everyone.

Morning.

So the first question's on -- you had a pretty good quarter from a volume perspective on the turbines but pricing was way down. My question is, are you cutting prices just for the volume or what's going on there?

No, it was largely -- we sold a lot into the [forage] product area so we had a bit of a change in mix more so than anything, Ed.

Okay. And not to be greedy here, but how much more inventory can actually be removed from the system? You did a pretty good job with a 20% reduction in the inventory so far this year. I know you say $55 million to $70 million, but can we actually do better than that?

Well, I think -- that was our initial estimate. If you think about what I just commented on and we've got our inventories down to about $243 million or so at the end of March and we look to reduce that by another $20 million through the course of this year -- another $20 million, $23 million, so we anticipate ending the year probably around $220 million, 215 million, in that range.

Okay. You had mentioned earlier in the call land-based gas turbines with MRO to OEM, do you have that breakdown for us?

We make estimates of it, Ed --

Okay.

-- and typically in that market I think we pretty much apply a mix number of about 55/45 typically slanted towards the OEM. But we think -- I mean, that's going to change. The OEM guys are probably the first ones right now saying it looks like things might back off a little bit and what I really should say is they're being very cautious now, whereas the MRO guys are pretty much going great guns. They express some caution. as well, when I talk with them, but for the most part they're still with pretty solid backlogs out there.

Okay. Then Marcel, I'm sorry, I missed your commentary on the backlog. Did you give orders heading into backlog for individual segments?

I did. Essentially I talked a little bit about our US backlog and the reduction from 12-31 to 3-31 and from 6-30 to 3-31. I don't really foc -- I'll just repeat the change from 6-30 of last year to 3-31 of this year because that's probably the more key one.

Right.

Aerospace is down 43%, our backlog for chemical processing's down 57%, the land based gas turbines are down by 44%, and other markets are down by 41%.

Okay. Now, you said that's the change in backlog, but how much of the change in backlog is because you guys are producing at a relatively quicker rate through your -- did you quantify that because your equipment upgrade is it making you burn through your backlog faster or is it just that orders are down?

Well, I think it's a combination of both. Really it's a combination of just the reduced -- reduction in activity in the markets, that's clearly a factor. There is the fact that we have accelerated our ability to produce product, that has had an impact. And you also are the impact of just lower raw material costs affecting average selling prices, also. So those three elements impact the reduction. I'm not quite sure -- and if you said it was a third, a third, a third you won't be too far off the mark.

Okay. So the numbers that you just gave us kind of overstate what you're seeing as far as an order flow in the market (inaudible)?

That's true. That's absolutely right.

Okay , thank you very

(Operator Instructions). Our next question comes from John Deysher with Pinnacle. Please state your question.

Good morning.

Morning John.

The headcount reduction that you alluded to, I'm reading from your 10-K and it says at September 30, 2008 you employed approximately 1,138 full-time employees. Where was that employee count at the end of the quarter? And I think you said you were reducing it even more this quarter, where do you expect it to be at the June 30 quarter?

We finished the quarter at 1,009 people, pretty much right on target with what we had anticipated, the 11.5%, 12%. So that's what our target was and that's what we achieved. Now, as Mark indicated, we're in the process of evaluating things that we can do, some of which will be possible headcount reductions. But there are other ways relative to achieving the cost reductions; reduced days per week, reduced shift time. We're looking to be just more effective, because part of the challenge when you reduce headcounts is that you impact your lead times, your production capability, so it becomes a bit more challenging at this point.

Yed, I think what you're seeing out in the industry in general, John, is a lot of people are flexing work schedules and things like that to reduce employment costs and, frankly, also reduce just general spending, so we're exercising a lot of that. Will there be some headcount reductions? Yes, we've got some attrition and things like that coming up and we're very careful about hiring. We've got some retirements and things coming up. And we are constantly looking at the organization. As I mentioned, are we in the right parts of the world, et cetera. So we're not doing anything as far as a broad swag type of layoff type of situation, but we're taking very, very targeted actions over the next X number of months as we watch the order book, more so than anything. We've got to make sure that we adjust and get our cost structure in line with what the order book is telling us.

I see. So no formal reductions so far this quarter?

We have had some, yes, but nothing that I'd say is huge, just a couple here and there type of situations.

Got it, thank you.

Thank you. Our next question comes from Nat Kellogg with Next Generation Equity Research. Please state your question.

Good morning, guys, thanks for taking my question. I think we saw a couple weeks ago or so -- maybe a little longer than that -- that some of your -- some of the guys in the industry -- some of your competitors raised pricing a little bit, I think on some of the more commodity end products but I know you guys have talked in the past -- and, again -- or at least that if stainless steel pricing improves a little bit that that might help some of your competitors move out some of the areas you guys focus on and lower the competitive pricing. So I'm curious to see if that's had any effect yet or whether you expect to see some effect from that down the line? Any sort of commentary would be helpful.

I think it's real preliminary, Nat. I saw same things. I saw something like a $0.05 a pound increase in some commodity materials and things like that.

Right.

And I heard some of the other calls where it sounds like maybe some of the housing and appliance markets are starting to pick up a little bit, and even some mention of maybe a bottom being put in on the automotive side. I think that's great for those guys. I really would like to see that firm up for some of the big mills and when they get busy it's a good indicator for the rest of the industry. But right now, Nat, no, we're not seeing anything along those lines of market strengthening such that we could say anything definitive like that. Right now we're still in a situation where, as Marcel mentioned, we're seeing the backlog declining still, but we've got a lot of great things going on as far as new applications that we're working on.

Sure, okay, that's helpful thank you.

Yes.

And then on the gross margin, you talked about for the fourth quarter in the 10% to 15% range, is that what margin you guys could expect to make given the current volume rate and that sort of assumes more normal balance between raw material prices and inventory versus shipments, or is there still going to be some drag from higher-cost inventories and raw material in that 105 to 15% number?

No, I think that that 10% to 15% is reflective of us being pretty much through the issue of the raw material.

Okay, okay.

That might be a little bit of moly overhang, but the real decline. I think. was -- and it hit about everybody -- was the collapse in October, especially with respect to us was nickel.

Yes.

So a little -- you saw the moly thing drop really in the first quarter of the calendar year more so than anything and that might have a small impact. But the real big one to get out of the way, like Marcel's saying, is get that nickel one out of the way.

Okay. Okay, that's helpful. On the deferred revenue that you guys are recognizing, is that on a straight-line basis or does that have any relation to rolling the amount -- on the schedules and the amount you guys actually produce?

That's on a straight-line basis.

Okay, that is, All right, that's helpful. All right, guys, thanks again for all the color you guys have given, I appreciate it and I'll hop back in the queue.

Thanks, Nat.

Our next question comes from Rob Moffett with Longbow Research. Please state your question.

Hi guys. I noticed your comment about 2010 being a low point in aerospace and I was wondering what's your timeframe for some strengthening in that market?

Right now we're just - we're pretty much looking at the same data that everybody is looking at, be it the Airlink information et cetera. I think a lot of people with the aerospace -- that are involved in the aerospace industry are waiting to see what Boeing says in -- I think June they're going to come out with their new production schedules and the current market outlook will probably follow shortly after that. But really what we've seen -- and I think you see the difference sometimes. We're very engine-dependent here so the aero engine guys have been very disciplined in pulling back and trying to right size their supply chain whereas I think there's a lot of take-and-pay -- take-or-pay agreements out there on the airframe side. A lot of the airframe guys, or supplying into the airframe industry have still been holding up relatively well. Everything we've seen in talking to the engine people has said that really what they're doing is reducing the supply chains out and leaning it out a little bit in anticipation of reduced deliveries for the 2010 year, that being the low point. Again, I think the qualifier comes back in as long as the worldwide economy starts to pick up again.

So maybe something closer to the second half of '10?

We keep thinking fiscal 2010, but yes, I think your number there is correct. If you ask me just off -- we think this continues through calendar '09, which covers our first quarter of fiscal '10. So to think that it might start to come back a little bit later in fiscal '10 is kind of what we're thinking right now.

Great, thank you.

You bet.

Thank you. Our next question comes from Mark Hoffman with J.J. Kenny Drake. Please state your question.

Good morning guys. Looking at the inventory number and I'm trying to figure it out in that you've got about $240 odd million in inventory value and about $22 million in payables and I'm just wondering why -- and you're assuming that sales will continue to decline, why I wouldn't see more of -- and you're anticipating pricing to continue to decline, why wouldn't I see more of a decline in your inventory levels, or are you trying to take -- or are you thinking about taking advantage of pricing of raw materials here?

Well, I think the key thing that we're faced with is a significant amount of uncertainties across a broad array of topics. We're hoping that volumes hold up, we're not sure they will. Raw material prices could begin to rise. We have seen a little bit of strengthening in nickel, not quite sure where that's going to lead us. Again, there's our -- just the process we're going through relative to our downsizing of staff, particularly out in the mill, that does affect our ability to process product. So again, there's a lot of moving parts to this process and, again, based on all those uncertainties and that's what I indicated as to what our reduction will be is what we feel comfortable sharing with everyone at this point.

Thanks very much, good luck.

Thank you.

Our next question comes from Edward Marshall with Sidoti & Company. Please state your question.

Just as a follow up, did you guys have any -- what was the quantification of the cost cuts in the quarter from cost of goods and SG&A, if there was any?

Relative to the indiv -- the people cuts the total was $8.4 million for cost of goods sold relative to headcount reductions on an annualized basis, $1.1 million SG&A on annualized basis, and then we also had the pay freeze take place, that was about $1.5 million. So in aggregate the annual -- when you annualize those savings or those processes it's about $11 million over the course of a year.

But did you get the full effect in this quarter?

In the second quarter we did not.

Okay.

We only initiated those changes in January toward the end and then you had severance costs that offset some of the benefits and we'll get to see those -- the full effect of those in the third quarter.

You can't break out what it was for the individual lines within the quarter to help us work backwards into some of the other cost lines? If you have those numbers.

I don't really have those numbers available. Could we -- if I -- and it's a good question, Ed, I just don't have the numbers at my fingertips.

Okay, okay. We can follow up later. And then as we build up cash here, as you guys generate pretty decent cash flow this year longer term perspective, what are thoughts for the use of cash. Is there the possibility of acquisitions? If there was would it be a mill acquisition or maybe a service center acquisition, what would be your thoughts for use of cash going forwards longer-term perspective?

I think right now, Ed, we're staying focused on the operation of the business day to day and looking long term at opportunities. So for the time being we really want to see if we can ride out this storm. We are looking for opportunities and we'll continue to look for opportunities for the cash, but right now the focus at the Company is really in getting through this storm.

But if we're looking out maybe at 2011 -- late 2010, 2011 timeframe, would acquisitions ever be a thought processor or would it be more of an internal growth?

Everything's on the table, Ed. What we're going to do is look for the opportunities that we think are going to be the best opportunity for us to grow the Company and enhance shareholder value.

And the million dollars question -- which you probably won't have an answer for -- but would you care to take a stab at a rebound here, when the market rebounds?

No, I think everybody's avoiding that right now Ed.

Fair enough. Thanks very much.

Excuse me, Ed, I was thinking about your question, just looked at the numbers a little bit. I would suspect that in -- based on the quick calculation I did here, I suspect that the --- or my estimate is, in the second quarter we probably saw about $2 million of favorable impact partially offset by the severance cost, about $700,000, so we probably had net maybe $1.7 million to $2.2 million positive effect in the second quarter.

Okay. So if we take -- and we will see the full effect?

In the third and fourth quarters.

Okay. So that will ramp -- we'll see additional increase of about maybe $0.5 million to $1 million -- or $0.5 million to $0.75 million impact in the third and the fourth quarter if my quick math is right?

Yes, yes.

Thanks very much.

Okay.

Our next question comes from Mark Parr with KeyBanc Capital Markets, Please state your question.

Good, thanks very much, good morning.

Morning. Mark.

I was wondering if you could -- Mark, if you could give us an update on the asset upgrades. You had a multi-year program that, unfortunately, it's a little difficult to see it in this market environment, but what can you tell us about the upgrades?

I tell you what, Mark, as Marcel mentioned we're continuing to hold firm to the CapEx plan of about $15 million this year. We're reprioritizing some projects. We also got some rebids on some projects that helped out a lot, so we're in pretty good shape there. I think for the purpose of these calls the thing that I've probably noticed, more so than anything, is if you remember a year or two ago when you would listen to these calls you were constantly talking about unplanned outages. So I think the work that Frances and the staff here did to upgrade equipment and the capital expansion program -- and I should really just say the reinvestment in equipment -- I think was extremely successful. Knock on wood we're not talking about those types of issues any longer. We're starting to talk more about velocity through the mill, we're starting to talk more about reliability and the capabilities and I think that's testament to the investments that have been made previously.

We just met with the board this week to talk about the [Forhigh] mill and some of the upgrades that need to be done there that are a bit overdue and we're going to take those on. We're just going to continue to reinvest. Look at the equipment that we have here and see where we need to do things and where it's going to pay off for us. We think there's some more business that we can get out there through some of these upgrades and we also think; one, it's going to increase our reliability which, I've said on previous calls that there is a number one issue we have in the eyes of customers it's our reliability and we're really working to resolve that issue and I think we're getting better all the time. In fact I know we are, the data says we are. So a lot of good programs going on in that vain.

I just -- I'm really glad to hear that. I haven't had a chance to listen to the entire call, but I know that previous calls you talked about the ability to burn through the safety stock that was necessary while the upgrade activity was in place and I know you've had commentary about working capital reductions over the course of the next several quarters, but to what extent does that -- is there a residual effect that could be incremental from the safety stock issue?

As far as the safety stock goes we've taken that out of the process. We did a --- we knew what that was. That was approximately $30 million of inventory and that actually started to come out in the last quarter of our fiscal 2008. So all that mater -- all that inventory's out of the process. I'm not sure you heard the commentary. We're at $243 million at the end of March on inventory. We look to take another $23 million out by the end of the year.

All right, terrific. Thanks, Marcel.

Ladies and gentlemen, there are no further questions at this time. I'll turn the conference back over to management for concluding remarks.

Thanks very much, Diego. Just want to thank everybody for your support of Haynes, appreciate everything you're doing. I think you see that the management group here recognized the downturn, when it was coming. I think we acted quickly. We still have a very difficult period, challenging period facing us, and I think like most of the people in the materials industry, and industry in general, the vision out there remains very cloudy. We're going to be very supportive of our customers, we're going to continue to develop new applications and new alloys. I'm very encouraged with some of the things we're doing as far as developing new markets, especially in the alternative energy area. s I mentioned, the nuclear application that we just picked up and we've got quite a bit going on in the solar area, so I'm very pleased with the -- some of the work that's being done in that area. I think we're doing a great job positioning the Company for the eventual upturn. The key is going to be make sure we manage the business very tightly on a day-to-day basis as we continue to go through the difficult period. So again, thanks very much everybody, appreciate your time. We'll look forward to talking to you again.

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