Haynes International Inc (HAYN) 2009 Q3 法說會逐字稿

Greetings and welcome to the Haynes International, Incorporated Third Quarter 2009 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, Stacy Knapper, Vice President and General Counsel for Haynes International, Incorporated. Thank you. Ms. Knapper, you may begin.

Thank you, Rob. Good morning. Welcome to the Haynes International, Inc. earnings conference call for the third fiscal quarter ended June 30, 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 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 ended September 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 differences between these non-GAAP financial measures and the most directly comparable 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.

Thank you. 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 the information. I'll briefly recap the quarter's results, and then get into what we are seeing in our core markets. I'll then turn it over to Marcel for a more detailed view into the numbers.

Our third quarter results included revenue of $98.3 million, down 41% from the same quarter last year. Volume was off 30% from third quarter of '08 to 4.4 million pounds. Pricing was off 16% to $22.45 per pound. Cash at the end of the quarter was upto $83.9 million. As a result of the higher cost inventory and lower volume and lower price levels, we finished with a net loss of $10.9 million or $0.91 per share for the quarter.

Over the past few weeks, we've seen some stabilization in order entry volumes and pricing. However, we are seeing this stability in very low levels. We've been encouraged that some of our peers who service the more consumer-oriented automotive, housing and electronics markets are reporting stronger demand for materials targeted at those applications, and from this it appears that some of these leading markets are starting to restock and possibly emerge from the depths of the recession. With respect to Haynes, our core markets are often referred to as late-stage recovery markets and in keeping with that description we have not yet seen an increase in demand for our products.

As we discussed during our last quarter, we expected our high cost inventory combined with the difficult economic environment to present us with our most challenging quarter to date. In view of the continued softness in the high performance alloy business worldwide, we took further actions this week to reduce our cost structure in order to more closely reflect demand levels and market activity. These actions along with those we took earlier in the year should allow us to operate at levels of roughly break even to slight losses over the next few quarters. This is contingent upon the economic environment and order entry, volumes and pricing remaining stable.

As I mentioned, we've seen some stability recently. However, we cannot definitively say we hit bottom. We simply do not have the visibility nor do our customers into the end use demand patterns. I will touch more deeply on this as we discuss the specific markets. We do expect that the current low volume and low pricing levels will make the operating environment very difficult into fiscal 2010. Marcel will speak to the specific savings associated with the cost reduction measures we've taken during the year in his section.

Turning to our core market outlook. We see this downturn lasting at least through the first six months of fiscal 2010, but we are confident that the longer term outlook remains positive for our three primary markets. Furthermore, we had a pretty good quarter in our new market development efforts. We booked a few nice orders in our nuclear supply chain as well as in our solar supply chain markets.

With respect to our largest market, aerospace, demand has slowed and as we are experiencing a disconnect between publicly announced build rates and OEM supply chain demand. In the past 12 months, our backlog in this segment has fallen 60% as customers lean out their inventory levels.

The meetings I had at Paris Airshow with customers and specifiers were excellent. On the positive side, their backlogs are immense. On the less optimistic side, they reflected a lot of caution with respect to financing and build schedules.

Customers are still busy, but they are not seing the equivalent reorders in the fabrication supply chain. I think this story is pretty much universal today. Lots of people in the supply chain are in a cash conservation mode and we don't see that changing dramatically through the remainder of the calendar year.

While some customers have said they feel the market is finished with de-stocking, others are projecting that demand softness will continue. The 60% drop in our backlog in this market is indicative of the supply chain leaning itself out. So our expectation is to see a more stabilized flow of demand if the planned delivery schedules are going to hold up. Just to remind everybody, aerospace comprises about 35% to 40% of our revenues, last quarter it was 37%.

In our land-based gas turbine market, which represents roughly 23% of our revenues, volumes continue to be less effected than in our other core markets. But as we said in the last call, our opinion is that this market lags the cycle, so we expect to see some falling demand here in the upcoming quarters.

Volume in the quarter dropped 7.5% on a year-over-year basis and dropped 16% in sequential quarters, although we consider the results in our second quarter to be extraordinarily strong. That being said, volume for the full fiscal year is up about 6% over last year at this time to about 4.6 million pounds in this market versus about 4.3 million pounds last year.

I was out at a few customers here in the Midwest recently and they continue to indicate that MRO and transactional business remains relatively brisk, but new projects appear to be slowing. Similar to what we hear in the aerospace sector, there is a lot of emphasis on cash conservation and delaying orders into the new year.

Moving onto chemical processing market, this area has been significantly impacted by competition and declines in demand in both construction and maintenance activity. This market represents about 24% of our revenue. China still seems to the area where we are seeing the most intense price in competition. Financing issues there seem to be less burdensome for our customers in China in the third quarter and that freed us up to make some shipments to the Chinese CPI market. On a broader perspective however, we expect that pricing and volume will remain soft in the worldwide CPI market even with some recovery in China. As we discussed previously, demand will continue to be spotty as current construction projects begin to close out and fewer new projects come online for at least the next few quarters.

Finally, in our other markets category as I mentioned earlier, this area continues to evolve as we develop new applications for long-term growth. Both solar power and nuclear fuel processing are presenting new opportunities and our product supporting the medical wire market are also doing well. On the downside however, the industrial areas such as flue-gas desulfurization, automotive and industrial heat-treating are well off prior year levels.

Our technical, marketing and field personnel are doing a great job in maintaining and growing our position in the marketplace. They are moving us into new markets and new applications and they are feeding back necessary information to our R&D group to create and market new alloys. Our new alloys, the Haynes 282 and HASTELLOY G-35 as well as HASTELLOY hybrid VC-1 are a testament to those activities. We are seeing some real good interest in this design cycle.

With that, let me turn it over to Marcel for a deeper dive into the numbers.

Thanks, Mark. I will briefly review our third quarter results as well as the outlook for the fourth quarter and the first half of fiscal 2010. Net revenues in the quarter were $98.3 million, a 40.9% decline from a year ago. This decline in revenue of $68 million is due to lower volume and selling prices between quarters, primarily as a result of the economic downturn, which continued to have an increasingly unfavorable effect on our top-line results as our three primary markets continued to slow.

In the quarter, the volume decrease of 29.6% accounted for $41.8 million of the reduced revenue, while a decrease in average selling price of 16.2% accounted for $26.2 million of the revenue reduction compared to last year. Reduced volume is clearly a result of the economic environment, while the pricing decline is a combination of competition in the marketplace and our lower raw material cost.

The third quarter gross margin line was a loss of $8.2 million compared to a profit of $40.1 million a year ago, or a reduction of $48.3 million. Our gross margin loss percentage in the period was 8.3% versus a profit of 24.1% last year and is significantly lower than anticipated. The items that contributed to the reduction in gross margin were significantly lower volumes and selling prices between periods leading to reduced revenues, which reduced the gross margin contribution by approximately $16.4 million.

The flow of higher-cost material from inventories with cost of goods sold compared to last year reduced gross margin by approximately another $13.1 million. And lower fixed cost absorption due to reduced volumes, particularly that of sheet, compared to last year reduced gross margin by approximately $18.8 million.

Moving now to the income statement, our SG&A expenses decreased by 18.9% or $2.2 million in the quarter compared to last year. This is the result of actions we've taken to reduce headcount and spending is slightly better than what we had previously discussed.

For the quarter, there was a tax benefit of $6.9 million, which was primarily a result of loss from operations. The effective tax rate for the quarter was 38.5%.

The items noted resulted in a loss of $10.9 million or $0.91 per diluted share versus net income of $17.6 million or $1.46 per diluted share in last year's third quarter. On a year-to-date basis excluding the goodwill, our loss is $6.4 million.

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 fourth quarter and the first half of fiscal 2010. However, our earnings in the fourth quarter and beyond should not be unfavorably impacted by the effect of high-cost inventories flowing through cost of goods sold.

At the end of the third quarter, the cost of our inventory approximated our current purchase cost and we expect that gross margin will not be materially affected by this issue on a prospective basis and as long as our volume and pricing stabilize. In addition, based on our personnel reductions and other cost reduction efforts, we believe we can offset a significant portion of the unfavorable effect of reduced absorption and selling price compression.

We expect our performance through the next three quarters will range from break-even to a small deficit per quarter with the first quarter of fiscal 2010 reflecting the weakest performance as customers conserve cash in the calendar fourth quarter. Typically the quarter is impacted by fewer ship days and extended customer shutdowns. However, everything is dependent on end-market conditions not deteriorating beyond our current outlook.

As noted in the 10-Q and press release, the backlog dollars have declined 25.9% from March 31, 2009 and 55.1% from June 30, 2008. The backlog continues to be a very good indicator of level of future revenue.

The decline by individual markets of the US backlog dollars from March 31, 2009 to June 30, 2009 and from June 30, 2008 to June 30, 2009 is as follows. From March to June, aerospace declined 30%, the backlog for chemical processing declined 27%, the backlog for land-based gas turbines declined 48%, and for other markets 8%.

Year-over-year June '08 to June of '09, the backlog dollars for aerospace declined 60%, chemical processing 68%, land-based gas turbines 71%, and other markets 49%. We expect continued declines in volume and pricing to unfavorably impact results for the remainder of fiscal 2009 and into at least the first half of fiscal 2010.

Although our P&L performance was disappointing, the cash generated in the third quarter was significantly better than anticipated. Our cash flow performance, particularly the inventory reduction -- the reduction in inventory, was clearly the most rewarding aspect of our third quarter result and this year's overall performance. As previously discussed, one contributing factor for reducing inventory has been the completion of the capital projects 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 including the concept of pull versus push for inventory management. All these actions contributed to our effort to reduce inventory. Obviously the slowdown in order activity has also contributed to the reduced inventory.

The combined result has been to reduce inventory dollars over the first nine months of fiscal 2009 by $106 million or by 35% while reducing the aggregate pound inventory by 3.5 million pounds or 20%. Approximately 34% or $36.2 million of the inventory dollar reduction is associated with the overhang high-cost inventory.

It is anticipated that by the end of fiscal 2009 inventory will be reduced by another $13 million and another 1 million pounds to approximately $186 million and 12.9 million pounds. The key focus of our efforts, which has been equipment upgrades and Lean manufacturing, 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 continue reducing inventory and improving our cash position, although not as much as in the past three quarters.

We started the year with $7 million in cash and a revolver balance of $11.8 million and have improved that by $88.7 million to finish the quarter at $83.9 million in cash. Our goal is to maintain our current cash balance and depending on selling prices, the cost of raw material, and our success in reducing cost, we anticipate improving on that balance by the end of fiscal 2009 and from there work at being cash neutral for fiscal 2010.

The key objective and goal for fiscal 2010 is to substantially reduce non-material cost. Based on the staffing reductions of approximately 18% since January 2009 and the other cost initiatives started, our goal is to reduce non-material cost year-over-year by $40 million. This plus the $36 million in high-cost inventory removed from the inventory should offset some cost associated with reduced absorption caused by lower volumes. In addition, we continue to evaluate our capital projects and expect to finish the year in between $10 million to $12 million on spending versus $15.1 million previously forecasted. 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 and we will probably look to spend between $10 million to $12 million in fiscal 2010.

We continue to maintain a strong and conservative balance sheet. We have a strong liquidity position and our minimal debt covenant give us good financial flexibility with access to a potential $120 million of borrowings. We are closely monitoring our accounts receivable and other areas of financial exposure and intend to conserve our cash until it is clear that our markets are improving. Then we will be prepared to take full advantage of the upturn in business.

With that, let me turn things back over to Mark.

Thanks Marcel. In closing, the current period is a severe cycle is forcing everyone in the industry to look at their cost structure and business levels and get the two in sync. Our objective in this downturn remains the same as a few months ago. We have to optimize our corporate structure worldwide and prepare for the upturn while preserving our strong balance sheet and conservatively managing our cash position. I am pleased with the progress we are making in our plans, but we have more opportunities to be relentless in driving waste and inefficiencies out of our system.

In the field, we stand very close to our account base, both fabricators and specifiers, and we will be there with the support for the existing application as well as materials for new applications when they need us. We got great alloys and great applications in our core business. We've repeatedly proven that we can move new products through our pipeline and into new applications as well. As we mentioned earlier, long-term these markets look very very good. We're just going through an extremely difficult period right now.

With that, let me open the floor to questions.

Thank you. (Operator Instructions). Our first question is from the line of Edward Marshall, Sidoti & Company. Please state your question, sir.

Good morning. Can you discuss -- and thanks for taking my call by the way. Can you discuss the order trends by month that you've seen so far I guess in July looking back to the previous Q2?

I think overall the backlog has continued to decline, but as far as the order trends are concerned and Mark spoke to this a bit, we've seen some stabilization over the past probably 12 weeks over the last quarter, where the order trend has stabilized and we feel that probably by the end of December the backlog will probably have stabilized at that level. We are looking for -- we look for that to happen.

Yes, Ed just to give you an idea, over about the last three months, we seen it stabilized, which -- the fancy way to saying it's flattened out.

Right.

It's flattened out at a low level. It's flattened out at a pretty lousy level right now. And I think that's pretty similar to what you are hearing from a lot of people right now that things seem to be flattening out, but they are not at -- really at would anybody would call a real acceptable level.

Right. And sorry if you touched on this earlier. But, I guess what -- I jumped on the call late, I had another call, but -- so you are not seeing the orders come in, is it that you are seeing higher indications of interest, maybe somebody quoting some business, I mean is that kind of what you are seeing or is it just stabilized at a low level?

Yes, the quote activity seems to come and go. We will go a month where we see real strong quote activity and then we will see a month where it really just backs off a bit. The key thing being that the orders being placed right now, like we said it flattened out, and just kind of qualitatively, out in the field as I meet with the aerospace guys and mainly the aerospace guys and land-based gas turbine in the last 10 to 13 weeks, it has been a lot of talk really about cash conservation. So it seems like a lot of people are sitting there pretty much ordering only what they need, and that's pretty much where we stand as these guys are really starting to lean out these supply chains.

So, on your aerospace engine material, do you have a indication or do you have an idea of how much goes to OEM and how much goes to after market?

Yes, we typically -- it goes to -- lot of it's the same people, the guy making parts for OEM and MRO.

Sure.

And so it's tough to track it. But we typically estimate on the aerospace side about 40% of our business is OEM and 60% of our business is MRO.

Okay. And so, then on the inventory takeouts, you've done a pretty good job of getting inventories down, but obviously it's not going to zero. Do you have any indication as to what you'd like to see for the remainder of this year?

Well, I noted that we'll probably take over the course of this year through September another $13 million and probably 1 million pounds out of inventory by the end of the fiscal year.

Okay. And so from a raw material perspective, is pretty much all this high raw material kind of out of your backlog, I know you mentioned it kind of in the press release and then could you kind of elaborate a little bit further as to what your balances are from raw materials that you've held over for the last year or so?

Well, actually through -- at the end of June we have our inventory valued. That's on the books is in line with the current, our current cost.

Okay.

So, all that has been purged at this point.

Yes. We pretty flushed everything out at the end of the quarter. There was maybe a little hangover, but nothing that significant.

So, can you remind us as to why we do -- and maybe this is for a follow-up call later, but why we value the inventory on a FIFO basis?

Well, actually for us it's just a matter of -- as we value the -- we value it on FIFO, we bring it into the inventory with the effort to match with the revenue that we generate as closely as we can with the cost. So from that perspective as we quote, we sell product, we do I think a better job than anybody else matching up actual cost with actual revenue and that's the primary objective. It provides better transparency.

But I mean I guess what I'm trying to get at is, this was an unusual atmosphere for raw materials and the last year created a lot of volatility. But that's generally not the case in your --?

In our case, it generally is not. I think you go back to that first quarter and the volatility was extreme, associated with also significant reduction in orders. Historically if you go back, our cost flows through over a six month period, so it's typically our production cycle, our order sales production cycle. So it does provide typically a better match and typically a flatter match when you match revenues with cost.

Okay. Thank you guys very much.

Thank you.

Thank you. Our next question is from the line of Tim Hayes with Davenport & Company. Please state your question sir.

Hi, good morning.

Good morning, Tim.

Just one question on -- and by the way, thanks for all the detailed numbers on your prepared remarks there. The -- in trying to quantify the -- what will be in less drag on gross margins as we head into the next quarter, the September quarter. Can you help us quantify, given that you flushed through these high cost inventories, what kind of actual improvement in gross margins you would get from the fact that you've got the high cost inventory flushed through the system?

Sure. In the context of what we had this last quarter for example, in the third quarter we pulled through about $13.1 million of high-cost inventory, or the inventory overhang, so that won't be repeating itself in the next quarter. But we also commented on the fact that revenues are moving -- won't be as good in the fourth quarter as they were in the third quarter either. But you won't have that $13.1 million impact.

And for the year, nine months year-to-date, that's about $36 million has been excluded from the -- will be excluded from the cost. In addition to that, we'll see some impact in the fourth quarter of our cost reduction efforts. However, you won't see the full impact until fiscal 2010.

So again the way I look at it is year-over-year from a cost perspective, what we are looking to do is take out $40 million in non-material cost year-over-year, and in addition to that you've got the $36 million inventory overhang won't be repeating itself. So if you look at it on a year-over-year basis, we've taken -- we'll be taking approximately $76 million out of the cost structure.

And Tim, just I'll add to it too in a different sense, which is actually, exactly what Marcel was talking about. The inventory valuation hangover that we've gone through in the last nine months is over. We've also taken quite a few cost reduction measures, but one of the things I've said earlier in other calls has been there is a real volume sensitivity at Haynes, being one of the smaller producers out there. And what we are going to see entering into this fourth quarter and why we've kind of cautioned everybody to numbers similar to break-even is the volume sensitivity is going to be -- we are going to really see the absorption number affected by that.

All right. Very good, thanks.

Yes.

Thank you. (Operator Instructions). Our next question is from the line of Mark Parr with KeyBanc Capital Markets. Please state your question, sir.

Okay. Thanks very much. Good morning, guys.

Good morning, Mark.

Yes. It was really kind of a shame that you had to put all that safety stock in place when nickel was as high as it was. So unwinding it made it a little more painful than you would have -- might have otherwise have experienced. Is that a fair way to think about this process over the past nine months?

Well, I think that's partially true. I think you have to look at the reason why we put that safety stock in place.

Yes, well, absolutely. I mean it was put there for a good reason, there is no doubt about that, but just the market conditions were different.

And, that was -- that's exactly right. So that under normal circumstances that wouldn't have had nearly the impact it had because of the events in our first fiscal quarter they were just exacerbated.

Okay, it's really a shame on the timing. There's nothing you could control on that. So it's good to have the context of the magnitude of the inventory mismatch and I for one I am delighted that you guys are on FIFO, seeing as that's the way world is going to be going over the next couple of years so. And so I am glad to see that result and I think it creates a lot more transparency.

I would agree.

I think also Mark for people like us, I've always -- I come from a background of LIFO and the FIFO what I like about it is it forces a lot of discipline into this, I kind of enjoy it.

Okay. Anyway I just -- so much for my soapboxing.

I really appreciate it.

I was wondering though, you had -- Mark, you mentioned nuclear and solar supply chains?

Yes.

And I guess, I've heard, as a steel producer, a carbon steel producer yesterday had a conference call that had also indicated the rebar going into concrete for a couple of nuclear programs. And I am wondering maybe you could explain to us kind of where Haynes participates in the nuclear and the solar supply chains. And also talk a little bit about how big a market demand this could represent for you guys in a couple of years?

Yes, it's going to be tough to estimate going out into the future, but for instance, and the reason I say supply chain. I mean if you take a look at the nuclear reactor or something like that, that's not really what we are talking about.

When we talk about the supply chain, we're really talking more about the fuel processing, and that's where we picked up some nice new applications in that area. So over in the nuclear fuel processing area, as we mapped out the supply chain, "Okay, here is the nuclear plant, here is what goes into it, here is how they do the various steps in the process," and what we found is a real nice niche for ourselves in the fuel processing area. And we picked up some nice business. It will be over a longer period of time, but we picked up a real nice commitment in the last quarter in that area.

On the solar it's kind of a similar story. Obviously we are in anywhere the temperatures are high, so in collection areas and storage and transport systems and things like that. But also as you move further into the solar supply chain and look at the materials that comprise things like solar panels and things like that, that's where we have again found some niches in those areas and mapping out that supply chain to find out which types of materials will go into solar panels. And specifically in this area we found some real nice applications in the polycrystalline silicon area, so it's worked up pretty well for us.

Okay. I look forward to seeing that emerge over the next several years. I just have one other question on this cost, the $40 million of non-material cost reductions. So your fixed cost level today is like $40 million less than it was 12 months ago, is that the correct way of looking at it?

That's essentially, you've got $40 million and based on what we've talked about, half of that's related to people. We've taken 18% of our workforce has been -- we've reduced the workforce by 18% and that's about $13.6 million. And in addition to that with the furloughs and outages on the manufacturing side of the business, we'll probably garner another $6 million. So half of that $40 million is personnel related, and then the balance is partially impacted or affected by the lower volumes.

And in addition to that, we've undertaken a lot of cost initiatives here and we've done a very very good job looking at what we do in one area. Energy for example, we've reduced the units that we require on the natural gas side or the kilowatt-hour side by 20%. That's significant for us. So when you have a lot of initiatives like that taking place throughout the organization in conjunction with the lean manufacturing process, it has a dramatic effect.

So, just -- how much of that $40 million actually showed up in FY or is showing up in FY '09, I mean you get a...?

Not much, Mark. We'll probably have maybe $7 million show up in this year.

Okay. So your delta year-over-year for 2010 is going to be over $30 million on the cost reduction?

That's true. Don't lose sight of the fact that we will have lower volumes next year, so we have the absorption issue to deal with.

Sure.

And we also have the pricing compression that we continue to face.

Okay. All right, so terrific. But at least that's helpful clarification. Thanks for all the color and good luck on the upcoming quarter guys. Thanks.

Thank you.

Thank you.

Our next question is from the line of Nat Kellogg with Next Generation Equity. Please state your question.

Hi guys, morning. How are you doing?

Good morning, Nat.

I appreciate all the color you guys gave on the margin side and I think that's been really helpful. Just a couple of question here. First, just on the -- I know some folks have talked about sort of service center restocking and I know you guys own your own service centers. And so I was just curious so maybe you could give us a little bit of help of -- maybe how that makes things a little bit different for you? I mean I guess in some sense, you guys should see for the service centers matching and demand a little bit more closely, and so does that mean that your restocking means things differently for you or not and just any color there would be helpful?

It ties a little bit into what Mark asked about in the last question. If you think what happened last year and that is frankly we got some new equipment put in place, but it required that we build up some inventory in certain areas in the plan. And if you go through and you take a look at what has really occurred this year is, about nine months ago we saw things coming as they were and we really cut things like an [old] schedule, okay.

And what that did is it cascaded then through the systems and we adjusted -- by the way, we've had a great cooperation from the people in the plants here and just everybody in this company and moving people around and things like that as we've gone through this. But as you can imagine what we've done is we've cascaded that material through, caught up on the past due list and shift the backlog, and then kind of restocked our own service centers at the same time as a lot of that material that was siting behind equipment that was being renovated and changed out, cascaded through the system.

So it's as far as like restocking and things like that, I think what we're seeing out in the marketplace today and you've heard from some of the other people in the materials industry, the copper guys talking about the electronics area restocking, some of the tool steel guys talking about maybe automotive demand picking up, and some of the housing guys with some of the higher volume stainless is starting to restock the service centers. We are more in touch with the end user because of our distribution system, and so what we've been doing is really matching the flow into the distribution system with the demand or the pull coming out of the distribution system. And I think that's been a big reason we've been able to catch the orders that have come through the system and not overly deplete the system.

Okay, that's helpful. And then just on the pricing side, I mean just obviously guys talked a little what are you seeing as far as -- obviously, I mean you guys have some input (inaudible) cash still a little low -- you guys have some input cost rising with nickel moving up and what not, but it sounds like you guys expect that pricing will continue to tick down over the next couple of quarters. So just wondering about how we should sort of think about that going forward, I'd think at some point if nickel moves up enough that will be reflected in the pricing even if the demand environment is remaining sort of tepid?

I think just in general, Marcel can add to this. I think one of the reasons now we've seen pricing stabilize if you notice we mentioned the volumes and pricing is stabilized and one of the reasons pricing has stabilized is commodities are moving back up. We are seeing some pricing erosion from competition. We've also seen a little bit pricing change because of little bit of a mix change in some areas as well, and it's going to be very market dependent, something in the chemical process industry are moving to lower grade materials and pricing is competitive.

Frankly, there is a lot of service centers and other people are trying to just destock and get rid of their high cost inventory as well, and get themselves more in line with current market conditions. So, we're one of those guys that's actually kind of pleased seeing that nickel is moving up a little bit, because now we think that's going to lead to some price stability, and it's too early to say, but hopefully some price expansion.

Okay.

That's perfect, okay.

And then just lastly, you guys deserve kudos for generating the cash that you have and you are obviously in a great shape and what not. But I just wonder if maybe you can talk a little bit more about your capital allocation program, I mean for shareholders it basically had -- compared to the market cap, you're sitting in cash. You guys have $80 million of cash plus you kind of have like $20 million of income tax receivable, which will turn into cash over the next six months. So, I mean we could be looking at Christmas time $100 million in cash or more on the balance sheet.

And so, just curious about where you guys are going to put that to work, I realize this necessitates some conservatism given the market environment we are in right now. But, the flip side is, are we thinking you hope to be able to earn a better return on capital than basically 0%, which is what you are earning now, and just curious about where you guys are thinking that that makes sense over the next 6 or 12 or 18 months?

Yes, and Nat the numbers you cited are frankly, that's where we want to be and that's who we want to be. Our first priority right now is making sure we have the right structure in place to get through and navigate the current environment. That said, we are working with the board right now for budget for 2010 and strategic plan that goes on beyond that, a very important piece, and then frankly we had a very spirited discussion recently on the topic is the discussion for the uses of the available cash.

The Board is looking at a number and evaluating a lot of uses as you mentioned. But also we are taking into account things like CapEx, acquisitions or joint ventures, pension pre-funding and looking at shareholder valuation and shareholder -- creating some value through things possibly like dividend or stock buyback. So the decision on using the cash is, yes I think it's pretty good board. It's going to represent the best expected returns for our shareholders in light of the current and anticipated market environments. We really want to take a look at what the vision is moving out into the future and the best available uses for that cash.

All right. Well, that's great and I think that's the right thing to do and I would just encourage you guys to continue to talk to your shareholders and the street about how that's going, and I mean especially if at some point your quarter is just telling you, people where you think and so I think for you guys it will be a big part of the story, you guys are managing the job, obviously a lot of it is in sort of capital allocation and you guys have the ability to allocate a lot of capital over the next couple of years. So, I -- kudos to you guys for generating the cash, and then we are looking forward to sort of seeing how all goes to work. So that's all I got and I'll hop back in the queue.

Thanks.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Again, thanks very much, appreciate everybody's time and appreciate your support of Haynes International. Some excellent questions and thank you very much as it's the first time we've really kind of provided any level of guidance, but we think with how -- where the environment is right now and the lack of visibility that's out there, we wanted to give you a little bit more this time than we had traditionally given you in the past.

Again it's a very difficult environment we have out there. We got great employees. We've got a great company and a great group of people here to get us through this environment and everybody is committed to making Haynes a better place. So again, thank you all very much. Really appreciate your time and look forward to talking to you again soon.

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