Haynes International Inc (HAYN) 2010 Q2 法說會逐字稿

Greetings, and welcome to the Haynes International Incorporated Second Quarter 2010 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. 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, or 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 December 31, 2009. 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.

I will now turn the call over to Mark.

Thank you, Stacy. Good morning everyone. Thanks for joining us today. We'll follow our standard agenda in today's call. I will open with comments about the marketplace and specifically the activity we're seeing with our customers and in our markets, and then Marcel will give you more in-depth look into the financial results. Most of my comments will focus on the sequential quarter results. Marcel will give you a lot of the year-on-year comparisons.

I think it's fair to say that we are seeing our markets continue to improve from the bottom of 2009. Billings and order entry are still choppy by market depending on the timing of significant projects, but we're pleased with the direction of the business levels since roughly October. Also just as a quick update, we continue to see similar levels of billing activity and order entry activity in April.

Moving to our markets, Aerospace accounted for 35% of our net revenues in the quarter. Following information released by Boeing and Airbus in the quarter on several of their key platforms, our customers are expressing cautious yet growing confidence and optimism. Our technology and marketing groups are also seeing good activity with the design community for the new generations of engines that are being developed. As a reminder, our Aerospace business is largely engine related. Revenue in the second quarter increased 18% over the first quarter of fiscal 2010 to $33.5 million. Perhaps more encouraging, our Aerospace backlog also increased 23% during the quarter continuing the strengthening we discussed last quarter.

The transactional environment remains very brisk, keeping our service centers very busy, as key customers request shorter lead-times to replace some stock outs in their supply chains. As we said previously, this activity is typically a positive indicator for future business. However, we are not yet seeing a full commitment from Aerospace customers to larger order quantities or longer-term blanket releases.

Our land-based gas turbine activity increased quarter-over-quarter and accounted for 21% of our revenue. As we stated in last call, this market area is expected to exhibit sporadic demand and requirements for quick turnaround responsiveness. Specifically, our quarterly improvement was mainly the result of sales of a key alloy, which have been dormant for roughly six plus months and several instances of key customers requiring quick turnaround replenishments. As a result, order entry and invoicing activity were higher than we had expected. These factors resulted in a revenue increase over the first quarter of fiscal 2010 of almost 34% to $20 million.

Second tier fabricators report good MRO activity, however, very slow OEM activity. And the OEMs are reporting sluggish order entry, which is expected to persist throughout the balance of 2010 with business expected to pick up in 2011. In this market, we saw our backlog expand 13% in the quarter. This is being driven, as we said, largely by the MRO market, good transactional activity for both OEM and MRO business and activity returning on some large volume alloys that have been over stocked for the prior six plus months.

Our feeling remains that responsiveness to transactional requests will continue to be required to meet the needs of this market at least until the OEMs start to report better order entry activity at their level.

Net revenues under the chemical process industry were $18.3 million in the second quarter, down 12% from the first quarter. This market accounted for 19% of net revenues. Price competition remains very intense, project activity remains slow. Pricing in the quarter was aided by two key factors. We shipped some high-value materials in the quarter and the lack of large competitively bid projects being shipped in the quarter.

Lower-end materials as we said previously remained very competitively priced. As a reminder this market of Haynes is largely driven by demand for assets for building products, food products, fertilizers, pharmaceuticals et cetera. And capacity utilization and new projects are keys to growing this market. We may be beginning to see some expansion in these areas or at least chemical plant utilization moving off the bottom. However, we do not anticipate a broad expansion of new chemical plant builds anytime soon. We continue to work with the design community on new applications for new projects requiring our materials. However, we expect this market will remain very competitive for the balance of this year.

Our backlog in this area grew 13% in the quarter, reflective more of timing of projects as opposed to a clear indicator of increased sustainable demand. However, I don't want to be dismissive of the expanding backlog, it is a good sign.

Finally, our other markets had net revenue of $19.4 million or 20% of our quarterly total and an increase of 48% over the first quarter of 2010. The increase in revenue was due to timing of some key shipments into the supply chains of the energy markets we've discussed on prior calls. These new applications will result in very choppy results but we're very pleased that we have converted these engineered opportunities into revenue generating application. Our backlog in this area decreased about 14% in the quarter reflecting these project shipments and low activity backfilling the order book. The decline in backlog highlights the fact that net revenues in this category are not expected to be consistent in the near term.

Operationally, our manufacturing personnel in our plants and service centers really stepped up to meet some significant requests from customers for quick turnaround on their demands. We are committed to driving waste out of our processes and increasing our delivery reliabilities and quality levels.

We are increasing yields in our melting area and the commitments we've made to capital upgrades in hot rolling and finishing are increasing our capabilities to respond to customer needs by reducing process cycle times. We still have a lot of work to do in these areas, but we're very pleased to see the intense focus our people are dedicating to safety, quality and responsiveness.

With that, let me turn it over to Marcel to get more in depth into the numbers.

Thanks, Mark. Good morning, everyone. The items I am going to comment on are the effect of volume and pricing on revenue and gross margin, SG&A, working capital management, liquidity and our outlook for the third and fourth quarters of this fiscal year.

Net revenues in the second quarter of fiscal 2010 were $94.6 million, a 21.4% decline from a year ago. This $25.8 million decline in revenue is the result of an 18% decline in volume, which accounted for $19.6 million of reduced revenue and a 5.2% decline in average selling price per pound, which accounted for $6.2 million of reduced revenue.

Although the reduction of revenue between the second quarter of this fiscal year and last year was significant, both gross profit margin and gross profit margin as a percentage of revenue increased year-over-year. This trend also occurred between the first and second quarters of fiscal 2010.

Gross profit margin in the second quarter of fiscal 2010 was $10.2 million, compared to $7 million a year ago, an increase to $3.2 million despite a revenue decline of $25.6 million between periods.

Gross margin profit as a percentage of net revenues was 10.8% in the current quarter compared to 5.8% a year ago. The key item that contributed to the improvement in gross profit margin between periods was a reduction in cost of goods sold per pound. In the current quarter, cost of goods sold per pound was lowered by $1.95 or 9.2%, compared to the second fiscal quarter of last year.

Our average selling price was reduced by only $1.14 per pound or 5.2%. The reduction in cost of goods sold per pound resulted from a reduction in both material cost and conversion cost between periods. The reduction in material cost reflects a recognition of high cost inventory in the second quarter of fiscal 2009 versus material from inventory in the current quarter that had a cost equal to market value. The improvement in conversion cost is a reflection of the improved cost structure of the Company as described in the 10-Q.

Between the first and second quarters of fiscal 2010, gross profit margin improved by $3.3 million, due to volumes increasing by a 0.5 million pounds to 4.4 million pounds between quarters and an average selling price that was up $1.06 between quarters, which was partially offset by a marginal increase in cost of goods sold per pound of $0.29 between quarters.

In addition to the Company's improved manufacturing cost structure noted in the outlook section of the 10-Q, the Company's SG&A also improved in comparison to prior years. To put it in perspective, SG&A was $45.7 million in fiscal 2008, $39.3 million in fiscal 2009 and it's forecasted at approximately $37 million this year. A key difference between fiscal '08 SG&A spending and the current level of spending is that head count is now lower by 13%.

As stated in the past, in addition to managing our cost structure another area of focus has been working capital management with specific emphasis on inventory. Our goal is to position ourselves so that inventory build required to support the economic upturn will not be as demanding in past periods. As noted on previous calls, we finished fiscal 2009 with controllable working capital which consists of inventory, AR and AP less tax AR and AP as a percent of revenues at 59.4% and we're able to maintain that same percentage through the first quarter of fiscal 2010.

At the end of March, percentage of working capital as compared to sales have been reduced to 51.8%, a substantial improvement, which is due to the improvement in all elements of working capital. This improvement was achieved despite adding 800,000 pounds of additional inventory related to initiating the inventory pool process in the second fiscal quarter.

As discussed in previous calls, the Company continues to refine its inventory management techniques for certain commodity alloys by initiating the pool inventory process. As noted, at the end of March, the Company had committed 800,000 pounds or approximately $9 million of material to this process, with another 700,000 pounds or approximately $8 million to be committed by the end of the third quarter of fiscal 2010. Customer orders will be pooled from staged inventory, which has been partially completed rather than starting from melt. The pool system will enable the Company to reduce lead times to customers and improve inventory turns.

Management anticipates that consolidated inventory turns in pounds should improve to a rate in excess of 1.35 over the course of fiscal 2011 compared to 1.17 at March 31, 2010. The goal continues to be to reduce the ratio of working capital to sales to 45%. If it can be achieved, the Company will be able to increase sales without any additional cash requirements for working capital, excluding the effect of changes in raw materials.

Our liquidity position remains strong. Currently we have the capability to borrow $120 million along with a cash balance of $91.8 million at 3/31. The reduction in cash of $13.3 million from the beginning of the year is due to CapEx of $7 million, dividends of $4.8 million and cash used by operating activities of $1.5 million.

Of the CapEx spending in the first half of the year, approximately $4.4 million of the $7 million was spent on 4-High equipment motor room upgrades. $900,000 was also spent on Arcadia at our tubular facility upgrading our pilger and pickling capability. Based on our current estimates, it is our objective to finish the year with approximately $90 million in cash, subject to changes in raw material cost and receiving a tax refund of approximately $15.8 million.

Looking ahead, we expect both net revenues and volumes in the third and fourth quarters will be at and likely above the levels seen in the second fiscal quarter. Also net income in the third and fourth quarters is expected to improve from the second quarter. Continued backlog growth supports these expectations specifically backlog at the end of April compared to the end of March in dollars increased to $127.8 million from $124.6 million while pounds remained constant at 5.8 million pounds. Backlog average selling price increased to $22.19 or by 3.5% from $21.46 at March 31, 2010.

Significant progress has been made at Haynes over the last five years and we continue to plan and execute for the next five years in order to continue the process of creating value for our shareholders. As previously discussed, the Company generated significant cash in the most recent fiscal five years and it continues to be management's opinion that despite the current economic challenges the Company will generate sufficient recurring earnings and cash flow to fund all corporate requirements, including working capital, CapEx spending, pension funding, dividend payments and also increase our liquidity on a prospective basis.

With that note, let me -- with that let me now turn things back over to Mark.

Thanks, Marcel. I spent most of the last quarter on the road at a couple of investor conferences and visiting our sites as well as our customers around the world. We've had some successes on covering some opportunities in Japan, Singapore and Indonesia and booking some new business in these regions. I think most of you know we're very proud of our international presence. About 39% of our net revenues in the quarter came from locations outside of the U.S. But we feel there is more room to grow geographically.

I was also at the NACE Conference in San Antonio where we presented papers and held discussions regarding some of our materials and we've had some very good interest in our materials as a result of those meetings. Out in the West Coast, we had some great calls with aerospace accounts and got a feel for what they are seeing as the industry restocks and they start to see call offs for some parts that had very low demand levels over the prior 18 months.

With commercial build rates being confirmed and in some cases expanded, sentiment is clearly improving. I am confident that the work we are putting in our sales and marketing initiatives are resulting in better service to our accounts and better penetration into the design levels of key decision makers. This activity combined with the work we're doing in our plants and service centers to rebuild and improve our process capabilities, drive out waste and improve the reliability of our products to our customers has us very well positioned to meet the needs of the market.

I think in the second quarter, we furthered our commitment to operational excellence, innovation, service and financial strength. We got more to do, but I feel our people are solidly on the same page.

That being said, let's open up the call to your questions.

Thank you. (Operator Instructions) Thank you. Our first question today is coming from the line of Mark Parr with KeyBanc Capital Markets. Please proceed with your question.

Hey, good morning.

Good morning, Mark.

Good morning.

Some encouraging results, congratulations on the progress, bringing it to the bottom line. I was wondering if you could give a little more color on the capital spending program in terms of how you expect it to unfold under the next 12 to 18 months and if you are going to need to build any safety inventory or what sort of working capital requirements might be involved in this process over the next year or so?

That's a fair question, Mark. Yeah, I think it was talked about in the past, in the last call, I think we talked about spending over the next five years about $85 million, about $15 million a year. And a significant amount of those dollars, for example this year, probably $6 million to $7 million on the 4-High to about the same level over the next five years. One of the things we noted was these projects won't require the same level of downtime that was required in the past. These projects are being planned such that they will be done over either a Christmas holiday or a summer outage and will not require any safety stock either. So, these are all the things we've reviewed at great levels of detail to make sure that those things weren't part of the process.

Yeah. And I'll add to that too Mark. If you remember we had the furnaces down, I guess, it was about two years ago and that's when we had a pretty good inventory build in front of it. If you remember we talked last quarter about we took the 4-High down to do some pretty extensive maintenance on it. And the people in the plants did just a really, really good job of planning that outage. That outage was about 3.5 weeks. And for the most part there was minimal -- well, there was no effect on cost of goods sold through that quarter or this quarter and there was minimal effect on anything as far as inventory increases or delivery. So, I think we're getting a little bit better on the way we plan and execute some of these things. And as Marcel just said, we don't expect any of the major types of outages like we went through two years ago.

Yes.

Okay. If I could just add a follow on to that just in a little different area. Mark, congratulations on all the new opportunities that you are discovering and new interest. Is there a way you can give us some color on the backlog momentum you are seeing now, how much of that is call it legacy business as opposed to new business? And also could you talk a little bit about the differences that you are seeing in the momentum between your non-US versus your US customer base and their demand patterns?

Yes. If you take a look at things geographically and the thing about Haynes is when you look at geography it also seems to fall pretty well along market lines. One of the things we are seeing, and you are seeing in backlog is, the Aerospace business, which had been largely dormant is coming back nicely right now. I'm not going to sit and say that it's like 2006, 2007 or 2008. But it's better than 2009 and the numbers reflect that. And that is largely North America and the European side of the business that we're seeing bounce in that area.

As far as legacy or new projects, we've got a tremendous core business that I think you would probably say is legacy. Most of the new business we have is sitting in our other markets area. So, the impact you saw in this most recent quarter in the other markets area was shipments into a lot of new opportunities. And like we said, that's going to be very project dependent, it's pretty much OEM work and there really isn't much of a core business there for MRO to start picking up. That will be a couple years out. But again, we're very pleased that some of these, especially energy initiatives that are out there seem to have moved from design into manufacture relatively quickly. And we were capable then of invoicing things, gosh within 18 or 24 months for the first time we sat down with a lot of these people to discuss these opportunities.

Is this -- the energy opportunities you are seeing are in addition to the flue gas desulfurization systems or is that essentially what we are talking about here?

Big shipments we had in this quarter were really shipments into mainly guys that are supplying into the solar industry. We also, as we said, we've some chemical process opportunities that we've mentioned previously that are in that nuclear supply chain, it's not in nuclear builds themselves but in that nuclear supply chain. Those are two key things that really hit in this second quarter.

Okay. Terrific.

Yes.

Okay. Thanks very much and congratulations.

Thank you, Mark.

Thank you. Our next question is from the line of Nat Kellogg with Hudson Securities. Please proceed with your question.

Good morning, guys. Congrats on a nice quarter. Just a couple of things, just first off, I think looking at some of the other folks in the space, clearly some guys are -- there is sort of a lot of talk about sort of restocking versus end demand. Because you guys own your own service centers, my guess is you guys are obviously less driven by restocking and more driven by end demand because you guys have the service centers. So I just wonder if you could talk a little bit about that and what you are seeing out there and to what extent you guys really see restocking either at the service center level even within your own firm and then also the restocking as far as customers go versus end demand?

On a larger view, I mean, if you take a look at the end business, just metals across at least the US, service center inventories are still very low even though there has been reports of a lot of restocking out there. Part of the reason we have our own service center system is the nature of the products that we manufacture. They are pretty high value items and a lot of people don't want to put that kind of an investment into this type of inventory. But it's critical for us as we -- especially as we develop business.

The environment is still very transactional. We are not seeing people come out and place a 200,000 pound order for 10,000 pound every two weeks for the next 40 weeks or something like that. So it is still very transaction oriented. So, we're seeing a lot of requests, short lead-time request. We're working the service centers pretty hard, especially in the cut parts area where we do the value added areas. So it's good business, we are continuing to see that very, very brisk right now.

I'm actually kind of encouraged that service centers in general that the inventories are still pretty low. It's real nice for a Company like us when we see some of the bigger mills report the volume increases that they've had in things like their stainless business or tool steel business. We think those are very good indicators for the industry as a whole. And it's nice to see some of these mills filling up. Did I answer your question there, Nat?

Yes. No, I think that's very helpful. And then on the transactional business, is that typically a little bit higher margin because they are getting paid for the -- you are sort of getting some capture for the service of holding the inventory and turning it or they tend to be lower value products so the mix is not as favorable?

I think generally speaking it's probably a little bit higher average value but it's also market dependent also.

Yes.

Okay. And then on the backlog and I know this is sort of tough to predict, but I know you guys have talked about it before and just what you guys were talking about -- where do you guys see backlog maybe topping out? And I'm just trying to get a sense of if we go back over the last peak and I think you guys feel like you've improved your processes a lot more so that you don't need to have the same sort of backlog that you can turn orders faster. And obviously some of the backlog probably during different times is related to shutdowns and downtime that you maybe don't need to take. So, just if we can we just sort of get a sense or gauge of what should be our expectations for sort of how backlog keeps up, maybe versus how it's done so in the past?

I am not sure that we are going to be able to tell you when it might top out or by what level. I think as we've said in the past, the key thing with the backlog for us is that people want to -- people ask about what's the direction the Company is going and what can we expect from a revenue perspective, market perspective? And that's really the key that we try to have people focus on us. That's the first you need to look at, how is the backlog improving quarter-over-quarter from a revenue and from an average selling price perspective.

And then Mark has done a very good job breaking down the backlog by the respective markets. Where it will top out? I guess back in fiscal 2008, it probably topped out at about 9 million pounds; I think that's the peak it reached, or very close to that. Again that's difficult to tell from a peak perspective, because one of the things that drives the backlog is our ability to produce product more efficiently and effectively. And so to the extent that we could reduce lead times and have reduced lead times, that will certainly, actually to support a lower level of backlog, which necessarily isn't a bad thing.

Right.

I am not sure that pointing to a top is really the gauge that we look to.

Okay.

And if I could throw at you too, Nat, if you take a look at what happened in that '06, '07, '08 type of period, I think one of the things when you are looking at backlogs, you start looking at general activity and capacities. Because what was happening during that period was a lot of people were placing orders to reserve a position in the queue, because some people, gosh, some people had lead times that were 50-plus weeks.

Your contact time to manufacture the product is still eight weeks or less. So the rest of that is just queue time sitting there waiting for your order to get started. Until you start to see people bump up about higher volume levels and capacity utilization really starting to go up, I don't think you will see that level of people just trying to get their orders stuffed in so they reserve a spot in the queue.

Okay. And then on the backlog, I think you guys said on the last call that and I think it was January 31, but it may have been end of February, the backlog had increased to 1.21, so we're up another couple of million but obviously sort of that rate of increases has slowed a little bit. And just was curious if there is any sort of -- was there any sort of pattern to things that order rates sort of decelerate through the quarter, or whether you guys are just able to increase your production rate as we moved sort of later in the quarter and was able to ship some product and that was able to keep the backlog from growing as much as (inaudible)?

I think you have focused on a key element of the process for us. As we approve our ability to move product through the facility, that certainly will affect the growth of the backlog. In addition to that, there are large projects and to the extent that, as Mark noted, we got some projects shipped in that first quarter and that will effect the backlog growth. So, overall there is still -- because of the low level, the competitive environment we are currently in, the backlog movement, although up, will be sporadic and it won't be a straight line.

Okay, okay. And then last one I will get back in the queue and give some other people a chance. But just on the gross margin, I know over the last year you guys have been dealing with the fact that you had some higher cost metal and in the inventory. And just sort of curious if you guys like that's fully flushed through and then going forward gross margins are really going to come from -- increased gross margins are really going to come from just volume increases and favorable mix or whether you still have any more sort of headwinds as far as cost of material you guys have?

As far as the cost of raw material, the excess cost, that was all flushed out through the end of the third quarter of last year. We've got a very good match between market and costs as of today.

Okay. Okay. That's great, that's all I've got. Thanks again for taking my questions guys, I will hop back in the queue.

Thank you. Our next question is from the line of Dan Whalen with CapStone Investments. Please proceed your question.

Great. Thanks. Just looking at, I guess, the estimates of your capacity utilization rates, it seems like it has gone from about two-thirds in the prior quarter up to about three-quarters this quarter. If trends continue and you get some sizable orders, how quickly can you increase that -- those utilization rates up to say an 85% rate? And I would imagine there probably shouldn't be too many costs associated with that, is that right?

Dan, the numbers we have for capacity utilization are quite a bit lower than what you are suggesting. We think right now in the most recent quarter, we were probably operating in that area of about 60% maybe 65%.

Okay. I was just using a base of about 23.5 as your peak.

No. That's pretty much what we shipped in one year when we had peaked, but if you think about it the furnace upgrades have added some capabilities, what we're doing with the 4-High now. But the big thing thinking about capacity for Haynes is I think the fact that some of the CapEx money that we are putting into things are improving the efficiencies of our material flow and reducing our cycle times. And we're finding a lot more capacity out there. And that's -- when we talk about driving waste out of the system, that's one of the biggest things we look at is what is our engineered scrap when we are going through a process and what are the engineering parameters. I mean if we're running a process just because that's the way we always did it in the past, we are challenging that now. And we are trying to get, we've mentioned previously, lighter gauges off the hot mill. That's why we are putting money into the controls and systems into the hot mill. That will then take less processing in the cold finishing areas increasing the capacity of the cold finishing areas even more than what we've discussed previously. So, we're adding capacity all the time right now by becoming more efficient in the processes we are doing through these CapEx investments.

Just to leverage that a bit further, in addition to what we're doing through the 4-High as Mark noted, we've done some projects, capital projects in the air melt area where we have typically been generating three 10,000 pound slabs out of an air melt heat. We have undertaken some capital projects that enables us to now melt four slab, 10,000-pound slabs out of an air melt heat without any additional time required. So that's significant also to the process to expand our capacity.

Okay, great. So this quarter you are saying capacity utilization was closer to about two-thirds?

I would say a little bit below that. The thing there to think as we go into the future, it's a good question to keep asking us because as we continue these process engineering projects, we are finding more capacity exists out in that plant.

Can you tell me what it was in the prior quarter?

We -- someone asked this in the prior quarter and it becomes very product specific too. And if you think of our typical mix of products, I think last quarter we felt we were operating right around in that 50% range. And I think we made the comment that we thought most of the industry was probably operating in about that 50% range as well.

Right. Any color on where you think you can be in terms of capacity in your fiscal calendar end?

Well, I think that's an open-ended issue for us, just because we continue to make improvements in the facility. Today we are doing, as Mark indicated, 60%, 65% of capacity. Six months from now, again we like to think, we'll improve upon that because we continue to undertake these capital projects. So, I think that's, as Mark indicated, you really just need to keep asking us every quarter where we think we are and based on what we have done and the ability to execute against that, we'll try to clarify where we are in our capacity utilization.

Great that's really demonstrating all the work you guys have been doing. So congratulations.

Thank you.

Thank you. Appreciate it.

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

Hey, good morning.

Good morning, Tim.

Good morning.

First question, on the IGT market and the split between business to OEMs and the split to MRO, is the MRO as lumpy as the OEM or is that a little -- a more stable business?

The MRO business has been -- it's spotty as far as where it's going. So geographically you get customer specific there. So it's a little bit spotty there. One guy needs more this month and another guy needs less et cetera that type of thing. Essentially, though, the demand for the MRO side has been pretty good and pretty consistent. The MRO backlogs were very strong earlier in the year. There is some concern now from the MRO guys. They are not seeing it fill up as much but they are still pretty busy. So, that's been good.

The OEM thing, when I start talking about alloy that has been kind of dormant and this gets a little back into what Dan had asked previously. We shipped some pretty good quantities of an alloy that we hadn't shipped in quite a while and most of that is pretty much ingot form. So that's quick turnaround, relatively low priced type of a product. But in answering your question, that's a kind of thing that's really going out there for OEM opportunities as well. So it's going to become -- the demand levels are kind of spotty on that side depending on what the supply chains have in them along with what kind of OEM activity our customers are seeing in their order books.

Okay. And then the second question is on the passing through nickel prices. What is the specific months or reference points that you use in terms of passing through the nickel, say for Q1 shipments? What kind of lag are you using for the nickel price?

Well, I think that's really a function of the way we look at -- the way we transact our business in the context of some of our business is spot business. So that reflects the current market pricing. And then part of our business is transaction oriented, maybe six months to a year running off of POs and in contract business which typically has escalators or de-escalators that's how we pass the cost through as it rolls through our system or a process, is probably a six month roll through process between buy and ship and collect.

Okay, thank you.

Thank you. Our next question is from the line of Alan Brochstein with AB Analytical Services. Please proceed with your question.

Hey guys, thanks for taking my call. Mark, I thought I heard you say that the engine part of your business was stronger in Aerospace, but can you just walk me through kind of your exposure to the body and the engine and kind of how the timing of that should play out with these new builds?

Yeah, what I said is, when we talk about the Aerospace market, the lion's share of our business is in the engine for Aerospace. A lot of other people in the specialty metals area have a pretty significant chunk of their business tied up in the airframe or structural area. And what I am trying to just ensure that people realize that's not really us, we have some, we do some hydraulic tubing but it's clearly the lion's share of our business is in the engine itself.

And what we've seen in that area is there has been a number of parts that for the lack of a better word I will say have been dormant. And our customers are finally seeing call offs for those parts again. And just in general, we are seeing the transactional activity pick up in our Aerospace engine segment. So that's for our typical product forms that we have out there and also quite a bit for also our cut parts area or our value added area.

Okay my next question on another big part of our business is the land-based gas turbines, and with gas prices so low I'm pretty bullish on the outlook there. But what else is going on besides just natural gas power plants that would apply to that business and kind of what's your outlook in the power plants?

Yeah, we look at that business in really three segments. One is mechanical drivers, marine and the power side of the business as you mentioned. So all of those power applications we deal with the OEMs as well as the second tier fabricators and the MRO side of the business and what's happening and where the business is going. We look at that business for the types of materials and types of engines that we are essentially involved with is, the core market is probably in the order of 14,000 engines or so right out there now. In normal years we are seeing about an additional 1,000 engines added to that number. This year a little bit less than that but still not bad. I mean it's still a pretty good business.

We do think the supply chain was a little bit overstocked but not as overstocked as maybe we saw in the Aerospace area a year ago when things started to destock there. So we have seen sporadic activity. And we just came off two pretty bad quarters in the land-based gas turbine or our shipments into those areas. I want to say 800,000, 900,000 pounds and then it picked up again this quarter. So it's going to be one where it's going to be very choppy for us, the type of demand and the types of products that people are requesting. And what we saw this past quarter and what we really think is going to continue is it's going to be quick turnaround. People are going to need parts when they need them and if we've got them in stock or we can get them to them quickly through our plants and through our service centers, the cut parts areas, we are going to pick up that business.

Okay. And then on your conversion services I know you provided those to TIMET, to Titanium Metals. Is that exclusive or do you provide services to other outside parties as well?

We'll do other conversion type work, but it's not on the titanium side that's limited to --

No I understand. I was just wondering what's going on in the overall conversion part of your business?

The TIMET conversion work is the major piece of that conversion business.

Okay. And then I saw, for instance, Carpenter just hike their prices effective June 1 and I know you just walked through that you have various types of pricing contacts, but it still seems like your pricing is finally maybe moving in the right direction but lagging kind of the underlying materials? It would seem to me it's still kind of, on a reported basis, it's still down year-over-year. I am just wondering if these price increases should I look at that as kind of a good sign for you guys as well?

I think overall I think the market is improving and you are getting work. You are getting people to initiate price increases. They take time to work through the process. I think the fact that, don't lose sight of it, it still continues to be a very competitive environment. So, even though we are working the price increases, we are seeing -- we think we will see something in the third and the fourth quarter relative to that. It's still very competitive.

Okay and then my last question. I know, Mark, when you got there your timing was interesting because you all are just coming off of $600 million annual revenues or something like that. Then obviously the economic downturn hit. So you guys have continued to make a lot of improvements and you were speaking earlier about some of those. I am just wondering, as we look out, without you providing guidance per se. But the next time we get to $600 million, as I look back, you were into a lot back then, but also pricing was going crazy, but as you look forward at $600 million, should you be able to earn as much as you earned last time?

Let me answer that question. That's a very good question and I think it's an excellent question. I think you need to look at a couple of things. First of all, look at where the gross margins were. You think about where we were in probably five or six years preceding our restructuring year, we were averaging over 20% gross margin. In '06, '07 and '08, we averaged 25% plus in gross margin percentages. Part of that clearly was with an excellent market in the metals industry, but also a portion of that improved margin was due to the things we had done to improve the product we provided from a value-added perspective. All the capital initiatives we undertook to improve our cost structure. We've continued to do those things, so I think those bode well for the future from a gross margin perspective. I know we talk about nickel hitting $24 a pound there. That was a peak. If you look over that time period of '07 and '08 we were generating $600 million of revenues, $60 million in net income. That $24 in average nickel price lasted very short time. Many people weren't buying against it or selling against it. And it's probably the more moderate level to look to. I think that's another key to recognize.

And in addition, look at the, I think you have to focus on our volume levels. That's certainly a key driver in the process. That affects obviously the top line but it also affects the absorption levels. And if you look at what we've done in the first half of this year, you -- or annualize what we did this past quarter, you're at a significantly higher level than our previous trough that we experienced in 2003. So, what I'm trying to say is, you look at the history of the Company, look at what we've done. Fundamentally, nothing has changed except that it's getting better and we're managing the business better, we're looking to expand our markets, add value. So, I think looking two, three years out, we are heading in the right direction. We're heading back to those levels.

Okay. And then finally, I want to say you all do an excellent job of laying out sources and uses of cash. It seems like you are going to be over capitalized despite your generous dividend. At least for now you have rolled your earnings into that, but what are the chances of a share repurchase down the road? What is the philosophy there?

There is a number of items we put in front of the Board and we discuss them and as we -- we walked through it probably a call or two ago and the CapEx being a major part of what we're doing. In addition to what Marcel had just said in the last question, looking at the history of Haynes, you look at a Company that had some pretty severe financial burdens on it from -- about '85 to 2005. And Haynes is kind of out from underneath those things and we're capable of reinvesting in the business. And I've said a few times that I think there is some gold to be mined out in our mills, once we upgrade some of our electronics and controls and things like that. So, the CapEx requirements are really paying off for the Company. And more importantly, since about 2005 when the management team here and the ownership of shareholders, things like that got involved in the Board, we've really changed the trajectory of the Company. It's a Company that's really, you might want to say even in its infancy of -- its ability now to reinvest and grow the business overseas. The focus used to be in meeting the interest payments and making sure we can do those things. And now you've got a Company that's really starting to see, wow, we can generate some cash here, we can reinvest in the business, we can grow geographically, we can grow some new products. It's really a Company that's really five years into a -- I think a nice change a nice metamorphosis in the Company. I don't know if I'm answering your question on that.

No, you are. It sounds great. And keep up the good work. Thanks a lot.

Thank you. Our next question is from the line of Edward Marshall, Sidoti & Company. Please proceed with your question.

Good morning everyone. Thanks for taking my call.

Good morning, Ed.

I have -- my -- I guess is a follow-up question to what was just asked. I mean looking back into the gross margin that you did in pervious -- the previous peaks, a potion of that we know is obviously the flow through of the pricing. Absent pricing, you made an awful lot of benefits to your cost structure, you're upgrading a little bit of the machinery as well. So, there's going to be some higher cost there. But can you kind of look at maybe, from a price neutral standpoint, as to give us an indication of what that margin could be as we kind of reach back towards not necessarily peak margins -- peak revenue, but as we kind of [transverse] forward?

If you move forward, if you look at the base average we had prior to undertaking any of the things we did. And we were averaging 20% gross margins with none of the things reflected today that we have available to us from a value added perspective, from a cut parts perspective, from a service center distribution perspective. We don't have any -- we didn't have any of the equipment upgrades. So, all those things will continue to, I think, contribute to that improved gross margin over the 20% level we historically had. We continue to do those things, going forward. Some of the things we haven't seen reflected in our gross margins will be, again, we are moving in the right direction from a volume perspective. That's a key element of the process, we are going to run -- we did 4.5 million pounds this past quarter, annualized that, it is somewhere north of 17, relatively high level.

When we hit our max, we were running 20 -- in 2008 we sold about 22 million pounds of product. We certainly are headed back that direction. I think that will be key for us, but most importantly we'll have the capability to sell substantially more sheet product than we've historically had, at a much better cost structure. So, if you are -- I am not going to be able to give you a specific gross margin percentage, but everything that we have done and all the things that we are aiming to do will move that gross margin above the 20% level.

So you are saying, mix, when you made the comments about sheet mix is going to play a little bit of a role and it's more value added?

(inaudible) always.

Yes sheet is our, that's our largest product. That's why we did the upgrades, the cold rolling operations, the finishing operations, the move from 9 million pounds of capacity to 14 million pounds of capacity. And we like to think that some of the things that we are doing currently on the 4-High will help us further along that path. So it's really -- it's a matter of rising volumes in the right product forms, with a more effective and efficient operation, and will take us above that 20%, how much above? I don't know.

Okay, so moving towards another look on the business, you are seeing increased volumes. You did a good job last year getting some cost out of the system. but as volumes increase throughout the remainder of the year, can you give us kind of a blueprint as to what kind of costs are going to be added to this system maybe from employment, compensation et cetera that we should kind of expect throughout the reminder of the year?

Well, I think to the extent that you ramp up volumes, you have to bring people back in order to add shifts to the operation, but you don't bring those people back unless you know you are going to need them to make product, which you'll be able to increase your top line and bottom line by. So it's cost, but clearly it's cost you need to make the product to sell it.

Are you sufficiently staffed to match the backlog that we kind of see in this quarter?

Absolutely.

Okay, okay. And then finally you had mentioned about inventory that you're holding for quick ship business. Is there any kind of risk associated with, maybe from a pricing perspective and the volatility of raw materials that you're actually incurring by holding on to material?

Well I think that's a risk under any set of circumstances that you do -- you might have. Again it's something that we look to -- it's an investment we're making. In order for us to improve the business, there is always an element of risk you have to take. You've got to invest in equipment, you've got invest in inventory. What we're looking to do are make long-term changes to the business, long-term improvements. And you can wait for the right moment, it will never come. And we know that we have a plan, we are working the plan. So you take the appropriate risk and you move the process forward.

Okay. Thank you guys very much for taking my questions.

Thanks a lot.

Thank you. Our last question is from the line of K.O. Jackson of the Kokomo Tribune. Please proceed with your question.

Hello?

Gentlemen, it appears we have lost our questioner. There are no more questions in the queue at this time.

Okay. Thank you. Thank you very much, Rob. In closing, thanks very much for your support of Haynes everybody. We've got a lot of work to do, but we're keenly aware of what needs to get done and who needs to do it. We're committed to our employees, customers and our ownership. We'll keep driving out waste and we'll keep building on Haynes' reputation for listening to customers and becoming a better Company. Thanks again. We look forward to talking to you soon.

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