Haynes International Inc (HAYN) 2010 Q3 法說會逐字稿

Greetings, and welcome to the Haynes International third 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. Thank you. You may begin.

Thank you. Good morning. With me today are Mark Comerford, President and Chief Executive Officer of Haynes; and Marcel Martin, Vice President and Chief Financial Officer. As always 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 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 30, 2009. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Thanks, and I will now turn the call over to Mark.

Thank you, Stacy. Good morning everyone, and thanks for joining us today. We'll follow our standard agenda in today's call. I will open with some comments about our business and the marketplace and give you some specifics about what we're seeing with our customers and in the marketplace. And then Marcel will give you greater detail on the financial results.

We mentioned in our last call that we were starting to see our core markets improve from the bottom of 2009 and that has continued through the third quarter of 2010 and through July as well. Interestingly, we saw what appeared to be some people adjusting their order patterns around some of the raw material volatility in the middle of the quarter, but that has abated and June and July were very good order entry months for our business. In short, revenue and order entry are both slightly stronger than when we last talked to you in May, and whereas we finally have seen some customers commit to longer term blanket buys, the clear majority of customers continue to buy for only their immediate needs. We are pleased with the direction of our business activities and we expect revenues to remain at, or slightly above, the current level for the balance of fiscal 2010 and into fiscal 2011.

Moving to our markets, Aerospace revenues of $36.7 million accounted for about 36% of our net revenues in the quarter. That's up 5% from the third quarter of fiscal 2009. Sequentially it's up over 9% from the second quarter of fiscal 2010. Customers we met with during the quarter, especially over at the show in Farnborough are expressing optimism and that optimism is clearly translating into a stronger order book. Both Boeing and Airbus I am sure you've seen had increasing build rates and talked about their production schedules, and clearly our customers are starting to follow suit.

Our backlog in Aerospace, and when I am talking about backlog I am really talking through the end of the third quarter, I am not including the July figures. But our backlog in Aerospace is up 52% since the beginning of our fiscal year.

Our revenue in land-based gas turbine market was $18.4 million in the quarter, which equates to roughly 18% of our total. This is down 17% from the third quarter of last year and down 8% sequentially from last quarter. I'll repeat what I said in the last call. This market area is expected to be a bit sporadic with demand over the next several quarters, and any success we have here will likely be the result of our ability to meet quick turnaround requirements.

End-users on the energy side of this business continue to see slow order entry, although it seems to have improved for them slightly over the past two quarters. The MRO business has held up fairly well, but their outlook is also a bit less optimistic than we've seen in the most recent past. Our backlog in this area is up 22% since the beginning of the year. I am pleased with that backlog level. However, after the low revenue quarter we just had in this market, I think you can see what I mean by volume in this market area being opportunistic and competitive so far this year.

Finally, our customers report that they don't expect to see any improvement or stability in this market until calendar 2011 at the earliest.

Moving to the chemical process industry, our revenues were $27.5 million in the quarter, accounting for about 27% of our business. This was up 2% from the third quarter of last year, and up about 50% sequentially from last quarter. Chemical plant utilization rates have moved off the bottom, and we saw some good activity in the quarter in plant retrofits resulting in a spike in our performance. This market is very price competitive and response competitive as most of what we are seeing are request for MRO applications.

By the way, I think this last quarter is a pretty good example of us being able to capitalize on having some extra inventory in place and our manufacturing and service center people stepping up to turn the product around.

Our backlog in the chemical process industry is down about 10% from the beginning of the year, mainly related to the strong shipments of the most recent quarter. Like our land-based gas turbine business, this market will continue to require quick turnaround to capitalize on opportunities. Those opportunities, as we mentioned, are going to be very choppy, very transactional as we go through the balance of 2010.

Finally, our other markets had net revenue of $15.5 million or 15% of our quarterly total. We continue to have some success in our new applications in this quarter, notably continuing our momentum of selling into some new solar and nuclear fuel applications. Our core applications in this area mainly, flue gas desulfurization and industrial heat treating have seen very strong quote activity in the past three months and pricing in those areas remain very, very competitive.

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

Thanks, Mark. The items I will comment on are the effect of volume and pricing on revenue and gross margin, SG&A, cash, working capital, our outlook for the fourth quarter of fiscal 2010 and first quarter of fiscal 2011 and capacity capabilities.

Net revenues in the third quarter of fiscal 2010 were $101.3 million, a 3% increase from a year ago. This $2.9 million increase in revenue is the result of a 7.9% increase in product volume, which accounted for $7.1 million of increased revenue and an increase of $300,000 in the other revenue or non-product category, which together accounted for $7.4 million in increased revenues between periods. These increases were partially offset by a 4.7% decline in average selling price per pound, which equaled $4.5 million between periods.

Although the increase in revenue year-over-year was modest, both gross profit margin and gross profit margin as a percent of revenue increased significantly year-over-year. This continues the trend, started in the fourth quarter of fiscal 2009, of improving gross margin performance.

Gross profit margin in the third quarter of fiscal 2010 was $16.9 million, compared to a loss of $8.2 million a year ago, an improvement of $25 million between periods.

Gross profit margin as a percentage of net revenues was 16.6% in the current quarter, compared to a deficit of 8.3% a year ago. The key item that contributed to the improvement in gross profit margin between periods was the reduction in cost of goods sold per pound. In the current quarter, cost of goods sold per pound was lowered by $5.44 per pound or 23.3% compared to the third fiscal quarter of last year.

Our average selling price was lowered by only $1.03 per pound or 4.7%. 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 third quarter of fiscal 2009 versus material from inventory in the current quarter that had a cost equal to the 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 second and third quarters of fiscal 2010, the gross profit margin improved by $6.7 million, due to volumes increasing by 300,000 pounds to 4.7 million pounds and an average selling price that was up by $0.05 between quarters, in conjunction with cost of goods sold per pound of $1.30 between quarters.

The relatively flat average selling price between quarters reflects the combination of the shift to commodity alloys being a slightly higher percent of the total product shipped, offset by the improvement in service center transactional pricing. The shift to lower price commodity alloys plus improving efficiency of operations contributed to a lower average cost of goods sold per pound.

In addition, the company improved manufacturing cost structure. The Company's SG&A, which includes R&D, also improved in comparison to prior years. To put it in perspective, SG&A was $45.7 million for fiscal 2008, $39.3 million in fiscal 2009, and it's forecasted to approximate $37.5 million for fiscal 2010. A key difference between fiscal 2008 SG&A spending and the current level of spending is that of headcount. It is now lower by 11% on a comparable basis.

Looking ahead, we expect that net revenues, volume and net income in the fourth quarter of fiscal 2010 and the first quarter of fiscal 2011 will equal, and possibly exceed, the levels of the third quarter of fiscal 2010. Continued backlog activity supports these expectations. Specifically, backlogs at the end of July, compared to the end of June in dollars, increased to $139.5 million from $130.9 million and pounds increased to 6 million from 5.7 million pounds. Backlog average selling price moved up slightly to $23.37 from $23.06 at June 30, 2010.

Now, about working capital. Cash declined by $46.5 million from the beginning of the fiscal year through 6/30/2010. Net cash used in operations is $29.5 million, investment in equipment used $9.3 million, and dividends used $7.3 million.

For purposes of this discussion, I separated net cash used in operations for the first 9 months of fiscal 2010 into two categories. The first category is cash used by controllable working capital, which equaled $45.2 million and includes AR, inventory, AP and accrued expenses. And second, all other operating activities, which include net income, depreciation etcetera, which in the aggregate provided cash at $15.7 million.

The net cash used by controllable working capital was $45.2 million and was attributable to an increase in AR of $7.8 million due to increased sales with DSOs flat and an increase in inventory of $54.9 million. These uses were partially offset by an increase in AP of $17.5 million, primarily due to increased raw material purchases. The significant increase in inventory during the fiscal year is due primarily to the staging of work-in process inventory for initiation of the inventory pool process, staging of both work-in process and finished goods inventory as safety stock for customers in the event of a work stoppage and increased inventory to support higher sales volumes.

The process of reducing inventories started in July with the initiation of the use of the designated pool inventory and reduction of safety stock, due to the successful negotiation of a new bargaining unit agreement. It is anticipated that by September 30, 2010 inventory will be reduced by approximately $30 million and equal approximately $205 million.

We estimate that the accounts receivable balance will remain flat between June 30 and September 30 due to at least equal sales between quarters. We estimate that the AP and accrued expenses balance at September 30 will be approximately $40 million. Our growth continues to be to reduce the ratio of working capital to sales to 45%. As said in the past, if that's can be achieved, the company will be able to increase sales without any additional cash requirements or working capital, excluding the effect of changes in raw material cost. At June 30, even with the increased inventory level, working capital as percent of sales is 53%, compared to 59.3% of October 1, 2009.

In summary, we expect the reduction in controllable working capital, plus receipt of our tax refund less net uses of cash by other operating activities should result in a yearend cash balance of approximately $73 million, which is an increase of approximately $15 million in cash from June 30. In addition to our current cash balance and anticipated increases over the balance of the fiscal year, our liquidity position remained strong with the additional capability to borrow $120 million from our working capital revolver.

I would like to comment on capacity. The last item I speak to briefly is production capacity. It's been at least a year since I spoke about this item and since then we have received a number of questions on that topic. In brief, we continue to make improvements in plant capacity with the most recent and significant being that of expanding our air melt capacity from 3 ingots per (inaudible) to 4 ingots. The cost of the project was less than $0.5 million. When you consider that change plus continued improvements to the 4-high rolling mill related operations, we estimate that total sales pound capacity for our company including our Kokomo plant, the Arcadia Tubular facility and the Wire Company is 30 million to 35 million pounds, depending on product mix. We continue to be predominantly a flat product producer with about 70% of our capacity geared towards flat products with the balance in ingots, forgings, tubular wire and bar.

Annualizing sales volumes in the last two quarters indicates that we are growing at approximately 55% to 60% of current capacity. Significant progress has been made at Haynes over the last five years and we continue to plan and execute for the next five years. Despite the current economic challenges of the last two years, earnings are beginning to improve and cash will follow to support all our corporate requirements including working capital, CapEx spending, pension funding and dividend payments.

With that, let me -- I will turn it back to Mark.

Thank you, Marcel. Adding to what Marcel discussed, we have added shifts to our operations and our customers are continuing to push for faster responses to their needs. We are also positioning material strategically to kick off our supermarket system for high volume alloys to meet the needs expressed by our backlog. We are seeing a good balance in the Aerospace market and indications we are receiving from our customers is that this will continue. Land-based gas turbine and chemical process markets are presently very transactional, requiring quick turnaround to get opportunistic business.

On the new materials and new applications front, I think we are broadening our exposure into markets and we have clearly given the engineers in our core markets some new material capabilities to open up their design. Our new materials like 282, C-22HS, HYBRID-BC1, NS-163 and HR-224 are all in test, in some cases already in production applications. A good example, HAYNES 282 has been approved for several new applications such as aircraft gas turbine exit guide and vane assemblers. Similar to when we introduced HAYNES 230, which is commonly used in combustors, rings and cases in 1984, or HAYNES 242 in 1990, which is used for ring shields and fasteners, HAYNES 282 is another example of customers coming to us requesting the material property set and we invent something to meet their needs. In this case, the nickel-based super alloy with excellent combination of high temperature strength, formability and weldability.

On the corrosion side, our HASTELLOY C-22HS continues to draw a lot of interest in the oil and gas industry where higher pressures and more corrosive environments require the strength and reliability that our materials is known for.

Operationally, we've responded well but we know we can do better. We are driving waste out of our processes and we are taking on new ideas to push ourselves to reduce cycle times and improve yields and turn inventory more quickly. Our account base is pushing us for quicker deliveries and we are committed to meeting their demands.

Finally, our safety record remains our most critical metric. In my opinion, when we focus on safety we focus on doing things the right way. This discipline carries over to our practices of driving out waste.

With that, let's open up the call to your questions.

Thank you. (Operator Instructions). Thank you. Our first question is coming from Edward Marshall with Sidoti & Company. Please proceed with your question.

Good morning and thanks for taking the call. You mentioned, and looking at the numbers, sales are up, gross profits up 65% and this was sequentially that I'm looking at. I guess, my question is how much of that wide spread is left in the materials. I mean, how much further can they drive that down? So, how much can you turn your inventory kind of as we go forward looking at maybe the margin profile is kind of what I'm trying to grab here on the gross profit line?

I think if you look at -- Ed, this is Marcel. Looking at the gross margin line, I think historically we've been in that 20% plus gross margin range. I think that we certainly had an improvement because of the decline or the reduction in the material. But if you just look at these quarters, you look at the third quarter performance, that's a pretty clean quarter from the perspective of a good match between revenues, the prices we can get on those products, in spite of the competition. There's nothing extraneous there. This continues to be a competitive environment -- 16.6% good margin percentage. Again, as I said and we've talked about in the past, if you look historically, we were averaging in excess of 20% gross margin. So, at some point, we drive towards that goal.

Looking back, I mean, that was an unusual raw material environment that we were getting decent drop through from the revenue. I guess, my question further drifting that out, if we're running at 55% to 60% capacity, is it possible to see a gross margin profile around 20% or better at that type of capacity?

Well I can't -- maybe clarify the issue a bit. If you think about our historical gross margin percentage, even go back prior to what happened last year, the year before, under normal circumstances we ran in excess of 20% '06, '07, and '08 were very good years at 25% average. We are running at a low capacity level. And clearly, once we begin to fill the facility up, we will get additional margins of absorption. So, we clearly expect it to improve because of those things and at some point we're going to begin to see an improving economic environment. So, all of these things would begin to move that gross margin percentage up and I'd like to think we'll get above at least the 20% which we historically have been at or in excess of.

Okay. And so, looking kind of at the capacity, obviously you have more capacity now than you have visible demand when you look at the backlog. My question is, what builds that demand? I know there are some new markets, some new avenues and new alloys that you're working on and, of course, I think it also enables you to compete on chem processing. But kind of -- how do you fill that capacity, if I could?

I think one of the things to keep in mind, Ed, is we always talk about us being late cycle recovery markets. We are just beginning to see the Aerospace guys come back a little bit. I think it's fair to say right now that that pipeline is pretty clean and we're starting to see real pulls, real demand and a lot of the indications there are moving up. If you ask my opinion, the land-based gas turbine, at least the energy side of it, is still going through a lot of pain and the chemical process industry is the same thing. We are not seeing a heck of a lot of a new projects, a lot of what we are seeing is MRO. So, just inherently, as those are late cycle, as they start to come back, we'll start to see some more demand in those areas. That should help us quite a bit.

And then there is, as you had mentioned, we got quite a bit going on in the new product area. That's where we spend a lot of our marketing effort. Our marketing guys don't sit around and count airplanes, they go out and do application engineering work and that's where we are developing a lot of new applications to try and really broaden ourselves and grow the overall core. And it ties a little bit into your last question too. Are we very volume sensitive? No. So the key for us is to always go out and try and pick up baseline volume and add to it with more valuable products.

And if I could throw one more thing in there, I think one reason this past quarter wasn't great, wasn't perfect, but it's better than we've seen for a while. The distribution system and having that capability to meet transactional requirements with materials that our people have put on the ground was very beneficial to us in this most recent quarter.

Adding to the last statement about the distribution unit, are you finding that your customers are looking more towards -- I think you said this is more transactional, but with volumes coming down and the backlog, are they reluctant to kind of place those longer within the order book or is it becoming more -- are we shifting more towards that? Sorry about the choppiness of the question.

Yes, it's a great question. There were a lot of things that went on in this quarter. We went through labor negotiation and things like that. Plus, there was the situation where nickel kind of got a little bit crazy if you think about late May and going into June and I think some people put off some of their order patterns. In fact, our order book got very, very heavy late in June. So that's part of what went on this quarter. It was a very choppy quarter on top of the choppy environment. I think this upcoming quarter will tell us a little bit more about what's happening.

Also, too, drawing what you said, there is just not tremendous confidence out there as far as committing to long-term blanket buys, part of that being that there is just not a lot of new chemical projects out there right now. It's a very transaction-oriented environment and same thing in the land-based gas turbine business. I think we are just going to see that for the next I'll say six to nine months that it's going to remain very transactional and that's where having the distribution system has been very helpful to us. Plus, it just helps us to be a lot closer to that end customer. We can actually walk into the floor of the fabricators and see how much material they have on the ground, which tells us whether we need to be putting more material on the ground on our side.

Thanks very much.

You bet.

Thank you. Our next question is coming from Mark Parr with KeyBanc Capital Markets. Please proceed with your question.

Hey, thanks very much. Good morning.

Good morning, Mark.

Hi Mark.

Hey great quarter. Congratulations.

Thanks.

I had a couple of questions. So this investment, I guess you called it an investment in inventory or you are referring to it as availability of material. Have you made a conscious decision to increase the amount of material or increase the investment to enhance availability? Can you give a little more color around the magnitude of working capital investment that you expect to put in this direction?

Well, I think if you look at what we have done over the past nine months, particularly the last three months, there are really three things involved and they were all conscious decisions. We chose to put inventory on the ground as part of initiating the full inventory process.

All right.

The first step in that is you got to commit material and stage it and then initiate the process. So that was something we undertook over the last nine months and particularly in the last three months. And we also undertook the process of putting some safety stock on the ground, primarily in the work process finished goods category, for our customers relative to the bargaining unit negotiation process that we were going to undertake. We wanted to make sure that we didn't put our customers the jeopardy, needed to make sure that we put some specific products for them on the ground. Again, I think that was intentional. Those two items together probably constitute 60% of what we did from an inventory perspective.

I think the balance, probably the 40%, really relates to what Mark was speaking to, putting additional staging inventory on the ground for this transactional type business. I think the other thing you need to reflect on is that, if you go back to the fourth quarter of 2009, the first quarter of 2010, we were shipping around 3.9 million pounds a quarter. This past quarter we shipped 4.7 million pounds. That's an 800,000 pound increase between that time period. Well, no matter how efficient and effective you are, you really do need to put additional material on the ground to meet those orders.

So what we anticipate to happen as I talked about on the call and in the Q is that the portion of the inventory related to -- that we stage for the pool process and for the bargaining unit process --that will be brought out of inventory, and the only thing that will be remaining there will be that material asset will be taking the advantages of the transactional business and just that required for operating at higher levels.

Okay, all right.

Okay. That is a long answer. But I wanted to make sure I covered all the pieces.

Well, it's not -- we shouldn't think about this as a permanent shift in working capital. It was more the transition area issue?

Absolutely. It was not permanent.

Okay. All right. That's really helpful. I had another question. Again, going back to an earlier discussion on margins, Mark and Marcel, the facilities, the operations underwent some fairly meaningful transformation in our call in the '06 to '08 timeframe. And, you were pushing a lot while the market was very strong as well. And, also nickel prices were very high through that timeframe as well.

And, I guess, as we look out here over the next cycle that we seem to be on the front end though, your operations are in much better shape, clearly, and nickel is probably not as strong or at least it's not maybe not starting out quite as robust as it might and the demand is weaker. I guess, I am trying to think about what the next cycle peak in profitability might be. I mean, I am sure you've looked at some things Marcel because -- is there a conceivable scenario where you could see margins north of 30% at some point in this upcoming cycle?

That's very optimistic. I think -- I still look at this -- I presented that topic in the past and if you look at '06, '07 and '08, we averaged 25% gross margin. Obviously, we had very strong markets. Part of that was also because of the improvements we had made in equipment. I think on a prospective basis it's going to be about utilizing the facility at a higher volume. That will certainly create additional opportunity. I think that we found ourselves being opportunistic. We are getting some good margins right now, again from a transactional perspective. I think all these things just build on the improving economic environment, as we've talked about, and we probably don't want to go too much past our historical average.

Over the last 10 years, 20 years, I think you will see that we have been in that 20% plus we had three very good years '07, '08, '09. I like to think that we certainly will retain some of that. We had three very good years -- three years of very good markets. The same was above 30%. It's very difficult to speak to. If we can just get back to where we were that's pretty good territory. So that's our first objective.

Step one.

Yes, step one.

I guess the way to think about it is you guys have gotten better but so has your competition along the way.

That's exactly right.

I mean, I think that's probably a better way to look at it.

Okay. All right, terrific. Congratulations on the results and the outlook commentary is -- it's nice to see two quarters of outlook commentary. We appreciate that very much and we will see how the stock trades today, hopefully -- the market is not acting very well, but you guys should -- this should be pretty well received we think.

Thank you.

Thank you, Mark.

Thank you. (Operator Instructions). Our next question is coming from Tim Hayes with Davenport & Company. Please proceed with your question.

Hi, good morning.

Good morning, Tim.

A specific question on the MRO market within the chemical processing and then the other segment. Are you finding that any customers are delaying routine maintenance that would sort of surprise you that year-in, year-out they always do, but this year they just said "look we are going to push it off a little bit?"

Not overtly Tim. I mean, if I've heard that anywhere where I have met with customers it's been more in the FGD area, the flue gas desulfurization where there is lot of quote activity and as I talked with the fabricators, some of them said we know this project is going to be let, we thought it was going to be let three or four months ago, but they are holding off. So, that's where I think there is going to be something like that break loose, it will come through.

A lot of what's happening in the CPI industry are -- they may have plant downturns and plant shutdowns that's when they do the retrofits or the usual MRO maintenance type of work. And I can't really say that we have seen a lot of delay in that at all.

Okay, thank you.

You bet.

Thank you. Our next question is coming from William Florida with Advisory Research. Please proceed with your question.

Yes, thank you very much, nice to talk with you. I just want to -- just thinking about the asset values at Haynes and are you able to comment at all if you guys had to replace the big Steckel mill and the ancillary equipment today, what kind of cost would that be? Is it very different from what's on the balance sheet or --

That's not an area we comment on at this point. There is too much variability, those markets change. So, we are just not going to comment on that. I think it's just not about something we speak to.

Okay, thank you.

You bet.

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

Hey guys, thanks for taking the call and congratulations.

Thank you.

Thank you Alan.

I just had one really easy one. Maybe I missed it, but what's going on internationally? Can you update us? I am sorry if I missed that?

No, internationally Alan, just if you familiar with Haynes, we tend to talk markets and we are an international company. About anywhere from 35% to 40% of our revenue comes from sources outside of the US. A little bit from Canada, but a lot from Europe and a growing market in Asia. So, our international business is still pretty strong. But, we typically talk about it in market areas. For instance, our European business is very much Aerospace and land-based gas turbine driven. We have good chemical process industry business there as well. But, typically our international business follows into these specific markets as well, whereas our Asian business is very much chemical process oriented right now, a little bit of Aerospace and a little bit of land-based gas turbine. So, that's typically how we talk about things. We stick to the markets because we see our customers are international and we follow them everywhere on the globe.

Just a lot of companies complaining about currency pressures and things like this, kind of glad to see you guys not whining about that. I am just curious if you can just assess overall -- was international business overall in line with the domestic side or it sounds like maybe not because of the chemical (inaudible -- multiple speakers)?

Overall, our domestic versus international typically runs 60/40 and that's where we are at today and that's typically historically the split between the two.

Okay. And then, my other question, I am sorry if I didn't understand this fully earlier, but you talked about a change in your inventory system. Is that -- the pulling in, is that for you or your customers?

That's really not so much a change in the inventory system, it's a way we stage material for our customers. Historically, we have taken orders and melted to those orders. But what we have done now is we are staging materials throughout the production process so that, if a customer places an order today, it's not coming from the mills, it's probably coming from work in process. So what we can do then is accelerate or reduce the lead time and turn the inventory faster.

Yeah, a good way to think about it Alan is like anybody in this business, it's the old 80/20 rule. 80% of the volume comes from 20% of the materials you make. So, we have taken a long hard look at the major turn alloys that we manufacture and rather than go all the way back to the mill [chap] every time we get an order, we are going to stage things at various locations in the system so that we can essentially fill those orders from stock on the high volume, high turnover types of material. We want to increase the turns on that critical 20% of volume might be the best way to put it. I am sorry, 80% of volumes, 20% of alloys.

So, this one quarter really the full impact of changing the way you do that and so that's why you are comfortable with inventories coming back down because you will work through it to take a one quarter adjustment?

Yes.

Got it. Okay, thanks a lot guys.

You bet.

Thank you. Our next question is coming from Chris Olin with Cleveland Research Company. Please proceed with your question.

I wanted to review some of your comments on orders. I apologize, I got on the call late, if we went over this. But starting up with Aerospace, the jet engine side, I was under the impression that the market really started to turnaround in the November, December time period and pretty much accelerated through May. I thought you said more or less that it was turning up later than that. I just want to make sure I am clear on when you saw or where we stand with jet engines?

I am talking mainly about the pull from our inventory. We saw a pipeline that was pretty well stocked in the static components might be a good way to put it as the jet engine business and for nickel-based alloys and cobalt-based materials. And what we have seen is over the last 18 months that inventory position has let itself down. And we really started to see a better pull last quarter and into this quarter. So that's where we've seen -- and I don't know if you got it Chris, but our backlog in Aerospace alloys has increased over 50% since the beginning of our fiscal year. So in the last nine months our backlog in Aerospace alloys has increased 50%. So we really started to see the increase in pulls or demand for our materials in the last, I will say, six months more so than anything.

Okay, that's helpful. And then in terms of looking at delivery schedules, if you kind of did the math, it seems like there could be another surge in order activities in maybe the February or January time period. Are you under that assumption that there is another wave of demand still out there?

Based on what we are seeing, we've talked about the next quarter and we've talked about our first quarter and we see relatively level demand. Actually we don't talk -- I mean we don't really go out further than that, but we don't really have that kind of transparency.

And Chris the discussions I've had with the engine manufacturers, it is going to be more of a grind up. They are going to continue to order and restock the pipeline might be a good way to put it. Now as you talk to airframe and air fastener people, I know a lot of them are talking about a real increase in demand as we move into 2011. Mainly because I think a lot of the airframe and air fastener guys are going through a pipeline cleansing right now that we went through over the last 18 months. I don't know if that helps you a little bit, but there was a little bit of a lag in especially guys in the titanium industry. When they saw demand drop versus those of us in the nickel and cobalt base, we saw demand drop much more rapidly earlier in the cycle.

Okay. Are you working with customers for let's call it the jet engine channel in terms of adding material for new jet engine designs. I have been hearing about these engines that could theoretically burn hotter, become more fuel efficient that would need more nickel content. Do you have any thoughts on that?

HAYNES 282, that's the new alloy that we are putting out there. Yes, we work with all of the engine designers and there is a myriad of alloys that are out there that are nickel based, a lot of them at 57%, 60% nickel type of range and we are right in there with everybody trying to get out material spec'd. That's when I said our marketing guys are doing application engineering, that's what we do for a living. We make sure that people are aware that there is a material out there like HAYNES 282.

Okay. Just the last question I had too is there is some talk about global contracts for power generation maybe India needing more demand. Is that a market you are looking to serve or have you seen any kind of pull of demand from that type of business in those regions?

We are heavily involved with the power guys on the land-based gas turbine side of things. So there is a myriad of OEMs and then a myriad of fabricators and we follow that supply chain all the way through. We are not real big players on the steam side of things. When you start talking about the future with things like the advanced ultra super critical types of applications, again we are in front of those engineers putting our materials into the mix. But for the most part we are on the gas side, not a heck of a lot on the steam side.

Got you. Thanks a lot.

Thank you. Our next question is coming from Jeff Bernstein with Barclays Capital. Please proceed with your question.

Hi gentlemen, thanks for taking my call. Just wondering on the SG&A line. Are there incentive comp programs that are going to be coming back in with the performance that you guys are delivering now and how should we think about SG&A as a percentage of sales next year?

I think we've always had incentive comp programs. They'll obviously be commensurate with the improvement in the business. But typically we are running around I think about 9% right now and over time as revenues go up, I have a sense it could move up faster than the SG&A, I think can go back to 7% and 8%, 9% or 6%, 7% and 8% we were probably in that 7.5% range. So depending on how quickly revenues go up, we will continue to move down so that I think at some point we will bring in that 7.5%, 8% range.

Great. Thanks very much.

Thank you. Our next question is coming from Luke Folta with Longbow Research. Please proceed with your question.

Hi, good morning guys.

Good morning Luke.

First question, I guess I have a couple of questions just surrounding this TIMET conversion agreement that you guys have. Couple quick things. Firstly, can you give us some update what you are seeing there as far as volumes? Secondly, can you give us a reminder of how you report this, is it in your total volume number? And I guess from a longer term perspective, could you give us a sense of what this agreement could -- what sort of impact it could have on your margins and ultimately does this -- I mean could it cause some sort of capacity constraints on your cycle note?

Relative to that particular agreement, again, we really are silent on the specifics, again we've got confidentiality issues, as you can appreciate. It shows up in the other non-product revenue and it's not part of the pounds. So when you see pounds that includes product sales pounds, not conversion pounds.

Okay. Can you give some sort of feel about what the longer term or longer tem impact you could see related to your margins overall in that business as well as the capacity?

No, again as I said, it's part of the other category. It's a relatively, again small piece of our overall revenues. So we have $100 million in revenue this past quarter; $3 million was other. I think overall it's a small piece. Again we have confidentially requirements that we are going to maintain.

Yeah, just to give you an idea, Luke, I mean, we don't see this Steckel mill is having capacity issues, it's a pretty big mill. And as far as amounts of TIMET material, we want to keep that confidential. I don't think TIMET wants us talking about how much of their material we are processing.

Okay, thanks a lot guys.

Yes, you bet.

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

Good morning, everyone.

Good morning.

Good morning, Dan.

Good morning. First of all, congratulations on the headway you've made with your capacity. It's a far stretch from where you were at the past peak of the cycle. So, I guess, a lot of your hard work has been paying off. And secondly, I appreciate your comments on the utilization rates. It addressed a lot of my questions. But, I may have missed part of it. I think you mentioned request for quotes seeing a pretty big uptick. Can you put any rough order of magnitude on that, is this 20%, 30%, or is this back to certain '06 levels, '07 levels in terms of request for quotes?

Yes, the industry started to move into the up cycle probably in the late '04, '05 type of range. I say that's kind of what we are looking at right now as far as -- and that's not volume, that's the RFQ activity. We are seeing a lot more request for quotes.

So we are back in the '04, '05 area?

Yes, I'll tell you as far as business activity level as far as quoting and things like that, it's looking like '05. And I guess the best way to summarize something like that Dan is it seems like confidence is starting to return to a lot of people and that's when you start to see people starting to quote on projects again.

Okay. So the requests have been ticking up and in terms of converting those actual orders, that delta is improving in that space as well?

You see that reflected in the improving backlog numbers.

Yes. The backlog is a key thing I think to watch. If you think about a good backlog gives us an ability to be a bit more aggressive and things like that so...

Yes.

Great. And then more mechanically here, but the tax rate seemed a bit higher than I was expecting. I mean if you put a more normalized tax rate on the quarter, it seems like it would have been closer to $0.35 number?

Well, what we had was we recognized the issue of the change in the state tax rate -- the allocation process. All states are endeavoring to attract business and part of that is by reducing the state tax rate. When that happens, you've got to recognize or write off the tax assets that were accumulated in the carry forwards, so that's what the effect of that was.

Sure. So when we look at your commentary regarding flat to slightly up earnings in the next two quarters, should we be basing that off of a $0.35 base or more of a $0.31 base?

We should be basing that off probably a tax rate in the 38% tax range.

38%? Okay. So, somewhere -- okay. Great, thank you.

Thank you.

There are no further questions at this time.

Thank you, [Jovi]. In closing, just want to say thank you to everybody for your support of Haynes. I really appreciate your time today and we'll look forward to talking to you again in the future. Thanks again and take care everyone.

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