Haynes International Inc (HAYN) 2010 Q4 法說會逐字稿

Greetings and welcome to the Haynes International Inc. fourth-quarter 2010 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Stacy Knapper, Vice President and General Counsel. Thank you, you may begin.

Thanks, Claudia. Good morning. With me today are Mark Comerford, President and CEO, (inaudible) and Marcel Martin, Vice President and Chief Financial Officer.

Before we get started, as usual 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 SEC, in particular in its Form 10-K for the fiscal year ended September 30, 2010. 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.

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

Thank you. Good morning, everyone. Thanks for joining us today. We will follow our standard agenda in today's call. I will open with comments about the end markets, and then Marcel will give you greater detail on the financial results.

Overall market conditions have improved. Net revenue in the quarter was $104.6 million compared to $85.6 million in the fourth quarter of fiscal 2009, which is a 22% increase. For the year net revenue was $381.5 million, down 13% from fiscal 2009's $438.6 million. If you saw the press release, we mentioned that fiscal 2010 was marked by a first half of low shipment levels, while the second half saw increases in net revenues, coupled with an increasing backlog. Marcel will give you more detail, but we believe this trend will continue into fiscal 2011 supported by our backlog.

The backlog, by the way, has increased to $157.2 million at the end of October. Since our last update, I have met with roughly 75 customers at various functions and trade shows, and virtually all of them reported stronger activity in their business and expectations for calendar 2011 to show continued strength over calendar 2010. Qualitatively the optimism from customers looking forward in the market place is as strong as I have seen it in more than two years. However, we do not expect a boom in our markets but rather more of a controlled, sustained buildout. Quantitatively this buildout mentality is supported by what we are seeing in the order patterns and quantities, as well as our aggregate backlog levels.

With that, let me turn to our specific end markets. Aerospace revenues of $39.8 million accounted for 38% of our net revenues in the quarter. That is up 32% from the fourth quarter of fiscal 2009. For the year aerospace sales were $138.4 million, down 13.5% from the $160 million in fiscal 2009. Airbus and Boeing backlogs remain strong as do their production plans. The supply chain destocking we saw earlier in the year appears complete, and we're seeing stronger activity. Our aerospace backlog has increased 57% since the beginning of fiscal 2010.

Our revenue in the land-based gas turbine market was $20.8 million, accounting for roughly 20% of our fourth-quarter net revenue. This was up 40% over last year's $14.8 million in the quarter. For the year revenue was $74.2 million, down 24% from 2009's $97.7 million. The energy side of this business remains very competitive, and the fabrication supply chain is aligning inventories with demand. The other end-use markets in this area, mainly pipelines and Marine applications, are holding up well. Our revenue in this market has varied dramatically from quarter to quarter depending on project timing, inventory adjustments in the supply chain, and our ability to respond to quick demand. We don't expect this to change dramatically in the next six months.

We have seen several customers who feel the supply chain has cleared itself out, while others still report high levels of inventory.

Our backlog in this area is up about 32% over the course of fiscal 2010. So, even though demand has been sporadic, we are still seeing an improvement from the lows of the fourth quarter of 2009 and the first quarter of fiscal 2010.

Moving to the chemical process industry, our revenues were $21.1 million in the quarter, accounting for roughly 20% of our quarterly net revenue. The $21.1 million in revenue is down roughly 18% from the fourth quarter of fiscal 2009. For the year net revenue was $87.7 million in this market, off about 20% from fiscal 2009's $109.7 million.

Our backlog during fiscal 2010 was about up 17%, and more recently project activity seems to be coming to life. Our backlog from the end of the third quarter to the end of the fourth is up about 30%.

As we mentioned on our last call, chemical plant utilization rates have moved off the bottom, and we started seeing stronger MRO activity in the third quarter. We are also seeing some increased activity for some of our higher priced proprietary materials; however, for basic commodity applications, this market remains very price competitive. Results in this market will continue to be spotty over the next 12 months as project work continues to be bid and hopefully funded. As we have said previously, this market will likely continue to be very choppy and very transactional as we go through fiscal 2011.

Finally, our other markets cracked the $20 million level, posting just over $20 million and accounting for 19% of our net revenue in the quarter. This is up about 78% from fiscal 2009's fourth quarter net revenue of $11.1 million. For the year we posted net revenue of $68.1 million in these markets, up over 14% from 2009's $59.4 million. Our backlog in this area also continues to expand as we ended fiscal 2010 up 10% from the beginning of the year. Our efforts to expand our presence in alternative energy applications is showing initial signs of success and spurred our growth in this area in fiscal 2010. Our traditional markets, principally flue gas desulfurization and industrial heat treating, are also expected to improve in 2011, but we do expect pricing in these areas to remain very competitive.

With that, let me turn it over to Marcel for more details on the financials.

Thanks, Mark. I will start with the year-to-year comparison of revenues and gross margin in the fourth quarters of fiscal 2009 and 2010. Net revenues in the fourth quarter of fiscal 2010 were $104.6 million, a 22.3% increase from the same quarter a year ago. This $19.1 million increase in net revenues is a result of a 21.1% increase from product volume, which accounted for $17.7 million of the increase, a 2.5% increase in average selling price which accounted for $2 million of the increase, which were partially offset by a decrease of $600,000 of other revenue in the non-product category.

The year-over-year improvement reflects improvement in the economic environment, primarily driven by the aerospace market and project business in the other markets product category. Net revenues between the fourth quarter of last year and the fourth quarter of this year were up 31.9% in aerospace and 79.5% in the other product category.

Gross profit margin in the fourth quarter of fiscal 2010 was $19.9 million compared to $4.9 million in the same quarter a year ago, an improvement of $15 million between periods. Gross profit margin as a percentage of net revenues was 19.1% in the current quarter compared to 5.7% a year ago. The items that contributed to the improvement in gross profit margin between periods were an increase in volume, an increase in the average selling price and a reduction in cost of goods sold per pound. Average selling price is higher by $0.52 a pound or 2.5% in the current quarter compared to last year. This increase is the result of an improvement in the economic environment year over year; however, I would note that the marketplace continues to be very price competitive.

Cost of goods sold per pound in the current quarter was lower by $2.72 or 13.3% compared to the fourth fiscal quarter of last year. This reduction was the result of higher volumes, which improved the absorption of fixed manufacturing costs and reduced conversion costs, which were the result of cost reduction efforts and improved equipment operating efficiencies. Overall the improvement in average selling price and cost of goods sold accounted for $12.1 million of additional gross profit margin between quarters year over year with increased volume, excluding improved absorption, contributing an additional $2.9 million.

SG&A for the current quarter was $10.7 million, an increase of $1.4 million compared to the prior year fourth fiscal quarter. Factors contributing to the lower SG&A costs in the fourth quarter of fiscal 2009 included a salary freeze, temporary salary pay reductions, reduced accruals for performance-based cash incentive programs, and reduced sales commissions due to lower sales in the quarter. Although SG&A for this year's fourth quarter is higher than last year, for the full fiscal year, SG&A was $38.3 million compared to $39.3 million last year. The primary reason for the lower SG&A costs compared to last year is that fiscal 2010 reflects the full-year effect of the headcount reduction initiated in fiscal 2009.

Looking forward fiscal 2011 SG&A including R&D is forecasted at approximately $42 million for the year and reflects the full-year effect of reinstatement of pay reductions, removal of pay freezes and strategic headcount additions.

For the fourth quarter of this year, pretax income was $9.3 million compared to a pretax loss in the fourth quarter of last year of $4.3 million. For the fourth fiscal quarter of 2010, there was tax expense of $3.8 million. The effective tax rate for the quarter was 41.4%. This includes a tax charge of $600,000 for a change in the state apportionment factor which lowered blended state tax rate, resulting in an unfavorable reduction of our deferred tax assets in the fourth fiscal quarter. However, it also results in a lower current tax rate going forward.

We were required to report a similar charge in June after filing our tax returns, but in the fourth fiscal quarter, an additional rate reduction was recorded based upon our estimated future tax rate.

Net income for the fourth fiscal quarter of 2010 was $5.5 million or $0.45 per diluted share compared to a net loss of $3 million or $0.25 per diluted share in last year's fiscal fourth quarter.

Between the third and fourth quarters of fiscal 2010, revenues increased by $3.4 million or 3.3%, while gross profit margin improved by $3.1 million or 18.3%. Volumes increased slightly by 43,000 pounds to 4.8 million pounds. Between quarters average selling price was up $0.55, and cost of goods sold per pound decreased by $0.10. The increased average selling price reflects an improvement in service center transactional pricing. The mix of alloys between quarters remained relatively constant and accounted for a conversion cost being essentially equal between third and fourth quarters.

Cash declined by $41.1 million from the beginning of the fiscal year through 9/30/2010. Net cash used in operations was $19 million. Investments in equipment was a use of $12.2 million, and dividends were a use of $9.7 million. For purposes of this discussion, I have separated net cash used in operations for fiscal 2010 into two categories. The first category is cash used by controllable working capital which equals $54.8 million and includes AR, inventory, AP and accrued expenses. And second, all other operating activities such as net income, depreciation, etc., which in the aggregate provided cash of $35.8 million. The net cash used by controllable working capital was $54.8 million and was attributable to an increase in AR of $15.8 million with increased sales and an increase in inventory of $49.5 million. These uses were partially offset by an increase in AP of $10.5 million, primarily due to increased raw material purchases. The significant increase in inventory in the latter part of the fiscal year is due primarily to staging of work-in-process inventory for initiation of the inventory pool process and increased inventory to support higher sales volumes, particularly in the fourth fiscal quarter.

We had a goal of reducing inventory by $30 million in the fourth fiscal quarter; however, several things occurred that limited our reduction to approximately 12% of our target. First, we found that initiating the pool process proved to be more complex than anticipated. Compounding this was the increasing level of sales as reflected both in the pounds shipped and the related build in our backlog. Comparing the first quarter of the fiscal year to the fourth quarter, pounds shipped increased by 21% from 3.9 million pounds in the first fiscal quarter to 4.8 million pounds in the last fiscal quarter. Correspondingly backlog pounds increased between the first and fourth fiscal quarter by 32%. A portion of this increase includes several large projects which can temporarily distort inventory levels.

We anticipate that it will require most of fiscal 2011 to complete adoption of the full process, which will improve turns and working capital as a percent of sales in the latter half of this year.

Cash at 9/30/2010 was $64 million, an increase of $5 million from June 30, 2010, but short of our goal of $72 million. This is primarily due to slower than anticipated inventory reduction.

Our liquidity position remains strong with the additional capability to borrow $120 million from our working capital revolver.

Although the market place is very competitive, the Company's backlog continues to improve in all end market categories. And it is anticipated that revenues and sales volumes will also continue to improve over the course of fiscal 2011.

Net revenues, volume and net income improved during each quarter of fiscal 2010 when compared to the immediately preceding quarter. Management expects the strength to continue into fiscal 2011 due to moderate improvement and demand in the Company's end markets and improving global economic conditions. Management expects the Company's operating results will continue to be negatively impacted by reduced absorption of fixed manufacturing costs due to less than optimal production volumes and by competition from stainless manufacturers who are trying to fill available capacity, which may impose continued downward pressure on prices. These negative factors are expected to be somewhat offset by the benefit of the cost savings initiatives undertaken in fiscal 2009 and 2010 and increased efficiencies in equipment reliability, resulting from the Company's capital improvement program. Although management expects continued improvement in forward performance for fiscal 2011 compared to fiscal 2010, net revenues, volume and net income in the first quarter of fiscal 2011 should approximate the levels achieved in the fourth quarter of fiscal 2010 due to the impact of fewer shipped days, customer shutdowns and major maintenance projects to be undertaken by the Company in the first quarter.

Management also expects that demand for the Company's products will continue to increase as market conditions improve, resulting in increased levels of net revenues, volumes and net income in the second quarter of fiscal 2011 as compared to the fourth quarter of fiscal 2010.

In summary, significant progress continues to be made at Haynes, and we continue to plan for the future. Despite the current economic challenges of the last two years, earnings are beginning to improve, and we expect cash flow to follow to support all corporate requirements, including working capital, CapEx bending, pension funding and dividend payments.

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

Thanks, Marcel. We are pleased with the direction of the overall economy and our end markets. With respect to Haynes specifically, we are pleased with the direction, but we have still got a lot of opportunities to continue to drive waste out of our processes and become a better supplier to our customers. By the way, I know many of you are interested in how we are reducing costs and improving efficiency and in general driving out waste.

A couple of good examples would be in 2010 we took on some projects in our melt shops in the melting area, one of which increased our air melt productivity by about 20% to 35%, and that process was really just some engineering adjustments to equipment. We did not add new equipment. We have made some engineering changes to the equipment and some process adjustments. So we have got some real nice gains, sustainable gains that we are seeing the fruits of right now in the air melt area.

We also took on a project to look at our refractories, and we have increased our efficiency there also. Those two projects alone -- and we have a myriad of engineers out there, and we have worked on a number of projects in various areas. But those two projects alone have reduced our production costs over $3 million at the heavy end of our operations. Those end up being pretty significant per pound savings when you talk about an operation the size of ours. Our approach to continuous improvement is textbook. We define areas of waste, and we attack the top items on the [parado]. We have seen great commitment from our people in the plants, and the process is paying off.

Commercially the feedback I'm getting from our customers is very good. Haynes is well-respected and considered an excellent partner. Economically the feedback I'm getting from those customers is also good, especially when gauged in reference to the past two plus years. As I mentioned earlier, customers are saying we don't anticipate a boom, but rather more of a buildout, and 2011 will be better than 2010.

On the new alloys, new markets and new applications front, we are continuing to drive our growth by giving our existing customers design capabilities to make their products better, and we are also picking up some new applications and new customers as evidenced by our work in our core markets on new applications and our work in new markets like alternative energy.

In short, I think the work Haynes started a few years ago to make us a better, more reliable and innovative company is making a difference to our customers and the design community. With that, let's open the call to your questions.

(Operator Instructions). Edward Marshall, Sidoti & Co.

Looking sequentially, so from the third quarter of fiscal 2010, it looks like volume and pricing was up a little less than 1% on a sequential basis, but you were able to squeeze out about a 250 basis point gross margin improvement.

Marcel, I know you talked to the year-over-year comps and a little bit of what is going on there. I suspect it is mix, maybe some cheaper inventory flowing through, and some efficiencies. But could you elaborate a little bit more to the benefit of each of these different markets or each of these different drivers here as to why the gross margin improved with such a small improvement on the volume and the pricing?

Well, I think part of it is to focus on -- you know, Aerospace clearly performed well through the course of the year, and again, you had -- we had a situation where we put inventory on the ground in anticipation of that activity. And because of the short lead times we were able to provide, we were able to garner some additional margins through pricing from that perspective. We continue to see additional improvements and benefits from the things that, for example, what Mark indicated. We are looking at continually putting in place new additional cost savings initiatives and getting the benefit of those. So it is a continuous process.

It was good economic performance. The environment improved. The pricing improved, so overall it was across a number of areas. It was pricing. It was cost initiatives, those kind of things.

It looks, though, if I look quarter to quarter, it looks like actually pricing on Aerospace went down slightly, maybe by about $0.40 or so per pound.

I think you need to look to the specific mix in that category. Again, the mix -- there is a wide variety of mix within that category from the 718 type product to cobalt-based type products. So, again, I think that's part of the effect that you are seeing. Even though the average selling price may have gone down, we have still probably garnered some additional margins on the mix issue.

Yes, but wouldn't that -- I mean just to dig further, I mean looking at the sequential improvement on the Aerospace volumes, wouldn't that assume -- why don't we just follow up on this because I think it might get a little too complicated for the conference call here.

Moving on then, I guess the guidance -- and you touched on this in your prepared remarks as well for the $200 million or so of inventories held on the balance sheet. You talked about complications of the pull-through and winding that down. Can you discuss a little bit more about what those complications were?

The primary complications were driven by the increasing level of activity. Typically we get projects through the course of the year. We have got a number of large projects or project activity in that third and four quarter of last year. And it's a little bit more complicated than -- for example, if you get a 300,000 pound project, well, you have got to commit 600,000 pounds to that. You know, our yield typically averages approximately 50% from start to finish. So we have got, as you can see through our backlog, a preponderance of activity in that third and fourth quarter that requires us to put probably more -- that requires us to put more inventory on the ground than required at any one particular time.

But, in addition to that, because of the nature of the specific alloys, typically we always have revert coming back through the process, but in this instance, because of the mix, we had to commit additional raw materials instead of using revert material. So that required an additional level of commitment. So there was a number of factors that just loaded more inventory into the process. And we're trying to balance initiating a pool process, which can be complex because you're talking about capacity planning, production planning, training, learning how to utilize that whole process.

Okay. There seems to be a few moving pieces on your outlook on capital expenditures, but I'm gathering that it could be right around that $20 million mark. Does that sound about --?

We could end up spending $20 million this year and $20 million next year. Typically that extra $5 million that we are thinking of, we are typically talking about $15 million per year. That extra $10 million in aggregate relates to the distribution process. So that is a timing issue more than anything else. However, by the end of 2012, we should have spent that additional $10 million.

Okay. So could it be frontloaded? You would not spend all $10 million of it in this coming fiscal year?

It would be backend loaded.

Okay. And then typically you give utilization on the quarter and then, of course, I guess capacity. I know it is a moving target, but if you can comment on each of those.

Our utilization was probably around, I would say, 70% to 75%. That is what we are running right now.

Yes, and I think it becomes -- I know you have heard this story before -- it is product dependent. Right now if you're talking our core products, cold finished flaps, things like that, high temp and corrosion resistant materials, we are quoting out into the April timeframe right now.

Dan Whalen, CapStone Investments.

Actually my question was on the utilization rate, and what you just mentioned certainly implies a capital base of much higher than what was talked about during the past peak. I was wondering if you could comment in terms of, I guess if we were in a baseball game, what inning we are in in terms of how much further incremental capacity can be added to the system?

Well, we have thought -- on the last call, we did comment and we haven't, you know, talked about it in our presentation. We looked at our capacity in aggregate probably approaching 28 million to 30 million pounds, and that is a result of all of the initiatives we have undertaken in the finishing area for sheet, upper plate, before high. As we look across all our capabilities, including the sheet, plate, bar, billet, ingot, slabs, we probably can approach 28 million to 30 million pounds in sales.

And just to give you an idea, too, I mean a lot of the capacity improvements -- like we gave you the incidents on the melt shop, air melt, how we pretty much improved capacity through really some engineering and process changes.

The same thing is happening on the finishing end, and we have discussed this previously. On the hot operations, the hot mill, the upgrades we are doing on the hot mill are going to give us the capability to roll the lighter gauges at the hot mill. That's going to give us more capacity in cold finishing because now we want have to go through so many [roll the metal pickle] sessions. So it will be -- we are improving capacity that way.

In other areas, we've got some furnaces. You know, about the furnaces we upgraded back in '08. We have got another furnace out there that we are playing with and modifying a little bit there that will also give us a little bit more capacity in the lighter gauges and by lighter gauges I'm talking under a quarter inch.

So we keep challenging the engineering and process engineering people and our R&D people to take a look at what we have got out there to also help us increase capacity marginally as we continue to get more opportunities out there.

Okay. So it almost sounds like we are maybe halfway there?

Well, from a sales perspective, we are probably -- I think if you take -- if you look at what we did in the last quarter of -- or the fourth quarter, we did 4.8 million pounds, almost 5. So I would say two-thirds of the way if you annualize that fourth quarter.

Tim Hayes, Davenport & Co.

Looking at the chemical processing, I wanted to get some more detail on that. The volumes there sequentially can be lumpy, to say the least. But when the volumes do go down, the pricing seems to go up nicely. Is that due to some underlying base volume that is supported perhaps by contracts with pricing that is higher than what you would get in the spot market, or is there something else causing those patterns?

It is a couple of things, and I will let Marcel add to this. Usually when you see the volumes drop off like that, it is a good indicator that there was not a big project that shipped. When there are big projects, those are bid very, very competitively, and the pricing is low. So when you see a down volume quarter like that, usually it means we did not ship a big project or a series of big projects. That then leads also to our -- I guess you would say our baseline shipping. When you come to Haynes you are frequently ordering -- maybe it is a MRO, maybe it is not in some cases OEM, but the MRO, a lot of times, it is for the more advanced alloys and materials that you cannot get from other people, something like a HASTELLOY B3, which is going to be a selling price that is a very high selling price type of item.

Marcel, anything to add to that?

I think that is the case, particularly CPI. That is primarily commodity-driven. That is your C-276, C-22 type alloys. When volume goes up, that is where the volume is going to go up with those commodity type alloys, and that lowers the average selling price.

Luke Folta, Longbow Research.

A quick question, actually a few here. Firstly, during your comments you had talked a lot about the price competition that you are seeing, and I got the sense from what you had said -- maybe I misunderstood -- but that maybe you are seeing more competition on the corrosion-resistance side as opposed to high temperature alloy? Is that right?

In general, that is true. I mean there are some high temp alloys that are out there that are also bid very competitively. But largely when we see a lot of price competition, it is in the corrosion-resistant materials.

Okay. I know there were some competitors that have announced base price increases back in October. I think one of them was out with a mid-single-digit increase. Are we seeing any traction? I'm not sure did you guys follow it, are we seeing traction there?

We are doing the same things. We are moving prices up everywhere we possibly can.

Okay. Another question on your overall jet engine exposure. Are you able to give us some indication of what the big OEMs or big programs are that are most significant to your business?

Just in general, we are a supplier to pretty much every engine manufacturer in the world, and you will find our products just about everywhere. We are not in the rotating components; we are in the static components. So the rings and seals and things like that. But we are pretty much everywhere. And we share that business again with some of the guys who make rotating components as well. They also are in the static components, whereas we are pretty much exclusively on the static components side.

Okay, that is helpful. And then just lastly, this ETI Ladish deal that was announced this week, I guess I never thought of you as probably a big supplier to those guys. Maybe I'm wrong, but what do you think the impact of this is going to be on your business?

I think it's a great move by ATI. I think they are brilliant. I think they are real good at what they do.

With respect to us, Ladish is largely triple-melt materials for rotating components, so they are not really a customer of ours. We have quoted them in the past, but it was mainly like tooling for their hammers and stuff like that as opposed to process material for their customers. So our sales to Ladish are pretty much zero. There will not be an impact from that point of view.

When -- if you remember, PCP bought Carlton about a year ago. We did see some benefit, I think, anyway. I think we saw some benefit in that some of the other forgers out there decided to purchase material from people like us who don't own a forging company. So there may be some upside to it in the future, but it will be very difficult for us to quantify.

Can I ask one more? I'm sorry. In your outlook, you talked about a modest increase in demand for next year. Can you just give us some sense of what you think modest is as far as volume growth year over year?

I think that is a great question. I wish I had a great answer for you. The reality is that I think you say our backlog, you see the growth we have had this past year. I think there are a lot of very positive things going on in the industry. But, at the end of the day, there's a lot of things that can work against you, too. The markets continue to be competitive. There are always fluctuations in raw material costs. So just leveraging off of what we know today, we expect to improve at least modestly through the course of the year. I don't think we can be any more definitive than that.

Alan Brochstein, AB Analytical Services.

Thanks for taking my call, and I want to also thank you for publishing your 10-K before this call. It is very helpful.

Not a problem.

My first question is, I thought your sales were great. I'm not trying to knock them, but I was kind of surprised after looking at some of your competitors with high aerospace. I'm just wondering, did some of your sales go into backlog? Was there a conscious effort maybe to build backlog?

No, not at all. And just to give you an idea, I don't know how familiar you are with Haynes. I'm actually very pleased -- you know, I talk about the Company from the sales and marketing side, as well as the production side. We are typically associated with late cycle markets. And where I am very pleased with our people is I think we did a nice job emerging from the downturn maybe a little quicker than a lot of people expected. I, too, would love to see that sales number a lot higher. But recognizing where our -- where late cycle markets are right now, I'm very pleased.

You have to remember we don't have an automotive market base. Not much to speak of there. We don't really have anything tied to appliances or housing or consumer electronics or anything like that where some of the bigger mills have those things that carried them earlier in the year, maybe trailed off a little bit as stocks got up into this quarter and stuff. So we don't have those markets. So I'm very pleased where we have come from on that point of view of really emerging from this thing and really being aggressive and working with customers to get ourselves to this level quickly.

That being said, we still have a heck of a lot of work to do as I say on the other side of the ball. Driving costs out and becoming just in general commercially and production-wise a better supplier to our customers. So there is still work to do, but all-in-all I think one of the key things you remember is we are really tied to late cycle recovery markets, and I think we have emerged from this thing maybe a little bit quicker than some people anticipated.

I think another aspect of that is just the fact that a number of our comps also have a significant amount of titanium as part of their aerospace revenue market grew. So that's not -- although we do have titanium tubing, it is clearly not the lion's share of what we do.

I don't know if that is helpful. Is that helpful at all to you or --?

Yes. I just looked through trying to break out -- I know that ATI and Carpenter certainly have a lot of other things going on. I tried to hone in and see, but no, that answers the question. Thanks.

And a follow-up, on China kind of moved in line with your sales in general this year. I imagine that is mainly aerospace, which is strong. Are you happy with what is going on over there? What kind of changes -- I think you were talking about opening another service center it sounds like?

A lot of our sales into China are chemical process related. So we do have some aerospace sales. We do have some land-based gas turbines. But largely our business historically in China has been associated with the chemical process industry and if you ask me to break that down one more point, largely with new builds, largely with OEMs, new plants, project type of applications in China. Through the downturn we have seen more diversification of that. But there is still -- we are still building a good foundation there, and we are positioning ourselves for more growth.

To be honest with you, too, we've had a lot of good things happening in the last year elsewhere in Asia, in Korea and in Japan.

Okay and one more. This is a tough one, Marcel, but I have looked at your backlog over time, and you guys just have very impressive backlog. Just basically it was about as low as it could get to kind of midrange typically in the good old days, I guess. Early in your public company years, you were typically north of 200. We are kind of midrange right now. So I'm just trying to understand better how your backlog will convert to sales. You guys must have given that some thought overall. I mean the sales have been running a lot higher than backlog would suggest recently, not surprisingly. I guess more short lead time fills. But, as we move through the cycle, we're going to move down. How do you expect that to pace out?

Well, I think it's typically -- historically it has been very consistent. About 75% of the backlog will flow out in six months and about 90% over the course of the next 12 months. Now there is an element of our sales that you never see in the backlog, and that is a portion of our transactional business that comes out of the service centers.

You get an order the second week of June, and you expect to ship it the third week of June. And that typically is an increasing amount of our business as the level of activity in the marketplace picks up. So those are the key elements, but it is very consistent. And I think you have to be a little bit careful about what you are looking at back in 2007 and 2008. Those were great years for high-performance alloys, particularly in the aerospace market, and also, there is a bit of distortion on the revenue side or the dollar side as it relates to the pricing of raw materials. So you have to be a little bit more careful. I think focus on the pounds, and I think you will see a smoother curve when you look at pounds versus dollars.

Great. And I know where to find that information. And one last one, if I can, great job on these alternative energy projects or products that you guys work on. But can you remind us again exactly what they are and kind of what is really leading the way there on that fabulous growth?

I cannot give you exactly what they are. However, we supply a lot of people who supply the solar industry. Maybe it is through polycrystalline and silicon. Maybe it is through containment vessels for storage of salts. But there is a myriad of applications in those areas, collection systems, things like that in solar. We also had a very good year in supplying people that work in I will say the nuclear fuels processing area. And, again, we don't supply directly into people. We typically supply into fabricators or second and third tier people whose business is being driven by a lot of these alternative energy opportunities.

We are working with some of the fuel-cell guys right now as well and again mainly on storage and transport type of applications.

Jeff Bernstein, AH Lisanti Capital Growth.

It is a great quarter, and my questions were answered. Thanks very much.

Mark Parr, KeyBanc Capital.

Nice quarter. It is nice to see improving visibility. So Mark, I thought the comments you made about customers feeling better about 2011 really were helpful. So thanks very much for that color.

One thing I was curious about, you talked about your air melts, your EAF from a productivity standpoint. Do you view that as just pure cost reduction, or is that incremental capacity that you picked up?

You nailed it, Mark. It is both.

Okay. I was just wondering do you guys see the need for an induction melting furnace, a vacuum induction melting furnace anytime in the foreseeable future?

No, we are in pretty good shape with the VIM. I mean we are always looking at it, and we do small upgrades here and there. But we're in pretty good shape there.

Okay. Any other significant capital projects that we should be thinking about that could enhance your capabilities over the next 18 to 24 months?

Well, I think one of the -- Mark mentioned some of the things we're doing on the rolling capability. And we have noted that of the capital plan going forward, we probably were going to spend about $30 million on our 4-high, and that's about improving the capability of the 4-high to ultimately roll and control thinner gauge material. It reduces the cost for the 4-high, but more importantly, it reduces downstream processing in our finishing operations, which adds capacity and reduces costs. So that is a -- of the $85 million, we are going to spend $30 million on the 4-high, and that's a big deal. But that's over four years, five years.

And I think you know the story, too, Mark. I mean the equipment here really did not have a lot of money put into it for a long time. And what we are finding is by putting -- like into the 4-high or the Pilger mills down in Arcadia or the cleaning lines in Arcadia. What we are finding is by getting these things back to a standard or a good operating level, we are finding more capacity, we are finding better efficiency, and we are finding better quality product, all things that -- we are getting very good returns on these investments internally right now.

Do you plan -- along with the improvement in the gauge control and the motors and the drives, are you going to be putting in any additional re-heat furnaces?

That is more of a longer-term issue, I think. That could be a possibility at the backend, not currently.

Yes, it is on our list, Mark, but right now we are upgrading some other things that are going to pay off and are more necessary right now.

Okay. I guess one last question. It is a little bigger picture, and I know, Mark, both you and Marcel had indicated a number of the markets are experiencing highly competitive conditions, and I would just like to get some more color on that. What do you think has to happen or how far into the cycle do we need to go before those competitive conditions ease, or what do you have under your own control that could help make those competitive conditions ease?

I think I would look at it from the perspective of overall industry capacity utilization. I think we are probably in that 65%, 75% range. And once you see that capacity move up to the 80% plus range with everyone, I think then you will see -- I think you will see improving margins across the board. But I think we are, as Mark indicated, this is a steady buildout. This is not going to happen this next quarter. It's probably not going to happen in 2011. It's probably going to happen further out, 2012, 2013.

Yes and I look at it just like Marcel does. I mean the one side of it is being in metals 27 years, I always watch automotive. When automotive does well, a lot of the big mills do well, and that is a good thing. When the big mills are humming, that is a good thing for everybody involved. So that is one side of it just like Marcel said.

The other side of it is I think this year was a great example. We got a bunch of guys that went out there and went hard after solar, went hard after some of these nuclear applications, and boy, we created a market for ourselves in those areas. And, you know, the story behind C-22HS. We presented it in May. There are some great things going on there that we are talking to the people that are working in the drilling and completions area. And, you know, the story on 282 where we are constantly trying to chip away and look for new applications inside of jet engines that want to run at higher temperatures more efficient. So that's a little bit of the area where it is great when the macro economy does well, but we are also doing a lot of things that control our own destiny that I'm real pleased with the way -- especially those other markets this year.

There was not as much FGD and industrial heat treating in there as in normal years. A lot of what made a difference for us this year were these solar projects and things like that.

Okay. All right. I appreciate that. Just one last question. Any thoughts about the upcoming Army game?

They wanted $175 a ticket. I'm staying in Kokomo.

Have a great Thanksgiving. Thanks.

(Operator Instructions). Gautam Khanna, Cowen & Co.

I wanted to just ask, you made a comment about how some additional business may come your way after the PCB Carlton acquisition was done. I mean how long does it typically take for those forgers to allocate share to push back on the consolidation? I mean when might you expect if it were to happen to gain some business from the ATI/Ladish combination?

I don't know if we will, to be honest. Some of the smaller forgers and people like that about a year ago we picked up some business in areas, and their indication was they did not want to buy from their competitor. Will that continue? I don't know, to be honest with you. But there is a potential upside there.

Is it a significant or core part of our business? I think most people, no. One, we're not into the triple melt business, and that is a pretty decent size of the forging business. So that is not a big part to it. But really where Haynes is heavily focused is on the cold finished flaps and plate type of areas, and those are a much larger part of our business. I really could not give you an answer to handicap that type of a number. And to be honest with you, I think some of the other people in the industry will be able to benefit from that type of activity more so than Haynes.

Okay and if you could prognosticate for us. Do you anticipate that you are going to see more of these backward integrated type of deals going forward with the forgers moving back, or do you think we are sort of done with that from here?

I will tell you what, I will answer that question. We don't know. That is not our area of expertise. What we sit here and do is run our business. I mean I don't think anyone knows. If you do, we don't. We just don't know.

Do you think it is important for that to happen? I mean you have mentioned that the deal was brilliant, the ATI/Ladish deal. I mean I was just curious as to why you think that?

I said that, and I just -- I have always been very impressed with ATI. I think they are an excellent organization, and I think they make some intelligent moves. And I think that from a competitive standpoint, like I said, I think they are a sharp company, and they know how to make things work.

This brings us to the end of our Q&A session. I will now turn the floor back over to management for any closing remarks.

Thanks, Claudia. In closing, thanks very much, everybody, for your support of Haynes. Please have an enjoyable and safe holiday season. Here at Haynes I think you know we have got a plan, and we are working it. We appreciate your time today. We will look forward to meeting with you in the future. Bye bye.

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