Haynes International Inc (HAYN) 2011 Q2 法說會逐字稿

Greetings, and welcome to the Haynes International, Incorporated Second Quarter 2011 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, Mr. Dan Maudlin, Controller and Chief Accounting Officer. Thank you, Mr. Maudlin. You may begin.

Thank you very much, and good morning. With me today are Mark Comerford, President and CEO of Haynes International, 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 a forward-looking statement. Although we believe our plans, intentions and expectations regarding 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 Form 10-K for the fiscal year ended September 30th, 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.

Thank you very much for listening, and now I will turn the call over to Mark.

Thank you, Dan. Good morning, everyone, and thanks for joining us today. Hopefully you've all seen the press release and had a chance to review it.

We'll follow our standard agenda in today's call. I'll open with comments about the business and our end markets, and then Marcel will give you greater detail on the financial results and the outlook.

Revenue in the quarter increased 47% over last year's to $139.1 million, and net income increased to $6.2 million from $1 million a year ago, further highlighting that fiscal 2011 is a transition to stronger market conditions.

Also, during the quarter, our backlog increased over 44% to $241.7 million from $167 million. I'm sure some of you have done the math on the backlog and invoice level for the quarter and notice that order entry in the quarter was over $210 million. This is the result of our customers placing larger and longer commitments to meet increased demand as well as restock their depleted supply chains. The backlog exhibits strong volume and higher average selling prices, further confirming the strength in our end markets.

Average pricing in the backlog also indicates some of the actions we've taken to manage our mix of products and push through price increases. We're developing a broader range of product applications and continue to support our customers' requirements. We're pleased with what our backlog says about the strength of the economy for our customers, and we're also very pleased that our customers have committed to Haynes. The industrial economy has clearly moved off the bottom and is strengthening. Oil prices remain a concern, as do commodity prices in general, but the overall tone in the marketplace from our customers is very, very positive.

Turning to our review by market; net revenue in the aerospace market was $49 million, up 46% over the second quarter of 2010. Aerospace accounted for roughly 35% of our revenue in the period. Sequentially, revenue in this market was up 10.1% over the first quarter. Perhaps more importantly, our backlog for aerospace products increased almost 45% in the quarter. Demand drivers are the increases in Boeing's and Airbus' production schedules, along with the restocking of the depleted supply chain. Our patented high nickel-based, high-temperature alloy HAYNES 282 continues to perform well in test applications, as well as broaden its role in commercial applications.

By the way, I just -- I looked at the numbers yesterday and 282 in 2011 is already ahead of full 2010 results in revenue. That's an encouraging sign for us that our application engineering efforts are paying off. And perhaps more importantly, 282's high-temp property set and the workability -- and by workability, I mean the fabricability and weldability of the alloy -- is gaining broader acceptance in the market place.

And by the way, a bit off the aerospace topic for a second, but staying with 282, there was a great paper published in the quarter by EPRI, that's the Electric Power Research Institute. It was jointly published with the Department of Energy and Energy Industries of Ohio during the quarter. It appeared in Turbomachinery International, and it talked about HAYNES 282 for use in high-temperature steam turbines for power generation. Historically, Haynes has not had a lot of penetration on the steam side of the business. This application, just so you're aware, is still a few years out, but I think it's a good indication of what is done in this industry as far as application development and new materials enabling new technologies like this.

And by the way, the technology, we've spoken to you about it before, is called Advanced Ultra Super Critical, and in general, it's about getting increased efficiency in these turbines through higher pressures and higher temperatures. Those are very good things for alloys like HAYNES 282. When people start talking about higher strength and higher temperatures, it's real good for HAYNES 282. 282, as I mentioned, has good high-temperature strength, great workability, good micro structural stability as well.

Anyway, sorry for going off on a tangent. Getting back to our market review, revenue in our chemical processing CPI market in the quarter was $37.2 million, up over 103% from a year ago. Large project-related shipments for the chemical industry were high in the quarter. We've also moved some of our solar activity into this segment. CPI was over 26% of our revenue in the quarter, and sequentially this market was up over 80%; again, due to the timing of key project shipments. CPI backlog also grew about 84% during the quarter, and user demand has continued to increase during the quarter and new application development remains very strong.

Our net sales into the land-based gas turbine market totaled $27.7 million in the quarter, representing 20% of our total business. Net revenues were up over 38% from a year ago and up about 29% sequentially from the first quarter. Backlog also increased in the quarter, up about 15%. This market has been the slowest of our core markets to rebound. However, we stated in the last call that quote activity had increased; now order activity has followed -- by the way, especially late in the quarter. I'll say the last 6 weeks of the quarter or so was when we really started to see some of these land-based gas turbine accounts start to come to life again.

Both OEM and MRO accounts have indicated that they are seeing better activity as global industrial economies start to improve. Oil at $100 per barrel has also spurred some of the demand or at least it's part of the conversation now. This market is still a bit spotty, but we're still -- we're seeing better activity of late.

Our final category, called other markets, had net revenues of $22 million, accounting for 16% of our total. The $22 million was up 13.4% from a year earlier and up over 44% sequentially. Backlog in this area also expanded just over 8% in the quarter. This area, as we've said before, includes our FDG business, industrial heat treating, oil and gas, as well as some of the other smaller markets we serve, and some of the new applications that we have, I'll say, in our incubator, for the lack of a better word. Demand in shipments in this area, therefore, are typically also very choppy.

We've seen some very nice quote and order activity in the past 6 months or so for our HASTELLOY C-22HS corrosion-resistant material for trial applications in the oil and gas industry. Similar to the work we do on HAYNES 282 or HYBRID BC-1 or G-35 or the other new alloys, we're frequently bound by non-disclosure agreements for the application. So, to ensure that we honor those NDAs, we don't discuss the details of the applications.

Before I turn it over to Marcel, I also wanted to mention that we've been raising prices, and this process accelerated in the last quarter as the order book strengthened. We expect to see the effects of these increases late in the third quarter, carrying into the fourth quarter, as these orders start to ship. The increases vary, but I'd say, in general, increases have been roughly 5% to 12% over the past 3 months or so; again, depending on product and depending on where our capacities stand in the plant.

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

Thanks, Mark.

I will start with the comparison of revenues, costs and gross margin in the second quarter of fiscal 2011 versus 2010. Net revenues in the second quarter of fiscal 2011 were $139.1 million, a 47% increase from the second quarter of last year. This $44.5 million increase in net revenue is a result of a 44.7% increase in product volume, which accounted for $40.7 million of the revenue increase, and a 2.8% increase in average selling price, which accounted for $3.8 million of the revenue increase. The year-over-year improvement reflects improvement in the economic environment we service, primarily driven by the aerospace and chemical processing markets.

The aerospace market improvement reflects the end of the supply chain destocking process that started during the economic downtown and improving airplane build rates. Net revenue for the aerospace markets were up 46.2% between the second quarter of last year and the second quarter of this year. That is the result of a 39.9% increase in aerospace volume and a 4.5% increase in average selling price.

Net revenues for the chemical processing market were up 103.1% between the second quarter of last year and the second quarter of this year because of a 127.6% increase in CPI volume, partially offset by a 10.8% reduction in average selling price. The volume within the CPI category is reflective of increased project business worldwide resulting from an improvement in demand for the products within the CPI markets that Haynes services and a corresponding improvement in the credit to fund projects. As noted by Mark, this is reflected in the significantly higher backlogs for the aerospace and CPI markets at the end of the second quarter as compared to December 31, 2010.

Cost of goods sold in the second quarter of fiscal 2011 was $118.5 million, a 40.4% increase from the second quarter of last year. The $34.1 million increase is the result of a 44.7% increase in product volume, which accounted for a $37.7 million cost increase, partially reduced by a cost decrease of $3.6 million attributable to a 2.6% decrease in average cost of goods sold per pound. From a cost perspective, the essentially flat cost of goods sold per pound [about] the same periods is due to rising raw material costs being offset by improved equipment performance, cost reduction initiatives and improved absorption due to higher sales volume.

The combination of the noted revenues and cost changes between quarters resulted in a gross profit margin in the second quarter of fiscal 2011 of $20.6 million, compared to $10.2 million in the same quarter a year ago, an improvement of $10.4 million between quarters. Gross profit margin as a percentage of net revenue was 14.8% in the second quarter of fiscal 2011, compared to 10.8% for the comparable quarter of last year.

SG&A, including R&T, for the second quarter of fiscal 2011 was $11 million, an increase of $2.3 million compared to the same quarter of the prior year. Factors contributing to higher SG&A costs in the second quarter of fiscal 2011, as compared to the comparable quarter of fiscal 2010, included an additional 10 SG&A employees, salary increases, increased marketing costs due to the increased level of activity, and additional administrative expenses. Looking forward, fiscal 2011 SG&A, including R&T, is forecasted at approximately $42.5 million for the year.

For the second quarter of fiscal 2011, pre-tax income was $9.6 million, compared to pre-tax income in the second quarter of last year of $1.5 million. For the second quarter of fiscal 2011 there was tax expense of $3.3 million versus a tax expense of $600,000 in the second quarter of fiscal 2010. The effective tax rate for the second quarter of fiscal 2011 was 35%, compared to 37.6% in the comparable quarter of last year, and it is anticipated that the rate for the full fiscal year of 2011 will approximate 35%. The reduction in rate year over year reflects lower state tax rates and a higher manufacturing deduction.

Net income for the second quarter of fiscal 2011 was $6.2 million or $0.51 per diluted share, compared to net income of $1 million or $0.08 per diluted share in last year's second quarter.

Backlog increased from the beginning of the fiscal year. As of March 31, 2011, backlog dollars have increased 63.3% to $241.7 million from $148 million at September 30th, 2010 as a result of backlog pounds increasing 60.9% and average selling price increasing 1.5%. As noted in the past, we believe that backlog continues to be a very good indication of the level of future revenue.

The increase in the order entry in the first half of fiscal 2011 was primarily driven by strong aerospace order entry of $141.3 million and represents a continuation of aerospace activity similar to the latter part of fiscal 2010. In addition, there was resurgence in the first half order entry for chemical processing which equaled $101.8 million. However, the order entry rate in the first half of fiscal 2011 for land-based gas turbine and other market categories was only slightly higher than the respective sales for each category in the first half. Over the past 2 fiscal quarters, order entry activity has averaged 2.4 million pounds and 55.3 million per month and will begin to impact revenue in the latter part of the fourth quarter of fiscal 2011.

To April backlog; the backlog improved in April, although not at the same rate as in the second quarter of fiscal 2011. The balance of the backlog at April 30th, 2011 was $250.7 million, an increase of $9 million from March 31, 2011. The backlog count at April 30th, 2011 equaled 9.9 million pounds with an average selling price of $25.40 per pound.

The outlook; competition in the marketplace continues to require the Company to aggressively price large quantity and project business orders, which all favorably impacts the Company's gross profit margin and net income. The average selling price in the second quarter reflected the impact of the competitively priced project business and the volatility of raw material prices, which tempered the effect of price increases. Although the marketplace continues to be competitive, particularly for large volume and project business, it is less competitive than 6 -- from 6 months ago. The Company's backlog continues to improve, and it is anticipated that revenues, sales volumes and net income will also continue to improve year over year.

For the balance of fiscal 2011, we expect net revenue for the third and fourth fiscal quarters to approximate the second fiscal quarter and volumes in each of those quarters to be slightly lower than the second quarter. We expect that net income will improve sequentially over the next 2 quarters due to a decline in project business, offset by projected increases in the higher margin transactional business. In addition, it is anticipated that price increases initiated in the second quarter to offset higher raw material and raw material costs will improve net income starting in the latter part of the third quarter.

A look at working capital; the Company continues to focus on improving working capital management, with the emphasis on inventory through the initiation of pull and Lean manufacturing techniques. The inventory balance decreased by approximately $4.1 million during the second quarter due to improvement in inventory turns. The improving inventory metrics are reflective of the inventory pull process gaining traction and sales continuing to rise in conjunction with record levels of order entry. In addition, AR DSOs also improved in the quarter. These improvements in inventory turns and DSOs were slightly offset by a decrease in AP days in the second quarter as compared to the prior quarter. The effect of the improvement in controllable working capital was to reduce working capital as a percent of sales from 58.5% in the first quarter to 46.8% in the second quarter of fiscal 2011.

Capital spending; capital spending for the quarter was $3 million and for the first 6 months of the year, $6.4 million, with spending for fiscal 2011 targeted at $15 million, of which $6 million is for upgrades of the four-high Steckel rolling mill and supporting equipment. In addition to the $15 million planned for fiscal 2011, the Company also plans to spend approximately $10 million over the course of fiscal 2011 and '12 to improve the customer service capabilities of the Company's service centers.

In summary, performance continues to improve, the economic environment is getting better, the order entry rate has improved, and earnings continue to increase. Although we may be challenged in the short term, we expect cash flow over the immediate and long term to be sufficient to support all corporate requirements, including working capital, CapEx spending, pension funding, dividend payments, and also generate excess cash.

With that, let me turn things back to Mark.

Thanks, Marcel.

Overall, we're pleased with the direction of the economy, and we feel we're well positioned to take advantage of the upturn, with new applications taking hold, inventory in place to support new and core business, personnel in place to meet customer demand, and an attitude to safely drive waste out of our processes. We still have a lot of work to do, but we feel good about where we are and our ability to meet the demands of this cycle.

With that, let's go ahead and open the call to your questions.

Thank you. At this time, we will be conducting a question-and-answer session.

(Operator Instructions) Edward Marshall, Sidoti & Company.

So, I wanted to understand, if I could, or dive in a little bit more on the mix issue that you had. In particular, I guess, it's the -- is it product specific? Is that what you're saying here, it's -- you're suggesting that spot market improvement may relieve some of that stress? I'm just trying to understand it if I put all the pieces together.

I think if you look at the process over the last 6 months, Ed. I mean, that's when we really start to see the order entry rate improve.

But, if you start 6 months ago, we saw the order entry activity, or at least the quote activity for the CPI market, begin to improve. So, you have an orientation to larger projects, larger order quantities, typically in lower-value type product, but then they're not competitively big. So, those orders -- we went out there. We looked -- we thought we needed to be a bit more aggressive than maybe we were in the past. We booked those orders at good margins, but not as good as we historically have had. Those orders filled up through the course of the last 6 months.

But, over that same time period, what's also happened is, not to lose sight of -- but the market has become -- or has improved. Capacities have risen in the marketplace. There's more capacity being utilized, which puts us in a better position longer term. The higher utilization rate -- it becomes less competitive.

So, through the course of the last 6 months, these orders ended up being shipped in the latter part -- in the second quarter of this year. And over the balance of the year, what we see is a decline in those large orders. We're being more selective relative to the orders we're taking. Those orders were falling off. We did have the restocking take place relative to that. We're seeing better response now and more traction in our pricing increases than we did 6 months ago, so we're seeing that come into play now.

So, there's still some uncertainty there, but clearly it's better from a pricing perspective today than it was 6 months ago. We're seeing the customers lean more towards ordering more often in smaller quantities. They've restocked. They're trying to balance out their loads now.

Does that help you out -- does that clarify the point for you?

Yes, wouldn't I have seen that in the backlog, though? The backlog pricing has a general -- I mean, I know it has a lot to do with mix and so forth, and backlog as well, but, I mean, wouldn't a sizable order or a notable size in order show up in a trend in backlog?

What I think you're seeing is that the trend -- these orders have come out of the backlog. The lower priced -- average selling priced orders have come out, and we've seen a nice move up in the pricing. We were $25 at the end of March. As at the end of April, we were $25.40. So, again, we're seeing the large priced competitively -- or the larger orders as they're competitively bid come out being replaced with a more selective, more richer product mix going forward.

It was impressive to see the volume amount that you put up in the quarter. I'm assuming it's -- a lot of it has to do with the lower weighting to some of the higher volume type businesses. But, when I look at your capacity -- I mean, you've done a lot over the last couple of years to increase your capacity, your efficiencies, etc. And we've asked this question in the past about your utilization rates, and I know it's a moving target, but when I look at this -- what was it, 6.4 million pounds in the quarter. Can you hit this volume rate -- within time, obviously. I know you're guiding to slower volumes over the remainder of the year. But, can you hit this kind of volume and get that kind of profitability out of it without having to shift these more commoditized materials to make up a bulk of that shipment volume?

If you start with where we are today from a capacity utilization perspective, we're probably at that 80% level today. So, we still have additional capacity to book.

What we see coming out is fewer of these large projects being replaced with an increasing amount of transactional type business. So, what we want to do, first of all, is be protective of where we are today, and we want to transition to a more valuable or richer product mix. We need to be selective in that process.

Longer term -- when I say longer term, fiscal 2012, I think we're going to begin to see the volumes in our markets begin to improve over that time period. They've improved dramatically over the last year, particularly the last 6 months. I think we'll see a trend like that continue.

In addition to where we are today, the fact is that we haven't stopped looking for ways to continue to expand our capacity. That's something that we started 5 years ago with the capital upgrades, and that's something that we look at every single day, trying to identify those places or opportunities where we can continue to expand our capacity.

So, I'm not -- I think we want to be selective. We're looking for a richer mix to transition into, but we are seeing -- but we still have some room or flexibility, and we're continuing to try to grow that capacity.

Yes, if I can just add a qualitative comment to that, Ed. If you think about it, we had roughly a 2008 type of quarter from a volume standpoint. But, I think we all feel we're still sitting in roughly a 2006 type of market, transitioning -- everybody seems to be finally starting to transition from barely breaking even into starting to make some money again.

Top line, you're going -- I think we're going to start to see a little more leverage. People seem to be filling up their own capacities a little bit, and we're moving price increases into the marketplace.

And I had a boss one time, and he used to always say that when the mill is full, we raise prices, and when the mill is empty, we go fill the mill. It's kind of like the old adage of pricing follows volume. So, I think that's a little bit of where we are. We're in that 2006 point of view from a top-line standpoint.

One of the other points I'd want to make about the volume that went through in this quarter; it is somewhat mix dependent, so you hit the nail on the head there. I'd also like to say a lot of the capital improvements that Haynes has put in, in the last 5 years that we've talked about, we hit this volume number with about 100 or so less people than we had back in the 2008 timeframe. And I think that speaks volumes to the efficiencies we're getting out of the equipment, the quality of the product, our throughput rates and things like that.

So, it's -- we're very pleased with where we stand right now and pleased with the backlog and the mix and what we see coming -- what we see going forward. I mean, there's a lot of moving parts out on the horizon, but right now where the backlog stands, things look pretty good.

So, if I can extrapolate on that, then -- and not to put words in your mouth, but just if I can understand you correctly, you're getting great leverage from lower headcount from the equipment that you've put in place. The pressure or the compression on pricing is somewhat temporary, you see that relieving in the future, and you've got ample capacity to increase your volumes going forward with a better product mix. And so, is there anything keeping you meeting or surpassing your previous type of gross margin structure, looking at everything --?

We've all -- we've talked about this in the past. It's clearly our goal or objective to return to the kinds of margins and net income numbers that we put out back in 2007 and '08. I mean, that's our goal. I mean, that's why we've spent the money we've spent, expanded our footprint, was to add value, to spread our -- increase our value-added type product portfolio.

But, the objective really isn't just to get back to where we were. The objective is to surpass that. We're looking to grow the business because we've increased our capacity, so we want to add to the top line and bottom line. We'll add efficiencies in the process from equipment improvements. So, it's just not about getting back to where we were; it's getting back to -- or it's surpassing where we were.

That's good to hear.

And then, finally, you mentioned and quantified the price increases that you saw throughout the quarter. And I think you said you expect to see them hit in the back half of 3Q and into 4Q. But, I was also curious about previous price increases. As you've said, you've implemented those as well. Surely they should be rolling on as we progress through 3Q or sooner. Should we see a noticeable pick up from prior price increases into the third quarter to start?

I think you'll see very little of it early in the third quarter. I'll let Marcel speak to it, but a lot of it gets back to, Ed -- some of the transactional business will come through immediately. But, it gets back to the fact that lead times -- on the last call and the call before that we were pretty much saying that we were quoting out about 6 months. If you came in today for our core products, the cold-finished flat products, we're quoting out into the November timeframe, even for replenishing our own stock. Cold-worked tubular products are pretty much out a year. Now, if you came in for wire today, welding wire or something like that, we'd be quoting you 5 weeks.

So, we're selecting pockets of where we go on our pricing, and also as far as the impact of some of those things coming through. Some of the price increases will roll through immediately on things like wire products, but, again, wire products are a very small volume element of our business.

I just -- to keep it in perspective, we can initiate price increases and we're very selective. We try to go broad based, try to get as much as we can out of the process. But, part of the dilemma that we face, and we have been facing, is the fluctuation in the raw material costs. That has a tendency to temper customers' approaches to how much they buy, when they buy and how much they're willing to pay.

I think the overall trend that we've established over the last 6 quarters and that we're talking about over the next 2 quarters points to higher average selling prices and improved margins. I think directionally we know where we're going. It's difficult to quantify specifically when we get there and by how much.

Excellent. Thanks, guys. Good quarter.

Thank you.

Tim Hayes, Davenport & Company.

Three questions. First, in terms of the spike in volumes in the quarter, was that due to orders that occurred in the quarter, and then you shipped during the same quarter, because judging from the backlogs leading up to it, I would not have predicted such a big sequential increase in the volumes?

What we shipped in the quarter was really a function of what we started booking the latter part of the fourth quarter of fiscal 2010 and through the first quarter of this year. You saw the build in the backlog. We're taking these orders. And again, when you take large orders like this -- or 6 months ago, you had the effect of -- the pricing environment 6 months ago was a bit more competitive than it is today, so that was one reason for the lower pricing. Those orders build up, and they, for the most part, were promised in the second quarter and got shipped in the second quarter.

Okay.

And then, on the margin, gross margin, for the fiscal third quarter, would that -- how do you -- you guided that it's going to improve. Might that -- how is that going to compare to, say, the margin that we saw in the fiscal first quarter?

Well, I think what we're looking at is sequential improvement from a margin perspective. The margin in the third will be better than the margin in the second, and the margin in the fourth will be better than the margin in the third.

Again, there's a difficulty in exactly nailing the -- what that percentage might be or a range is difficult because of things I previously mentioned.

Again, Tim, I think it's possible. I mean, when you say -- look, for instance, a good example is the comparison of the first quarter to the second quarter. And a lot of it really talks to timing of some of these large projects. Just looking at the average selling price overall first quarter to second quarter, you can see where some of the larger projects shipped second quarter.

So, we're a volume-dependent company, clearly. We're also very mix dependent, and I think this quarter bears that out.

I think in the context of the guidance provided in the Q and in the press release, if -- we're looking for our revenues to be approximately the same, we're looking for volumes to be down slightly and net income to be up sequentially quarter over quarter. That indicates that the margins need to improve through the balance of the year.

And then, lastly, on the volume guidance down slightly -- on the service, I would think, down slightly something under a few percentage points. But, given how lumpy the volumes can be, if they were to come down sequentially by 10%, would that fall into your thinking of -- down 10% would be a slight decline?

I think that would probably be a significant decline. We wouldn't anticipate -- we don't see the volumes coming down that much.

Alan Brochstein, AB Analytical Services.

Hey, guys. Great quarter.

Thank you.

Thank you, Alan.

It's really exciting. I just -- in the past, we've talked about backlog in pounds really being the best leading indicator of your business. And I'm just blown away. This is -- your backlog is now -- and I know the April update, it's about 15% higher than it's ever been, if I'm not mistaken.

That sounds pretty close, yes.

And so, I guess I want to just parse out something. As I try to look out -- and I appreciate what you guys have shared in the past, that you're more efficient now than you were in the past and you're trying to do better. The one thing I'm trying to flesh out, though, is your average selling price per pound back in '07 into '08 was pushing $30, right? I think some quarters on the backlog the average was -- I mean, I see one as high as $32, but generally about $30. So, you're still about $5 under that or something like that. Is that something we're going to see increase over time or do I need to parse into that to look at the aerospace versus maybe lower dollar price segments?

I think you need to be a bit careful on that comparison. If you go back and look at the raw material cost during that time period, you'll see nickel probably peaked out in 2008 at around $24 a pound, and the other raw materials were commensurably high also compared to where they are today. So, I guess, it's a good question, but I think you need to start with an adjustment relative to where you're thinking is on raw materials.

Got it.

Okay?

So, basically, just the average selling price -- and that's why your dollar backlog is pretty much close to your all-time high, but that's really the difference. That has nothing to do with your profit; that just has to do with your sales levels, right?

It has to do with the pounds. If you think about where we were back in -- I think our highest backlog quarter was March of '08 and that was $255 million, 8.7 million pounds. So, from a pound perspective, we're probably 1.1 million over that, but we're almost at the same level from a dollar perspective.

But, I think from a qualitative perspective, the quality of the backlog, I think it reflects a better quality backlog today than it did then.

Is that because of the higher aerospace component or something else?

Well, I think -- no, I don't know if it's aerospace. I think from a quality perspective -- well, I guess that's a good observation. Aerospace is typically our strongest market. It's typically our better -- it's our higher-value product. So, I think it is qualitative in that regard.

Alan, also, too, if you think of -- the thing I mentioned earlier about 2006 versus 2008. One of the great things about 2007, 2008 for this industry is you had pretty much every mill quoting 26 to 50 weeks, some people quoting 70 weeks. There was a lot of top line pricing leverage out in the marketplace.

As I mentioned, we're still sitting, in my opinion, roughly in about a 2006 market activity area. Capacities are still operating -- we say we're probably around 80%. Some of the bigger mills are probably still in the 60% to 70%. So, people are starting to move price levels up, but I don't think we still see the pricing leverage we saw in 2007, 2008. I think it's fair to say that right now.

So, another way of saying it is we're pretty early in the cycle. This wasn't the last hurrah.

Yes. I listened to a few of the other conference calls in the quarter, and this was the first time I started hearing people talking about pricing leverage.

Okay.

And then, commodity prices are obviously all over the place, depending on the hour that you want to look at them. How is this -- I have two questions on commodity prices. How is it impacting your customer behavior? You made some comments on that. Is it scaring them into placing orders, bigger orders? You mentioned you have these bigger orders. And also, how are you guys handling the pricing volatility yourselves on raw material purchases?

I think from a raw materials perspective -- historically, we've always been able to pass on raw material price increases to our customers. It's a very transparent environment. Everyone knows what the cost of nickel is or cobalt or moly, and they understand that we've got to pass that cost on, and we've been successful at it.

I think that -- I just want to leverage back on two points -- or a point that Mark made in relation to all this. Back in '07 and '08, all the markets that we service, CPI, aerospace, land-based gas turbines, were having the best years they ever had. Mills were full; a lot of pricing leverage. We find ourselves in a situation today where that pricing leverage has not yet come to pass. So, we look -- we certainly think we'll have leverage going forward. I just wanted to clarify that.

As to what happens today in the marketplace with this volatility, customers, I think, hesitate to make commitments or if they do, they don't make as large a commitment and maybe they'll buy smaller more often versus -- they don't want to be burdened with a high-price inventory versus getting an opportunity to buy a lower-price inventory.

Yes. And Alan, some of the volatility is good for someone like us. We own our own distribution system. So, when people are making a number of transactional buys because they're worried about the change in nickel this month versus next month, they tend to buy it from a distributor, and that helps us.

I think we saw it about a year ago. If you remember back in the first quarter, second quarter of last year on the stainless type of business, we saw activity in the stainless market. A lot of people were talking about how service centers were putting off their purchase because they thought nickel had some room to come down. And I think there's almost a little bit of a sentiment like that today, too. I can't say it for sure, but in talking to some customers, when they see what just happened to silver this week, a lot of them are thinking -- gosh, is nickel going to pull back like this now, and should I hold my purchases?

So, we saw a tremendous booking quarter; $210 million plus in bookings in the quarter. I don't expect to see that continue. It's like Marcel said, we've been doing on average about 55. I tend to think that as we go into this quarter -- I mean, we've got a great backlog. It'd be nice for us to work some of that backlog down. And I think some of the uncertainties in the commodity market may force people into ordering more transactionally in the next few months as opposed to placing large, large blankets. But, we'll see. We'll see what happens with the nickel market.

And then -- sorry, my last question is just on the land-based gas turbines. Can you -- I know you've said this before, but can you talk about how you're positioned for what I view -- I guess there's two things going on; the low natural gas prices, as well as regulatory incentives to build out solar and wind, which need natural gas to supplement them. Is that something that you guys will benefit from?

Yes, that -- in fact, our market manager on land-based gas turbines, he just did a very good update for our employees at our last employee meeting, which was -- well, we've got another coming up, so about 3 months ago. And that's really the point he made that all of these alternative or renewable energy technologies essentially have to have a support system for backup, and that is typically a land-based gas turbine. And so, the macros for that industry look very good going out into the future.

So, what else do your land-based gas turbines go into besides power generation?

Mechanical drivers, so the driving systems for pipelines, marine applications, defense, ships, things like that; those are probably the primary things where these materials go.

And so, that's been a little bit slower to recover than -- obviously, the one that was really slow to recover, but all of a sudden came back to life, was the chemical processing. Not surprisingly, because those are huge dollar commitments, I guess, but what's -- why is this market slow to recover?

Land-based gas turbine?

Yes.

The energy side of it was very slow, and it was -- if you look at the aerospace industry 2 years ago for the nickel guys, people like us, the aerospace industry 2 years ago just shut off. There was so much metal in the supply chain.

That's what happened about a year ago on the energy side of the land-based gas turbine market. It pretty much slowed to almost a halt. In fact, we had some of our alloys pretty much -- we went 6 months without orders for a couple of the alloys. That just tells us the supply chain was just way over stocked --.

-- And what do you -- how do you flesh out where that is now?

Right now?

Yes, how do you -- what do you look to, to see where that supply chain is now?

We get out and talk to customers probably more so than anything. On a macro level, we also look at the booking levels. Like, GE booked 27 turbines, I think, last quarter versus 11 in the year-earlier quarter. And then, we look at the Siemens and we look at the Alstom numbers, too, and how they look. So, we watch the OEMs. And then, from the MRO side of it, we are in very good position talking to customers constantly.

And on the MRO side, there's also been destocking, I guess, as well?

Yes, recently. I'd say in the last 6 to 9 months, we saw -- I mean, it was still a good level, but demand was very choppy. We could tell when a big render fit was coming in because all of a sudden we saw a great booking of orders. And then, it would go dormant for another month and a half, 2 months. But, in the last 6 weeks, we started to see -- on both sides, OEM and MRO, starting to come in better. And it started with the quote activity last quarter.

Got it.

And actually, I did have one last one. You guys in the past have talked about pricing as not necessarily a function just of the markets you compete in. But, some of your other more larger competitors, like ATI, who are obviously influenced by more commodity type vehicle-based products, how are you able to characterize that pricing pressure right now for them? Is that getting better for those guys?

I think overall -- the overall economy is improving, and we're certainly off the bottoms we experienced several years ago. Capacity utilization is the key in all the mills, and that capacity utilization has been rising. And when it rises with ATI or Cartech or whoever; again, that bodes well for the industry and it bodes well for us.

Yes, it's -- I get back to that 2007 type of timeframe. And we do almost nothing in the automotive market, but when you're in an automotive 17 million unit type of number, like we were back in 2006, 2007, that's great for the big mills. And when they get to fill up their mills with those types of materials, we begin to see better pricing leverage for our materials for our markets.

So, the best thing in the world for us is to watch those guys fill up on things like automotive or housing construction, where they begin to do well there because the volumes there tend to absorb a lot of their capacity, and we can all -- we all see more leverage in the pricing side of the business.

So, if I hear what you're saying now, that's turning into -- it was a headwind -- it's not a tailwind yet, but it's not really an issue as far as --?

-- It's better than it was, but there's still --.

-- More competition out there --.

-- More competition out there.

Okay.

There's more competition out there.

Mark Parr, KeyBanc Capital Markets.

I just -- a couple of things that I'm curious about because I'm looking at the margin differential. I get the fact that capacity utilization for a number of reasons is not back to where it was back in '07 and '08. I was wondering -- you guys have done a lot of de-bottlenecking internally and -- for example, you enhanced air melt capacity by, I think it was, what, 20%, 25% last year?

Yes.

Some of the other companies that we track have also talked about capacity upside. I know Universal Stainless, which makes bar products, has -- their melt shop is probably twice as capable as it was in the last cycle. I mean, do you think that the overall industry has built capacity and de-bottlenecked as much as Haynes has over the last couple of years?

I think it depends on -- well, how I look at it is, Mark, we've essentially done our bottlenecking organically. I mean, that's how I look at it. We've spent capital dollars on the equipment we currently have to upgrade it.

I mean, if you think about the money we've spent over the last 5 or 6 years, average $10 million to $15 million a year, for a facility of this size, those aren't really a lot of dollars. They've been very focused dollars on the specific pieces of equipment, like the four-high or the cold-rolling mills or the kneeling line. Not a lot of dollars, but certainly significant improvements in capacity additions. The 25% increase in our air melt we achieved with less than $1 million of capital investment. So, we've gotten significant -- we got big bumps for very low investments.

Now, you look at other folks, I think they've done much of that same thing, but there has also been a number of new mills added or in the process of being added. So, I think overall they're adding incrementally larger levels of capacity; we're not.

Yes, Mark, if you think about it, too, a lot of guys added a lot of melt capacity in the last 5 years, a lot of vacuum induction melting, especially, capacity. And people are now looking at their downstream operations. The nice thing when I hear that is it's the overall expansion of the nickel- and cobalt-based market worldwide. There are more applications out there -- the oil and gas guys are going in a nastier environment, so now they have to use nickel- and cobalt-based material.

The overall market, the overall pie, is starting to expand nicely. And that's what I like to hear is when people are starting to expand those downstream operations, so that they can take away melt capacity. There is still, I think, quite a bit of melt capacity, premium melt capacity, out there. But, it's nice to hear a lot of the long product guys starting to invest more in the finishing end.

The flat-rolled side of the business, again, I think it's dependent on who's adding what in what areas. A lot of our focus -- we've got pretty good melt capacity -- has been in the last 5 years to add better efficiency, might be the best way to put it, to our cold-finishing departments.

And so, you look at the -- Marcel, I'll use your words -- the quality of your current backlog is much better than it was, say, 2, 3 years ago when it was close to this level of dollars.

Right.

I mean, with the quality you have. But, the pricing -- so that would imply more volume, a million pounds incremental higher volume, but the pricing hasn't unfolded yet because there's more capacity in the market. And so, that's one issue.

And then, another issue, perhaps, is the fact that the -- while nickel is not nearly -- nickel and cobalt is not nearly as a pervasive component of your backlog as it was back in '07. That presence back then when nickel was so high probably had a positive impact on margins, if I'm -- just because it was perceived -- it was nickel was going to $50 a pound or something.

Well, I think you've focused in on the issues, Mark. Again --.

-- Is there anything that you can say in terms of -- look at your margins at about -- you're about 1,000 basis points lower than you were back in '07 timeframe, '08 timeframe. And I was just wondering how much do you think is this extra capacity or you're -- like, again, Mark, to your point, your back -- your really back more like in '06. You're really on the front end of this, but it's at a higher level. And that's kind of interesting because it definitely creates an opportunity for you guys to grow and get much bigger than we were the last time around. And so, you can look at '07 and '08 as not a peak, but as just -- it was a high in the development of this aerospace cycle that we're -- that's gradually unfolding.

And I'm just curious if you think nickel was a bigger piece or if you think this extra capacity is a bigger piece as you sit here right now today looking at where margins were?

I mean, it's a good question, and it's a very complex question. We've worked hard to put ourselves in the position we are today. We're at the front end of the up cycle. Business is still difficult. I mean, the markets aren't particularly good. CPI still has a long way to go before it gets back to where it was. Land-based gas turbines is still at the low.

But, the fact is we've got a facility that's in significantly better shape than it was 5 years ago. It has more capacity. It's more efficient than it was. We've got a global footprint that's significantly larger. We've got a higher orientation to value-added products. So, we've put ourselves in a position where we're financially capable. We've done it. We're in good shape. We're doing well. We've done progressively better. We know that historically we use to run 20% gross margins. We know that we'll get back to that level sometime over the next several years, but that's not the stopping point. The point is to continue to grow the business to levels that exceed where we were in 2007 and '08.

And we've got, I think, a facility to do that, and we're in markets that are still growing and have a significant amount of upside. I mean, look at the aerospace forecast from a plane-build perspective. They've got significant work to do there. So, I think we're just in a good place. We've worked very hard to put ourselves in a place to optimize the value we can deliver.

Yes, I'll get way too specific here, Mark, but a -- let's say a $16 a pound 10,000-pound order of C-276, in 2008, nobody was taking that order. There are still some people out there that are taking that order today. So, it does get back to there is capacity out there and people are filling it. And their pricing requirements are not where they were in 2007, 2008.

Okay.

Just one other question, if I could. This is more to the near term. You look at the labor component and cost of sales -- you've been bringing people on. Is overtime -- was overtime a negative contributor to margin in the March quarter?

Not significantly, no. That's not the significant impact. Labor costs were certainly higher, overtime was certainly higher, but we needed to bring these people back just so we could fill shifts out to product more product.

Yes, and by the way, too, everybody -- when we spoke at the last call, it was the -- we were starting to bring people back in the November timeframe. People really stepped up, I mean, for us to put up 6.4 million pounds. We got a lot of output from a lot of new people. They did a great job stepping up to the task at hand.

Yes, I don't want to -- the labor was not a significant negative factor. I think you can see that -- we talked about the average selling price. Take a look at the average cost per pound over the last 6 quarters. It's -- we controlled that, and I think that's a credit to the cost initiatives, it's a credit to the efficiency of the equipment, and obviously absorption also with the higher volumes.

All right, okay. All right, terrific. Congratulations on the quarter, and good luck.

Yes, more work to do, but thank you.

(Operator Instructions) Dan Whalen, CapStone Investments.

Great. Thanks for all the color on the margins. That addressed most of my questions.

But, just, I guess, maybe taking a longer-term look at things and looking at the -- you've leaned balance sheet and all the trends that we've been discussing are doing nothing but improving. Can you talk a little bit about initiatives to maybe expand your international service center footprint or if you're looking at bolt-on acquisitions or other avenues of growth besides the efficiency programs you've been working so hard at?

Yes, Dan, let me address it. I mean, we have, I think, a pretty disciplined approach. We essentially have a worksheet we go through with projects in mind. Here are certain things, certain ideas we have for growing the business and making the business better and getting a better return to shareholders, better efficiency and better quality to our customers, and a better place to work for our employees, of course. And what we do is we walk through it.

Right now, our capital intensity, I think, still shows that -- one of the best places to put it is still back into the equipment, and I think this cycle, so far, is proving it. I get back to this is the first time, I think anyway, that Haynes caught the front end of one of these cycles. And I think a lot of it goes back to the money that was spent in the past 5 years upgrading the equipment and the Board's commitment to allowing us to put the inventory in place back when we said we thought the order book was going to start to get heavy, and it did come back nicely.

So, in answering your question, yes, we look at all of the attached, we do our ROIs, and so far everything has been coming back to -- okay, let's get the four-high back to world class. Let's get these -- the kneeling lines and finishing lines back so that we can get more sheet product and improve the quality of that product going through; reduce the rework levels on those things.

There's still more work to do in that area. Remember, this Company and this facility was capital starved for about 20 years. There's -- by the way, too, just to let you know, as far as future capacity, Cabot, when they owned this X number of years ago, we still have a [MKW-90] mill, a cold-rolling mill, that's mothballed. And so, we don't have to go out and buy another $10 million or $15 million mill. As capacity needs increase, we could probably put a $1.5 million or $2 million into gauging equipment and things like that and get a pretty nice mill up to speed quickly.

So, it gets back to what Marcel was talking about, like in the air melt area. We just took a look, and some of the guys had an idea, and it cost us less than $1 million to add 25% more capacity in our air melt area. So, a lot of these types of projects keep rising to the front and keep giving us incrementally more capacity and also giving us, we think, a better product throughput and a better product.

Marcel, you want to add anything?

No, I think you're right on point.

Okay, great. Thank you, and congratulations on all the success you've had with these programs so far.

Thanks, Dan.

Thank you.

Thank you. At this time, I'd like to hand the floor back over to management for any closing comments.

Yes, if you don't mind, I'd just like to take a minute to acknowledge and congratulate Pat Hassey of Allegheny on his retirement. Many of you know Pat. Pat's been a great leader and spokesman for the entire specialty metals industry over the past, gosh, 8 years or decade or whatever it's been. He's also been a great steward and driving force for alloy and application development in the industry, expanding the overall use of high-performance alloys worldwide. He was great for Allegheny, and he was great for the entire specialty metals industry. So, I just wanted to take a minute from all of us at Haynes and say thank you for the work he did for the industry, and he'll be missed.

Everyone, thanks very much for your time on the call today, and we'll look forward to updating you next quarter.

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