Haynes International Inc (HAYN) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Haynes International third quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. A 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, Dan Maudlin, Controller and Chief Accounting Officer for Haynes International. Thank you. 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 and 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 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 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.

Revenue in the quarter increased 41% over last year to $143.1 million, and net income increased to $8.4 million from $3.7 million a year ago. Shipments in the quarter were slightly under 6.2 million pounds, 31% higher than last year's level.

By the way, as I mentioned last call, our plants have performed well in getting product shipped. We've shipped about 12.5 million pounds of product over the past six months, which is a record level of output for Haynes, and as I mentioned last time, our employment levels are about 100 fewer employees than the prior peak in mid 2008.

Also, the mix components are quite different than 2008, with more cold finish products being shipped today. And that's testament not only to the work of our people but also to the capital investments made in the past few years, upgrading the annealing and cold finishing area. Marcel will give you greater changes in the business from the prior cycle as he does his deeper dive into the numbers.

That being said, we still have a lot of work to do in eliminating waste, driving efficiency, and becoming more responsive to our customers. At this point, we're pleased with how our people are tackling the challenges of meeting increased customer requirements.

Also during the quarter our backlog increased from to $241.7 million to $288.6 million, indicative of strong market demand for our products. In conversations we've had with our customers, they report that they expect to remain busy through 2012.

So far, since January, we have had order entry levels in January, February, March, May, and June, that have all exceeded our prior historical peak achieved in March of 2007. And just to frame that for everybody, in March of '07 nickel, as you recall, was north of $20 a pound, whereas so far this year it's been in that $10 to $12 range, so very strong order entry activity thus far this year.

We do not expect this pattern of month-after-month levels of record order entry to continue. For example, as the aerospace supply chain replenishes and achieves a comfortable level to meet demand, we expect order entry to flatten out; albeit we expect it to flatten out at levels above the prior cycle, as commercial build rates are expected to be above that prior cycle. July order entry slowed to levels similar to what we saw in April as customers decided it was a good time to assess their order patterns and await clarity in the price of nickel.

Some other accounts, by the way, mentioned that they're going to -- back to their regular maintenance and vacation shutdowns this summer for the first time in several years, so I think it's fair to say we expect to see an order entry slowdown for the balance of the summer, which will give us a chance to get caught up on some shipments. Our customers have made it very clear in their sentiment and with the orders they've placed, they expect solid operating levels through 2012.

Turning to our review by market, net revenue in the aerospace market was $53.6 million, up 46% over the third quarter of 2010. Aerospace accounted for roughly 37% of our revenue in the period. Sequentially, revenue in this market was up 9.5% over the second quarter. Backlog increased just over 15% in spite of the higher invoice levels, and as the supply chain continued to restock to meet improved demand and anticipated ramp-ups in commercial end user programs. Our expectation is that this market will ramp up and stabilize at levels above the prior cycle.

Revenue in our chemical processing market in the quarter was $46.1 million, up 68% from one year ago. Our application engineering, R&D, process engineering, and field sales group have done a remarkable job in new application development in this area, and the project work they've developed has quickly turned into invoice sales.

CPI was over 32% of our revenue in the quarter, and sequentially this market was up almost 24%. Backlog pulled back 20% due to the strong sales over the past six months, and as we've said before, this market is very project timing-dependent. Overall end user demand is increasing and we're starting to see more quote activity in this area as well.

The land-based gas turbine market totaled $21.1 million in the quarter, representing 15% of our total business. Net revenues were up over 14% from one year ago but down 24% sequentially from the second quarter of fiscal 11, due to the larger number of project shipments in the second quarter as compared to the third.

We mentioned last time that quote activity had increased in this market, and that quote activity has turned into orders as the backlog increased just over 85% in the third quarter. The increased backlog was due to good order entry activity for both OEM and MRO applications.

By the way, it's good to see the OEM side coming back. That's where things have been -- I won't use the word dormant, but pretty slow for about the past nine months. So it's nice to see that side of the business coming back.

Finally, our other markets had net revenues of $19.2 million, accounting for about 13% of our total sales. This area was up just under 24% from last year and down roughly 12% sequentially.

Backlog increased dramatically as well, with an increase of 79% as we start great order entry activity for FGD, oil and gas, and some of our industrial applications.

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

Thanks, Mark. Overall third quarter fiscal 2011 improved in all the key categories from third quarter of fiscal 2010, including revenues, gross margin, and earnings per share, due to our price initiatives, improved product mix, equipment efficiencies, and an improving market environment.

Net revenues in the third quarter of fiscal 2011 were $143.1 million, a 41.3% increase from the third quarter of last year. This $41.9 million increase in net revenues is the result of a 30.6% increase in product volume, which accounted for $32.8 million of the revenue increase, and a 9.2% increase in product average selling price, which accounted for $9.1 million of the revenue increase. The year over year improvement in performance reflects improvement in the economic environment we service, primarily driven by aerospace and chemical processing markets.

Cost of goods sold in the third quarter of fiscal 2011 was $117.8 million, a 39.5% increase from the third quarter of last year. The $33.4 million increase is the result of a 30.6% increase in product volume, which accounted for $27.6 million of the cost increase, and an additional cost increase of $5.8 million attributable to a 6.9% increase in average cost of goods sold per pound.

The increase in average cost of goods sold per pound from last year to this year is due to a mix reflective of higher-value product and a higher raw material costing partially offset by improved equipment performance, cost reduction initiatives, and improved absorption due to higher sales volume.

The combination of the noted revenue and cost changes between quarters resulted in a gross profit margin in the third quarter of fiscal 2011 of $25.3 million compared to $16.9 million in the same quarter a year ago, an improvement of $8.5 million between quarters.

Gross profit margin as a percentage of net revenues was 17.7% in the third quarter of fiscal 2011 compared to 16.6% for the comparable quarter of last year.

SG&A including R&T for the third quarter of fiscal 2011 was $11.4 million, an increase of $1.3 million compared to the same quarter of the prior year.

Factors contributing to higher SG&A including R&T cost in the third quarter of fiscal 2011, as compared to the comparable quarter of fiscal 2010, included an SG&A additional six head counts in SG&A employees, salary increases, increased marketing and selling costs due to the 30.6% increase in sales volume.

SG&A including R&T was 8% of sales for the third fiscal quarter compared to 10% in the third quarter of fiscal 2010. For fiscal 2011, SG&A including R&T is forecast at approximately $43.3 million for the year.

For the third quarter of fiscal 2011, pretax income was $13.9 million compared to pretax income in the third quarter last year of $6.7 million. For the third quarter of fiscal 2011 there was a tax expense of $5.5 million versus a tax expense of $3 million in the third quarter of fiscal 2010. The effective tax rate for the third quarter of fiscal 2011 was 39.7%, which included a one-time non-cash tax adjustment of $732,000 for the quarter to reflect a change in the Indiana corporate income tax rate, requiring a reduction of deferred tax assets.

Excluding this one-time non-cash tax charge, the effective tax rate for the quarter was 34.4%, with the effective tax rate for the year anticipated at approximately 35%, excluding the one-time non-cash tax adjustment. Prior year third quarter effective tax rate was higher due to the impact of permanent items and a low pretax earnings number.

Net income for the third quarter of fiscal 2011, including the one-time non-cash tax charge for the state income tax rate change, was $9.1 million, or $0.75 per diluted share, compared to net income of $3.7 million or $0.31 per diluted share in last year's third quarter.

As of June 30th, 2011, backlog dollars have increased 95.1% to $288.6 million from $148 million at September 30th, 2010 as a result of backlog pounds increasing 72.7% and average selling price increasing 12.2%.

As noted in the past, we believe that backlog continues to be a very good indication of the level of future revenue. The driver of the increasing backlog is an increasing rate of order entry during the first three quarters of fiscal 2011, which was primarily driven by strong aerospace order entry of $213.9 million, and represents a continuation of aerospace activity similar to the latter part of fiscal 2010.

In addition, during the nine-month time period there was also improved order entry activity for all our remaining three segments, which average, for each of the -- these three segments, 31.9% higher than their respective sales during the time period.

The backlog at the end of July was essentially unchanged from June, and reflects a reduced level of order entry activity in July compared to previous periods, which is reflective of both the normal summer slowdown in the US and Europe, but also some customer reluctance in placing orders during the current period of uncertainty in the economic environment. It is currently anticipated that backlog at the end of the fiscal year will approximate the backlog at the end of June.

Management expects that net revenues and volumes for the fourth quarter of fiscal 2011 and first quarter of fiscal 2012 will approximate the level of the third quarter of fiscal 2011. However, management anticipates improvement in net income for the fourth and first quarter of fiscal 2011 and fiscal 2012 respectively.

Due to the impact of price increases initiated in the second and third quarters of fiscal 2011, in addition, management expects net income for fiscal 2012 to exceed the net income of fiscal 2011. However, due to the continued competitive and uncertain economic environment, the amount of improvement in the net income from fiscal 2011 to fiscal 2012 is uncertain.

Our balance sheet and liquidity position remains strong, with cash at $52 million at the end of the third fiscal quarter, up $4.7 million from the balance at the end of the second fiscal quarter. The improved cash position resulted from a strong cash flow from operations in the third quarter of $10.4 million, driven by improving earnings.

In addition to the cash available, the Company has working capital facility of $120 million, which can be increased to $170 million at the option of the Company. This provides total liquidity of $222 million, which will enable the Company to continue to take advantage of improving economic environment and other growth opportunities that may become available.

Controllable working capital, which includes accounts receivable, inventory, accounts payable, and accrued expenses, increased slightly during the third quarter of fiscal 2011 as compared to the second quarter of fiscal 2011. However, the percentage of controllable working capital as a percent of sales at June 30th, 2011 is essentially unchanged at 47% compared to March 31, 2011, and it is anticipated that the Company will maintain that percentage through the balance of the year.

Capital spending for the quarter was $3.3 million, and for the first three quarters of the year was $9.7 million, with spending for fiscal 2011 targeted in the range of $15 million to $17 million, of which $6 million of the upgrades will be to the 4-high Steckel rolling mill.

Lastly, Mark commented on the performance in 2011 versus 2008, and how we are doing more with less. I'd like to quantify that a bit more. There are -- these are macro comparisons, but important in that they clearly indicate significant improvements which are easy to see and measure. There are three of them I want to note -- comparison of the number of people between periods, sales of pounds between periods, and working capital as a percent of sales, then and now.

First, people. On average there are 91, or 8% fewer people, at Haynes today compared to 2008. That equates to $7 million in lower operating cost. Also, with fewer people to do equipment upgrades and process improvements, we were able to produce at a higher production rate, making a more complex product -- sheet and cut parts, for example.

Shipments for the last six months annualized to 25.1 million pounds compared to 23.3 million pounds in 2008, which is a 7.7% increase in sales with fewer people.

In addition, sales in 2008 included a specific order for 2 million pounds of slabs. Adjusted for that slab order, the increase between years is 17.8%. The point is, fewer people making a larger quantity of a more complex product.

Lastly, working capital as percent of sales at 06/30/11 was 47%, with a more complex product mix, compared to 54% at 09/30/08. That 7% is equal to approximately $40 million in cash.

In summary, performance continues to improve, the economic environment Haynes services is getting better, and earnings continue to increase. Although we may be challenged in the short term, we expect cash flow over the intermediate and long term to be sufficient to support all our corporate requirements including working capital, CapEx spending, pension funding, dividend payments, and also generate excess cash. With that, we now turn things back over to Mark.

Thanks, Marcel. We're pleased with the activity and direction of our end markets. We're cautious about some of the recent surrounding economic events. However, our customers remain bullish on the strength of their order books, and we're going to support their needs.

Capital investments made over the past seven years at Haynes have increased our capability to meet demand, and they've positioned us as a more reliable supplier to our key accounts. We're committed to developing new applications and new materials that give our customers the performance they need to differentiate their products.

Finally, we still have a lot of work to do to get better, and everyone here is living and breathing safety, continuous improvement, and waste elimination. We all feel those elements are critical in our path to becoming a better supplier to our customers.

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

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

Sounds like you're positive about the next couple of years. I guess, given 2008, you sound somewhat cautious, and therefore I think it's coming through as a little bit conservative as well in your comments, although I still think they're positive comments. Is that the right read? I mean, is that the way I should be thinking about what you're saying?

I think that's fair, Ed.

Volume was high in the quarter again, despite the fact that I thought we were going to see somewhat of a -- further of a dropoff. What did the mix look like for you guys? Because I think the volumes were much higher last quarter because of what was lower-grade mix, but it looks like the pricing held in there as well, so help me out.

Pretty good shipping quarter on some CPI products, which helped out, of course aerospace numbers are looking very strong.

I think you had a little bit of change in the -- we had -- second quarter did have a number of large projects in it, and I think this quarter we had less land-based gas turbine business than we did the previous quarter; but overall you had a nice pickup in aerospace, you had a nice pickup in the CPI.

Overall, though, I think it continues to be a good mix. It's hard to look quarter to quarter, Ed, on just what exactly's happening because of the projects. But overall, the volumes are solid. As we talked about, we're going to look -- we're looking for volumes approximately the same the next two quarters. So I think overall, it's conservative but we've got a strong base to work from.

Great. In past quarters you've given backlog as it sits currently, at the time of the call. Do you have that available?

I think -- as I indicated -- or maybe I didn't; I don't recall.

I may have missed it. Sorry.

The backlog at the end of July is essentially the same as at the end of June, and we expect the backlog at the end of the year to be equivalent.

And capacity utilization in the quarter? I know it keeps changing, and I keep asking on a quarterly basis, but --

Yes. It's interesting. I think we're in pretty good shape. Our capacity right now -- we're probably running in that 75% to 80% range. It is a function of mix.

If you had to look, where do we have some opportunities, we probably have another 2 million pounds of sheet that we could probably fit into our capacity, another maybe million pounds of plate product, probably another million pounds of wire product, maybe 300,000 or 400,000 pounds of some tubular products, and then there's (inaudible) the other categories, so where we have sheet -- or, sorry, we have plate, billet, forging, fittings -- probably several million pounds of that.

So, all in all, I think we're probably looking at potentially another 5 to 6 million pounds of potential volume we could add to the process -- push it to 75% to 80%.

And keep in mind that it's not a static process for us. I think we continue to find ways to enhance our capacity. One of the things that we talked about earlier in the year, or several years ago, and we continue to work on it, is our 4-high. We plan to spend $30 million on the 4-high over five years, and that's the improve the capability in the context primarily of the gauge relative to the sheet of product. You achieve that with automatic gauge control. You improve that with roll bending; improved gauge control equipment to measure gauge.

Because what it is -- what it's all about for us, for example, is taking a 4-high, which has a significant capacity. If we can reduce the gauge and produce it more reliably, and then move that lower-gauge product into the finishing operations, we manage to increase our capacity.

And I think in terms of sessions reduced, if we can take out 20% of the sessions in the cold -- in the finishing operations, you're talking about adding several hundred thousand pounds a month of additional sheet product. You can do the math. So, that's pretty significant for us. So, it's not a static process. That's the thing to keep in mind.

You've introduced new alloys. This is kind of more strategic, by the way, but you've introduced some new alloys. There's some new aircraft rolling -- engines rolling on over the next couple of years. What are you doing to kind of get your -- increase your content or get your materials kind of on those platforms, and is that a strategic focus for you? I'm assuming it is, but any comments there would help.

Yes, definitely, Ed. I mean, you know about HAYNES 282, and we're in qualification on the engine platforms that a number of people, you hear them on other conference calls discussing. We're in those same discussions. In fact, 282 this year -- revenue levels on 282 will be double what they were last year. So, it is finding traction in applications. There's also, I mentioned, a real good EPRI paper that came out, so for the power generation industry as well, 282's -- it's being looked at for a number of components on new platforms out there.

We're bound by NDAs, and I'm surprised that's not more prevalent in other areas, I guess. But we're bound by some NDAs on talking about specific applications. But things like 282; you've heard me talk about HASTELLOY C-22HS. We've got some good things going on on the HYBRID-BC1 as well. So, a number of new alloys. In fact I just got an RID, which is a Record of Invention Disclosure, here in the last quarter for a new alloy that our guys are working on as well.

So, it's still a lot of great activity, and it's interesting to me with the way things are ramping up -- I guess it's maybe because of a lot of new engine platforms, but there's been a lot more development work this cycle than I can recall in up cycles before. In up cycles usually it's always about getting more product out, but the performance requirements seem to be one of the major driving factors in this up cycle. Better engine efficiency requiring new materials.

So, there's a tremendous level of activity right now in taking in new materials, I guess would be the best way, or qualifying new materials. Because the performance requirements are changing so much, really across the board, be it chemical, land-based gas turbine, or even aerospace.

A lot of activity on the new materials front, and even some existing materials that are getting spec'd into more difficult applications. I think oil and gas is testament to that. Every time these guys talk about going further offshore or deeper wells, they're talking about definitely more difficult environments, which is -- that's good news for people like us where they start -- or anybody in nickel and cobalt based materials, where they start upgrading into these materials that handle corrosion and heat a lot better.

That's glad -- I'm glad to hear that. It's also good to hear that you guys are going to get a break this year once the summer shutdowns begin, so I think it's well deserved. Great momentum, and good job this quarter, guys.

Thanks very much, Ed.

Absolutely.

Tim Hayes, Davenport & Company.

Just a question to further on the mix issue -- on some of this project business, is the bidding becoming at least a little bit less competitive out there? Is that's what -- might that be helping the improvement in the mix?

I think, overall, we're always going to see projects. I think right now we're -- the aerospace business is performing well. The other two businesses are coming along. Land-based gas turbine is starting to firm up a bit. CPI continues to be a more longer-term project but we are seeing some opportunities from an applications perspective.

However, it still continues to be very competitive. I mean, we can't get away from the fact that there's -- as long as there's excess capacity, we're going to have this competitive environment. And so, from that perspective it's getting better, but it's not like it was back in '07 and '08, I guess, is another way of saying --

Yes, Tim. The way I always look at it, is I look at the alloy performance matrix. The more critical the quality of the alloy or the performance characteristics of the alloy, the less competitive it gets. There's a lot of competition still in especially the -- what we'll call the corrosion alloys or the CPI types of materials. Extremely competitive.

I think you know that there's a big competitor of ours over in Europe that's up for sale these days. And naturally they want to build an order book when they're for sale. So, it's -- and it's mainly large projects.

Again, on transactional business where a plant's going down for a maintenance shutdown, and we're the guys who have the metal on the shelf, we're going to be in pretty good shape. When it's a large project that's being bid and it's not going to be run for six or eight months or something like that, we're seeing -- we still see the occasional crazy price out there. We're lucky right now that we're filling the mill with the products we want to fill it with, and whereas we shake our heads -- we're -- we have the luxury today of walking away from some of those crazy prices that are out there.

To leverage into that a bit more, I talked about product mix and we typically talk about the market segments -- aerospace, CPI. But I think more of what we're seeing today is just an effort to change the products that we provide customers, to differentiate ourselves a bit more.

If you think about where we were several years ago, back in fiscal 2007, when you look at our backlog. At that point in time we probably had -- about 47% of that backlog was commodity alloys -- the typical X, 625, C-276, C-22. Well, today that's 35%. So that's one change in what we provide the customer from an alloy perspective, which is a function of our specialty-type alloys -- the alloy development programs.

And another key aspect of that is the level of value-added work we're doing today versus what we were doing four years ago, as it's reflected in the backlog. Probably 30% more product has value added reflected in it. So, I think those are some of the things we're doing differently. It continues to be competitive but we've got a richer mix of costs that we talk about in our Q's and K's. Okay?

Okay. That's good color. Thank you.

Dan Whalen, CapStone Investments.

First of all, congratulations on all the success you're having with your capital investments and incremental capacity that's being generated from that.

Thank you.

My question -- and certainly, this ranges in terms of the grade and the thickness and the product mix it goes through that capacity, and you've -- I think you've given ranges in terms of what your peak capacity could be. If it wasn't last quarter, I think it was two quarters ago. My sense is, as mix continues to improve it would sort of be on the higher end of that range.

And then secondarily, if you could just add a little color or maybe a little guidance in terms of, if we were to look at this process, are we in the third or fourth inning, or seventh or eighth inning, in terms of continuing to generate some incremental capacity?

Well, I think that's a good question. This is a -- it's a bit complex, because the mix does affect capacity. If you think about what we're doing today from the primary product or the lead product, is clearly, the market is aerospace. The products you provide for aerospace are more complex products, typically at lower gauges, say, versus a land-based gas turbine-type product that's sheet-oriented, or CPI. So, you've got to put more work into it. But even based on today's product mix, we're significantly beyond where we were several years ago.

I guess one comparison might be, back in fiscal 2007 and '08 we could make 9 million pounds of sheet product. Today we can make probably 14.5 or so million pounds of sheet product -- saleable product.

Taking the same mix that we have today and looking back at 2007 or '08, you're probably talking about 7 million pounds of sheet product, just because of the kind of sheet product [as much] from a gauge perspective, a testing perspective, a quality perspective. So that's one issue.

But coming back to today, we're looking at, as I've mentioned earlier -- based on where we are, we're 75% to 80% of capacity. We probably have another 5% to 6% on top of that that we can look to build, on a very measured approach. And we're looking to expand beyond that. And that's why we've undertaken some of these projects. I know I'm repeating myself from what I said before, but I'm not sure that -- I just -- also, I want to start to answer the question; if you can refine the question from there, maybe we can clarify that a bit.

Yes, and let me just add to it a little bit too. I mean, as far as the early innings, I think we're just saying, assessing the processes we have and things, there's still more capacity out there that we're finding, might be the best way to put it.

Marcel mentioned the big project, which is the upgrades we're doing to the 4-high allow us to enter the mill at lighter gauge, which gives us more capacity down at the finishing end. You know about the capital investments we made in the rolling mills and the annealing line. I've also mentioned previously, it was nice having Cabot on this business back in the '80s, because we've got a rolling mill that's still sitting in mothballs that we could bring out and get online, I think, fairly quickly, if we needed it. Right now we still don't need it.

But talking a little bit more -- I mentioned in one of the calls previously that on air melt, our guys made some tweaks and adjustments relatively inexpensively and we increased our capacity on air melt about 25%.

The guys -- we had another Record of Invention Disclosure come across my desk in the last three months in the mechanical cleaning area of some of our products, would probably be the best way to say it.

The guys came up with an invention on the ingot side of the business that's going to relieve a bottleneck there, and also quicken the process as well.

We looked into the pickling area and we were starting to run up against some constraints with the chemical cleaning area, and again, the guys have gone out and they've done some process changes and things like that. And, boy, that constraint seems to be relieving itself.

So, we're finding more capacity as our engineering is turning more toward it. It's a very strong mill from the point of view of, there's some great equipment, some great capabilities out there, and our engineers -- we finally have a little bit of money to spend on upgrades, and we're finding a lot more capacity out there.

Okay, great. So you've made a lot of headway but there's still plenty of opportunities, it sounds like.

Absolutely.

Great. And then secondarily, just in terms of expanding further into the international markets, any investments or opportunities to generate a larger footprint internationally? Any projects underway there?

I don't know if there's any projects. I think the projects are more marketing-oriented. We were focusing on developing -- to continue to develop our Asian presence. I mean, that's an area we've historically been -- we've been there, but never at the level we'd like to be there. We know it's a growing market; there's more opportunities there. Recently we've taken -- we've undertaken putting an expatriate there. We've -- as you know, we bought the marketing company there. So, we're focusing on Asia primarily as a growth area. For us it's a growth area.

And honestly, too, Dan, I mean, one of the things we talk about here is, yes, the geography's great, and you've got to have the bodies on the ground and the engineers going in to talk to design engineers. And I think we're in pretty good shape there. We're always -- like Marcel's saying, we're going to continue to expand on that.

One of the areas I've been pushing our guys, and they've really responded well, is greater market diversity. Four or five years ago, I don't know how many conversations we were having with the oil and gas guys. We're having them daily now. So -- and as we talked about, their environments are getting more difficult, where they're drilling, and they're looking for better materials and we're finding some niches there.

Our chemical guys in -- are looking into pulp and paper, and some of those other applications. The alternative energy, we've discussed. Solar. And just following and mapping that supply chain. Solar's more than just the collector plates. It's the transmission. It's the storage of the heat.

We're finding applications by going into, I don't want to say new markets, but we're seeing that markets are beginning to be technically challenged. And one of the technical challenges they're facing is corrosion and heat. And, boy, that's -- those are magic words for people with our alloy systems.

I can take it a step further. It's all -- it's obviously about the product we sell into those areas, but we make a concerted effort, and have over the past six months, to really look at various parts of the world, and contacting, looking for people we can work with.

It's about not only our own people but it's about finding distributors or agents, or maybe in some cases actually hiring additional people, employees, in various countries. We've looked at that in Korea. We've looked at that in Japan. We've looked at it in Southeast Asia. We've looked at it -- at that from a European perspective.

So, it's really about going out there and having a good product, finding new markets, but also putting people on the ground that we can help sell that product. And that's something we've undertaken, I think, very aggressively over the last six months.

Great. Well, thank you very much for the added color.

Jeff Bernstein, AH Lisanti.

Great quarter. Congratulations. Couple of questions for you. One, what kind of content do you guys have in ethylene crackers?

Jeff, I don't know. I -- honestly, I don't know. I'd have to talk to some of our guys about that.

There's like five world-scale plants announced in the US. We all thought that we'd never build another chemical plant here. And I'm just sort of wondering when those would be coming on in terms of orders. I guess they're looking to open them in '14, '15, so I'm kind of wondering what the timing would be for you guys.

And then just looking at the incremental margins from last quarter -- incremental gross margin 118%, incremental operating margin 107%. You know, obviously those kinds of numbers are not sustainable. But what should we be thinking about going forward for incremental margins?

Well, to the extent that -- we've -- I think you've seen where we were back in '07 and '08, you were probably 20% plused, up to 25% plus. Our objective is, longer term, to continue to improve those margins. That's how we're attacking this process. We're looking at it from the perspective of, again, the products, the value added, the alloys we provide, things that we do for our customer.

So, our objective is to continue to expand our margins back to that 20% range, and maybe by probably '13 or '14, fiscal years '13, '14. Again, based on the things we're doing, we're looking to potentially even go beyond that. But that's the objective. That's our goal, to continue to improve the margins.

That's great. Keep up the good work.

Thanks, Jeff.

Mark Parr, KeyBanc Capital Markets. Mark Parr, your line is open. (Operator Instructions). Alan Brochstein, AB Analytical Services.

I think I have just two quick ones. The first one is, I think on the last call you mentioned that a lot of the chemical processing business is driven by, I guess, Asia or maybe China. And I'm just wondering in general if you get any sense of what's -- how sustainable that is? I know it's lumpy from quarter to quarter.

Alan, it's -- China, we don't define it as China's a driver. What we said last time is, our China business was largely chemical processing products. Do you know what I mean?

Okay. So, the business is spread around the world then. Okay.

Correct. Correct.

But that's not what's been driving the lumpiness.

No. No.

Okay. Thanks for clarifying that. And also, on your guidance you've given kind of preliminary outlook for the coming fiscal year, and it seems like you're very confident on the sales side but a little less on the profit side, just based on your language. I was just wondering, maybe Marcel, is it more on the pricing or is it something internal on your operating -- you know, below the gross margin line?

Well, I think it's -- when you talk about the top line, we're leveraging off of primarily what we can see in our backlog. So, if you look at a quarter or two quarters, we typically talk about what we ship in a pounds and revenue perspective. That's driven by 75% of what comes out of our backlog. So, it's easier to see.

What we're confident of is that the earnings for the next two quarters will be better than the earnings for this third quarter. So -- and the reason we're less specific -- we're not [really/only] less confident, we're just less specific -- is because there are many more items that come into play relative to the bottom line. That's really the only issue there. It's more difficult to quantify.

Let me rephrase it. What's your biggest challenge, d'you think, on the margins next year?

For next year? I think it's the continued uncertainty in the economic environment. I mean, you can't ignore that.

All right. Thanks, guys.

Thank you, Alan.

Mark Parr, KeyBanc Capital Markets.

Sorry I missed you guys earlier. Having a little technical problem. Nice job. Good quarter, again.

Thank you.

(Laughter). So, it's too bad you're posting such good results in the midst of all this economic uncertainty, you know? (laughter). God.

That's why -- that's where we figured you went. The market opened and we heard the dead line, and we thought you went (laughter).

Well, they did get a door here on my window, so just in case. They gave you the emergency rope. You're on the 16th floor and the rope's only good for ten floors (laughter). Oh, well.

Hey, one thing I was curious about. You were talking about catching up some base price increase announcements, for -- as far as helping the next couple of quarters. I was wondering if you could give us some sense of where you think base price -- what we ought to be assuming for the full year '12 as far as base price upside opportunities?

Well, I think historically, we really have been very reluctant to provide anything too specific relative to that market. I don't think what we see today -- we're looking to increase prices all the time, get the best product we can, via either the product mix (inaudible) we've initiated and trying to work towards. But you can appreciate the vacillations, the fluctuations of the raw material cost and what that does to the market. I mean, there's just so much going on out there, I think that would be very difficult to do.

Well, one of the things -- I think some of the other questions related to capacity utilization have been trying to get at that same thing, because, to the extent that you've got lots of excess capacity, and we've seen this over and over again, there's more of a reluctance, I think, on the part of customers and on the part of the market, to be able to absorb price increases. And to the extent though that you're really tight and things are -- your lead times are extending, et cetera. You know, price increases are perhaps a bit more fluid, and pricing power tends to kind of move more toward the producers and away from the buyers. So, I mean, that -- I mean --

Yes. I mean, that is the adage. Market pricing follows volume, so --

So, I mean, I guess -- it's one thing to -- and I congratulate you, and I also wanted to ask about your thoughts on maybe putting -- you know, thinking about putting in a VIM furnace or moving into some -- taking the next step up on some higher-purity products that might get you into some of the rotating grade properties. But just kind of -- I think that's kind of where the question on capacity utilization, and my question on base price, is coming from.

And I guess, going into this strategic thing, you were talking about Asia. That's been an ongoing effort for you guys. And I don't know -- Marcel, did you give any updates on how the Asian business has been going the last couple of quarters, or where you expect Asian momentum to be in -- for the full year of fiscal '11 compared to '10?

Yes, I think we have in March. I think just because of the uncertainty, the things have been going on, and we're probably going to -- we'll do that when we do the K update; when we go through the K discussions. We'll have a full year. I think we try to do that once a year with some color as to the nature of the products and the quantity changes; revenue changes. We'll try to do it once a year. We're not going to do it this time around. But we'll do it in November.

Okay. Mark, have you been giving any thoughts to -- any serious thoughts to a VIM furnace, or anything more aggressive on the front end of the manufacturing process?

I'll tell you what, Mark, we take a look at -- we sit with the board and we go through everything, and you can imagine right now, getting close to the end of the fiscal, we're revising last year's five-year plan and putting together the new one, which then -- we start with the end user. Hey, what are the key markets? What are the new applications we're winning worldwide? And where are we on capacity? Where are the constraints? And, okay, how does that translate into a new capital plan? What adjustments do we have to make into the capital plan? And we go through.

As far as premium melt, I'll say, the rotating components -- and we don't do VAR melting here at Haynes. We have VIM, we have air, and we have VSR. So, we do constantly take a look at those products.

We've looked at VAR in the past. A lot of our applications and a lot of the markets that we are servicing, and even the new applications we've developed, don't seem to require VAR. I'm not saying it's off the table, Mark, but we constantly look at that.

But we look at the capital needs of the Company as a whole, and we go from there. There's a lot of -- we're finding a lot of need for our value added services. The cut parts programs, the wider gauge tube products, the welding products. And that complements our sheet product, so a lot of our requirements that we're seeing, and our opportunities that we're seeing, are in the, I'll say the secondary stream or the value added stream of the business.

So you really don't see any constraints to growth, given your current front end and your basic metallurgical capabilities?

You know, I -- being a metallurgist myself, I mean, the -- it's always attractive to look at melting. I mean, melting is a key, and I think some of the guys that have recently acquired melting in the last couple of months, I admire what they did. They went out and they bought a couple of real nice melt shops out there, and I think they're going to make themselves better with it.

But our strategy -- where the -- when I look at the market and when I let the data lead me, our strategy and our capital requirements, nothing is screaming at me from the point of -- and I think you meant a VAR, Mark. But nothing is screaming at me, and my marketing guys and manufacturing guys aren't screaming at me for a VAR. They ask for it a lot, but they're not screaming for it right now.

Well, thanks for the color, and good luck on the September quarter.

Thanks very much, Mark.

(Operator Instructions). I'll turn it back to management for closing remarks. Thank you.

Thanks very much, Diego. Everybody, thank you very much for your time today. Great questions.

We've still got a lot of work to do here at Haynes. As I mentioned, I think everybody here is living and breathing the safety, continuous improvement, and waste elimination. I'm enormously pleased with the people in our mills and the way they've found capacity and performed. The same thing with our people out in the field. We're out in front of customers constantly, and as you can imagine with the recent upheavals we've seen in the world markets, we're requiring that we get back out in front of customers even more, if you might say. So, a lot going on.

Thanks very much for your interest and support of Haynes. We look forward to updating you again next question. Bye bye.

Thank you. This concludes today's conference. All parties may now disconnect. Have a great day. Thank you.