Haynes International Inc (HAYN) 2011 Q4 法說會逐字稿

Greetings and welcome to the Haynes International Inc. 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, Dan Maudlin, Controller and Chief Accounting Officer. Thank you, sir. You may begin.

Thank you very much, and good morning, everyone. 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, as always, 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 21-E of the Securities Exchange Act of 1934. The words believe, anticipate, plan and similar expressions are intended to identify forward-looking statements. Although we believe our plans, intentions, 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 the Form 10-K for fiscal year ended September 30, 2011. 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.

Good morning, everyone, and thanks for joining us today. Hopefully you have all seen the press release and had a chance to review it. We will 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 financials.

Fiscal 2011 finished the year with net revenue of $542.9 million. That was up 42.3% over fiscal 2010's net revenue of $381.5 million. Net income more than tripled in 2011 to $31.1 million or $2.54 per share versus $8.9 million or $0.73 per share in fiscal 2010. Pounds shipped in 2011 were up 32.6% over fiscal '10 and finished the year at 23.6 million pounds.

Backlog finished the year at $273.4 million, up 84.8% from the end of last year. By the way, we had projected backlog to be flat last time we spoke to you, and actually it was down slightly quarter to quarter. We shipped a bit more than we had anticipated in the fourth quarter and order entry was good but a little bit soft in the fourth quarter.

Also updating the backlog at the end of October is up over $280 million again. In fact, I think it's $282.1 million.

I spent a lot of time visiting customers in the past few months, discussing their business and any impact they might expect from the broader global economic situation that we all seem to be enduring. Without exception, they've told me that their business levels are solid and improving. We discussed short and longer-term situations. The short-term has definitely been impacted. The order patterns have been impacted as they prepare for the end of fiscal 2011 or the end of calendar 2011. Many are getting their balance sheets in order so they are controlling their incoming inventories. Some of them are scheduling their necessary holiday maintenance shutdowns. Some others have even admitted to me that they're holding off orders a little bit until they can see more clarity in the nickel market. That being said, virtually all of these customers have said they expect 2012 to be stronger than 2011.

Internally, during the year we completed about $15 million worth of capital projects at Haynes, and we expect that number to climb in 2012. In addition to the work we have undertaken to assess and enhance our service centers, we have also recently approved a project to upgrade our global IT infrastructure, which will help us in our mill capacity planning, our working capital management as well as our customer responsiveness. We have also recently approved the addition of a new ESR furnace to increase our remelt capacity. We are relieving bottlenecked operations first to better process engineering and lean initiatives and, where necessary, we are adding capacity to meet customer requirements and better position Haynes for the future.

Turning to our view by market, net revenue in the aerospace market for fiscal 2011 was $203.6 million, up 47% over fiscal 2010. Aerospace accounted for roughly 37.5% of our revenue during the year. We had [Akima] and Airbus last month, and I visited Boeing in late October. Both are ramping production, as I believe you are all well aware and we met to discuss capabilities, capacity and opportunities. I met with several engine manufacturers and fabricators in the supply chain during the quarter as well, and the optimism throughout the supply chain is very high. The $25 billion in orders placed earlier this week at the Dubai Air Show further strengthens expectations that peak demand in this cycle will be well above the prior cycle.

Our backlog in aerospace increased 84.7% during fiscal 2011. Between the increased shipping level of 47% over last year and the increased backlog of almost 85% over the finish of last year, we remain very confident that 2012 will be a very strong year for our aerospace products.

In our chemical processing market, net revenue for 2011 was $150 million, up 71% from one year ago. CPI accounted for 27.6% of our total revenue for the year. As I've mentioned previously, our application engineering, R&D, manufacturing, process engineering and field sales groups have done a remarkable job in new application development in this area and the project work they have developed has quickly turned into invoiced sales. Backlog during the year almost doubled, increasing 96.2% from September 30, 2010. As we've said before, this market is very project timing dependent, and therefore always difficult to project quarter to quarter changes in fluctuations. We

are pleased with the results we have had with HASTELLOY C-22 HS and HASTELLOY G-35 during the year. We're also seeing some new applications being developed for HASTELLOY HYBRID-BC1. The land-based gas turbine market totaled $98.2 million in net revenue for us force in fiscal 2011, up 32% from fiscal 2010. This market was 18.1% of our total revenues for the year and backlog increased 36% during the year. This market remains able a little spotty, but quote activity is strengthening and we expect this market to start to strengthen in 2012. By the way, in October we had very strong order entry activity this market.

Finally, our other markets had net revenues of $77 million in fiscal '11, up 12.6% from fiscal '10. They also accounted for roughly 14.1% of our total revenue during the year. Backlog in this area more than doubled, up 137.7% from the beginning of year as activity increased in alternative energy applications as well as in our traditional applications, like FGD and industrial heat treating.

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

Thanks, Mark. My initial comments are directed at the fourth quarter to fourth quarter P&L comparisons, then several brief comments on liquidity, CapEx, backlog, and finish with a look forward.

Net revenues in the fourth quarter of fiscal 2011 were $154.3 million, a 47.5% increase from the fourth quarter of last year. This $49.7 million increase in net revenues is a result of a 40.1% increase in product volume which accounted for $43.1 million of revenue increase and a 5.8% increase in product average selling price, which accounted for $5.9 million of the revenue increase. In addition, there was also a $676,000 increase in other revenue in the non-product category. The year-over-year improvement in performance reflects improvement, although at a very slow rate, in the economic environment we service, primarily driven by chemical processing and aerospace markets.

Cost of goods sold in the fourth quarter of fiscal 2011 was $124.3 million, a 46.8% increase from the fourth quarter of last year. The $39.6 million increase is a result of a 40.1% increase in product volume, which accounted for $35.6 million of the cost increase and an additional cost increase of $4 million attributable to higher raw material cost and a mix reflective of higher-value product.

The combination of the noted revenue and cost change between quarters resulted in a gross profit margin in the fourth quarter of fiscal 2011 of $30 million compared to $19.9 million in the same quarter a year ago, an improvement of $10.1 million between quarters. Gross profit margin as a percentage of net revenues was 19.4% in the fourth quarter of fiscal 2011 compared to 19.1% for the comparable quarter of last year.

SG&A, including research and technology, for the fourth quarter of fiscal 2011 was $12.1 million, an increase of $1.5 million compared to the same quarter of the prior year. Factors contributing to higher SG&A costs in the fourth quarter of fiscal 2011 as compared to the comparable quarter of fiscal 2010 was higher headcount and personal costs and a higher level of business activity, which resulted in increased administrative and sales and marketing expenses. SG&A, including research and technology, was 7.9% of sales for this fiscal quarter compared to 10.1% in the fourth quarter of fiscal 2010. For fiscal 2012, SG&A, including research and technology, is forecasted at approximately $45.2 million for the year.

For the fourth quarter of fiscal 2011, pre-tax income was $17.9 million compared to pre-tax income in the fourth quarter of last year of $9.3 million. For the fourth quarter of fiscal 2011, there was tax expense of $6.6 million versus tax expense of $3.9 million in the fourth quarter of fiscal 2010. The effective tax rate for the fourth quarter of fiscal 2011 was 37%. For fiscal 2011, the effective tax rate for the year was 35.5%. After excluding the one-time non-cash tax charge of $732,000 to reflect the reduction in the Indiana corporate income tax rate which required a reduction of deferred tax assets, the effective tax rate for fiscal 2012 is anticipated at approximately 35%.

Net income for the fourth quarter of fiscal 2011 was $11.3 million or $0.92 per diluted share compared to net income of $5.5 million or $0.45 per diluted share in last year's fourth quarter. Between the third and fourth quarters of fiscal 2011, revenues increased $11.2 million or 7.8% while gross profit margin improved by $4.7 million or 18.5%. Volume increased by 510,000 pounds between quarters to 6.7 million pounds in the last quarter of the year. Between quarters, average selling price was down $0.09 per pound and cost of goods sold per pound increased by -- decrease by $0.48 per pound.

The mix of alloys between quarters remained relatively constant with the cost of goods sold being lower due to improved absorption due to higher shipment volumes.

As of September 30, 2011, backlog dollars have increased 84.8% to $273.4 million from $148 million at September 30, 2010 as result of backlog pounds increasing 50.7% and average selling price increasing 22.6%. 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 increasing backlog has been an increasing rate of order entry during fiscal 2011 due to an overall improving economic environment which has been primarily driven by strong aerospace order entry of approximately $267 million for fiscal 2011. This aerospace activity is driven by a forecasted increase in build rates and continued solid activity of the maintenance portion of the aerospace market. In addition, during fiscal 2011 there was also order entry activity for the remaining three segments, which averaged for each of these three segments 19% higher than their respective sales during the same time period.

Although the September backlog was down from June's backlog of $288.6 million by $15.2 million or 5.3% we view this decline as a typical summer slowdown in conjunction with the market turmoil in Europe related to sovereign debt and believe that long-term market demand will continue to be strong in the markets we service. Backlog at the end of October was up from September and reflects a slightly improved level of order entry activity compared to the previous quarter's monthly average.

As in September, we are continuing to see the customer reluctance in placing orders during the current uncertainty in the economic environment, as previously noted. Backlog at the end of October was $282.1 million, up approximately 3.2% from September 30, 2011 with aerospace and land-based gas turbine backlog improving.

Year-over-year cash declined by $3.9 million from the beginning of the fiscal year through 9-30-2011. Net cash provided by operations was $19.6 million. Investment in equipment was a use of cash of 14.4 million and net cash used in financing activities was $9.3 million, primarily due to the payout of $9.8 million in dividends. For purposes of this discussion, I have separated net cash from operations for fiscal 2011 into two categories. The first category is cash used by controllable working capital, which equaled $24.7 million and includes AR inventory, AP and accrued expenses, and, second, all other activities, including income and depreciation, which provided cash of $44.3 million. The net cash used by controllable working capital is $24.7 million and was attributable to an increase in AR of $24.8 million due to increased sales and an increase in inventory of $17.9 million. These users were partially offset by an increase in AP of $18 million, primarily due to increased raw material purchases.

Although controllable working capital increased during the year, the increase was moderate when compared to the increase in sales. Working capital as a percent of sales decline through the fiscal year. At the end of the first fiscal quarter of 2011, working capital as a percent of sales was 58.5% and declined to 43.7% in the last quarter of the fiscal year. This reduction is primarily due to improved inventory turns due to the initiation of [pool] inventory process, lean manufacturing, along with improved equipment reliability.

In addition to the cash available, the Company has a working capital facility of $120 million which can be increased to $170 million at the Company's option. This provides total liquidity of $230.1 million, which will enable the Company to continue taking advantage of the improving economic environment and any other growth opportunities that become available.

Capital spending in fiscal 2011 was $14.4 million. The target for capital spending in fiscal 2012 is approximately $27.1 million, which includes approximately $5 million for additional remill capacity, approximately $5 million for a continued four-high Steckel rolling mill upgrades, approximately $5 million per year for the next two years in restructuring of the Company's service centers and spending for the upgrade of the Company's information technology system of $9.1 million, also split approximately equally between fiscal 2012 and 2013.

The Company expects to spend approximately $20 million of the forecasted $27.1 million in fiscal 2012 on these items with the remaining balance of $7 million expected to be spent on a number of maintenance CapEx project and upgrades.

The quarterly dividend to be paid on December 15, 2011 has increased by 10% from $0.20 per share to $0.22 per share, or to $0.88 per year per share. Looking forward, management expects the volumes for the first quarter of fiscal 2012 to be approximately 10% to 15% lower than the fourth quarter of fiscal 2011 with a corresponding reduction in net income of 10% to 20%. Volume was lower in the first quarter of fiscal 2011 because of fewer production and shipment days available due to holidays, vacations, maintenance projects and capital projects. Management also anticipates that net income in the second quarter of fiscal 2012 will improve from the first quarter to be equal or possibly slightly exceed the net income of the fourth quarter of fiscal 2011. In addition, management expects net income for fiscal 2012 to exceed the net income of fiscal 2011. However, due to the continuous competitive and uncertain economic environment, the amount of improvement in net income from fiscal 2011 to fiscal 2012 continues to be uncertain.

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 both net income and cash flow over the intermediate and long-term to improve sufficiently to support our corporate requirements, including working capital, CapEx expanding, pension funding, dividend payments and also generate excess cash. With that, let me now turn things back to Mark.

Thank you, Marcel. We are continuing to execute on our plan of strengthening our manufacturing operations via process improvements such as lean manufacturing and Six Sigma as well as investing in equipment upgrades and adding equipment where necessary. We are strengthening our customer service via investments in our service centers and IT communications platforms. We are investing in our future via marketing, application development and R&D. We continue to innovate as we have discussed in our 10-K with new alloys like HASTELLOY C-22HS, HAYNES 282, HASTELLOY Hybrid BC-1, HASTELLOY F-35 and new patents and prototype applications we're developing for HAYNES HR-224 and HAYNES NS-163.

By the way, I have never seen an up cycle quite like this one with customer so willing to try new materials. I think is has to be related to the need for new technologies for running cleaner, running more efficiency, higher strength requirements, higher temperatures, deeper wells -- just a lot of things going on that are necessitating newer, better materials. I have often made a point of discussing with you these new alloys that we have brought to market in the '80s, '90s and since 2000, and we are very proud of these new materials. 32% of our revenue dollars and 44% of our margin dollars in 2011 came from these alloys and applications we have developed since the 1980s. Our product and application development pipeline has been and remains very strong and, in my opinion, it's a key differentiator for Haynes.

Financially, we are pleased to announce the dividend, as Marcel had mentioned, and we're committed to providing shareholders with that competitive return for their investment and confidence in Haynes. We have a lot more work to do. We've got a lot more opportunity to drive waste of our processes and work more safely. We entered our monthly safety review yesterday and our people in the plants are doing an excellent job adapting to the higher product volume, and they are 5S-ing the plants. By the way, that's ship shape, keeping things clean and organized and making sure the right tools are in the right position to do every job. But we are 5S-ing the plants at the same time as we are adapting to these higher volumes. Kokomo, Arcadia and Mountain Home as well as the distribution centers are doing a great job getting these work places organized and in ship shape. I like that discipline and I believe that helps our organization work more safely more efficiently.

Anyway, finally, we are cautious about some of the recent global economic events. I think you have to be. However, our customers remain very bullish on the strength of their order books and we're ready to support their needs.

With that, Dan, let's go ahead and open the line to questions.

(Operator instructions) Edward Marshall, Sidoti & Company.

Question I generally ask about utilization -- I'm just curious what your rates were. It looks like you shipped the highest pounds you've shipped ever, in this quarter. I would have expected when the general economy is at this level, mix suffers. It didn't. So what kind of utilizations were you running in the quarter?

I think right now, we are probably running at that 80% level, 75% to 80% level. I think people were a little bit -- they keep remembering what we used to do. And I think what we have been doing is steadily increasing our capability and our capacities.

I think on the last call we talked about capacities. Right now, we are probably in that probably 75%-80% range with capacities available on sheet product of several million more pounds over the course of the year, plate probably 1 million, 1.5 million. We have additional capacities available for ourselves on tubular and wire products. So we still have some opportunities to continue to grow the business. And with the addition of the ESR, we are going to expand that capability even further.

So that leads me to my next question, which is the comments maybe on margin. You are doing it without really getting a lot of pricing like you have in previous cycles from the cost push of raw materials. I'm wondering if you can discuss what you see, how you measure it maybe from a volume perspective and maybe the efficiencies that you are pulling off of that. Is there any way we can quantify the efficiencies versus volume improvements?

That's difficult for us to do at this point because we continue to do better. I guess that's one way to say it. The fact is that we continue to improve the efficiencies of the equipment. We continue to add volume through the process. I know that last time on the call, we talked about the projects on the 4-high, with looking to run thinner gauge product to feed the cold finishing operations. There's efficiencies there. We've had efficiencies in the air melt, in the ESR, through the operations in Arcadia here at the wire company.

So I wish there was an easy answer. But they are both positive in that context. We are improving the equipment capability, we are improving the efficiency of the equipment and we are improving our volume situation. So at this point it gets better. Over the long-term, you will continue to see those kinds of improvements, but at this point to quantify and say it's one over the other, it's very difficult to do. So we'd just as soon not try to do that it because it will be different quarter.

Okay. And the CapEx programs -- have you seen any kind of impact on the quarters that have maybe been a drag to margin, or do you expect that over the coming quarters as you've got a few projects coming on?

I don't think our CapEx is of the nature that really creates a drag in the process. Our projects are relatively -- I guess, in one context, small. They are very focused, and they are almost like a bolt-on. For example, the perfect example is the ESR that we will be putting in over the course of this year. That will be up -- it's planned to be up and running in the last quarter of this fiscal year. It's just a matter of adding another ESR facility or a piece of equipment. That doesn't interfere with what is already there, so that really doesn't create a drag. It's really just technology straightforward, just -- it's another piece of equipment that we already have in use. It's much the same things with the 4-high upgrades. This is really just taking and adding in or upgrading equipment we already have, like the AGC or the edger, the charging crane. These are very specific pieces of equipment that have a positive effect on the overall performance of the organization. So, again, I don't look to see any of these things really create any drag on the organization.

It's Mark; I'll add to that too. We've discussed it, a lot of things that are happening, and the people in the plants are doing an excellent job in, one, adapting to the volume and driving waste out of the system. Be it through lean or 5S, I think there's a very strong discipline and a recognition of what needs to happen to get the job done. And they've done a great job driving waste out of the system and, frankly, getting more output out of the equipment.

We've talked to you before about some of the process changes we're making that are giving us more capacity in areas like the cold strip mill. We've got similar programs going on down in Arcadia as well as in Mountain Home at the wire and tube company. So a lot of things, as Marcel said, that we're really upgrading instruments, electronics, controls, small inputs getting us good outputs and a very good process change on the engineering side and the manufacturing side and getting more output.

Also adding, Ed, as for as margins and things, one of the things I really liked and I stress when I -- with my team and the people in our plants is we didn't put a lot of cost on the balance sheet. Inventory for the increased level of sales this year, inventory didn't really go through the roof. So I'm very pleased that we saw pretty good margin improvement without transferring some of the cost structure to the balance sheet. I'm very pleased with where we are heading. But, that being said, we still have a lot more opportunities for improvement.

And on that comment, and this will be the last one, you talked about the inventories and the balance sheet. I think you've done a good job. I'm curious; do you have safety stock built into that inventory still? And if so, on the future cash flows, do you see that getting pulled down as some of these CapEx projects get behind you?

I think you've focused on the right point, your latter comment there. As we bring these new projects online, they'll have positive impacts on our working capital management. And we always keep safety stock because everything is not perfect yet, and we hope -- it will never be perfect. But as we make these improvements, we can bring down that cushion or safety stock we have been carrying. So they are directly -- all these things affect directly our working capital management.

Adding to that, too, being cognizant we own our own distribution system, so there is an implied level of safety stock always there. If I had to criticize us in one area, every now and then, you see our inventory balloon and it's usually because we get some big special project that comes through, and that sometimes moves through like a big bubble. But that's probably -- and I shouldn't say it's a criticism of us. I think it's a fact of life. Every now and then, we nail a big project, and you will see that bubble of inventory moving its way through the system.

It's good to see that the strength on the improved operations and what you guys are able to generate on the margins, and good job today. Thanks, guys.

Mark Parr, KeyBanc Capital Markets.

This is Phil Gibbs. Good morning. I had a question on the ESR capacity. Would that be targeted at new alloys? Is there a certain market that you are going after? Is this mostly aerospace business? Because the implication is that you are tight on your remill capability, as is.

That isn't targeted at any specific market. These machines are homogeneous in that respect, so they are not specifically designed for any market. It's just we need to capacity and that's why we are bringing that additional ESR on. That will support all our markets.

Yes, just to give you an idea, Phil, when I came to Haynes, one of the things that shocked me was the ESR run rates that we have at Haynes. And what I mean by that is, I think our ESR remelting is -- some of the guys on the process engineering side have really -- I've never seen ESR rates that have moved this quickly and we maintain the quality we do. And, as you know, that's where I always hammer guys. What can we do from a process point of view before we spend the money? And when I see the ESR rates we have, ESR clearly identified itself as not a process constraint in the organization, but it was a capital equipment constraint. So spending the money for the new ESR is going to give us a couple to 4 million or 5 million pounds more capacity, we think, of output.

Answering your question in a more general term, aerospace is definitely -- when you see the airplane backlogs and the engine builder plans for the next 5 to 7 to 10 years, we definitely see that we will need that capacity to support the aerospace market.

Can you update us on your re-mill capability today, as far as what equipment that you have as far as adding to that with the ESR investment?

I (inaudible) the question with -- you mean -- I'm not questioning what are you asking. We have --

How many ESRs you currently have in place, VARs in place, things like that? I'm just asking the magnitude of your --

We currently have six ESRs, and this will be a seventh ESR for us.

And we don't vacuum our re-mill. We arc AOD, and we VIM melt and we ESR remelt. We do not have VAR remelting.

Perfect, thanks guys.

Dan Whalen, Auriga USA.

Just wanted to circle back to the backlog issues. I think with backlog down 5% looking back over the past 5 years, I think four of those years it has been down and averaged down about 7%, 7.5%. I understand it was more expected to be flattish this quarter, given everything going on. Can you delve a little bit in from a geographic perspective? I appreciate the color from the end market perspective, but in terms of -- was that delta really from Europe?

And then secondarily, we have already seen, I think you said, October backlog was up 3%. Anything incremental you can share with us from a geographic perspective in terms of what's going on there?

I'm not sure that's a large enough decline to really focus in on any one particular geographic market. The bulk of our sales are domestic, obviously. So that's a bit of -- that's looking for a lot of granularity there where I'm not sure we can really break it down that way. You're talking about from the end of June to the end of September, a decline of about $15 million on sales of over $400 million for the year. That's just a difficult -- I don't really think we can do that.

Okay.

Dan, the way I -- when I approach it with everybody, I never look at backlog unless I look at what the invoice level was. And to me, we over-shipped the quarter a little bit, and so that impacted the backlog a little bit more than we expected.

Order entry, I think, it pretty much had gone as we had expected, what customers told us was going to happen. If you remember last quarter, we said backlog will stay flat because we expect order entry to back off a bit because of what's happening in the world and what's happening with nickel, and also, frankly, because people want to get their balance sheets in order. A lot of people's fiscals end with the calendar, and I think we've seen that. I think it's going to continue through the rest of the calendar and we'll see what happens at the beginning of next year.

Our business, if you want to look at it at an end market and tie it to geography, yes, our Asian business is still largely chemical processed, so you might say that, okay, the chemical process might have gone down that. And as Marcel mentioned to you, the areas where the backlog has improved the most, especially in October, were aerospace and land-based gas turbine, and those have largely been North American and European markets for us. I hope that helps a little bit, Dan.

I appreciate that; I know it's a difficult question. In terms of outlook, and this may be similar. But in terms of your outlook commentary, mentioning reference to gross margin dollars versus percent, given the efficiency improvements that are underway, that you've had great success with and the product mix improvements, can you talk a little bit more just in terms of the margin from a percent impact versus the dollar impact? I would imagine the margin impact would probably be down less than the dollar impact?

Overall, I guess -- that's a real long question. I think that, relative to what affects the overall gross margins, clearly we are a manufacturing facility. We have a significant amount of fixed cost, and even to a great extent, that which you might consider variable is not really variable within a relevant range of productions like, for example, labor. Even thought -- for us, that's more like a fixed cost than it is semi or a variable cost.

So volume is a key aspect of what we do. And when the sheet volumes go up, and that's primarily what we are, is sheet and plate producer. We so, I think from that perspective, it has more of an impact on the cost of goods sold. The absorption improves. So that's a significant impact.

But also, the things we are working on relative to making the equipment improvements, that clearly has an impact on the margin, both on a pound basis and a percentage basis. And the other aspect of what we noted in the K this time around is that the proprietary alloys, which are the advanced material requirements that people need, are becoming a larger percentage. So that's also supporting an improved level of profitability. So it's really about equipment efficiencies. It's about volumes and it's about our patented alloys, or proprietary alloys. All of these things improve both the overall selling price. They enable us to be competitive, provide us with an edge. And then there's the issue of what we do through the distribution network and our value-added products, it's just not about sheet and plate. So when you try to fragment all of these areas relative to how much they contribute, it's very difficult to do. So we don't really -- we don't try to do it. We just try to improve the operations so that we do see the improved results and provide just the overall impact on the gross margins in the aggregate, because our product, to a great degree, is homogeneous from a production perspective.

Okay, great.

I hope that answers was equally as long as your question.

Fair enough, congratulations on the results, guys.

Alan Brochstein, AB Analytical Services.

Thanks for taking my question. First of all, this was a quarter with a lot of volatility in foreign exchange and in prices. I was just wondering if that impacted your results at all.

From a foreign exchange perspective, it was significant -- it was very, very small. Again, you've got to think in terms of how we do what we do. Most of -- essentially all of our sales are in dollars; particularly in the metals industry, sales are in dollars. We do have some exposure overseas except that we have a natural hedge. I like to call it a natural hedge, where we've got receivables and payables in US dollars that originate in foreign currencies. So over the course of the year, it's really almost a wash; I mean, it's net. We're talking about very, very small numbers from a foreign exchange perspective. So I think that's not an issue for us at this point.

On the nickel side, again, we have -- because of our -- how we manage our sales, and we've got three buckets of sales, for lack of a better term. We've got contract sales, which is about a third. We've got some purchase order six months to a year delivery type sales, and we've got our service center or transactional business. A third of that business, the transactional business, is priced literally daily, at least once a week, but almost daily. We are very sensitive to that. We are very quick to react to changes in the nickel price so we can pass that on. Our contracts of escalators or de-escalators, so we cover ourselves there. To the extent that we don't have coverage on some of our materials, our orders, we can buy forward and fix the margin on those particular orders.

So, overall, I think we do a good job of managing changes, fluctuations in raw material cost, I think, as well as anybody can in this environment.

Thanks for that detailed answer. So the metal price, even though it fluctuated a lot in this quarter, wasn't particularly meaningful?

No, it was not.

Okay. And my other question is, I don't think you guys have opened a new service centers since you got there, Mark. Correct me if I'm wrong. But as you guys look out, is that something you're considering? And I guess a deeper question, is there any M&A? Is that on your table at all?

We look at everything, Alan. We essentially -- when we sit with the Board, we have a list of items and we go through them by the need. My personal view of opening a service center is I reverse integrate. I sit and I put a guy on the ground and see if we can drive up sales. Once we drive up sales, we decide if we have to put stock in place to support the customer base. Then, after that, the next step is to add equipment behind that stock. And, really, what we are seeing through dedicated logistics carriers around the world, that you can kind of centralize some of the operating end of the business and still get metal to people within 24 or 48 hours.

However, that being said, and you look at Haynes history -- and there hasn't been a lot of capability to expand to various places globally. Top in my mind is places like Japan and Korea. Yes, it's always possible in the future. But every time I go through and look at the ROIs for certain projects, a lot of them keep coming back to upgrading equipment in the mill so we can get more volume out. But I won't shut it out, Alan, but right now I wouldn't say that that is top of mind. I think we are doing a good job servicing customers. If we see any kind of a service issue, then we would have to look at open service centers or purchasing somebody in the service center business.

Okay. And then a follow-up on service centers -- I know you're pretty quantitative about the way you look at these. You've made a lot of efforts to -- I think you talked about this a few quarters ago -- to improve the service centers. Are you able to share some sort of quantification of some things that you have done over the last couple of years?

Well, for example, over the past year, just specifically what Mark was -- one of the think specifically that Mark noted was the ability to place material and service customers. For example, in Europe we have three entities in Europe. And they each had -- they have a service center with a sales office with an inventory location. Over this past year, in France, we have taken the inventory out of France and moved it to both Zurich and to the UK. And we continue to service our customers equally and even better than we did before.

So what that did was take out the back-office or the back room operation, the inventory management in France. Well, by eliminating that we have elevated headcounts, we went to a smaller facility. And that will save us over the course of the year several million dollars in operating cost. And, in addition to that, it makes the operations in Zurich and the UK more efficient. Now, they have a higher level of inventory, they process more orders, they are more effective and efficient. And we still service our customers equally as well. That's an example. We are (technical difficulty) our inventories and our locations now, looking -- taking all our wire, putting it in one location. You eliminate the management at those other locations, you eliminate any redundancies in inventory. We are doing it with our tubular facilities, so we are going through that process. We're looking at adding equipment in our various locations -- laser, additional laser cutters, plasma cutters. So we are doing all those kinds of things in order to improve our efficiencies, but from a management perspective and from any customer support perspective.

Yes, and Alan, just to give you an idea, we talked a little bit about working capital and inventory during the year. I can't give you an exact, firm number, but I know you want us to quantify it a little bit. By consolidating inventories in specific locations and using dedicated logistics providers and really running operations now around-the-clock in some of these areas as opposed to run them one shift a day, I think we've gotten quicker to customers and we've turned the inventory a little bit better. The number we've used is, had we continued to do things the way we had been doing them, we think we probably would have had to have an extra $50 million or so of inventory on the ground to support the $540 million we did last year.

So that's kind of a rough -- kind of vague, but still something of a quantifiable number we can give you.

That's great, I appreciate all the things you're doing, both inside the factory and out in the field. Excellent job, thank you.

(Operator instructions). It appears there are no further questions at this time. I would now like to turn the floor back to management for closing comments.

Thank you, Dan. Thank you, everybody, for your time today, and thank you for your interest and support of Haynes. Please be safe over the holidays and we will look forward to updating you do next quarter. Thanks again.

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