Haynes International Inc (HAYN) 2012 Q1 法說會逐字稿

Greetings and welcome to the Haynes International Inc. first-quarter fiscal year 2012 earnings conference call. (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 Inc. Thank you. Mr. Maudlin, you may begin.

Thank you very much for joining us today. 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 are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1933 and Section 21E of the Securities & Exchange Act of 1934. The words believe, anticipate, plan and similar expressions are intended to identify forward-looking statements. Although we believe our plans, intentions and expectations regarding or suggested by forward-looking statements are reasonable, such statements are subject to a number of risks and uncertainties, and we can provide no assurance that such plans, intentions or expectations will be achieved. Many of these risks are discussed in detail in the Company's filings with the Securities and Exchange Commission, in particular Form 10-K for the 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.

Thank you, Dan. 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 will open with some comments about the business and our end markets, and then Marcel will give you greater detail on the financial results.

First quarter of fiscal 2012 closed with net revenue of $128.9 million, up 21.2% from the first quarter of fiscal 2011. Net income was up 60.6% to $8.4 million or $0.68 per share. Backlog fell slightly in the quarter to $261.8 million. Sequentially we mentioned in our last call that we expected our first fiscal quarter to be slower than the fourth quarter of fiscal 2011 as customers cleared their inventories for the calendar year, kept a close eye on developments in Europe and watched nickel prices.

Within our order book, what we saw was fewer large blanket orders with multiple releases. We saw more transactional business. And if you recall a year ago in early 2011, that is when we started to see order books firming up with large blankets. So essentially what happened during the fourth quarter is we saw fewer of those blanket type of orders.

In short, our customers' views that they gave us on the directionality of order volumes has been spot on. The softening occurred pretty much exactly when they told us it would in time. The magnitude of the correction was larger than expected, but essentially the story our customers have given us and we gave you played out as they had said.

By the way, as a quick update, January came in strong on both net revenue and order entry, and our backlog at the end of January is north of $271 million again. Marcel will probably give you more detail on that. So, again, this falls very much in line with what our customers have been telling us would happen.

And looking back at prior first quarters in Haynes history, the first quarter of 2012 is among the top three or for from the perspective of revenue and net income. However, that being said, I think all of us at Haynes feel we could have done even better.

We mentioned to you in the last call that we anticipated the lower volumes, revenue and net income in the quarter, but we finished the quarter below our own internal expectations.

On the positive side, looking at our order book and end markets, we expect to make up the shortfall during the course of the year. In fact, we expect to make up most if not all of the first-quarter shortfall during the current second fiscal quarter.

Also, on the positive side, during the first quarter of 2012, we completed some critical maintenance and upgrade work at our plants, spending $7.4 million in capital projects. For those of you new to Haynes or unfamiliar with our normal cap spending, $7.4 million is about half of what we spent all of last year.

So we took on some pretty important projects in the first quarter of 2012, and we got them done. These projects are critical to positioning us for larger volume capabilities, better quality and as a more reliable supplier to our customers as we move into the upturn in our key markets.

Finally, also on the positive side, pricing held up well in the quarter, and it appears the large stainless mills are projecting some better strength in their markets moving forward. We see that as a positive factor for firming up pricing in 2012.

Looking at our key markets, net revenue in the aerospace market for first quarter of 2012 was $52.7 million, up 18% over first quarter of 2011. Aerospace accounted for roughly 40.9% of our revenue during the quarter. Aerospace volumes and order entry are holding up well as end-user requirements are flowing through the supply chain. Boeing and Airbus ramp-ups continue. And the need for greater fuel efficiency and subsequent cost efficiency is driving demand for better engine designs and materials. We expect this innovation and demand to continue, and both Boeing and Airbus have made it clear to us that they expect this aerospace cycle to expand beyond the peak of the last cycle. Our conversations with the engine manufacturers have confirmed this as well.

Boeing delivered about, I think, it was 477 plans in 2011, Airbus about 534, and both of them expanded their backlog. I believe the total backlog is now over 8000 airplanes. Our backlog in aerospace expanded 3.3% during the quarter, on top of a strong invoicing level, and we remain very confident that 2012 will be a strong year for our aerospace products.

In our chemical processing market, net revenue for the first quarter was $29.7 million, up 44% from one year ago. CPI accounted for 23% of our total revenue for the quarter. Business in this market remains very competitive for large project-related applications. Our backlog in this area fell in the quarter about 15% as customers watched the nickel market and expressed concerns with respect to what has been happening in Europe.

As I have mentioned previously, our application engineering, R&D, manufacturing, process engineering and field sales groups have done a remarkable job at new application development in this area. We expect several of those applications to invoice this year, but, as always in this market, the exact timing of when those applications will invoice is unclear. Our new products and applications in HASTELLOY C-22HS, HASTELLOY G-35 and HASTELLOY HYBRID-BC1 are continuing to expand globally. C-22HS especially has garnered very strong interest in the oil and gas area, and we already have some appointments set up at [NAS]. So I think we are going to be talking quite a bit to customers about new applications for C-22HS at NAS next month. By the way, CPI orders also -- that is one of the key areas that picked up in January.

The land-based gas turbine market totaled $30.1 million in net revenue in the quarter, up roughly 40% from last year. This market was 23.4% of our total revenues for the quarter, and backlog decreased slightly during the quarter about 6%. This market has been very transactional over the past year, but it appears to be firming up. Qualitatively customers are indicating greater confidence in the past three or four months than they had in the prior two years.

Quantitatively it looks like GE had a very good quarter for order entry. I believe they booked about 50 gas turbines so far, and there was a great article in the trades about a week or so ago about Siemens investing for the upturn. I think that was a Bloomberg report. Also, Alstom mentioned solid bookings up 20%, citing demand in US and Iraq. Our expectation is for strengthening in this market as 2012 progresses.

Finally, our other markets had net revenues of $12.7 million in the quarter, down 16% from the first quarter of fiscal 2011. These markets accounted for about 10% of our total revenue in the quarter. Backlog in this area fell about 6%. However, if you recall, I reported last time that backlog had more than doubled in fiscal 2011, up almost 138% during the year. So much of the decline in this market was due to inventory adjustments at our customers.

This market, especially industrial heat treating and flue gas desulfurization, remains very competitive from a pricing standpoint. The pricing gains we have made in this area have largely been mixed related, and by that I mean typically new applications and newer more advanced materials related.

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

Thanks, Mark. I will start with the year-over-year comparisons of revenues, gross margin and costs between the first quarter of fiscal 2011 and fiscal 2012. Net revenues in the first quarter of fiscal 2012 were $128.9 million, a 21.2% increase from the same quarter a year ago. This $22.5 million increase in net revenues is the result of a 16.3% increase in product volume, which accounted for $17.6 million of the revenue increase; a 5.6% increase in average selling price, which accounted for $5.7 million of the revenue increase; and a decrease of $853,000 of other revenue in the non-product category.

The year-over-year improvement in performance reflects both the favorable change in the economic environment from last year, which favorably impacted all our markets, and the ability of the Company to take advantage of this market improvement.

Cost of goods sold in the first quarter of fiscal 2012 was $105.4 million, a 19.1% increase from the same quarter a year ago. The $16.9 million increase is the result of a 16.3% increase in product volume, which accounted for $14.8 million of the cost increase, and a 2.3% increase in average cost of goods sold per pound due to higher cost of product mix, which accounted for $2.1 million of the cost increase.

The combination of the noted revenues and cost changes between quarters resulted in a gross profit margin in the first quarter of fiscal 2012 of $23.5 million compared to $17.9 million in the same quarter a year ago, an improvement of $5.6 million between periods. Gross profit margin as a percentage of net revenues was 18.2% in the current quarter compared to 16.8% a year ago.

SG&A, including research and technology for the current quarter, was $10.6 million, an increase of $700,000 compared to the prior year first quarter. Factors contributing to higher SG&A costs in the first quarter of fiscal 2012 include an additional headcount between quarters, salary increases and increased marketing costs due to the increased level of activity. From last year first quarter to this year's first quarter, SG&A plus R&T as a percent of sales declined from 9.2% to 8.2%.

Looking forward, fiscal 2012 SG&A, including R&T, is forecast at approximately $45.2 million for the year. For the first quarter of the fiscal year, pretax income was $12.9 million compared to pretax income of $8 million in the first quarter of fiscal 2011.

For the first quarter of fiscal 2012, there was tax expense of $4.5 million versus a tax expense of $2.8 million in the first quarter of fiscal 2011. The effective tax rate for both quarters approximated 35%, and it is anticipated that the rate for fiscal 2012 will approximate between 34% to 35%.

Net income for the first quarter of fiscal 2012 was $8.4 million or $0.68 per diluted share compared to net income of $5.3 million or $0.43 per diluted share in last year's first quarter. Gross margin trends between the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012.

Gross profit margin declined by $6.5 million from the fourth quarter of fiscal 2011 to the first quarter of fiscal 2012. The reduced gross margin between quarters is attributed primarily to three things. First, approximately $1.7 million of the lower gross margin is to reduced absorption of fixed costs caused by reduced production days attributable to holidays, vacations and equipment projects in the first fiscal quarter. Another $1.7 million of the lower gross margin is due to pounds produced but not shipped. And lastly, the remaining $3.1 million in lower gross margin is due to lower planned shipments due to fewer production and shipped days representing the recurring issues of holidays, vacations and equipment projects in the first fiscal quarter.

As a point of comparison, the fourth-quarter performance of fiscal 2011 against which the first-quarter performance of fiscal 2012 is being compared, was the best quarterly performance since fiscal 2008. It was the quarter in which 6.7 million pounds of product was shipped, and $30 million in gross margin was generated.

Also, the goal in the first quarter of fiscal 2012 was to improve from last year's first quarter and in addition complete a very comprehensive list of projects, which we did. Although not as good as planned, the quarter's performance was very good by historical standards, and a shortfall from the planned gross margin is expected to be made up in quarter two, in addition to the already planned margin.

Backlog, as of December 31, 2011, backlog dollars had decreased 4.2% from September 30, 2011, as a result of backlog pounds decreasing 5.4%, offset by an increase in average selling price of 1.3%. The primary contributor to the 4.2% decline in backlog dollars was the reduced level of order entry activity starting in the fourth quarter of fiscal 2011 due to the uncertain economic environment.

As in the past, we believe that backlog continues to be a very good indication of the level of future revenues.

The January backlog moved up from the end of December with the balance of the backlog at January 31, 2012, equaling $271.1 million, an increase of $9.3 million from December 31, 2011. The backlog pounds at January 31, 2012, were approximately 9.2 million pounds with an average selling price of $29.66. The order entry rate for January was the highest order entry rate since June of fiscal 2011 and included continuing solid order entry for aerospace and land-based gas turbines, plus strong CPI order entry activity. The order entry for January reflects a broad product mix of project business and bill of product, which contributed to the reduction in backlog average selling price of $0.97 from December to January.

The Company continues to focus on improving working capital management with the emphasis on inventory through initiation of full and lean manufacturing techniques plus capital improvements. However, inventory did increase by approximately $19.3 million during the first quarter due to an increase in finished goods, a portion of which is material produced but not shipped, and an accumulation of production scrap or revert inventory during the quarter, due to the capital upgrades which reduced melting during the quarter. This increase in finished goods and raw material partially offset by a reduction in work-in-process, which occurred for the same reason -- reduced melting due to the capital upgrades in the melt shops.

Capital spending. The Company has begun increasing the amount of capital spending from traditional levels in order to enhance its capabilities to increase capacity commensurate with the expansion of the markets the Company services and also improve the customer service in the form of accelerated deliveries and expanded value-added products and services. In the first quarter of fiscal 2012, the Company spent $7.4 million on capital projects, including the continuation of work on the 4-high step rolling mill, the upgraded vacuum melting furnace processing systems and instrumentation, upgrades to the research and technology laboratory equipment and the upgrade of the information technology system. These projects are expected to improve quality, enhance working capital management, reduce costs and increase capacity.

Liquidity. 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 $224.1 million, which is expected to enable the Company to continue taking advantage of the improving economic environment and any other growth opportunities that become available.

Outlook for the second quarter of fiscal 2012. It is anticipated that net income for the second quarter of fiscal 2012 will equal and possibly exceed the net income of the fourth quarter of fiscal 2011 and in addition include as much as $1.1 million more in net income related to the shortfall from the first quarter of fiscal 2012 from material produced which did not ship.

Typically we provide two quarters of guidance, guidance for the second quarter as just noted and the third quarter. However, we are limiting guidance to only the second quarter for three reasons. The first and primary reason is that there is project business due to ship in the second half of the year, which is significant enough that depending on when the project is completed and shipped could shift net income between the third and fourth quarters. The other two reasons and to a lesser degree are the uncertainty of the current rate of order entry and the possibility of a recession in Europe. However, the original outlook for the fiscal year as originally provided for fiscal 2011 year-end reporting remains appropriate as we expect net income for fiscal 2012 to exceed net income for fiscal 2011.

In summary, although the order entry rate slowed in the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012 in comparison to the second and third quarters of fiscal 2011, we consider this slowing of order entry only a short-term delay by our customers in committing to larger and longer blanket orders. It appears at least through January that in addition to our aerospace and land-based gas turbine customers having confidence in the future, our CPI customers have at least for January started increasing the size and duration of their orders. The result at the robust shipments and order entry in January is a January backlog equivalent to what it was in September, a solid place to start from for the balance of fiscal 2012.

With that, let me turn it back to Mark.

Thanks very much, Marcel. The direction of our end markets is good. Our relationships with our customers are also very good. I think what happened in the last quarter, we projected we missed on the magnitude, but it is pretty much exactly what our customers told us would happen did happen. We are pleased with where we are positioning our manufacturing capabilities and service capabilities as we enter the upturn.

We have got some exciting things going on with new applications for old alloys and new applications for our new alloys. Customers remain very receptive to new materials. I mentioned this the last time. More so than any other time in my 28 years in metals, customers are very receptive in this upturn to new technologies and new materials.

I think a lot of it is being driven by the efficiency requirements for jet engines. That is also translating through into the power generation side, things running a lot hotter than they did for greater efficiency. And on the energy side, as far as oil and gas, I think it is fair to say that they are getting into some more difficult environments, and the need for higher strength and better corrosion resistance is out there. And, again, we are seeing just tremendous new design and new specing activity, a lot of samples out there and a lot of work going on with our technical staff.

My feeling is that Haynes new materials -- our global, technical and distribution capabilities -- have us very well positioned for meeting those needs. With that, let's go ahead and open up the call to your questions.

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

The first question, I just want to clarify the guidance. You had mentioned $1.4 million in net income. The verbiage in the press release last night almost made it sound like you were reiterating your guidance, which I think you did. But you are also saying that you are adding an additional $1.4 million to the net income line. Is that right; is that accurate?

I think what we are saying is we reiterated our guidance, our original guidance for the second quarter, and I think I said $1.1 million.

$1.1 million, okay. And that is on top of it, assuming that you ship everything in Q2 that you missed out on shipping in 1Q?

That is exactly right.

It looks like that is about, say, anywhere between $15 million and $20 million in sales. Is that about right?

You mean the shortfall?

Yes.

It was probably -- it was the mix. It was a pretty rich mix. It was actually I would say it was probably about $10 million.

$10 million, okay. Wow, that is pretty rich. What caused it? I know you had some upgrades, and you were doing something on the Steckel, but what caused the production delays on your side?

A very ambitious list of things we wanted to get done in the first quarter. I mean one of the things we talked about is clearly just increasing our levels of sales beyond what we did last year. So we started out with a process to ship at a relatively high level in comparison with what we have typically done, maybe in that 5.5, 5.6 branch, 5.7 range with total pounds.

In addition to that, we had just a list of projects that had to get done, that we wanted to get done because they are important to the future of the Company, not only in the long term but also in the short term.

In addition to that, there's always things that go on during the course of the quarter that are unplanned in nature. You break down a piece of equipment to repair and upgrade it, and you find more things wrong than you thought you were going to find. You have to make a decision. Since I have got this piece of equipment broken down, what -- I'm going to fix everything that needs to be fixed, it may take you a little longer, a little more difficult to come back up again.

So yes, that slowed the process for us.

I think part of it also is the nature of the product that we ran short off time to get completed. This is, again, it is aerospace land-based gas turbine type products. It is not only sheet and plate type products, but it is the additional value-added things we are doing to those sheet and plate items like taking sheet and cutting the sides, but more important laser cutting, waterjet cutting, plasma cutting. Just a longer process, and we just ran short of time relative to getting it completed and out the door.

Okay. Now, as you look at your backlog and your CapEx plans for the remainder of the year, are there any other tight windows that this may fall into -- we may see this occur again in the future quarters?

Probably not. As I say, we do have some outages planned for the summer. We always do, but nothing -- you know, that is one or two outages. Not quite as robust a list of outages as we had in the first quarter.

But the balance of -- we will continue spending money on some other things we started on relative to the 4-high Steckel mill, some other equipment upgrades, but a lot of the spending over the balance of the year will be on the new IT systems upgrade. When we plan to spend approximately $5 million on that project this year, we spend $1 million in the first quarter. We have got the ESRs, the ESR at the end of the year probably in the fourth quarter. That is a $5 million project that will come in at the end of the year.

But, again, this is a new ESR furnace. It does not disrupt what is already operating. So it does not really impact the business. We have got spending on the distribution process, the processing center spending over the course of the year.

So we have still got a lot of money to spend, a lot of things to get done, but they are less intrusive into the manufacturing process.

And correct me if I'm wrong, the summer is usually the time where you do a lot of heavy maintenance anyway because of the downtime due to the seasonality.

That is exactly it.

Okay. And then lastly, I missed what you said -- and this will be the last one -- highest order entry in January? You said it was the strongest since --

June of last year (multiple speakers)

June of last year? Great. Thanks, guys.

Dan Whalen, Auriga USA.

Just so I understand it 100% here, the unplanned equipment outages, essentially just the maintenance and the upgrades took longer than anticipated. It was not due to a response to demand conditions?

No, not at all. In fact, you know what, Dan, I mean this is one of those situations if there were four more days in December, we would have been in good shape.

Okay. Can you tell us where your utilizations are now?

It depends on the product. (multiple speakers) -- a core product like a sheet type of product is probably round about 80%. If you talk about plate, that has backed off a little bit. We had a big project last year, and so we have got a little breathing room right now in plate. That is probably operating around 70%.

Tube, seamless tube, is at capacity. Welded tube we have got capacity available, and wire we have got a lot of capacity available. That gives you a rough idea, but in general, if you ask me overall what are we running out, we are running at about 75%.

Okay. And my sense is that number will probably be higher next quarter?

Yes, it probably should be. Yes.

Okay, probably closer to 80% or something?

Yes.

Okay. Now when we look at Europe, can you help us frame in terms of Europe in terms of it's certainly aerospace is a significant portion of that. But can you help us in terms of Europe kind of an end market breakdown roughly speaking?

Yes, if you take a look at Haynes in general, I mean the end markets that we supply, aerospace, CPI and land-based gas turbines being the main items there, the aerospace and land-based gas turbine I typically think of those as global markets. The demand is global. There is a finite number of manufacturers involved, a finite supply chain, and those products move around the world from one fabricator to another.

So they are more driven by the end use demand cycles. I don't think local -- I don't really typically think of them as local manufacturer for local consumption. So those I think have some level of insulation. Airbus and Boeing are going to drive the demand on the aerospace and all the engine manufacturers, yet they may move around some of the manufacturing. But essentially it is going to be driven by the end-user.

The CPI side of it is I think more constrained into local manufacturer, local demand, local growth rates, etc. So our CPI business we do a lot of CPI business out of our Zurich facility, and it has definitely been impacted. Some projects being delayed and things like that.

But, on the other side, we also do quite a bit of power generation work or land-based gas turbine work out of the Zurich facility, and that has been doing quite well.

So it kind of almost goes more end market related than it does to geographic related (multiple speakers) but the geographic component definitely comes in when you talk about things like the CPI types of products.

Okay. And did you you say earlier that CPI was picking up in January?

It was a good month for order entry in CPI in January, yes.

Okay. And your conversations with customers would imply that is likely to continue?

You know what, that is a tough one to answer because it is so spotty. You know, the project work comes in or the (multiple speakers) maintenance type work.

Right, right. And then lastly, if I may, just in terms of it is very encouraging to see you adding headcount, is that something that we will probably continue as well?

To a certain extent. If you look at our overall headcount, we really -- I would break it into two categories. You have got your SG&A bucket, and you have got your production bucket. We really have not had added a lot of people. I mean if you think about it, a $700,000 increase quarter over quarter is not very much. It's essentially a few people. It increases in some activities with the high level of activity.

Now you think on the production side, we have been a bit more adding people in that process. If you look year over year last quarter to this quarter, we have added 50 people globally in our production manufacturing processes. We are doing more things, we are making more complex products, and that is the reason for that. Okay?

Tim Hayes, Davenport & Co.

Thanks for the detail on the what impacted the quarter. I think you gave out three numbers. One of them, that second one, that $1.7 million, I just wanted to clarify it. How did that compare to the $1.1 million? Is one a pretax, one and after-tax, or is --

That is exactly right.

Okay. And the first and third factors -- and the first one again being $1.7 million and the third being $3.1 million, those struck me as almost the same. Can you clarify what the differences are on those two?

The first item I talked about, the $1.7 million, would recur under pretty much any set of circumstances. In that quarter we have a reduced number of production days available to us because of the holidays, because of the vacations and the projects we typically plan. So if you go back to the quarter to quarter, historically, yes, that number is approximately the same. That number will grow every year because we typically add more people, and if they are fixed cost oriented, you are not going to be able to absorb that cost.

The second item, the $3.1 million really relates to product that we did not plan to produce. We just did not forecast to produce and operate at the same level we did in the fourth quarter, which was a very robust fourth quarter. Does that help?

It does, yes. Thank you. And that is all my questions. Thanks.

(Operator Instructions). Alan Brochstein, AB Analytical Services.

Congratulations. Things look like they are progressing well. I just had a question on how (technical difficulty) -- you know, natural gas prices are very low in the United States. I was wondering if you expect in the intermediate to longer term how that will affect your business in terms of your customers? I am thinking obviously land-based gas turbines, but also maybe in the chemical industry where natural gas prices are high overseas obviously. Are you starting to see anything yet, and do you agree that this could be favorable for you guys in the longer run?

I will start and then Mark can finish up if you want. We have talked about that internally quite a bit, and I read the literature that is out there. First and foremost, the low natural gas prices is just good for the economy overall. But I do think that you have focused in on really two things.

The order activity of sales right now for our land-based gas turbines is really leveraging off of the historical thousand units per year kind of build rates. What we anticipate happening we know will happen at some point in the future, low natural gas prices cannot be anything but very favorable for our land-based gas turbine market. I don't know when that tipping point is going to come, but I suspect it will be within obviously the next several years. And I think you think about what has happened in China or with Japan with the nuclear side of the business, think about environmental regulations, reading the article that was (technical difficulty)-- about Siemens and Bloomberg, it spoke to a lot of the specifics as to why low natural gas prices is going to be very favorable for the land-based gas turbine business. So longer term it is a very, very good thing.

You also touched on the other aspect of the process. Natural gas is probably a third of the cost of feedstock for the chemical processing industry. So ultimately unless the consumer side of the business starts to pick up, that will also be very favorable.

So I think it is not only limited to the US, though. This whole issue of unconventional natural gas is really a global opportunity. It impacts Europe. It impacts China. There is substantial reserve globally relative to that. So overall I think it is a good thing for all world economies. Now that is the global look.

Yes, talking to our customers, a lot of feedback on exactly that topic. And I don't want to get too much into detail, but if you have not had a chance to read that Bloomberg article, it came out in the middle of January. A very brief article, maybe two or three pages, talking about a Siemens $1.3 billion investment to take -- essentially compete with GE on the land-based gas turbine side, and it also mentions [Valstrom] and some things going on at Mitsubishi (technical difficulty) -- technologies that are out there. Real -- very, very good article talking about migration over to natural gas or land-based gas turbines.

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

I have a quick follow-up. On CPI, one of your competitors reported earlier this earnings season and talked about the fact that after market is now being shifted toward new facility demand. If I am incorrect, I think that is a little bit more stable demand. Can you confirm that? Have you seen that going on, or do you -- can you see the difference based on the way you ship to your clients, etc.?

We are seeing good bid project activity out there. But one of the things we always talk about is how competitively priced some of the larger projects are out there right now. It is one of the areas if you took a look at today versus 2007 type of numbers, you can see the fact that some of the larger mills that are not -- their capacities are not filled with stainless steel products and things like that, you can see where that is keeping kind of a cap on price levels.

So we are still doing a lot of transactional business. We have some good project business, especially in new applications and CPI. But I think things like FGD business and some of the larger projects items, some of those prices are still being capped at lower than where we are comfortable participating right now.

Let me just see if I understood you correctly. You are basically saying to me that you are foregoing some CPI business because the margin is just not there for you?

I think so. I think some people are underbidding us, and they are winning some of those projects, yes.

Jeff Bernstein, AH Lisanti.

Just a follow-up to a couple of the priors. You say in the press release that the backlog is reflecting a significant amount of higher value alloys compared to previous quarters. So what are the implications there for margins? It sounds like you are cherry picking business a little bit in terms of avoiding some of the more commodity stuff out there. Is there a net positive to margins, and how should we be thinking about that? Then I had a follow-up.

You are absolutely right. The reality is that the average selling price within the backlog is moving up because it is reflective of higher priced products, and these are higher priced products in the context of more valuable products, more value added work. And we are orienting toward cut parts, a lot of value added in that context. Tubular type products, again, more value in that product. It is a higher priced product. It is also a higher cost product.

But overall if you track back against what has happened over the last two years, you can see an improvement in the margins overall. And that margin is reflective of obviously a number of things.

Number one, it is reflective of this improvement in the economy. It is reflective of an improvement in our own increased efficiencies to operate our facility. But, as importantly, it is attributable to the improvement we are producing and selling and how we are being more selective in moving toward a richer product mix from a margin perspective. Very similar to what Ed was asking and what we commented on. We are not pursuing every order out there, but we pursue it, we just at points choose not to take them. So we are really managing everything we do from a product perspective. Does that help?

Yes, that is great. I appreciate that. And then just in terms of chemical industry investment in the US, there have been five world scale ethylene crackers announced planned to be built here over the next few years. What kind of content would you have in there? I guess currently pricing is tough in the chemical business, but with that kind of scale investment coming on, does that kind of tighten up the market at some point?

We had a question similar to this a couple of quarters ago, and I went and talked to our chemical people about it. We would not have a lot of content necessarily in something like that, unless we see a bill of materials come through, and there are other parts, fittings and things like that where we participate. Typically because in a large project like that, some of those alloys, the high-end are typically at the lower end of our pricing spectrum.

Where we tend to participate are where we are more heavily involved is, there is a lot of bidding right now going on also in things like phos acid type things and acetic acid type plants. And that is where, for the lack of a better phrase, we are holding a lot of our capacity for those areas. And those are higher alloy types of materials like our HASTELLOY B-3 and things like that.

Mark Parr, KeyBanc Capital Markets.

I really appreciate all the color. I think you guys have done a great job of helping people understand how the year is unfolding. I had one question. This is a little bit strange, but has Haynes ever produced amorphous steel that could be used in electrical transformers?

I'm not familiar with it, Mark, and I think you know I was here back in the Cabot days, 26 years ago, 28 years ago. But I think you are talking about, remember, who was it, I think AlliedSignal used to produce that kind of stuff down in Conway where it was cast over a drum, and they used a lot of that in magnetic applications and stuff. I'm not familiar with Haynes ever doing those things.

All right. I appreciate that. Thanks. Good luck in the March quarter.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thanks very much. Thank you, everyone. Thanks for your interest and support of Haynes. We have got a lot of work to do. We are cognizant of the economic environment, especially of what is occurring in Europe, but we are also very bullish about our end markets. And our customers, as I have said, we are staying very, very close to our customers and discussing their new applications, as well as their ongoing needs. I think right now the information we are getting from our customers is still very bullish. So, again, thanks very much for your time, and we will look forward to updating you in three months.

Thanks, again. Bye-bye.

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