Haynes International Inc (HAYN) 2012 Q4 法說會逐字稿

Greetings, and welcome to the Haynes International, Incorporated fourth-quarter and fiscal year-end 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 for Haynes International. Thank you, sir, you may begin.

Thank you very much for joining us today. With me today, as normal, 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 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 Securities and Exchange Commission, in particular, Form 10-K for the fiscal year ended September 30, 2012. 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. Now, let me 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 comments about the business and our end markets, and then Marcel will give you greater detail on the financial results.

Fiscal 2012 finished the year with net revenue of $579.6 million. That was up 6.8% over fiscal '11 net revenue of $542.9 million. Net income increased more than 60% in 2012 to $50.2 million, or $4.07 per share, versus $31.1 million, or $2.54 a share, in fiscal '11. Pounds shipped in 2012 were down 1% from fiscal '11 to 23.4 million. However, average selling price per pound increased to $25.73 per pound from $25.07 per pound in fiscal '11, up 2.6%. Our backlog fell during the year to an ending level of $222.9 million from the $273.4, and we've been updating you as it goes; it fell another $2 million in the month of October. So, it fell from the $273 we had at the beginning of the year, as we saw slower economic activity in the latter half of the year as customers managed their inventories more aggressively and large project-related business, in particular the CPI market, went on hold.

We managed our mix very well during the year. We gained quite a bit of traction with some new product. Both aerospace and land-based gas turbine had strong years, record volume levels. CPI market fell off a bit. Perhaps, more importantly though, I feel we have continued to position Haynes for greater success as all of these markets move into a growth trajectory. By the way, one other note on the backlog, the $50 million in reduction we saw during the year includes a very large oil and gas project that we shipped in fiscal '12 that has not yet been reordered in fiscal '13. That order alone accounted for 40% of that backlog reduction. We are not sure if a reorder is coming in fiscal '13, but we are working on it right now with our partners in that market.

As you are aware, we also announced, during the year in June, some expanded capital spending targeted for growth opportunities. Those projects are running on time; and just to remind you, the bulk of that investment was announced for our tubular product area, where we are still operating near capacity. And, the remainder is in our flat products area, which is expected to experience growth over the next decade, supporting market growth and new applications growth in the land-based gas turbine and aerospace market.

Internally during the year, we spent over $25 million on capital upgrades, and we feel we are better positioning the Company's service capabilities to our customers and improving the velocity of products through our mill. If you recall, we previously discussed our capital investments in our sheet area back in 2008, and that those investments were intended to grow our capability in sheet from roughly under -- just under 9 million pounds per year to 12 million pounds per year. In fiscal '12, we ran over 13 million pounds through that facility, and the mix was far more complex than in the 2008 projections. In my opinion, it's fair to say that those investments were well spent, and our efforts to increase capacity via better processing and better first-time through throughputs are paying off.

Similarly, back in 2005, Haynes acquired Branford Wire. Branford, as you recall, was largely a stainless redraw facility. In 2012, we shipped a record of over $40 million of wire products. And whereas we still do some stainless alloy, that facility is largely dedicated to higher-priced Haynes-type alloy, mainly nickel-based material supporting Haynes' core markets.

Finally, we also had a record year in the tubular products area, but to be honest with you, we have never felt worse about it. The tubular products side is still heavily booked and quoting lead times of roughly one year. In my opinion, we had a great year, great volume, the people in the plants did a great job, but we still disappointed customers. We are hopeful that we can bring on our new capacity, or at least begin to see the incremental improvements from our investments in the latter half of fiscal '13, before we expect to get those investments fully operational in late '14 or early '15.

The short-term picture right now is very cloudy. I think you are hearing that from most people in the specialty-metals area, and I'd like the reiterate that point. But, our end markets in aerospace, land-based gas turbine, and chemical processing, especially chemicals for fertilizers, pharmaceuticals, other advanced applications, are expected to grow over the next decade. I am pleased with the progress we have made in fiscal '12 to further position Haynes for this anticipated growth.

Moving to our core markets, net revenue in the aerospace market for fiscal '12 was $229.9 million, up almost 13% over fiscal 2011. The $229.9 million figure is second only to 2008's $247.3 million. Volume in both fiscal '08 and fiscal '12 was 8.9 million pounds, which is the highest in the Company's history in this market. Aerospace accounted for 39.7% of our revenue during fiscal '12. Boeing and Airbus continue on their path with increased production schedules and this, along with needs for more fuel-efficient engines, continues to drive demand. On products supporting the engine side of the business, we are investing ahead of time to meet anticipated demand schedules; and in the short term, we are managing our mix to ensure that we have available capacity and support inventories in place to meet the needs of engine manufacturers.

On the structural side, we feel the investments we are making in our tubular products area will be sufficient to meet demand, with ample capacity available to pursue our growth projects in other areas. In the short term, we are operating at very close to capacity in our tubular products production area. Overall, the backlog in the aerospace area increased from first quarter '12 through the third quarter of '12 and fell slightly in the fourth quarter of '12. This slight reduction is due to the timing of orders and customers watching their inventories, as we progress through the final calendar quarter. We expect this market to remain strong in fiscal '13.

In our chemical processing market, net revenue for fiscal 2012 was $134.6 million, down just over 10% from the $150 million we did in fiscal '11. CPI accounted for 23.2% of our total revenue for the year. As we have discussed, this market experienced softness during the year, as large project-related business went essentially on hold as the year progressed. Economic uncertainty impacted several key projects. Also, if you recall in fiscal '11, we had a very large project in excess of $30 million that did not repeat in fiscal '12. So, adjusting for that single project, we saw fairly solid growth of about 12% in this area during the year.

Our new alloys, like HASTELLOY HYBRID-BC1 and HASTELLOY G-35, are gaining traction. And in my opinion, our global distribution network benefited us by having some of the right products positioned at the time right time to take advantage of some selective spot MRO buys. This market is expected to remain very project-timing dependent as we progress through fiscal '13, so being in front of customers will remain very critical.

Our backlog, as you can imagine, dropped about 10% during the quarter, and about 29% during the year, for the reasons I have mentioned. It's too early to tell, but quote activity has increased in the past three months in this area, and there are some good signs on the horizon, especially here in the US, as natural gas prices remain low. We have seen some larger projects moving off the back burner. I don't know if some of you saw it, but CF Industries or Terra Nitrogen, I forget who owns who there, just announced two new plants, one going up in Iowa and one going up in Louisiana. So again, I think the low natural gas prices are definitely going to help the CPI market, at least here in the States, over the next decade or so. Anyway, the initial buys in those areas will likely be better for some of our larger competitors; [Haynes'] price levels are very aggressive for these large initial quantities, but we expect there will be some spot buys involved, and of course, the MRO buys in the future. Again, it's too early to tell, but the quote activity has picked up.

In the land-based gas turbine market, we totaled $119.2 million of net revenue for us in fiscal 2012, up over 21% from fiscal 2011. This market was just under 21% of our total revenues for the year. Volume of 6.5 million pounds in fiscal '12 eclipsed the Company's prior record of 6 million pounds in fiscal 2008. We saw consistency of revenue throughout the year in this market, as each quarter ranged from about $28 million to $32 million, even though the buying patterns between MRO and OEM were very much varied within those numbers. Our response times from the mill were excellent for these products supporting spot OEM requirements, and our inventory position and distribution capabilities supported the MRO needs.

In fiscal '13 we expect the end market in this area to strengthen. Coming off record volume performance in what was clearly not a record year for the market, we are cautious about inventory levels in the short-term supply chain as we enter FY '13. I think from -- hopefully, what you are hearing me say on this market is, I'm a little cautious on saying that this is going to be on an upward trajectory in fiscal '13, mainly because of the record performance we had in fiscal '12. I might be a little conservative there; but again, I think it's good time for us to be a little bit conservative in looking at these things. Our backlog in this market declined throughout the year. However, we do not see that as an issue as these products are typically short-lead time from the mill on large requirements and ordered pretty much off the shelf on many of the MRO applications. We do expect this market area to remain very competitive and very service dependent through fiscal '13.

Finally, our other markets had net revenue of $81.6 million in fiscal '12, up 6.4% from fiscal '11. These largely industrial applications counted for roughly 14.1% of our total revenue during the year. Backlog in this area fell dramatically during the year, due to the oil and gas application I had mentioned previously. By the way, just to remind you, that application involves our recently invented alloy, the HASTELLOY C-22HS, which exhibits excellent strength and corrosion characteristics for some of today's more demanding down-hole exploration and production applications. We shipped that large order in fiscal '12. We have not yet seen the reorder for fiscal '13. Without that single application the backlog stayed roughly flat throughout the year.

Expectations for fiscal '13 remain cloudy for this area, as we are still unsure if we will see a repeat order in the oil and gas area. And, we are still unsure if the FGD, flue gas desulphurization industry, will be impacted by emissions policies over the next 12 months and beyond.

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

Thanks, Mark.

I will start with the fourth-quarter-to-fourth-quarter comparison, then years, then with working capital, CapEx, and liquidity. Net revenues in the fourth quarter of fiscal 2012 were $150.3 million, down 2.6% from the fourth quarter of last year. This $4.1 million decrease in net revenues between quarters results from the combination of a 9.1% decrease in product volume, which represented $14.8 million revenue decrease and a reduction of approximately $700,000 in other non-product revenue. These decreases of revenue were partially offset by an $11.4 million increase in revenue caused by a 7.6% increase in product average selling price. The primary reason for the reduced volume is the year-over-year reduction in project business. The increase in average selling price represents an enhanced product mix compared to last year.

Cost of goods sold in the fourth quarter fiscal 2012 was $119.8 million, a 3.6% decrease from the fourth quarter of last year. $4.5 million decrease is the result of a 9.1% decrease in product volume, which represented $12 million of cost decrease, partially offset by a cost increase of $7.5 million attributable to a 6% increase in average cost of goods sold per pound. The increase in cost of goods sold from last year to this year is due to a mix reflective of a higher-value product.

The combination of the noted revenue and cost changes between last year's and this year's fourth quarter resulted in a gross profit margin in the fourth quarter fiscal 2012 of $30.4 million, compared to $30 million in the same quarter one year ago, an improvement of approximately $400,000, or 1.3%, between quarters. The improvement in product pricing of $1.71 per pound netted against an increase in product costs of $1.12 per pound between periods contributed $3.9 million to the gross margin improvement, which was for the most part, offset by the increase in cost of goods sold due to the higher volume in the fourth quarter compared to the prior year. As noted, the primary driver of both the higher average selling price and higher average cost per pound is a higher-value product.

Last year's fourth quarter gross margin per pound was $3.94 per pound, and this year's fourth quarter gross margin per pound was $4.53, a 15% increase in gross margin per pound contribution between comparable periods. The gross margin, as a percentage of net revenues, was 20.1% in the current quarter, compared to 19.4% in the comparable period one year ago. The year-over-year improvement in gross margin per pound performance between the comparable quarters reflects the effort of continuing to improve product mix by managing what markets we sell into, what forms we sell, what alloys we sell, and our continuing effort to improve the manufacturing cost structure through capital spending.

SG&A, including research and technology, for the fourth quarter fiscal 2012 was [$7.6 million], a decrease of $1.5 million compared to the same quarter of the prior year. Factors contributing to lower SG&A costs in the fourth quarter fiscal 2012, as compared to the comparable quarter of fiscal 2011, was that the fourth quarter fiscal 2011 included costs associated with the downsizing of the French service center, while this year's fourth quarter reflects the benefit of that downsizing. SG&A, including R&T, was 7.1% of sales this fourth fiscal quarter, compared to 7.9% in the fourth quarter of fiscal 2011. For fiscal 2013, SG&A, including R&T, is forecasted at approximately $46.1 million for the year, compared to $43.9 million for the past fiscal year.

Pre-tax income for the fourth quarter fiscal 2012 was $19.8 million, compared to pre-tax income in the fourth quarter of last year of $17.9 million. Tax expense for the fourth quarter fiscal 2012 was $6.9 million, versus a tax expense of $6.6 million in the fourth quarter of fiscal 2011. The effective tax rate for the fourth quarter fiscal 2012 was 35% versus 37% in fiscal 2011. The prior-year effective tax rate was higher due to Indiana enacting a corporate income tax rate decrease from 8.5% to 6.5%, causing additional tax expense reflecting our estimate of the decrease in the deferred tax asset due to the lower tax rate. For fiscal 2012, the effective tax rate for the year was 34.8%. The effective tax rate for fiscal 2013 is anticipated at approximately 35%.

Net income for the fourth quarter fiscal 2012 was $12.9 million, or $1.04 per diluted share, compared to net income of $11.3 million, or $0.92 per diluted share, in last year's fourth quarter. As noted by Mark -- an add on to Mark's comment relative to the backlog, the October-ending backlog declined from September year end due to an October book-to-bill that was slightly less than one. The backlog at the end of October was $220 million and 6.7 million pounds, and an average selling price of $32.80 per pound. Although the backlog has declined during the year and quarter, due to reduced project business, particularly for the CPI and other markets, the backlog continues to represent a solid order book representative of good margin product.

Cash and working capital. The cash balance at September 30, 2012 was $46.7 million, a decline of $13.3 million for the fiscal year. During the fiscal year, net cash provided by operations was $20.8 million. Investment in equipment was a use of cash of $25.9 million, and net cash used in financing activities was $8.1 million, primarily due to the payout of $10.8 million in dividends.

I have separated the net cash from operations of $20.8 million into two categories. The first category includes operating activities such as income, depreciation, amortization, which provided cash of $63.2 million for the fiscal year. The second category of controllable working capital used cash of $42.3 million during the year. The net cash used by controlling working capital of $42.3 million for the year was attributable to an increase in AR of $12.9 million for the year, with the increase coming in the fourth quarter, due to increased sales during the quarter as compared to the third quarter, with the majority of the sales in the latter half of the quarter.

Inventory increased $13.2 million for the year, which was the net of an increase of $41.4 million in the first three quarters, followed by a fourth-quarter reduction in inventory of $28.2 million. As previously discussed, material was purchased during the third quarter and melded, in order to accommodate the melding equipment maintenance outages planned for the fourth quarter. During the fourth quarter, inventory declined due to increased shipments and reduced melding. Correspondingly, there was always a decrease in AP of $16.2 million, primarily in the fourth quarter, due to reduced purchases of raw material during the quarter because of the reduced melding. At the end of the fiscal year, AR was up and cash was down for the reasons noted. However, with the collection of receivables during October, the cash balance at the end of October was $65.2 million, an increase of $18.5 million from the end of September.

Liquidity at year end. At September 30, 2012, the Company had a working capital facility of $120 million, with no borrowing against the facility. At the Company's option, the working capital facility can be increased to $170 million. The revolver, plus cash, is expected to enable the Company to take advantage of an improving economic environment and any other growth opportunities that become available.

Capital spending in the first three-quarters of fiscal 2012. The Company spent $17.1 million on capital projects, including the continuation of work on the four-high Steckel rolling mill, installation of an additional electroslag remelt furnace, upgrades of the vacuum melt furnace processing systems and instrumentation, upgrades to the research and technology laboratory equipment, and the upgrade of the information technology system.

Capital spending in the fourth quarter was $8.8 million and includes spending of $7.1 million on the two new capital projects announced in the third quarter. The total capital spending for fiscal 2012 was $25.9 million, with spending for fiscal 2013 and 2014 estimated at $70 million and $39 million, respectively. The majority of the spending for fiscal 2013 and 2014 is to complete the tubular plate -- to complete the tubular, the plate, processing center, and information system projects. The outlook for the first quarter of fiscal 2013 is that the Company anticipates the net income of the first quarter of fiscal 2013 to be similar to the first quarter of fiscal 2012. However, net income could be lower due to customers tightly controlling their inventories and continued uncertainty in the global economic outlook.

In summary, the current economic environment continues to be uncertain, and we may be challenged over the next several quarters. However, we have a business plan and continue to work with that plan. We expect cash flow to be sufficient to support our corporate requirements, including working capital, CapEx spending, pension funding, the dividend payments, and continue to support a positive cash amount on the balance sheet.

With that, let me now turn things back to Mark.

Thanks, Marcel.

We are in a short-term area of uncertainty. I think that has been a consistent story in the industry. However, longer term, I think it's reasonable to believe that our end markets will return to a strong growth trajectory. We have deployed the capital necessary to meet these needs in a very targeted and disciplined manner, as been our history. We continue to invest in new alloy development, tech service, and developing Lean and Six Sigma methodologies in our operations. On the service side, we are staying close to customers, and I firmly believe we are solving the technical and logistical issues that allow us to add value in our customer supply chain. I am pleased with the progress we made in '12, and I'm pleased with where we are positioning Haynes.

Finally, I want to thank Marcel for his 26 years of service at Haynes. As many of you know, Marcel is retiring at the end of this month. He has been a consistent workhorse of this Organization, guiding us through extraordinarily difficult periods, and being a beacon for who we can become. My dad used to always say the true measure of success in everything you do and every day you do it is, did you leave it better than you found it? I think it's pretty easy to see that Marcel is leaving Haynes better than he found it. All of us at Haynes wish him well in his retirement, and we thank him for making us a better and safer workplace.

Dan Maudlin will be filling in as the CFO when Marcel leaves. Many of you know Dan from these calls and from the industry presentations we have done over the past 12 to 18 months. Dan and Marcel have spent the last eight years working together, so Marcel leaves his role in very capable hands. We are all very excited to have Dan promoted into this role.

With that, let me open the call to your questions.

Ladies and gentlemen, at this time we will be conducting a question-and-answer session.

(Operator Instructions)

Edward Marshall, Sidoti & Company.

Marcel, good luck with your retirement. You surely will be missed. And Dan, welcome.

Thank you.

Thank you.

The initial qualification -- this is a question on the oil and gas. I'm wondering, there was some initial qualification, I think, test runs that were going on earlier in the year, as I think the customer was testing your product and the capabilities, as you were looking for a fourth leg, and you discussed that 40% decline backlog relative to oil and gas. I'm curious, is it related to this project, and is it just a matter of that customer qualifying the product and qualifying the process and making a business decision? Or, is it something a little different?

In fact, Ed, that's exactly what's happening right now. The qualification is occurring. In fact, it's occurring as we speak. So, we'll probably know in the next, gosh, I'll say in the next month or so. The technical -- what I mean by that is the actual field qualifications going on right now. In the past six months a lot of the qualification work that was being done with laboratory qualification, bench testing, et cetera. The actual production lines are in right now and being tested.

The math says $20 million. My sense is that it's much larger than $20 million, especially if you want to -- the potential of that project, if -- not just the project, but the win, if it does go in your favor. Do you have a sense as to what kind of annual revenue could be contributed with that, with a project win of that size?

We have numbers that we talk about internally, Ed, but we need those to stay internal for now. There's an old saying -- you know what they say about potential, it can get you fired. So, we'll wait to see where the qualification tests. It's been a great product over the last two years as we've gone through these prototype tests. We think we have an excellent alloy, but we still need to see how it performs in the field.

Let me ask a question another way, maybe. The other markets participate for about $91 million -- $81 million of annual revenue. You talk about a fourth leg to be a, say a fourth segment of the business, other than other markets. So, if I just think about it, it would be larger than that $80 million number, I would assume?

Not initially, Ed. I wouldn't expect that.

Okay, that's fair enough. I'll leave it alone. I'll wait for more clarity guys bring along -- bring up. Can you remind me what your exposure is to refineries in any of your segments?

Very little, Ed, if you think about it, it would go more back into our CPI business. Again, CPI, I think we're more heavily involved with asset work and things like that, as opposed to normal, what people would consider, petrochemical.

Okay. The change in the pension expense that you expect for fiscal '13 and maybe any funding requirements that you may expect to make --?

Thank you, Ed, that's a good question. We're actually pretty proud of how we've managed our pension liability over the last seven, eight years. This year, I think our pension expense was about $13.7 million, $13.8 million. Next year, the expense will be about $13.4 million, $13.5 million. It's anticipated to come down over the next year.

And, I think if you go back and look at our cash obligation schedule, you can see that -- look out over the next five, seven years, you see the funding requirements, and along with -- if the discount rates stay the same and if we earn our 7.5% on our investments as we forecasted in the pension footnotes, we anticipate that the plan will be funded in five to seven years; and the cash -- the pension expense will continue to decline through that time period.

You're one of the select few that's actually going to see a pension decline next year.

I like to think we are one of the select few. We've managed the process. It's a comment, we manage everything here. This is just another piece of the process.

My last question, and this is about cash and cash on hand and then uses of cash. And, you've laid out your priorities, or schedule as you see fit, in the press release. You also reiterated that this morning. I'm curious, you have some large CapEx projects, probably larger than you've had in maybe the history, I don't know, but certainly in the recent history. And, it looks like you have some other uses for cash as well. Is there any chance that you think that you may need to add debt as you move forward into fiscal '13, or is the cash generation enough to supply the internal growth?

As far as we're concerned, we get our forecast -- and obviously, these things are always subject to changes in the environment. Based on our forecast, again as I indicated, through the course of this year, our cash balance will decline through the course of the year. We continue to maintain a positive cash balance on the balance sheet, so what that says is we don't foresee utilizing any debt at this point.

In the absence of, say a large project coming in, and you need to hasten up some inventories or something for working capital?

I think you've kind of focused on the real issue. It's about working capital.

Right.

Based on the working capital requirements, as we see it at this point, and the pricing levels, we don't see a need for additional borrowings beyond what we currently have, relative to -- we can generate internally. If the business took off, across the board, and raw material costs doubled, I think we're going to be -- we'll have to probably dip into the revolver, but --

That's a high-class problem.

Yes, it's a good problem to have.

We'd be okay with that.

Thanks, guys, I appreciate it.

Dan Whalen, Topeka Capital.

Taking a look at the backlog a little closely here, and I know it's a little difficult to gauge. But, just looking back over the past five years, I think this quarter, the backlog has declined four out of the past five years. So, I'm trying to get a handle of the decline, how much is really seasonally related, and how much is really tied to this wait-and-see approach we're seeing throughout the supply chain here?

Dan, when you look at backlog, especially with our business, there's a couple of factors to look. A one is available capacity throughout the industry. So end markets, and I'll use CPI as the example right now -- and, I can even throw land-based gas turbine in there a little bit, too. There is available capacity in the industry, and the ability of most people to respond, either within inside of a lead time, or within time of a quarter, such that things never have to hit a backlog number. In other words, customers don't really have to go out and reserve capacity. You can pretty much get the products you need within 12 weeks.

Likewise, along with that, you have the lack of commitment to large blanket orders. That's when we see the backlog. When confidence grows and people worry about available capacity, that's when you really begin to see the backlog growing.

So, if you think about our backlog, and I've kind of moved to point two here on it, when you take a look at our backlog, one of the key things to remember are things like the tubing mill is very, very heavily booked right now. So, you will continue to see backlog increases on the tubing side of the business, as people reserve capacity as we move out. Same thing for some of the aerospace products, the more complex products, the items that take maybe a premium-melt capabilities, where we are still booking heavily into, I'll say the 26-week timeframe, those are the types of items that will be sitting in backlog. By the way, that's another reason why you will see higher price levels sitting in the backlog.

I hope that answers your question. It's more of an issue with available capacities in the industry, ability to respond quickly, and then reserving capacities for -- for the lack of a better word, I'll say some of the more complex products that are out there.

Marcel, anything else --?

I think that's -- you're right on point.

Okay. Then, I may have missed this -- I certainly heard your commentary on the year over year change in the gross margin, but maybe you could touch a little bit on the sequential change in the gross margin, a little lower than what I was anticipating, especially with your average pricing realization there?

I'm not quite sure -- you mean year, quarter over quarter --?

I think you addressed year over year, but can you comment on third quarter versus fourth quarter, the gross margin?

Okay, sure, I got you. I think the key is that between the third and fourth quarters of this past year, you had a situation where the average selling price went up about $0.15 per pound, third to fourth quarter; however, the cost of goods sold per pound went up by $0.62 per pound, quarter to quarter. So, a net $0.47 decline between quarters. Essentially, what you're looking at is a $5 gross margin per pound in the third, versus the $4.53 in the fourth. Again, I think this is reflective of the environment we are in. We continue to move up the value-added scale. Our cost to make these products increases commensurate with the pricing. However, we find ourselves in a very competitive environment, so what you saw was some pricing pressure from the top down. Does that help you?

Okay. So, just so I understand, it sounds like this is largely a timing function as the inventory levels out there is being adjusted, it's not -- it's just a timing function as the inventories work their way through system?

Yes, and that happens, I think you know, a lot with us, Dan. One big project that will go through the mill can really -- it can really help gross margins, or it can really hurt gross margins, depending on timing if things go through. Same thing with things like, when orders are placed, and what happens with nickel movement, and competitive price pressures on a transactional environment. Sometimes if we have a heavy transactional month in a period when nickel prices are way down, it manifests itself as lower prices and price pressure, whereas if -- sometimes you have good bookings from old nickel prices that are sitting in there, and they come through as pretty nice margin projects.

Okay, that's great. That's what I figured. Certainly, I guess given your backlog, average selling prices is north of $30, I would suspect that's only beneficial to gross margins, going forward?

Yes.

Okay. Great, thanks a lot.

Alan Brochstein, AB Analytical Services.

Marcel, I wanted to wish good you luck as well. I appreciate everything that you've done to help me understand your company better in the last few years.

Thank you, Alan.

I had a question, I guess, about the Precision Castparts acquisition of Titanium Metals. I had two questions, actually. One, what did you all think about that transaction, and what it says for the industry? And two, more specific to you, you have a relationship with them for providing conversion services, is that expected to change at all?

This is Mark, Alan. One, you've got some very, very smart people that work very well together. I think Timet is PCC's largest customer. Yes, I think it is a good move for the industry. I think it's beneficial for the entire supply chain. Smart people do smart things, so I think it's good move.

I think you said the same thing about Ladish, if I recall.

And, I think that's working well for ATI, if you ask me. I think it is working well for ATI. With respect to our relationship with them, yes, we've -- the people from Timet have been just an excellent partner to work with, wonderful people to work with. It's too early to tell what kind of impacts would occur, so we'll wait and we'll see. We think we do a great job for them, and we're hopeful we'll continue to do business with them.

Okay. Just so I make sure I understand this correctly, you guys have a cash deposit on -- well two, more parts to this question. You have a cash deposit on your books for future services, so -- I don't have that contract in front of me, but I think --?

Let me clarify that, Alan. That $50 million up-front payment --

Yes.

That's ours. There's no refund; there's no earn back on that. That was their payment to us to reserve capacity on the mill.

Got it, thanks, okay. Yes, thanks for clarifying that. Then -- well, hold on a second -- what was the second part to that? That's okay. That was really my main question. Thank you for clarifying that.

(Operator Instructions)

It appears we have no further questions at this time. I would now like to turn the floor back to management for closing comments.

Thanks very much.

In closing, thank you, everybody. Thanks for your time today. We appreciate your support of Haynes. Please be safe over the holidays, and we will look forward to updating you next quarter. Bye-bye.

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