Haynes International Inc (HAYN) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Haynes International Incorporated second quarter fiscal year 2013 earnings conference call. (Operator Instructions). It is now my pleasure to introduce your host, David Van Bibber, Controller and Chief Accounting Officer for Haynes International. Thank you Mr. Van Bibber. You may begin.

Thank you very much for joining us today. With me today are Mark Comerford, President and CEO of Haynes International, and Dan Maudlin, Vice President and Chief Financial Officer. Before we get started, I would like to read a brief cautionary note regarding Forward-looking statements. This conference call could contain statements that are Forward-looking within the meaning of the Private Securities Litigation Reform Act of1933 and Section 21E of the Securities and Exchange Act of 1934. The words believe, anticipate, plan, and similar expressions are intend to do 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 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, and now let me turn the call over to Mark.

Thank you, Dave. Good morning everyone and thank you 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 with today's call. I will open the call with comments about the business and our end market, and then Dan Maudlin will give you greater detail on the financial results. As we mentioned in the press release, the current economic environment for our products is somewhat muted and visibility is very poor. Whereas our second fiscal quarter was better then the first fiscal quarter with land-based gas turbines, chemical processing, and our other markets showing a sequential increase, we were still negatively impacted as customers continue to be very conservative in their order patterns in light of global economic uncertainty in industrial markets and lower commodity price levels.

I think there is best exhibited in the sequential decline in the engine side of our aerospace business. Haynes net revenue in the second quarter of 2013 came in at $129.2 million, down 18.7% from last year's $158.9 million. Net income in the quarter was $6.4 million, down 57.9% from fiscal 2012's $15.2 million.

Our net revenue in the aerospace market for the second quarter was $49.3 million, down just over 20% from last year's $61.9 million. Aerospace accounted for 38.2% of our total revenue in the quarter.

Activity in our structural aerospace tubing area continues to operate at full capacity. Demand for our products for Arrow engine applications remain slow as customers continue to manage their requirements and very tightly. Also several fabrication contracts are currently being negotiated, and it appears that commodity price adjustments are being negotiated and then renegotiated in light of the downward price pressure on commodities. In addition to the lower invoice level, our backlog this area also fell during the quarter by 5%. We remain very bullish on this market especially in light of the delivery rates our of Boeing and Airbus, and we are in direct contact with customers and designers in the supply chain to discuss our concerns about how tightly they are attempting to manage their order patterns and inventory. we expect this market to rebound as the year progresses, but we are unsure of the timing of that rebound.

I will also remind you that remember in 2012, that we ship -- we equaled our record for shipments in the aerospace market. So some of this was not unexpected that we would see a breather in this. In our chemical processing market, net revenue for the second quarter was $33.9 million down over just 10% from the $37.8 million we did in second quarter of fiscal 2012. CPI accounted for 26.2% of our total revenue for the quarter.

As we have discussed, this market has experienced softness over the past few quarters as large project-related business went on hold. New application activity, including several related to natural gas applications drove several new projects during the quarter and over the past six to nine months. We have also seen some good activity in some of our proprietary materials for heat exchanges for what we would call traditional CPI applications. Whereas this market remains very choppy and large projects remain on hold, we have had some pretty good success winning some of these one-off specialty engineered applications. I wish I could tell you if these applications would be large repeating business application wins, but that is not the case in this point in time.

These are very specific wins. Some involving new technology or wins for our materials based on reliability which may have the potential for repeating, but right now these are one-off wins by our field sales engineers with great support from our manufacturing and technical groups. Our backlog decreased about 11% in the quarter after increasing 31% in the first quarter. We expect this market area to remain very competitive throughout 2013, but as I mentioned, we are seeing some requirements out there for new design work using new materials. We expect that trend will service well when the economy begins to strengthen. Net revenues in the land base gas turbine market totaled $32.2 million in the quarterdown 6% from the same quarter last year.

As you may recall, we shipped a record level of product to this market in fiscal 2012, and we then saw a drop to about $22 million to $23 million in the first quarter of this year. The increase in the second quarter to $30 million plus was unexpected as we anticipated the supply chain to be overstocked from 2012 shipments. However, activity was strong in the second quarter as an addition to the higher shift level over the first quarter. We also saw the backlog in this market increase 9.5%. The land base gas turbine market accounted for 23.4% of our revenues during the quarter. Similar to what we saw in CPI, our distribution and manufacturing groups responded well to some quick delivery requirements, and we believe that has helped us secure our position with several key accounts.

Looking ahead, we are still very cautious about this market and the state of supply chain. On very positive note, we are continuing to see more up tick in this market for new designs and new applications seeking better materials for more efficient engines. Design and quote activity is very strong.

Finally, our other market's category had net revenues of roughly $12 million in the quarter down almost 48% from the second quarter fiscal 2012. This market accounted for 9.3% of our net revenues during the quarter. Key components in this area like solar energy, industrial heat treating, and (flu)gas to sulphurization remain very sluggish. Our HASTELLOY-C 22HS material remains in testing. We are working through some specification changes right now, but as we said previously, we do not expect any significant shipments for that application in fiscal 2013.

Finally, on the commercial side, you may have seen that we introduced a new Nickel-chrome molly alloy during the quarter. This is Haynes HR-235 which is targeted in industries where metal dusting failures occur. We are currently scaling the alloy up and plate, sheet, and tube for prototype work with some alpha customers. It is not a 2013 or 2014 story. This will likely be 2015 or beyondby the time we see the scale ups, the testing, the field test results, etc.. But I thought it would be important to highlight this material and give you some insight into how the application engineering side goes in our business.

With respect to the our capital investments, the projects are proceeding well. The Kokomo flat roll upgrade and expansion- - we have got one of the new four high furnaces in place. It is undergoing validation. In fact, I think they are surveying it right now. Foundation work, wiring, and substation work, construction has begun for some of the new larger pieces of equipment that are going in to support that expansion. On the tubular product side down in Arcadia, the new heat treating addition is in process with significant portion of the furnace walls poured. We also relocated several pieces of equipment and improved the layout of the facility in preparation for the second structural addition which will house the finishing process.

Also we had a OSAS 18,001 Safety Audit about a week ago with a lot of attention directed towards the new construction area, and we were very pleased that there were no findings by the auditors On the distribution side, during the quarter, we are continuing to review our in-house process capabilities and how we stock material based on customer demand and general market conditions to determine areas where we might improve our next generation supply and product quality capabilities. We expect to be assessing those capabilities as we better rate our current distribution and light manufacturing capabilities in North America. In Europe, I think you know, our activity has picked up quite a bit over there in the past five years in support of the land-base gas turbine and the aero-engine business in Europe.

So our UK facility we are expanding the footprint for more value-added processing equipment. Also in Zurich where we also handle quite a bit of the land-based gas turbine and a lot of the chemical process industry, we are re-roofing that facility right now. Our IT project, our European locations have run their facilities on the new system for just over four months now. Fine-tuning is still under way to support user requests for minor modifications to help with work flow and reporting. The great thing in Europe is that we have taken three different systems none of which was consistent with our US system, and we migrated our operations to a single system which in the future is the same system we will be using in the US.

The focus right now is shifting to the upcoming implementation for North America for order fulfillment, the service area operations, the accounting and purchasing. The final phase involving the manufacturing locations is also in the planning and training stage for implementation. With, that let me turn it over to Dan for more details on the financials.

Thank you, Mark. Let me begin the financial review with the year-over-year comparison to the second quarter of fiscal 2013 to the second quarter of fiscal 2012. Net revenues were as Mark mentioned $129.2 million which is a 18.7% decrease from the second quarter last year.

This represents a decrease of $29.7 million of which $21.9 million can be attributed to volume. With pounds sold lower by 13.8%.

We believe this decrease in volume is primarily due to the continued reductions of inventory within the supply chain and customers delaying orders as the price of nickel decreases. Also contributing to the sluggish demand is the continued uncertain macro economic conditions such as slowing industrial production in the USand soft European economic data. We continue to see delays and lower order levels for large project-type orders. The amount of the net revenue decrease attributable to price is $7.8 million with lower average selling prices by 5.7%.

We continue to expand increased price competition in the marketplace relative to fiscal year 2012 particularly in the commodity-type alloy. This competition requires us to aggressively price orders which has unfavorably impacted average selling prices as well as gross profit margin and net income. As mill-direct lead times are decreasing downward pressure on prices for service inter-transactional business is also occurring. In addition, the lower metal prices, primarily in nickel put downward pressure on prices.

We also had a lower value product mix compared to last year that contributed to lower average selling prices. Net revenues were down across each market compared to Q2 of last year. Gross profit margins and margin percentages declined in the second quarter of fiscal 2013 compared to the second quarter of 2012 due to combination of lower volumes, weaker pricing, and less profitable product mix as we have discussed.

Gross profit margin as a percentage of net revenues was 15.5% in the current quarter compared to 21.7% a year ago.

Selling, general, and administrative expenses including research and technical expenses were $10.3 million, which is a decrease of $1.2 million compared to the prior year's second quarter of $11.5 million.

The reduction is due to reduced cost for incentive compensation programs and certain cost management initiatives to reduce costs. SG&A as a percentage of sales increased from 7.2% to 7.9% compared to a year ago due to the lower level of revenues.

Looking forward, the full year fiscal 2013 SG&A is forecasted to be approximately $43 million. Tax expense in the second quarter of fiscal 2013 is $3.4 million or an effective tax rate of 34.5% versus $7.9 million or a 34.2% effective tax rate in the second quarter of fiscal 2012.

The effective tax rate for the full year is anticipated to be between 34% and 34.5%. Net income for the second quarter was $6.4 million or $0.52 per diluted share compared to the net income of $15.2 million or $1.23 per diluted share in last year's second quarter.

A comment on the sequentially quarters, comparing the first quarter of 2013 to the second quarter of 2013, the second quarter of FY2013 achieved higher revenue and gross profit dollars than the first quarter. However, the gross profit margin percentage declined to 15.5% from 16.4% of the prior quarter. Average selling prices per pound was negatively impacted during the quarter by items previously discussed such as lower valued mix, lower metal prices, and increased competition. Net revenues in the aerospace market declined by $3 million.

However, net revenues increased in the chemical processing market by $7.6 million increase in the land base gas turbine market also $7.6 million,an increase in other markets by $1.4 million,and other revenue increased $1.2 million.

Overall, the second quarter of fiscal 2013, net revenues increased $14.9 million from the first quarter of fiscal year 2013 volume increase by 0.09 million pounds and net income increased by $0.6 million during this period.

Backlog was $207 million at March 31, 2013, a decrease of $4.7 million or 2.2% from December 31, 2012. The backlog dollars declined during the second quarter of fiscal year 2013 due to a 8.3% decrease in the backlog average selling price for the quarter largely offset by a 6.6%increase in the backlog pound. The reduction of backlog during the second quarter resulted from reduced order entry pricing and lower valued mix of products in the backlog.

The backlog for aerospace and chemical processing markets declined in the second quarter of fiscal 2013 and the backlog for the land based gas turbine market increased in the second quarter of fiscal 2013. To comment on our April backlog, the balance of the backlog increased from the $207 million at the end of March to $210.5 million at April 30, 2013, and the backlog pounds were approximately 7.1 million pounds with an average selling price of $29.57. The increase in backlog in April includes a large blanket order for aerospace tubing which will ship in 2014.

We received these blankets from time to time, but in light of the current economic slowdown, we felt it important to let you know about this specific increase in the backlog. Capital investments. Management continues to believe in a long term growth potential of our core markets. Therefore, we are continuing to implement the previously announced capital investment projects. The proper execution of these capital projects continues to be a major focus area for the management team.

Capital investment in the second quarter of fiscal year 2013 was $13.7 million which brings capital investment to $22.7 million for the first half of fiscal 2013. The forecast for capital investments for fiscal year 2013 and fiscal year 2014 are $70 million and $39 million respectively.

It is possible that we could be light on the $70 million spent this year due to the timing of cash payments, but that amount would carry into 2014. The actual and planned capital investments over the three-year period of fiscal 2012, 2013, and 2014 is approximately $135 million and are expected to allow the Company to increase capacity, enhance product quality, reduce cost, and improve working capital management. The Company anticipates that these significant investments will help the Company improve efficiency and meet the expected long-term customer demands for volume and quality improvement. Cash flow.

During the second quarter, the Company's cash balance declined from $65.5 million at December 31, 2012, to $48 million at March 31, 2013. Cash flow from operations was $29.1 million in the first six months, but with a slight use of cash of $0.5 million in the second quarter alone. In the first quarter, cash collections from accounts receivable was strong from the high levels of accounts receivable that we had at the end of our fiscal year ending September 30th, 2012 that was collected in the first quarter of this year.

In the second quarter, accounts receivable increased $14 million from December 31, 2012, which we expect should contribute to a stronger cash collection in the upcoming third quarter from accounts receivable. Inventory decreased in the second quarter as a source of cash of $13 million. Uses of cash included capital expenditures in the quarter of $13.7 million and a dividend payment of $2.7 million.

Our liquidity remains strong with a zero balance on our revolver. In addition to the $48 million cash on hand, the Company has a credit facility of $120 million which can be increased to $170 million at the Company's option. This combined with cash on hand provides total liquidity of over $235 million which is expected to enable the Company to fund the capital program as well as take advantage of future economic recovery and any other growth opportunities that may become available. Outlook for the third quarter of fiscal 2013. Management continues -- I'm sorry.

Management currently expects the net income for the third quarter of fiscal 2013 may be lower than net income for the second quarter as it is expected to continue to be unfavorably impacted by weaker pricing similar to that experienced during the first and second quarters. Visibility in the marketplace remains poor. And based upon the continued economic uncertainty, level of bookings to date and feedback from key customers, management does not anticipate a significant recovery during the third quarter of fiscal 2013.

We believe this period of uncertainty, low visibility, and sluggish customer demand is temporary. As we navigate through this period, we continue to focus on the long-term demand drivers and growth potential of our markets. When the economy recovers, we feel we are well position to do capitalize on those future opportunities. Now, with that let me turn the discussion back over to Mark.

Thank you, Dan. The economic environment is cloudy right now, and one of the best evidence points of that is it is probably the first time in six months or a year that we have been able to talk to you about an increase in the backlog. However, as Dan mentioned, quite a bit of that was blanket orders that will be out into 2014. I mean Airbus and Boeing at the pole end of the commercial aerospace supply are doing well. They have got great backlog, and they are ramping to higher levels.

As a result, we expect demand for our aerospace products to firm up over the next few quarters. Our land base gas turbine market has shown surprising resilience over the past 18 months, and we are pleased where we have positioned our products and service capabilities. However, because of our high shipments levels into this market area, as we mentioned, and 2012 was a record level, we remain very cautious as we look forward in land base gas turbine. In the chemical process market we see pockets of specific strengths both geographic and application driven, but the overall larger project market remains very slow.

As we mentioned in the press release, and we reiterated in this call, we have excellent growth opportunities, geography, new alloys, new products, we are expanding in areas where we have constraints for instance in aerospace tubing area, and we are associated with excellent end markets. However, at this point in time, we still have not seen any rebound to our order books. Broader economic indicators in the US, the automotive and housing seem to be doing well.

They appear to be signaling that the consumer is gaining confidence. Japan is also doing well and showing greater strength. Hopefully, we will begin to see Europe work through their issues, and we will begin to see China maintain a reasonable level such that we can see industrial demand increasing globally as we move through the balance of 2013 and into 2014. Rob, if you will, let us turn the call over to questions.

Thank you. (Operator Instructions). Our first question is from the line of Edward Marshall of Sidoti & Company. Please proceed with your question.

Good morning.

Good morning, Eddie.

Correct me if I am wrong. It sounds like to me that at least sequentially, it looks like the only large of the three segments that fell was aerospace. And it doesn't seem that the aerospace supply chain when you listen to the OEMs or you listen to some of the suppliers are really seeing a decline. It sounds to me that maybe because of penalties in the supply chain if you miss shipments, that they restocked well in advance of the rate hikes. Now the rate hike is out of the way, I think there's somewhat of a destocking going on. Is that kind of in line with what you guys are seeing in the supply chain there

That is pretty much what we are hearing. That Ed, and that there is some destocking occurring, and we are also hearing from as I mentioned some of these second tier, third tier fabricators that there is quite a by the -- people are being rewarded right now for putting off purchasing by the fact that nickel keeps going lower. So there is -- people are playing a little bit of a nickel game right now. And that is where we have expressed a lot of concern to people. That you cannot keep doing this. We cannot just turn the faucet on and off.

What happens to -- how do I think about kind of coming off that question. What do I think about maybe your lead times and how fast could you ramp up if the supply chain starts to tighten again?. I am assuming you are pretty short lead times right now. And if the supply chain tightens up how fast could you get back to full production?

It depends a lot on the product. but for instance, we are still running pretty much at capacity. As I mentioned aerospace tubing, we are at capacity, but premium melting vacuum melting is also still running pretty close to capacity. So now, that is also - - that is restocking and making sure we have product on the ground. But it is anticipation of what we are seeing if the order book starts to get heavier. As far as people, we are still in good shape with people.

We have cut back on overtime hours and things like that, watching the cost structure, but we have not gone through any major cost reduction efforts at this point in time as far as personnel or anything like that. So we think our ramp up time should be relatively quick. And you're right. Right now lead times across the board are very, very short.

We are pretty fortunate in that we own our own distribution system, and we have picked up a lot of transactional business which helped us a lot in the second quarter. That is the big wild card. As we talked about, the view for the third quarter. We do not know what that transactional business will look like in the third quarter.

And as we manage through this kind of uncertainty - - that is the challenge is how much inventory to keep on hand, and if you have the right inventory for the upturn. So as we manage through this, keeping inventory levels at a place where we can respond quickly is always going to be a challenge.

So, extrapolating from what you just said, it sounds like to me that -- and I do not think this is a surprise looking at the release and kind of your commentary already, but I just want to make sure that I am right. You are running at full capacity in several different lines. You saw a gross margin contraction and that was really just a function of price. I think your gross profit per pound fell about $0.47 or so in the quarter. It is just about a function of just pricing and what that deckariment in price something doing to you.

a lot of that is occurring, yes, especially as we commented with production lead times shortening. That puts a lot of price pressure on the service inter-transactional business. We may be getting some transactional business, but there is a lot of competitive pressure on that price.

Okay. You mentioned some --

If I could also too. I If you look at that as a broad statement, absolutely true. One of the things to look at too on the pricing side is with aerospace correcting itself more so than anybody, I will say in the supply chain as evidenced by the decreased revenue levels and decreased backlog, that is a big mix issue. When you look at the overall price, that is one of the areas, one of the reasons price is dropping as we are seeing the change in mix so dramatically in the past I will say six months.

And again, that is not something systemic. That is just a destocking because we went up in rate hikes.

That is exactly what we believe, yes.

Okay. So I guess that confirms the reason why you continuing the expansion plans, and you are not looking at further restructuring and so forth. That this is strictly a temporary situation and not something more systemic

Yes. If you take a look at the two big expansion projects. One is the aerospace tubing that is still operating at capacity. And if you look at the Kokmo flat rollout operations, that is an area that has run into very severe constraints twice in the last five years.

And the benefits of those projects, especially, in Kokomo are reduced cost, better inventory management, and some better efficiencies than we would gain even at these current volumes.

So I think you said there was a couple large orders that hit in was it chemical processing that you mentioned in the quarter? Is that what you said?

Yes, We have seen some project work. Again, what we define as large is not what some of the other people in the space might define as large. But yes. We get some nice things associated with heat exchangers and also rather than just assets and things like that. We saw some things in the natural gas area that were very helpful to us in the last I will say -- we have been working at it for the last nine months and a year, but some of them hit in the last two quarters which helped us out quite a bit.

This follows a 30% increase in the backlog in chem processing last quarter if I remember. So it seems that there is some momentum building in the backlog, and I understand you are cautious about how you are phrasing some of the chem processing discussion. But it sounds like knowing that there is a big advantage to lower gas prices here domestically. It almost sounds like we are starting to see the trickles of maybe what would be a rebound in that cycle.

I do not know where it will come short term, but I mean in the last couple of months, if you take a look, I think it was Methanex and Salsoul both announced big plants coming into the US So yes. I would agree with you. What that looks like short term versus long term, I think long term is very good. We will see where things go. But I do think those are direct results of what we have seen with natural gas prices

So if I could sum up just the way I see it. The chem processing maybe even some of the gas turbines in a sequential basis saw some improvements year-over-year as well and with temporary aerospace destocking and who knows what happens with nickel, but looking at the demand scenario going forward after we get back past this temporary situation I think not much has changed. Is that the right way to think about it? And that you see the improvements in the other markets kind of filling in where aerospace left off

That is pretty much the story of what has been occurring. Just the short term visibility is low, and we just cannot quite see past it on where the upturn may begin

Okay. Makes sense. Thanks, guys

Yes.

(Operator Instructions). Next question is from the line of Dan Whalen of Topeka Capital. Please proceed with your question.

Good morning guys

Good morning Dan.

You addressed a lot of my questions there. But maybe we could touch on the capital projects and where you are actually at in capacity there. Is that going to require additional certifications from some of the key customers? And if that is the case, where will we kind of stand in terms of the timeline from that perspective?

the Kokomo flat roll not so much. We will be in real good shape there., Now obviously, we have to commission and get it through our quality standards and things like that.

Sure

On the furnaces and production equipment down in Arcadia, the product is what is certified as opposed to the process or the equipment. But again, it will be a very rigorous testing procedure that we will go through internally. It is almost like the automotive guys with GPAP. It is not a formalized thing, but we will run it internally through very rigorous.

So giving it a frame on it. The equipment will be in by end of the next fiscal year. So let us call that in the September/ October time frame of next year. And then we will probably spend about three months commissioning that. So by the time you start talking about calendar 2015, we will be up and running. In fact, we had a meeting just this last week, I talked to some of the commercial guys about the product. We started talking a little bit about, okay, when should we start book that equipment? And we are starting to talk to our suppliers of things like Shells and Tube Hollows as to what their lead times will be, and when they will be able to firm a price, etc.

But if you think about it, if I were to give you a time line, I would say October of next year, we expect to have all the equipment run, in place, and we will start commissioning and doing surveys and evaluations of the equipment, getting it qualified. And then I would say by first calendar quarter of 2015, we should be up and running and booking that equipment.

Great. And then certainly this is a bit out here, but these initiatives certainly have a lot of potential leverage here to the gross margin line. How should we kind of be thinking in terms of a ramp process in terms of when that will start flowing through here just given -- it seems like there is tremendous leverage that will be taken from these initiatives.

Yes. We are expecting some leverage on the gross margin line as we previously mentioned. We are hoping for 2% to 4% improvement in our gross margin percentage kind of based on 2012 levels

Yes.

When that will start occurring, of course, we need the whole program to be up and start utilizing that capacity. There will be a few pieces of equipment that will come online prior to that, and we will start seeing some cost benefit. So I do expect a little bit of leverage prior to the entire program being completed. But it really will be most of it after the full project is complete, and we start increasing the volumes across that equipment. Does that help.

That is very helpful. I appreciate the color.

Yes.

Our next question is from the line of Phil Gibbs of KeyBanc Capital Markets. Please begin with your question.

Good morning.

Morning.

Morning, Phil.

I had a question on the aerospace business. How much of the -- of what you are seeing now is purchasing managers just being cute with nickel versus guys just maybe having too much inventory on the ground?How do you parse out between those two things?

I will tell you what. If I were to take a look at it, what I would say is we anticipated some of this. If you ask my opinion that -- and we mentioned it last call, and we may have put it in the shareholder letter that we had the record output in aerospace last year. So we expected some level of a pull back. If you asked me, I would say the over -- the destocking would be two-thirds of the issue right now and maybe one third of the issue is the transactional people putting off ordering or at least putting off blanket ordering until we see a change.

I think if we start to see a change in the nickel market, we will see people starting to rush to get contracts done and get blankets put back in. I think it will be something maybe not as dramatic as what we saw in the early part of 2011, but I think we will see a rush at that time. So I would say it is about two-thirds, one third

Okay.

And if you are looking at the nickel LME, it is now below $7 a pound. So I think the room to go down farther than that, we would think we are getting close to the bottom. So hopefully that will start a baiting soon.

Yes, and Phil putting in your terms. If you sit back and say would it have been reasonable to see maybe a 10% to 15% drop in volume year-on-year because of the destocking, I think that would have been reasonable and then seeing another 5% to 10% drop because of what is happening in the transactional environment with people playing nickel games, I think that is reasonable, and that is where you come up with that essentially the 20% year-over -year drop.

Okay. Gosh, and on the MRO front for the engine business. How do we think about some of these headwinds from aircraft retirements?I am sure you have been reading the same things I have, Mark, on that issue.

Yes. We do not have the visibility -- I mean we have estimates for MRO versus OEM. We do not have the visibility because essentially we are supplying customers the same people doing OEM are the same people doing the MRO work at our level. So we do not have that same level of visibility through this.

So it is tough for me to really come out and say -- I mean I have read the same things you have. That the MRO issue is a major part of what is occurring right now. I think for me to speculate on something like that, I just don't think it would be responsible right now. Just what we are seeing right now is a big -- a pretty fair size destocking in the aerospace industry, and we just do not know when that is going to start bouncing back for us

Okay. This is the last one if I could. I really appreciate it. Your initiatives to restructure your service center

Yes.

Footprint and some of your I.T. upgrades. Can you give us an update on those hose two major items? Thank you.

Yes. On the I.T., as we mentioned, Europe's been up and running for four months now. We went through the usual bugs in getting that going.

But frankly going from three systems, none of which matched up with the US system now down to a single system. I think is just going to be fantastic for us. And by the way, that is also going to be a system that will match the US system which we will start implementing here in the October/ November time frame. And just think about it.

I mean from a point of view of supporting people, the tech support on it, we will be able to do those things internally now. We will have everybody seeing the same data. We will be able to see data real-time as opposed to getting monthly reports or weekly reports. I think it will be very very helpful to everyone in the Company as we go through it. We are very excited about the It system.

With respect to the distribution, I think I have said this before. A lot of people when they think of distribution they think of pick and pack. That is not Haynes. Haynes distribution is really light manufacturing.

We are cutting a lot of parts these days. So the location of those pieces of equipment, some of the computer programs for optimizing yields, a lot of that is going into what we are discussing now. Also, our European operations have done a real nice job of consolidating the backend operations for certain applications. So a lot of the aerospace parts regardless of where they go in Europe are now cut out of the UK facility. So we are seeing gains in that area, but we need more floor space to continue in that program.

And we will be doing the same type of thing here in North America, making sure that we are optimizing those types of operations on the backend as we go through it. Dan, anything to add to it?

I would add on the ITside, especially, we have the UK service center which is kind of a nice model of a service center for us, and in implementing the IT there first , we are able to kind of work out the normal issues all the normal bugs that you would expect. We will be able to bring back everything we learned from there to implementing it for the domestic service centers here. So it is kind of nice the way we have done it in Europe first a little smaller footprint. We will bring it back to the US and get a nice running start. So I have been very happy with what I see in the system so far.

Any time you implement any RP system it is a challenge, and it certainly is, but we are progressing well, and I think we are going to get some great benefit in production, planning, visibility and some of the other things Mark said. I am pretty excited about it, but we still have quite a by the left to go on it.

Thank you.

Thank you. At this time, we have reached the end of our Q&A session for today. I will turn the floor back over to Mr. Mark Comerford for closing comments

Thank you, Rob. I appreciate it. Thank you for your time today everybody, and thank you for your interest in support of Haynes International. We look forward to updating you again next quarter.

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