Haynes International Inc (HAYN) 2014 Q1 法說會逐字稿

Greetings, and welcome to the Haynes International first-quarter fiscal 2014 earnings conference call. (Operator Instructions). As reminder, this conference is being recorded.

I would now like to turn the conference over to your host, David Van Bibber, Controller and Chief Accounting Officer. 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 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, 2013. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

With that, let me turn the call over to Mark.

Thank you, Dave. 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 Dan will give you greater detail on the financial results.

Net revenue in the first quarter was $93.7 million, down 18% from last year's $114.3 million. Pounds shipped in the first quarter were 4.3 million, down roughly 8% from last year's 4.7 million. We reported a net loss of $3.5 million in the first quarter of 2014 versus net income of $5.8 million a year ago. As we mentioned in the press release, the current business environment has been challenging, marked by intense competition for available volume in the marketplace. Nickel prices remain very low, and leadtimes are still very short across the industry, contributing to the sluggish demand as customers are placing very few large blanket orders.

On the positive side, we are starting to see some signs of strength, as evidenced by our increasing backlog. And as I have mentioned in prior calls, we're seeing some demand for our proprietary materials in the chemical process industry. Also, the transactional activity remains very slow. We have seen more expedites in the last couple weeks then we have seen in probably the prior six months.

January activity was good -- not great, but good. Dan will give you a bit more detail on the backlog. It increased again in January. I do want to caution everyone on the backlog growth. As we mentioned last quarter, and I mentioned a moment ago, we are seeing more orders come in for some of our proprietary materials, and these are principally project-related applications. These will likely ship later in the year -- third or fourth quarter. We still feel the upcoming second quarter is going to be challenging.

Let me move to the market to give you some color on what we are seeing. Net revenue in the aerospace market for the first quarter of 2014 was $40 million, down $23.6 million from the first quarter of 2013. Volume was 1.6 million pounds in the first quarter, down 23% from first-quarter 2013's 2.1 million pounds.

Aerospace comprised roughly 42.6% of our net revenue in the quarter, and our backlog in aerospace fell during the quarter by roughly 4%. I think most of us in the industry feel that the destocking that we have been experiencing for the past 15 months is likely to end this year. Our aero tubing business remains very strong. The business decline that we have experienced has been on the aero engine side of the business.

Obviously, with the lower revenue and declining backlog, I can't quantitatively call this as a bottom, but I can tell you that the meetings I have had with customers indicate that they feel we're at the bottom. Also, some of the current decline in the backlog has to do with sequencing of orders in the aero tubing side. We are expecting to see a restock order shortly in this area.

I think you all know the bigger picture on the aerospace side. Boeing and Airbus continue to deliver record numbers of commercial aircraft and are ramping up production on key platforms. On the engine side, the efficiency and emissions requirements are creating new platforms and increasing the number of old engine retirements. These are all good signs for our business in this market, and further evidence of the disconnect between the commercial aircraft deliveries and the destocking being experienced at the metal supplier end of the supply chain.

We are continuing to develop new applications for our materials in this area, and we feel we are establishing a very solid position at many of the key target accounts through our service capabilities. We expect this market to increase in demand as 2014 progresses.

In our chemical processing market, net revenue for the first quarter of 2014 was $23.1 million, down about 12% from first quarter of 2013, $26.3 million. Volume in this market was up 13.7% in the first quarter of 2014 to 1.1 million pounds.

CPI accounted for 24.6% of our net revenues, and our backlog increased 55% in this area during the quarter. Quite a bit of what we have been seeing in the past few months has been some of the applications we have been working on -- oh, gosh, probably for the last year, year and a half; some even longer than that -- utilizing some of our proprietary materials. Of course, some of the applications also include non-proprietary materials, but overall we are pleased to see that this market is responding well.

The core business in this market, or the traditional business in this market, still remains slow. And what I'm talking about there -- I'm talking about things like our acetic acid-related applications, our phosphoric acid applications, methyl methacrylate -- those are all kind of just limping along. Really what we've seen, the change that we have seen lately, has been in energy-related applications and some of these project-related applications that we are talking about.

Because of the core business being so slow, it still -- it remains very, very competitive for any of these materials. And these are typically the higher-volume alloys that you see out in this market; but at least related to Haynes, these are the higher-volume materials.

Most of the new projects that we have in the backlog are expected to ship in the third or fourth quarter, and as I mentioned earlier, so we still have some concerns about booking up this current -- the second quarter. Longer-term, as we've mentioned in prior calls, we think the natural gas development we are seeing in North America and elsewhere will have a positive impact for our materials well into the future.

Land-based gas turbine market totaled $18.1 million in net revenue in the first quarter, down almost 20% from the first quarter of 2013, to $22.6 million. And I think most of you know that I even think that $22.6 million in the first quarter of last year, that had some correction in it as far as being lower than what we would normally expect in this marketplace. Usually we expect about $25 million to $28 million a quarter in this market, so this first quarter of 2014 was very soft.

Volume was 1.2 million pounds, flat with last year. This market accounted for 19.4% of our total revenue in the quarter, and the backlog declined by roughly 5%. As we have mentioned previously, we felt a temporary slowdown would be coming in this market as we shipped a record volume into this market in 2012, and we had our second-highest volume year in our history in 2013.

We expect this market to exhibit very choppy demand patterns in 2014 as inventories correct, and we see some variability within the mechanical driver or pipeline applications, energy applications, and marine components of this market. Longer-term, we view this market as having excellent growth potential due to the availability, economics, and environmental advantages of natural gas compared to traditional fuel sources like coal.

One other point, we're winning some new applications in this area. It's pretty clear that the better efficiencies in this market, similar to the requirements we see in the aero engine area, are necessitating use of higher temperature capability materials. We feel some of our new materials are finding, and will find, more applications in this area.

Our other markets had net revenues of $9.4 million in the first quarter of 2014, down 11.4% from the first quarter of last year. This market accounted for 10% of our revenue in the quarter, and the backlog increased 5.5%.

Traditional core of this area had been applications in the flue gas desulphurization, along with applications in industrial heat treating and some smaller automotive applications. In the past year, FGD and industrial heat treating applications have been very slow; however, we have managed to pick up some applications in the oil and gas area that we believe will develop into larger contributors in this area. We also believe that some of the traditional applications, especially in the industrial heat treating, are poised to make a comeback and 2014 as broader economy improves worldwide.

Internally, we are pleased with the progress we're making on our CapEx projects. As we mentioned last time, we extended our shutdowns over the holidays in some of the manufacturing operations to get some necessary maintenance and project work completed. These shutdowns were very successful.

On our tubular products expansion, we completed the exterior structure wall on the two additions, and received our certificate to occupy. As a result, we started up the new annealing furnace. In fact, I was down there a couple of weeks ago, and we ran our first production lots very successfully in the new annealing furnace.

We have also started relocating certain pieces of equipment to facilitate a leaner flow process through the plant, and we also have to make room for some of the new cold reduction mills. We will start foundation work shortly on the cold reduction mills. And I think as I mentioned to you when we were digging the pits of the annealing furnace -- I always get nervous when you start digging pits. So we will see how that goes, but we are really excited about the new cold reduction mills coming in.

In fact, I think they shipped -- I think they shipped either today or yesterday from Germany, so we should be seeing them arrive probably in six or eight weeks, and that will probably consume most of the summer. Right now, we will dig the foundations. Then we will have to pour some foundations, and let them cure for a while. But then the installations will come through probably -- I think it will be most of the summer period.

We also, on the Kokomo flat roll expansion is running extremely well. We commissioned -- since we talked to you last time -- we commissioned the new shape fraction equipment along with some finishing equipment and some inspection lines. All that is up and running and running well.

We also got a new shear in place, which is going to help us with our working capital and really on our timeliness and responsiveness, especially as we feed some things into our welded tubing area. We're really excited about that piece of equipment. That's also going to open up some cutting capacity that we needed for other products and other areas of the plant.

We also are doing some equipment relocations here in our heat treating and annealing areas, specifically the hot working furnaces. The preheat for the 4-high are in place. Some of the refractory work starts today on the last furnace. All the new control systems are in and qualified, so we should be up and running there very shortly.

And, as far as the annealing furnace, we have an old temporary furnace -- it is funny, we call it the temporary furnace -- and I think it was in there since about 1960. But we have relocated that, and we have done an addition into what we call our [R1] facility, and we will be putting in our new annealing furnace. That is scheduled to come in probably in the June timeframe. So, again, that will be most of the summer getting that new furnace up and commissioned.

Finally, our new IT system is in place in Europe, and we started the North American go-live process. As we've mentioned previously, this new IT platform will put all of Haynes' facilities on the same system. Up to now, and I have mentioned this previously, for example, we have been running three different systems in Europe, none of which is the same system as the United States. Like any IT platform change, I am sure we're going to have our frustrations, but this project is long overdue.

We're excited about the attributes that this product will give us for better customer service, better planning, better working capital management, and more efficient communications worldwide. All of these projects are scheduled to be up and running by the end of the calendar year. We have taken on a lot of project work in the last 18 months; but all of this, we feel, is necessary to better position Haynes for the future.

With that, let me turn it over to Dan for more details.

Thank you, Mark. First-quarter results are typically impacted by holidays, maintenance projects, and planned outages for capital improvement. This quarter's financial results were impacted further by challenging business conditions, which decreased volumes and decreased average selling prices. Volumes continue to be impacted by destocking in the aerospace and land-based gas turbine supply chains; lack of large project chemical processing shipments; and customers delaying orders due to the combination of both short industry leadtimes on mill direct products; and raw material prices remaining low, primarily nickel.

We experienced significant gross margin compression compared to a year ago, with our gross margin percentage dropping from 16.4% in the first quarter of last fiscal year to 5.6% this quarter. The gross margin in dollars this quarter was $5.3 million, which was a reduction of $13.5 million from a year ago.

Four primary factors contributed to this $13.5 million margin compression. First, increased price competition, which impacted margin by an estimated $6.8 million. The intense competitive environment continues to require the Company to aggressively price orders across all markets, particularly in the commodity-type alloys. This is especially true for corrosion business in the chemical processing market.

Additional downward pressure on service enterprises is a result of reduced mill direct leadtimes in the industry that, in turn, resulted in downward pressure on prices for service center transactional business, which typically commands a higher price due to faster product availability.

Second factor impacting margin compression is reduced volumes and the related unfavorable absorption of fixed costs, and unfavorable variances arising from lower volumes, as we are very volume-sensitive. This, combined with changes in product mix, impacted margin an estimated $13.7 million.

Third, higher-cost inventory charged to cost of sales with falling raw material, due to our FIFO inventory costing method, impacted margin an estimated $2.1 million. This FIFO lag is especially true with our longer cycle products.

And, lastly, the impact of a fixed-price nickel agreement pursuant to which the Company agreed to purchase a portion of its nickel supply at a fixed price that has been greater than the market price of nickel. This impacted margin an estimated $0.9 million.

In order to mitigate the impact of these factors on gross margin, we continued through the quarter to adjust production schedules and implement reduced workweeks, in control of hours worked and overtime. In addition, we continue to carefully review discretionary spending and reduce costs were possible.

Our backlog at December 31, 2013, increased to $180.2 million. This represents an increase of 8.1% over the quarter, driven by chemical processing specialty project work. The January backlog increased to $185.9 million, as we see a notable pickup in order entry.

Capital spending in the first quarter of fiscal 2014 was $9.3 million, and the forecast for capital spending for the full fiscal year 2014 is $57 million. This includes $18.8 million for the Arcadia tubular project; $8.9 million for the Kokomo flat product project; $14 million for the processing and service center upgrades; $2.5 million for the information systems upgrade; and the remaining $12.8 million for additional enhancements and upgrades of current facilities and equipment.

The Company forecasted expense for pension and post-retirement benefits is reduced this year to approximately $10.4 million, which is lower than last year's $16.2 million, driven by lower discount rates and better-than-expected return on assets. The funding status of the domestic pension plan does not require funding this year, and has allowed us to temporarily suspend funding for the domestic pension plan.

Cash flow from operations for the first quarter of fiscal 2014 was $24.1 million, which improved our cash position to $81 million. This, combined with zero borrowings on our revolver, keeps our liquidity strong.

Outlook -- revenue and earnings for the second quarter of fiscal 2014 are expected to improve from those of the first quarter of fiscal 2014, but the Company may still experience a net loss for the second quarter. Given the increase in backlog and the feedback from customers, the Company currently expects financial results to improve over the course of fiscal 2014.

As we navigate through these challenging conditions, our focus continues to be on controlling costs and the completion of our current capital investments in 2014. We are cautiously optimistic that business conditions are improving, leading to improved financial performance over the remaining quarters of fiscal 2014.

And with that, I will turn the discussion back over to Mark.

Thanks, Dan. First quarter of fiscal 2014 was a difficult quarter, and we feel the second quarter is also going to have some challenges. We are confident in our market position. We are confident that the land-based gas turbine and aero engine markets have excellent longer-term growth opportunities for us, once we get through this temporary destocking slowdown.

We are pleased with the results for the application development work we have done here, as well as the work we are doing in the chemical area and our other market areas, especially the steps we've had in developing applications that are eventually driven by demand for energy -- be it oil and gas, solar, coal, fuel-cell, or nuclear -- we are seeing more requirements for Haynes types of materials.

I'm also pleased with the work being done in our plants to bring on the targeted new capacity to drive out waste from our processes and improve safety in all areas. We are also building a better service capability worldwide by upgrading our IT systems, and improving our distribution capabilities and value-added processing capabilities.

We've got a lot more to do, but we know we are building a better Haynes, and positioning ourselves well with our customers in these targeted growth markets.

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

(Operator Instructions). Julie Yates, Credit Suisse.

This is Dylan filling in for Julie. I was just wondering, you mentioned a little bit about the unutilized capacity that is pressuring prices and leadtimes within the industry. I was just wondering where your capacity utilization is today.

I'll tell you what, Dylan, it depends on the product line. For instance, when we talk about the aero tubing area, that is obviously operating at pretty much 100% capacity.

We talked the rest of our corrosion tubing -- that's also running at fairly high capacity. Our wire products largely going into welding applications, probably operating at about 50% capacity.

Most of our flat roll area, which goes across many markets -- aerospace, chem process, land-based gas turbine -- typically operating, I will say, in about a 60% capacity right now. I will tell you January we are loading equipment a little more heavily. We lost some production days due to the weather. January, it came through okay, but I still haven't seen all the cost numbers come in.

We had to do a little overtime. We are definitely going to see higher utility requirements as we go through this cold weather. It is minus-12 here this morning, by the way. But we are also -- we are loading the mill a little bit better, as we have got some of these orders that have now started to come in that are out into the third and fourth quarter, we are loading the mill a bit better.

In fact, I could also offer to you too, Dylan, on the melting side -- air melt capacity is probably operating at about 50 -- 55% capacity. And the vacuum melt there is still very, very heavily loaded. Even in the downturn, the vacuum melt area was very heavily loaded. I will say it's 80% to 90% capacity, and that remaining capacity is usually what we will call surge capacity, that rush order that comes in from somebody.

Does that help you out at all, Dylan?

Yes, that was great. Thank you. And then, also, just in terms of the industry, so what do you think you need to see in terms of utilization for pricing to begin to firm?

I think just in general we need to see the economy start to pop a little bit. I was just over in Asia last month; and for instance, we've got some good project work going on over, I should say, Asia-Pacific. We have got some good project work going on over in Asia-Pacific. We have talked about in last year that we won some key heat exchanger applications. And there is more of those types of applications, along with some other what I'll call big science type of applications, some new technologies that are being developed that we are working with people on, and that is some of the stuff that is coming late in the quarter.

I am giving you kind of a long answer to a simpler question. But we are not seeing, for instance, those traditional corrosion applications coming through in sufficient volume. If you ask me what my wish list would be, I would like to see some of those chemical applications come back, not only for Haynes, but for a number of the larger producers in the industry, so that we can begin to see a little more capacity utilization for things like FGD, pollution control equipment, just traditional chemical plants.

Those will bounce back, and they will come along. But right now, in the past 15 months, there just hasn't been a lot of letting of the large projects. So we would really like to see those bounce back.

If you noticed, I am not talking a lot about aerospace are the land-based gas turbine. Those will come back. As I have mentioned previously, we over-shipped heavily into -- at least my opinion is -- we over-shipped heavily into land-based gas turbine. In the last two years, I've been talking about a temporary slowdown or correction coming, probably in our last two or three calls. I think it really hit us right between the eyes this last quarter.

On the aerospace side, most people are locked into good LTAs. We are, too. I think you see that when you take a look at things like our pricing, not really degrading a heck of a lot in aerospace.

Again, that's another area where I think once we get through this spares situation and we start seeing a replenishment of the pipeline, especially a stocking of the pipeline for some of the new engine platforms that are going to be released in the next couple of years, I really think we will start to see those markets start to pick up. And usually in this industry, when that market picks up, it never picks up in a nice, controlled fashion. It usually goes gangbusters.

So, we will see what happens. But, again, if I would really like to see something come back stronger, it would be the traditional corrosion business, so we could start to see some capacity buildup throughout the industry.

Great, thank you.

Edward Marshall, Sidoti & Company.

So, listen, I was curious, you mentioned downtimes in the December quarter. And I'm just curious, have you quantified the lost days due to the extended shutdown -- and what a typical December quarter might reflect?

I think we did say, Ed, we talked about it last time, we talked about extended shutdowns. If you are asking me for the number of days, I would say we took an extra three days in December and probably an extra three days in January. It is kind of like we added a week of shutdowns just to get a lot of these projects done.

We had a real big one here in Kokomo for one of our pickling areas, and our people just did a great job. And it was a pickling project that was long, long overdue, and that really was a time-consuming effort for the guys through that shutdown.

Okay. And when I look at -- and, by the way, was there any impact from -- I believe the storm fell into this period, as well. Was there any kind of shutdown, delays, lost production time, maybe for the storm that hit?

I think that was primarily in January. Right at the beginning of January, we had quite a bit of impact due to the winter weather.

Okay. When I look at aerospace, it looks like the destocking was more extreme than I would have thought. I am curious, you talked about some capacity utilization in the prior questions, but I'm wondering if there is any significant capacity or new entrants to the field that put some of that on there? Or is that just the end market pull-through? Because it's obviously much quieter, and has been for some time, than the ultimate aircraft production rates.

Yes, it really is, and I think you have heard a number of us in the industry talk about this disconnect that is occurring between the metal supplier side of the supply chain and the obvious -- I think it was 80 or 90 more planes that were delivered last year between Boeing and Airbus. So there is a disconnect. There is a clearing of the supply chain.

There's a lot of talk about how the spares industry was really down last year as they were taking existing spares and clearing out the supply chain. But while I was in Asia I met with a buddy whose business is largely driven by spares, and that's a lot -- that's where I got the commentary about, there is going to be a situation where we have to replenish, or actually create a new spare supply chain for the new platforms that are coming out.

How much that will impact us -- yes, we've had some customers come to us for the new engines and say some of the parts are modified. They are slightly different; a slightly different gauge; or a slightly different width of material that they will be taking; or a slightly different orientation for a cut part. So there will be some changes into the new engine platforms. So I'm sure there is some of that going on as well. But, you're right, I think we -- and it goes quarter by quarter -- I think we got hit especially hard this quarter in that area.

Okay. I am curious about the transactional business. And assume when you talk about transactional, you mean through -- I just want a point of clarity, I guess, that through your service centers, not necessarily --?

Yes, that is through the service centers. It's where we get the order and we ship that in less than a mill production time. So, if we get it and ship it in the same month, or maybe the following month, that's a transactional order. It's something we don't have to melt and push through the plant.

And, Ed, that's where I expressed concern when I -- a lot of guys will talk to and say, well, we have already got this quarter booked up. We enter pretty much every month with as much of one-third or 40% of our business not even booked in. Now some of that is contract business where we have an idea of where XYZ company -- they normally take 4000 or 5000 parts of this product each month. But we don't have a firm agreement with them going into each month.

So they might take 3200 this month and 8000 next month. And we won't know that until we get into the month, some of these JIT type of deliveries. Also, our transactional business does include -- and this is mainly in the corrosion area -- just where a plant comes down and they need an extra 10,000 pounds of C-276, and they need it tomorrow. That's the other kind of transactional business that we get.

So that's roughly when we talk about the transactional business, there's a couple of components in there, one being contract-related; but, largely if you think about it, it's JIT driven. And then there is the real true traditional transactional business, where you just have to have certain sizes sitting in stock for traditional requirements, and sometimes the guy will buy it from us; sometimes he will buy it from one of the other distributors out in the marketplace.

And then, finally, I want to just touch on nickel if I can, because I want to -- and there is two parts to this. One, what do we see as far as matching of the cost with price that you are selling? Because it looks like nickel has been stable for a while, and I understand you have some fixed-price contracts in there. But it looks like that was lesser of an impact in the quarter, and I'm just curious of when the pull-through -- when FIFO starts to benefit you, rather than squeeze you.

And the second part of that is looking at the destocking in the transactions, the pricing, that's a lot of customer psychology right now, too, I guess -- or psyche. I am curious about your thoughts on maybe the ban in Indonesia on nickel ore exports, and what that could ultimately do to not only your business, but the market and the tightness maybe in the nickel market?

Look, let me start out with the FIFO, that will benefit us when nickel starts rising. In a rising market --.

Sure.

We will see that turn the other way. And, certainly, the FIFO lag impact of this quarter, I think it will also continue to impact us next quarter as some of the higher cost still flushes through, but I don't think it will be quite as heavy as it was this quarter. So I think that will lighten the impact next quarter, but we still have a little bit of pain to go through from nickel dropping earlier in the year.

So with our fixed-price agreements, that impacted the margin about 1% this quarter. And as volume increases, that will dilute that percentage, so it will get back to a smaller percentage in the future as we get some higher revenue flowing through. So I don't think that will be significant. The dollar impact shouldn't change unless nickel goes down further.

And you mentioned the ban in Indonesia. That's, I think, yet to be determined. I think if the regulatory agencies enforce the ban, it should restrict supply and create a rise in nickel, but I think that is still yet to be determined. I think there's a lot of buzz in the marketplace about it, but it really hasn't moved the needle much yet.

Sure. Thanks.

Does that help?

Yes, that's perfect. Thank you.

Dan Whalen, Topeka Capital Markets.

Great, thank you. Hello, everyone. Just help me more, I guess, theoretically -- certainly pricing is very aggressive right now in the marketplace. Assuming things pick up, but how do we think about -- as new capacity comes into the marketplace, there is a new facility coming on in Pennsylvania -- how do we think about the dynamics of pricing going forward? Does it remain this aggressive, or does the macro backdrop enough of a mitigator?

Yes, I think you have to look at -- also, you have to look at the size of our facility and our ability -- really what we focus on is, okay, let's go ahead and see if we can pick up the best 20 million or 30 million pounds of applications that we have. That's why we do a heck of a lot of work on application development. We are constantly trying to upgrade the type of alloys that we are producing and the product forms that we produce. So a lot of the cut parts and value-added processing that we do trying to lock ourselves in more tightly with customers.

New capacity coming into the market is, I would think, more intended to be what we would call at Haynes -- we will call them commodity alloys; but, really, the higher volume types of materials and typically the lower, much lower, selling price materials that we have.

It remains to be seen. A lot of those are bought in such quantities that I think they will stay with us. I do think some -- I think, inherently, there will be some more pricing pressure in that area as new capacity comes on. But, again, I think a lot of the new capacity that might be coming onstream has to be targeted at much larger volumes than are available from -- I will just say, from taking a share from someone like a Haynes. We just don't have a heck of a lot of huge projects, big run, similar gauge types of applications on these commodity alloys.

We have said previously in things like the K -- 40% of our profitability comes from what we call proprietary materials. So the remaining, I will say, 60% to 70% of volume out there, a lot of it is tied into distribution or cut parts, or packaged with other materials as part of a bill of materials.

Yes, it's a factor that we put into our planning models. And as we continue to keep going down the value chain and get more entrenched into our customer supply chain with cut parts, et cetera. But, again, our objective is always to try and find the best available 20 million or 30 million pounds at the highest end, and keep upgrading applications so that we can get into our average selling prices of $20-plus per pound.

Okay, great. And then just one other, if I may, in terms of the cost containment or reduction initiatives that you mentioned earlier. Was there any benefit from that in the current quarter, or was that more of something that was in the works and should benefit second quarter? Is there much increment?

Yes, there was benefit in the current quarter. As we looked at our volumes and planned out our production schedules, we went to great pains to reduce cost as far as reduced work weeks and managing overtime, and everything that we could do on the discretionary spending. So it certainly had a favorable impact in offsetting some of the lower volumes and the absorption issues that you would have. So I think it mitigated the issue.

Okay. So just to help us out a little bit more here, sequentially should we see much of an incremental benefit in the next quarter as well, or is that already baked in?

I think it is somewhat already baked in. As volumes pick up, and the mill gets a bit more full, we will not be looking at reduced work weeks and that kind of thing as we pick up volumes.

Okay, great. Thanks a lot.

Tyler Kenyon, KeyBanc Capital Markets.

Thanks for taking the questions. Just one on the power gen side, can you decipher between how much of the decline you think is related to destocking, and how much is related to demand degradation? And then maybe you've -- and I think you have maybe touch in this a little bit already -- can you talk about what you are seeing in the solar and in flue gas desulphurization markets as well?

Yes, well, let me start there for you, Tyler. FGD in North America, we have seen that pretty much, and we have discussed this earlier, but we almost called it a cessation. We think our business in the FGD, last year it was down on the order of 80% to 90%. Now it was never a gigantic part of our business. It was probably on the order of 5% of revenue, but that is about a $20 million or $25 million hit to revenue that I think we saw last year on the FGD drop. We still have sporadic applications coming through, and a couple of outages here and there that we are working on. But, again, the FGD business was hit very, very hard in 2013.

With respect to the gas turbine business, I will just give you what we traditionally think of that. Right now we traditionally think of that as about a $25 million to $30 million-a-quarter type of business; and yes, you can move nickel up, down, around, wherever you think. That's what I typically think of that business. So that gives you a rough idea that when we only put up an $18 million or a $19 million quarter, that's a pretty dramatic hit.

However, as I stated, and I'm not sure how familiar you are with the past with Haynes. And 2012, we shipped a record volume into that market, and then the second-best year in our history was 2013. So, starting about six months ago, we started talking about we think we are going to see some level of a slowdown in this business, just because -- and I will say, anecdotally, when I am out at customers, we are seeing a lot of our materials. Now, it's good that we are seeing our material in the plants, but we are seeing a lot of material in the plants. And at the end of the supply chain, so the manufacturers' end of the supply chain, we just haven't seen a corresponding level of activity that would warrant us shipping so much material into that marketplace.

The good news is, there is some good reports that some things are picking up in that area. And as I mentioned, also, we have actually picked up a number of new applications in that area. These aren't gigantic applications. But just to give you an idea, one of them, we have a licensing agreement for Haynes 282 that's out there. It's a product form we don't manufacture, so we really just pick up the licensing fee on it. That's a nice application win for a new alloy.

And then there is a second one for 282 that is just being developed now that's probably going to be $0.75 million application this year but with -- and this is just a single part in a single turbine -- and I will bet you that within 3 to 5 years, that's going to be a $5 million-a-year type of application.

So I hope that helps you a little bit in understanding that area for us.

Yes, that's helpful. I appreciate it. And one more, just if I may -- what is your thought process on how direct mill volumes can compete with your service center business, given your moves over the last several years to produce more parts? I guess any thoughts there would be helpful. Thanks.

The best thing in the world for us is when we start to see leadtimes moving out. That makes the material in stock in the service centers that much more valuable. It gives you a little more latitude in moving pricing around.

It's like the nickel discussion. When we start to see nickel moving up, that's usually the nickel market is telling us all something, that we are all going to start getting busy. We still haven't seen that. So, we would like to see that start to move. But, again, you do get concerned about the volume expansions that are out there, but our distribution center is a real good differentiator for Haynes, and the parts cutting capability is a very good differentiator for Haynes.

Chris Brown, Bank of America.

Could you talk about your position on some of the new engine platforms, whether it's the LEAP or the [Keer] turbofan, and maybe provide us with some timing as to when you might start to see some volume benefit from those platforms?

I think you know some of the fly schedules that are out there for -- for instance, for the Pratt. We do have -- we've mentioned it in our annual report, the application wins we have there. We also have the traditional applications for things like Waspaloy, [Haztex], a number of other materials -- 718, et cetera, in the static component of those engines, both LEAP as well as the Pratt 1000 family. So, we expect those volumes to be similar to what we have seen, a lot more engines going into the sky. We are expecting new engines growing at a rate of 4% or 5% over the next five years, and engines and service growing at a similar rate, maybe a hair below, because there is going to be so many more retirements of engines. But, again, there will be a whole supply chain that has to fill in for spares, et cetera. So we're excited about what we are seeing on the engine side of the business, and what will be coming.

It's interesting; we still meet with all the engine manufacturers, and they continue to ask if you're going to be ready for the ramp. And we continually reply, yes, that's why we're adding capacity in Kokomo. We have got tight on capacity in 2008 in Kokomo. We got tight on capacity in 2011/2012 in Kokomo. That's why every doing the flat rolled expansion project. So we think we will be ready for the additional volumes.

Does that answer your question?

That sure does. Well, that's the only one I had. Thanks, and good luck.

Gerald Richardson, Private Investor.

This is my third conference call that I've sat in on, and the storyline has been nickel prices, nickel prices. I am wondering if you can quantify what effect on your gross profit margins, with the improvements in your capital spending, what that will have if nickel prices remain static at the current level into the future. Can you give me an idea of what type of improvement you would see based on the money that you are investing in the business?

I think we had mentioned the four factors impacting gross margin, and the FIFO lag was one of them, and that's really the nickel price going down. And we're having to pull through that higher-cost nickel from the past through our P&L, with the selling price being down because the market prices of raw materials being down.

So, as I mentioned, I think, in one of the other questions, that impact will still impact our next quarter, but it will lighten up. And as nickel has stabilized, bouncing along the bottom lately in the low 6s, that stability will abate to that FIFO lag.

As we go into the future, that should be much less of an impact. Now, when nickel starts to strengthen, as Mark just said, that's the market telling us something -- that we are going to get a lot busier, that demand is coming back and we can get some pricing leverage, and, certainly, some higher volumes, which will take care of a lot of these other issues that are impacting our margins.

As we ramp up higher volumes than we've experienced before because of the new CapEx going into 2015, we have made the assertion that the CapEx improvements, the return on investment in those will -- should add about 2 to 4 points on our margin, and that was made based on 2012 margins, when they were around 20% at that time. So once we get back to volume levels that we experienced back in 2012, and market conditions of 2012, then, certainly, these new CapEx investments that we are making should garner that 2% to 4%. We're still confident in that.

Did that answer your question?

Yes. (multiple speakers)

Gerald, let me just add for you, as Dan mentioned, too, with you being relatively new in the three calls or so. One of the things we talk about, too, at Haynes is with average selling prices of $20 plus per pound, and volume, we're kind of hyper-volume-sensitive at Haynes. A lot of that pricing goes into absorption. When you see us in that 1.5 million pound a month, 4.5 million pounds per quarter, that is when we are going to be struggling. When we get back into that 6 million pound a quarter type of capability -- that's when Dan is really talking -- that's when we really start to make hay a little bit. And the new capacity that we're bringing on, as well as the upgraded equipment that were bringing on, that's where Dan starts talking about.

We start moving into that 6 million pound a quarter type of number, that's when we will start to really see the benefits of the new equipment, and start to see that -- what we feel is going to be that margin enhancement.

As Dan said, in the 2012 we were running that 20 to 22, and our expectation is we're going to see that number run more the 24 to 26 type of margin level, once we get ourselves back to those good volumes and a little bit more activity in the marketplace.

That does answer my question, because I was getting at if we were in a flat nickel price zone for the foreseeable future, I wanted to hear how or what would cause the bottom line to improve. And I was hoping it was going to be because of the improvements to the capital structure of the business. And it sounds like to me that's exactly the way we are headed.

Now I would like to have one follow-up question. The previous caller asked about the new GE platform, that Lear engine. And as I read a little bit about that, it seems to be ceramic-based, and that caused me to have a little bit of concern. But it sounds like, to me, that you are a player in that engine. Is that correct?

We are a player in every engine platform. I will say that one of our competitors out there I think did a fantastic job in getting some of their materials specified into that application. We have a new alloy called HAYNES 282. It will be looked at for future generations and modifications. But we will be in that engine from all the traditional alloys -- the Waspaloys, the -- GE is not a big user of Waspaloy. They are more of a Rene and 718 and 625, those types of materials. But we will be in the engine in all of those traditional components.

Great, thank you.

We have reached the end of our question-and-answer session for this morning.

I will turn the floor back to management for closing comments.

Thanks very much. Thank you for your time today. Thank you for your interest and support of Haynes. As we have mentioned, really a difficult period we went through here in the first quarter. And as we mentioned, especially in some of the questions that came up, we do see that the second quarter isn't fully booked out. We are hoping that we we'll see some more transactional activity come through. But then, as we think we move later into, deeper into 2014, we see some good signs for where the marketplace is going.

So, again, we will look forward to updating you next quarter. Thanks again. Bye-bye.

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