Haynes International Inc (HAYN) 2014 Q2 法說會逐字稿

Greetings and welcome to the Haynes International Inc. second quarter fiscal year 2014 earningsconference 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, David Van Bibber, Controller and Chief Accounting Officer for Haynes International Inc. Thank you. Sir, 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 comments that are forward-looking within the meaning of the Private Security Litigation Reform Act of 1995, and Section 21E of the Securities Exchange Act of 1934. The words believe, anticipate, plan and similar expressions are intended to identify forward-looking statements.

Although we believe our plans and 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 would be achieved. Many of these risks were 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 30th, 2013. 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.

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

Thank you Dave. Good morning everyone, 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 Dan will give you greater detail on the financial results. Net revenue in the second quarter was $115.4 million, down 10.7% from last year's $129.2 million. Pounds shipped in the second quarter were $5.7 million, up 2% from last year's $5.6 million. We reported a net loss of $1.2 million in the second quarter of 2014 versus net income of $6.4 million a year ago.

As we mentioned in the press release it appears we're seeing the end of the destocking, and starting to see signs in an upturn in the marketplace. Lead times are starting to extend, andwe're also seeing more confidence from customers in placing longer term blanket orders is as evidenced by the increase in our backlog. Transactional business also appears to be picking up but we're still too early in the recovery to tell if have a market situation that will continue to strengthen.

Nickel increases during the quarter forced many accounts off of the sidelines increasing order activity, however as March moved into April, some customers pulled back on ordering, as they feel the recent nickel increase was too much too fast. At these levels they may wait to see how the geopolitical situation in eastern Europe plays out. Competition is still intense in the marketplace, but it appears many of our peers are also seeing demand increase, and their lead times are pushing out as well in select areas. Again it's still too early in the upturn to make any definitive conclusions, but at this point we feel good about volume starting to push out some of these lead times, and our ability to start managing the product mix.

Let me move to the markets to give you some color on what we are seeing. Net revenue in the Aerospace market for the second quarter of 2014was $47.3 million, down 4.2% from the second quarter of 2013. Volume was 2.2 million pounds in the second quarter,up 12.4% from the second quarter of 2013's 2 million pounds. Aerospace comprised 41% of our net revenue in the quarter, our backlog in aerospace increased during the quarter by roughly 7%, and that is in addition to the sequential increase in revenue of 18%.

As you are well aware, our aero tubing business remains solidly booked, and we are starting to see a stronger level of activity in the aero engine side of the business. We saw quite a few expedites in the aero engine materials side of the business during the quarter, and as evidenced by the backlog we're seeing more confidence that customers are starting to place longer-term quarters, apparently reserving their spot in the queue as they start to restock. Discussions I have had with customers have strengthened. As we mentioned in the press release we did have a one-off ingot order in the quarter in our aerospace market, aero engine market, so I'm reluctant to say that this market is back on a dramatic up slope, but I do believe that we're beginning to see the end of the destocking that we've been discussing with you for the past 18 to 24 months.

In our Chemical Processing market, net revenue for the second quarter of 2014 was $30.4 million, down about 10% from the second quarter of 2013's $33.9 million. Volume in this market was 1.5 million pounds, up about 6.9% in the second quarter, compared to the second quarter of 2013. CPI accounted for 26% of our net revenues, and our backlog increased about 3% in this area during the quarter. Sequentially revenue was up about 32%. And if you recall, last quarter I told you that the backlog had increased 55%, so we're seeing very good strength in the CPI area.

During the quarter we saw quite a few small projects utilizing some of the more common competitively priced alloys. We're currently working on some projects utilizing higher value materials but it's still too early to determine if those materials will be let. We mentioned last time with our backlog expansion that we were seeing project-related work starting to expand, and that trend is continuing. We're pleased with the increasing level of order activity in this market, and as I mentioned, there are a number of exciting design activities going on in this market right now, and many of them are energy-related, but there are also quite a few of what Haynes would call, traditional chemical applications.

The land-based gas turbine market totalled $21.8 million in net revenue in the second quarter, down roughly 28% from second quarter 2013's $30.2 million. Volume was 1.5 million pounds, down 16.3% from last year. This market accounted for 19% of revenue in the quarter. As we have mentioned previously, we felt a temporary slowdown would be coming in this market, as we shipped record volume into this market in 2012, and we had our second highest volume year in this market in 2013.

Sequentially net revenue was up 20.4%, and more importantly, the backlog increased over 39%. Similar to the comments we made last quarter about aerospace and CPI, we can't determine if this market has bottomed, but the increase in revenue combined with the dramatic increase in backlog is encouraging. This market has historically been very choppy as far as demand patterns, especially since so much of it recently seems to be tied to MRO demand patterns. But I feel that our people are in touch with customers on a regular basis, and I feel confident that our plant can respond to the needs of this market.

Similar to what I saw in aerospace we saw quite a bit of expedite activity associated with this market in the last quarter. Again due to the record levels we shipped in fiscal 2012 and fiscal 2013. I'm still cautious about the volume needs of this market, but I think that its fair to say that I am migrating from caution to cautious optimism. By the way I always like updating you on new applications, as you may recall we're finally able to give you some details about customers and applications in the shareholder letter about some aerospace wins in Haynes 282, I am not able to talk through the specifics for non-disclosures, but the second quarter we received orders in the land based gas turbine market from 2 OEMs for new parts utilizing Haynes 282 for evaluation. They are not yet production units, but as most of you realize, it is a pretty good move when you come off the concept or the design boards, and now we have now moved into prototype stage. It's pretty much that first stage to winning these things for qualification.

Finally on our other markets, we had net revenues of $11.4 million in the second quarter of 2014, down 5.4% from the second quarter of last year. This market accounted for 10% of our revenue in the quarter, and the backlog increased over 49%. Activity in this market has increased in industrial applications for heat and corrosion, our key elements in the processing, and just to give you some examples, that is things like surface coatings, heat treating equipment, some overlay applications. Those are where we're beginning to see some of the driving force in this area.

Turning to our capital projects. On our tubular product expansion we have commissioned the new heat treating equipment, and we are currently installing and commissioning some of the new inspection lines, specifically we've got them functioning mechanically and electrically, so now we're running and setting standards for calibration, as well as round robin testing with existing equipment. Again a lot of calibration, we're going into some of this test equipment that we've got.

We have completed the foundation work on the main two cold working mills, and started the mechanical installations also. As we mentioned when we outlined this project,we relocated quite a bit of equipment in this facility to create a safer more efficient material flow. We still expect to commission this equipment by the end of the calendar year, the construction, equipment relocation, commissioning and calibration work is difficult, when we're running a plant so close to capacity, and it has impacted our volumes. But I feel that our people are managing the process well, and we'll continue to grind through this process.

On our flat roll expansion, it is also running well, we completed the installation of the new furnaces in the hot working area. We are now started the installation of the new heat treating furnace in our plate facility, along with the necessary support equipment, instrumentation, and controls. Like the tubular project, we expect to have this equipment commissioned by the end of the cal ender year. Many of the pieces of equipment, like the shape correction equipment and the inspection equipment, are already up and running, and we're experiencing the benefits of those pieces of equipment right now. But the real benefits of this project will occur once we see demand return in the marketplace.

Finally on our new IT system we are up and running in Europe, and the cutover of the financial and maintenance and some of the other support areas here in the US went well during the quarter. Originally we had planned to cut over our North American distribution operations on May 1st, however with the increases we're seeing in activity, and the increases we expect to see in activity, especially through our distribution centers, some of that transactional activity, as the marketplace returns, typically can get very brisk especially towards the end of the month.

What we're going to do is we're going to push this out and implement the North American distribution areas towards the end of the year. As a result instead of completing this project by the end of this year, we expect to complete it in mid-2015. Just reminding you this system, for instance, cuts us from three different IT platforms in Europe, none of which connected into the system here in the United States. We also have multiple systems here in North America. We'll finally get the entire Company onto a single platform. It's a large and necessary task. This we feel will improve our communications, customer service, response times, analytics, working capitol management, just a myriad of things that we think are necessary for Haynes to be world class worldwide.

With that, let me turn the call over to Dan for details on the financials.

Thank you Mark. Business conditions while they remain challenging appear to be improving. The backlog increased 12.3% during the quarter, pounds shipped increased over 30%, and net sales increased 23.1% sequentially from the first quarter. Our gross margin dollars increased by $3.8 million compared to Q1, but the gross margin percentage expanding from 5.6% of net revenues in Q1 to 7.9% in Q2.

While this is better, many factors continue to compress our gross margins this quarter. The largest item impacting our gross margins was competitive pricing, which continues to be a significant issue. While we have announced price increases that are expected to help expand gross margins in the second half of the fiscal year, projects shipping out of our backlog contains competitively priced orders that continue to pressure our gross margins. Recently increased volumes processed through the mill have resulted in improved absorption of fixed costs, however we're still impacted from prior periods where we had lower production levels, and unfavorable absorption, a portion of those higher costs have yet to flush through the P&L as the inventory sells.

This quarter higher spending for utilities during the winter were significant especially natural gas. Spending for natural gas was high due to high NYMEX market prices, but more significantly for problems with the pipeline, which caused very high rates at the city gate. Some of this issue was mitigated as the Company has a portion of its natural gas usage on a contract, a fixed rate. However the portion not fixed resulted in higher spending in the quarter slightly over $1 million, that hits our cost of goods sold, as the produced inventory sells. The actual P&L impact on this quarter was $225,000 pre-tax,$150,000 aftertax, or $0.01 on the fully diluted earnings per share.

As we previously mentioned, the decline in the market price of nickel over the course of fiscal year 2013 and the beginning of fiscal year 2014 which caused customers to delay orders for the Company's product, contributed to the overall decline in our volumes. This resulted in a FIFO lag where we're selling off higher cost inventory against sales at lower nickel prices. In the latter part of the second quarter of fiscal 2014 the market price of nickel began increasing, while the FIFO lag still unfavorably impacted our margins in the second quarter, it was to a lesser extent than in prior quarters. Also impacting margins in the second quarter and also to a lesser extent than the first quarter, was a fixed price nickel agreement pursuant to which the Company agreed to purchase a portion of its nickel supply at a fixed price. Subsequent to March 31st, 2014, the Company canceled the fixed price component of the agreement on volumes not tied to customer and fixed price contacts.

Overall as was mentioned in the press release in the second quarter we saw volumes increase, nickel prices move up, backlogs grow, and lead times extend, and we remain cautiously optimistic about the continuation of these trends. Related to the tax charge, a state tax law that was passed at the end of the quarter reduced the future tax rate in the state of Indiana. While this is expected to be a future benefit, it required us to lower the value of our deferred tax assets, which resulted in a one-time noncash charge to tax expense during the quarter. This tax charge was $0.03 per fully diluted earnings per share.

Backlog was $202.3 million at March 31, 2014, an increase of $22.1 million, or12.3% from the $180.2 million at December 31, 2013. Management believes that the improved order entry volume is due to the customers beginning the process of increasing their stock levels to accommodate the demand in the company's end markets, along with the rise in the nickel market prices. The backlog for all of the Company's major markets increased in the second quarter of fiscal 2014. The April 30, 2014, backlog increased just slightly to $203.6 million.

Capital spending, a key element of the Company's business strategy is to capitalize on strategic equipment investments. Capital spending in the first six months of fiscal 2014 was $24.3 million, and the forecast for capital spending remains at $57 million. The actual and planned capital investments of approximately $125 million over the 3-year periods of fiscal 2012 through 2014 are expected to allow the Company to increase capacity, enhance product quality, reduce costs, and improve working capital management. These are significant investments, and we're very focused on the execution and completion of these projects. We remain committed to realizing the expected shareholder return on these investments.

Cash flow from operations for the first six months of fiscal 2014 was $22.6 million. Our controllable working capital was $254 million at March 31, 2014, a decrease of $19.4 million, or a 7.1% decrease so far this fiscal year. However our inventory is beginning to increase in response to our higher backlog, which is expected to continue to reduce our cash balance. Our cash balance at March 31, 2014, was $62.1 million. Even with our significant investments in capital spending, our cash position remains strong and our revolver balance remains at zero borrowing.

Outlook, revenue and earnings for the third quarter of 2014 are expected to improve from those of the second quarter of fiscal 2014. Business conditions appear to be improving, and the Company may generate net income in the third quarter. Management remains cautiously optimistic about the continuation of these favorable market trends. In summary, the solidifying demand appears to be signalling the end of the relatively long period of destocking. However the extent and pace of the recovery still lacks visibility. We continue to focus on growing our net revenues, and regaining the price and margin levels that experienced compression during the downturn.

With that, I'll now turn the discussion back over to Mark.

Thanks, Dan. Second quarter showed signs of improvement and demand across all of our end markets. We're a long way where we want to be and where we need to be. We're still processing some of the lower value, a better way to say it may be the lower priced orders that were booked during the downturn as Dan had mentioned to you, and we're still clearing some of the cost inefficiencies of that period, when we were operating well below current levels.

Compared to the past five or six conference calls I think this is the first time I am able to report to you that we had sequential improvements in net revenues and backlog expansion in each of our target market areas. We know there will be ups and downs as we move forward, but we're already in the process of managing and upgrading the product mix, ramping up production in our manufacturing facilities, moving our expansion and upgrade projects closer to completion, and we feel confident in our market position with our customers.

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

Thank you. (Operator Instructions). Thank you, our first question comes from the line of Edward Marshall with Sidoti. Please proceed with your question.

So my first question is, if we look at the transactional orders and I know you mentioned there was a pick up there, first I'm curious if there are specific markets, or whether it was broad based, and if there is a way to maybe quantify either from a sequential or year-over-year improvement that we can talk about?

Well, we've been watching the transactional business very carefully, and the pick up as far as the market goes was a little more on the aerospace land based gas turbine side. But it was across all of the markets. I would broadly say it was across all of the markets. Typically our transactional businesses is around one-third of our business. This quarter it was higher. It was not quite 40%, not that high, but it was higher than 33%. We're seeing that. That's a sign of restocking inventory in some of these markets. We view that as a pretty positive sign, as well as picking up the price of the current market price of nickel is a positive sign for us as well.

Just to give you more color on it. In March the transactional activity, the order entry activity in March was the strongest of the months in the quarter. Again qualitatively a lot of it was people were now talking about, holy smokes, we have got to beat the nickel. We started to see that pick up pretty dramatically in March. What I will say to you though as we moved into April we then saw that pull back. It is a very dynamic market place right now as far as where people are going with the transactional activity.

How much would you attribute to maybe a catch-up because of weather in the first part of the year, and March was more of a catch-up and then maybe more of a moderation in April, or is it more related to, and this is the million dollar question, but is it related to the wait and see and let's see where nickel goes, maybe it got ahead of itself?

We lost about three production days in January due to weather, and I'm answering your question from the point of view of Haynes. Dan and I were talking about this. We didn't want to talk a lot about weather. A year ago we had a flood here. We're kind of in the middle part of the country, and in central Indiana, we're going to have weather issues. We didn't really talk a heck of a lot about whether, and with respect to customers I don't think weather really impacted them that dramatically at all. We had a couple of customers up in the Northeast that had to shut down for a day or two. For us, I would have liked to have seen us ship some more material in the first quarter. But like it always is in this type of a situation, remember just October, November and December we're doing the opposite. We were cutting as much cost as we possibly could, and building that cash position.

All of a sudden we flipped a switch in late January and it became, okay now let's get as much material out as possible. We're still in that phase of ramping up. That might be the best way to put it. It's hard to say anything weather related to me. This is more about the ramping up process. Dan was talking, a lot of the profitability right now, we have to cleanse out and cycle out some of that business that was taken in that October, November, December, early January time frame, and we have got to cleanse out that cost structure from when we were clearly sub-optimizing the efficiency in the plants, taking out as much cost as we could. But clearly you can't take out as much costs as the problems you have with absorption, and the way that we amortize our costs, we have got to cleanse that out of the system. I probably gave you more than you needed on that, but I just wanted to give you a little more background.

That's good color. When I think about the backlog information that you provide, andI appreciate the April 30th absolute dollar value, I'm curious if you have, maybe it is more appropriate right now to look at it from a volume perspective, I wonder if you have that measure? You may not. I know the March 31 volume levels, but I'm curious, if you have the April 30th volume level, and if that materially changed?

It did not. You're talking about pounds in the backlog? It stayed consistent at about 7.5 million pounds.

Pounds in backlog, right. Okay, as I look, you mentioned cancelling your nickel contracts? What happened there?That was a negative as we moved into the first half of the year. Now it has disappeared? Did I misunderstanding that?

No, with the nickel prices moving up a bit we had the opportunity to for those who were above the fixed price customer agreements. We were able to neutralize those. That's what we've done to neutralize our position going forward. Which is great. We want to be in a neutral position. We do have some of those higher cost items still in inventory that we will flush through in the next few quarters. But that impact of those contracts will certainly diminish in the future months as we go forward.

Did you buy a financial hedge. Or was it just an outright cancellation?

It was a cancellation through our vendor of nickel.

Finally just strategically thinking, the consolidation that is going on in the European markets with Alstom maybe even Rolls Royce to this point,big turbine manufacturers, or customers for you. Do you suspect or do you think there would be any kind of customer issues as we move forward? How should we think about the consolidation?

We're positioned very well with all of them, and especially the ones that you've mentioned. I think we're very well positioned and remember a lot of work we do goes through sub-tier fabricators. So there might be changes and adjustments through the sub-tier fabrication supply chain. Again, this is a big reason we run our distribution facilities, and we do a value-added cutting, I think we're very well-positioned all of the way through those supply chains.

Perfect, thanks, guys.

Thank you.

Our next question comes from the line of Julie Yates with Credit Suisse. Please proceed with your question.

Good morning.

Hey, Julie.

Hey, Julie.

Mark, you talked about seeing the bottom in demand but the average selling prices are continuing to decline, and I understand some of that has to do with, as you work through your backlog, where the prices are more competitive. Do you expect selling prices to start to firm in H2 based on the nickel, and now that you have put in a couple of price increases?

Julie, I think it is the easy side of the business, I won't say easy, that sounds wrong, but we have to follow nickel. Bumping prices up based on nickel, we have to do it. The sales guy walks in my office, and says it's too competitive, no, get the nickel. That's the easy side of it. The other side of it, that's one of the things that I talk about with being a smaller mill. Our objective is to make sure that we manage our mix through our capacity, and fill the mill and raise prices might be the best way to put it. In areas, selective areas where we're tight on capacity, on some of our premium products especially, that we will make the most aggressive price increases, what we're seeing in the marketplace as well is even in some of the more common alloys, we'll call them commodity, but they typically are also specialty alloys for some of the other people in the market, but we're seeing prices increasing there, so we're staying with those as well.

One more comment on it Julie. If you take a look, going back through history, and the downside of this downturn was that it was so prolonged that pricing really took a beating. Especially if you compared it to the 2009 downturn. That was quick, rip off the band aid price and sell, but then within 15 or 18 months we started to see the order book come back, and subsequently we were able to start taking pricing actions. This one, we're 24 months into it. It was a death by a thousand cuts. Pricing fell more in this downturn than it did in 2009, even though nickel did not fall as far in this downturn as it did in 2009. The road back, it typically takes us on the order of four quarters to keep pushing these things through and getting the pricing back. That is just typically, you just keep grinding that price number back upwards.

Okay. Where are you on cash utilization across your businesses?

Again I would say right now in the premium melt, when I say premium melt, that is the vacuum melting area, that is pretty close to capacity. Air melt gosh, I think the last time we talked to you, that was on the order 50% or 55%. That's closer to 70% right now. The tubing facility obviously is full, and we've complicated things with the CapEx work we're doing down there. We've got people working very hard down there, but that's full. Wire is probably running 50% to 60% capacity. A lot of available capacity there. We're booking some nice orders in the wire area with some nice applications too. That's very exciting.

As we look at sheet operations, plate operations, those are starting to fill, we are probably in that 75% capacity right now as you move into the finishing operations. A lot of that is you can see if you take a look at our material break down right now, you can see we've increased the whip. That capacity is up, we're moving bumping up against some capacity issues in that area, and we are trying to reposition some material as we ramp up and try to get caught up with where demand is right now.

Okay, okay. And then finally just on the aerospace destocking, any more specific comments that you can provide? Is it stabilization or more of an acceleration, and when do you expect shipments to more closely align with build rates?

I think the wild card in that, Julie, as I mentioned in my commentary is that we did see a little bit, holy smokes let's get it in here now because nickel is going up. Think of what nickel has done since we spoke last. I want to say that nickel is in the mid-6s in January, and I think today that it was above 9. Sometimes Dan and I are called a little conservative compared to some other people, but one of the things that goes through my mind is yes, we have seen some demand increases in this quarter coming through in both order entry and in shipment. I just want to make sure, I need another quarter or so, to see how much of this was people in a purchasing mode to beat the nickel, and is it going to soften in this next quarter because they over bought? Or are we truly at that destocking phase, the destocking has ended, and now we'll start to see that demand. Me being an engineer, I have got one data point of good demand that came through this quarter, I need to see a little bit more of that to be able to really be able to say to you guys to say yes, things are picking up and strengthening.

Okay, understood. Thank you.

Our next question comes from the line of Dan Whalen with Topeka Capital Markets, please proceed with your question.

Great, thanks, good morning, everyone.

Good morning, Dan.

I want to circle back to the nickel contract question quickly. There were no incremental costs associated with the cancellation. Since nickel is close to $9, it's kind of a wash. Is that the way to think about it?

Essentially yes, the fixed price component and the volume commitment of those is canceled. So that we're buying nickel related to that on the spot market now. So we have got a great relationship with our vendor and we were able to do that really at no cost.

That's great. You guys are working through the capital investment process and making some great changes here. I think eventually you guys have pointed to gross margin improvement of 200 basis points, or potentially that, but I imagine you are also having a base level revenue. Can you remind us, are we doing it to kind of get back to a certain level where we start to see that leverage so to speak?

Yes, we do. We need that. And you can break it down on the tubular side that is not as much of an issue because we are at capacity. We do have the customer demand. Whenever we get that product finished, and all of that equipment commissioned, we can start building up those volumes. I think we're ready to go on that side of it. However, on the flat product side we certainly do need that demand level to return to where it was back in the 2012 when we made that assertion. If it gets back into those volume levels then we can start seeing that leverage overall as you mentioned 2 to 4 points on our overall margin. We're looking forward to that.

That's great. If I may just ask one more. You certainly have been using your cash for some great investments. You still have a very healthy cash position. What are your thoughts on the utilization on that going forward, now that major CapEx programs are kind of done here?

I wouldn't say that we're not done yet with CapEx. We still have quite a bit more throughout the remainder of this year. As I mentioned in my prepared remarks, we have increased inventory. As business continues we'll continue to increase inventory. On our balance sheet our accounts payable is quite high. You get the inventory in, it goes into accounts payable, andthen you start paying for it. We do expect that cash balance to decline over the next quarter. So beyond that we certainly have this discussion with our Board often on capital allocation, and we'll go from there on what the next step is. The CapEx projects that are currently under way, that is our focus. Once we get those completed and executed, then we'll take the next step.

Great, thanks a lot.

Yes.

Our next question comes from the line of Matthew Dodson with JWest. Please proceed with your question.

Can you talk a little bit about your thoughts relative to when Athens comes on for Carpenter, will that make a more competitive environment? Does that concern you about pricing at all, or are those products that they produce there, don't overlap with yours?

Carpenter specifically. Carpenter is very complimentary to Haynes. If you look at the key members of this marketplace, and I'm talking really the high temperature alloy marketplace, probably moreso than anything as opposed to corrosion, but a little bit of corrosion, Carpenter is considered what we call a long product to manufacture, so bar products, ingot products, those types of products, where we're a flat rolled manufacturer. The other people in the marketplace, people like Allegheny Technologies, they do both. So something like a Carpenter and Haynes combined are similar to the capabilities of an Allegheny Technologies, or similar to a Special Metals Corporation, who is part of Precision Cast Parts. So the Carpenter, specifically happens, the premium melt capabilities that is more of a long products discussion, as opposed Haynes is really a flat products manufacturer.

Got it, great. Thank you so much.

Sure, no problem.

(Operator Instructions). Our next question comes from the line of Chris Brown with Bank of America Merrill Lynch.

Hi, good morning, guys.

Good morning Chris.

We've seen some supply issues at nickel mines around the world here recently, is there any concern that your supply might be impacted, or do you feel pretty comfortable with your diversity of suppliers?

We feel comfortable but I will say on the nickel side, we have an agreement that is a sole supplier of nickel, but we've had this relationship for quite some time, and we feel very comfortable that we'll get all of the product that we need. We certainly look at all of the other products that we purchase as well. Certainly with the issues going on in Russia for example, we look at any product that originates out of Russia, and ensure that we have alternative sources for those, and we've made a little change on some of the smaller items, but nothing significant, nothing that concerns us. Just to give you more color on that, Chris.

If you go back to the 2010 or 2008 time frame, when the inventories were sitting at 60,000 or 70,000 tons, and today they're at 260 tons, and we had no disruptions in nickel supply there. Our relationship with our nickel supplier is excellent, and they've really done some great things for us. History is a good element to look at with something like this, and again we've never had disruptions.

And then secondly, what are the lead times of your primary flat rolled products, and can you give us some color on how they've turned it over in the last few quarters?

It goes back to a capacity utilization question that was asked earlier. The lead time itself, the manufacturing time for let's say a traditional light gauge sheet product might take 12 weeks of manufacturing, but right now if that is a vacuum melted product, you might be out 26 weeks. Now the thing about Haynes to be cognizant of is we're alwaysproducing to stock inventory, not just specific made to order inventories. If you are a guy that comes in off of the street with an odd size or made to order inventory size item, you might be in that, I am sorry but we're quoting 26 weeks. However if you're ordering common sizes, remember Haynes is stocking common sizes that we will sell to a myriad of combustible manufacturers, or a myriad of other manufacturers of other products. That's really the distribution system kind of cushions that blow. Like I said, we have certain market inventories we are producing all of the time based on the demand that we are seeing in the end use area.

Thank you, good luck.

You bet.

Thank you.

We have no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thank you, Christine. Thanks everybody for joining us today. We appreciate your time. We appreciate your support of Haynes. The marketplace does appear to be strengthening, as Dan has mentioned and I have mentioned, we still have some cost items that have to flow through, as well as some lower value pricing levels to flow through.

We feel really good about the fact that we saw sequential revenues increase and sequential backlogs increase from first quarter to second, but we are still very caution about where we see the business going. We're very pleased with where we are right now as far as the slope of things. We have a lot of things that still need to get done to get back to where we want to be. Right now we're very pleased with the direction of the end markets. Thank you very much for your time. We look forward to updating you next quarter.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.