Haynes International Inc (HAYN) 2014 Q3 法說會逐字稿

Greetings and welcome to the Haynes International, Inc. third quarter fiscal year 2014 financial results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being record.

It is now my pleasure to introduce your host David Van Bibber, Controller and Chief Accounting Officer. Thank you. 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 contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21-E 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 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, and thanks for joining us today. Hopefully, you've 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 finance results.

Net revenue in the third quarter was $126.3 million, up 2.2% from last year's $123.6 million. Pounds shipped in the third quarter were roughly 6 million, up 9.3% from last year's 5.5 million. Net income was $2.1 million in the third quarter of 2014 versus a net income of $5.3 million a year-ago.

As we mentioned in the press release and discussed in our last call, it appears we are seeing the end of the de-stocking and starting to see signs of an upturn the marketplace. Volumes in the industry are strengthening, as evidenced by larger backlogs and, in many cases, longer lead times. If you noticed sequentially, we saw increased revenues in each of our end-markets, especially aerospace and land-based gas turbine, which were each up 15% sequentially.

Also, as mentioned last time, we felt we were nearing the bottom in pricing. We started managing our mix pretty aggressively in the end quarter and continued that activity in the third quarter, testing price points and attempting to migrate our business to a higher value mix. We feel it will take a few quarters for overall pricing to bottom and start moving up. You will that notice backlog has stayed relatively flat. That's a function of us managing our mix, the available capacity we have in our plants, and the higher sales levels we have seen over the last two quarters.

We started to see early signs of overall average selling prices bottoming and we expect to start seeing that our average selling prices will start to rise over the next quarter or two. By the way, July continued the strengthening trend.

Dan will give you information about the backlog, but I will just quickly mention that the quality of order entry we saw on July was our best of the fiscal year. I will qualify that by saying we do anticipate a slowing in August, due to the European vacation period, but so far we are very pleased with what we're seeing in order entry trends so far this year.

We're continuing to see more confidence from our customers. The customers I visited over the past few month are clearly getting busier, even in the land-based gas turbine area, where I think I have been pretty bearish over the past few quarters, due to our high shipping levels in the prior two fiscal years. Those that I visited in that market have definitely seen an increase in activity.

We're still very cautious and I want it remind you that we're still pushing through a number of lower-value orders through our system and we will feel that impact over the next quarter or two. Also, across the industry, as we have mentioned previously, volume levels are not bad and they are improving, but average selling prices are still not where we need to them to be.

When I refer to managing our mix, I'm saying that we have to pull in higher value business to get ours, Haynes, to where we need to be. Competition is still intense in the marketplace and certain targeted areas are still seeing very low price levels, in my opinion, but it appears many of our peers are also starting to see demand increase and their lead times are pushing out, as well, in select areas.

Again, it's too early in the cycle to make any definitive conclusions, but at this point, we feel good about the volumes, starting to increase backlogs, and we feel good that we're starting to see some lead times pushing out. And as I mentioned, we're already started, upgrading our product mix. Let me move into the markets to give you some color on what we're seeing.

Net revenue in the aerospace market for third quarter of 2014 was $54.2 million, up 6.2% from the third quarter of 2013. Volume was 2.6 million-pounds in the third quarter, up 24% from third quarter's 2.1 million-pounds. Aerospace comprised roughly 43% of our net revenue in the quarter. Our backlog in aerospace increased during the quarter, by roughly 1%, in addition to the sequential increase in revenue of 15%.

I mentioned, last time, about expedites increasing, we have stepped up shipments in this market to over $50 million in the quarter from below $40 million just two quarters ago. So, I'm pleased with the speed of the ramp-up from our people in our plants.

Also, we shipped the last of that one-off order we mentioned last quarter. If you recall, that was the ingot order that we had received. It was substantial, as you can tell from the impact that it has had on our average selling prices in this market, but as we had mentioned, it was good volume across unconstrained equipment. By the way, this is one area, in my opinion, where the backlog being flat this quarter may be a bit misleading.

With that ingot shipment clear of our system, and the backlog still holding up, even at shipping levels 35% higher than two quarters ago, it tells me that we've backfilled the order queue, or our backlog, with some of our higher value products. I will also mention to you that we've recently completed a contract, and I'm pretty confident -- Dan will update on the backlog, but I'm pretty confident in mentioning to you that I think the backlog, especially in the aerospace area right now, is probably about $10 million understated. We just completed a contract and so we will be seeing orders for that business coming in shortly. Again, that's in the Aero Tubing side of the business

I think you know the story at the poll end of the supply chain. Volume in Airbus remained very strong, with exceptional backlogs, and plans to continue ramping up production. At the sub-tier levels in the [aero-engine] supply chain, we're seeing stronger pulls from our customers and we have committed to supporting their needs.

In our chemical processing market, net revenue for the third quarter of 2014 was $30.6 million, down about 4% from the third quarter of 2013's $31.8 million. Volume in this market was 1.4 million-pounds, down about 1%, compared to third quarter of 2013. CPI accounted for 24% of our net revenues and our backlog increased about 1% in this area during the quarter. During the quarter, we had a shipment of some specialty applications, I had mentioned to you previously.

In fact one of those orders was originally planned for the fourth quarter of 2014, but we had a partial ready and the customer needed expedited, so the partial went out in June. We've discussed this type of thing with you in the past, some of these higher value specialty projects can have a pretty dramatic impact on our numbers and our quarter. This is one of those examples. It's also one of the reasons we have both caution and optimism looking forward.

We're working on a number of specialty projects, but some the geo-political instability we see around the world right now could have an impact on whether those projects come to fruition. Pricing remains very competitive in the CPI market, especially for the higher volume and what we call non-specialty applications. But as we have mentioned previously, we're very pleased with the level of activity we're seeing from the design community on specialty applications.

The land-based gas turbine market totalled almost $25 million in net revenue in the third quarter, up roughly 3% from the third quarter of 2013's $24.2 million. Volume was 1.6-million pounds, also up about 3% from last year. This market accounted for approximately 20% of our total revenue in the quarter. The backlog in this area was up 39% in the second quarter, and then decreased 5% in the third quarter. Similar to what we have seen in aerospace, shipments in this market are up 37%, compared to just two quarters ago.

Demand has been historically very choppy in this market, but we have seen some longer-term, blanket orders starting to make their way into the system, primarily from some of the second- and third-tier fabricators. My opinion, I believe this is indicative of some the contractual settlements for supply in the supply chain, between the primes and their fabricators.

We mentioned a few quarters ago that there was quite a bit of volatility in the supply chain, as contracts were being negotiated and renegotiated, as commodity prices continued their migration downward. We believe the change in nickel prices may have finally helped resolve several of those contracts, and now we're seeing some of the demand pick up, as inventories were adjusted during those negotiations. We're still cautious about this market, but I think it's fair to say that we're feeling better about these contracts being settled. Once the larger global economic environment settles in, and economic expansion starts, I think we will see increased demand. Volumes are picking up, but we have a long way to go in getting this market back to peak performance levels.

The nice thing for Haynes is that we're seeing a lot of application engineering work being undertaken to increase engine efficiencies, and that requires better materials, like Haynes 282. I think we will see new generation of engines operating at higher temperatures, which will be good for all of us in the nickel and cobalt-based materials industry.

Finally, our other markets had net revenues of $12.6 million in the third quarter of 2014, down 14% from the third quarter of last year.

This market accounted for 10% of our revenue in the quarter, and the backlog increased 13% during the quarter. Demand, as you know, is spread out over a myriad of markets, like flue-gas desulfurization, industrial heat treating, brazing, energy, and consumer-related applications. In this quarter, FGD, we had a pretty good quarter in FGD, which we haven't had in quite some time.

It's still not at two- or three-year ago levels, and I don't think it ever will be again for us, but again, this past quarter was much better than, I will say, the prior three quarters. So, FGD picking up a little bit there. And we picked up some new consumer applications in the quarter; our people in the field doing a nice job there.

Turning to our CapEx projects. On our tubular project expansion, we're in the process of commissioning the large cold working mill, and we will start commissioning the smaller cold working mill next month. This project is on time and on budget. The inspection and finishing areas, along the with heat treatment area, the heat treatment section of the new building, are already up in operation. We expect to have the commissioning largely completed about the by the end of the calendar year

And just to let you know, in the last three months or so, I have mentioned to you, previously, how the people down in a Louisiana are really working through a disruptive work environment, with all the project work going on, and the last three months, they had very, very good output month. So, a lot of good work going on from our people down there. On our flat roll expansion, it's also running well. We've largely completed the project.

We have some heat treating equipment coming in, and obviously, when you have that, you have some support equipment for that heat treat to install and commission, but that's really it for that project. The rest of that project is up and operating. Like the tubular project, we expect to have this project largely completed and the equipment commissioned by the end of the calendar year.

Many of the pieces equipment, like the finishing areas, things like shape correction, inspection equipment, et cetera, are already up and operating in production. And our IT system, we mentioned last time that we're extending this project to ensure that when we cut over to the new system, we minimize any potential disruptions. We're still on plan for that cutover for the North American operations, at the beginning of the new fiscal year.

Finally, in the press release, we've mentioned that we're moving out some of our planned capital spending into next year. There's no change in the overall long-term strategy. It's just a combination of trying to get all the projects completed and utilizing the resources of the Company wisely. In some cases, we just don't feel we can take the downtime on the equipment right now, as compared to a year ago or so when we were laying out the plans; we were nowhere near as busy as we are right now. So, we want to make sure that we have material position in the right spots and will be able to take the downtime when we're prepared for it.

Now, also, in some situations, we are reassessing some of the plans. Like I said, there's no change in the long-term strategy. We still have these projects active and the spend is still planned, but we are revamping some of the plans and the timing to fit current market conditions.

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

Thank you, Mark. Our financial results have improved in the third quarter, compared sequentially to the second quarter of this year, moving us into positive, quarterly net earnings.

Pounds shipped increased to over 6 million pounds for the quarter. Net sales increased 9.5% sequentially from the same quarter, and our average selling price per pound is beginning to strengthen. Our gross margin of $14.1 million increased by $5 million, compared to Q2, with the gross margin percentage expanding from 7.9% of net revenues in Q2 up to 11.1% in Q3. This is nearly double the margin percentage we had six months ago.

While this is better, we still have a distance to recover and get back to normalized margin levels. Business conditions are improving and we are optimistic about the business levels being reported by our customers; however, we are cautious regarding the pace of the margin recovery as some headwinds to our margin recovery remain in the near-term.

These include lower-priced orders in the backlog that were booked in previous quarters that may weigh on our margin percentage, as they are shipped over the next couple of quarters. We have announced and implemented price increases that are expected to help expand gross margins, however, it takes a while for these price increases to gain traction, as they do not apply to existing contractual business or to orders booked into the backlog, prior to the price increase.

We are managing our product mix and pricing strategically so that we can make progress on recovering our margins that became compressed during this cycle. In addition, we are 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 would include the higher spend for natural gas during the winter.

Natural gas spending for the portion not contractually fixed was very high in prior periods, but hits cost of goods sold, as the inventory sells. The estimated P&L impact of this quarter for the high natural gas was approximately $600,000 pretax, $400,000 after tax, or $0.03 per fully-diluted earnings-per-share, and will likely be a similar amount next quarter, as well.

The market price of nickel increased to over $9.00 a pound, and softened, to the mid- to low-$8.00; therefore, the typical, favorable tailwind from rising nickel with FIFO was tempered and resulted in a relatively neutral impact on the quarter. As a final thought on margin, again, we expect margin to improve, but we are cautious regarding the pace of the margin recovery. SG&A costs, combined with research and technical costs, were 8.7% of net revenues in the third quarter, compared sequentially to the second quarter of 9%.

Operating income was $3.1 million, which was $4.4 million higher than the second quarter's operating loss of $1.3 million. [An] effective tax rate this quarter of 32.9% puts net income at $2.11 million, compared sequentially to the second quarter net loss of $1.2 million and the first quarter's net loss of $3.5 million.

Outlook. Revenue and earnings for the fourth quarter of fiscal 2014 are expected to improve from those of the third quarter of fiscal 2014, as business conditions appear to be improving. While favorable trends are expected to improve our results, pressure on margins will continue in the fourth quarter as lower-priced orders from the backlog are shipped. Conditions have improved and Management remains cautiously optimistic about the continuation of these favorable trends.

Backlog was $204.7 million at June 30, 2014, an increase of approximately $2.4 million from March 31, 2014. Backlog has increased 23%, or $38 million, over the course of fiscal 2014. The July 31, 2014, backlog increased by $10.2 million during the month to $214.9 million. Our strategic capital investment projects are progressing well, as we are nearing completion of these projects and we remain committed to realizing the operating leverage and expected shareholder return on these investments.

Capital spending in the first nine months of fiscal 2014 was approximately $33.3 million, and we expect aggregated capital spending in fiscal 2014 to be approximately $40 million. Compared to our last quarter's forecast, that is pushing about $17 million from this fiscal year to our fiscal year 2015. And as Mark mentioned, this is no change in our overall long-term strategy. We still have these projects active and the spend is still planned in fiscal 2015

Net cash provided by operating activities was $24.1 million in the first nine months of fiscal 2014. Controllable working capital was $261.2 million at June 30, a decrease of $12.3 million during fiscal 2014.

Our cash balance at June 30 was $52.4 million. Cash is expected to decrease in the fourth quarter of fiscal 2014 as we pay down Accounts Payable, related to inventory investments required for the increasing levels of business. Even with our significant investments in capital spending, our cash position remains strong and our revolver balance remains at zero borrowings.

In summary, we continue to focus on growing our net revenues and regaining the price and margin levels that experienced compression during the downturn. The long-term demand in our markets continues to look favorable and our capital expansion projects are expected to position us well for future growth.

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

Thanks, Dan. Third quarter built on the momentum we feel we started in the second quarter. We're pleased with how we're ramping operations and we're pleased with the direction we're seeing from our core markets and accounts. We're still processing some of the lower-value orders that were booked during the downturn and we're still clearing some of the cost inefficiencies of that period when we were operating well below current levels.

We expect some ups and downs over the next couple of quarters, as we clear out lower-value products and we have some inconsistent flow of project work. But overall, we feel good about the direction of our end markets. We're already in the process of managing and upgrading the product mix, ramping up production in our manufacturing facilities, and moving our expansion and upgrade projects to completion. We feel very confident in our market position with our customers.

With that let's open it up to your questions.

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

Morning, guys.

Morning.

Morning, Ed.

So, I wanted to talk about pricing for the basis of my questioning, for the most part, and it may seem odd asking about the spot market in [transactional] orders, but I think that could ultimately discuss the pace at which pricing may come through, as aside from the different buckets of pricing you do have?

You talked about it picking up toward the end of the quarter. I'm just kind of curious as to where we are in the transactional order bucket and how fast we could see pricing increase there?

Well, we typically see -- transactional is about a third of our business, and we have seen that, a slight uptick from that percentage, and we're still seeing that now. And the uptick that you mentioned was probably more in the July than in June. As Mark mentioned, the quality of that order entry was the best we have seen throughout this year, so as that flows through the P&L, that should help strengthen our pricing, as well.

Yes. Also, too, Ed, if you think about it, I know with June being the end of a quarter, a lot of accounts that we have, even the contract pricing that we have with accounts, resets, and this is to the prior three-months average nickel. So, this is the first time some of them, starting in July, will be the first time some of them are starting to see the increase in nickel prices, as well.

Okay. Thank you, both.

You get a pretty good jump as you -- at least, we saw a pretty good jump in the average selling price of bookings in July.

And customers accepted those, from my understanding; is that right? The price increases?

Yes, the transactional price increases. Now, my opinion on that, and that's why I say managing the mix, now my opinion on that, we had a couple things going on in the backlog, right? One is, what was a good order six- or eight-months ago is not necessarily the price level at which we want to be entering orders right now.

So, there are certain pockets of business where we're pushing through price increases and if they're not accepted, they can go elsewhere to pick up that business, if it's available to them. So, that's one area of upgrading the mix. The other area is, things like contracts and things that have a quarterly adjuster are, for the first time, seeing, pretty much, a fairly dramatic change in nickel; that occurred over the prior three, four months.

You have discussed -- I'm going to jump down to a question that I was going to it save for little bit later, but. You've said that you've already increased product mix, and you discussed product mix several times throughout this call, I think you mentioned it specifically four different times, and you said, in particular you said, already increasing product mix this cycle, which is encouraging. I am curious as to what is the significance? And I understand the product mix equation, but I'm curious as to why, this early in the cycle, has that got you excited? And what the significance is to that?

I think the biggest part of that, Ed, really is, this is probably earlier than we've ever jumped into something like this. Almost, I want to say managing the backlog a little bit, and being willing to put business at risk, and aggressively going after some increases.

The downturn we saw over the prior seven quarters, we felt was so severe, from the point of view of average selling price, that as soon as we started seeing a ramping up of volumes, we didn't sit around and say, Oh, that's just a blip. That's a blip. It's going to drop back down. We said, Okay, right now, we've got some pieces of equipment that are starting to fill up. And we have really taken a very careful look at backlogs on select pieces of equipment, and in those areas we have said, Okay, we can be more aggressive on the price levels of these.

And I guess what I'm trying to say to you is, in my opinion anyway, we have started this process a lot more quickly in this upturn than we did in, at least, the prior one, when I was here. And again, mainly due to just how severely pricing degraded over the prior seven quarters.

Right. And finally, I guess I would ask any news on the titanium? Have you seen anything? I guess there's some well-published reports about the Russian sanctions and so forth. I'm wondering with your operations with titanium metals, have you seen any increase in demand for titanium?

If you think about it we're at capacity, and on the aerospace tubing side of our business. As I mentioned to you, we have seen better output in the last three months than we probably did in the prior six or eight or nine months out of our facility as some of the equipment has come online. Perhaps, and, more importantly, and I'm kind of going off the cuff here, so be careful, but I think fewer disruptions as the projects are coming through to completion.

But we have seen real good output out of our facility there. In answering your question for us it's been pretty flat. It's coming through at a better level now because we're getting more product out, but the orders have always been there. One thing that has changed, and we saw this in this July order entry, is some of the orders that we hadn't placed into the system in the prior, I'll say six months or so, we brought in in July. And I think there will be more of that occurring in the August, September, October time frame, as we've settled contracts, things like that.

Did you give us data on backlog through July? August is probably too soon. Did you give us that data this quarter?

Dan has the number for July right now.

Yes. The July backlog I mentioned was $214.9 million. So, that's an increase of $10.2 million for the month of July.

And was that price or volume driven, or a combination of both?

Really, a combination of both, but the quality of the backlog is improving, so pricing is strengthening.

Yes. You might say, if you compare it to the prior six months, it's much better pricing that entered the backlog in July than at any time in the prior nine months.

Great. Guys, that helps a lot. I appreciate it. Thanks, guys.

Thank you.

Thank you. Our next question is coming from the line of Julie Yates with Credit Suisse. Please proceed with your request question.

Good morning.

Good morning, Julie.

How should we think about the level of earnings improvement in FQ4? Dan, you just mentioned that the pressure on margins continue, but I imagine you will see some benefit from volume leverage. Can you earn enough to generate a profit for the year?

Well, we expect earnings to be better than it was this year. Oh, I'm sorry. This quarter. So, revenue and earnings better than Q3, but the cautionary note I gave was really just on the pace of the recovery. If you think about it, our margin doubled in the past six months, so the caution is that that pace, that kind of a pace, is going to be tempered a bit by the lower-priced orders in the backlog, and plus, some of the costs that still have, yet, to flush through. So, we expect it to be better, just maybe not quite on the pace that you have seen in the past couple quarters.

Okay.

Does that help?

Julie, if I could throw at you, too, just one of the things we don't really -- but, [for instance], I mentioned it in my part of the talk, we did a little bit better in the third quarter than we had anticipated and a lot of it was due to that project, that half of that project shipped early. The other half of that project is scheduled into late in the fourth quarter or early in the first quarter.

Like we did this past quarter, third quarter, if it's ready and the customer can take it, we'll get it out fourth quarter. But that's where some of the cloudiness -- these projects are significant to us and it's sitting right there, right now, on the cusp of fourth quarter/first quarter.

Okay. And then, I was a little surprised to see aero pricing remain so weak, with destocking now coming to an end and demand recovering. Can you talk about the competitive dynamic and what you're seeing in that space?

I will tell you what the big thing on that is, what we see right there is, probably, similar to the last quarter, we saw the shipping of the other half of that ingot order that we had come through. So, we expect to see that bounce up a little bit as we go into the next quarter. Dan, if you want to add to that?

No. That's it. A little more of that project shipped in Q3 than it did in Q2. So, that did kind of depress the average selling price of aerospace. So, without that, it should normalize in the fourth quarter.

Okay. Thank you very much.

Thank you. The next question is coming from the line of Phil Gibbs of KeyBanc Capital Markets. Please proceed with your question.

Morning.

Morning, Phil.

I just had a question on the backlog. You had pointed to some higher-value titanium slipping a bit, in your comments. How does that pair with your view that the titanium hydraulic tubing piece of the mix is still really strong? And you seem to be at capacity there. How do we think about that?

Yes. I guess the best way to think of it, Phil, is if you take a look at the third quarter results and that first comment you came out with, that's kind of code for, we shipped more than we brought in in orders, but as we mentioned, we had a real strong July, so some of the customers on that side decided to catch up on their orders. And a couple of the other customers on that side of the business, those orders are being placed now.

So, it's a timing lag. At least, what we have seen, there is no change in demand from that market. We're still in, what I would say, is a very good place to be, in that everything we can make, our customers are taking from us, on that titanium side.

Okay. And then, as far as the Power Gen markets, your comments there sounded really encouraging, probably more encouraging than I have heard from any of your competitors, or even GE, is what you're seeing now more on the maintenance side? Are you starting to see a pickup on the OEM front?

Maintenance mainly, but, you know how I've been over the past, I'll say, three quarters. I have been hyper paranoid about the land-based gas turbine side of the business, and this quarter, it came in pretty nicely. And the order entry, it was down a bit, but it still held up fairly well. And like I said I visited, spoke with and visited a couple customers and they're really busy. So, we'll see where things go. And you know how this thing is, it's very choppy.

A demand for six, or ten, or 12 engines comes in, either on the maintenance side or even the new side, and it's a panic to get material out. This is where our distribution system really helps us in getting material positioned into that finished goods area. Really helps us a lot on the ingot side. A lot of it is quick turnaround and we can get it out from the mills quickly. Our mills have been very responsive. But I'm always cautious on this market, because of how much we shipped in fiscal 2012 and fiscal 2013. That's the origin of my paranoia on it. But, it's held up pretty well in some of the discussions I've had.

I put a lot of faith in some of the discussions I've had with customers, and a lot of them, they're very busy right now.

Okay. Terrific. Thanks very much.

You bet.

Thank you.

Thank you. (Operator Instructions). Our next question is coming from the line of Chris Brown with Bank of America Merrill Lynch. Please proceed with your question.

Hi. Good morning, guys.

Morning.

Morning, Chris.

Have the customers that put off orders, due to the abrupt rise in nickel, come back to the market? Or are they still waiting on the sidelines looking for a better price point?

I think it's a mixture of both right now, Chris. I mean, a lot of things we have, as Dan said, a lot of what we have is contractual, so those are pretty much -- they're ordering what they need. We haven't seen panic buying, I guess would be the best way to put it. And I think this is more of a grinded-out type of increase, in volume that we're seeing right now. But as I said, our transactional business has picked up. And usually, to me, when I see the transactional business pick up, it means -- there are some cases where there are stock-outs, or orders that are coming in, from which they don't have sufficient inventories or sufficient plan.

Usually we see that transaction business pick up and then -- I don't want to say shortly after but within -- if things hold up within three to six months, we start to see more of a blanket-order type of increase. You know, someone who is ordering 4,000 or 5,000-pounds a month is all of a sudden, now, starting to order 6,000-pounds a month.

Right now, a good example would be that customer is still taking 4,000- or 5,000-pounds a month, he's operating at a lower blanket level, but then all of a sudden, he's, also, coming in and he needs an extra 1,000, or he needs an extra 1,500, that comes in over the transactional side, which is, in today and out within two weeks. That type of thing.

Okay. Thanks. And then, can you give us some more color on where we stand in the [leap] engine? Are you guys still bidding on material for that platform? And then, in terms of timing, when should we expect any sort of contract awards?

I think a lot of the material decisions have been made. We are still doing some test work with some of our new alloys, but if you ask me, I think that will be, as far as our new alloys gaining positions into them, I think most of that will be next-generation type of work. However, are we in the leap? I think everybody in this industry who has been in prior generations would tell you that they are in the leap.

So, a lot of our material will be used in the leap, but things like Haynes 282, I don't see it, right now. My marketing guys might correct me, maybe there's some applications I'm missing, but I don't see it in initial designs, but I think we might see it in some next-generation types of designs.

Okay. Great good luck, guys. Thank you.

Thank you.

Thank you. We do have a follow-up question coming from line of Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question.

Yes. I am just looking at your gross margin profit margins having improved over 300 bps versus the second quarter. Any color that you could give us as to the composition of that improvement? Is it most mostly volume-driven, or is there, call it, half of that piece driven by better transactional pricing? To your point, because I know that piece can almost happen immediately.

That's a portion of it, is the higher transactional business at the higher price, but as Mark mentioned, that was a project that was originally scheduled for Q4 that was shipped in Q3 because the customer needed it. And that was a specialty-type of project, so, specialty alloy, which can come with higher margins than our typical commodity-type alloy. So, that kind of helped increase that increase in gross margin from the quarter.

And that's the caution that we give on the fourth quarter, is that similar-type project is right on the cusp of the end of Q4 or the beginning of Q1, so. If that goes into Q1, then that would slow down the pace of the margin recovery. That's one of the issues that we're facing. Does that help?

Yes. Thank you.

Thank you. Our next question else coming from the line of Jonathan Brolin with Edenbrook Capital. Please proceed with your question.

Hi. Good morning.

Morning.

Could you help breakdown the portion of the capital spending that you have pushed out to next fiscal year? What are the prime components of that? What areas are being shifted to next year?

It's primarily the service center, processing center type of upgrades that we mentioned, just related to servicing our customers. Again, project is still very active. It's just a matter of when the money would be spent, so we pushed that into the next fiscal year. Still planned to spend it and still have the projects as very active.

About $15 million or so is that, and about $2 million are just other miscellaneous type of projects, that just the timing of the cash outlay spills into the next quarter rather than Q4.

So nothing in terms of increasing production capacity in the main facilities towards higher margin products?

You might say it's a support facilities for certain projects or products. For instance, one thing I always talk to people about is our distribution. We use the term distribution capability at Haynes, and I always like to remind people that it's actually a light manufacturing capability. You have to remember that our distribution centers add value to products, from the point of view of frequently cutting parts. So, some of this, you would say they are value-added or higher value products, because be it for shape correction or cutting of parts, our distribution capabilities do those types of processes to the raw material that is brought in.

Okay. That's a very helpful distinction. Thanks again for all your clarity and explanations on the call. Thanks.

Thank you.

Thank you. It appears there are no further questions at this time. I would now like to turn the floor back over to Mr. Comerford any are for any additional concluding comments.

Thanks, Jesse. Thank you for your time today, everybody, and thank you for your interest and support of Haynes. We will look forward to updating you next quarter.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.