Haynes International Inc (HAYN) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Haynes International fourth-quarter and fiscal year-end 2014 earnings call.

(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. Please go ahead, sir.

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'd 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 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, 2014. 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'll 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.

FY14 was clearly a transition year, as we saw most of our key markets bottom out with respect to demand in the first or second quarter. And we started seeing an improving order book in early spring of the year, followed by better invoicing and booking levels as we moved through third and fourth quarters.

As we mentioned in the last couple of calls, we also started to go to work on our product mix in an effort to improve average selling prices, essentially trying to reverse the trend that seemed to impact our entire industry over the past two years. I believe we're making process, but I want to remind you that this process will take time, and it won't be up, up, up at every instance. We're still in a very competitive marketplace.

Also, at this point, there remains significant geopolitical uncertainty and macroeconomic uncertainty all around the globe. So, whereas we're pushing to improve the quality of our order book, we have to stay cognizant of these larger economic factors.

Again, over the past six months or so, we've seen a strengthening in our order book, especially for higher-value materials, when we compare our Business to 2013. And in discussions with customers, they report that their inventory levels are not inflated. We believe we still have a lot of work to do to get to where we need to be, but we feel we're on a better path than we were a year ago.

Taking a look at FY14: FY14 finished the year with net revenue of $455.4 million. That was down 5.7% from FY13's net revenue of $482.7 million. Net income decreased to $3.75 million in 2014, from $21.6 million in FY13.

Pounds shipped in 2014 were up slightly, about 3%, to 21.7 million pounds, versus 21 million pounds in FY13. And average selling price per pound decreased 8.4% in FY14 to $21.02 per pound, from $22.94 per pound a year ago.

Backlog increased during the year from $166.6 million to just over $221 million at year's end. That being said, the year seemed to bottom out late in the first, or early second quarter, and we believe we started to see some strength returning in most of our target end markets.

As I typically do at the end of our fiscal year, I met with about 50 or so customers over the last few weeks to discuss the upcoming year. In general, they expect 2015 to be an improvement over 2014. Even in discussions with our colleagues in Europe and Asia, the underlying commentary was that demand in our key markets appears to be improving, even though they expressed clear concern about their own local economies.

Overall, we're encouraged by the activity we're seeing in more advanced applications requiring higher-performance materials for new, higher-efficiency products and projects. We mentioned in the press release that our upcoming quarter has very few specialty application shipments; that is principally a timing issue. We are still seeing new orders coming into our system for advanced materials and applications, as evidenced by the increased quality of our backlog. But at this time, very few of those applications are slated to ship between now and the end of the calendar year. Obviously, where possible, we'll pull orders forward in the queue, in instances where a customer can take material earlier than scheduled, but at this point, we're a bit light in the first quarter for those higher-value items.

Moving to our end markets: Net revenue in the aerospace market for FY14 was $195.2 million, roughly flat with last year's $197.1 million. Volume in FY14 was 8.8 million pounds, up roughly 9% from FY13's 8.1 million pounds. The 2014 figure does include that one-off ingot application we mentioned in prior quarters. And just to frame it for you, Haynes's best year in aerospace was 8.9 million pounds, so we're starting to get back up into that higher performance level. And with our new capabilities, we won't be constrained as we were in prior cycles.

Our backlog in aerospace increased pretty dramatically in the fourth quarter, up almost 14%, even in spite of the higher shipping levels we've had in the back half of FY14. The aerospace market accounted for approximately 43% of our revenue during FY14.

I think most people know the story on the commercial side of the Business: Boeing and Airbus continue to ramp production on key platforms, and new engines and re-engining continues to gain traction in the industry. The supply-chain de-stocking appears to have ended, and we're starting to see the replenishing process.

On the aero tubing side, as I've mentioned previously, we're already seeing increased output from our Louisiana facility. And as we complete commissioning and turn all of the available capacity over to production in the second quarter of FY15, we expect we'll be able to further grow this area of business. We feel the work we've done in installing our new equipment in both Kokomo and Arcadia will position us well for the needs of our customers in the next upcycle.

In our chemical processing market, net revenue for FY14 was $113.4 million, down 8.6% from the $124.1 million we did in FY13. Volume during the year was 5.2 million pounds, essentially flat with last year's 5.2 million pounds. Backlog increased 6.7% during the quarter, and CPI accounted for almost 25% of our total revenue for the year.

If you recall last year, we talked about how this market had many large projects placed on hold. In FY14, we started to see more of these projects get let. And perhaps more importantly, we started seeing a significant increase in new projects requiring more of Haynes's proprietary materials, especially in the back half of FY14. We expect to have more of these projects materialize as we progress through FY14, and as the world economy starts to rebound and gain momentum.

Although I can't say definitively that our Business has been impacted at the lower end by our pricing actions, I do feel we have bypassed some higher-volume opportunities in the second half of the year, as we've been trying to push through our strategy to manage our mix a little more aggressively. This is always a difficult balance, and we do expect our commitment to this strategy will continue to be tested in FY15. However, at this point, we're pleased with the levels of activity we are seeing, and the quality of the project work that we've been booking as we enter FY15.

The land-based gas turbine market totaled $86.7 million in net revenue for us in FY14, down 15% from the $102.1 million we had in FY13. Volume dropped about 4%, to 5.9 million pounds, from the 6.1 million pounds we saw in FY13. This market accounted for approximately 19% of our net revenue in 2014.

Backlog fell 30% in the quarter, as this market continued to adjust off record levels we experienced in FY12, and our second-highest volume level in FY13. We expected this correction, and we've discussed it in previous calls with you.

Qualitatively, discussions I've had with key accounts and our people in the field seem to be indicating that we may be bottoming in this market area. Most of the activity we've seen in this market over the past few years has been MRO related, but some of the work we're starting to see is on the OEM side. Some relatively dormant alloy-size combinations appear to be coming back to life. It is too early to say if this is the end of the correction, and data at the demand end of the supply chain still suggests this market is flat and expected to remain flat year over year. But as I mentioned, we're seeing some activity recently in products that have been dormant for quite a while.

Just on a cynical side, I'll also offer, at this point, a qualifying statement here. So far, it's largely qualitative information that I've discussed. Our order book, as I mentioned to you, is still obviously not quantitatively confirming a rebound in this market. However, for the first time in about five or six quarters, I feel we're hearing more positive indications in the field on the OEM side of the Business. With current volatility in energy prices, the dollar strengthening, and a lot of global instability, I think it's fair to say that demand in this market will stay choppy and unpredictable in the early stages of FY15.

In our other markets, we had net revenues of $44.4 million in FY14, down roughly 9% from FY13. Volume increased slightly from 1.6 million to 1.7 million pounds during the year, and the backlog was up about 32% in the fourth quarter. The application base in this category is pretty much turning over with the loss of the flue-gas desulfurization business in North America, largely due to the war on coal, and it appears to be being replaced with applications in energy, welding, consumer electronics, and various industrial heat-treating applications.

Looking at our key growth projects, we're commissioning our new flat roll equipment in Kokomo, with just the heat-treating furnace remaining on the not-yet-completed list. It's on time; it's just the last cog in the completion of the project. Equipment in this area is running, pretty much, into normal production mode now, with normal preventive maintenance intervals, et cetera. We're very pleased to have this area up and running. And interestingly, quite a few of the projects that we're seeing, especially in the CPI market, will run across this equipment; whereas in the old days, we would have been scrambling to find conversion sources.

Also, we're in the final stages of our commissioning of our cold working equipment in Arcadia on the tubular projects expansion project. We've already seen increased levels of production from this equipment, and we're starting to pull in some of the orders to reduce our lead times on both corrosion and aerospace products.

As you saw in the press release, in the service center and distribution section, we announced our intent to purchase some specific assets of Leveltek Processing, LLC, up in LaPorte, Indiana. But any discussion on that topic would be too preliminary. We expect to close in the second fiscal quarter, and will update you with the details and the business case after closing on that project.

Finally, we're also in the early stages of the next phase of our go-live with our new global IT platform that has been running in Europe for about a year. Always a challenge in this area, and a lot of great people putting in a lot of hours to get it done. It's going well. I'd say we have the normal frustrations, normal challenges. But to be honest with you, it's going better than I had anticipated.

I know we did one of these when I was -- a long time ago, when I was an inside sales person at American Brass -- and I remember answering the phones from customers. It's a difficult job when you're doing this, and you're that person on the front line, when some of the paperwork is incorrect, et cetera, but we are fighting through those things.

We're still making a lot of coding adjustments on paperwork. We're still working -- increasing response times on some of the functions, et cetera. But the one thing here is we're all very excited about what this system will offer us, once we get it up and running fully, throughout all Haynes locations worldwide.

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

Thank you, Mark. My comments will hit the financial highlights of the fourth quarter and the full fiscal year. Our financial results continue to improve sequentially, with fourth-quarter results better than our third quarter of this year, and driving us into positive net earnings for the full fiscal year.

While our volumes shipped in Q4 were lower in pounds than the third quarter, the pricing and profitability was better, which helped drive a higher gross margin. Our gross margin dollars for Q4 was $18.9 million, which increased by $4.8 million compared to Q3, with the gross margin percentage expanding from 11.1% of net revenues in Q3, up to 15.8% in Q4. This is also better than the 14.0% in last year's fourth quarter. While this is not yet back to normalized margin levels, and it will take some time to grind the margins back to those levels, we are on a solid progression of margin recovery.

This margin momentum is driven by many factors; I will mention four. First, price increases we have implemented are gaining traction, including some pricing power improvement at our service centers, and a Q4 product mix of more profitable alloys and product forms. Two, less of the lower-margin orders shipped out of the backlog that were taken in previous time periods of more compressed pricing. Number three, much of the higher-cost inventory produced in prior periods has flushed through the system, causing less unfavorable impact on margins in Q4. And four, we have less impact from declining nickel prices that in prior quarters earlier this year.

And of course, we are always diligent to watch our cost structure, and our production efficiency and yields. Lean manufacturing is a foundational part of our Company culture.

SG&A cost, combined with research and technical costs, were 8.4% of net revenues in the fourth quarter, compared sequentially to the third quarter of 8.7% and the second quarter of 9.0%. The full year was 9.3%.

Operating income was $8.8 million, which is more than double the $3.1 million of the third quarter, and over $10 million higher than the second quarter's operating loss of $1.3 million.

The effective tax rate this quarter of approximately 28% is more favorable than the first three quarters of this year, due to the proportion of taxable income in lower-rate jurisdictions and our ability to more fully utilize the US manufacturing deduction that was previously recognized in the prior year's tax provision. The effective tax rate going forward is expected to be approximately 33% to 34%.

Net income for the fourth quarter is $6.4 million; and for the full fiscal year, it is $3.8 million.

Outlook for FY15: First-quarter results are typically impacted by lower production days due to holidays and planned maintenance outages. Planned outages related to the capital expansion projects in both Kokomo and Arcadia, as well as other maintenance-related projects, are expected to impact first-quarter results.

While the Company has continued to see order entry, pricing, and backlog improvement with higher demand, this improvement only partially offsets the expected lower production days in the quarter. As a result, we expect revenue and earnings for the first quarter of FY15 to be lower than the revenue and earnings of the fourth quarter of FY14. Beyond the first quarter, gross margin recovery is expected to continue over the course of 2015, as pricing continues to strengthen and volumes continue to improve.

Backlog was $221.3 million at September 30, 2014, an increase of $16.6 million, or 8.1%, from $204.7 million at June 30. On a year-to-date basis, the backlog has increased $54.7 million, or 32.8%, from the $166.6 million at September 30, 2013. We believe the improved order entry levels over the past few quarters are due to customers increasing their stock levels to accommodate the demand in the Company's end markets. In addition, we implemented price increases, which are beginning to improve the quality of our backlog, but may slightly temper the order entry rates as we manage mix to better pricing levels. The October 31, 2014, backlog remained essentially even with September's $221 million.

Raw materials: The market price of nickel and other of our raw materials has been volatile recently. It is difficult to predict the impact this will have on our Business. Typically, a continual decline in nickel prices have an unfavorable financial impact. And conversely, continual increasing nickel has a favorable financial impact. Recent volatility will likely produce a mixed financial result, but may cause customers to delay orders, potentially impacting our volumes.

We monitor the drivers of nickel markets, such as the geopolitical events, the Indonesia laterite ore ban, the production capability in the Philippines, the overall inventory stock levels in the LME, and the demand for stainless steel, as well as others. Many of these indicators are mixed, but the general consensus is that nickel supply will move into a deficit position in 2015, lifting nickel LME prices. But this can be difficult and hard to predict.

Capital spending: Our strategic capital investment projects are nearing completion, and many items are complete or in the commissioning stage. As we finalize these projects, we move to the next phase, which is capturing the operating leverage and the expected shareholder return on these investments that we committed to.

In FY14, we invested $39.7 million in capital projects. And the forecast of capital investments in FY15 is approximately $22 million, excluding the previously mentioned acquisition of the Leveltek LaPorte assets. The $22 million of planned capital spending includes $5 million to complete the previous strategic projects for the tubular expansion, Kokomo flat product expansion, and the global IT system. The remaining $17 million of planned spending is earmarked for continued upgrades throughout our manufacturing facilities, and this level of spending is considered a maintenance level of spending.

Cash flow: Net cash provided by operating activities was $26.9 million in FY14, even with our lower net income. Controllable working capital was $271.3 million at September 30, 2014, a decrease of $2.1 million during FY14.

Our cash balance at September 30, 2014, was $45.9 million. Even with our significant investments in capital spending, our cash position remains solid, and our revolver balance remains at zero borrowings.

And in summary, while we are seeing some mixed signals from US and foreign economic indicators, as well as some concerning macroeconomic and geopolitical issues, business conditions are improving. And we continue to be optimistic about the business levels being reported by our customers.

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

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

Thanks, Dan. A year ago, we mentioned that we felt the jet engine de-stocking was nearing completion, but the economic situation was still cloudy. As we migrated into the middle of FY14, conditions for our Business clearly started getting better. We experienced better backlog strength, and we went to work immediately on mix, while keeping our eye constantly on the broader economy and, of course, making sure we're targeting -- all the time -- targeting new applications.

Although the macroeconomic situation worldwide remains cloudy as we enter 2015, we feel the demand drivers for advanced nickel-based and cobalt-based alloys are starting to strengthen. More jets with better engines, natural gas -- the building block of the chemical industry -- is experiencing a renaissance with greater global availability and very attractive price levels. The industry keeps driving now for more efficient gas turbines, and new applications are coming out in coatings, welding, and even in the consumer product side.

Structurally, the industry-driving forces we've always identified remain intact. We feel very good about our products and service capabilities being able to meet the needs of our customers.

As I mentioned earlier, we still have a lot of work to do. Got a lot of work to do driving out waste in our processes. We just had our fourth wave of black belts and green belts go through the system -- some phenomenal projects going on out in our plants for driving cost out of our systems.

We also have to continue to identify higher value-added opportunities, as we're doing through our distribution systems and our cut parts projects. And we have to just continue to get our Business better positioned for the upturn. We're encouraged by the recent developments in our Business. And we're very pleased with the quantity and quality of our current order book.

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

(Operator Instructions)

Edward Marshall, Sidoti & Company.

Good morning, guys.

Good morning, Ed.

So it must feel good to finally have some breeze at your back.

I'm curious on the cadence in the quarter. Because obviously, your raw materials were much stronger in the first, let's say, two months of the quarter, and then it kind of ebbed off. I'm wondering if you could talk about maybe pricing and even, to some extent, volume throughout the quarter, and maybe the cadence?

I think you're seeing some of the usual dynamics, as we're in the current quarter, more so, than anything. Not so much fourth, but as we're in first, I think we'll start to see some of the people playing nickel games. I think that's what your question is about. Nobody wants to be the person to buy the most expensive nickel. As Dan mentioned, the backlog was essentially flat in October. You also have the factor of a lot of people just don't want to order material and inflate their balance sheets.

Everybody wants to keep their own cash for the end of the calendar year, which seems to coincide with a lot of fiscal years. Were not going to get too worried about what this current quarter looks like, from an order entry point of view. You know how I am -- I'm hyper paranoid. If I feel hyper paranoid, it will hit me in February, March timeframe.

But right now, we're feeling real good about -- we made a lot of progress on the pricing side of our business. And I think you see that in the -- we call it the backlog quality -- but if you look at that average selling price in the backlog, a lot of the work we've been doing over the last three quarters has started to pay off, both from flushing out the lower-cost orders but then more importantly, replenishing it with, I'll say, higher-value items.

Okay. And then if you look at maybe the pricing improvement in chemical processing on a year-over-year basis, is there any sign that you're seeing less competition in the market? Is the commodity, stainless, picking up?

It's still very competitive. Ed, when we talk about managing the mix, that's code for there are some lower-end items that we would have taken a year ago that we haven't had to take recently. So when you look, especially at CPI, a lot of what's happening there is a lot of these -- there have been some really great projects in the last year for some of our more advanced proprietary materials, which garner a much higher selling price. And obviously, we're also maybe not as competitive, or not competing as heavily, you might say, for some of those lower-end fill-the-mill type of orders as we did a year ago, 15 months ago, when we were really -- everybody in this industry was struggling just to get base load into their mills.

It does -- and I understand during the fourth quarter, here, you had renegotiated the titanium contract. Is some of that tubing worked into the chemicals? Is that responsible for maybe some of the backlog growth? And maybe talk around that contract, specifically, and what that might have done to the dynamics?

Not so much in chemical processing. That is a contract that would be in the aerospace market. It's titanium hydraulic tubing for the aerospace industry, so that's where that's showing up. And yes, we did have some order entry from that. Once the contract was signed, we were able to enter some additional orders there. So that helped on the aerospace average selling price.

Okay. Is there any way to parse first-half versus second-half to get a different look at maybe the backlog improvement, as opposed to getting clouded by maybe the mixture of the two? Is there any kind of way that you maybe dissected that backlog that may give us a better understanding of what's happening in this six months versus the prior six months?

I think some of our comments have reflected that.

Sure.

We mentioned -- look at the backlog by market. And I think Mark mentioned, we've been, throughout the year, cautioning a bit on the land-based gas turbine side. So that, I think, is being reflected, and you can see that in the backlog. And with aerospace, Mark mentioned those volumes picking up as well. And some of these transactional business and the subsiding of the de-stocking that we've mentioned, I think, is helping on the backlog of the aerospace side, as well. So I think the mixture between -- CPI is a good alloy for mix, so we're getting some nice quality of backlog on the CPI side. Aerospace is the de-stocking subsiding. The land-based gas turbine is the one that, as Mark mentioned, declined a bit.

Yes, if you take a look at it, Ed, too -- if I can also offer to you -- if you take a look at the back half versus the front half of the year in FY14, you can really see where aerospace -- the mix dramatically picked up. I want to say, out of the $200 million or so we did in aerospace, I think it was like $115 million and $85 million back-half loaded. And the reason I bring that up is, you get a lot of revenue in aerospace in the back half of year, and you consistently increased the backlog in the aerospace, as well. And it just happens to be the highest overall average selling price item that we do.

So you see that you were doing higher volumes and increasing backlog. So that backlog is heavily influenced by a richer mix of aerospace products. Where I think our backlog is going to be more difficult for you to cipher and decipher is the fact that we've got -- we had a good year for booking some of these high-quality chemical process projects. We started talking about quoting them five quarters ago, and they started rolling in, probably, three quarters ago. And it's -- knock on wood -- it's been a very good year for those CPI projects. And there are still some of those sitting in the backlog. And those are pretty advanced applications, also, with very good selling prices -- very good margin levels.

I'm curious on the CPI. Is it new build, or is it MRO-driven -- the replacement work?

I'm talking about the high-quality work that's sitting in backlog. It's new build.

New build. And aren't you later in the cycle with chem costing demand? I mean, more of the costing materials, say, less ethane crackers for the [downturn]?

Absolutely. If you take a look at the chemical table, let's start with natural gas and go all the way through all the process improvements until you get into a Haynes level of materials. Absolutely, we are late cycle. However, some of these applications, I'll say, our not traditional chemical asset applications. These are completely different types of applications. Again, a lot of heat exchanger work and containment vessels, transport vessels, things like that.

So you're seeing a lot more in the beginning of the cycle that you normally haven't seen before, which is probably a pretty good sign for you, cycle-long.

And also, just not the traditional chemicals, I'll say, that Haynes was always associated with. And when I say that, not as much of the commodity -- I can't really say that I've seen the commodity chemical side of the business come back in its normal evolution so far, this cycle. The things we've been doing have been more advanced chemical applications.

Interesting. Thanks, guys.

Yes. Thank you.

Chris Brown, Bank of America.

Hey. Good morning, guys.

Good morning, Chris.

Can you give us a better sense for when that lower-priced backlog will be worked through? Is this all going to be worked through by the end of the first quarter, or will it linger into the second, do you think?

I would say the first quarter will get the brunt of it. We've been flushing it out as we've gone through, and the fourth quarter -- that we just finished here -- didn't quite have as much impacting the margin as we expected, but there will be some of that in the fourth quarter. And always, thinking about what average selling price you're seeing in the income statement versus what you're seeing in the backlog, those can sometimes be a bit different, depending on where we're capacity constrained and how much lead time we have in different product forms and alloys. So those aren't always comparable.

Plus, we have our transactional business, that we take an order and ship it in the same month. Those won't even really show up in the backlog numbers and average selling prices that you're seeing. So there can be a little bit of difference between the P&L average selling price and the backlog average selling price. But I think we're doing a good job of flushing some of those old ones through.

Okay. And then for the quarter, how much would you say was more the transactional-based business versus what came out of the backlog? Can you give us a sense for that?

It's pretty steady with what we've been seeing. Usually, it's about a third of our business. So the past couple quarters have been a little bit higher than that, so between the 35% range, maybe a few points above that. So a little higher than normal, which is a good sign.

Okay, thanks. That's helpful. With the major CapEx plan winding down, what will be the primary uses of cash, going forward? You have this bolt-on a position in the process of working its way through. Should we expect more of those? Would you favor maybe raising the dividend over M&A at this point in the cycle? What are your thoughts regarding cash use?

Certainly, we're -- spent quite a bit over the past three years. That's been these strategic capital projects. And as those wind down, certainly, we have our eye on more of those types of projects. So we want to evaluate those and see what kind of return on investment we're going to calculate from those. But I think there's still some opportunities with our own facilities that we can garner a nice return on investment. So we're analyzing those.

But with this industry, it's quite interesting. You're looking at an expansion. It will take quite some time before you're actually spending the money on it. So I think this FY15 will be a lower year than what we've seen in the past three. We'll have that lull -- which hopefully, we can generate some additional free cash flow with that lower CapEx. But as you mentioned, we have the CapEx that we will be expending in closing the Leveltek LaPorte assets. And we'll give you more details on that when we actually close.

Okay. And then just lastly, your nickel prices is corrected back down to below $16,000 per metric ton level. Do you guys think that there could be deficit conditions throughout 2015? Does it make any sense to maybe build some inventory right now, when prices are lower? And what's your view regarding your current inventory of nickel and how you see that progressing throughout FY15?

We typically don't want to speculate, really, on nickel prices. So we will determine our production schedules and what kind of inventory build we have, really, based on order book. So if we see our order book trending up in a certain alloy and form, we may melt a little heavier in that area. But it's really not around the nickel price.

Many of our contracts -- we attempt to pass that nickel price onto the customer. So many of our contracts, even though they may be long-term agreements, will have adjusters in them. So most of which are quarterly adjusters, some are six months. If they get out past that, if there are year adjuster, then we will typically try to buy the nickel forward on those to protect the margin. But we try to not really speculate what the nickel is going to do, as far as what production levels that we have.

Okay, great. That's it for me. Good luck, guys.

Thanks.

Dan Whalen, Topeka Capital Markets.

Great, thanks. Thanks for the backlog data in the latest month, here. Essentially flattish. Did you break out what the volume and the price component of that was?

No. We did that for the September backlog number.

Right.

But we did break that out.

Can you give any color on the October backlog number?

Typically, we just quote the dollar amount. And it's essentially flat with what we were seeing in September.

Okay. Just looking at the gross margin. Certainly, clearly, very impressive. I think it's the highest level since fiscal first quarter of 2013. From your commentary, it sounds like we will probably see a sequential decline in gross margin, and then an upward trend from there. Certainly, I think nickel dynamics are certainly different than they were in 2012. You've certainly undergone some internal initiatives. Is it premature to see your margins going back into the low 20%s in the back half of this year?

That's clearly the objective -- to keep grinding and keep -- but a lot of it's going to depend on where the marketplace goes. It still very cloudy out there. We've got a lot of good projects in the queue. And you take a look, and generally, you can look at that average selling price in the backlog, and you can say okay, we seem to have stemmed the tide or reversed a trend as far, as average selling price per quarter. And we've seemed to have reversed a little bit of the tide, as far as the average selling price sitting in the backlog.

Those are usually pretty good indicators on the business. But -- here's my qualifier again -- a lot of is dependent upon where does the broader economy go? Remember, we always talk about how pretty much entering every month, close to a third of our business isn't even booked. That's the transactional business we talk a lot about. So a lot of our business still does depend on the distribution system and that transactional side, which is directly related to how the broader indicators are going and what the market forces are in each of our target markets

Okay. Just, if I may, and maybe just on the backlog, certainly, what you saw in September. Certainly nice development on the pricing front. Volume was down. Can you help us extrapolate a little bit how much was that due to, maybe, base price increases or less competitive or rational market? And how much of that was, maybe, from higher nickel prices, in the middle of this year, that may have been incorporated into the backlog?

It is very difficult to actually parse that out. We do have, I think, mix probably moves that pretty dramatically, as well. But our higher price increases -- they are gaining traction. So we are able to, as I mentioned in my commentary, get a better quality of backlog. So those price increases are improving, and some improving pricing power in our service center. So I think you can see that portion flowing in.

But you also have the higher titanium being booked in the backlog. That's going to lift the average selling price. And different alloys in different forms can move that number pretty dramatically. It is hard to break that out.

Okay, understood. Okay. Appreciate it.

Yes.

(Operator Instructions)

Phil Gibbs, KeyBanc.

Good morning.

Good morning, Phil.

Last quarter, you cautioned on the pace of the margin recovery. And clearly, there was a nice pop, here, quarter-on-quarter.

Maybe it was just a general comment for the next couple -- call it -- next couple quarters, but is there anything that really surprised you, as far as the gross margin performance? Was it the transactional business maybe coming forth a little bit stronger? Was it mix? Just trying to understand where that gross margin may have shook out, relative to the expectations that you had.

Right. The commentary I think we had last quarter did reflect, not just this quarter, but a couple quarters out. So I think we still have a similar theme, going into this first quarter of FY15. But I think the mix in Q4 was a little bit richer than, maybe, we expected. What we actually shipped was a good mix, and it definitely helped the margin go up. As we look at what we are going to ship over the next quarter, we give similar caution that we still have some of the lower-cost items in the backlog that will flush out.

As I mentioned earlier, I think most of that will occur in this first quarter. And we still have some of the higher-cost inventory in there, from -- that were produced in earlier quarters. So that is more minimal because we were able to flush a lot of that through in this quarter. But I'd say the lower-cost items flushing out the backlog will still have the impact in Q1.

Okay. The way that you are laying it out Mark, sounds like pricing. And you expect pricing in the backlog at the end of the calendar year to be better than where it stood at the end of September. Is that accurate?

I think it is difficult to say right now, Phil especially with declining nickel. So I mean that's why where I made the cautionary note about -- hey, we've seen some real good momentum. But this is not going to be up, up. I think it is going to be more of a grinding recovery. Where I'm encouraged is, as I mentioned earlier, is the higher shipping volumes of aerospace and replenishing that backlog more strongly. So essentially saying, even though we're shipping higher volumes, we're still not chipping away at the backlog. The backlog in aerospace is still bigger, would be the best way to put it. And that's our best selling-price items.

So that's an encouraging sign. But there's so many moving parts right now, especially in my mind, nickel. And exactly who will be ordering and how much will they be ordering over the next two to three months is where I really can't make a projection on what the backlog pricing number is going to look like.

Okay. Just to piggyback off of Dan's question on the chemical processing projects. Anywhere specifically that you're seeing that, as far as the region or as far as a type of chemical? Because you do talk about some of the more advanced applications and new builds, but where are you seeing the new builds, geographically?

I think, Phil, with our business, the actual end use demand is going to be, really, all over the world. But the fabricators are the key. And the fabricators, likewise -- for instance, something might be getting fabricated in Washington state. But the actual demand or application is going over into Eastern Europe. And the key for someone like us is, we've got our marketing people and application development people in Eastern Europe working on the application. And then, understanding the path of the supply chain, so we can get to each of those fabricators, wherever the heck they are in the world, to make sure we're getting the orders.

So really, it's a mishmash. It's all over the place. And we don't want to get too specific about which regions certain applications are in because, frankly, a lot of our competitors listen to these calls.

Understood. Appreciate that. Then as far as your CapEx for next year, definitely positive from our perspective -- lower than we were anticipating. Is there something in there that you're pushing out? Or is the new capital projects coming in at a little bit better cost than you anticipated? I think we were expecting you to do some service center upgrades and maybe have a bit more costs associated with some of these projects.

As I mentioned, the $22 million that we're forecasting excludes the Leveltek LaPorte acquisition. So when that closes in January, we'll have more that we can reveal about it -- the purchase price and so on. But that is excluding that number.

That's really why the CapEx number that we reported to you came down. We pulled that out and separated it from the regular CapEx, Phil.

Okay. Then just -- I think that will do it. I appreciate it, guys. Thank you.

Thank you.

Edward Marshall, Sidoti & Company.

Thanks for taking the follow-up. I just wanted to ask about inventory levels because they buck the trend, which normally sees down 4Q or kind of lower volumes or inventory in Q4. They actually are up. And looking on a sequential basis, it looks like work in progress, raw materials are up. I guess that makes sense. I was just curious about maybe your strategy with the distribution units you have and timing with nickel. Are you anticipating building up some kind of safety stock in the distribution channels, in case the market does accelerate as [you] anticipate? Or maybe you can help me out with going on with inventory?

No. And just to give you an idea, the last couple of quarters, one of the things with the market accelerating -- and again, probably a great example is that aerospace. I think last two quarters, one of the things I mentioned was that, for instance, our volume was up -- revenue was up 30% over two quarters earlier. And if you think about it, it's the acceleration of the marketplace. So a lot of what we've done is, we've put a lot of material into the melt schedule, and we're flushing it through try and get it through to finish into the service centers. For instance, the $120 million or so we did the most recent quarter. We would have liked to have done more. We just didn't have everything positioned in the locations where we wanted it to be.

So we did build some inventory to push through, but what we'll do, now, in the upcoming quarter, we'll have our normal maintenance shutdowns. So we'll have some shutdowns in the melt shops in November and December to do a lot of maintenance. So what you'll see is, you'll probably see a bleeding off of some of that inventory as we get into the January, February, March timeframe. Or at least a reversal of that inventory. We'll probably see a lot of it going into finished products in the next couple of months, hopefully getting sold out. And then the [whip] will start to pick up again, probably, once we get into January and start melting again.

Just to be clear, it's more of a safety stock in front of down operations because you're going to be doing some maintenance. And not a bet on the market.

Correct.

Right. But it's also a response to our increasing backlog.

Yes.

Sure. Of course. Yes. I mean, that-- (multiple speakers)

There's quite a bit of that backlog sitting there, which we love, which is [or sooner]. So there's quite a bit of things that are sitting in that backlog that have a delivery date of or sooner. So that's some of the inventory that's in there.

And that's usually a good sign in the cycle, when we will take it earlier, if you can get it done.

That's what we all like to see.

Yes. Good. Okay, thanks, guys.

Thank you.

Phil Gibbs, KeyBanc.

Yes, Dan. Just housekeeping on the pension and [OPEB] expense for FY15. Not the expense, but the contribution.

Contribution for 2015? As you can see in 2014, given the fact that we weren't obligated to fund, we did have a reduced year this year. Really, just one month of funding this year. But going into next year, we're still evaluating that, so we haven't determined what our funding level is going to be yet. The pension valuation, actually -- the discount rate went down this year as of 9/30, which increased the liability a bit. So we did have a slightly expanding funding position. So we'll analyze that and see what we're required to fund and make that decision in the next quarter or so.

Okay. So to be determined?

Right. Yes.

Okay. Thanks, gents.

Thank you.

Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over to Management for further or closing comments.

Things very much, Kevin. Thank you, everybody, for your time today. As always, we appreciate your interest and support of Haynes. Please be safe over the holidays, and we'll look forward to updating you after the new year. Thanks again.

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