Haynes International Inc (HAYN) 2015 Q1 法說會逐字稿

Greetings and welcome to the Haynes International Incorporated first-quarter 2015 earnings conference 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, Mr. David Van Bibber, Controller and Chief Accounting Officer. 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'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 have all seen the press release and had a chance to review it. We'll follow our standard agenda in today's call. I'll open with comments about the business and our end markets, and then Dan will give you greater detail on the financial results.

Net revenue in the first quarter was $110.7 million, up 18.1% from last year's $93.7 million. Pounds shipped in the first quarter were 4.5 million, up roughly 4.7% from last year's 4.3 million. Net income in the first quarter of fiscal 2015 was $6.4 million, up approximately $10 million from last year's reported net loss of $3.5 million.

A couple of key factors have had positive impact on our business over this quarter -- really, I suppose I should say over the past couple of quarters. As we mentioned in the press release and over the past few calls, several special projects we have been working on over the past few years have been coming through as orders and have in shipping over the past six to nine months. We still have several of these in the pipeline and we are constantly working on new applications.

The timing of these projects is always difficult to predict. In many instances we are counting on outside conversion sources. Frequently, customers' schedules are often changing and variable. And even internally melt and other processing sequences can impact the timing of the projects. We are very pleased that we were able to move some of these projects through this past quarter, and we still have some which are likely to ship in the current quarter.

In addition, we are also seeing better strength in our aerospace business as the aerospace destocking that occurred over the past two-plus years has largely come to an end. I don't think we can describe the aerospace business as booming, but we feel we are seeing a trend grinding upwards in demand as the transition continues in 2015, and we expect from discussions with key accounts that 2016 will be stronger still.

Overall, we expect 2015 to continue to strengthen, albeit with pockets of weakness. For example, at this point in time the global industrial economy appears to be trying to find its footing after a precipitous drop in oil and subsequent postponements in capital spending by drillers and producers. Oil appears to be trying to find a bottom. Whereas Haynes does not have an extremely large position in the oil and gas industry, several of our competitors do. And so they may now have up in capacity in some of their operations which may impact pricing and volumes through the industry as we look forward in 2015.

That being said, we are pleased with the strength and quality of our backlog. We are keeping an eye on the economy as a whole. One thing to remember, and we mentioned it briefly last call -- with nickel and general commodity price levels falling, we are back in that mode where we were about a year ago where customers are very low to place large blanket orders. We expect that trend to continue until we see a broader economic rebound.

With that, let me move into the markets and give you a little more color on what we are seeing. Net revenue in the aerospace market for the first quarter of 2015 was $43.3 million, up 8.3% from the first quarter of 2014. Volume was 1.8 million pounds in the first quarter, up 11% from the first quarter of 2014's 1.6 million pounds. Aerospace comprised 39.1% of our net revenue in the quarter. Our backlog in aerospace was flat during the quarter, up less than 1%, indicative of the falling nickel market and end-of-the-year inventory management by our customers. We don't expect any broad, sustained downward correction occurring in the supply chain.

In fact, we expect the aerospace business to continue to increase as 2015 progresses, although the increase will likely be somewhat uneven. I think you all know the story at the larger level. At the macro level, Boeing and Airbus now have an aggregate backlog in excess of 12,000 aircraft. New platforms like the 737 MAX, the A320neo, and the engine programs associated with that continue to book heavily. The engine manufacturers and the sub-tier fabricators that are associated with these platforms are expecting better activity. As a result, we expect that the destocking we feel ended in 2014 will result in stronger demand as we move through 2015 and into 2016.

On the structural side our tubular products facility had one of its best quarters since 2012. If you remember back in that timeframe, we were shipping pretty heavily out of are tubular products division into a deep well oil and gas operation. That business has obviously slowed down. But what has really been driving us over the last of quarters on the tubular side has been the aerospace tubing and the chemical process projects that we are talking about.

Again, overall we expect the aerospace market to remain strong as we progress through 2015.

In our chemical processing market net revenues in the first quarter of 2015 was $30.8 million, up 33.3% from the first quarter of 2014's $23.1 million. Volume in this market was up 5.4% first quarter of 2015 to 1.2 million pounds. CPI accounted for 27.8% of our net revenues during the quarter. Backlog fell 14.4% during the quarter, principally due to the high-volume shipped and the high value of that volume that was shipped.

As we discussed previously, several of the new applications we've been working on over the past three-plus years became orders in 2014. And we have been shipping these projects over the last six to nine months. We still have several in the pipeline for 2015. It's sometimes difficult, just to let everyone know that it's tough for the Company to dedicate these resources sometimes to developing these projects when we are in periods of lower demand and lower profitability, as we were in late 2012 and into 2013. But I think most of you realize that's really when these projects were developed, when the prototyping was done and the engineering work was done.

It's important for me to acknowledge the work of our technical people, our production people, and our field personnel, that they commit themselves so heavily to these projects when times are tough. And then it's -- as you have all seen, they are very, very strong for Haynes when they hit the order book and turn into top-line revenue.

Looking ahead, we continue to work on these new projects in this area, and we are confident we will convert some of them into new applications, just as we've done over the past few quarters. In the immediate future I mentioned last time that we still have concerns about booking up the second quarter. We do have some project work and transactional volume that is filling in the second quarter. And we are working with customers on those applications now.

Also, whereas we still have some excellent CPI projects in the pipeline, we would be remiss if we didn't expressed some concern about some of the higher-volume, low-value products that typically ship in this market area. With oil and gas pulling back we could see available capacity being dedicated to attacking this market area on the higher-volume materials. We can't say we've seen anything like this so far. We just have not seen any of that impact. But we are wary of this possibility. And as many of you know, this market area, the chemical process area, especially large projects and high-volume areas -- these are typically where we see lower-priced alternatives and lower-priced competitors targeting our volume when we move into slow periods.

On the land-based gas turbine side, this market totaled $17.5 million in net revenue in the first quarter, down 3.4% from the first quarter of 2014's $18.1 million. Volume was 1.1 million pounds, down about 10% a year earlier. This market accounted for 15.8% of our total revenue in the quarter and backlog increased 6.6%. This market remains depressed as the OEM side of the business remains slow since roughly the end of 2013. We do not foresee a pickup on the OEM side until we start to see energy demand from the industrial economy rebounding.

MRO business is holding up. And as you know, the demand on the MRO side is very difficult to predict. We've been successful in developing new applications for our higher-temperature capability materials, but until new platform sales kick in on the OEM side we don't expect those application wins to result in significant short-term sales. Overall, we expect this market to remain soft and exhibit very low visibility through 2015.

Our other markets had net revenues of $14.1 million in first quarter 2015, up 50% from the first quarter of last year. This area accounted for 12.7% of our revenue in the quarter. And even in spite of this higher shipping level, our backlog increased about 3% during the quarter. Whereas the traditional core of this market, flue gas to sulfurization in North America, has been heard by alternative technology and legislation, we are continuing to develop new applications for our materials. Industrial heat treating, welding, brazing, even some areas in medical and consumer-related applications have been helping us to rebuild the segment of our business.

Finally, on our expansion investment projects in January, we closed on our acquisition of Leveltek Processing LLC's assets in LaPorte, Indiana. We will be operating the company under the name LaPorte Custom Metal Processing as we seek to grow the tolling side of the business. This acquisition grew out of the relationship we've had with Leveltek over the past 10-plus years and our need to develop capabilities to support our customers' needs for higher-quality products and faster, higher-quality service. This acquisition gives us the capabilities we need along with an existing business we would like to grow, and an operation with people and equipment that has been proven capable of working with our most difficult alloys.

And by the way, it's in addition to it being an existing business with an existing revenue stream and an existing profitability stream. The integration has gone smoothly, and I think most of you know that's code for very few startup headaches and heartburn so far. We are very excited about welcoming the LaPorte operations into the Haynes family.

Our IT platform integration is ongoing. These are always difficult. But, as I've spoken to you previously, it's very necessary at Haynes in managing our global business. We simply have too many discrete systems that didn't connect to each other. We are still phasing in North American sales and financial functions, and when we feel we have that area appropriately up and running we will move to our Kokomo operations.

As I mentioned previously, our expansion of our tubular products capability is largely complete. And as I mentioned in the aerospace section, we saw a very nice quarter coming out of the people down in the tubular products division. We are still qualifying some of the product sizes, mainly on of the large cold working mills, and we are writing the standard operating procedures. But the equipment has been turned over to production.

In fact, we had to do some very necessary maintenance on some of the legacy equipment in January. That went well, and it was nice to have this new equipment up and running so that we could take some of that equipment down and perform some very, very necessary maintenance. We had a very solid quarter in tubes. And again, that's largely due to the additional capacity being brought online.

A similar story on the flat rolled expansion. We are still riding the SOPs and finalizing some of the temperature surveys on the last furnace. That's the heat-treating furnace. But the rest of that equipment is up and operating. It's an area we used to have to count on substantial outside processing and pulling those capabilities in-house helps us and turning product around more quickly, as we saw in the past few quarters.

We will need a stronger market to fill up that capacity. I think we've been pretty open with you about that. But where we see the markets going, the expectations for growth on the engine side and some of these new applications we're developing in CPI, and once we start to see land-based gas turbine come back we expect that we will be able to get this equipment filled up. We are very excited about having all these capabilities in-house.

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

Thank you, Mark. Our financial results in the first quarter were solid with strength in the project-related shipments in both the chemical processing market as well as in our other markets category driving a gross margin percentage of 18.3% this quarter compared to 15.8% in our last sequential quarter, Q4, and 5.6% in last year's first quarter. These were project shipments of high-value specialty and proprietary alloys that included-value product forms. Our volume shift in Q1 was lower in pounds due to expected seasonality than the sequential quarter Q4. However, the pricing and profitability was better, which help drive higher gross margin percentage.

Our gross margin dollars in Q1 was $20.3 million, which increased by $1.3 million compared to Q4 and up $15 million compared to Q1 of last year. These results continue a solid progression of margin recovery. We do expect next quarter's sales to be higher in volume and dollars, but likely a lower gross margin percentage as the mix is expected to include less of these high-value project-type shipments and more commodity-type shipments. As we continue to push margins back towards the normalized level, certain headwinds and uncertainties persist such as declining commodities, most notably the price of nickel.

Looking at the 30-day average LME price at the end of each quarter last year, we saw nickel price rise in Q1 at $6.31, Q2 at $7.10, Q3 peaked at $8.42 and Q4 had $8.20. The LME for our Q1 FY2015 was at $7.22, then more recently dropped into the $6.50 to $7 range. This lower level, if it persists, could be a headwind to margins, as it may push down our average selling prices as we sell off the higher-cost inventory in our stock.

And a second headwind maybe the continued strength of the US dollar and the impact that may have on our competitiveness in foreign markets and the translated value of sales made in foreign currencies. However, this risk is somewhat muted for us, as the majority of our sales to foreign customers are in US dollars, mostly due to the US dollar being the common currency of the aerospace market.

On the favorable side, we see some margin support with price increases we've implemented favorably impacting selling prices and margins. The Kokomo and Arcadia CapEx projects are substantially complete, and we are beginning to produce higher volumes, especially at the tubular facility in Arcadia, as Mark mentioned. And our continued focus on our cost structure and our production efficiencies and yield through lean manufacturing projects as well as from the new capital investments recently completed.

SG&A costs combined with research and technical costs were $10.6 million, which includes a favorable foreign currency translation gain of $1 million. However, this is offset by higher commissions and higher accruals for incentive compensation compared to last year. SG&A as a percentage of net revenues was 9.6% in the first quarter compared to last year's first quarter of 11.6% and a full 2014 fiscal year of 9.3%.

Operating income was $9.6 million compared sequentially to Q4 of $8.8 million and last year's first-quarter with an operating loss of $5.6 million.

The effective tax rate this quarter was 33.9% but may slightly increase to approximately 34% to 35% as proportionately more taxable income is expected in the US tax jurisdictions then in our lower-rate foreign jurisdictions.

Outlook -- we expect revenue in the second quarter of fiscal 2015 to be higher than the revenue in the first quarter of fiscal 2015. However, we expect earnings to be similar to that for the first quarter of 2015 as the expected gross margin percentage may be lower with a higher volume of commodity products expected to ship in the second quarter as compared to the first quarter of 2015, as I previously mentioned.

Backlog was $215.5 million at December 31, 2014, a decrease of $5.8 million or 2.6% from $221.3 million at September 30, 2014. Contributing to this decrease is a solid level of shipments in the first quarter of 2015. Our order entry levels have reduced as customers are showing caution. However, this can be common at the end of the calendar year. In addition, we implemented price increases which are helping to improve the quality of our backlog but may slightly temper the order entry rates as we manage mix to better pricing levels. The January 31, 2015, backlog was roughly $205 million.

The forecast for capital investments in fiscal 2015 is approximately $22 million excluding the previously mentioned acquisition of the Leveltek LaPorte assets, of which $14.6 million was paid in January 2015. The combined $36.6 million is our projected cash used in investing activities for fiscal 2015. And as a management team we are excited to complete the acquisition of the LaPorte assets, as this transaction is important to our long-term strategic plan. This acquisition is it to be mildly accretive to earnings and operating cash flow this year, and the integration is expected to go smoothly, as they have been a part of the production process for many years.

Operating cash flow was a small use of cash at $0.8 million in the first quarter of fiscal 2015, driven by investments in inventory. Part of the operating cash flow is expected to move to a positive source of cash over the course of 2015.

Controllable working capital was $285.7 million at December 31, 2014, an increase of $14.4 million during the first quarter of fiscal 2015, with inventory increasing $12 million due to positioning inventory for higher sales in Q2.

Our revolver balance remains at zero borrowings, and our cash balance at December 31, 2014, was $38.4 million, a decrease of $7.5 million over the quarter. Our cash is expected to decline further over the next quarter, primarily due to the acquisition of the LaPorte assets mentioned earlier.

In summary, we are seeing some concerning macroeconomic trends and uncertainty related to the impact of lower commodity prices. As we proceed cautiously further into 2015, we continue to view fiscal 2015 as favorable to 2014. Our focus will remain 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 with the completion of our CapEx and expansion projects we are well-positioned for future earnings growth and improving shareholder value.

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

Thanks, Dan. We are pleased with the start we have in fiscal 2015. We've seen excellent project activity in new applications in several market areas. Energy, specifically the oil and gas, and, at Haynes, the land-based gas turbine market are expected to remain challenged in fiscal 2015. However, in addition to our new applications we are confident in our market position, and we are building on the added platforms we have worked on over the past few years, specifically the tubular products expansion and upgrades, the flat rolled expansion and upgrade, and the acquisition of LaPorte Custom Metal Processing. We feel all of these are already contributing and we expect to build on those contributions.

We also just completed our third wave of black belt and green belt projects and we are continuing to drive waste out of our operations. Our margin expansion would be impossible without this focus on driving out waste from our operations. We still have a lot of opportunities in this area as we move forward.

We feel confident in where Haynes is positioned in the market. We've seen pretty solid margin expansion as we started rebounding from 2013. We will undoubtedly see some pressure, as nickel has dropped and the oil and gas situation opens up capacity in the industry. But we are also chasing great opportunities.

And remember, Haynes has to develop new applications. It's what we do and it's what we do well. We can't wait for the market to carry us upwards. Haynes has to be about improving base markets and driving new products and new applications. We will keep that push on. We will continue to offer higher-value products and services to our customers.

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

(Operator Instructions) Edward Marshall with Sidoti & Company.

So I want to look at -- if I could, talk about maybe the pricing element because it seems like a lot of the discussion points that we had going into fiscal 2014 are now starting to show themselves in fiscal 2015, meaning nickel is declining. However, there are some significant differences around destocking, and maybe you are not juggling CapEx programs and things like that that might distract you. I'm just kind of going to ask to see if I can get a sense of what you think pricing might do over the next couple quarters. And I know that you don't give guidance, but do you see it hitting the lows from fiscal 2014? Or is that exaggerated?

It's tough to say right now, Ed. Somebody asked a similar question, if you remember, last call -- do we continue to see pricing moving upwards? And my response at that time was we are staring in the face of a declining nickel market. That's always the wildcard. If the dollar strengthens and nickel declines, blah, blah, blah. You can have a lot of difficulty in continue to move pricing upwards.

This oil and gas situation, too, the decline in oil over the last six months -- just to let you know, and this is really just a qualitative discussion -- a lot of customers, even though we are not heavily into oil and gas, are pretty spooked by that. It's really made a lot of people nervous.

Now, in the last week or so we've seen that seem to find a little better footing. And we are hearing some more positive things. But there's a lot of concern out in the marketplace about this dramatic drop in oil and the immediate cancellations we've seen in capital spending by the drillers and the production people. I've never seen people respond so quickly to canceling capital projects, as we saw out of Royal Dutch Shell and the layoffs at Schlumberger and things. It happened lightning fast. So a lot of people are nervous about that.

The reason I get into that as we talk about pricing is that does then open up available capacity. We haven't seen the trickle-down yet, and I don't know if any of our peers in the industry have talked a lot about cancellations or push outs. But when you see cancellations and push outs, you see available capacity open up and all of us have to fight to fill our capacity.

The nice thing for someone like Haynes is a lot of our end-use markets have not been directly impacted by those things. The tough thing for someone like Haynes is then those guys lose their big volume from oil and gas they tend to start moving into especially things like our base load volume on the chemical process side, those higher-volume, lower-priced items that we frequently have coming through our chemical process area that are very, very attractive price levels to some of the competitive materials out there and even some of our competitors with similar materials. They have the capability to go to a lower price level if they have to fill up their equipment.

So I gave you kind of a long answer. But if think the question you asked is a very difficult one for where we are in visibility right now.

Right, maybe I can ask a different way. And maybe this is two-part. But can you give us an update on where backlog is right now?

Yes, backlog is right around $205 million. And if you remember, for about the last three or four calls we said we are not going to be real, real concerned about an expanding or growing backlog, for two reasons. One, we are working on the value of the backlog. Are we bringing in the right projects and making available capacities for higher-value products to go through the mill? And the second thing being is as soon as we started seeing nickel declining we knew we were going to come back into that more transactional environment where, instead of people placing 10 releases at 4,000 pounds a pop, they are saying, you know what, I only need 4,000 pounds this month and I'll let you know next month. So you have a more transactional environment to curry.

And the dollar value of that backlog coming in, is that easy for you to discuss maybe as it relates to the $26.83, on average, for Q1?

I think you will see some decline in the price level. Two things -- if you are looking at the current backlog we did see fewer high-value projects and more commodity business come in, I'll say, in the last three or four months as a percentage. And you have the declining nickel situation now starting to load itself into the backlog.

Yes, and with the mix of products that we shipped this quarter, these were high-value type of items. So with this coming out of the backlog that's going to lower the average selling price in the backlog, just from that. And we mentioned the forecast for next quarter will probably not be quite that favorable of a mix.

Right. Okay, you talked about Arcadia in your prepared remarks, and the response you've had there. I'm wondering if you could kind of detail, maybe talk about some utilization rates. I think prior to the upgrade, you were at 100%-plus, if you could be more than 100%. And then maybe you can talk about some of the efficiencies and how much more you can squeeze out of that from a margin perspective as you ramp up.

I think we are still sticking to the plans. We've pretty much said that this is going to give us a 40% greater capacity down there. And what I've committed to you guys and everybody is I think we can fill that up as we move through and we get into a run rate out in 2017. If you ask me right now, I told you we had a great quarter out of the tubular products area. It was, in my opinion, about 10% higher than what we would standardly expect when we were running at that capacity. You know what I mean? In the old days when I was talking about capacity it was X number of dollars. If you tack 10% on to that normal quarterly amount, that's where they finished this past quarter at, about 10% above what they had been doing previously per quarter.

Okay, now, that's dollars. And again, so there were some nice high-value projects that came out of the tubular products division in the last quarter. There will be some coming through this quarter as well. Is that fair, Dan?

Yes.

And when we look at Leveltek, first, could I ask, was it a defensive transaction? I know you do some tolling in that. Would you consider that somewhat defensive, [vesting] maybe?

I think you could look at it as defensive if you wanted to. If I was outside the Company looking in, I might view it that way. But we've talked for, gosh, probably the last three or four years about adding capabilities that will give us better control, one, over the turnaround time in getting product out; but, two, in the process efficiency. And it's a critical component of the end processing when you are feeding into things like lasers or water jets, then you have a stress-aligned uniform product that's not going to fold up like a potato chip after you cut the scalable structure out.

We now have control of that process. And that, to me, has always been -- it's been about getting a better product and a better service out to customers. And we look at a number of outside processing capabilities and new equipment versus buying it. And this just -- it all came back to, look, the reliability of this is excellent. We've been working with these guys for years. It's a great operation with great people. This makes the most sense to go this way.

And is there any margin enhancement that you can get from that, from in sourcing? Is there any kind of knowledge of the capital that you put into the business or your existing business that you may be able to bring in that direction that would help your processes that you could actually even squeeze out even more margin than what they had?

That's certainly what we are pushing towards, absolutely. So with control of that process we will be able to look at yields a little bit differently and look at the product that goes across some of that equipment little differently. So that, I think, is going to help us. In addition, they have a tolling business that is something we are excited to add to our portfolio. So that, we feel, will be an accretive earnings per share and operating cash flow this year and certainly into the future.

Yes, you can imagine, Ed, anytime you bring something like this to a Board of Directors you better be able to talk about cycle time reduction or speedier service to customers. You better be able to talk about yield improvement. You better be able to talk about margin enhancement. So, yes, that's all sitting there in the justification for getting this project out.

Great. Thanks, guys.

(Operator Instructions) Phil Gibbs with KeyBanc.

I had a question on the other markets. That seemed to be driven by a lot of project business. And I apologize if I missed your comments on this earlier, Mark. But what did you say that drove that outside of FGD? And then also what did you say on the backlog momentum there?

I think we've really just touched on this in very broad terms. A lot of what we have in the other market area is covered by non-disclosures and -- well, in general, some of it's competitive situations. But just to give you a rough idea, on the FGD side, if you look back, I'll say five, six years ago, actually probably more than that before I came to Haynes, that was probably a $30 million, $40 million, maybe even more, million-dollar a year business to Haynes. And I'd say 80% of that is now gone and maybe even as much as 90%. That's how much that has changed in North America in the past five, six years.

So we've had to replace it. We've gone out and sought a lot of new applications, a lot of it using the new -- I shouldn't say new, but we've had the Wire Company in operation for 10 years. A lot of the wire opportunities that we've come to fit into this niche very, very well, the wire operation.

So it's really been just grinding out and continuing to find people who need either better corrosion resistance or better wear resistance and finding applications for our products that fit into these applications. And obviously, because there's always the high-temperature and corrosion, so industrial heat treating or industrial heat applications, brazing, welding, overlay applications. There's just a myriad of new applications that we brought into the Company that Haynes didn't used to -- and by the way, there's also new products.

There's products that Haynes wasn't producing out of the series of our facilities that -- we always had this parochial thought process of, if we didn't invent it we are owing to make it. If we didn't make it, we're not going to sell it. And we broken those barriers down. We will process other people's material and we will take it to market. And that has worked well for us on the other products side.

And I think it shows in that market segment, too, that that's where we can do some of the higher-value, move up the alloy chain. The average selling price this quarter was $31.54 in other markets, where last quarter was $24.65. So you can see some opportunity to garner those higher average selling price type projects.

I'm sorry; did you talk about the movement of backlog as far as what that is doing now relative to some of the other businesses?

Do you mean just in the other product area?

Yes.

Yes, we essentially said that the backlog was up -- let me take a look. I think it was up about 3% or 4% -- 3% in the quarter, in spite of shipping 50% more. So, we had a strong shipping quarter and we backfilled it with even more orders. So the other area has some pretty good momentum right now.

Okay. And then, Mark, you mentioned that the tubular business was 10% stronger than you normally see it in the first quarter. Did that include some of the new capacity as well? So with the new capacity it was 10% above? Or are you talking about the legacy business and then starting to think about phasing in some of the new capacity as we move forward?

It's with the new capacity. If you look at the chart on my wall, we've committed to saying we are going to get 40% more out of the tubing business once this capacity is up and running. And our target, as we said to you in the -- I think we said in the shareholder letter two years ago, that we will be doing 40% more out of tubular products division by 2017.

My chart is sitting there and saying, boy, the guys have already stepped it up. We had a great quarter. That doesn't mean we're going to have a great quarter year in and year out. But it's time for them to start showing me that this is now the new standard.

But it was up 10% over what I'd say a standard quarter was last year or the year before. And it's because they've got new equipment up and running. And they are also -- the flow of materials is a lot better than it was. They've doing some great things down there on the engineering side as well as on the new equipment side.

That's largely in the aerospace segment? Is that --?

It's everywhere. In fact right now, Phil, a lot of these special projects that we are shipping that at CPI, a lot of it is nickel-based alloys. We've had some really good quarters for these one-off big projects that we finally nailed after working on the engineering for three or four years. The last six to nine months they've come through. A lot of them in plate and sheet, but quite a bit of tube and some of the other products that we would ship through the Arcadia facility.

So you are saying that some nickel tubing going into the CPI applications. And is there any of the business there going into other markets, meaning some of what we were just talking about, the other piece? Is that in served by Arcadia as well?

Yes. Arcadia serves all of our markets. If you ask me just off the top of my head, Arcadia is largely aerospace products. Probably second largest area is into the chemical process area. And third would be into other markets, not a lot of it goes into the industrial gas turbine area.

Okay, terrific. Appreciate it. Thanks, guys.

Davis Paddock with Invesco.

Just a question on -- now that the two capital projects are nearing the end stages and starting to ramp up, can you give us a sense on how this might result in inventories coming down? They have been rising the last few years, and that's part of services -- how you are structured with your service centers around the globe. They were elevated quite a bit the last few years. Is there a possibility that we can return back to more historical, lower levels?

Well, that's certainly part of what we're trying to achieve with these new CapEx projects. Certainly, the cycle times improvement that we hope to get from some of it and -- we call it inventory velocity. So the faster the inventory velocity through the plant, the better the turns will be and yield improvements and so on. So we certainly expect our turns to improve.

We also expect revenues to increase with the additional product that we are pushing over into new equipment and the growth that we are going to get over the years on that. And that will make inventory rise. So the expectation is that inventory over the long-term will still rise. But we hope the inventory turns will improve to show better efficiency in our working capital management.

Do you have any targets for that or timeframes for how that should play out over time?

Yes. We look at inventory turns really based on pounds rather than in dollars. So you will probably calculate it based on dollars, but we look at it in pounds. So we certainly have targets that we are trying to achieve and, quite frankly, pretty aggressive ones. We are trying very hard to unlock as much cash as we can from our inventory so that we can better utilize that cash for shareholder value. So that is certainly the goal.

I'll give you the one qualifier on it as well. Recently, on the inventory side, as we've mentioned on the last couple of calls, we were getting ready for some shut downs that we had to take in maintenance, so we built a little bit of inventory in the November-December timeframe. Also, we are pushing as much as we possibly can through into the finished goods area because, quite frankly, we are still behind on orders. So we are still behind in a number of areas. So in January, we had a pretty good shipping month, as Dan indicated, through the lower backlog. We are finally getting a lot of that into real into finished goods and getting it out the door, finally. We have been disappointing some customers -- quite a few of them, quite frankly.

The other qualifier I'll give you on the inventory side, and which we've seen a lot of especially in 2014, are these fantastic special projects. Remember, these are items that are constantly coming through the plant. They are usually for new alloys, alloys that are not sitting in stock or made to stock. They are typically made to order. And the nice thing about these projects is, when they come in, they are usually pretty big block or chunk of inventory we have to feed into the system because we don't produce these alloys all the time. And then they typically -- when they go out, they will go out in a block. And that's what we've been seeing recently.

Okay. Second question. Assuming, if nickel prices were to stabilize here at current levels, how long does the nickel turn through take to turn through this system to where the nickel part would no longer be a headwind to gross margins? Is that a quarter away? Is it two or three or four quarters away? How should we think about that?

Well, it usually takes a couple of quarters. We do have transactional business that those kind of effects can be seen right away. Part of our business have adjusters, escalators and de-escalators on the selling price based on nickel. So some of the longer-term multi-ship type projects, it will take a couple of quarters, at least, to get through. But with the transactional business you can start seeing it really within one quarter.

And what's the mix between transactional and, I guess, project business, typically?

Our transactional business is usually around 33%. About the third of the business flows through transactional type. We get the order, we ship it within 60 days.

Okay. Okay, thank you very much.

At this time, I would like to turn the call back over to management for closing comments.

Thank you very much for your time today. And thank you for your interest and support of Haynes. We will look forward to updating you next quarter.

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