Haynes International Inc (HAYN) 2016 Q1 法說會逐字稿

Welcome to the Haynes International first-quarter fiscal 2016 financial results 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, 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, 2015. 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 financial results. As we mentioned in the press release, business conditions in the first quarter were very challenging. We had some bright spots like the increase in the backlog both in aggregate dollar value and average selling price indicative of a very high quality backlog as we booked some excellent project work during the quarter.

However, revenue levels in the quarter were off sequentially from the fourth quarter of 2015 in each of our core markets as customers were very cautious about their inventory levels going into the end of the calendar year. In addition, as we mentioned last quarter, we had very low special project shipments in the first quarter and that will continue into the second quarter. I will get to the market details shortly.

Overall, net revenue in the first quarter of fiscal 2016 was $95.1 million, down 14.1% from last year's first-quarter revenue of $110.7 million. Net income in the first quarter of 2015 was $6.4 million compared to $228,000 this quarter, again illustrating the weakness in our markets and mix absent the project work. Shipments in the first quarter of 2016 were 4.4 million pounds, down 3% from last year's 4.5 million pounds. Average selling prices, inclusive of our other revenue, which is primarily our tolling business, were down over 11% to $21.68 per pound from last year's $24.48 per pound.

As we mentioned in the last call, we expected the first quarter of 2016 to be difficult and it appears to have proven true for both the industry and Haynes. At Haynes, our special project backlog, which was extremely strong in all of fiscal 2015, was thin, as expected and it will be thin in this upcoming quarter as well. Beyond the second quarter, as you can see from our backlog numbers, we were successful in booking orders during the quarter, including some special project business. So as we said last time, we expect our business to pick up in the second half of this year, but again reiterating we expect the upcoming second quarter to be soft similar to the first quarter.

In addition to customers clearing inventory, lower project shipments, lower commodity price levels and the usual fewer shipping days in the first quarter, business conditions in general are very soft and there's a lot of concern in the industrial economy right now. Both Europe and Asia-Pacific are struggling economically and the manufacturing PMI here in the state has dipped below 50 for three straight months. We mentioned in the last call that fiscal 2015 was a year of contrast and that still holds true at Haynes as we enter the second quarter.

In spite of the difficulties I mentioned above, we saw an increase in our backlog, primarily in special projects, but also in our aerospace products and our tolling business is still holding up well. We are working to relieve capacity constraints in our sheet and coil products area so we can take advantage of the expected increase in demand in aerospace and also support a return of business in our land-based gas turbine and CPI markets when those markets rebound. We expect better shipping levels of special project business in the second half of fiscal 2016. And just to remind you, that is because some of the special projects are already in process in our plants.

The mix of products, primarily aerospace and special projects, are typically more complex alloys and product forms to produce, so the cycle time in our plants are much longer then say a typical product for our land-based gas turbine market or for our high-volume chemical process market. We expect second-quarter 2016 shipments to remain challenging based on our ship schedules from our plants and our expectations that transactional business will remain soft. We do expect that business will pick up as we enter the third and fourth quarters of this year.

I meet with customers frequently and I think their sentiments in general would not be surprising to you. In aerospace, it's all about the readiness audits. There is a lot of bullish sentiment in the aerospace side of the business. In land-based gas turbine, there are positive indications from those involved with large turbines, but concern from those more heavily involved with smaller turbines. In CPI, the impacts of the oil and gas cutbacks are rippling through the supply chain. The strong dollar, available capacity and slowdowns in Asia and Europe are clearly impacting demand.

Moving to our end markets, net revenue in aerospace market for the first quarter was $47.5 million, up almost 10% from last year's $43.3 million. Volume in this market increased 14.1% to 2.1 million pounds from last year's 1.8 million pounds. Average selling price was down about 3.7% to $23.03 per pound from $23.91 per pound. Backlog in aerospace increased during the quarter 3.3% indicative of the strength we expect to see as this market moves deeper into 2016 and closer to the expected rampups in the new generation engine platforms.

I think most of you are well aware of the A320neo and the 737 MAX programs and the GE LEAP and Pratt 1000 series that will support those programs, but perhaps more specifically the launch plans over the next 6 to 18 months. I think all of us in the engine materials industry are excited to get these platforms ramping up and into production, and I know at Haynes we are positioning ourselves to meet that demand and meet the value-added opportunities we expect to see as these platforms drive the supply chain into production.

On the structural side, our aerospace tubing business is also holding up well, but I do expect to see that business flatten out a bit in the next 6 to 9 months as our key customers cycle through their inventory and rightsize their stock level to coincide with the increased reliability they've seen from Haynes. In short, as I've been telling you for the last three plus years, we were frustrating that industry by not having sufficient capability to meet their needs. Subsequently, they were forced to increase their safety stock levels. We are now further entrenching ourselves into their supply chains and forecasting and we expect to move some of that slack out of the system during the upcoming year creating a more efficient, reliable flow.

The aerospace industry has clearly been a bright spot for the specialty alloys industry over the past four or five quarters and we expect it to strengthen further as we move through 2016 and into 2017.

In our chemical processing market, net revenue for the quarter was $16.2 million, down over 47% from last year's $30.8 million. Volume was off 39.6% to just over 700,000 pounds from last year's 1.2 million pounds. Average selling prices fell to $22.69 per pound in the first quarter of 2016 from $26.02 a year ago, a reduction of 12.8%.

As we mentioned last time, we had very few special projects invoicing during this past quarter and next quarter is also expected to be weak. And comparatively, last year at this time was when we were invoicing some very strong special projects in the chemical process industry.

In addition, the core high volume side of the CPI business has been very slow. Our business in Asia-Pacific is off dramatically from a year ago further defining the scope of this issue. That being said, the backlog in this area rose 136% as we booked some special project business that we expect to start shipping late in fiscal year 2016 and into fiscal year 2017. This more than doubling of the backlog was largely responsible for the overall increase we saw in total backlog for the quarter and the increase in quality of that overall backlog. And I think you realize when I say quality of the overall backlog, I'm really talking about -- the higher-quality backlog is really that increase in average selling price of the backlog in spite of the calling commodity prices, primarily nickel.

I've mentioned this to you before, but I think it bears repeating, this emphasis we have developed in working with customers to overcome technical design hurdles and win special projects is a tribute to our applications engineering people both in the field and here at the plants, as well as the can-do attitude we see from our manufacturing people in the plants. These projects are often very complex and in some cases require special processing, but they are a key strength of Haynes, especially in these times where that differentiation means winning business.

With respect to the core CPI business, it remains very competitive and demand is as low as I have seen it in my eight years here at Haynes. I think I said the same thing last time. Genuinely concerned about where the demand level is right now in CPI and if you really do look at it, one of our applications guys can up to me and said that oil and gas pricing is to the CPI industry what nickel pricing is to the specialty metals industry. When you see that oil and gas price get so heavily depressed, it impacts the pricing downstream, compresses margins downstream and really creates a lot of concern and volatility downstream. And I think that's exactly what we are seeing right now.

The oil and gas crisis combined with the slow economies in Asia and Europe have made applications very difficult to find and MRO business very competitive. The strong dollar makes this situation even worse because the higher volume, more common alloys are also produced in Europe and Asia by local producers. CPI is always our most competitive market, which is another reason that the differentiation we have in special project development is so critical to Haynes' strategy.

Moving to land-based gas turbines, our sales into the land-based gas turbine market totaled $17 million in the first quarter, down about 3% from last year's $17.5 million. Volumes shift into this market was 1.3 million pounds, up almost 20% from last year's 1.1 million pounds. Average selling price fell 19% to $13.07 per pound from $16.17 per pound, mainly due to a shift in mix to a lower level of sheet and coil products shipped.

Backlog in this market also decreased in the quarter falling almost 21%. We are about two years into the downturn in this market and whereas we've been seeing application wins for materials like Haynes 282 and other alloys, along with better quote activity for large frame engines, the concern remains in smaller engines, especially those struggling due to the drag from low oil and gas investment activity, as well as other downstream industrial segments. We are hearing some positive comments in the supply chain, especially pertaining to some maintenance projects expected this year. We are just not seeing it materialize at this point on the order book. We are very close to the key players in this market and we will have the material available for the expected turnaround, but at this point this market remains very slow from an invoicing standpoint.

Finally, our other markets and other revenue accounted for $14.3 million during the quarter, down roughly 25% from last year's $19.1 million. Similar to CPI, the biggest impact here was the startup of a special project last year and the filling of the supply chain for that project. The good news is that one of those specific projects that we started up last year is becoming a recurring application on the consumer side of the business and we expect more orders to follow as we move through 2016.

Also, in this area, we saw a pretty dramatic pullback on some of the welding applications related to the corrosion industry. Again, quite a bit of that being related to oil and gas and the downstream chemical industry.

Finally, on the other revenue side of the business, La Porte custom metal processing set a record for revenue during the calendar year. As many of you know, we acquired them in January of last year, so I am quoting this over their first 12 months as part of the Haynes family. We are very pleased with the performance of this acquisition, especially in light of the economic times we now find ourselves operating in.

On our operating side, we mentioned the constraints we have in our coil and sheet processing area where we are operating very close to capacity. We are upgrading some cold-processing equipment and adding some heat treatment capabilities to relieve those constraints. That's really the crux of the CapEx that Dan will cover with you shortly and we detailed in the Q.

During the past quarter, we also went live with our IT project at our tubular products operations and it went very smoothly. And I know when it goes smoothly it's because a lot of the work that the IT people and the people on the ground down in the tube division put in for it. We will be entering our final major hurdle in the IT project in the third quarter. We still have some small add-ons after that stage, but we expect that the major hurdles will have been implemented. With that, let me turn it over to Dan for more details on our financials.

Thank you, Mark. As we noted in the press release, our financial results for the quarter were clearly impacted by the slowdown in the global industrial economies, the strong US dollar and the continuing decline in nickel. The market price of nickel declined another 12% over the quarter, which exceeds a 50% decline in the past six quarters. As Mark mentioned, transactional business, especially in our CPI market, was slow this quarter. Also lower this quarter, as we expected, were deliveries of the project-oriented specialty application shipments. These conditions unfavorably impacted revenue and compressed margins during the quarter. The average selling price for product sales declined $2.79 per pound, an 11.9% reduction in the first quarter of fiscal 2016 compared to the same period last year.

Gross margin as a percentage of net sales decreased to 12.7% in the first quarter compared to 18.3% in the same period last year. This compression on gross margin is partly due to pressure on selling prices from lower nickel prices combined with high cost of sales as we shipped the inventory melted in prior periods with higher nickel. Or said another way, pricing mechanisms sell faster than the length of the manufacturing cycle.

In addition, for certain commodity alloys still in inventory, a valuation charge to adjust inventory to lower net realizable values was necessary due to falling nickel prices and lower margins. On the last call, we originally forecasted $2 million to $2.5 million margin compression from declining nickel for this quarter. However, the impact was higher. With nickel falling further over the quarter and the valuation adjustment to lower realizable value, we estimate the impact was approximately $3 million pretax or a compression of 3.2 margin points.

Also, significantly impacting gross margin was the less favorable sales mix with lower specialty application projects with lower margin percentages. Another cost increase was our pension and retiree healthcare expense at $4.8 million in the first quarter compared to $3.2 million in the first quarter of last year. For the full-year fiscal 2016, this expense is expected to be $19.1 million as compared to fiscal 2015 of $12.6 million. The $6.5 million increase is primarily due to the Company's September 30, 2015 valuation, which required a change in the mortality tables and was impacted by a market drop in pension assets that we discussed on the last call.

SG&A costs combined with research and technical costs were $11.2 million for the quarter compared to $10.6 million in the first quarter of last year with the primary difference being foreign currency fluctuations. Our effective tax rate was high this quarter due to the lower pretax earnings and a discrete item due to a tax law change in December related to bonus depreciation that unfavorably impacted our manufacturers' deduction.

Net income was $228,000 for the quarter or $0.02 per diluted share, low but positive. Outlook for the quarter. The Company expects continued soft global demand, especially in the high-volume CPI and land-based gas turbine markets, along with low commodity prices, particularly in nickel, to continue to unfavorably impact product selling prices and continue to compress gross margin in the second quarter of fiscal 2016.

In addition, the mix of shipments is expected to be similar to the first quarter with lower levels of project-related specialty application shipments than recent quarters. Given these factors, management anticipates financial results in the second quarter to be similar to the first quarter of fiscal 2016.

Backlog was $204.7 million at December 31, 2015, an increase of $18.9 million or 10.2% from $185.8 million at September 30, 2015. The increase in backlog includes specialty project orders of approximately $24 million, which are expected to ship in the second half of fiscal 2016 and the first half of fiscal 2017. To give you an updated number, the backlog on January 31, 2016 was $200.9 million.

Capital spending. In our last call, we discussed plans to increase sheet manufacturing capacity in the Kokomo operations in order to help keep pace with current demand and anticipated growth in the aerospace market. We expect to spend approximately $16.6 million on this project in fiscal 2016. Overall, the Company plans to spend a total of $30 million in fiscal 2016 on capital expenditures. Our previous 2016 forecast for CapEx was $35 million and we've pulled that back to $30 million after reviewing and analyzing all the planned projects in light of the current markets, the current market conditions, to determine if certain projects could be delayed and cash-conserved. We believe that we can conserve $5 million from capital expenditures in fiscal 2016.

Cash flow. Net cash provided by operating activities was $10.1 million for the first quarter of fiscal 2016. The Company received upfront cash receipts of $16.1 million on special projects of which $9.2 million is recorded as restricted cash, which is not included in cash provided by operating activities. Our unrestricted cash balance was $48.3 million at December 31, 2015 and our revolver balance remains at zero borrowings.

In conclusion, from a financial perspective, this is a tough start to the new fiscal year. We are analyzing production schedules, spending requirements and inventory plans in order to strategically navigate this challenging environment. On the positive side, we have a backlog with solid orders for aerospace and for special project work expected to ship in the second half of the fiscal year. We will stay focused on managing costs and manufacturing efficiencies and the things that differentiate Haynes to create shareholder value. Mark, with that, I will now turn the discussion back over to you.

Thanks, Dan. The economic picture right now is very cloudy. It's interesting, as Dan just spoke here. We are talking about in some areas of the plant we are cutting back production schedules. We are moving people around. Meanwhile, in other areas of the plant, we are working overtime and as we said to you, we are trying to release some capacity constraints. We are booking a lot of our sheet and coil product now out into October/November of the upcoming year.

The aerospace business has held up extremely well and there are indications it's going to strengthen over the next year. In fact, we are still -- probably the best way to put it -- jamming some orders in to meet demand in that area, both on the production side, as well as in the finishing or value-added side of the business.

Our project business is still good, although it's definitely not as strong as 2015. We just landed some nice project work in the most recent quarter, which really helps. The core chemical process industry is soft and I said it to you in my commentary about markets, 700,000 pounds is a little bit frightening. Again, it's an odd -- it's an area of a lot of contrast right now. The American Chemical Council is reporting that there's -- I think there's 250 or 260 projects out there right now worth about $155 billion between plant expansions and new plants, more than half of that money being foreign investment in the US, really predicated on that low natural gas price being a big driving force.

I don't know what impact the strong dollar will have on those exports, but also a tremendous expectation for the chemical trade surplus as we move forward. Those are items that, as we look further into the future, that are going to generate and built that CPI business out into the future. Other products are slow as well. Land-based gas turbine, we've often said to you that that is an area of business where our distribution system is critical. A lot of those projects when they do come in, they are quick turnaround and that's worked well for us in the past. It's been extremely soft for the past two years.

There appears to be some new applications and orders come through as the year progresses. Our tolling business is still good. I don't expect to see it outperform last year's figures just strictly based on what I'm seeing in the metals industry in North America right now and the slowdowns I'm seeing elsewhere. The softer PMI is concerning. I think we are all feeling it. The same thing with demand out of Europe and Asia-Pacific. It's really soft right now. Again, I think we are fortunate. We have some great products. We have some great applications that we are developing out there and the aerospace business has been fantastic and we expect it to build, so that's held up well.

I do feel great about Haynes. I think we are positioned extremely well to compete in this environment. I know we are ready for the upturn. We are still addressing specific capacity issues in key operations and we've completed some much-needed capital investment over the past three years to position ourselves to meet the needs of our customers. We still have a lot to do, but again I'm very confident that Haynes is up to the challenge. With that, let's open the call to your questions.

Thank you. (Operator Instructions). Ed Marshall, Sidoti.

So you mentioned inventory adjustments. I am assuming you incurred some charges. If I had to guess, it sounds like $0.5 million or so, is that about right?

It's about $800,000 for our valuation adjustments, yes.

Okay. So roughly --.

And that's part of the $3 million that I mentioned, so about $2.2 million is the mismatch of nickel falling and the higher cost inventory flowing through the system and about $800,000 is related to the valuation.

Okay, okay. So the variance between your guide and the change was the inventory allowance?

Yes.

Okay. So Mark, you mentioned the moving in the tubing market based on your commentary in the call and I'm just curious, as your customers shift to more I guess I'd say more on-time delivery, how does it affect pricing for you?

Pricing is -- these are long-term agreements, so the pricing is locked in for the most part through 2018.

Okay. But presumably they go -- looking out a little bit further, presumably you will have renegotiations at some point. Does it ease pricing when the market has maybe more on-time delivery because of the capacity you put in, I assume?

I think we are in a pretty good position with this product, Ed. I don't like talking about specific pricing, but I think we do a real good job in delivering a very high quality product to people. So I feel real good about our pricing and our strength on those products as we move forward.

To be honest with you, I think we have a good enough product that there's going to be more opportunity to grow that on some of the platforms where maybe our product doesn't have as big a position as it does right now and without sacrificing pricing. And if I have -- normally I'd say if I had a big concern, it would be on the strength of the US dollar and our other competitors now going to start jumping into this because it is a pretty attractive product. But we will see. That's something you deal with all the time in this marketplace. But I think we have a very attractive product.

Got it. And the tolling agreements, it sounded like everything was a-okay there, even post I guess the second acquired acquisition that your main tolling customer went through? There's been no change? I guess that just closed recently? Comment?

We prefer not to discuss the tolling arrangements with other people. But I can say that I think we've done pretty well.

Okay. Then, finally, I guess looking at the aerospace opportunities, it sounds like there's been some disruption in the supply chain due to the shifts in capacity maybe of some of your competitors and I know they are long-term agreements and some of the older projects are probably well-protected, but I guess is there any chance as we look forward, are you potentially taking share from maybe some of the problems that some of your competitors might be having?

I think there's always skirmishes out there for marketshare because a lot of aerospace is under long-term agreements, but the complexity of the supply chain is such that you have a number of sub-tier fabricators and you are pretty much always at war with one another trying to garner more share from those sub-tier fabricators. So that's where a lot of the share skirmishes occur.

Again, I like where we've differentiated ourselves. I said this to you before, some of the guys in the long-product areas have acquired foraging capabilities that have moved them downstream. We are not really a big foraging product supplier. We are more of a flat product supplier, so we've kind of integrated ourselves in our parts manufacturing capabilities and I think that little bit of differentiation has allowed us to secure a pretty strong position at a number of the primes and even at a number of the sub-tier fabricators. It's just we've made things a lot easier for them by kitting products and giving people essentially that first stage in the operation, the cut part, so that they don't have to deal with scrap situations, etc. So that's kind of been our strategy of differentiation and integrating ourselves further into entrenching ourselves better into the supply chain.

So maybe I guess I will say because you are not coming right out and saying it, maybe I will just say it. Since you are taking share, do you think that those things will take -- improve as we go forward based on some of what's going on in your positioning and so forth? Do you think that will continue to accelerate?

I never like putting the cart before the horse, Ed. You know I'm very conservative. But I don't think anybody else had a record year in aerospace last year and we did. And I think it's a tribute to a lot of people putting a lot of time in working directly with customers making sure we are getting them what -- and customers know, they know we will turn this place upside down to get them out of trouble when they are in trouble, and we do it all the time. So it's a commitment I think we have more so than some of the other people in the industry that we're going to kill ourselves to give our customers what they need, when they need it and we are going to work with them whenever they have a push-out or a change in demand or anything like that.

That's good to hear. Thanks, guys. Appreciate it.

Chris Olin, Rosenblatt Securities.

Thanks for taking my questions. I just wanted to follow up on the aerospace questions and it seems like you're outperforming the peer group. You had something in the neighborhood of 14% growth. A lot of the other special material companies seem to be in that low single-digit range. I guess I just wanted to make sure, is that outperformance related to what you are seeing in terms of that safety stock being built that's not sustainable, or is there something else in that number?

I will tell you, Chris, if you work in this industry long enough, you see the whipsaw in the supply chain. It really moves up and down and some guys high volume this year frequently end up in low volume next year just because of the way this supply chain does whipsaw itself. I do think we've done a lot of things to make sure, as I was saying to Ed, to make sure we are putting product in the right spots for people. I think when you are in a period where we are right now where people are extremely conservative with their order patterns because they've been rewarded for that -- lower nickel. Every month for the last 20 months, if you can put off ordering 1000 pounds until next month, it is less expensive than it was last month. And I think someone like us who owns their own distribution system responds more quickly to that capability, so I think that's part of it, of what's going on out there.

I will say though too that we've won applications. Some of those applications, I talk about things like Haynes 282. Haynes 282 doubled last year in our sales and I can tell you guys -- I don't want to tell you a lot about it -- but I will tell you that the number one application for Hayes 282 is no longer defense. So there are some good stories going on out there with application engineering and development that are working real well for us right now. And that's -- we've got to keep doing that. That's who we are. That's what we have to keep doing.

Okay. That makes sense. Just as a quick follow-up, can you tell how much of the transactional volume weakness would be related to general market conditions, or how much of it would just be related to the drop in nickel prices? Do you get a sense of there's a lot of buyers on the sidelines that could come back in because it feels like nickel might be closer to a bottom now that that could be a positive?

I'm hopeful nickel is close to a bottom, but nickel has been at the bottom for -- it will be at the bottom next month for six months now. We've been talking about nickel dropping for a year and a half. The big concern to me when I sit here right now, land-based gas turbine is down and we understand why it's down. We see what's out there and what's available. We talk to the customers all the time. Very difficult right now what's happening there. Like I said, some of the large frame -- and when I'm talking large frame, I'm talking mainly the big utilities, the primary power products -- there seems to be a little bit of life in that. There seems to be some activity right now whereas the medium frame -- so I'm under 75 megawatt, medium and small now -- that seems to really be struggling.

We understand that area where it's really struggling in the oil and gas area, but on the chemical process area -- and I said this last time -- under 1 million pounds is deeply concerning to me. And when you are sitting in my chair, the first thing, are we losing share, are we losing share. You go out and you talk to customers. You meet with the salesforce. You go out and talk about the applications. You meet with the application engineers. I don't think we're getting killed on share. Do I think there are some areas where pricing has dropped so deeply that we are not participating as heavily as we used to? Yes, absolutely, I think that's some of the case. But I don't think we are losing heavy share in the chemical process industry.

Getting back to your question, how much of the transactional business. A great deal of the transactional business dropoff right now is in the chemical process industry. A lot of that comes in. When that area is booming, that's when you see our transactional business being 40%, 45% of a month's sales. Right now, transactional business in the last few months has been 25% of sales; and I think I've told you before I enter every month with one-third of my business I expect to be booked through transactional business, at least one-third. So you get a little bit of an idea of how much that can vary from good time to bad time. And right now, the transactional business, as Dan mentioned in his script, has been extremely soft.

That's helpful. Thanks a lot.

Michael Gambardella, JPMorgan.

Yes, good morning. Just wanted to follow up on your comments about the dollar and the competitive pressures you are feeling. Are you seeing in addition to foreign producers -- that may not be dollar costs giving you a higher competitive pressures on some of the transactional issues -- are you seeing some of your domestic competitors backing off the export market and creating more competitive pressures in the US?

I don't think so, Mike. In fact, in the US, I think we are just seeing general market softness more so than anything. I do feel, for instance, in Europe, I do feel in Europe we've seen very aggressive pricing pressure at our lower end markets. So high volume, chemical process, kind of bread and butter things that you would sell out of the distribution center. That pricing has been extremely difficult and you know why. VDM is over there. It's their home field and I'm the smartest guy in the world when it's $1.42 per euro. I get stupid real quick when we are down to $1.10 per euro. It makes them very competitive there.

Same thing when you get into Japan. There's some companies over there and even in China, China makes alloys like C276 now in some areas, and it depends on the quality requirements of the application. But in Japan also they can -- Nippon Yakin makes a pretty nice C-Series alloy, so you can see some very competitive pricing situations over there as well.

The domestic producers, I can't really say that I'm seeing anybody going haywire cutting prices. Again, you get back to that skirmish thing, every now and then you can tell when there is a new guy trying to become a hero and he's out there cutting prices, but that becomes very regional and you see guys cutting prices. Sometimes it lasts, sometimes it doesn't. I think we've been very patient. We have seen -- our history has been that when somebody undercuts us on a price, sometimes their material doesn't work as well as ours and the customer comes back to us.

So I think we've been very patient on that end and again, I don't want you to think that this is some strategic genius. I've got a free full mill from the aerospace side of the business, so I can afford to be patient. But like I said, I don't like seeing that CPI number at 700,000 pounds per quarter. That is of concern.

Right. And then on the aerospace where you do have contracts, is there a concern that given some of the competitive pressures overseas even with some of the aerospace suppliers overseas who are not dollar-based that even though you have contracts -- Boeing had a contract for titanium that was a take or pay that when titanium plummeted they basically forced all the suppliers to cancel the take-or-pay contract. Do you see a possibility of that as well?

We haven't been -- if you think about it, Mike, I like to go back to history. I agree with you. On the titanium side, I think where you really saw it itself is take or pay over three years all of a sudden became take or pay over five or seven years. They really lengthened those contracts, but they stayed essentially committed to the volumes. But kind of we will give you a couple extra years contract if you give us a little bit of relief on pricing I suspect is what happened.

When this industry really went through it in spades, think of 2009, it didn't see a lot of that. We are very fortunate. One, the aerospace business is US-dollar denominated as far as the engine components, so that helps a lot. But you did see reductions in volume that came through. But, again, I don't think anybody saw extensions, and maybe it's just because we don't ship as much, as many pounds, as much volume on an engine side as those guys do than are in the big structurals. But you did see some lengthening of take-or-pay contracts. But gosh, I can't think of one that went more than maybe three months over the contract life. We didn't see anybody go say, hey, you've got a three-year LTA, it just becomes a five or six year LTA because we need you guys to cut. It was people still didn't take or pay but people like us become a little more patient when we understand the market and say, hey, you still have the contract, we still have the metal, we will let you go an extra month. We will let you go an extra two months or three months before we renegotiate the next contract.

Right, right. Yes, I was thinking difference between now and say 2009, now maybe you can make a case -- you may say we have more structural issues to deal with like the dollar in China as opposed to back in 2009, it was more of a sudden shock to the system, financial system

Yes. I do get concerned. The nice thing about 2009 was you still had a weak dollar, so you knew you still had a manufacturing advantage and, you know what, if push comes to shove, we can export our way out of it. I am a little more concerned this time with the strong dollar out there. And again, to me though, I mean the day I got in here, it became more and more important and we just had been driving it all the way through the organization. We've got to be developing new applications and it's worked. It's sporadic. It's a tough way to live, but I think it makes us look more like our customers than just another merchant metal guy. And I think that's critical to us, developing these new applications and developing these special projects so that you almost get a little bit away from worrying about half a penny per hundredweight. You are worried more about a value you can bring into an application.

Okay. Thanks a lot.

(Operator Instructions). Lisa Springer, Singular Research.

Good morning. Regarding capital spending, the investments you are going to be making in sheet and coil capacity, when would you expect the capacity expansion to come online and how much of an increase are we talking about?

We will start seeing some of the capacity -- and just to give you an idea, Lisa -- we talked a little bit about it last time. The cold-rolling operation, we essentially have the structure in place. Cabot Corporation, when they used to own Haynes 30 years ago, put in some really good bones and skeletal structure, so that's really an upgrade to an existing cold-rolling capability that we already have. We expect that to be online in calendar 2016. Now there will be the usual rampups and conversion of products and qualifications and all that, so it'll be out to 2017 before it's really producing.

The heat treatment side of it, there's a big hole in our mill right now if you look outside the window, so I can't lie to you there. That thing -- that's coming along well. That's a little bit longer process to get it up and running. That'll be coming on late in 2016, probably more into mid-2017 or so before we actually start to see production come out of that. And as for the increase in capability, I'm going to say about 20% to 30% more product we should be able to get out.

We talked a little bit about it on the last call. Our cold finish is about 13 million capacity now. That'll go up to in the zone of 18 million with the new CapEx.

And you can imagine now, Lisa, I don't know if you this story from Haynes, but in 2012 they did an upgrade. Haynes was doing about 8 million pounds a year of cold-finished product. That upgrade got us up to 12 million pounds. Of course, we finished that upgrade just in time for the Great Recession. But, in 2012, we filled it. We did some more incremental work on pieces of equipment that got our capability or capacity up to -- from that 12 million up to about 13.5 million pounds, again just in time for a little bit of a downturn in 2013. But then we filled that again in 2014 and 2015, so this is a necessary part. And like I said too, that coil and sheet area is pretty heavily booked now. We are booked pretty much out into the October timeframe.

Okay. Thank you.

Thank you. We have reached the end of the question-and-answer session. Mr. Comerford, I would now like to turn the floor back over to you for closing comments.

Thanks very much, Christine. 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 again next quarter.