Haynes International Inc (HAYN) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Haynes International First Quarter of Fiscal 2018 Earnings Call. (Operator Instructions)

As a reminder, this call is being recorded.

It is now my pleasure to introduce your host, David Van Bibber, Controller and Chief Accounting Officer. Thank you. You may begin.

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(inaudible) 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, 2017. 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'll open with comments about the business and our end markets, and then Dan will give you greater detail on the financial results.

As you saw on the release, our order entry strengthened quite a bit during the quarter. The momentum we talked about in our last call in November has continued with stronger specialty project orders, particularly in our chemical processing area, along with good oil and gas and some other energy-related special projects and applications in our other markets area. We also saw strong booking activity in the aerospace market during the quarter. I'll touch on these as we get into the markets, but the net result is that our backlog is now over the $200,000 -- $200 million threshold.

I think it's also important to note the uplift we're seeing in the commodity prices. And as we mentioned in the last call, we started pulling back on price discounting and now we're starting to see some better acceptance of higher pricing in the marketplace. We're still working through some lower shipping volumes and lower-priced products within these volumes, but I think it's fair to say the turnaround in several of our key end markets is starting to take hold.

Moving to the first quarter results.

Net revenue was $89.7 million, down 3.9% from last year's $93.4 million. Notable in this number is that we had a very substantial specialty project a year ago that more than made up the difference here. Without that specialty application, the remaining business was actually up about 5%.

Our first quarter is always impacted by holidays and plant maintenance shutdowns and customers managing their balance sheets for the end of the year. But the big difference this year, and I think we outlined in our calls in August and November was that we had very little in the quarter as far as the high-priced specialty applications. We're also still, as I mentioned, flushing through some of the lower-priced products we've booked during a very difficult 2017.

Volume in the quarter was slightly lower than last year by 1.5% at approximately 3.9 million pounds, and pricing in the quarter was up about 2.5% from a year earlier, again reflective of the lack of specialty project applications.

As a result of this, along with the tax law change, the net loss in the quarter was $22.5 million as opposed to a loss of $672,000 in the fourth -- first quarter of 2017.

As we mentioned in our last call in November, we won some specialty applications recently, and some high-end applications that have been relatively dormant over the past 2-plus years, especially in our chemical processing area, are becoming active again. So as we get deeper into the second quarter and into the third quarter, we expect to begin to see this richer mix impact. We still have some pain to navigate during the front end of this quarter, but as we get into March and April, I think we'll start seeing higher volumes and a richer mix in our invoice shipments.

Moving to our end markets.

Net revenue in the aerospace market for the first quarter was $46.8 million, representing 52% of our total revenue. Sales were up about 2.3% from last year's $45.8 million. Volume in this market was also up slightly, just over 2 million pounds. Average selling price was up 2% to $23.15 per pound from $22.70 per pound last year. The backlog in aerospace also increased in the quarter 12.1% as we're starting to see better activity flowing in from the new engine platforms.

The activity we've seen in the leading end of the -- leading edge of the engine market, as evidenced by activity at key forgers, is now starting to flow deeper in into and more broadly into the fabrication supply chain. We expect demand from our key customers to continue to ramp as we progress through fiscal 2018. The work we've done to design and get specified into these new platforms, along with the upgrades and expansions we've done supporting our aerospace-related operations, have us very well positioned to meet the anticipated growth needs of this market.

As many of you know, Boeing and Airbus have backlogs of roughly 7 years on their order books, and they're continuing to look for opportunities to ramp their production, driving demand for the engine manufacturers and subsequently Haynes. I'm very confident that the investments we made in our tubular products area, our flat rolled products area, our distribution and value-added operations areas and in R&D, that we're more than ready to take on the anticipated ramp in demand.

By the way, we had a meeting earlier this week with a large specifier for our HAYNES 282 high-temperature material earlier this week. They told us they expect the ramp for this alloy and application to increase 25% this year. They also mentioned to us that some of the engines they're manufacturing for smaller commercial aircraft, that they expect HAYNES 282 to displace some existing alloys due to some temperature requirements. So again, in aerospace, I'm very pleased with our market position and our service capabilities as we enter the upcycle.

In our chemical processing market, net revenue for the quarter was $13.4 million, down 30% from last year's $19.1 million. CPI accounted for about 15% of our revenue in the quarter. Volume increased 13.6% during the quarter to almost 700,000 pounds from last year's 600,000 pounds. Average selling price was down 38.5% to $19.44 per pound compared to $31.62 per pound.

I think in this market, you can clearly see the importance and impact of special projects and that impact they have on our business. Dan will get into this a little bit more in his talking points and speaking specifically about specialty projects bookings. But as we've relayed you over the past 2 calls, we saw this ahead of time. We saw that we had significant gap in specialty applications and it hit our CPI business very hard over the last 2 quarters.

On the positive side, we mentioned last time we're not seeing huge projects rolling in right now, but we're seeing better activity in specialty applications and we're seeing a broader number of specialty applications. As a result, backlog in this area increased over 32% during the quarter, supporting some of our optimism as we move more deeply into 2018.

We also mentioned last time that there were some large applications being quoted in alloys Haynes does not produce and some very substantial volumes. One of these projects was let during the quarter, providing a substantial uplift in bookings for some of our peers. More importantly, we believe that this type of application is indicative of better confidence and a positive turn in the overall industry. I think we're far from out of the woods in this market, but the market has definitely started to turn positive over the past 6 months or so.

As I mentioned, our special projects activity has increased. We've also seen some better activity in our baseline products in flat roll and wire. I'd like to see stronger transactional activity as I believe that might indicate that some of the distribution supply chain is seeing stock-outs. But as of yet, this is still an area that has not seen much of an uplift. By the way, in my experience, that increase in transactional activity, and I think I mentioned this before, is also typically the best indicator of a stronger pricing environment.

One last thing on the chemical processing area and on the specialty projects. As overseas markets start to improve, this area also starts to improve. A lot of this industry will work with domestic specifiers and designers on these applications. And frequently, the first stage or 2 of fabrication is also in the U.S. But very frequently, end product and the end application is in Asia or the Middle East or Europe. So the demand shows up in bookings and sales in the United States, but the real driving force for that demand is overseas. And the improving economies we're starting to see overseas, as we see in Asia and Europe getting busier, we expect to see broader improvements in demand for these higher-end applications.

Moving to the industrial gas turbine market.

Our sales in the quarter totaled $13.4 million, down 8% from last year's $14.6 million. IGT accounted for roughly 15% of sales during the quarter. Volume shipped into this market was down 15.7% to approximately 900,000 pounds from last year's just over 1 million pounds. Average selling price during the quarter was $15.32 per pound, up 9% from last year. Backlog during the quarter also increased just slightly, though, at 2.3%.

I think the issues in the gas turbine industry have been pretty well documented with the restructurings announced at GE, who now owns Alstom and Siemens. This has dramatically impacted the large-frame OEM side of the business, and it'll likely continue impact demand there for at least the upcoming year.

MRO activity is still pretty good, and activity in smaller-frame applications appears to actually be strengthening with better demand from oil and gas. However, the overhang of the larger-frame issues have created a little bit of a sit-on-your-hand situation throughout the industry.

Right now, the uncertainty is causing a reluctance to buying activity, and I'm sure the cash concerns are also a big part of what's going on. As a result, until the restructurings become more clear, I think a significant level of activity in this market is on hold.

I've mentioned previously our work to develop new applications and work with designers on driving higher efficiency, utilizing higher-temperature capability materials, and our work here has been very successful. However, I expect that the shake-out in this industry will likely take all of 2018 to get sorted out. And as a result, we expect this market to continue to face a very challenging environment throughout the upcoming year.

Finally, our other markets and other revenues accounted for $16.1 million during the quarter, up 16% from last year's $13.9 million. This area is roughly 18% of our revenue. Sales of both products and tolling services were up over last year, with the products side being primarily carried by some project work and some repeat applications becoming active in the oil and gas market. The uplifting in toll processing business was very broad. It's a broad increase in activity across the customer base. In short, I think that just goes hand in hand with most metal processors now getting busy as the economy gets bigger -- busy again.

On the operating side, we've completed the major CapEx projects in flat roll and the IT platform, and we're nearing completion in our transition to centralizing our value-added distribution capabilities in LaPorte. Strategically, I think these moves were well timed and that we're starting to see activity in our key markets, and we expect these upgrades and expansions will position us well to meet the anticipated growth we expect in these markets. These changes, I think, will make us quicker with better quality and broader capabilities to penetrate deeper into our customer supply chains. We feel confident that we're better prepared than ever to be a resource to our customers all the way from the alloy design and specification to parts manufacture and processing for their components.

Also, perhaps less strategic and more on the tactical side of the execution, I think you know these large capital upgrade projects are difficult to manage and at times disruptive to material flow and continuity of the business. We managed to complete a fairly significant list of project upgrades over the last few years with no business interruptions, and the equipment we've put in place is actually doing what we expected it to do and what we designed it to do. I think that's an expectation, but I think most of you know in this industry, it's really no easy achievement. It comes only with a lot of good people doing the specification work, the building, the implementation and the commissioning of these projects. I'm extremely thankful to our employees and our contractors that worked tirelessly to get these projects over the goal line.

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

Thank you, Mark.

As we have historically mentioned, the start of our fiscal year typically is unfavorably impacted by lower volumes due to holidays, plant maintenance outages and customers managing their calendar year-end balance sheets.

Sequentially, volume dropped 16.9% in the first quarter of fiscal 2018 from the fourth quarter of fiscal 2017. Volume this quarter compared to last year's first quarter was 1.5% lower. This was driven by lower specialty application projects this quarter. As last year, we had approximately $8 million higher revenue in special projects as compared to this quarter.

Margins this quarter improved to 7.8% as compared to the third quarter's 3.7% and fourth quarter's 5.7%, even on lower overall revenue levels and similar sequential special project levels. This margin expansion is driven by improved product mix and lower inventory reserve due to more favorable market conditions.

Overall average selling price per pound increased sequentially 7.2%, driven by higher raw material prices and pricing strength. In addition, we are expecting further pricing strength moving forward as pricing under many of our customer long-term agreements increased according to annual escalation clauses related to the market price of certain raw materials beginning in January.

Our backlog increased significantly over the first quarter with backlog at $205.7 million at December 31, 2017, an increase of $28.4 million or 16% from the $177.3 million at September 30, 2017.

Backlog pounds increased 25.1% over the quarter. This backlog strength underlines our optimism for increasing revenue and profitability as we progress through 2018.

Beyond the quarter-end, backlog continued to increase, with January 31, 2018, backlog at $207.6 million.

Looking forward, we expect continued improving gross margins driven by higher volume levels, pricing strengths and improving levels of specialty application projects utilizing higher-margin proprietary alloys that our company produces.

Additional items impacting operations and costs include the following. First, our strategic action to expand our value-added capabilities at our service center in LaPorte, Indiana is essentially complete, including moving operations from Lebanon, Indiana to LaPorte. We expect improving productivity as we move forward, and we expect less costs related to the move in the second half of fiscal -- of the fiscal year and eliminating duplicate costs as we bring the project to closure. We incurred approximately $800,000 this quarter and expect a similar amount next quarter as well.

Second, our upgrade to the cold finishing equipment designed to increase sheets and coil capacity primarily for the aerospace market is expected to drive higher aerospace shipments over fiscal 2018. Production of this product form in the first quarter increased nearly 25% from the same quarter last year.

Third, the relief in expense from pension and retiree health care cost after increasing $10.8 million pretax over 2 years is expected to decrease this fiscal year by approximately $9.2 million. This will ease into the P&L as a portion is capitalized into inventory and thus hits the P&L when the inventory is sold.

Fourth, raw material prices have increased. The most impactful change is nickel. Looking at some recent history for nickel, the average LME price for nickel starting way back in fiscal 2014 was $7.51 per pound and declined 20.9% to $5.94 per pound during fiscal 2015, declined an additional 30.3% further in -- to $4.14 per pound average over fiscal 2016, then increased moderately to $4.70 over fiscal 2017. The LME price for the 30 days ending September 30, 2017, was $5.10 per pound and has continued to rise through December to $5.18 and up over $6 in portions of January. If this rising trend continues, they should provide a tailwind for margins into fiscal 2018.

Lastly, the recently weaker dollar has contributed to the nickel increase as well as the increase in the price of oil, which, as a side note, we hope will impact the demand in our chemical processing market. The weaker dollar may also improve our competitiveness in our European markets, which, conversely, would likely create a charge to SG&A related to our U.S. dollar monetary net assets at our foreign locations. In fact, this SG&A charge is roughly estimated to be over $650,000 unfavorable in January due to the recent foreign currency fluctuations.

SG&A costs combined with research and technical costs were $11.7 million in the first quarter of fiscal '18. For the full year fiscal '18, SG&A is expected to be slightly less than $47 million, excluding any foreign currency impacts.

Based upon a normal 40% effective tax rate, which is likely used in your models, our adjusted net loss was $2.9 million or $0.24 net loss per diluted share, excluding the significant tax adjustments this quarter.

The Tax Cuts and Jobs Act signed into law this quarter reduces the statutory U.S. federal rate from 35% to 21%. Since we are a September year-end company, our prorated statutory rate is reduced from 35% to 24.5% for our full fiscal 2018, then further reduces to 21% thereafter. The largest impact is the revaluing of our deferred tax asset to account for the future impact of the lower tax rate on this deferred amount. We performed an analysis of our first quarter tax provision as compared to a previous effective tax rate of 40% and quantified the $19.6 million, which impacted earnings per share by $1.58 per diluted share.

Our effective tax rate going forward will likely be a bit unusual. This year, since we are expecting a shift from pretax losses to pretax income during the year, our effective tax rate is currently estimated at only 4%. But this is subject to change as the year progresses.

Beyond fiscal 2018, assuming normalized market conditions and a solid income environment, our effective tax rate is expected to be in the mid-20% level.

Other aspects of the tax reform could impact us such as the repatriation of accumulated foreign earnings. Further analysis is needed such as a full foreign operations E&P study to determine if any adjustments are needed, which will be completed before our year-end.

Cash flow and liquidity.

Net cash used in operating activities was $6.3 million for the first quarter of fiscal 2018 and capital expenditures were $3.2 million. Inventory increased over the quarter by $22.5 million, driven by our higher backlog levels, higher special project material and production and higher raw material costs.

Our revolver balance remains at 0 borrowings and our cash balance was $34 million at December 31, 2017, with $19 million in the U.S. and $15 million outside the U.S. Additional cash required to ramp up business activity levels is expected in the second quarter and will come from U.S. cash balances and, if required, borrowings against our revolving credit facility.

Outlook for next quarter.

Given the positive trends we're seeing in order entry rates, backlog and pricing, we expect higher revenue in the second quarter as well as earnings closer to break even than those of the first quarter of fiscal 2018.

In conclusion, while we continue to push through these periods of overall unfavorable financial performance, we are encouraged by the improving order entry rates and backlog levels, especially in certain specialty application projects utilizing our patented alloys. This, combined with strengthening raw material prices, will drive better pricing levels and are favorable signs of improvement in fiscal 2018. In addition, the CapEx investments we've made over the past few years provide potential for improving operating leverage to be realized on higher volume levels.

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

Thanks very much, Dan.

I think 6 months ago when we had a call with you, we -- I think it's the only time we ever gave you more than a quarter's view on things. We looked out and mentioned that we didn't see much of a specialty project backlog, and we told you things were going to be very difficult for that 6 months through the end of last calendar year might be the best way to put it. And -- but we also gave you some hope when we looked at some of the macros or larger-scale things. We saw some of our peers who have forging businesses starting to come out of the doldrums and do better, and we felt that was a good indicator of where things were going. We saw things like aluminum prices and iron ore and subsequently carbon steel, just a lot of things that were making the economy a little bit busier, starting to do better. So we kind of gave you hope that things were getting better for us. That's kind of where we were.

Where we are is I think you've seen it in the backlog levels now and the key thing for us is to transition that backlog into better invoice levels. As Dan mentioned, January was kind of tough from the foreign exchange hit that we'll -- we took. Backlog increased again in January. Invoice levels were pretty good in January as well. So I think we are definitely starting to move out of the doldrums, might be the best way to put it.

I think I've used the phrase in the past when things were getting tough that nickel was telling you something. And I think now that things are getting better, I think nickel is also telling us something. I think we're seeing that opposite impact right now, that things are starting to get better. Asia and Europe appear to be coming out of their doldrums. The U.S. seems to be moving into a broader expansion that includes applications utilizing more of our types of advanced materials.

Haynes is ready. We've done the base work to get our products specified on next-generation platforms and new applications. And those applications are starting to gain traction and increase in demand in the marketplace.

One of the discussions I had recently with people was about the backlog at $200 million. And I don't know that Haynes has ever seen a backlog of $200 million when nickel was essentially $5 a pound and we had a very, very difficult IGT market and baseline CPI is still difficult. So I think it's one of the highest-quality backlogs we've had in quite some time.

I like where we are right now. I like where that backlog is. I like the quality of the products I see in it. I like the way our equipment has been brought online. As Dan mentioned and I mentioned, I still think we need to fight through a little bit of this upcoming quarter. When I look at the layers in the order book and the backlog, I think we're seeing a good transition into 2018.

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

(Operator Instructions) Our first question comes from Edward Marshall from Sidoti & Company.

So I want to talk about the chemical business. Aside from bookings and customer in -- making inquiries, discussions with sales, it's a global business. So I'm curious, what kind of benchmarks do you guys pay attention to so that we can kind of look [at that]? Because we've seen this market give us several head fakes, I guess, over the last, call it, 4, 5 years so that we don't have to wait for the kind of the quarter results to kind of really understand that this market's changed in one direction or the other.

I think as a macro, more so than anything, we look at the American Chemistry Council numbers. And specifically, our people look at a lot of the CapEx spending that's going in -- on inside of those numbers into the chemical market. What we also tend to look at is the types of chemicals that are being produced. And I think everybody knows, I mean, we have a little bit of a role at some of the big ethylene crackers, but we're really more downstream into the more advanced chemicals. So a lot of that comes with direct discussions with the manufacturers, and that's where the projects side of the business has really driven at. And I think that's probably the toughest thing for you guys to model, is this project business. And I think this quarter probably -- comparing this quarter to the first quarter of last year is probably one of the most dramatic impacts. You see that we had that -- we had a huge chemical project that came through last year and an excellent project for one of our more advanced proprietary materials. So it was a very, very high-priced type of project, et cetera. And now we're starting to see more project work coming through and it's nicer. So we're starting to see broader applications come through, and we're starting to some reorder points come through, which is nice. But if you're looking for that baseline chemical activity, I'm sure some of the bigger guys look at things like just oil prices and where that's going. And that's not a bad macro indicator to look at for where things are going, especially on the front end of the chemical side of the business. But for us, it's more dependent on more advanced chemicals, and the big, big driver for us is always when we can score these projects that come through or the more advanced applications for things like HASTELLOY G-35 or HASTELLOY B-3 or HASTELLOY HYBRID-BC1. When we land those types of projects, that's when we see big differences come through in our CPI business.

Got you. You mentioned 282 as a percent of aerospace volume today. You mentioned that customers, that it could be up 25%. (inaudible)?

Now what I said is -- yes I didn't mention 282 as a percent of aerospace volume. What I said is that's a proprietary material we have on the Pratt & Whitney 1000 engine, that family of engines, might be the best way to put it. And we were told to get ready for a 25% ramp this year. And not only that, one of the things that's being driven in there is we have a number of applications where we're specified in. But due to some heat profiling that they've done, we've actually won a few more applications inside that engine.

Got it. But I guess my question was what percentage of aero volume was it's at?

We don't discuss that. Yes, I'm sorry. Yes.

I didn't think so. I asked the question wrong. Anyway, aero backlog, you said 12% increase in the quarter. I'm assuming that's the revenue number?

Yes, it is.

What's volume? It looks like volume's up much more.

Overall -- you mean overall volume in the backlog?

Yes. No, no, I meant volume for Europe. You have that in December?

I don't know that we've released that out. By the -- ...

Yes, yes.

I don't know that we break out the pounds by market to discuss.

It's those percentages that you've...

Yes, we just do the -- I just gave you the revenue increase in the backlog, Ed.

Okay. And so the volume increase looks relatively large and due to the fact that pricing went down on a sequential basis in backlog, and it's minor. My question is, were some of the aerospace customers getting in front of price increases? Maybe you can kind of comment to that a little bit.

Well, one thing I did mention in my prepared remarks is we have quite a few long-term agreements that are on escalators. That's both annual agreements as well as ones that adjust quarterly and biannually. And so in January, those annual ones especially are stepping up a bit with higher raw material prices. So those escalators always help us because we may already be feeling the impact of the increased nickel and we've already purchased the nickel and produced the product. And then this will give us a bit of pricing strength that goes along with it.

Got it. Well, regardless, 8 million pounds. You haven't seen it in over 3 years, so it's a good number. Okay.

It's a great backlog right now. We feel real good about it, Ed.

And one other point on the kind of the quality of the backlog. If you're just looking at the average selling price in the backlog, as you mentioned, it went down slightly. But think about the mix in there. A lot of what causes that is you got a long lead time of titanium. And per pound, titanium is quite high versus nickel. So as Mark mentioned in his script, we're quite happy with the quality of the backlog. Even though you see that ticking down slightly on the average selling price, overall we're happy with it.

(Operator Instructions) Our next question comes from the line of Phil Gibbs from KeyBanc Capital Markets.

Mark, the inventory in the first quarter, I think you have planned to take down, at least per your commentary last call or at least that's what I thought what was going to happen, and it did build a good bit. Does that reflect just the complexity in the current business, meaning some of the orders that you're taking on are of, call it, increasing variety? And just wanted to get that disconnect relative to what we were thinking. And then do you expect the inventory to, call it, increase further into your second quarter as business improves?

Yes, Phil, the big difference is the uplift we saw in the backlog and a lot of it being special projects, which essentially is not off-the-shelf type of material. But we saw a good uplift in aerospace and in the specialty projects side of the business. And the aerospace side that we saw a lot of the uplift in was the non-titanium. So the backlog you're looking at right now, that's why we talked about it as a higher-quality backlog than normal. I think we'll start to see some more of the titanium orders rolled in later, but we've got a lot of that inventory planned. As far as we look at the balance of the year, I think it's going to depend on what types of orders we see coming through. Six months ago, if you remember, we didn't have a lot of specialty applications sitting in the backlog, but we were quoting a lot. Now we've got a lot of specialty applications sitting in the backlog. And the thing is, we're still quoting more. So I can't make a guarantee that inventory is going to come down. The objective is to bring it down and start generating that cash. But if we have the high-quality problem of a lot more specialty applications getting booked, I can't make a guarantee on it. We'd love seeing those specialty applications coming in.

So it sounds like you're waiting a bit to let some of the titanium inventory out as the year progresses. So it sounds like you're pretty well stuck on that and most of the inventory that you're seeing was a surprise and is mostly on the CPI side, it sounds like.

Yes, the titanium side of the business is very predictable. And what we saw is an uplift essentially in the non-titanium, be it special projects in chemical or in the -- our other products area. For instance, we had a huge application about 3 years ago that was essentially a coal-related, if you don't my saying it, a coal-related application that was huge about 3 or 4 years ago. And we had a huge reorder come through, not as big as that one was, but a huge reorder come through, and it was one of those things where, oh, gosh, it's a great material, it's a great alloy, it's a great product, but it's not the kind of thing we have sitting on the shelves. So that was one of our big uplifts that we saw in our other markets area as far as order entry. So it's a brand-new application 3 years ago. And we essentially got a big order for spares and things along that line that came in during the quarter. And obviously, we booked the order and then we've got to start melting.

The other thing that may impact inventory is keep in mind the cap line. We have that CapEx complete. We're starting to ramp up production on that. As I mentioned in my remarks, production on the cap line was 25% higher this quarter versus a year ago's first quarter. So more going through WIP. So WIP numbers are the ones that really are up right now. And as we complete the production on those, some of those have some very long production cycles depending on what alloy it is, then we get that out into finished goods, we get that into top line revenue, so.

Okay. And then I have a couple more for clarity. I think the tax commentary was helpful but also a little bit confusing, probably somewhat for you as well. But what should we be modeling for an effective rate for the remaining 3 quarters of the year?

Remaining 3 quarters. This year, we're expecting a very low 4% effective tax rate. Now that can bounce around, so that's why I say it's subject to change. But right now, as we look at how the shift from pretax losses, which we're currently in, into pretax profits we hope later in the year, that really makes the effective tax rate kind of funny because you're kind of zeroing in around breakeven. So the permanent items really mess with your effective tax rate. So right now, we're modeling around 4%, which I know is strange. But once we get into a stronger, profitable area in a normalized market, then our effective tax rate, we are expecting it to be in the mid-20s. So mid-20% is what we're kind of -- our feeling going forward with the new tax law, much better than what we had, had before in the 40% range. But this year's going to be a little strange. So I would model around 4% at this point.

Okay. And did your SG&A guidance for the year include or exclude research and development?

Includes research and development. Yes, that's -- SG&A including research and technology, yes.

Okay. And your pension decline year-on-year, this $9.2 million, how much of that is in SG&A and cost of goods sold?

Yes, the split is -- it's mostly cost of goods sold. We would estimate the split to be around 90% cost of goods sold and 10% SG&A.

Okay, very helpful. And just one follow-up on Ed's question on the pricing and some of your escalators. You said annually, quarterly and biannual. Can you give us a feel for how we should think about average pricing per pound in the second quarter versus the first quarter? I mean, are we thinking about it up $1, up $2, flat? And how do we think about that?

Well, certainly, the escalators are going to help us. And right now, our product mix is quite skewed to the aerospace side, as you can see. So we previously told you that our LTAs are something in the range of 30% of our business, maybe the annual wins in that, maybe 20% of our business. Well, now, with this current mix, it's quite different than that. So this past quarter, which may not be indicative of the full year by any means, but this past quarter, our annual LTAs were about 36% of our revenue. So as we -- as those step up with raw materials, we're expecting maybe a 3% or so escalator due to raw materials, which will be very helpful because, as I mentioned, we may -- we are already feeling kind of the sting or the impact of the higher raw materials in general. I mean, this recent January move, maybe not, but nickel has increased and cobalt has increased for a while now, and we're already feeling that somewhat in our cost of goods sold. So when you hit that annual adjuster time frame, that really helps.

Yes, it's probably a good number that Dan gave you, that type of a 3% number, Phil. And be cognizant. And again, I know it's very difficult for you guys to model, but there are some special projects coming through as well, which tend to help us quite a bit.

Yes.

There are no further questions at this time. I would now like to turn the floor back over to Mark Comerford for closing comments.

Thanks very much. And everyone, thank you very much for your time today and your support of Haynes International. We look forward to updating you in the next quarter. Thanks again.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.