Haynes International Inc (HAYN) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Haynes International Second Quarter Fiscal 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Van Bibber, Controller and Chief Accounting Officer.

Thank you very much for joining us today. With me today are Mark Comerford, President and CEO of Haynes International; and Dan Maudlin, Vice President and Chief Financial Officer.

Before we get started, I would like to read a brief cautionary note regarding forward-looking statements.

This conference call contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 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 a greater detail on the financial results.

The momentum we talked about in our last call in February continued to strengthen this quarter. Sequentially, we moved from just under $90 million in shipments to over $110 million in shipments in the quarter. And on top of that, we saw the backlog for unfulfilled orders increase. As we mentioned last time, we're still invoicing some of the lower-margin orders we took 2 or 3 quarters ago, so we've not yet seen the corresponding uplift in profitability. We still have another quarter of lower-margin products to work through. But as we mentioned in the press release, each month during the quarter got better, ending with March being our best month in about 2 years for transactional business, along with being our best order entry month in about that same time frame. And if I'm not mistaken, I think our backlog is the highest it's been in probably 2 years. It might even be almost 3 years. And with the IGT business being so soft, that's -- it's a very high-quality backlog that we're looking at right now.

Returning to the second quarter. Net revenue was $110.2 million, up 6.9% from last year's $103.1 million. Volume in the quarter was 4.7 million pounds, down about 3% from last year's 4.8 million pounds. Average selling prices in the quarter were $23.46 per pound, inclusive of our other revenue, up about 10% over last year's $21.28 per pound. Our shipments into the aerospace, chemical processing and our other smaller markets increased significantly, both year-on-year and sequentially in the second quarter, but those gains were offset by poor shipping levels into the industrial gas turbine market. As we mentioned last time, we expect the IGT market to remain soft as the large OEMs restructure their businesses over the next year or so.

I'm pleased with how quickly we were able to ramp up shipments into aerospace and CPI to cover the shortfall in IGT, and we'll have to continue to push in that direction to make up for the expected lack of volume in the IGT market. Again, with the ramp we made in the quarter from $90 million to over $110 million in revenue, and the backlog still expanding beyond that ramp in revenue, I think we'll be able to make that transition.

With that, let me move to our key markets. Net revenue in the aerospace market for the quarter was $59 million, representing approximately 53.5% of our total revenue. Sales were up about 19.2% from last year's $49.5 million, and this quarter's $59 million is our second highest shipping quarter in aerospace in the past 4.5 years. Volume shipped in this market was 2.6 million pounds, up 11.1% over last year's 2.3 million pounds. Average selling price was up almost 7.4% to $22.90 per pound from last year's $21.33 per pound. We finally moved through the start-up and commissioning phases in our tubular products area, our cold finish strip and sheet area, and our primary distribution and finishing operations. And I think we're now beginning to see a smoother flow of material and a better capability to meet increased demands that we're seeing and we expect to see in the aerospace market, as the new engine platforms ramp up their production rates. By the way, in spite of the increased shipping levels, we also saw the aerospace market, our backlog, increase sequentially from Q1 to Q2 by about 4% during the quarter. Overall a very solid performance in aerospace, and we need to keep driving forward in this market. As I believe you're aware, Boeing and Airbus have backlogs of roughly 7 to 8 years on their order books, and they are continuing to look for opportunities to ramp production driving demand for the engine manufacturers and, subsequently, Haynes. I'm very confident that the investments I mentioned earlier in the tubular products area, our flat rolled products area, our distribution and value-added operations areas as well as in R&D that we're ready -- more than ready to take on that anticipated ramp in demand. I was very pleased with how our operations responded this quarter to the increased step-up in shipments. Again, in aerospace, I'm very pleased with our market position and service capabilities as we enter this long-awaited upcycle.

In our chemical processing market, net revenue for the quarter was $21.1 million, up roughly 17% from last year's $18.1 million. CPI accounted for 19.2% of our revenue. Volume was 1 million pounds, up 29.7% from last year's 771,000 pounds. Average selling price was $21.15 per pound, down about 10% from last year's $23.45 per pound. The backlog in this area fell slightly, about 4.7%. But remember, that slight drop in backlog was after we ramped shipments over 45% sequentially from the first quarter of '18's 687,000 pounds.

As we discussed last time, we're starting to see better activity in both areas of our CPI business. On the higher-volume, lower-priced applications, some of our peers have reported better activity in large applications, most notably some large pipeline repair projects. Following on that lead, we're also seeing more investment repair work, along with some project work, at some of our larger chemical customers and fab shops. I think I mentioned last time that we were seeing better activity out of the Asia Pacific region, in particular quote activity and some applications that have been dormant were starting to come back.

Also some repair work that had been relatively dormant is coming back in Asia Pacific. We had a very good quarter in CPI in the Asia Pacific region.

Likewise, in our specialty applications area, the activity we discussed over the past few quarters is starting to bear fruit as new applications are starting to move out of the potential column and into the order column. Specialty application projects are very sporadic, but they're also one of our best avenues for moving our alloys into the market and gaining a better profitability outcome. Activity remains very brisk in this area. By the way, 2 new special projects came in last week, both of them significant to us, not huge, but about $1 million apiece or so, which is always great for us to see when our customers are moving these concepts into actual applications.

I think activity will remain sporadic in this market, but the bias appears to be up as world economies are getting busier, and oil prices appear to be holding up, and reports from our customers indicate that there was quite a bit of underinvestment over the past 4 years. This area benefited most during the quarter from higher transactional activity. We're seeing some lead times moving out in the industry. I think if this holds up, we'll see better transactional activity as we move deeper into 2018. It will be sporadic, but it definitely feels like the bias is upward.

Similar to aerospace, I'm very pleased with how our people in the plants and distribution centers responded this quarter. A 45% increase in demand inside of one quarter is difficult to meet, and it's difficult to schedule. I don't expect this market to move smoothly upwards, but as I mentioned, I think that overall bias is finally trending back up.

Moving to the industrial gas turbine market. Our sales in the quarter totaled $11.8 million, down 34.1% from last year's $17.8 million. IGT accounted for roughly 10.7% of sales during the quarter. Volume shipped into this market was down 54.4% to 640,000 pounds from last year's 1.4 million pounds. Average selling price per pound in the quarter was $18.37 per pound, up about 44% from last year's $12.71 per pound. Backlog in this area increased over 20% in the quarter, but as you can imagine, that is off a very low level. As we discussed last call, the restructuring announcements from the large OEMs have pretty much frozen demand in the large and medium-frame turbine markets. And just to give you an idea, I mean, a lot of the work for -- MRO work seems to be put on hold, or at least it's moving a lot slower than it was, I'll say, 6 months or a year ago. And I think that will be something we see and continue to see as the year goes on.

Our customer opinions on consolidations and the duration of the pain in this market differ widely. As their opinions on where the market will emerge and when it emerges, the one thing they seem to be unified in saying is don't expect to bounce back in 2018. Smaller-frame applications could see a pickup as investment in oil and gas applications start to increase, but the overhang in the large- and medium-frame applications will likely continue to dampen this industry in the next few quarters.

Interestingly, 2 of the areas where our backlog increased in IGT over the past quarter were in orders for new applications and orders from some relatively new customers. So we need to stay in front of these decision-makers as the industry -- and make sure we're prepared for any transactional opportunities that present themselves as well as for new applications. Again, we are seeing more development work for higher efficiencies. And I think as you know, that typically means -- for people like Haynes, that means higher operating temperatures, it means more severe operating environments and it means better demand for Haynes types of products.

Finally, our other markets and other revenue accounted for $18.3 million during the quarter, up 3.4% from last year's $17.7 million. This area was roughly 16.6% of our revenue. Sales of products into our smaller markets led the way this quarter, jumping about 37% sequentially and 28% over last year. We're not a big player in the oil and gas applications, but those applications led the way this quarter.

On the toll processing side, business fell a bit, as we processed more material for our own internal shipments and replenishments, but we also saw some slight adjustments that customers are making and corrections in their own stock levels. Operationally, as I mentioned earlier, we're stepping up shipping levels on the revenue side. With the fall in the IGT business, we're seeing less ingot, billet and slab demand, which in our business, those product forms are your fastest-turning, highest-shipping volume types of products. Translating that means that we're shipping a more complex mix of products right now, which means lighter gauge thicknesses, more precise requirements, more demanding quality requirements, that type of thing. We're still below that 5 million pound per quarter shipping threshold that I've mentioned to you previously that's critical to getting us back to profitability. We made a pretty solid push this quarter versus the first quarter, but now we have to finish the job and get to that next level. The mix, while more complex, is a better mix, more aerospace, more specialty applications work. Having a $200 million-plus backlog with an IGT market that's on its back is surprising and very encouraging to me. The backlog has high-quality, high-priced products in it. And as we bleed out the lower-priced items, as I mentioned earlier, I think we'll continue to do that this quarter, and I think we'll start to move into the transition into profitability.

Finally, I'm very proud of the work our people have done to respond to the changes of work and the increased demand we're seeing. With the new equipment we've put in place, along with consolidation of our primary service center in our LaPorte operations and subsequent manpower moves that were concurrent with that process, I'm very pleased with the focus our people showed to get that work done safely, on time, on budget and while ramping up shipments in aerospace, CPI and some of our smaller markets like oil and gas. As a result, and I've mentioned this previously, we feel confident that we're better prepared than ever to be a resource to our customers, all the way from alloy design and specification, to parts, manufacturer and processing for their components. We're meeting that ramp in demand. Our backlog is testament that our customers want to place more business with that -- with that, let me turn it over to Dan for more details on the financials.

Thank you, Mark. Gross margins this quarter have continued to recover, improving to 10.4%, which is better than the past 4 quarters. Margins are not yet where they need to be, but they are moving in the right direction. This margin expansion was driven by improved product mix, pricing strengths and more favorable market conditions in aerospace and chemical processing, partly offset by the continued shipments of lower-value orders from the backlog that were taken in prior quarters. As Mark mentioned, it typically takes 2 to 3 quarters to cycle through these lower-margin orders from the backlog in a period of market recovery, thus, resulting in a lag of P&L margin recovery.

Our specialty application project sales improved this quarter to $6.7 million compared to only $1.1 million in the first quarter of fiscal 2018. This higher level of special projects drives a higher margin. In addition, with the strength of our aerospace shipments and chemical processing beginning to improve, our product mix has shifted over the first 6 months of fiscal 2018 with higher production levels of sheet, coil and plate products and lower levels of ingot and forged products, which are tied a bit more to the industrial gas turbine market. While lower overall volumes are a headwind to margins, this shift in product form is favorable to margins.

Also strengthening our ability to ship higher-value products is the expansion of our value-added capabilities at our service center in LaPorte, Indiana, which is favorable to margins. However, this quarter was partially offset by an expense of $360,000 related to the transition, which is expected to diminish as we move forward.

Regarding overall gross margins, continued improvement is expected over the second half of fiscal 2018, with strengthening volumes and market prices, better product mix and rising raw material prices.

SG&A costs, including research and technical costs, were $13.2 million in the second quarter of fiscal 2018. This includes a charge of approximately $650,000 to increase our bad debt reserve to a customer in Italy filing for the equivalent of bankruptcy. In addition, SG&A includes approximately $450,000 of unfavorable foreign currency impacts. Going forward, we had a new foreign currency hedging program in place beginning in April that should help to mitigate future foreign currency impacts in SG&A.

Our effective income tax rate for the second quarter was negative 2.9%, partly driven by a stock option forfeiture in March of a full grant from 10 years ago, creating an unfavorable income tax charge of over $150,000. Our effective tax rate going forward will continue to be a bit unusual as we're expecting a shift from pretax losses to pretax income during the year. Our effective tax rate is currently estimated at only 4%, but that 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.

The Tax Cuts and Jobs Act signed into law in the first quarter, reduces the statutory U.S. federal rate from 35% to 21%. In the first quarter, we had a significant charge from the reduction in our deferred tax asset value. Going forward, other aspects of the tax reform could impact us, such as the repatriation of accumulated foreign earnings. Further analysis is underway, such as a full foreign operations E&P study, to determine if any adjustments are needed, which should be completed before year-end.

Our net loss for the quarter of $2.068 million was impacted by a tough start to the quarter and the items I previously mentioned driving that loss. Four items to reiterate are the charge to increase bad debt reserve of $650,000 pretax, unfavorable foreign currency of $450,000, costs related to the LaPorte expansion of $360,000 and the tax charge for the forfeited stock options of $150,000. We hope that a majority of these costs do not recur going forward.

Turning to backlog. Backlog increased significantly over the first half of fiscal 2018 with backlog at $212.3 million at March 31, an increase of $35 million or nearly 20% from the $177.3 million at September 30, 2017. 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 April 30, 2018 backlog at $217.6 million, an increase of $5.3 million for the month.

Liquidity. In conjunction with this backlog increase and the corresponding increase in production levels, working capital also increased. Inventory increased resulting in a use of cash of $21.5 million, and accounts receivable increased $2.9 million, partially offset by increased accounts payable and accrued expenses of $2.3 million during the first 6 months of fiscal 2018. This working capital investment contributed to a decrease in cash of $28.8 million over the first 6 months of fiscal 2018. Cash balances are expected to improve over the second half of fiscal 2018, as cash collections increase from higher second quarter sales.

In addition, inventory levels are expected to decrease, as current work-in-process inventory is complete and shipped. Our revolver balance remains at 0 with the size of the untapped credit facility at $120 million, with an accordion feature to $170 million.

Outlook for next quarter. Given the positive trends we're seeing in order entry rates, backlog and pricing, we expect third quarter revenue and earnings to be better than those of the second quarter fiscal 2018. We are encouraged by the improving market trends in aerospace and chemical processing, including our overall improved backlog levels and improved specialty application project activity utilizing our patented alloys. This, combined with a higher-value product mix capability, a strengthening price environment and lead times extending across the industry, are favorable signs for improvement in the second half of fiscal 2018.

Our capital expenditures target for this year is $12 million, which is well below our forecasted depreciation levels of $23 million. We believe key equipment is in place, and the focus is now on obtaining a return on investment. The CapEx investments we have made over the past few years provide an upside for improving operating leverage to be realized on higher volume levels going forward.

With that, Mark, I will turn the call back over to you.

Thanks, Dan. Book-to-bill was over 1 in the quarter, where we increased revenue almost 23%, and we also pushed through a price increase. Also in that quarter, we had a very, very difficult IGT business, that business falling to the lowest level that I can recall.

One of the things to think about as we talk to you a lot about nickel. And when things are tough, we tell you that we think some customers are holding out for a lower nickel price. I think it would be disingenuous to not point out that it's likely that the reverse phenomenon is occurring right now. I think some people are getting their orders in, trying to make sure they're reserving their place in the queue. I also mentioned that there appears to have been some upset a little bit in the aerospace forging supply chain, and I think that's made some of the -- our customers a little bit nervous there as well. Even though we're a very, very small supplier into the forging supply chain, I think a number of aerospace customers are saying, "Look, let's get our orders in and get our place in the queue, and make sure that we've got them booked." So a very, very strong order entry over the last 2 quarters.

That being said, as Dan mentioned, April held up extremely well. We have to fight through this lower-priced product mix. I will also tell you, though, April transactional activity, we don't have the final numbers yet. But the April transactional activity didn't look great. It pulled back a little bit from March. But as I mentioned, and Dan mentioned, that April bookings number was very good. Again, I think that's indicative of the aerospace market. And I mentioned to you some specialty projects. Those are not going to be transactional types of orders. Those are orders that are typically placed into the queue for future delivery. So it still looks very, very good and continuing to strengthen.

As I mentioned, I think, and Dan mentioned, we still have to fight through another quarter of this lower-priced product mix. But as I look at the layers in the order book and in the backlog, I think the momentum that kicked in last quarter is clearly continuing, and I think we're seeing a good transition beginning here in 2018.

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

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

So I'm curious, you mentioned -- Mark, you mentioned April at the end of your prepared remarks. I'm curious, was April stronger than March? You talked about the cadence to the year, and I'm just kind of curious if that continued into March?

I don't have the final numbers yet, Ed, but no. Now is April better than the first month of a quarter usually? Yes, it was, especially on the order entry side, but not -- at the preliminary numbers that I look at, not on the invoicing side. And again -- a lot of it, again, just it's qualitative information at this point. We don't have the final quantitative information. But the transactional activity looked more like January, February, not like March.

Got it. And is there any way you can quantify the traction that you're seeing in the transactional orders? I mean, is it mid-cycle, kind of early cycle? I mean, any way you can kind of identify it, so we can have an idea to the strength of that?

Still early cycle. The thing I like to look at, Ed, is you can talk to the -- and again, we're peripheral to oil and gas at best. We're more into the deeper end of the chemical supply chain. But you're seeing a lot of activity coming back in the oil and gas area, and we will typically lag that by 9 months. That's why it's good news when I see some of our peers starting to ship pretty heavy volume levels into the oil and gas area. And I think we're starting to see it. Really this last quarter, we also started to see Asia pop. And Asia is still a big area for us for the chemical side of the business, in particular the specialty chemical side of the business. So we saw that come through, a lot of it being -- I don't want to confuse it with specialty projects, but more like project outage replacements. So that's metal that we put into the supply chain and shipped last quarter for a project that will probably be completed late spring or into the summer months. We'll have an outage at a chemical plant and do that work. So I'm real pleased. You know how I am. I'm a little bit paranoid. I've got like 1 or 2 good data points right now, but what I really like that I'm seeing is on that oil and gas side. And oil price is holding up. And I think I've heard from more than one person about the lack of reinvestment in the business over the last 4 years, I think we're going to start to see a better chemical business. I think it's going to be lumpy. I don't know what the rest of this quarter is going to look like. I think it's going to be lumpy, but I think the bias is definitely upward.

Got it. And the spread, I was surprised the spread over raws wasn't as strong this quarter as -- given the move in nickel. And I understand you talked about some of the lower volume shipments coming out of backlog. Is that more related to maybe the difference between those orders versus what you've seen on the spot market, and that's more of a 3Q, 4Q event for you?

Yes. If you think about it, Ed, and we talk about this a lot, every time we go into an upcycle. This time, we're lagging everybody because the specialty project work wasn't real strong a couple of quarters ago. Whereas last time, in the upcycle, I think we kind of led it because we had a real good specialty project book. So this is more like a traditional upcycle, where we'll lag some of the other bigger industries. And think about it, I think every time we do lag going -- coming out of these things, we talk about how we've got essentially 3 quarters of business that we are at lower price levels or lower mix levels that we have to flush out. That's part of what's going on. The other thing to remember, too, Ed, is you have the situation where prices reset either monthly, quarterly or annually. And that's when those contracts -- so you're always going to have that lag on the nickel side either a month, quarterly or semiannually or annually. So again, as we move into a new quarter, we'll get a little bit more uplift on those pieces of business. Anything to add, Dan?

Yes. I'm just going to reiterate that, that a lot of these adjusters do take time to adjust and get reflected in the shipping value. As you know, nickel ended the quarter at $6.08, which was actually only up for about $0.90 from the $5.18 of the quarter before. So kind of that $0.90, you kind of think about -- we're about 50% contained nickel in our product. So you could kind of take that $0.90, say about half of it, $0.40, $0.45 or so, should be a bit of a driver for some stronger ASPs going forward into the next quarter. So it's a bit of a lag before we really start seeing it.

Got it. And then finally, I think, IGT, I'm surprised the MRO is slowing. I can understand what's going on, on the OE side. Any insight into maybe what's going on in that market, and why -- I mean, why the replacement demand isn't there?

I think I used the phrase in the last call that people are sitting on their hands. And I think that's it, Ed. I mean, you really have people, especially at -- the largest players in that market on the heavy frame, the large frame side of the business, they don't even know if they're going to have jobs next month. So there's a tremendous cash conservation effort going on, and we're seeing it all the way through the supply chain. Now a number of our customers, fabricators are able to migrate their business into aerospace, and we're doing real well there. It's been great for us from that point of view. And some are able to migrate into more defense-related applications. Not as good for us. I mean, they're buying more carbon or aluminum or those types of products. But really, what we've seen on the OEM and the MRO side is -- it's a colloquialism, but people are sitting on their hands. People are afraid to place any kind of an order. Typically, when these things do bounce back, they bounce back with a vengeance, but I don't see that happening for another year.

Our next question comes from the line of Phil Gibbs from KeyBanc Capital Markets.

Mark, I was just curious in terms of what happened in terms of what may have surprised you. I think you were talking about potentially getting back to breakeven or hopeful that you would for the quarter. And March sounded really strong relative to the other 2 months. So can you kind of help us bridge the gap between what happened maybe relative to your expectations?

I think we mentioned last time in the call that we had a pretty tough January that we were coming out of. We'd been hit pretty hard by foreign exchange and pretty low transactional activity. So we were a little concerned going through the quarter. And so I feel great about the order book. It's one of those situations right now that I hate where we are, but I like where we're going. I really like what I see in the order book and the layers that I see in the order book, but it gets back to that. And this is -- I think we had these discussions in 2013 and going into 14, we typically take 3 quarters to bleed out the lower margin stuff. And I think this will be the third quarter of it, moving that stuff out in time to start to take advantage of that better order book. The other thing, Phil, to me is -- and I say this a lot, is volume. We've got to have some volume going through the place, and we've got to get over that 5 million pound per quarter type of number. Otherwise, we really struggle, and these higher margin types of products are forced to bear a lot more cost structure. So we've got to get that number. We've got to get over that 5 million pound mark.

And clearly, I think some of the things I mentioned, Phil, in my script were surprises. The bad debt reserve for the bankruptcy in Italy was a surprise. That was almost $700,000. The foreign currency that we mentioned at the last call that we were seeing some high numbers there ended up -- if you look from one quarter to the next, that was about $300,000 higher than Q1. So that was a bit of a surprise. And a couple of things that Mark mentioned in his script was the conversion revenue or other revenue was a bit lower than we expected. Some inventory corrections with some customers going on there, I think, was impacting things that we didn't quite expect. And of course, IGT being as weak as it was, that was a bit of a surprise that it was going to be that low this quarter. Does that help?

That's helpful. Yes, it does. Can you give us any flavor in terms of what the kind of gross margin recovery could be? I think you were a little north of 10% this quarter because, obviously, that's a big lever as the mix and things get regulated through your system in terms of timing-wise. So can you give us a sense of where that can go if the revenues play out like you think the next couple of quarters?

Well, I mean, we don't give guidance on our margins. But clearly, we need to get back over that 5 million pound per quarter level that Mark was mentioning. So if we can do that as well as flushing out those lower margin orders, then we'll certainly start seeing some strength in margins going beyond the 10% that we have. So clearly, we're moving in the right direction, as I mentioned. What that cadence is, going forward, as we get back to what we might consider normal, that's still very unclear. But if you look back at the last time we had a very strong market, maybe 2012, we were at that 20% gross margin level. And since then, we've invested some CapEx. That should give us capabilities to exceed that. So we're not quite to a market such as that yet, but I think we're headed in that direction.

And Mark, can you qualify a little bit of the commentary you were making on the forging disruptions and people trying to reserve their place in the queue and some of the volatility associated with that? I was just trying to understand that better in terms of what you were trying to qualify.

Yes, we're just -- and I think you know, Phil, we're a few steps away. We've got some specialty applications going to the forging supply chain. So we're in touch with the forgers kind of on the periphery compared to the bigger mills who are supplying huge volumes into the forging industry, the aerospace forging industry. And we lag that industry typically with our products. But just during the quarter, we've heard some things in the industry from some customers about, obviously, when they're placing orders with us, and they're placing them and they used to place them for a month or 2. And now all of a sudden, they're looking to place them for the next 4 to 5 months, the logical question is, "Hey, I get that you're placing these, thank you very much, but why are you all of a sudden placing them so far out for us?" And it's 2 things. One, lead time's moving out in the industry in general, which I think will be good for pricing, and it's one of the reasons we feel so bullish about things. But the other kind of qualitative or anecdotal thing has been, look, we're seeing some disruptions out of the forging supply chain. I think most of that is cleared up. I'm not sure. But I think over the last 2 quarters, there were some disruptions in the forging supply chain that have made some of the people in the aerospace side of the business a little bit skittish. And I think that's helped us from the point of view of placing a stronger order book with us.

(Operator Instructions) Our next question comes from the line of Christopher Hillary from Roubaix Capital.

I just wanted to ask. You had a strong move upward in your ASPs. And as you look out over the next 12, 24 months, how do you expect that to continue? And how much capacity do you have in that higher value of that product to continue to meet that demand?

Capacity is not an issue. If you think of our product, the way we manufacture here, for instance, the products that go to IGT and the products that go into aerospace and even into corrosion typically run over the same pieces of equipment. So the downfall in IGT volume helps us from the point of view of being able to ship more into, in the instance of maybe CPI or chemical processing, we can ship more billet or more plate. And in the instance of aerospace, we'll be able to ship more sheet into the aerospace. And that's really what's been occurring over the last 6 months or so, has been shifting more of our product into that aerospace market. If you look historically at our data, you'll that the average selling price is the -- the highest average selling prices we typically have in the company are specialty applications, followed by the aerospace market, followed by the chemical process market, followed by the IGT market. So when you're seeing that uplift in the average selling price, you're seeing a combination of things. One, we are in a stronger pricing environment. We passed through a price increase in February, as did most of the market. You're seeing stronger raw material pricing or commodity pricing starting to load into those price levels now. And you're also seeing that mix shift. The IGT, which is the lowest average selling price, is a very depressed market right now, whereas aerospace and specialty applications are probably our 2 strongest markets. And those are our highest price areas where we're selling. So I hope I answered your question. That gives you an idea of how the pricing, weighted averages of pricing work out in the system, and it also gives you a little bit of an idea of what we're seeing in the marketplace right now.

And Mark mentioned that aerospace, one of the higher average selling price markets that we have, we did just finish a CapEx project for our cold finishing operations, which is not all aerospace, but it's skewed towards aerospace. It's the center gauge sheet and coil products. We're ramping up our capacities and our utilization on that. The capacity in that line used to be about 13.2 million pounds. And now with this CapEx that we spend, it's around 18 million pounds once we're fully ramped up on it. And we are stepping that up. The production rates on that equipment increased 17%, over 17% this first 6 months versus the first 6 months of last year. So we're starting to see a nice ramp-up on that capability, which is driving a bit of a higher average selling price as well, and should continue to in the second half of the year.

Okay. And maybe just one more question in your aerospace business. As you allude to the ramps in production from your major customers, to what extent is your business predictable and scheduled there? And to what extent is it just sort of coming in with order rates like other end markets?

In macro terms, you can feel the change in the market when you talk to customers, when they start talking about how busy they're getting and, like I said, starting to make sure they have their spot in the queue. So again, it's more of a qualitative situation. Quantitatively, as far as trying to directly correlate it to the number of commercial aircraft shipped in a quarter or the number of commercial engines shipped in a quarter, that never seems to work out. And it's because there is so much of a whipsaw effect in the supply chain. Typically, the guy who's manufacturing combustors versus the guy who's manufacturing seals or plugs or nozzles, these things are -- they'll move at different rates, might be the best way to put it, depending on how many fabricators there are in that supply chain and what the buying patterns are of those fabricators. So it's more of you have to be in front of people every day to book their orders as opposed to being able to draw a line between the number of engines built or the number of aircraft shipped.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mark Comerford for closing remarks.

Thank you, Dana. Thank you, everyone. Thanks for your time today, and thank you for your interest and support of Haynes. We look forward to updating you again next quarter.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.