David Sean Van Bibber - Chief Accounting Officer and Controller Mark M. Comerford - Chief Executive Officer, President and Director Daniel W. Maudlin - Chief Financial Officer, Vice President of Finance and Treasurer.

Edward Marshall - Sidoti & Company, LLC Daniel M. Whalen - Topeka Capital Markets Inc., Research Division Christopher R. Brown - BofA Merrill Lynch, Research Division.

Greetings, and welcome to The Haynes International First Quarter Fiscal 2014 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. Mr. Van Bibber, 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 could contain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1933, 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, 2013. 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.

Net revenue in the first quarter was $93.7 million, down 18% from last year's $114.3 million. Pounds shipped in the first quarter were $4.3 million, down roughly 8% from last year's $4.7 million. We reported a net loss of $3.5 million in the first quarter of 2014 versus net income of $5.8 million a year ago.

As we mentioned in the press release, the current business environment has been challenging, marked by intense competition for available volume in the marketplace. Nickel prices remain very low and lead times are still very short across the industry, contributing to the sluggish demand as customers are placing very few large blanket orders.

On the positive side, we're starting to see some signs of strength as evidenced by our increasing backlog. And as I've mentioned in prior calls, we're seeing some demand for our proprietary materials in the chemical process industry.

Also, though transactional activity remains very slow, we've seen more expedites in the last couple of weeks than we've seen in probably the prior 6 months. January activity was good, not great, but good. Dan will give you a bit more detail on the backlog. It increased again in January. I do want to caution everyone on the backlog growth.

As we mentioned last quarter and I mentioned a moment ago, we're seeing more orders coming for some of our proprietary materials, and these are principally project related applications. These will likely ship later in the year, third or fourth quarter. We still feel the upcoming second quarter is going to be challenging.

Let me move to the markets to give you some color on what we're seeing. Net revenue in the aerospace market for the first quarter of 2014 was $40 million, down $23.6 million from the first quarter of '13. Volume was 1.6 million pounds in the first quarter, down 23% from first quarter '13's 2.1 million pounds.

Aerospace comprised roughly 42.6% of our net revenue in the quarter, and our backlog in aerospace fell during the quarter by roughly 4%. I think most of us in the industry feel that the destocking that we've been experiencing for the past 15 months is likely to end this year. Our Aero Tubing business remains very strong.

The business decline that we've experienced has been on the aero engine side of the business. Obviously, with the lower revenue and decline in backlog, I can't quantitatively call this as a bottom, but I can tell you that the meetings I've had with customers indicate that they feel we're at the bottom.

Also some of the current decline in the backlog has to do with sequencing of orders in the Aero Tubing side. We're expecting to see a restock order shortly in this area. I think you all know the bigger picture on the aerospace side.

Boeing and Airbus continue to deliver record numbers of commercial aircraft and are ramping up production on key platforms. On the engine side, the efficiency and emissions requirements are creating new platforms and increasing the number of old engine retirements.

These are all good signs for our business in this market and further evidence of the disconnect between the commercial aircraft deliveries and the destocking being experienced at the metal supplier end of the supply chain.

We're continuing to develop new applications for our materials in this area, and we feel we're establishing a very solid position at many of the key target accounts through our service capabilities. We expect this market to increase in demand as 2014 progresses.

In our Chemical Processing market, net revenue for the first quarter of 2014 was $23.1 million, down about 12% from first quarter of '13, $26.3 million. Volume in this market was up 13.7% in the first quarter of '14 to 1.1 million pounds. CPI accounted for 24.6% of our net revenues, and our backlog increased 55% in this area during the quarter.

Quite a bit of what we've been seeing in the past few months is been some of the applications we've been working on probably, for the last year, year and a half, some even longer than that, utilizing some of our proprietary materials.

Of course, some of the applications also include nonproprietary materials but overall, we're pleased to see that this market is responding well.

The core business in this market or the traditional business in this market still remains slow, and when I'm talking about that, I'm talking about things like our acetic acids related applications, our phosphoric acid applications, Methyl methacrylate, those are all kind of just limping along, really what we've seen -- the change that we've seen lately has been in energy-related applications and some of these project related applications that we're talking about.

Because of the core business being so slow, it's still -- it remains very, very competitive for any of these materials, and these are typically the higher volume alloys that you see out in this marketplace, but at least related to Haynes, these are the higher volume materials.

Most of the new project that we have in the backlog are expected to ship in the third or fourth quarter, and as I mentioned earlier, so we still have some concerns about booking up this current, the second quarter.

Longer-term, as we've mentioned in prior calls, we think the natural gas development we're seeing in North America and elsewhere will have a positive impact for our materials well into the future. Land-based gas turbine market totaled $18.1 million in net revenue in the first quarter, down almost 20% from the first quarter of '13's $22.6 million.

And I think most of you know that I even think that $22.6 million in the first quarter of last year, that had some correction in it as far as being lower than what we would normally expect in this marketplace. Usually, we expect about $25 million to $28 million a quarter in this market. So this first quarter of '14 was very soft.

Volume was 1.2 million pounds, flat with last year. This market accounted or 19.4% of our total revenue in the quarter, and the backlog declined by roughly 5%.

As we've mentioned previously, we felt the temporary slowdown would be coming in this market as we shipped a record volume into this market in 2012, and we had our second highest volume year in our history in 2013.

We expect this market to exhibit very choppy demand patterns in 2014 as inventories correct, and we see some variability within the mechanical driver or pipeline applications, energy applications and marine components of this market.

Longer-term, we view this market as having excellent growth potential due to availability, economics and environmental advantages of natural gas compared to traditional fuel sources like coal. One other point, we're winning some new applications in this area.

It's pretty clear that the better efficiencies in this market, similar to the requirements we see in the aero engine area are necessitating use of a higher temperature capability materials. We feel some of our new materials are finding and will find more applications in this area.

Our other markets had net revenues of $9.4 million in the first quarter of '14, down 11.4% from the first quarter of last year. This market accounted for 10% of our revenue in the quarter and the backlog increased 5.5%.

Traditional core of this area had been applications in the flue-gas desulfurization, along with applications in industrial heat treating and some smaller automotive applications. In the past year, FGD and industrial heat treating applications have been very slow.

However, we've managed to pick up some applications in the oil and gas area that we believe will develop into larger contributors in this area. We also believe that some of the traditional applications especially in the industrial heat treating are poised to make a come back in 2014 as broader economy improves worldwide.

Internally, we're pleased with the progress we're making on our CapEx projects. As we mentioned last time, we extended our shutdowns over the holidays some of our manufacturing operations to get some necessary maintenance and project work completed. And these shutdowns were very successful.

On our tubular products expansion, we completed the exterior structure walls on the 2 additions and received our certificates to occupy. As a result, we started up the new annealing furnace. In fact, I was down there a couple of weeks ago and we ran our first production lots very successfully in the new annealing furnace.

We've also started relocating certain pieces of equipment to facilitate a leaner flow process through the plant. And we also have to make room for some of the new cold reduction mills.

We'll start foundation work shortly on the cold reduction mills and I think as I mentioned to you, when we were digging the pit for the annealing furnace, I always get nervous when you start digging pits, so we'll see how that goes, but we're really excited about the new cold reduction mills coming in.

In fact, I think they shipped either today or yesterday from Germany, so we should be seeing them arrive probably in 6 or 8 weeks, and that will probably consume most of the summer.

Right now, we'll dig the foundations and we'll have to pour some foundations when impure for a while, but then the installations will come through probably, I think it'll be most of the summer period. We also -- on the Kokomo flat roll expansion is running extremely well.

We commissioned, since we talked to you last time, we commissioned the new shape correction equipment along with some finishing equipment and some inspection line. All of that is up and running, and running well.

We also got a new shear in place which is going to help us with our working capital and really on our timeliness and responsiveness especially as we feed somethings into our well detubing area. We're really excited about that piece of equipment.

That's also going to open up some cutting capacity that we needed for other products and other areas of the plant. We also are doing some equipment relocations here in our heat treating and annealing areas. Specifically, the hot working furnaces, the preheats for the 4 higher in place. Some of the refractory work starts today on the last furnace.

All the new control systems are in and qualified, so we should be up and running there very shortly. And as far as the annealing furnace, we have an old temporary furnace. It's funny we call it a temporary furnace, I think it was in there since about 1960.

But we've relocated that and we've done an addition in to what we call our R1 facility, and we'll be putting in our new annealing furnace. That is scheduled to come in probably in the June timeframe, so again, that will be most of the summer getting that new furnace up and commissioned.

Finally, our new IT system is in place in Europe, and we started the North American go live process. As we've mentioned previously, this new IT platform will put all of Haynes' facilities on the same system. Up to now, and I mentioned this previously, for example, we've been running 3 different systems in Europe.

None of which is the same system as the United States. Like any IT platform change, I'm sure we're going to have our frustrations, but this project is long overdue. We're excited about the attributes of this product will give us for better customer service, better planning, better working capital management and more efficient communications worldwide.

All of these projects are scheduled to be up and running by the end of the calendar year. We've taken, on a lot of project work in the last 18 months, but all of this, we feel is necessary to better position Haynes for the future. With that, let me turn it over to Dan for more details..

Thank you, Mark. First quarter results are typically impacted by holidays, maintenance projects and planned outages for capital improvement. This quarter's financial results were impacted further by challenging business conditions, which decreased volumes and decreased average selling prices.

Volumes continue to be impacted by destocking in the aerospace and land-based gas turbine supply chains, lack of large project chemical processing shipments, and customers delaying orders due to the combination of both short industry lead times on mill-direct products, and raw material prices remaining low, primarily nickel.

We experienced significant gross margin compression compared to a year ago, with our gross margin percentage dropping from 16.4% in the first quarter of last fiscal year to 5.6% this quarter. The gross margin in dollars this quarter was $5.3 million, which was a reduction of $13.5 million from a year ago.

4 primary factors contributed to this $13.5 million margin compression. First, increased price competition, which impacted margin by an estimated $6.8 million. The intense competitive environment continues to require the company to aggressively price orders across all markets, particularly in the commodity type alloys.

This is especially true for our corrosion business in the chemical processing market.

Additional downward pressure on service enterprises is a result of reduced mill-direct lead times in the industry that, in turn, resulted in downward pressure on prices for service inter-transactional business, which typically commands a higher price due to faster product availability.

Second factor impacting margin compression is reduced volumes and the related unfavorable absorption of fixed cost and unfavorable variances arising from lower volumes. As we are very volume sensitive. This combined with the changes in product mix impacted margin an estimated $13.7 million.

Third, higher cost of inventory charged to cost of sales was falling raw material due to our FIFO inventory costing method impacted margin an estimated $2.1 million. This fivefold lag is especially true with our longer cycle products.

And lastly, the impact of a fixed-price nickel agreement pursuant to which the company agreed to purchase a portion of its nickel supply at a fixed price that has been greater than the market price of nickel. This impacted margin an estimated $0.9 million.

In order to mitigate the impact of these factors on gross margin, we continue through the quarter to adjust production schedules and implement reduced work weeks and control of hours worked and overtime. In addition, we continued to carefully review discretionary spending and reduce costs where possible.

Our backlog at December 31, 2013, increased to $180.2 million. This represents an increase of 8.1% over the quarter, driven by chemical processing, specialty project work. The January backlog, increased to $185.9 million, as we see a notable pickup in order entry.

Capital spending in the first quarter of fiscal 2014 was $9.3 million, and the forecast for capital spending for the full fiscal year 2014 is $57 million.

This includes $18.8 million for the Arcadia tubular project, $8.9 million for the Kokomo flat product project, $14 million for the processing and service center upgrades, $2.5 million for the information systems upgrade, and the remaining $12.8 million for additional enhancements and upgrades of current facilities and equipment.

The company's forecasted expense for pension and postretirement benefits is reduced this year to approximately $10.4 million, which is lower than last year's $16.2 million, driven by lower discount rates and better-than-expected return on assets.

The funding status of the domestic pension plan does not require funding this year, and has allowed us to temporarily suspend funding for the domestic pension plan. Cash flow from operations for the first quarter of fiscal 2014 was $24.1 million, which improved our cash position to $81 million.

This, combined with 0 borrowings on our revolver, keeps our liquidity strong. Outlook. Revenue and earnings for the second quarter of fiscal 2014 are expected to improve from those of the first quarter of fiscal 2014, but the company may still experience a net loss for the second quarter.

Given the increase in backlog and the feedback from customers, the company currently expects financial results to improve over the course of fiscal 2014. As we navigate through these challenging conditions, our focus continues to be on controlling costs and the completion of our current capital investments in 2014.

We are cautiously optimistic that business conditions are improving, leading to improved financial performance over the remaining quarters of fiscal 2014. And with that, I'll turn the discussion back over to Mark..

Thanks, Dan. First quarter of fiscal '14 was a difficult quarter, and we feel the second quarter is also going to have some challenges. We're confident in our market position.

We're confident that the land-based gas turbine and aero engine markets have excellent longer-term growth opportunities for us, once we get through this temporary destocking slowdown.

We're pleased with the results of the application development work we've done here, as well as the work we're doing in the chemical area and our other markets area, especially the success we've had in developing applications that are eventually driven by demand for energy be it oil and gas, solar, coal, fuel cell or nuclear, we're seeing more requirements for Haynes type materials.

I'm also pleased with the work being done in our plants to bring on the targeted new capacity, to drive out waste from our processes, and improve safety in all areas. We're also building a better service capability worldwide by upgrading our IT systems and improving our distribution capabilities and value-added processing capabilities.

We've got a lot more to do, but we know we're building a better Haynes and positioning ourselves well with our customers in these targeted growth markets. With that, let's open the call to your questions..

[Operator Instructions] Our first question comes from the line of Julie Yates with Credit Suisse..

This is Dylan filling in for Julie. I was just wondering, you mentioned a little bit about the unutilized capacity that's pressuring prices and lead times, within the industry.

I was just wondering where your capacity utilization -- utilization is today?.

I'll tell you what, Dylan. It depends on the product line. For instance, when we talk about the aero tubing area, that's obviously operating at pretty much 100% capacity. We talked the rest of our corrosion tubing, that's also running at fairly high-capacity.

Our wire products largely going into welding applications, probably operating at about 50% capacity. Most of our flat roll area, which goes across many markets, aerospace, chem process, land-based gas turbine, typically operating I'll say, in about a 60% capacity right now. I will tell you, January, we're loading the equipment a little more heavily.

We lost some production days due to the weather. January, it came through okay, but I still haven't seen all the cost numbers come in. We had to do a little over time. We're definitely going to see higher utility requirements as we go through this cold weather. It's minus 12 here this morning, by the way.

But we're also -- we're loading the mill a little bit better as we've got some of these orders that have now started to come in that are out into the third and fourth quarter. We're loading the mill a bit better.

I could also offer to you to, Dylan, on the melting side, air melt capacity is probably operating at about 50%, 55% capacity, and the vacuum melt area is still very, very heavily loaded. Even in the downturn, the vacuum melt area was heavily loaded.

I'll say it's 80% to 90% capacity, and that remaining capacity is usually what we call surge capacity, that rush order that comes in from somebody.

Does that help you out all, Dylan?.

Yes, that was great. Thank you.

And then also just in terms of the industry, so what do you think you need to see in terms of utilization for pricing to begin the firm?.

I think just in general, we need to see the economy start to pop a little bit. I was just over in Asia last month, and for instance, we've got some good project work going on over, and I should say, Asia-Pacific. We've got some good project work going on over in Asia Pacific.

We've talked about in the last year that we won some key heat exchanger applications, and there's more of those types of applications, along with some other, what you call big science type of applications, some new technologies that are being developed that we're working with people on, and that's some of the stuff that's coming late in the quarter.

I'm giving you kind of a long answer to a simpler question. But we're not seeing, for instance, those traditional corrosion applications coming through in sufficient volume.

If you ask me what my wish list would be, I'd like to see some of those chemical applications come back, not only for Haynes but for a number of the larger producers in the industry, so that we can begin to see a little more capacity utilization for things like FGD, pollution control equipment, just traditional chemical plants.

Those will bounce back and they will come along. But right now, in the past 15 months, there just hasn't been a lot of letting of large projects. So we'd really like to see those bounce back. If you notice I'm not talking a lot about aerospace or land-based gas turbine, those will come back.

As I've mentioned previously, we over shipped heavily in, at least my opinion is, we over-shipped heavily into land-based gas turbine in the last 2 years. I've been talking about a temporary slowdown, our correction coming probably in our last 2 or 3 calls. I think I really hit us right between the eyes this last quarter.

On the aerospace side, most people are locked into good LTAs, we are too. I think you see that when you take a look at things like our pricing, not really degrading a heck of a lot in aerospace.

Again, that's another area where I think once we get through this spares situation and we start seeing a replenishment of the pipeline, especially a stocking of the pipeline for some of the new engine platforms, better going to be released in the next couple of years, I really think we'll start to see those markets start to pick up and usually in this industry, when that market picks up, it never picks up in a nice controlled fashion.

It usually goes gangbusters. So we'll see what happens but again, if I'd really like to see something come back stronger it would be the traditional corrosion business, so we get start to see capacity fill up throughout the industry..

The next question is from the line of Edward Marshall, Sidoti & Company..

So listen I was curious, you mentioned downtimes in the December quarter and I'm just curious, did you -- have you quantified the loss days due to the extended shutdown? And what a typical December quarter might reflect?.

I think what you say, Ed, we talked about it last time, we talked about extended shutdowns. If you're asking me for the number of days, I'd say we took an extra 3 days in December and probably, an extra 3 days in January. It's kind of like we added a week of shutdown just to get a lot of these projects done.

We got a real big 1 here in Kokomo for one of our pickling areas and our people just did a great job. It was a pickling project that was long, long overdue and that really was a time-consuming effort for the guys who got shut down..

Okay.

And when I look at kind of -- and by the way, was there any impact from, I believe the storm fell into this period as well? Was there any kind of shutdown delays, lost production time maybe for the storm that hit?.

I think that was primarily in January. Right at the beginning of January, we had quite a bit of impact due to the winter weather..

Okay. When I look at aerospace, I mean it looks like stocking was more extreme that what I would've thought. I'm curious, here we talked about some capacity utilization in the prior questions, but I'm wondering if there is any significant capacity or new entrants to the field that kind of put some of that on there.

Is that just the end market pull through, because it's obviously much quieter and has been for some time than the ultimate aircraft production rates..

Yes, really, and I think you've heard a number of us in the industry talk about this disconnect that's occurring between the metal supplier side of the supply chain and the obvious, I think it was 80 or 90 more planes that we're delivered between Boeing and Airbus. So there's a disconnect, there's a clearing in the supply chain.

There's a lot of talk about how the spares industry was really down last year as they were taking existing spares and clearing out the supply chain.

While I was in Asia, I met with a buddy who's business is largely driven by spares and that's a lot -- that's where I got the commentary about there's going to be a situation where we have to replenish or actually create a new spare supply chain for the new platforms that are coming out.

How much that will impact us? Yes, we've had some customers come to us for the new engines and say some of the parts are modified.

They are slightly different, slightly different gauge or slightly different width of materials that will be taking course, or slightly different orientation for a cut part, so there will be some changes into the new engine platforms. So I'm sure there's some of that going on as well. But you're right. I think we -- and it goes quarter by quarter.

I think we got hit especially hard this quarter in that area..

I'm curious about the transactional business and I assume when you talk about transactional, you mean through -- I just want a point of clarity, I guess, that's through your service centers not necessarily....

Yes, that is through the service centers. It's kind of where we get the order and we ship that in less than a mill production time. So if we get it and ship it in the same month or maybe the following month, that's a transactional order. Something we don't have to melt and push to the plant..

And that's where I express concern when -- a lot of guys will talk you and say, well, we've already got this quarter booked up. We enter pretty much every month with as much as a 1/3 or 40% of our business not even booked in.

Now some of that is contact business where we have an idea where XYZ company, they normally take 4,000 or 5,000 parts of this product each month, but we don't have a firm agreement with them going into each month. So they might take 3,200 this month and 8,000 next month.

And we won't know that until we get into the months, some of these JIP type of delivers. Also, our transactional business does include, and this is mainly in the corrosion area, just where a plant comes down and they need an extra 10,000 pounds of C276 and they need it tomorrow. That's the other kind of transactional business that we get.

So that's roughly when we talk about the transactional business, there's a couple of components in there, one being contract related, but largely if you think about it's like JIT driven and then there's the real true traditional transactional business where you just have to have certain size of sitting in stock for traditional requirements and sometimes, a guy will buy it from us, sometimes he'll buy it from one of the other distributors out in the marketplace..

And then finally, I want to just touch on nickel if I can, because, I wanted -- in there is two parts to this one, what do we see as far as matching of the cost with the price that your selling, because it looks like nickel has been stable for a while.

And I understand you have some fixed price contracts in there, but it looks like that was lesser of an impact in the quarter. I'm just curious of when the pull through kind of -- when FIFO starts to benefit you rather than squeeze you.

And the second part of that is looking at kind of the destocking and the transactions, the pricing, I mean that's a lot of customer psychology right now too or I guess psyche.

I'm kind of curious about your thoughts on maybe the ban in Indonesia on nickel ore exports and what that could ultimately do to, not only your business but the market and the tightness maybe in the nickel market..

Well, let me start out with the FIFO. That will benefit us when nickel starts rising. In a rising market, we'll see that turn the other way.

And certainly, the FIFO like impacted this quarter, I think it will also continue to impact us next quarter as some of the higher cost still flushes through, but I don't think it will be quite as heavy as it was this quarter.

So I think that will kind of lighten the impact next quarter, but we still have a bit of a pain to go through from nickel dropping earlier in the year. So with our fixed-price agreements, that impacted the margin about 1% this quarter.

And as volume increases, that will kind of dilute that percentage, so it will get back to a smaller percentage in the future as we get some higher revenue flowing through. So I don't think that will be significant. The dollar impact shouldn't change unless nickel goes down further. And you mentioned the ban in Indonesia.

That's, I think yet to be determined. I think the -- if the regulatory agencies enforce the ban, it should restrict supply and create a rise in nickel, but I think that's still kind of yet to be determined. I think there's a lot of buzz in the marketplace about it, but really hasn't moved the needle much yet..

Next question is coming from the line of Dan Whalen of Topeka Capital Markets..

Just help me, I guess, theoretically, we certainly pricing is very aggressive right there -- right now in the marketplace. Assuming things pick up but how do we think about, as new capacity comes into the marketplace, there's new facility coming out in Pennsylvania.

How do we think about the dynamics of pricing going forward? Does it remain this aggressive or does the macro backdrop enough of a mitigator?.

Yes, I think you have to look also -- you have to look at the size of our facility, and our ability really what we focused on is okay, let's go and see if we can pick up the best 20 million or 30 million pounds of applications that we have.

That's why we do a heck of a lot of work on application development, we're constantly trying to upgrade the type of alloys that we're producing and the product forms that we produce. So a lot of the cut parts and value-added processing that we do trying to lock ourselves in more tightly with customers.

New capacity coming into the market is, I would think, more intended to be what we would call at Haynes, we'll call them commodity alloys. It's really the higher volume types of materials and typically, the lower -- much lower selling price materials that we have. It remains to be seen.

A lot of those are bought in such quantities that I think they will stay with us. I do think some -- I think inherently, there will be some more pricing pressure in that area as new capacity comes on.

But again, I think a lot of the new capacity that might be coming on-stream has to be targeted at much larger volumes that are available from -- just say from taking a share from someone like a Haynes. We just don't have a heck of a lot of huge project, big run, similar gauge types of application on these commodity alloys.

We've said previously in things like the K, 40% of our profitability comes from what we call proprietary materials. So the remaining, I'll say, 60% to 70% of volume out there, a lot of it is tied into distribution, or cut parts, or packaged with other materials as part of the bill of materials.

Yes, it's a factor that we put into our planning models and as we continue to keep going down the value chain and get more entrenched into our customer supply chain with cut parts, et cetera.

But again, our objective is always to try and find the best available 20 million or 30 million pounds at the highest end and keep upgrading applications, so that we can get into our average selling prices of $20 plus per pound..

Okay, great. And then just one other, if I may. In terms of the cost containment or reduction initiatives that you mentioned earlier.

Was there any benefit from that in the current quarter, or is that more of something that was in the works and should benefit second quarter? Is there much increment?.

Yes, there was benefit in the current quarter. I mean, as we looked at our volumes and planned out our production schedules, we went to great pains to reduce costs as far as reduce workweeks and managing over time and everything that we could do on discretionary spending.

So certainly had a favorable impact in offsetting some of the lower volumes and the absorption issues that you would have, so I think it mitigated the issue..

Okay.

So just to help us out a little bit more here, I mean sequentially, should we see much of an incremental benefit the next quarter as well, or is that kind of already baked in?.

I think it's somewhat already baked in. As volumes pickup and the mill gets a bit more full, we will not be looking at reduced work weeks and that kind of thing as we pick up volumes..

Our next question is from the line of Tyler Canyon [ph] with KeyBanc Capital Markets..

Just one on the Power Gen side. Can you kind of decipher between how much of the decline you think is related to the destocking, and how much is kind of related to demand degradation.

And then maybe -- and I think you've maybe touch on this little bit already, but can you talk about what you're seeing in the solar and flue-gas desulfurization markets as well?.

Yes, well, let me start there for you, Tyler. FGD in North America we've seen that pretty much and we've discussed this earlier, we've kind of almost call it a cessation. We think our business in the FGD last year was down on the order of 80% to 90%.

It was never a gigantic part of our business, so it's probably and our business, so it's probably on the order of 5% of revenue, but that's about a $20 million or $25 million hit to revenue that I think we saw last year on the FGD drop. We still have sporadic applications coming through and a couple of outages here and there that we're working on.

But again, the FGD business was hit very, very hard in 2013. With respect to the gas turbine business, I'll just give you how we traditionally think of that. Right now, we traditionally think of that as about $25 million to $30 million a quarter type of business, and you can move nickel up, down, around whatever you think.

That's what I typically think of that business. So that gives you a rough idea that when we only put up an $18 million or $19 million a quarter, that's a pretty dramatic hit. However, as I stated and I'm not sure how familiar you are with the past with Haynes.

In 2012, we shipped a record volume into that market and then the second best year in our history was 2013.

So starting about 6 months ago, we started talking about -- we think we're going to see some level of slow down in this business just because -- and I'll say anecdotally when I'm out of customers, we're seeing a lot of our material -- that's good that we're seeing our material in their plants, but we're seeing a lot of material in their plants and at the end of the supply chain.

So the manufacturers end of the supply chain, we just haven't seen a corresponding level of activity that would warrant a shipping so much material into that marketplace. The good news is there's some good reports that some things are picking up in that area and as I mentioned also, we've actually picked up a number of new applications in that area.

These aren't gigantic applications, but just to give you an idea, one of them, we have a licensing agreement for Haynes 282 that's out there. It's a product form we don't manufacture. So we really just pick up the licensing fee on it. That's a nice application win for a new alloy.

And then there's a second one for 282 that is just being developed now that's probably going to be 3 quarter of million dollar application this year but -- and this is just a single part in a single turbine. And I'll bet you that within 3 to 5 years, that's going to be a $5 million a year type of application.

So I hope that helps you a little bit in understanding that area for us..

Yes, that's helpful. And one more just, if I may. What's your thought process on how direct mill volumes can compete with your service center business, given your moves over the last several years to produce more parts. I guess any thoughts there would helpful..

The best thing in the world for us is when we start to see lead times moving out. The makes the material in stock in the service centers that much more valuable. It gives you a little more latitude in moving pricing around. It's like the nickel discussion.

When we start to see nickel moving up, that's usually the nickel market is telling us all something that we're all going to start getting busy. We still haven't seen that. So we'd like to see that start to move.

But again, you do get concerned about the volume expansions that are out there about our distribution center is a real good differentiator for Haynes and the parts cutting capability is a very good differentiator for Haynes..

Our next question is in line of Chris Brown of Bank of America..

Could you talk about your position on some of the new engine platforms, whether it's the leap or the gear turbo fan and maybe provide us with some timing as to when you might start to see some volume benefit from those platforms?.

I think you know some of the flight schedules that are out there for instance for the Pratt. We do have -- we mentioned it in our Annual Report, the application wins we have there.

We also have the traditional applications for things like HASTELLOY, [ph] a number of other materials, 718, et cetera, and the static components of those engines both leap, as well as the Pratt 1000 family.

So we expect those volumes to be similar to what we've seen a lot more engines going into the sky, and we're expecting new engines growing at a rate of 4% or 5% over the next 5 years, and engines and service growing at a similar rate, maybe a hair below because there's going to be so many more retirements of engines.

But again, there will be a whole supply chain that has to fill-in for spares et cetera. So we're excited about what we're seeing on the engine side of the business and what will be coming. It's interesting.

We still meet with all the engine manufacturers and they continue to ask if you're going to be ready for the ramp, and we continually reply, yes, that's why we're adding capacity in Kokomo, we got tight on capacity in 2008 in Kokomo. We got tight on capacity in 2011, '12 in Kokomo. That's why we're doing the flat rolled expansion project.

So we think we'll be ready for the additional volumes.

Did that answer your question?.

Our next question is from the line of Gerald Richardson, a private investor..

This is my third conference call that I've sat in on, and the storyline has been nickel prices, nickel prices.

I'm wondering if you can quantify what effect on your gross profit margins, what the improvements in your capital spending, what that will have if nickel prices remains static at the current level into the future? Can you give me an idea of what type of improvements you would see based upon your -- the money that you're investing in the business?.

Well, I think, we have mentioned the 4 factors impacting gross margin and the FIFO lag was one of them, and that's really the nickel price going down and we have to kind of pull through that, that higher cost nickel from the past through our P&L with the selling price being down because our the market prices of raw materials being down.

So as I mentioned, I think in one of the other questions that impact will still impact our next quarter, but it will lighten up and as nickel has stabilized, kind of bouncing along the bottom lately in the low sixes, that stability will abate to that FIFO lag. So as we go into the future, that should be much less of an impact.

Now when nickel starts to strengthen as Mark just said, that's kind of the market telling us something. That we're going to get a lot busier. That demand is coming back and we can get some pricing leverage and certainly, some higher volumes, which will take care of a lot of these other issues that are impacting our margins.

As we ramp up higher volumes than we've experienced before because of the new CapEx, going into 2015, we've made the assertion that the CapEx improvement, the return on investment in those should add about 2 to 4 points on our margin, and that was made kind of based on 2012 margins when they were around 20% at that time.

So once we get back to the volume levels that we experienced back in 2012, and market conditions of 2012, then certainly, these new CapEx investments that we're making should garner that 2% to 4%. We're still confident in that..

That answer your question? Let me just add for you, as Dan mentioned with you being relatively new in the last 3 calls or so, one of the things we talk about to at Haynes is the average selling prices of $20 plus per pound and volume. We're kind of hyper volume sensitive at Haynes, a lot of that pricing goes into absorption.

When you see us in that 1.5 million pound a month, 4.5 million pounds per quarter, that's when where going to be struggling. When we get back into that 6 million pound a quarter type of capability, that's when Dan's really talking, that's when we really start to make hay a little bit.

And the new capacity that we're bringing on, as well as the upgraded equipment that we're bringing on, that's where Dan starts to talk about. We start moving into that 6 million pound a quarter type of number.

That's when we'll start to really see the benefits of the new equipment and start to see that, what we feel is going to be that margin enhancement.

As Dan said, in the 2012, we're running that 20 to 22 and our expectations are to see that number run more to 24 to 26 type of margin level once we get ourselves back to those good volumes and a little bit more activity in the marketplace..

That does answer my question because I was getting at, if we're in a flat nickel price zone for the foreseeable future, I wanted to hear how or what would cause the bottom line to improve, and I was hoping it was going to be because of the improvements to the capital structure of the business and sounds like to me that is exactly where we're headed.

And I would like that one follow-up question. The previous caller ask about the new GE platform, that lear engine and as I have read a little bit about that, it seems to be ceramic-based and that caused me to have a little bit of concern, but it sounds like made that they are player in that engine.

Is that correct?.

We're player in every engine platform. I will say that one of our competitors out there, I think did a fantastic job in getting some of their materials specified into that application. We have a new alloy called Haynes 282.

It will be looked at for future generations and modifications, but we'll be in that engine from all the traditional alloys the HASTELLOY's, the GE is not a big user of HASTELLOY. Their more of a René and 718 and 625 those types of materials but we will be in the engine in all those traditional components..

We reached the end of our question-and-answer session for this morning. I'll turn the floor back to management for closing comments..

Thanks very much. Thank you for your time today. Thank you for your interest and support of Haynes. As we've mentioned, really, a difficult period we went through here in the first quarter and as we mentioned in, especially in some of the questions that came up, we do see that the second quarter isn't fully booked out.

We're hoping that we'll see some more transactional activity come through. But then, as we think we move into later into, deeper into 2014, we see some good signs for where the marketplace is going. So again, we look forward to updating you next quarter. Thanks again..

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