Greetings, and welcome to the Haynes International Fourth Quarter and Fiscal Year End 2014 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, David Van Bibber, Controller and Chief Accounting Officer for Haynes International. Please go ahead, sir. .

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

Before we get started, I'd like to read a brief cautionary note regarding forward-looking statements. This conference call contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities and Exchange Act of 1934.

The words believe, anticipate, plan and similar expressions are intended to identify forward-looking statements.

Although we believe our plans, intentions and expectations regarding or suggested by such forward-looking statements are reasonable, such statements are subject to a number of risks and uncertainties, and we can provide no assurance that such plans, intentions or expectations will be achieved.

Many of these risks are discussed in detail in the company's filings with the Securities and Exchange Commission, in particular Form 10-K for the fiscal year ended September 30, 2014. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise..

With that, let me turn the call over to Mark. .

Thank you, Dave. Good morning, everyone, and thanks for joining us today. Hopefully, you'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. .

Fiscal year 2014 was clearly a transition year as we saw most of our key markets bottom out with respect to demand in the first or second quarter, and we started seeing an improving order book in early spring of the year, followed by better invoicing and booking levels, as we move through third and fourth quarters.

As we mentioned in the last couple of calls, we also started go to work on our product mix in an effort to improve average selling prices, essentially trying to reverse the trend that seem to impact our entire industry over the past 2 years.

I believe we're making progress, but I want to remind you that this process will take time, and it won't be up, up, up at every instance. We're still in a very competitive marketplace. Also at this point, there remains significant geopolitical uncertainty and macroeconomic uncertainty all around the globe.

So whereas we're pushing to improve the quality of our order book, we have to stay cognizant of these larger economic factors.

Again, over the past 6 months or so we've seen a strengthening in our order book, especially for higher value materials when we compare our business to 2013, and in discussions with customers they report that their inventory levels are not inflated.

We believe we still have a lot of work to do to get to where we need to be, but we feel we're on a better path than where we were a year ago. .

Taking a look at fiscal '14, fiscal 2014 finished the year with net revenue of $455.4 million, that was down 5.7% from fiscal '13's net revenue of $482.7 million. Net income decreased to $3.75 million in '14 from $21.6 million in fiscal '13.

Pounds shipped in 2014 were up slightly, about 3%, to 21.7 million pounds versus 21 million pounds in fiscal '13, and average selling price per pound decreased 8.4% in fiscal '14 to $21.02 per pound from $22.94 per pound a year ago. Backlog increased during the year from $166.6 million to just over $221 million at year's end.

That being said, the year seem to bottom out late in the first or early second quarter, and we believe we started to see some strength returning in most of our target end markets. .

As I typically do at the end of our fiscal year, I met with about 50 or so customers over the last few weeks to discuss the upcoming year. In general, they expect 2015 to be an improvement over 2014.

Even in discussions with our colleagues in Europe and Asia, the underlying commentary was that demand in our key markets appears to be improving, even though they express clear concern about their own local economies.

Overall, we're encouraged by the activity we're seeing in more advanced applications requiring higher performance materials for new higher efficiency products and projects. We mentioned in the press release that our upcoming quarter has very few specialty application shipments. That is principally a timing issue.

We are still seeing new orders coming into our system for advanced materials and applications as evidenced by the increased quality of our backlog. But at this time, very few of those applications are slated to ship between now and the end of the calendar year.

Obviously, where possible, we'll pull orders forward in the queue in instances where a customer can take material earlier than scheduled, but at this point, we're a bit light in the first quarter for those higher value items. .

Moving to our end markets. Net revenue in the aerospace market for fiscal 2014 was $195.2 million, roughly flat with last year's $197.1 million. Volume in fiscal '14 was 8.8 million pounds, up roughly 9% from fiscal '13's 8.1 million pounds.

The 2014 figure does include that one-off ingot application we mentioned in prior quarters, and just to frame it for you, Haynes' best year in aerospace was 8.9 million pounds, so we're starting to get back up into that higher performance level, and with our new capabilities, we won't be constrained as we were in prior cycles.

Our backlog in aerospace increased pretty dramatically in the fourth quarter, up almost 14% even in spite of the higher shipping levels we've had in the back half of fiscal 2014. The aerospace market accounted for approximately 43% of our revenue during fiscal '14. I think most people know the story on the commercial side of the business.

Boeing and Airbus continue to ramp production on key platforms, and new engines and re-engining continues to gain traction in the industry. The supply chain de-stocking appears to have ended and we are starting to see the replenishing process.

On the aero tubing side, as I've mentioned previously, we're already seeing increased output from our Louisiana facility, and as we complete commissioning and turn all of the available capacity over to production in the second quarter of fiscal '15, we expect we'll be able to further grow this area of business.

We feel the work we've done in installing our new equipment in both Kokomo and Arcadia will position us well for the needs of our customers in the next up cycle. .

In our Chemical Processing market, net revenue for fiscal 2014 was $113.4 million, down 8.6% from the $124.1 million we did in fiscal '13. Volume during the year was 5.2 million pounds, essentially flat with last year's 5.2 million pounds. Backlog increased 6.7% during the quarter, and CPI accounted for almost 25% of our total revenue for the year.

If you recall, last year we talked about how this market had many large projects placed on hold. In FY '14, we started to see more of these projects get let, and perhaps more importantly, we started seeing a significant increase in new projects requiring more of Haynes' proprietary materials, especially in the back half of fiscal '14.

We expect to have more of these projects materialize, as we progress through fiscal '14 and as the world economy starts to rebound and gain momentum.

Although I can't say definitively that our business has been impacted at the lower end by our pricing actions, I do feel we have bypassed some higher volume opportunities in the second half of the year, as we've been trying to push through our strategy to manage our mix a little more aggressively.

This is always a difficult balance and we do expect our commitment to this strategy will continue to be tested in fiscal '15. However, at this point, we're pleased with the levels of activity we're seeing and the quality of the project work that we've been booking as we enter fiscal 2015. .

The land-based gas turbine market totaled $86.7 million in net revenue for us in fiscal '14, down 15% from the $102.1 million we had in fiscal '13. Volume dropped about 4%, 5.9 million pounds from the 6.1 million pounds we saw in fiscal '13. This market accounted for approximately 19% of our net revenue in '14.

Backlog fell 30% in the quarter, as this market continued to adjust off record levels we experienced in fiscal '12 and our second highest volume level in fiscal '13. We expected this correction and we've discussed it in previous calls with you.

Qualitatively, discussing -- discussions I've have had with key accounts and our people in the field seem to be indicating that we may be bottoming in this market area. Most of the activity we've seen in this market over the past few years has been MRO-related, but some of the work we're starting to see is on the OEM side.

Some relatively dormant alloy size combinations appear to be coming back to life. It's too early to say if this is the end of the correction, and data at the demand end of the supply chain still suggests this market is flat and expected to remain flat year-over-year.

But as I mentioned, we're seeing some activity recently in products that have been dormant for quite a while. Just kind of on a cynical side, I'll also offer at this point kind of a qualifying statement here. So far it's largely qualitative information that I've discussed.

Our order book, as I mentioned to you, is still obviously not quantitatively confirming a rebound in this market. However, for the first time in about 5 or 6 quarters, I feel we're hearing more positive indications in the field on the OEM side of the business.

With current volatility and energy prices, the dollar strengthening and a lot of global instability, I think it's fair to say the demand in this market will stay choppy and unpredictable in the early stages of fiscal '15. .

In our other markets, we had net revenues of $44.4 million in fiscal '14, down roughly 9% from fiscal '13. Volume increased slightly from 1.6 million to 1.7 million pounds during the year and the backlog was up about 32% in the fourth quarter.

The application base in this category is pretty much turning over with the loss of the flue-gas desulfurization business in North America, largely due to the war on coal, and it appears to be being replaced with applications in energy, welding, consumer-electronics and various industrial heat treating applications. .

Looking at our key growth projects, we're commissioning our new flat roll equipment in Kokomo, with just the heat treating furnace remaining on the not-yet-completed list. It's on time, it's just the last cog in the completion of the project.

Equipment in this area is running pretty much into normal production mode now, with normal preventive maintenance intervals, et cetera.

We're very pleased to have this area up and running, and interestingly, quite a few of the projects that we're seeing, especially in the CPI market will run across this equipment, whereas in the old days, we would have been scrambling to find conversion sources.

Also, we're in the final stages of our commissioning of our cold working equipment in Arcadia on the tubular projects expansion project. We've already seen increases in levels of production from this equipment, and we're starting to pull in some of the orders to reduce our lead times on both corrosion and aerospace products.

As you saw on the press release, in the service center and distribution section, we announced our intent to purchase some specific assets of Leveltek Processing, LLC up in LaPorte, Indiana, but any discussion on that topic would be too preliminary.

We expect to close in the second fiscal quarter and will update you with the details in the business case after closing on that project. .

Finally, we're also in the early stages of the next phase of our go live with our new global IT platform that has been running in Europe for about a year. Always a challenge in this area, and a lot of great people putting in a lot of hours to get it done.

It's going well, I'd say we have the normal frustrations, normal challenges, but to be honest with you, it's going better than I had anticipated. I know we did one of these when I was -- a long time ago, when I was an inside salesperson in American brass, and I remember answering the phones from customers.

It's a difficult job when you're doing this, and you're that person on the front line when some of the paperwork is incorrect, et cetera, but we are fighting through those things. We're still making a lot of coding adjustments on paperwork.

We're still working in increasing response times on some of the functions, et cetera, but the one thing here is we are all very excited about what this system will offer us once we get it up and running fully throughout the all-Haynes locations worldwide. .

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

Thank you, Mark. My comments will hit the financial highlights of the fourth quarter and the full fiscal year. Our financial results continue to improve sequentially with fourth quarter results better than our third quarter of this year and driving us into positive net earnings for the full fiscal year.

While our volumes shipped in Q4 were lower in pounds in the third quarter, the pricing and profitability was better, which helped drive a higher gross margin.

Our gross margin dollars for Q4 was $18.9 million, which increased by $4.8 million compared to Q3, with the gross margin percentage expanding from 11.1% of net revenues in Q3, up to 15.8% in Q4. This is also better than the 14.0% in last year's fourth quarter.

While this is not yet back to normalized margin levels and it will take some time to grind the margins back to those levels, we are on a solid progression of margin recovery. This margin momentum is driven by many factors, I will mention 4.

First, price increases we have implemented are gaining traction, including some pricing power improvement at our service centers. And a Q4 product mix are more profitable alloys and product forms.

Two, less of the lower margin orders shipped out of the backlog that were taken in previous time periods have more compressed pricing; number three, much of a higher cost inventory produced in prior periods has flushed through the system, causing less unfavorable impact on margins in Q4; and four, we have less impact from declining nickel prices than in prior quarters earlier this year.

And of course we are always diligent to watch our cost structure and our production efficiency and yields. .

Lean Manufacturing is a foundational part of our company culture. SG&A costs, combined with research and technical costs, were 8.4% of net revenues in the fourth quarter compared sequentially to the third quarter of 8.7% and the second quarter of 9.0%. The full year was 9.3%.

Operating income was $8.8 million, which is more than double the $3.1 million of the third quarter and over $10 million higher than the second quarter's operating loss of $1.3 million. .

The effective tax rate this quarter of approximately 28% is more favorable than the first 3 quarters of this year due to the proportion of taxable income and lower rate jurisdictions and our ability to more fully utilize the U.S. manufacturing deduction that was previously recognized in the prior year's tax provision.

The effective tax rate going forward is expected to be approximately 33% to 34%. Net income for the fourth quarter is $6.4 million and for the full fiscal year, it's $3.8 million. .

Outlook for fiscal 2015. First quarter results are typically impacted by lower production days due to holidays and planned maintenance outages. Planned outages related to the capital expansion projects in both Kokomo and Arcadia, as well as other maintenance-related projects are expected to impact first quarter results.

While the company has continued to see order entry, pricing and backlog improvement with higher demand, this improvement only partially offsets the expected lower production days in the quarter.

As a result, we expect revenue and earnings for the first quarter of fiscal 2015 to be lower than the revenue and earnings of the fourth quarter of fiscal 2014. Beyond the first quarter, gross margin recovery is expected to continue over the course of 2015, as pricing continues to strengthen and volumes continue to improve. .

Backlog was $221.3 million at September 30, 2014, an increase of $16.6 million or 8.1% from $204.7 million at June 30. On a year-to-date basis, the backlog has increased $54.7 million or 32.8% from the $166.6 million at September 30, 2013.

We believe the improved order entry levels over the past few quarters are due to customers increasing their stock levels to accommodate the demand in the company's end markets.

In addition, we implemented price increases which are beginning to improve the quality of our backlog, but may slightly temper the order entry rate as we manage mix to better pricing levels. The October 31, 2014, backlog remained essentially even with September's $221 million. .

Raw materials. The market price of nickel and other of our raw materials has been volatile recently. It is difficult to predict the impact this will have on our business. Typically, a continual decline in nickel prices have an unfavorable financial impact, and conversely, continual increasing nickel has a favorable financial impact.

Recent volatility will likely produce a mixed financial result, but may cause customers to delay orders potentially impacting our volumes.

We monitored the drivers of nickel market, such as the geopolitical events, the Indonesia laterite ore ban, the production capability in the Philippines, the overall inventory stock levels on the LME and the demand for stainless steel as well as others.

Many of these indicators are mixed, but the general consensus is that nickel supply will move into a deficit position in 2015, lifting nickel LME prices, but this can be difficult and hard to predict. .

Capital spending. Our strategic capital investment projects are nearing completion and many items are complete or in the commissioning stage. As we finalize these projects, we move to the next phase which is capturing the operating leverage and the expected shareholder return on these investments that we committed to.

In fiscal 2014, we invested $39.7 million in capital projects, and the forecast of capital investments in fiscal 2015 is approximately $22 million, excluding the previously mentioned acquisition of the Leveltek LaPorte assets.

The $22 million of planned capital spending includes $5 million to complete the previous strategic projects for the tubular expansion, Kokomo flat product expansion and the global IT system.

The remaining $17 million of planned spending is earmarked for continued upgrades throughout our manufacturing facilities, and this level of spending is considered a maintenance level of spending. .

Cash flow. Net cash provided by operating activities was $26.9 million in fiscal 2014, even with our lower net income. Controllable working capital was $271.3 million at September 30, 2014, a decrease of $2.1 million during fiscal 2014. Our cash balance at September 30, 2014, was $45.9 million.

Even with our significant investments in capital spending, our cash position remains solid and our revolver balance remains at 0 borrowings. .

And in summary, while we are seeing some mixed signals from U.S. and foreign economic indicators, as well as some concerning macroeconomic and geopolitical issues, business conditions are improving, and we continue to be optimistic about the business levels being reported by our customers.

We continue to focus on growing our net revenues and fully regaining the price and margin levels that experienced compression during the downturn. The long-term demand in our markets continue to look favorable, and our capital expansion projects are expected to position us well for future earnings growth and building shareholder value. .

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

Thanks, Dan. A year ago, we mentioned that we felt the jet engine de-stocking was nearing completion, but the economic situation was still clouded. As we migrated into the middle of fiscal '14, conditions for our business clearly started getting better.

We experienced better backlog strength and we went to work immediately on mix, while keeping our eye constantly on the broader economy, and of course making sure we are targeting all the time, targeting new applications.

Although the macroeconomic situation worldwide remains cloudy as we enter 2015, we feel the demand drivers for advanced nickel-based and cobalt-based alloys are starting to strengthen.

More jets with better engines, natural gas, the building block of the chemical industry is experiencing a renaissance with greater global availability and very attractive price levels. The industry keeps driving now for more efficient gas turbines, and new applications are coming out in coatings, welding and even in the consumer products side.

Structurally, the industry driving forces we've always identified remain intact. We feel very good about our products and service capabilities being able to meet the needs of our customers. As I mentioned earlier, we still have a lot of work to do. We got a lot of work to do driving out waste in our processes.

We just had our fourth wave of black belts and green belts go through the system, some phenomenal projects going on out in our plants for driving costs out of our systems. We also have to continue to identify higher value-added opportunities as we're doing through our distribution systems and our cut parts project.

And we have to just continue to get our business better positioned for the upturn. .

We're encouraged by the recent developments in our business, and we're very pleased with the quantity and quality of our current order book. .

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

[Operator Instructions] Our first question today is coming from Edward Marshall from Sidoti & Company. .

So it must feel good to finally have kind of some breeze at your back. I'm curious on the cadence in the quarter, because obviously your raw materials were much stronger in the first, let's say, 2 months of the quarter and then kind of ebbed off.

And I'm wondering maybe if you could talk about maybe pricing and even to some extent volume throughout the quarter and maybe the cadence. .

I think you're seeing some of the usual dynamics as we're in the current quarter, more so than anything, not so much fourth, but as we're in first. I think we'll start to see some of the people playing nickel games. I think that's what your question is about, nobody wants to be that person to buy the most expensive nickel.

As Dan mentioned, the backlog was essentially flat in October. You also have the factor of a lot of people just don't want to order material and inflate their balance sheets. Everybody wants to keep their own cash for the end of the calendar year, which seems to coincide with a lot of fiscal years.

So we're not going to get too worried about what this current quarter looks like from an order entry point of view. If I -- you know how I am I'm hyper paranoid, if I feel hyper paranoid, it will hit me in February, March timeframe.

But right now we're feeling real good about -- we've made a lot of progress on the pricing side of our business, and I think you see that in the -- I'll call it -- we call it the backlog quality, but if you look at the average selling price in the backlog, a lot of the work we've been doing over the last 3 quarters has started to pay off, both from flushing out the lower cost orders, but then more importantly, replenishing with I'll say higher value items.

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Okay.

And then if you look at maybe the pricing improvement in Chemical Processing on the year-over-year basis, is there any signs that you're seeing less competition in the market? I mean, is the commodity stainless picking up?.

No, it's still very competitive. Ed, when we talk about managing the mix, that's code for there are some lower end items that we would have taken a year ago that we haven't had to take recently.

So when you look especially at CPI, a lot of was happening there is a lot of these -- there have been some really great projects in the last year for some of our more advanced proprietary materials, which garner a much higher selling price.

And obviously, we're also maybe not as competitive or not competing as heavily, you might say, for some of those lower end fill-the-mill type of orders as we did a year ago, 15 months ago, when we were really everybody in this industry was struggling just to get baseload into their mills. .

It does -- and I understand during, I guess, the fourth quarter, here you had renegotiated the titanium contract, is some of that tubing worked into the chemical? Is that responsible for maybe some of the backlog growth, and maybe kind of talk around that contract specifically and what that might have done to the dynamics?.

Not so much in Chemical Processing. That is a contract that would be in the aerospace market, it's titanium hydraulic tubing for the aerospace industry. So that's where that's showing up. And yes, we did have some order entry from that once the contract was signed, we were able to enter some additional orders there.

So that helped on the aerospace average selling price. .

Okay.

Is there anywhere to parse kind of first half versus second half to kind of get a different look at maybe the backlog improvement as opposed to getting clouded by maybe the mixture of the 2? Is there any kind of way that we -- that you may be dissected that backlog, that may give us a better understanding of what's happening maybe in the 6 months versus the prior 6 months?.

Well, I think some of our comments have reflected that. We mentioned -- we look at the backlog by market, and I think Mark mentioned we've been throughout the year, kind of cautioning a bit on the land-based gas turbine side. So that I think is being reflected and you can see that in the backlog.

And with aerospace, Mark mentioned those volumes picking up as well, and some of the transactional business and the subsiding of the de-stocking that we've mentioned, I think is helping on the backlog in the aerospace side as well.

So I think the mixture between CPI is a good alloy for mix, so we're getting some nice quality of backlog in the CPI side. Aerospace is the de-stocking kind of subsiding. But land-base gas turbine is the one that, as Mark mentioned, declined a bit. .

Yes, if you take a look at it, Ed, too, if I can also offer to you, if you take a look at the back half versus the front half of the year in fiscal '14, you can really see where aerospace, the mix dramatically picked up. I want to say out of the $200 million or so we did in aerospace, I think it was like $115 million and $85 million back half loaded.

And the reason I bring that up is you did a lot of revenue in aerospace in the back half of the year, and you consistently increased the backlog in the aerospace as well. And it just happens to be the highest overall average selling price item that we do.

So you kind of see that you were doing higher volumes and increasing backlogs, so that backlog is heavily influenced by a richer mix of aerospace products.

Where I think our backlog is going to be more difficult for you to cipher and decipher is the fact that we've got -- we've really -- we've had a good year for booking some of these high-quality chemical process projects. We started talking about it, but we starting talking about quoting them 5 quarters ago.

And they started rolling in probably 3 quarters ago. And it's knock on wood, it's been a very, very good year for those CPI projects, and there are still some of those sitting in the backlog. And those are pretty advanced applications, also with very, very good selling prices, very good margin levels. .

And I'm curious on the CPI, is it new build or is it MRO, given the replacement work?.

I'm talking about the high-quality work that's sitting in backlog, that's new build. .

New build.

And aren't you later in the cycle with chem processing demand? I mean, more of the costing materials say less ethane, less ethane crackers?.

Absolutely. If you take a look at the chemical table, let's start with natural gas and go all the way through all the process improvements until you get into the Haynes level of materials, absolutely, we are late cycle. However, some of these applications I'll say are not traditional chemical asset applications.

These are completely different types of applications. Again, a lot of heat exchange at work and containment vessels, transport vessels, things like that. .

So you're seeing a lot more in the beginning of the cycle that you'd normally haven't seen before which is probably a pretty good sign for you cycle long?.

And also just not the traditional chemicals I'll say that Haynes was always associated with. And when I say that, not as much of the commodity, I can't really say that I've seen the commodity chemical side of the business come back in its normal evolution so far this cycle.

The things we've been doing have been kind of more advanced chemical applications. .

Our next question today is coming from Chris Brown of Bank of America. .

Can you give us a better sense for when that kind of lower-priced backlog will be worked through? Is this kind of all going to be worked through by the end of the first quarter or will it kind of linger into the second, do you think?.

I would say the first quarter we'll get the brunt of it. I mean, we've been flushing it out as we've gone through in the fourth quarter that we just finished here didn't quite have as much impacting the margin as we expected, but there will be some of that in the fourth quarter.

And you're always thinking about what average selling price you're seeing in the income statement versus what you're seeing in the backlog. Those can sometimes be a bit different depending on where we're capacity constrained and how much lead time we have in different product forms and alloys. So those aren't always comparable.

Plus, we have our transactional business that we take an order and ship it in the same month. Those won't even really show up in the backlog numbers in average selling prices that you're seeing. So there can be a little bit of difference between the P&L, average selling price and the backlog average selling price.

But I think we're doing a good job of flushing some of those older ones through. .

Okay.

Then for the quarter, how much would you say was more the transactional-based business versus what came out of the backlog? Can you give us a sense for that?.

It's pretty steady with what we've been seeing. Usually, it's about 1/3 of our business. So the past couple of quarters have been a little bit higher than that. So between the 35% range, maybe a few points above that. So a little higher than normal, which is a good sign. .

Okay. That's helpful. With the CapEx -- with the major CapEx play kind of winding down, what will be the primary uses of cash going forward? You have this kind of bolt-on acquisition in the process of working its way through.

Should we expect more of those? Would you favor maybe raising the dividend over M&A at this point in the cycle? What are your thoughts regarding cash use?.

Well, certainly we spent quite a bit over the past 3 years that's been kind of the strategic capital projects. And as those wind down, certainly we have our eye on more of those types of projects. So we want to evaluate those and see what kind of return on investment we're going to calculate from those.

But I think there's still some opportunities with our own facilities that we can garner a nice return on investment. So we're analyzing those, but with this industry, it's quite interesting, you're looking at an expansion. It will take quite some time before you're actually spending the money on it.

So I think this fiscal year 2015 will be a lower year than what we've seen in the past 3. We'll have that lull, which hopefully we can generate some additional free cash flow without lower CapEx.

But as you mentioned, we have the CapEx that we will be expanding in closing the Leveltek LaPorte assets and we'll give you more details on that when we actually close. .

Okay. And then just lastly, nickel prices have corrected back down to the low $16,000 per metric ton level.

You guys think that there could be deficit conditions throughout 2015? Does it make any sense to maybe build some inventory right now, when prices are lower and kind of what's your view regarding your current inventory of nickel and how you kind of see that progressing throughout fiscal 2015?.

We typically don't want to speculate really on nickel prices. So we will determine our production schedules and what kind of inventory build we have really based on our order book. So if we see our order book trending up in a certain alloy and form, we may melt a little heavier in that area. But it's really not around the nickel price.

Many of our contracts we attempt to pass that nickel price onto the customer. So many of our contracts, even though they may be long-term agreements will have adjustors in them. So most of which are quarterly adjustors, some are 6 months.

If they get out past that, if they're a year adjustor, then we will typically try to buy the nickel forward on those to protect the margin, but we try to not really speculate what the nickel is going to do as far as what production levels that we have. .

Our next question today is coming from Dan Whalen from Topeka Capital Markets. .

Thanks for the backlog data in the latest months here, essentially flat.

Did you break out what kind of the volume and the price component of that was?.

No, we did that for the September backlog number. We do break that out. .

Can you give any color on the October backlog number?.

Typically, we just quote the dollar amount and it's essentially flat with what we were seeing in September. .

Okay. Just looking at the gross margin, certainly clearly very impressive I think it's the highest level since fiscal first quarter of '13. From your commentary, it sounds like we'll probably see a sequential decline in gross margin and an upward trend from there.

Certainly, I think nickel dynamics are certainly different than they were in 2012, what you've certainly undergone some internal initiatives.

I mean, is it premature to see your margins going back in the low 20s in the back half of this year?.

I mean, it's clearly the objective, to keep grinding and keep -- but a lot of it's going to depend on where the marketplace goes.

It's still very cloudy out there, we've got a lot of good projects in the queue and you take a look in general, you can look at that average selling price in the backlog and you can say, okay, we seem to have stemmed the tide or reversed the trend as far as average selling price per quarter, and we've seem to have reversed a little bit of the tide as far as the average selling price sitting in the backlog.

Those are usually pretty good indicators on the business. But, and here is my qualifier again, a lot of it is dependent upon where does the broader economy go. Remember, we always talk about how pretty much entering every month close to 1/3 of our business isn't even booked. That's the transactional business we talk a lot about.

So a lot of our business still does depend on the distribution system and that transactional side, which is directly related to how the broader indicators are going and what the market forces are in each of our target markets. .

Okay. And just if I may, maybe just on the backlog, certainly, what you saw in September, it's certainly nice development on the pricing front, volume was down.

Can you help us extrapolate a little bit how much was that due to maybe base price increases or less competitor or irrational market? And how much of that was maybe from higher nickel prices in the middle of this year that may have been incorporated into the backlog?.

It is very difficult to actually to parse that out. I mean, we do have, I think, mix probably moves that pretty dramatically as well, but our higher price increases, they are gaining traction. So we are able to, as I mentioned in my commentary, get a better quality of backlog.

So those price increases are improving and some improving pricing power on our service centers. So I think you can see that portion flowing in, but you also have the higher titanium being booked in the backlog. That's going to lift the average selling price and different alloys in different forms can move that number pretty dramatically.

It's hard to break that out. .

[Operator Instructions] Our next question today is coming from Phil Gibbs from KeyBanc. .

Last quarter, you had cautioned on the pace of the margin recovery, and clearly, there was a nice pop here quarter-on-quarter.

Maybe it was just a general comment for the next couple of quarters, but is there anything that really surprised you as far as the gross margin performance? Was it the transactional business maybe coming forth a little bit stronger? Was it mix? Just trying to understand where that gross margin may have shook out relative to the expectations that you had?.

Right. The commentary I think we had last quarter did reflect not just this quarter, but a couple of quarters out. So I think we still have kind of the similar theme going into this first quarter fiscal 2015. But I think the mix in Q4 was a little bit richer than maybe we expected.

What we actually shipped was a good mix, and it definitely helped the margin go up. As we look at what we're going to ship over the next quarter, we give similar caution that we still have some of the lower cost items in the backlog that will flush out. As I mentioned earlier, I think most of that will occur in this first quarter.

And we still have some of the higher cost inventory in there from -- that were produced in earlier quarters. So that is more minimal because we were able to flush a lot of that through in this quarter. But I'd say the lower cost items flushing out of the backlog, we'll still have that impact in Q1. .

Okay. And the way that you're laying it out, Mark, sounds like pricing and you expect pricing in the backlog at the end of the calendar year to be better than where it stood at the end of September.

Is that accurate?.

I think it's difficult to say right now, Phil, especially with the declining nickel. So I mean, that's where I kind of made the cautionary note about -- we have seen some really good momentum, but this is not going to be up, up, up. I think this is going to be more of a grinding recovery.

Where I'm encouraged is, as I mentioned earlier, is the higher shipping volumes of aerospace and replenishing that backlog more strongly. So essentially saying, even though we're shipping higher volumes, we're still not chipping away the backlog.

The backlog in aerospace is still bigger -- it'd be the best way to put it and that's our best selling price items. So that's an encouraging sign.

But there are so many moving parts right now especially, in my mind, nickel and exactly who will be ordering and how much will they be ordering over the next 2 to 3 months is where I really can't make a projection on what the backlog pricing number is going to look like. .

Okay.

And just to piggyback off Dan's question on the chemical processing projects, anywhere specifically that you're seeing that as far as region or as far as a type of chemical? Because you do talk about some of the more advanced applications and new builds, but where are you seeing the new builds geographically?.

I think, Phil, with our business, the actual end-use demand is going to be really all over the world. But the fabricators are the key, and the fabricators, likewise, for instance something might be getting fabricated in Washington state, but the actual demand or application is going over into Eastern Europe.

And the key for someone like us is we've got our marketing people and application development people in, in Eastern Europe working on the application, and then understanding the path of the supply chain, so we can get to each of those fabricators wherever the heck they are in the world to make sure we're getting the orders.

So it's really it's a mishmash, it's all over the place. And we don't want to get too specific about which regions, certain applications are in, because frankly a lot of our competitors listen to these calls. .

Understood, appreciate that. As then as far as your CapEx for next year, definitely positive from our perspective, lower than we were anticipating.

Is there something in there that you're pushing out, or is the new capital projects coming in at a little bit better cost than you anticipated? I think we were expecting you to do some service center upgrades, and maybe have a bit more costs associated with some of these projects?.

Well, as I mentioned, the $22 million that we're forecasting excludes the Leveltek LaPorte acquisition. So when that closes in January, we'll have more that we can reveal about it the purchase price and so on. But that is excluding that number. .

That's really why the CapEx number that we reported to you came down. We pulled that out and separated it from the regular CapEx. .

Our next question today is from Edward Marshall from Sidoti & Company. .

I just wanted to ask about the inventory levels, because they buck the trend, which normally sees down 4Q are kind of lower volumes inventory in Q4. They actually are up. And kind of looking on a sequential basis, it looks like work in progress, raw materials are up. I think that makes sense.

I was just curious about maybe the strategy with the distribution units you have and kind of timing with nickel, are you building -- are you anticipating building up some kind of safety stock in the distribution channels in case the market does accelerate as you anticipate or maybe you can kind of just help me out what's going on with inventory. .

Just to give you an idea, we've -- the last couple of quarters, one of the things would be market-accelerating. And again, probably a great example is at aerospace.

I think the last 2 quarters, one of the things I mentioned was that for instance our volume was up -- revenue was up 30% over 2 quarters earlier, and if you think about it, it's the acceleration of the marketplace.

So a lot of what we've done is we put a lot of material into the melt schedule and we're flushing it through to try and get it through to finish into the service centers. For instance we -- the $120 million or so we did in the most recent quarter, we would have liked to have done more.

We just didn't have everything positioned in the locations where wanted it to be. So we did build some inventory to push through, but what we'll do now in the upcoming quarter, we'll have our normal maintenance shutdowns. So we'll have some shutdowns in the melt shops in November and December to do a lot of maintenance.

So what you'll see is you'll probably see a bleeding off of some of that inventory as we get into the January, February, March timeframe, or at least a reversal of that inventory.

We'll probably see a lot of it going into finished products in the next couple of months, hopefully getting sold out, and then w-i-p will start to pick up again probably once we get into January and start melting again. .

So just to be clear, it's more of a safety stock in front of kind of down operations because you're going to be doing some maintenance, and not a bet on the market?.

Not -- correct, right. But It's also a response to our increasing backlog. .

There's quite a bit of that backlog sitting there that is which we love, which is or sooner. So there's quite a bit of things that are sitting in that backlog that have a delivery date of or sooner, so that's some of the inventory that's in there. .

And that's usually a good sign in a cycle when we will take it earlier if you can get it done. .

That's what we all like to see. .

Our next question is a follow-up from Phil Gibbs from KeyBanc. .

Dan, just housekeeping on the pension and OPEB expense for fiscal '15. Not the expense, but the contribution. .

Contribution for '15, well, as you can see in '14, given the fact that we weren't obligated to fund, we did have a reduced year this year. Really just one month of funding this year. But going into next year, we're still evaluating that. So we haven't determined what our funding level is going to be yet.

The pension valuation actually, the discount rate went down this year as of 9/30, which kind of increased the liability a bit. So we did have an expand -- slightly expanding funding position. So we'll analyze that and see what we're required to fund and make that decision in the next quarter or so. .

Okay, so it's to be determined. .

Right. .

Yes. .

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments. .

Thanks very much, Kevin. Thank you, everybody, for your time today. As always, we appreciate your interest and support of Haynes. Please be safe over the holidays, and we'll look forward to updating you after the new year. Thanks, again. .

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today..