Greetings, and welcome to the Haynes International, Inc. Third Quarter 2015 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 today, Mr. David Van Bibber, Controller and Chief Accounting Officer. Thank you, sir. You may begin. .

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

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

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

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

Many of these risks are discussed in detail in the company's filings with the Securities and Exchange Commission, in particular, Form 10-K, for the fiscal year ended September 30, 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. .

As we mentioned in the press release, we benefited from continued strength in our specialty niche project applications, along with strength in our core aerospace business, which offset some of the headwinds impacting the industry..

In Haynes' case, we saw the land-based gas turbine market continued to stay very light at low levels. We also saw a much softer commodity chemical process business.

And we felt the negative impacts of the tax change, which is expected to be a positive in the long term; negative impacts of foreign exchange; and continued decline in commodities, in our case, most notably, nickel..

For those of you new to Haynes, one of the things we discuss frequently is our core strategy of working with the design community on new applications.

Over the past few years, we've highlighted some broad areas where we've benefited from our materials, participating in new technologies in various markets, including our core markets of aerospace, gas turbines and chemicals, but perhaps more importantly, we've also won projects and applications in markets beyond our core, like consumer devices, welding and a myriad of energy-related applications.

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In 2015, specifically, we benefited from many of these design wins turning into significant project-related orders and shipments.

When I mentioned that we've benefited from continued strength in our specialty niche project applications, I'm referring to this work that we do to win projects, typically in new technologies that necessitate the use of better materials, like those we manufacture here at Haynes.

I wanted to highlight that because I feel this is a key source of differentiation at Haynes, and we'll discuss this a little bit more as we talk about each of the markets. .

With respect to the details of the third quarter, overall revenue in the third quarter was $121.3 million, down 4% from last year's $126.3 million. And I think most of you realize a lot of that change is due to the problems in nickel during the year, the slow degrading of nickel..

Net income in the quarter was $6.6 million, including the tax charge, up 215% over last year's $2.1 million.

Volume in the quarter was soft at about 4.8 million pounds, down about 21% from last year's 6.1 million pounds, but that was offset by overall higher average selling price, including our other revenue, which is primarily our tolling business, of $25.34 per pound this year against $20.85 per pound last year, a change of 21.5%, and again, indicative of a stronger mix, primarily comprised of aerospace products, the specialty niche products and, as I said, our tolling business..

We saw much slower order entry levels during the quarter as many customers conserved cash and watched their buying patterns in light of their demand needs and lower commodity price levels.

This has pretty much been the theme all year, as nickel has fallen from about 8-plus dollars per pound about a year or 15 months ago to levels in the $5 range during the most recent quarter..

Also, in many cases, production lead times in the industry for certain products remained very short, so customers were able to make adjustments quickly if their needs change, and they see almost no impact to their supply chain dynamics..

At Haynes, we're still very heavily booked on our aero tubing business and our flat rolled coil and sheet businesses. Both of those product forms are booked into 2016. We're encouraging our customers to get their business booked.

However, in light of continued downward trending commodity prices and available capacity in the industry, we expect slower buying patterns and low visibility to remain the norm through calendar 2015..

Moving to each of our key markets. Net revenue in the aerospace market for the third quarter of 2015 was $56.5 million, up 4.3% from the third quarter of '14. Volume was 2.4 million pounds in the third quarter, down 5.4% from the third quarter's 2.6 million pounds.

And by the way, if you recall, last year, we mentioned that we had that special one-off ingot order in the aerospace market. If you pull that out, our volume in aerospace was actually up quarter-on-quarter..

Aerospace comprised 46.6% of our net revenue in the quarter. Our backlog in aerospace fell about 8% during the quarter. However, we feel our current booking level in aerospace is somewhat underbooked on the tube -- the aerospace tubing side compared to how we normally have that level booked up.

We're probably a few months short of the booking level we normally have in that area, and that's something we're working on right now. It's not really an issue. In other words, I think we believe that our backlog in the aerospace area, on an apples-to-apples environment, is about flat. .

Overall, the aerospace business remains very strong. Similar to last quarter, when we did about $60 million, we continue to see excellent signs of this market improving as we move into 2016. .

The engine makers reported somewhat mixed results, with GE reporting very strong conditions. Pratt, Rolls and others are a bit more conservative. It appears the spares side of the business is picking up. We still don't feel we're seeing the full impact of the new platforms kicking in. A good example of that is our business in HAYNES 282 alloy.

It's a proprietary high-temperature alloy. It's continuing to increase in sales, and we're preparing for stronger increases in demand as the new engine platforms kick in. .

As you can imagine, right now, a lot of what we're doing is working with fabricators in the supply chain and making sure we have all the parameters we need in our processing, but more importantly, in their processing, things like getting the technical specs down and the standard operating procedures, et cetera, and seeing anticipation of the stronger demand we expect beginning in 2016.

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Moving into the chemical processing market. Net revenue for the third quarter of 2015 was $24.2 million, down 21% from the third quarter of '14's $30.6 million. Volume in this market was down 37.8% in the third quarter '15 to 850,000 pounds from last year's just under 1.4 million pounds. .

Additionally, the backlog in this area fell 34.8% of timing of new projects, and order entry for normal maintenance business has slowed dramatically. The chemical process business accounted for 20% of our net revenue in the quarter. .

I think there's a couple of things happening here, one, obviously, being some impact, kind of collateral damage, so to speak, that we've discussed previously from the oil and gas shock we're seeing here, especially in North America.

But we're -- I think we're also seeing some of the impact -- I was just in Asia, and we're seeing some of the impact of the slowdown in economies outside of the United States, especially in China. But let me get back to my script. .

In our last call, we discussed the oil and gas industry and the potential impact it might have on our chemical process business. I think we saw some of that impact this quarter. It's not so much of a direct impact as you see in manufacturers who have large segments of their business directly tied to drilling or completions or production.

But during the quarter, we saw lots of customers sitting on their hands in chemical-related industries, very nervous about what is occurring further upstream in the oil and gas supply side of the business.

In short, it appears that many customers are in a cash-conservation and wait-and-see mode until things shake out a bit more clearly throughout the industry..

We're seeing a slight increase in quote activity and discussions with key customers and fabricators regarding projects in the fall/winter outage season, but I can't really say that we've seen this market get its confidence back.

The speed with which oil dropped and the ensuing cutting of capital spending appears to have caused some pullbacks on project work and even slowed some of the maintenance projects. .

Along with the oil and gas slowness, China has slowed dramatically in this area. I was just in Asia, and in my opinion, if you look at the fabricators as a whole in Asia, I feel I've seen a dramatic slowdown in the level of fabrication work taking place.

The impact is primarily on the higher-volume, bread-and-butter applications, replacement systems, reactors, et cetera. Again, based on the customers I met with and the general view of what we're seeing, the core side of the chemical process industry is very slow right now..

There are pockets inside that segment that are still very active. Our people are working on some replacement reactors for the pharmaceutical industry right now. And I think you know we've had excellent success this year with our specialty niche applications.

Specifically, our high-value, project-related applications remain solid, as evidenced by the increased average selling price we saw in this market area in spite of the fierce competition and low volume of the traditional corrosion projects -- products sold to this market. .

The CPI business has been very complex in the last few years. The convergence of the lower oil and gas demand and the collateral impact throughout the build-out side of the chemical industry in the short term has been very dramatic.

Combined with the softness in global economies outside the U.S., most notably China, they've made the transactional environment very competitive. It's kind of odd, though, too.

It's funny, those lower commodity prices, oil and gas, are eventually what's going to be the stimulus, at least here in North America, for a broader build-out in infrastructure in the chemical industry as we look forward. .

one, remain committed to our customers' needs in supplying products from our plants and distribution centers for the higher-volume applications and be ready for that build-out while serving the MRO side; and two, push to develop higher-value applications and product forms to pave the way for new technologies and more efficient processing.

The new applications we've won in the past 2 to 4 years, along with the anticipated build-out of this industry, bodes well for the prospect of Haynes alloys as we look longer term at this market..

In the land-based gas turbine market, we totaled $17.6 million in net revenue in the third quarter, down 29.5% from the third quarters of 2014's $25 million. Volume was 1 million pounds, down 37.4% from a year earlier. This market accounted for 14.5% of our total revenue in the quarter, and the backlog increased 9.2%..

Over the past 2 years, we've been seeing this market clear out its inventory in the supply chain, while the OEMs experienced very sluggish demand. If you remember, we expected a correction after we shipped record volumes into this market in 2012 and 2013, and I think we spoke of it frequently. We're now almost 2 years into that correction.

The reports appear stronger from the OEMs, but in my opinion, they're still at very, very low levels. We've won several new applications on the high-temperature side of this business with our new alloys and processing capabilities, but none of those have yet resulted in dramatic increases in sale levels.

And we do not expect to see that impact until this market moves off its current low activity levels. .

We've won in this market historically by providing excellent product and excellent product service, and we expect to remain positioned to do so when this market rebounds.

There are catalysts on the horizon, specifically the lower-cost natural gas and legislation reducing coal usage, but I think the primary driver needs to be a rebound in global economies to get the OEM side of this business moving again. .

Finally, our other markets and other revenue accounted for $23 million in net revenue in the third quarter of '15, up 39% from last year's third quarter level of $16.6 million. Our backlog in other markets fell 20% in the quarter as we shipped some significant special project volume, and we've not yet received replacements for that volume.

By the way, we do expect replacements for some of those special projects. They are repeating types of businesses, so we will see those coming in. .

On the other revenue side, we do not report a backlog level, typically, as those orders and releases are transactional, typically entered in process within the same 4-week period, as is common and customary in the tolling business. .

Other markets and other revenue accounted for 19% of our net revenue in the quarter. As we've discussed previously, we've been targeting specific applications in the welding areas with our other products as well as in heat treatment, brazing and various high-temperature applications and wear-resistant applications.

The addition of our LaPorte operations on the tolling side has also been a solid contributor to this side of the business since we made the acquisition in January..

By the way, during July, we invested in upgrading some of the capabilities in LaPorte. In short, what we're doing is we're expanding the capabilities of some of the equipment at that facility so we can handle a broader range of products. .

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

Thank you, Mark. Our financial results in the third quarter reflected the challenging environment in the specialty metals industry. And we had -- as we had anticipated and mentioned in our previous guidance, our revenue and profitability were lower sequentially than last quarter Q2.

However, on a favorable note, we were able to hold average selling price and margin over the quarter..

Our average selling price per pound for product-related revenue, which excludes other revenue such as toll conversion, was $23.56 per pound this quarter. This is sequentially 5.7% higher than Q2 and 16.6% higher than last year's Q3 during a year where the LME market price for nickel has declined over 30%.

This is primarily due to a solid product mix of high-value proprietary and specialty type alloys that drives strong pricing and a strong margin. .

While we did have less of these types of special projects in Q3 versus Q2, it was still a favorable product mix in the quarter.

We believe this continues to showcase one of our foundational strengths and a key part of the Haynes strategy, which is leveraging our technical applications development with our proprietary and specialty alloys in value-added product forms.

This also highlights our pricing discipline that strives to garner economic value, even in a challenging market environment. .

Lower volumes -- volumes were lower in each market due to lower global demand and our customers managing their inventory levels, presumably due to softer nickel, as Mark just described. Our gross margin percentage this quarter was 19.9%, down only 20 basis points compared to Q2 of 20.1% and up significantly compared to Q3 of last year of 11.1%.

These results show our success in holding margins in a challenging environment..

Clearly, certain headwinds continue to persist, such as declining commodities, especially the price of nickel. We estimate that margin was compressed by approximately $1 million to $1.5 million in the quarter due to declining nickel. And we are expecting more significant compression to margin from declining nickel in our upcoming fourth quarter. .

SG&A costs, combined with research and technical costs, were $13.3 million for the quarter, which includes unfavorable foreign currency translation that impacted SG&A by $2.3 million compared to the impact in last quarter's Q2.

Compared to last year, higher incentive compensation accruals are included in this year's SG&A as compared to the same period last year. SG&A as a percentage of net revenues was 10.9% in the third quarter compared to last year's third quarter of 8.7% and the full 2014 fiscal year of 9.3%. .

Operating income was $10.9 million compared sequentially to Q2 of $17.3 million and last year's third quarter of $3.1 million. A discrete tax adjustment was recorded in the third quarter, but it's considered unusual and nonrecurring. .

During the quarter, legislation was passed in Indiana related to the throwback rule that initially has an unfavorable impact on our Q3 earnings of $1.1 million. But after 2017, it's expected to have a favorable impact on our tax rates and earnings.

The $1.1 million impact is immediate, as we carry a sizable deferred tax asset on our balance sheet that is valued based on the company's future effective tax rates. Lowering the expected future tax rate lowers the value of the deferred tax asset, which has to be booked in the quarter in which the law was passed. .

Outlook for next quarter. We expect lower nickel market prices to unfavorably impact our product selling prices and margin percentage in Q4. However, even with lower nickel and the other noted headwinds, we expect Q4 to be similar to or slightly higher in revenues and earnings compared to that of Q3, excluding the previously mentioned tax adjustment. .

Backlog was $192.9 million at June 30, 2015, a decrease of $27.5 million or 12.5% from Q2. Mark provided commentary on backlog already, but I wanted to update the numbers to July 31. The backlog at July 31, 2015, increased $5 million over the month to $197.9 million..

The forecast for capital investments in fiscal 2015 remains at $33.4 million, which includes the completion of the tubular and flat product investments as well as the acquisition of the Leveltek LaPorte assets. The integration of the LaPorte acquisition continues to go well and continues to be accretive to earnings. .

Net cash provided by operating activities was $38.9 million in the first 9 months of fiscal 2015, which represents a more than 60% improvement from the same period last year, driven by stronger net income..

Controllable working capital was $276.2 million at June 30, 2015, which is nearly $10 million improvement over the quarter. Our revolver balance remains at 0 borrowings. And our cash balance at June 30, 2015, was $47.2 million, an increase of $15 million over the quarter. Our projected free cash flow in fiscal 2015 is expected to be positive. .

one, leveraging our technical applications development expertise; two, carefully managing our pricing discipline; three, mix management to higher-value alloys and product forms; and four, capturing the ROI on the capital investments and acquisitions included in our capital allocation strategy.

As always, we will stay focused on creating shareholder value. .

And Mark, with that, I'll turn the discussion back over to you. .

Thanks, Dan. I think most of us in the industry expected 2015 and '16 to be a transition period in specialty alloys. And in fact, I think it's also fair to say that expectations were for a far better transition to a stronger industrial gas turbine and chemical process market activity in '15, as well as a growing aerospace market..

The gas turbine and CPI market remain very soft, but we've definitely gotten a stronger aerospace market.

And whereas the transition, so to speak, hasn't gone exactly to plan for the industry, I think at Haynes, 2015 has definitely shown additional signs of transition in view of the successes we've had in developing new applications in both our core markets and some new markets.

We had very good success in developing these new projects all over the world. .

I think we've positioned ourselves extremely well for when those core market industries -- we always talk about the late-cycle markets of chemical process and industrial gas turbines. I think when those -- I call them more platform markets. When those platform markets start to kick in a little bit, I think we'll be in pretty good shape.

I'm very pleased with the new applications we've been developing..

I know we've also expanded our service capabilities with the addition of new equipment, like the lasers we use for producing parts in our service centers, as well as the addition of our LaPorte operations. And we're servicing aerospace a lot better with our aero tube expansion. And I think most of you know the story on the flat roll side as well.

And I'll remind you that both of those areas, the aero tube and the coil and sheet side of the flat roll areas are very well-booked into 2016 already. .

We still have a list of projects that can help us get better. On the mill side, we see additional opportunities to drive out ways to become even more efficient. On the marketing side, we're continuing with R&D to develop new materials and new applications.

And financially, I think we have a balance sheet that will allow us the flexibility to take advantage of opportunities when they arise. .

2015, in my opinion, is indeed a transition year in many ways. We think we're building a stronger, more viable company that is a resource to our customers. We've got a lot more work to do, but I think we're proving that we're up to the challenge. .

With that, let me turn the call over to the operator for your questions. .

[Operator Instructions] Our first question comes from Michael Gambardella with JPMorgan. .

I have a question on nickel.

How much of your nickel requirements do you purchase with -- by virgin nickel as opposed to through stainless steel scrap?.

Yes, Mike, we usually don't talk to people about that, but I think we're like just about anybody that's in the nickel industry. You typically base your price levels on an LME number plus some level of an adder, same way the nickel companies do when they sell us the virgin nickel. And then the objective -- and it's based on mix.

You can imagine, Mike, that depending on what we're melting, if we're melting commodity materials or, I'll say, easier alloys, you can usually melt a lot more scrap. And the objective is always to melt as much scrap as you possibly can because of its cost. And if you remember, this has been kind of an odd year.

We've got so many of these specialty projects. And if you remember last time we talked, we talked about how -- I think we mentioned how some of our raw material numbers and the inventory numbers were pretty high, and that was because these specialty projects typically require a lot more virgin nickel.

Whereas if you go out and get -- some of the areas where we're slow right now, the larger-section products, be it plate, billet, ingot, things that are going to get reworked a lot more heavily. And when I talk about commodity or higher-volume chemical process industry, those are typically alloys that consume a lot more scrap for us.

So I kind of gave you a long answer to a short question. But the short answer is, we don't tell people how much virgin nickel we buy, and one of the reasons is it varies pretty dramatically month-to-month. And in a year like this, it's very [indiscernible] because our mix is so highly valued right now. .

And you can imagine, through our process, we do generate a lot of scrap as we produce our products. So that revert scrap, of course, is a recycling, and we put that back into the mill as much as we can. And we do try to buy our own scrap back from the marketplace, from our customers and so on.

If we can bring back -- that back into the mill, that's very cost efficient as well. .

Because I was just trying to get to this issue that you mentioned about the lower nickel pricing compressing your margins.

And my understanding is that last year, when Indonesia put the ban on their nickel exports and virgin nickel prices spiked on the LME, the subsequent move by, say, stainless producers around the world was to try to buy even more of their nickel through stainless steel scrap, which pushed up the nickel cost in stainless steel scrap higher than the virgin and squeezed some people that were buying a lot of their nickel through scrap.

So that's why I wanted to understand, is that what's compressing your margins now that the nickel prices, which are embedded in stainless steel scrap have actually gone up more than nickel, virgin nickel?.

No. We see those moving really in tandem, so we don't see that. It's much more related to the fact that we're long in nickel, and we're on a FIFO inventory methodology.

So we do see that squeeze in margin, as nickel's going down, we're selling the, what you might say, higher-cost nickel that we melted in a previous period, we're selling it against selling prices that may be getting squeezed because of the lower nickel market prices. So it's really just a timing issue related to that.

And we do have some contracts that vary quarterly, some vary every 6 months and some are spot prices. So it's more of a matchup between the cost of melting and the selling customer contract. .

Mike, I think you also understand, too -- in fact, I know you understand this, but we always cite the nickel numbers and talk through it in our K and Q. And it's because the mix of alloys that we -- stainless guys are typically 8% and 12% nickel and here we are at 55%, 57% in a typical alloy [ph]. .

Great. What -- just last thing on this nickel.

Currently, what is the discount of nickel prices embedded in scrap versus buying it on the virgins?.

It's pretty similar. So it's really -- I mean, there is maybe an 80% versus raw, but it's moving in similar ways. So if we see the LME for nickel going down, we'll see the scrap prices going down in a similar margin. So... .

But is it at about a 20% discount to the virgin price?.

About a 20% discount would be a good estimate, so 80% of the price, yes. .

And remember again, too, Mike, we also have limitations on the kind of scraps that we can buy. It's even like you hear a lot of talk about NPI, the nickel pig iron. We're not a big consumer of nickel pig iron, because a lot of that goes into the stainless mills. We're more the pelletized, more pure vacuum-grade materials. .

And then on the end markets and your products, you mentioned the kits, and I remember you've been doing that for years as a way to differentiate. As opposed to just selling the metal, you're selling kits people can assemble.

What percentage of your business are kits? And can you kind of quantify what percentage of your business do you think you can truly differentiate from other competitors?.

I'll tell you what, it's increased a lot. We really talk about it in the form of the cut parts. And if you think about it, again, it gets almost back to the more complex the industry, the more of that type of work we're doing.

So on the aerospace side of the business is probably where we're doing the most cut parts, followed by land-based gas turbine, very little in the CPI industry. But a very -- we don't tell people exactly what the number is, and again, because it varies. But quite a bit of our aerospace business now is cut parts. .

Our next question comes from Sam Doctor with Fundstrat. .

As I'm thinking about the aircraft shipments in the end markets for your aerospace business, and they get return [ph] engine shipments from GE or Rolls-Royce, how should we think of reading through that data to your aerospace demand?.

I'd love to tell you there's a direct correlation, but anybody in this industry will tell you, no, there's not. The complexity of the supply chain is such that you see pretty dramatic variations.

All of us, if you think of the aero engine side of the business, we're the nonrotating components, so our primary competition would be Special Metals, which is a division of Precision Castparts, and of course, Allegheny and then a myriad of distribution channels within that.

So all of us will, through the distributors, Allegheny and Special Metals will make cut parts through some of their distribution partners. They don't do them theirselves -- themselves. But it gets very complex as you go through it, Sam. And that's why you see these fairly dramatic swings in demand with respect to engine counts themselves.

Typically, what we see is, you really see a buildup and a bleed-off.

And if you look at our aerospace industry or, really, pretty much anybody in this -- the nickel side of the aerospace industry supplying into jet engines, you'll typically see very dramatic increases in demand at the front end of the cycle, followed by pretty dramatic falloffs in demand as you get into a mature level in the aerospace cycle.

And these seem to go in 2-, 3-, 4-year increments. If you look at our business, and by our, I mean the industry, you saw tremendous demand in '06, '07 and '08; and you saw it fall off a cliff in '09 and '10; started to pick up, '11 and '12; fell off dramatically in '13, early '14; started picking up again, I'll say, in the middle of '14.

And when we do $60 million or $56 million in a quarter at $5 or $6 nickel, those are pretty high output tonnage levels that we're doing right now. I'll say they're very comparable to record levels back when we did set revenue records in aerospace, which was back in the days of $18 and $20 nickel.

So again, giving you a long answer there, but you can go through and slot these things. I've done it. But they're very broad swings, a whipsaw effect, if you will, in the supply chain. .

Our next question comes from Edward Marshall with Sidoti & Company. .

So I wanted to kind of address -- at the end of the -- your prepared remarks, you said something like Haynes is becoming a stronger and more competitive company. And looking at the margin in the quarter, historically, I would have thought that with nickel coming down, your margins would have gotten crushed, I guess, for lack of a better word.

But they held in pretty well. And I know there's probably a timing difference there, and you kind of alluded to that in the guidance. But we talked about maybe the testament to what's going on from the equipment side, I mean, more efficiencies and maybe from -- and I see the mix as well is probably relatively strong.

And the backlog looks like the mix is strong, too.

Would you kind of talk about maybe why that margin kind of held up as well as it did in the June quarter?.

Yes, I'll let Dan talk to this. But Ed, if you think about it, it held up well because of the mix of products. We had a very good aerospace quarter, very good niche product quarter, and the tolling business is holding up well.

And those are, boy, if I could do nothing but sell those types of products and fill the mill with just those products, I'd be the happiest guy on the face of the earth. What does concern me is when we have a shipping quarter that's only 4.8 million pounds, and I've said this on these calls before.

I don't expect Haynes to be making hay below 5 million pounds, and that's an area of concern for me.

That's -- when I look at a quarter with a chemical process industry at only 850,000 pounds, that's when I need to get out on the road and start talking to people and figure out what's going on in the world, and that's why I was over in Asia this quarter, et cetera.

So that's an area -- again, maybe I'm too conservative or too negative on something like this, but I think you pay me to do that. That's where I get concerned. I take a look at a quarter that I think was pretty good, that I feel could have been a lot better.

And Dan, do you want to add?.

Yes, I mean, just looking at our mix, it's clearly, I've mentioned this before, that proprietary and specialty alloys garner a much better margin than some of the commodity-grade alloys that other people can produce.

So I think we are leveraging our expertise in that area and getting some great project business with solid margins because of the type of product it is. So if you just kind of look at the variations in this quarter's revenue versus a year ago, the mix improved revenue by a good $25 million.

Volume, of course, took a lot of that away, and that was a reduction of about $25 million. The raw material reduction, I mentioned the impact on margin. The impact on revenue was well over $5 million, was quarter-on-quarter what nickel was doing. So nickel certainly depressed the top line and squeezed our margin, but that favorable mix made up for it. .

And it's funny, Ed, I mean, we said about a year ago that we thought that the -- when the markets start coming back -- and Mike Gambardella mentioned the spike in nickel last year. And if you remember, that's right when our order book spiked as well, and we were able to get to work on mix and pricing and all of those good things.

But it's still -- we said at that time, we thought that coming out of the downturn of '13 and early '14, we felt that this market was going to be -- it wasn't going to be all lines up and to the right.

We felt that this was going to be some fits and starts, some good quarters and some okay quarters and things like that, and I think we're feeling some of that impact now. I'm not crazy about the strong dollar. That has some concern for me. But again, I like who we are as far as most of our competition is U.S. dollar-based.

Most of the markets we serve are U.S. dollar-based. But I'd like to see some of these, what we call, traditionally late-cycle markets start to kick in a little bit better. I'll feel a lot better then. And until then, we're going to just make sure that we're constantly in front of customers trying to get as much as we can. .

Do you -- will you buy opportunistically on nickel? I know that's not historically what Haynes does. And maybe a year ago, you would have bought it at $8 or $6 and thought that was opportunistic. But I'm curious. .

We don't. We don't own the mine. We buy the nickel and we change the price and pass it on to customers. And I always think that if I'm out there trying to buy opportunistically on nickel, there's some guy in New York who's a hell of a lot smarter than me placing a counter-buy, and he's going to be the guy that makes the money. .

Right. On the SG&A line, what happened there in the quarter? I mean, this was unusually high, especially with the down revenue quarter on an absolute dollar value. .

Yes. I think what you're seeing is, in Q1 and Q2, you're seeing a favorable foreign currency impact. Keep in mind, this is the SG&A line, so the FX element that I'm talking about here is really in our foreign locations. Their net monetary assets not in their functional currencies translates back and hits SG&A.

So we actually had favorable about $1 million a quarter in Q1 and Q2; where in Q3, that reversed, and it was $1.261 million unfavorable. So that swing from Q2 to Q3 is the $2.3 million swing that I mentioned before in FX.

And the other item I highlighted in SG&A was the incentive compensation this year is in that number, and maybe it was kind of hard to see with that favorable foreign currency in Q1 and Q2. But we had been recording that all year, where last year, it was much lower. .

Got you. You're talking about the CPI industry. And historically, I guess, for the last couple of years here, it's been driven by MRO activity.

And based on what your comments were, did the MRO activity dry up just as, I mean, soft as the OE side, which has been pretty sluggish for some time? And also, I guess you've been talking about some project work that was lining up into 2016. I know you talked about some quoting activity.

Are they still kind of there? Or are they getting pushed to the right?.

No, they're still there. The project activity, in fact, we're talking -- Dan gave you a backlog number for July. July order entry was almost half of what total order entry was in the whole third quarter. And we did pick up some specialty projects in there, one real nice one.

We also closed -- now part of that July order entry number is we closed on a pretty big contract or blanket order for the whole year. But if I start pulling out projects and blanket orders, I mean, we get those every month. So July was a pretty good order entry month. But answering your initial question, yes, it's just -- it's pretty slow right now.

And I'm not kidding you when I say when I went to China, when I came back from Asia earlier this month, first thing I did was write a note to the board saying, "I've been going back and forth for 20 years to China. This was about as slow as I've seen it." It's pretty slow over there right now.

And you've got a lot of fabricators, and this is throughout the region now, that are really at war with one another about what the available projects are. And that just says to me that that's an indicator of just how slow things are on building vessels, reactors, heat exchangers, et cetera, right now at this point in time. So it's pretty slow.

In fact, the U.S. market seems to be doing a heck of a lot better than that market. And it was a real eye-opener for me to see it, not that it was slowed down. I mean, I expected that. But it was slower than I've seen it since -- I was living over there during the Asian financial crisis, and things got a little bit crazy at that time.

And this kind of reminded me of that type of a period, from the point of view of how slow some of the fabricators were that I saw over there. .

And then, I guess, finally, last time we've talked, or we've talked quite a bit about acquisitions and fabrication and wanting to get a bigger value add for the customer.

And I'm just kind of -- I mean, I know you're still digesting Leveltek, but where are we in that process? I mean, are there other targets, other thoughts? Are you kind of just digesting Leveltek? And then maybe some of the opportunities that you might be looking at. .

Yes, I'll tell you what, Ed, we're digesting Leveltek, and we're also trying to make sure we sell out the new capacity that we've added into the tubular operations. The aerospace side of that is doing really well.

The corrosion side has some special projects, so they're getting some good output, but it's nowhere near the weight or tonnage that I think they could be processing through there. So you can imagine some of what I'm driving the salespeople crazy about is to get some more corrosion projects in the tubular side. Same thing on the flat roll.

Thank God we did the flat roll thing, because I mentioned that we're booked out into the -- out into the new year in our coil and sheet areas. But again, getting back to the heavier section, so plate, those types of products, that's where I want to see some push, too, to fill out that flat roll capacity that we've added here.

So yes, we're digesting a Leveltek. We're also digesting the CapEx we've put in and trying to get those things, for the lack of a better phrase, sold out as quickly as we possibly can. But we're always looking at things.

We have pretty rigorous capital allocation discussions, and not just acquisitions, not just equipment, but a myriad of topics when we get into board meetings on how to -- constantly keeping increasing the value of the company in the eyes of our shareholders, employees and customers. .

And when you are ready, what markets do you think that Haynes will have the best opportunity to add the most value to the market, which will give you the biggest bang for the buck?.

Ed, I think we're always ahead of the game when we're doing stuff other people don't do. So I'm always looking for places where there's minimal competition and they're value-added opportunities. I'm not real interested in -- our average selling prices are $20 to $25 a pound.

I'm not going to get real, real excited about some company out there that's struggling, that makes a product that maybe fits our portfolio, but it's $5, $6 a pound. I'm going to look for things that add value and go more on the complexity side of the supply chain. That's kind of our mantra here. .

[Operator Instructions] Our next question comes from Phil Gibbs with KeyBanc. .

I had a question, just largely on the comments you made on the aerospace tubing piece. I think you said backlog there has gotten a bit weaker just in the very near term, but you're confident that you're booked out through most of next year. So I'm just trying to put those comments together, I guess. .

Yes, I guess I can give you a little more clarity on that, Phil. I mean, we usually like to keep that area of the business booked out about 18 months, and I think we've got it booked out right now at about 14 or so. And it's just that we're rebalancing orders and pushing them through to try and figure out what sizes.

I've mentioned to you that our customers have been great on that side of it. We've disappointed them for 3 years. We got the capacity in. We're finally getting on time with our deliveries to them. And they're -- they've been great. They've been honoring us with more orders. It's been wonderful.

So really, what we're in is that kind of phase where, okay, now we've got to rebalance what they really, really want versus what we're making. And so I'm confident we'll be able to get that. If we want to book it out to 18 months, we could.

But that's what I meant, apples-to-apples, I think the aerospace backlog is pretty flat, and it's because there's a 4- or 5-month gap, so to speak, in what we would normally have called our aerospace tubing backlog. .

Okay, that's helpful. And then on the question Ed asked about the FX hits, I think, Dan, you gave some really good color on that. You benefited from a couple of quarters of tailwinds there.

And was it a $2 million swing or just a $1 million swing? Because I remember you said there was about $1 million a quarter in Q1 and then switched over to a negative.

So was that swing $2 million, or was that swing $1 million?.

Well, in Q2, the favorable impact was $1 million. And in Q3, it was favorable -- or I'm sorry, unfavorable $1.3 million. So the swing, the difference between FX in those 2 periods are $2.3 million. So if you were to assume a neutral impact on FX, you would adjust the SG&A this quarter by $1.3 million. .

Got you. Okay.

So is that SG&A impact going to continue to the extent that currency rates stay where they're at right now?.

Only if they move. So if they stay flat, that will be a neutral impact. If they move, then it will have an impact here. .

Okay. So it -- so basically, all else equal, we should expect to see the SG&A run rate from this quarter stay where it's at, unless things move in the other direction. What currencies... .

It should go a little lighter, actually, $1.3 million. It should be -- the normal run rate, assuming neutral FX, would be a little lighter than what you see here by $1.3 million. .

It should be [indiscernible]. .

Why would it go back to neutral if the currencies have already moved?.

Well, if -- yes, moving from where they were at the end of June or the average over the quarter, you're right. But assuming a neutral, then it would be different by $1.3 million. But you're right, if you're looking at what currencies are doing out into July here and in August, then that could have an impact. .

Okay.

What currencies have impacted that calc?.

It's mostly the pound sterling and the euro. .

Okay. Okay, I appreciate that. And on the chemical processing business, just the last one from me, the chemical processing business in China, Mark, you said the weakest that you've seen it in a while, but you feel really good about your own mix.

How do we see that whole dynamic, in your mind, playing out here over the next 12, 18 months?.

We're still looking at pretty good project work, Phil. And like I said, we booked some the end of last quarter. We just booked some last month, not huge projects but good projects. I think that's going to be a key for us. We'll see how the chemical -- how the CPI business comes back, when and if it bounces back.

It's pretty competitive right now, and it is -- and it's just -- it's very low volume right now. Talking to customers, "Hey, are we losing share? Are we doing something wrong? No, everything's fine." It's just -- it's dead right now. .

Our next question is a follow-up from Michael Gambardella with JPMorgan. .

Yes.

I just wanted to ask, what were your exports as a percent of sales in the quarter?.

Typically, our exports run around 42%, but this quarter, they did decline down to 37%. So we're certainly seeing the impact of competing in some of these foreign markets with the strong dollar, so there was a 5-point decline. .

Are most of your exports to Europe?.

Yes. .

Yes. Yes, if you take a look at that 40% of our business, about 60% of that 40%, or roughly 25% is European and then the other 15% of the 40% is typically Asia Pacific. .

And I know Allegheny is running into the same problem in their high-performance segment, because they export about 43%, and most of that is high performance, I think, going to Europe.

But do you -- how much competition do you have from euro-based competitors?.

Not a whole lot, Mike. But if you think about, for instance, the CPI business, right now, VDM is going to enjoy a good advantage compared to, let's say, 18 months ago. Or you could say we enjoyed a pretty good advantage for 5 years when we were at $1.42 per euro for a long time.

So yes, on the transactional side, there's definitely an advantage there on the -- and I'll say the more higher-volume corrosion types of materials for someone like a VDM in Europe. .

And in terms of your exports in the quarter and lags in the contracts that you have, do you think you the quarter that represents the full impact of the currency?.

Yes, I think... .

Of where the currency is today?.

Yes, I think it would. I don't think the lag would really impact that. I mean, the -- I do mentioned the nickel decline and the lag that will have, and we do expect Q4 to have a bit heavier impact and compression on our margin than we saw in Q3. So I mentioned $1 million to $1.5 million in Q3. In Q4, that's going to be a little greater.

But from a foreign currency point of view, I think we're okay. .

Okay. I was just curious if you had like annual contracts that maybe before the dollar has started to really rally were going to be renegotiated shortly. .

Most of the long-term contracts, like we might have in Europe would be probably in the aerospace business, and most of those are U.S. dollar-denominated. .

At this time, I would like to turn the call back over to management for closing comments. .

Thanks very much for your time today, everybody. Kind of a difficult time in the industry. We mentioned a year or 1.5 years ago when this started that we expected that this rebound was going to have some fits and starts to it. And I think we are seeing that.

As I've mentioned, I'm very pleased with the specialty applications work we're doing and we're continuing to do. I think that's a big key. I think we're always going to be ready when that platform repeat business comes back. And we're seeing it in aerospace now.

I think we'll start to see it in land-based gas turbine and, hopefully, in the chemical process business as we move into '16 and global economies get a little bit busier. But again, thanks very much for your time. We look forward to updating you again next quarter. .

Thank you. This does conclude today's teleconference. You may disconnect at this time, and have a great day..