David Van Bibber - Controller and CAO Mark Comerford - President, CEO and Director Dan Maudlin - VP, Finance, CFO and Treasurer.

Edward Marshall - Sidoti & Company Phil Gibbs - KeyBanc Capital Markets Tom Lewis - High Road Value Research Chris Olin - Rosenblatt Securities.

Greetings, and welcome to the Haynes International Second Quarter Fiscal 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference to your host, Mr. David Van Bibber. Thank you, Mr. Van Bibber. You may begin..

Thank you very much for joining us today. With me today are Mark Comerford, President and CEO of Haynes International; and Dan Maudlin, Vice President and Chief Financial Officer. Before we get started, I'd like to read a brief cautionary note regarding forward-looking statements.

This conference call 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, 2015. 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 then Dan will give you greater detail on the financials.

Business conditions in the second quarter remained very challenging. As we mentioned in the press release and you've heard from pretty much everyone in the industry.

In this match between nickel market price levels and nickel in the cost of goods sold is pretty at its highest differential level and I think as most of you know we're very nickel intensive at hand, our average chemistry is on the order of 50% to 55% nickel.

Again, like several of our peers we expect the upcoming quarter to have similar impact before getting more in line as we move through the summer months. Again that's as long as metal prices remain stable.

In addition specific to Haynes as we mentioned in the last call, we had fewer large special projects being invoiced than last year at this time and that helped through in the quarter also impacting margins on a comparative basis. As we move through the late third quarter and into the fourth quarter we expect special project activity to get busier.

By that I mean we're processing several special projects right now in our plants that we expect to ship in the upcoming third and fourth quarters and beyond. By the way we also landed a new project late last week it's another high temperature, highly corrosive environment utilizing one of our proprietary materials.

So, even though activity and pricing in the chemical processing market is very difficult in fact it's difficult as I've ever seen it. We're still finding and winning some new applications.

With that let me move to the year-on-year comparisons as I always do and I'll give you more color on the current market conditions when I move into the buy market commentary. Net revenue in the second quarter of fiscal '16 was $102.5 million, down 26.1% from last year’s second quarter net revenue of $138.7 million.

We reported a loss of $1.2 million this quarter as compared to last year's net income of $11.7 million, again illustrating the lower overall volume, the absence of special projects and the impact of that nickel mismatch. Shipments in the quarter totaled 4.8 million pounds, down almost 20% from last year’s 5.9 million pounds.

Average selling prices inclusive of our other revenue, which is primarily our tolling business, were down over 7% to $21.54 per pound from last year’s $23.36 per pound. Moving to our key markets and I'll give you some sequential information just on -- just to give you a little bit better idea of where the business is at the present time.

Net revenue in the aerospace market for the quarter was $52.3 million, down just over 13% from last year’s $60.3 million but up sequentially about 10% from last quarter's $47.5 million.

The volumes shipped into aerospace was 2.3 million pounds in the quarter down 13.9% from last year's £2.7 million, but again up 12.1% from last quarter's 2.1 million pounds. Average selling price of 22.62 per pound was up a little less than 1% from last year's 22.45 and about 2% lower sequentially than last quarter's 23.03.

Backlog fell slightly in the quarter about 4.8% due to the timing of orders and slightly from the correction we expected in the tubular product supply chain as we had mentioned last quarter. Business demand is very strong in this area.

Backlogs at Airbus and Boeing are very solid, deeper into the supply chain the new engine platforms are booking well and we're seeing the initial demands. Also on legacy platforms the spare business has reported to be strengthening and our customers are reporting expectations from improving conditions as we move deeper into 2016 and into 2017.

We feel very positive about the status of the aerospace market and we feel we're positioned with Haynes extremely well with our new materials, our new production capabilities and increased value added distribution services.

In our chemical processing market net revenue for the quarter was $13.1 million down over 63% from last year's $35.6 million and down sequentially almost 23% from last quarter's $16.3 million.

Volume in the quarter was again well below 1 million pounds finishing at 649,000 pounds down 48% from last year’s 1.35 million pound and down sequentially 9.1% from last quarter’s 714,000 pounds.

Average selling price in the quarter was $20.20 per pound down over 23% from last year and sequentially down roughly 11% from last quarter’s $22.69 per pound.

As we mentioned last quarter we’re in a period of extremely competitive pricing and common alloys which we frequently refer to as commodity alloys and very low project related business releases.

I have never seen this market suffer this badly in my eight years at Haynes but there is also some good news as we have some project work that is in process in our plans that will ship over the next quarters.

We mentioned last time that our backlog in the chemical processing industry had improved 136% more than doubling, so you have an idea of the project work that we booked. During this quarter the backlog increased again by more moderate 3.8% but it's still indicative of a market that we’ll hopefully start climbing off the bottom.

I mentioned previously that we expect possibly start seeing improvement in this market with respect to project shipments in the third quarter. Specifically we have some project work that we expect to finish processing in the current quarter and we expect the customer to request we ship the product upon completion.

We still don’t have definitive release dates on those shipments. I know we’ve discussed this with you before frequently customers are coordinating multiple supply sources and multiple fabricators so timing of shipments especially on the cusp of a quarter is always unpredictable.

I know this is very difficult when some of you are putting your models together. As I mentioned though we will do everything we can to get this product shipped as quickly as possible upon completion.

Moving to land based gas turbines, our sales in the land based gas turbine market totaled $19 million in the quarter down about 4.5% from last year’s $19.9 million but up sequentially 11.5% from last quarter’s $17 million.

Volume shipped into this market was 1.4 million pounds up 12% from last year’s 1.2 million pounds and up 5% sequentially from last quarter’s 1.3 million pounds. Average selling price in the quarter was $13.89 per pound down almost 15% from last year’s $16.30 per pound but up just over 6% sequentially from last quarter’s $13.07 per pound.

Backlog decreased just over 15% in the quarter on the higher shipping levels however the sentiment in this market and some of the data at the demand end of the supply chain appears to be more favorable than it has been in the last two years.

And that was some customers during the quarter who indicated that both the MRO and OEM sides of the business appear to be strengthening. And orders for some of their partners that have been dormant for two years or more are starting to come back to life.

I don’t think this market is out of the woods yet but as we discussed last quarter it finally appears its sentiment is turning positive. And again especially in large frame and mid frame areas, the smaller frame turbines that have been mechanical drivers pipeline systems et cetera that’s still pretty slow.

I think we’ll have to see some rebound in oil and gas before we see that starting to move up substantially. Finally our other markets and other revenue accounted for $18.1 million in net revenue, down 21% from last year’s 22.9 million but up just over 26% sequentially compared to last year’s 14.3 million.

Most of the sequential strength in the second quarter was from three key areas; one was a new energy application that started shipping in the quarter and it will continue to ship throughout the balance of the year; second with material going into the precision application engineering industry, typically for high temperature applications; and finally, our tolling business increased from the first quarter primarily due to more operating days and customers restocking after year-end inventory clearing.

On the operating side of the business, we experienced some growing pains with the new equipment in our tubing operations. We had to do some realigning of one of the production line. We completed that and the results are going well so far. We still have some work to do in getting our lead times down on the corrosion side of that business.

And I think I mentioned to you last time we’re processing a special project in our tubing area a corrosion project which has been it's a great project, it's been very difficult in processing.

And once we complete that project that should clear out some of the pipeline and allow us to pull some lead times back in and get more competitive on corrosion types of products.

And again I think as most of you know, the corrosion market has been extremely slow and extremely price competitive to be honest with you I think we’re very-very fortunate that we have this excellent special project that we’re running right now, difficult project but an excellent project.

On the sheet coil side our incremental capacity addition which includes upgrading some rolling capabilities in heat treating and cleaning equipment is going well.

As you know these are two areas where we’ve been tied to our capacity so we expect to get that coming online to aid in the aerospace demand that we’re seeing and also meet the needs of the gas turbine and chemical markets when they rebound. Our new IT platform went live in manufacturing at our tubing operations that went extremely well.

As I mentioned last time our people put a lot of work into this to ensure that smooth transition we’re entering the final hurdle of the IT project, the final major hurdle I should say of the IT project later this month as we implement the platform in our Kokomo manufacturing operations.

You also saw we announced earlier this week some changes to our sales and distribution footprint. These are part of our ongoing effort to streamline our operations and supply our customers more efficiently.

If you recall a few years back we closed down the back end of our operations our distribution operations in France once we felt we were comfortable with our capabilities to meet customer demand seamlessly from some other facilities.

We did a similar thing when we closed the office in Downtown in Shanghai and we integrated those operations if you call with our distribution facility in Waigaiqiao which is just outside of Shanghai. We are constantly looking at where our customers are, where our operations are and how we can optimize the connection of the two.

So we are constantly looking at the footprint of the company. With that let me turn it over to Dan for more details on our financials..

Thank you, Mark. This quarter was impacted financially by the nickel mismatch where the market price of nickel was misaligned with the cost of nickel in our cost of goods sold.

The market price of nickel has been relatively stable over the second quarter, however, the significant decline over fiscal 2015 and the first quarter of fiscal 2016, continues to have an adverse impact on our financial results.

Falling nickel prices create compression on gross margins due to the pressure on average selling prices from the lower nickel, while we are selling higher cost inventory acquired in prior periods with higher nickel prices.

The impact this quarter is estimated at nearly 4 million pre-tax of margin compression from declining nickel, or a compression of 3.8 margin points.

This compression was significant in the second quarter of fiscal ’16, and is expected to also similarly adversely impact the third quarter 2016 with a compression alleviating during this fourth quarter to about half that level, assuming nickel continues to be stable.

This quarter also was impacted by low volumes in our chemical processing market, the commodity portion of the chemical processing market remains highly cost competitive with a low number of available projects. However, more significantly impacting volumes and overall profitability relates the less project oriented specialty application businesses.

The lower level of project business this quarter highlights the sporadic nature of these type projects, and the dramatic impact on average selling prices. Average selling price per pound in our chemical processing market declined $6.13 per pounds sold in the second quarter of '16 as compared to the same period one year ago.

This was primarily due to three items. First, the lower value product mix i.e. less specialty application projects causing average selling prices to decline and estimated $3.25 per pound. Second, lower raw material costs primarily nickel reduced average selling prices by $1.56 per pound.

And third competition reduced average selling prices by $1.32 per pound. This is a significant impact on average selling prices and a significant impact on profitability.

Looking forward the company has specialty application projects in the pipeline including significant project work in the backlog that is expected to ship primarily in the fourth quarter of fiscal 2016 with a small portion potentially shipping late in the third quarter of 2016 that Mark mentioned.

This improvement in the second half of 2016 is expected to be a positive driver for increased gross margins starting potentially in the third quarter more significantly in the fourth quarter of fiscal 2016. The gross margin was lower than expected this quarter due to less favorable product mix and higher nickel impact than we expected.

The gross margin as a percentage of net sales decreased to 8.7% in the second quarter compared sequentially to 12.7% in the first quarter of this year.

Our pension and retiree healthcare expense increased to 9.6 million in the first half of this year, compared to 6.4 million in the same period of last year or a 3.2 million increase in the first half, 1.6 million for the quarter. For the full year 2016 of this expense is expected to be 19.1 million as compared to fiscal 2015 of 12.8 million.

The 6.3 million increase is primarily due to the Company’s September 30, 2015 valuation which required a change in the mortality tables and was impacted by a market drop in pension assets that we discussed on the last call.

SG&A cost combined with research and technical cost were 10.4 million for the quarter compared to the 10.5 million in the second quarter of last year, with the primary differences being less incentive compensation this year, offset by foreign currency fluctuations. Net loss for the quarter was 1,162,000.

Outlook for next quarter, the Company expects the continued selling of higher cost nickel inventory in a lower cost nickel market environment to continue to unfavorably compress gross margins in the third quarter of '16 similar to the second quarter, estimated at $4 million.

This compression is currently expected to alleviate by approximately half in the fourth quarter assuming stability in nickel market prices.

On an overall financial perspective our outlook is similar financial results in the third quarter as compared to those achieved in the second quarter of fiscal '16, however there is possibly as I previously mentioned, portion of that specialty application project that could ship in the third quarter which will be a positive driver of revenue gross margin and profitability.

Backlog was 193.5 million at March 31, 2016 a decrease of 11.2 million or 5.5% from the 204.7 million at December 31, 2015. To give you an updated number, the backlog on April 30, 2016 increased over the month to 197.4 million.

Capital spending, in our last call we discussed our actions of reviewing and analyzing all the planned capital expenditures project in light of the current market conditions and we reduced 5 million from capital spending in fiscal 2016 to consider cash. The company plans to spend a total of 30 million in fiscal 2016 on capital expenditures.

We are progressing well on the project to increase our sheet manufacturing capacity in Kokomo operations in order to keep pace with the current demand and anticipated growth in the aerospace market. We expect to spend approximately 16.6 million on this project in fiscal 2016.

Cash flow, net cash provided by operating activities was 18.4 million in the first half of fiscal 2016 and we generated positive free cash. Our cash balance remains strong at 57 million including restricted cash at March 31, 2016.

Our revolver balance remains at zero borrowings and we're currently negotiating the term of an extension our credit facility which we expect to announce next year quarter. Mark mentioned our strategic action to expand our operations in La Porte, Indiana and relocate our service center located in Lebanon Indiana to La Porte.

The project is expected to start in the fourth quarter of 2016 and be completed by the end of calendar 2017. Costs associated with the move are expected to be in the range of 2 million to 3.6 million that will primarily be equipment relocation costs but also include employee relocation or termination cost and lease termination cost.

A portion of these costs will be reported as a one-time charge in the third quarter of fiscal 2016 estimated to be in the range of $400,000 to $600,000 and the remaining portion will be recorded as incurred over the project period.

The benefits of combining these locations include more streamlined product flow, reduced transportation costs and approving production yields and profitability. We expect this action in combination with the purchase of the Leveltek asset in January of 2015 to result in a solid return on investment and better position us for future growth.

In conclusion, given the current market environment, we are staying focused on managing costs and spending levels. Adjusting production hours worked to match the backlog and order entry levels and reducing our inventory levels.

From a financial perspective, this was a tough quarter and we expect next quarter to be tough as well, but we see some improving economic conditions and recent stability in the nickel prices which may be unlocking some pent up customer demand as well as provide some relief in the fourth quarter for the margin compression for the mismatch of nickel cost assuming nickel remains stable.

Additionally, we have special project work expected to ship potentially in the third quarter but more significantly in the fourth quarter of the fiscal year that's expected to expand our margins and our profitability. Mark, with that, I will turn the discussion back over to you..

Thanks, Dan. And just reiterating to it, as Dan said obviously we're doing the usual things of reducing production hours wherever we possibly can. Just so you are aware too we're moving in towards the summer months, so we will take an extended shutdown this year to do equipment maintenance, we've been modifying that.

We've been so busy in some of our coal finishing areas over the last couple years, but we will be extending that shutdown so you can imagine right now part of what we're doing is you cascade or start slowing up the inventory a little bit to get ready for that shutdown, which will occur in the late June or early July timeframe, so just to give you the heads up on that.

In general, as Dan said market conditions appear to be improving and our industry looks like at this point the better times in the second half of 2016 things like the PMI, I think you it saw finally got back above 50, just marginally above 50. So I think that's an indicator for the industrial economy as well.

There are other indicators so like a new engine platforms. There is better spares activity, stronger OEM activity in the gas turbine market even on special project business point to a stronger second half of calendar year 2000. Sequentially, we saw improvement in invoice levels and three of our four key major markets during the quarter.

I feel very good about the backlog at $193 million especially when you talk about that backlog being largely $4 nickel as you look at it.

Also, we did indicate to you last time that we did see some adjustments that we expect to come through in the aerospace supply chain, both engine because we -- I think I used the word we were jamming some orders in for supporters last quarter, we got a lot of those put in and we also saw -- we're going to see that supply chain adjustment on the two sides.

So that 193 million, I still feel very good. Remember, I used to always talk to you that 200 million was one I would be going over and sitting on the sales guys to raise prices.

It just doesn't feel like that kind of an atmosphere right now that backlog that we have is very strong and some special projects in aerospace, but we still have a very-very difficult, very competitive marketplace in things like land-based gas turbine and the chemical process industry specially.

But again I think those are all good signs for improving performance as we move through the year. There is still a lot of clouds lingering over the broader economy. You know my concerns about the-based chemical process industry, low nickel prices and low commodity prices typically are not a positive for industry strong.

The dollars makes foreign competition very intense especially in areas where competitor is beyond our core U.S. based competitors come into play. Again this is mainly impacts Haynes with respect to that chemical processing industry.

Our transactional business was pretty slow in January and February, picked very nicely in March and just so you are aware it dropped off again April so there is some concern about that as we look forward. Also just to be open with you, I still don't see the real signs of a solidly strengthening industrial economy out there right now.

And by that in our industry that usually means longer lead times. I can't say I am seeing longer lead times out. Lead times are still very competitive. I can't say I am seeing a lot of pricing leverage in the marketplace and again those are usually indicators at least historically of a strengthening industrial economy.

We just wanted be upfront with it and say right now in our opinion it's still extremely competitive out there. I think a lot of positives going on but I'm still in that phase of cautious optimism.

Because of that I think -- you know the usual thing we'll do, we're going to stand in front of customers, we're going to keep winning orders everywhere we can. We've been very solid at converting new applications in these special projects and win lot of recent activity in that area, that's really helped us out and we will continue to do that.

We'll also keep driving waste out of our processes. We're going to keep pushing and pounding to ensure that Hayne is better positioned to compete. With that let's go ahead and open the call to your questions..

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Edward Marshall with Sidoti & Company. Please go ahead..

So you talked about the nickel impact in the quarter and you said it was about $4 million by the way is that -- how is that measured, is that loss spread, is it sequential is it year-over-year or is it just loss spread versus pricing in the quarter, I think you're defining it as loss spread but?.

Yes, it is just the impact in the quarter. So, last quarter that was estimated at about 3 million so the differential from the first quarter to the second quarter is about 1 million but the overall compression, the mismatch, the misalignment is 4 million for this quarter..

You talked about other versus -- you had inefficiencies in the quarter in your tubing business and you talked about mix, can you talk about those different buckets and maybe quantify in the way you did nickel as to the impact of the gross margin as well?.

Well it's difficult to quantify some of that, I mean some of the issues with some of the new equipment is really just how much production gone out, so that was a little bit tapered off from what we're expecting with the new CapEx we put it we have what we call the full the mill plan, so, certainly some ramp ups that we're expecting in that tubular mill but we're not quite getting the ramp ups yet, so that was the largest impact, it's kind of difficult to quantify..

Yes, I think also as to on the inefficiencies in the tubing mill most of that was within manufacturing product to go into stock right now, again the bigger so what on the tubing mill was really the slow nature of the corrosion business right now, that's the most dramatic impact.

Most of the new equipment that we've put it is committed towards manufacturing aerospace tubing and as I've said before we're really starting to get caught up really well in the aerospace tubing side, so what we're doing is building a little bit of buffer there.

I'd say that the aerospace tubing, the misalignment of one of the pieces of equipment was negligible as far as an impact to the quarter..

You guys talked about last quarter you gave the anecdotal I guess outlook and your thoughts kind of to the margin and I think I went back and looked if is that relatively flattish to Q2 or to Q1 what changed and I am kind of thinking about your businesses more of a contract basis I guess for about two thirds of it, kind of how -- walk me through kind of the impact here and how it kind of -- so I guess not only us but you by surprise as well?.

Yes I think the two biggest things were really -- the nickel mismatch we expect it to be pretty similar and ended up being as we calculated and estimated this quarter 4 million so that was a larger impact than we expected but also the product mix that we shipped this quarter was a little less favorable than we expected a little less favorable than last quarter, had a lot of shipments of ingots and that type of product forms versus some of the high value forms, so that was kind of the other piece to it and as Mark mentioned the competition in the chemical processing market, only 652,000 pounds shipped in CPI, that's pretty low and that kind of speaks to the low number of application projects that we're bidding and the high competition impacted things as well.

So, those were kind of the three big things that I think impacted our expectations..

I'll tell you what Ed too and I oversimplify these things and I think it makes the accounting guys go crazy but if you also look at it volume was not horrible in the quarter overall I mean it wasn't as good as last year but a 5 million pound quarter is not that bad, but when you're in this situation where every pound you're shipping has got this mismatch between nickel and cost of goods sold and nickel in the marketplace it's difficult from that point of view and we're FIFO I mean you guys know that we're FIFO, so we don't get to take the big inventory rate down all at once, we have to flush it through naturally.

What it does help though is it helps us flush that nickel out a little quicker so it's a little more painful when you're looking at that mismatch and cost of goods sold every month but it's also you're saying okay we'll get closer to flushing this stuff out of the system..

You talked about a lot of the chemical processing orders and backlog, special project work..

Yes..

I don't know that you quantified it, is there any way that you can kind of quantify from a pound perspective as to maybe the orders that are sitting there and then on the same note the project that you won last week?.

It's a little difficult Ed because we don't want to tip people off to where we're winning some of these projects and the magnitude of them to me though when I just look broadly if you look at our average selling price in the quarter of $21 and change and then you take a look at the backlog..

Right..

You see over $30 sitting in there. And if you really disappointing stuff to think about that backlog, it's the aerospace products, which always have a much better selling price and a lot of these longer term special projects are sitting in there.

So, it gives you an idea of the special projects are a real good thing for Haynes when we -- especially in our proprietary materials.

And so we don’t go out of our way to separate those out and quantify and I know what drives you guys crazy in your models because when we ship like last year at this time we had a huge quarter for special projects and they were things like our HASTELLOY D3 which is excellent high selling price excellent products for us to be selling.

That’s the type of thing that it's sitting in the backlog right now, some of those large -- not D3 but some large special project guidance..

And then finally I guess we talked a lot about the cost of the move and in the facility closure et cetera. We haven’t really talked about the savings.

So when you guys see your models from a cost perspective what are you anticipating this is going to save you on an annual basis?.

Well, we’re still kind of working through some of that, and we have a few things to negotiate through and as we go through this whole moving of this facility. So once that’s complete we can probably provide a lot more color on what our expected ROI is. But I just mentioned generally in my prepared remarks that the ROI is going to be favorable.

And the big thing is having the product a lot less transportation cost because most of our cold finished products go up to La Porte so and then to our Lebanon service center. So that being a combined facility we should certainly see some improvements there.

And a little less lease cost and some things like that as well, but yield will also be an important improvement in the combinations. But we’ll give you a lot more color on that as we progress through the negotiations and the project. As you can imagine Ed there is -- we have a good ROI on the project that we have put together.

But as you know we have to do some bargaining and negotiation with the representation of the employees and that’s why we’re not really coming out with any of the numbers or anything like that at this point..

Not even a range I mean you can provide a range?.

No, we prefer not to at this point..

And then turbines geographic location where is the strength coming from? Is it North America? Is it Middle East?.

You mean the land based gas turbines?.

That’s right..

Yes, we think the end demand a lot of it is going into the Middle East at least that’s what we’re getting some of the indications. But I think you know that this market is as far as us supplying into the account base the fabricators et cetera it is global. So these things tend to move around with strong dollar weak dollar.

And so we’re still seeing a lot of strength out of some of the North American areas. We’re seeing a lot of strength in Europe in this area. And we’re really seen some strength lately in Asia Pacific as well. So, and again what I am saying these are mainly large and the medium frame turbines.

We’re still not seeing tremendous activity at the -- I’ll say the under-25 megawatt type of business..

Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead..

Well, Ed took seven of the questions that I had, but I do have another one for you just in general in terms of the pricing power in general in the market. Mark you talked about the backlog approaching 200 million, but not having that air of where pricing power is really coming back into the full.

I just wanted you to just talk a little bit more about that if could in general? And maybe how much of this near-term margin pressure outside of the nickel impacts just due to the fact that you’re having to be more aggressive along with the rest of the marketplace here? And then maybe also some thoughts on the cost reduction initiatives at Boeing and the other like that you’re talking about in terms of supplier pressure?.

Tell you what so let me walk you thought a little bit by market. If you look at aerospace most of those things are long-term agreements so the pricing arrangement has pretty much been settled. Now at Haynes we have pricing adjusters built in. I always tell everybody we don’t own the nickel mines so we don’t guarantee firm nickel to anybody.

If somebody wants us to go out and buy nickel forward we’ll do it for them but then they get themselves into a situation where they have to buy ex-number of pounds every month and we adjust up and down et cetera. But the aerospace business has been excellent.

However, think about it, with pretty hopefully we just bottomed out our nickel so anything that has a nickel price adjuster that would kick in let's say January 1st, it is pretty much seeing as lower prices we’ve seen in a long time might be the best way to put it.

So even the aerospace a pretty low nickel price adjusters kicked in, in January, so that impacted that area. On land based gas turbine you have fewer long-term agreements it's a more competitive market again just because of the dynamics of supply and dynamics of changing people out.

That’s where our business actually gets helped frequently by things like owning a distribution system and we have had this discussion that the land-based gas turbine business can get very choppy especially on the MRO side when a series turbine come into repair and they got to get turned around quickly.

And we are the guys who have metals sitting in the distribution center and typically we get a pretty recent price for it when that happens.

You move to the chemical process industry that’s where we begin to see products get extremely competitively priced because of the nature of where these products go around the world, the ease of substitution, we just had a situation where we have got one of our more advanced materials specked into an application and one of the customers just went to and it is an advanced coding, but a coding of a carbons deal, even though he know it's going to wear out in about one fifth the time that when he uses our product.

But he said right now, that piece of equipment is running such that he can afford to just do more often change ups. So you see that kind of thing.

More importantly I think on the CPI side of the business, you see situations where, I think C276 which is one of the alloys we manufacture HASTELLOY C276, I am seeing prices that type of a product now that I haven't seen in I don’t know. Prices lower than 2009, may be a better idea.

And I think a lot of it is of course nickel being well below that level. You also run into situations again more so on the chemical side than anywhere else, I would like to give people mixed units of measure here, but -- and I think of somebody that was charging €10 per pound three years ago.

€10 per pound three years ago was $14.52, €10 per pound today is $11.09, that guy is still charging €10 per pound but $3 a pound just when out of my selling price so I am going to meet that competition. So you have some of those dynamics occurring.

Chemical process has -- it will be the most competitive repriced item that we see, as we are right now and as we look into the future. That being said the interesting thing to me is if you ask me the largest constraint right now on the CPI business is there is just no volume.

We are just not seeing even where we are competitive, even where opportunities do exist our core customer base we are just not seeing a lot of work being left, especially on the MRO on the chemical side of the business. That’s the biggest part of why our volumes are so bad in the chemical process industry.

I gave you a very long answer there but I hope I answered what you were looking for..

So yes, I mean I think you have hit it pretty well the sort of strong dollars is very much an impact on more of the transaction side of things right now and on the CPI side, it sounds like it's pricing but it also sounds like it's just the fact that not a lot of volumes out there because there is not a lot of maybe maintenance work being done or guys trying to conserve cash right now, it sound like I am not…?.

I think you saw CapEx cuts when the big oil and gas guys got hit, and I think you have seen that cascade all the way throughout the chemical industry and therefore you are seeing a lot of hold back on capital spending, my opinion throughout the entire chemical supply chain. And that’s part of the big impact that’s hitting us.

I won't say that we are not being hurt by competition we are being hurt by competition as well. But I think the biggest item is definitely that volume in that corrosion side of the business right now is just very-very slow..

And if you look at just the numbers fair that up pretty well. If you look at this quarter versus the year ago’s quarter, chemical processing volume wise went down 52% and the average selling price drops to 23%. So that’s pretty significant drops on both volume and price, reflecting what Mark is talking about..

Yes..

Our next question comes from Tom Lewis with High Road Value Research. Please go ahead..

Two questions, first of last quarter you made a very interesting observation with respect to how over the past two years maybe you put in terms of 22 months, your customers had learned or figured out that if they can possibly put off buying a pound of nickel for a month, they got better price.

Just is that still pretty much the case, can we kind of call that 25 months or have you seen any fraction in that any signs in that of that behavior changing at all?.

We really haven't Tom, I mean we finally think nickel has put a floor in, we will see if it really has, it's been bouncing around that $4 mark down to the higher 3s and then back of above 4 so we are hoping it finally put a floor in. But there is still a reluctance to place I will say longer blanket types of orders for releases.

And again a lot of it gets back to people are being rewarded for pushing orders out as long as they possibly can. That’s where why, I am I kind of hinting at that when I say our transactional business wasn’t great in January and February and then all of a sudden it just spiked up dramatically in March.

That’s an indicator to me that people are just running things so thin and then all of a sudden they have got to come to us for some pretty substantial quantities like they did in March. Where I get nervous and I think we have an obligation to tell you these things where we get nervous is okay it fell back out again in April..

Sure, so generally the buyers are no reals cracks yet in that complacency other than a bit of anecdotal maybe?.

Yes, and if you look at it Tom, the guys who are busy, aerospace..

Yes..

They're taken the normal quantities every month and in fact now we're seeing some increases here and there.

Land-based gas turbine as I mentioned to you, we're seeing some better code activity on the large frame, we're hoping that it turns into order I mean if you look at it, we actually had a semi-decent invoicing quarter on land-based gas turbine this past quarter not, I won't call it great but it's a lot better than it was.

But the chemical side of the business is still, you just get the feel when you talk to people and you see it when you're reading the reports be it everybody who is doing construction in the chemical industry or anything like. You can see the people are delaying, pushing, holding back on the capital spending right now..

Okay and I guess my another question speaks to exactly that and this coming from somebody who sits a bit further out on the chemical and industrial side than I did on the aerospace side two or so [indiscernible] low?.

Tom, I apologize but you're breaking up on us..

Oh sorry.

There seem, yes up until 20 or so months ago there seemed to be a plausible motion that there was somebody of a reboot of petrochemical and related industries in North America and all that obviously that exchanged, can you give us sense though I possibly it's just that an interruption around uncertainty and waiting for a while for the uncertainty to dissipate.

Alternatively maybe it wasn't such a great idea after all, can you give us a sense of the degree to which it -- all those projects that seemed to be in place two year ago, are just waiting for the uncertainty to clear up as opposed to moment that wasn’t such a good idea after all?.

I will give you a two part answer on that. One if you look at some of the guys that are supplying let's say the aggregates or the construction firms involved, you can take a look and see, how busy they are in certain areas and they will give you good indications as to whether are there delays or some of the bids have moved out and things like that.

It does still seem to be a lot of construction down in Louisiana, Texas and stuff related to the natural gas boom. And as part of Haynes that will hit us a little later in the cycle because our materials are typically involved in further refining of these applications.

So some of the guys who make the ethylene cracker materials those types of things, lower temperature still will very corrosive and advanced materials they will see the immediate impact hopefully in the next couple of years, next year. I think we're a little further downstream than those guys.

The second part of it is American Chemistry Council stays all over those types of applications. And they're talking about some changes in the chemical industry as far as growth via acquisition as opposed to growth by building out and building more plants.

I don't know that we've really seen that transition occur yet, but I think what they're talking about is possibly as we look forward there may be a transition or change in the deployment of capital from what we've been traditionally talking about over the last I'll say five years about the natural gas build out down in the Louisiana Texas area..

[Operator Instructions] Our next question comes from Chris Olin with Rosenblatt Securities. Please go ahead..

Three questions for you.

One in terms of just modeling, you mentioned a maintenance, maybe an extended maintenance shutdown in the summer months, how should we think about that in terms of cost or like a modeling impact?.

I don't think it will be significant, it was more of a production planning and inventory levels issue that we needed to build up some inventory in certain areas, so that we did not have any kind of a significant disruption in Township.

So I don’t think it will really impact our quantities shipped and I don't believe it's really going to be a significant issue on elevated maintenance expenses or anything like that, mostly just a product flow issue..

Okay.

I am looking through the 10-Q and the pounds shipped in the backlogs are like 6.2 million, which would be the lowest level since I think your first quarter 2014, but your comments generally lean positive and I guess I was just curious, how do reconcile the difference between those two because it would suggest from the volume side that the outlook is not that great..

To me Chris, that gets back to the discussion about the lead time, what you're seeing in the backlog right now are very-very high value products be it a -- and largely if you look at that is, it's largely aerospace products and it's largely the special projects that we have right now probably more so than ever where the backlog is latten with those products.

And it gets back to the fact that right now lead times are so thin in the industry not just at Haynes but everywhere in the industry that there is no need for a customer to go out and place advanced orders and again possibly take that risk on nickel or whatever.

More importantly we're in a situation where pricing is very competitive and you see it in the lower lead times and the way it manifests itself with that backlog report is you don't see a lot of backlog items sitting in there, again it almost gets back to what you saw this quarter versus last you saw 10 percentage increase in volume shipped this past quarter with a lot of that coming out of that March month with that higher transactional activity..

Your aerospace side, are you able to distinguish how much of the mix would be driven by after-market or spares versus OEM demand right now?.

What we do is it's very difficult for anybody at this level of supply chain because a lot of the fabricators we're supplying are doing both MRO as well as OEM, I am friends with a guy making combustors and we'll just supply in the material and he makes combustors and he is -- keep guessing he's got a better guess than we do but he's guessing how many are going into a new platform versus a legacy type of platform.

Because frequently it's the same component going into that engine, but typically what we look at is on the order of I'll say 45/55 OEM to MRO and in a situation like right now it's probably a little bit heavier on the MRO but we're expecting that to start swinging over to the OEM side as we start moving into heavier volumes I'll say on the new platforms that are coming out..

Okay. In terms of like a big picture question I'm curious on your thoughts.

You talked about the strengthening of the spares demand and I have heard that from a couple of other companies in these recent round of conference calls, I'm in the impression that the spares market was going to be fairly weak in 2016 because you had all of this inventory out there all of these kind of parted out engines and with the aftermarket would be a headwind for the specialty material side, I'm just curious has that changed, are we talking about a market that was flat now mid single-digits or is there something I'm missing in terms of why the outlook has started to improve?.

I think what you're seeing is some of the other people especially in the industry moving away from the destocking situation that you saw last year, we were fortunate we really didn't experience that destocking last year for instance, the comparative quarter if you look at our -- I think it was $60.3 million in revenue in aerospace last year during this quarter I believe at the time I stated to you that was probably the -- I want to say top five, six maybe aerospace quarters of all time at the company of revenue and back then it was a $6 nickel where as the other four or five top revenue quarters were all at $12 or $18 or $16 nickel.

So, that was a heck of a quarter for us on the aerospace side and we did a very strong aerospace year last year and again we talked about jamming orders and et cetera, et cetera.

But some of them being for new platforms we are seeing new platform activity but I don't think that has really kicked in yet, I think a lot of that was because of the depletion of the spares industry and some of -- you have heard the talk over the last five years retiring double the number of engines they had been retiring before because of high oil high gas prices et cetera high fuel prices and really picking apart of those engines for spares.

I think in general what we're seeing is a lot of people feel that that is starting to wind itself down or at least we're beyond the peak of it and again I think it's more so other people in our industry are really starting to see better activity in that area.

I think we've been seeing it for over a year, but I think other people are starting to see more of that, I'll say that is probably more in the long products area fording products area where they are really starting to enjoy that spike that we started seeing a year ago..

Mr. Comerford there seems to be no more questions at this time.

Would you like to make any closing remarks?.

Thanks, very much Audrey, just thank you everyone for your support of Haynes International. Very difficult period that we're in right now, very competitive period but again we feel very good about the backlog that we have.

We feel very good about the distribution capabilities that we have in place and like most of the people I think you've heard in the industry we're looking towards the better second half of 2016. So, again thanks very much for your support of Haynes and we look forward to updating you next quarter..