David Van Bibber – Controller and Chief Accounting Officer Mark Comerford – President and Chief Executive Officer Dan Maudlin – Vice President of Finance, Chief Financial Officer, Treasurer.

Edward Marshall – Sidoti & Company Chris Olin – Rosenblatt Securities Phil Gibbs – KeyBanc Capital Markets.

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

It is now my pleasure to introduce your host 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 would like to read a brief cautionary note regarding forward-looking statements.

This conference call contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities and Exchange Act of 1934. The words believe, anticipate, plan and similar expressions are intended to identify forward-looking statements.

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

Many of these risks are discussed in detail in the Company’s filings with the Securities and Exchange Commission, in particular Form 10-K for the fiscal year ended September 30, 2016. 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 have all seen the press release and had a chance to review it. We will 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 saw in the press release sequentially, we had pretty good performance on the revenue side, all of our markets being up, land-based gas turbine was pretty flat, but all other markets were up in revenue. I think we’re hopeful that we’re starting to see the early stages of a market up cycle.

Although I think like any up cycle there's going to be some fits and starts associated with it and I think this cycle will be no different. Also as many of you know Kokomo was hit by a tornado back in late August. And it couldn't have come at a worse time, it came during our shift changes. Thankfully, we had no injuries and everyone was safe.

But the Southern edge of our manufacturing operations did sustain some damage. Our people got back online very quickly with minimal downtime. So we were very pleased with the progress we made during the quarter, getting our shipments out to our customers. That being said, there were a lot of moving parts in fiscal 2016.

I think the headline has to be the weakness, the industry felt from the oil and gas correction, which spilled over impacting our base chemical process industry business and our gas turbine business. We had worse year in baseline CPI that I can remember I think we discussed that in the last call as well.

The industrial gas turbine business was also weak, but it started – it's now start to show some early signs of rebound in volume. A lot of the IGT weakness involved some of the smaller engines, which very often support oil and gas applications. On the positive side, the aerospace business is held up well.

As did our tolling business and our specialty applications business, but even those areas were not as strong as we saw in fiscal 2015. As we closed out this fiscal 2016 and calendar 2016 we're seeing weakness in our transactional business and we've also got a relatively low backlog at roughly $165 million or so. Dan will update that in his comments.

With sentiments in the industry seems to be getting more positive, as I always do this time of year I met with about 50 or 60 customers over the past couple of months. And the sentiment seems to be that they feel they should be busier and they mean that in a positive sense.

They feel end users are being very conservative and they expect 2017 to be a stronger year. It's a bit of a dichotomy right now. I'm hearing very positive sentiment, seeing better code activity, but at the same time we have the weakest order book that we've had at least a year.

As you can imagine, this means it's going to be very difficult to give you anything resembling concrete guidance. Situation is extremely cloudy with low transactional activity, very few large blanket orders being placed.

And there are very short lead times throughout our industry, which implies and which leads to – why there are not being large blanket orders being in placed. As a result, we're reducing production hours in inventory to line up with what we're seeing in our order book. We still have a very full pipeline in our new applications area.

We just had our key field people in to discuss new applications and I think all of you know that I love the new application side of the business. We're all very excited about the application work, we have going on with key accounts in all our key markets.

Several of those new applications are outside of our core aerospace, industrial gas turbine and CPI businesses. But again, right now, we're pulling back on the production hours and spending, as well as reducing inventory until we see a stronger order book.

Taking to look at fiscal 2016 by markets, fiscal 2016 finished the year with net revenue of $406.4 million, down about 17% from last year's $487.6 million. Net income in fiscal 2016 was $5 million, down over 80% from last year's $30.5 million. Volume shift, this past year declined 11.3% to 18 million pound against last year's 20.3 pound.

Pricing, during the year with negatively impacted by a weaker product mix and lower raw material prices finishing at an average of $22.62 per pound inclusive of our other revenue, which is primarily our tolling business and that is down 6% from last year $24.07 per pound.

Net revenue in the aerospace market for fiscal 2016 was $197.4 million, down 8.2% from last year's $215.1 million. Volume in this market 8.7 million pounds, down 5.7% from last year's record 9.2 million pounds.

Framing it for you Haynes record shipments, prior to fiscal 2015 was 8.9 million pounds in the aerospace market and that occurred both in 2008 and 2012. So the pullback this year to 8.7 million pound is still a very solid year in aerospace. In fiscal 2016, aerospace accounted for 48.6% of our revenue. That's a record for us.

That's up from last year's 44% which was the prior record. Backlog during the quarter decreased slightly by 2.6%, primarily due to the timing of orders and some inventory management by key account. As we move into the final quarter of the calendar year.

Sentiment the engine industry is still very strong based on projections for single oil aircraft production rate, at both Boeing and Airbus along with their backlog. And the new engine platforms, which we believe will kick-in as we move deeper into 2017. On the structural side, we heard in the industry of some inventory corrections during the year.

And if you recall, we told you on the prior calls that some of our accounts were preparing us for corrections. As we have become significantly more reliable on our deliveries with the upgrades, we've made especially in our tubular products area. We saw those corrections on the order entry side. That results in an ongoing lower backlog number.

But in fiscal 2016, our shipments to these key structural accounts were actually up almost 3.5% during the year as opposed to us seeing any corrections. In short, our backlog is lower, but we're doing more business in this product area.

Our people have responded really well to the quest for better on time delivery performance on this side of the business, and as a result, our target accounts are rewarded us with more of their business. Qualitatively, I had a number of discussions with our key accounts in this area recently.

And they expect to continue to increase their participation in this business and they expect that they will translate that to a larger business level with Haynes. Looking ahead, our aerospace customers are still very bullish.

Certainly as you're aware there are some supply chain issues that have to be ironed out and some of the new production engine platforms. But Haynes is well positioned for the demand ramp when it comes. But there's been a lot of talk about a destocking in the aerospace industry.

I think it's been difficult for me to say there's a real destocking going on, when we have – we had probably our third best year in aerospace from a volume point of view, coming off of our record year that we had last year.

And if there is destocking I think it's more – at least what I'm hearing in the industry, it's more associated with some delays that are occurring on the new engine platforms. And so the people in the pipeline have ordered material they have it sitting, waiting.

And so they're kind of pulling back on some of their order entry might be the best way to put it. Until those platforms really ramp up. In our chemical processing market, net revenue for fiscal 2016 was $72.3 million, down 35.2% from last year's $111.6 million.

Volume in this market fell 34.5% during the year to 2.8 million pound from 4.3 million pounds in FY2015. And this one is negative and I need to frame it for you as well. In fiscal 2014, we did over 5 million pounds in this area, and again in 2016, it was down to 2.8 million pounds. This is what I'm talking about when I said.

This is the worst CPI market I've ever seen. This market accounted for quite a few of our special projects during the year resulting in average selling prices holding up well at $25.68 per pound compared to fiscal 2015 is $25.97 per pound. The backlog in the quarter fell 33.4% as we shift a significant level of special project business.

CPI was approximately 17.8% of our total revenue during the year as we discussed previously, I can’t remember weaker base CPI business, talked about the special projects just to give you an idea of the special projects in this market area for us accounted for about 30% of the revenue in this market.

And again I think that gives you either more insight into exactly how weak that baseline business was during this year. We expect this market to remain slow, although we are seeing some signs of improvement or perhaps at least a bottoming.

This is an area where we’ve actually increased some of our inventory levels in very targeted areas to take advantage of some transactional activity.

Some of the people here thought we were missing out on some applications by not having some appropriate materials put in place and I’m okay when I’m wrong and we let them put the inventory in and to their credit – our people got out and sold it. Just to give you an idea, September these products – these very targeted products.

September was our best month in the last 12 months for transactional activity in these very specific items where our people have increased some stock levels. We'll see if we can continue that momentum as we move forward. It's still a long way to go to get this base market back to strength.

And I think we're going to need to see a little bit better activity out of the oil and gas sector. I think we're going to need to see better activity out of Asia-Pacific. I think we're going to need to see some rebounds economically globally before we really see the CPI business pick up to where it use today.

We're still heavily focused in this area on developing new applications and projects. And I think this market area has always been one of the best areas where we are most successful in these special project applications. We still got a lot of these in our pipeline and in our incubator. We just haven't translated them into the order book yet.

Moving to industrial gas turbines, our sales in fiscal 2016 into this market totaled $68.1 million down 8.6% from last year's $74.5 million. Volume shift in fiscal 2016 increased 6.6% to just under 5 million pounds from last year's 4.79 million pounds. Average selling price for the year was $13.71 per pound of 14.3% from last year's $15.99 per pound.

Both the volume level and the selling price results are indicative of the mix shift we saw year-on-year. Again, as I mentioned in the introductory comments smaller turbines are still very weak at this point in time, a lot of those going to be oil and gas industry.

And I think as we discussed last quarter, we're finally seeing better activity on medium and large frame engines. The backlog in this market was up in the quarter 2.3%. This market accounted for 16.8% of our net revenue in the year. Hopefully, we've seen the bottom of this market. We’ll start to see some increase as we move into 2017.

Customers I’ve met with over the past few weeks were cautiously optimistic. I know it's only a couple of months worth of data it's not quite trend where they yet. But the activity we've seen on the medium and large engines along with some slight increases in backlog have us also sharing this cautious optimism.

Spend about two plus years, I've been able to give you any data indicative of optimism in this market. Again on the smaller frame side, I think we'll have to see stronger oil and gas market levels, but one customer I didn’t mentioned, I mean I’m kind of quoting here.

That they said, we're starting to see some urgent requests as some of the equipment in the field is starting to wear out. We're very well positioned in this market area. I think you know that. So we'll be ready for that up cycle. By the way, I mentioned in last call, but I think if there is a – it's worth repeating.

We're winning quite a few new applications on those medium and large engines. The need for better fabric ability and durability is working out well for Haynes proprietary materials like HAYNES 282, even in the down market we're still finding new application wins for our new materials.

I think I told you in the third quarter, these new application wins accounted for 5% of sales in the quarter. I love it when our new application wins are contributing significantly in a market even in the down market. To me it's all about that good positioning for the up cycle and especially when it's for a proprietary material like HAYNES 282.

Finally, other markets and other revenue accounted for $68.5 million in net revenue in FY2016 down about 20.8% from last year's $86.5 million. This area was 16.8% of our net revenue in the year.

Most of the reduction in year-over-year revenue occurred in some energy related specialty application projects that did not repeat in FY2016 and as we’ve frequently discussed, we win these applications and they seem to come along very in block increments.

So we'll get them for a year, we might get a year or two and then sometimes we get a follow-up on. That's really what's occurring right now. And we also saw some inventory corrections on some of the products we supply into ongoing oil and gas applications. By the way, we're starting to see a little more activity in those oil and gas applications.

But we're coming out very, very low levels over the past 12 months.

At our operating side, we’re up and running on a rolling mill upgrade and by the way my opinion I think that's part of what helped us after the tornado that's part of the thing that helped us make sure we got our on time deliveries and we got as much volume amount as we did in the quarter.

And we expect our new heat-treating capabilities will begin commissioning in April 2017. Our IT upgrade is largely complete. We’re in a process of now implementing it at our wire operations and we expect to complete that by the spring.

We're also moving along smoothly with our upgrades in report, which will allow us to consolidate our finishing operations in that facility and streamline our footprint much the same way we did when we consolidated our China operation into our Shanghai service center.

And we consolidate a large part of our European operations into our UK service center over the past few years. I've mentioned it to you before. We're always looking at our global footprint and the availability of better logistics. So we consolidate and optimize our local operations everywhere we possibly can.

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

Thank you, Mark. This was a challenging quarter as sequential revenue strengthened and average selling price per pound sold strengthened, but our gross margin percentage compressed 70 basis points from 13.1% in the third quarter, 12.4% in the fourth quarter of fiscal 2016.

We had solved little levels of specialty application projects in the fourth quarter primarily reflected in our chemical processing market. But our overall product mix was less profitable compared to the third quarter compressing overall margins.

In addition, we continue to see sluggish business activity in the base business commodity side of certain markets as evidence by weaker transactional business in the fourth quarter. Our order entry rates have reduced and backlog has declined over the quarter reflecting these weaker business conditions.

We reduced inventory by over $9 million in Q4 by reducing production rates most notably an 18% production rate decrease at our main Kokomo facility, which creates unfavorable absorption of fixed costs contributing to the overall margin compression.

As we move into our first fiscal quarter ending December 31, we are also reducing production hours and costs with rolling layoffs across the production facilities. We will continue to take costs out of the operation as business level to dictate.

On the favorable side, we did see continued relative stability in the market price of nickel over the quarter. Stepping back a couple of years nickel average $7.51 per pound in fiscal 2014 then dropped nearly 21% in fiscal 2015 then again dropped over 30% in fiscal 2016 with an average FY2016 market price of $4.14.

Our margins compress as we sell the higher cost inventory purchased in prior periods, but our average selling price trends downward along with the market price of nickel.

We were able to sell through the remaining high cost nickel in the fourth quarter with a margin compression of about $2 million in the quarter about half of the $4 million impact we had last quarter.

We are now nickel neutral at the end of the quarter and expect to continue to be nickel neutral going forward and the compression eliminated as we move into fiscal 2017 assuming nickel prices remain stable. The nickel compression over the full fiscal year 2016 was estimated at $13 million.

Our gross margin percentage for fiscal 2016 was 11.7% as compared to the 19.2% at fiscal 2015. Another item weighing on profitability is pension and retiree healthcare expense, which increased to $19 million this year compared to $12.6 million in fiscal 2015.

The $6.4 million increase, which is reflected in both cost to sales and SG&A is primarily due to the September 30, 2015 valuation, which required a change in the mortality tables and was impacted by a market drop in pension assets at that time.

The recently completed valuation for September 2016 was again unfavorable and will increase expense for fiscal 2017 by approximately $4.4 million from $19 million in fiscal 2016 to $23.4 million in fiscal 2017. The main unfavorable driver was a sizeable decline in the discount rates.

SG&A cost combined with research and technical costs were $11.6 million in fourth quarter, which increased $1.5 million versus the $10.1 million for the third quarter of fiscal 2016 with the differences being three primary items.

First a change in foreign currency of $700,000, second an accrual for the insurance deductible for tornado damage of $250,000, and third of the remaining $500,000 for higher commissions and IT spending related to cyber security preparedness. SG&A for fiscal 2016 was $43.4 million, compared to $46.2 million in fiscal 2015.

The $2.8 million reduction is primarily driven by a less incentive compensation accruals in fiscal 2016. Income taxes were favorable, as a result of additional states where we have Nexus and are now required to file state returns due to our tolling business.

This increases are effective tax rate going forward by approximately 1%, due to this increase, we had to increase the value of our deferred tax asset to reflect this higher rate, which led to a one-time favorable tax adjustments in the quarter of $2.1 million or $0.17 per share.

If you recall last quarter, we had a favorable tax item from recognizing the research and development tax credit of over $800,000. And in the first quarter of this year, we had an unfavorable discrete tax item related to a federal tax law change to bonus depreciation, which impact that our manufactures deduction by $300,000.

We estimate are effective tax rate going forward at approximately 35%. Net income for the fourth quarter of fiscal 2016 was $3,162,000 including the favorable tax adjustment and net income for fiscal 2016 was $5,020,000.

Outlook for next quarter, we expect revenue and earnings in the first quarter of fiscal 2017 to be lower than those achieved in the fourth quarter of fiscal 2016. Our first quarter is always impacted by lower production and shipping days, due to holidays and planned maintenance shutdowns.

In addition, we are expecting lower levels of specialty application projects in the first quarter as compared to the fourth quarter. We still see base volumes and prices to be challenged in the next quarter with tepid demand, the continued strong U.S. dollar and uncertainties in the global macro-economic and political environment.

Backlog was $168.4 million as September 30, 2016, a decrease of 10.1% over the quarter with a 7.4% decrease in price, combined with 2.9% decrease in pounds. The reduction in backlog was driven by the shipment of specialty application projects in the fourth quarter and from slowing order entry rate.

To give you an updated number, backlog on October 31, 2016 was $164.5 million. Cash flow and liquidity, net cash provided by operating activities was strong at $54 million in fiscal 2016. And with $31.6 million of capital expenditures, we generated positive free cash flow of over $22 million in fiscal 2016.

We will continue to focus on free cash flow going forward, as we plan to spend less on capital expenditures in fiscal 2017 and continue to focus on working capital, which positions us well for when our markets recover. Our cash balance remained strong at $64.7 million, including restricted cash, an increase over the fiscal year of $15.7 million.

Our revolver balance remains zero borrowings, and as you recall we amended our credit agreement on July 7, 2016 extending the agreement for five more years, reduced the end use line fees and lowered certain administrative costs. This solidifies our strong balance sheet positioning us well for capital allocation opportunities in future value creation.

In conclusion, given the current market environment, we are staying focused on driving our cost, managing spending level, adjusting production hours worked to match the backlog and order entry rate, reducing our inventory levels and reducing our capital expenditures.

We are well position to benefit when markets improve especially as we near completion with our investments in the additional fee capacity to capitalize on strengthening aerospace. This combined with our focus on continuing to secure specialty application projects for our proprietary alloys allows us to capitalize on our niche in the industry.

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

Thanks, Dan. Overall the marketplace is very cloudy right now. You have some markets that are doing fairly well and you have some markets that are pretty much as bad as I've ever seen them. Sentiment as I’d mentioned to you in my meetings with customers is more positive than I have seen or heard in probably the past 12 months.

But then I come back to the order book, and I come back to our transactional activity. The order book is the lowest has been in a couple of years, as far as measured by backlog and I think this is probably three quarters in a row where we've talked to you about weak transactional activity.

And I think most of you know, I watch the transactional activity because that tells me when people are running out of material and when they're running out of material, our distribution system picks upon transactional activity and that tells me I can expect the order book to start increase and then backlog to start increase.

I don't have those things going in the right direction right now. So as Dan mentioned, we will continue to work on that order book. Right now, focus continues to be on safety, on-time delivery, inventory and cost reduction, eliminating waste in our processes, and of course new application development.

We feel we're very, very well positioned with our customers for the up cycle. But we feel that we still need to navigate very carefully over the next few quarters until we started to see an improving marketplace. With that Michelle, I’ll open up call to question..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Edward Marshall with Sidoti & Company. Please proceed with your question..

Hey, good morning, guys..

Good morning, Ed..

Good morning..

So I wanted to just, if I could. I guess I wanted to get some clarity on maybe some of the transactional business. So when I think about the transactional business I think about chemical processing which I think comes out of a lot of that of Europe.

And I wanted to get sense on maybe how the dollar impacted you in – those meetings Mark, have you seen stronger demand from those customers. But yet not translating into your order book maybe because of the U.S. dollar? And also maybe how nickel plays into there? Because I know that people may be taking kind of bets on the rapid increase in nickel.

Anything if you could share?.

Yes. Let me start with the nickel and again just talking to customers I think that one of the worst things that happened for us was some members of oil spike and then it kind of retraced itself back down into the 40’s, lot of our customer said, what nickel kind of do the same thing. It's kind of spike and then retrace.

So, we're not going to place orders right now. Lot of people are gambling on where nickel is going. As far as a stronger dollar, I tell you what it, we had a better economy and we were doing poorly in CPI. I would say that the stronger dollar is hurting us dramatically and I think the stronger dollar has the potential to hurt us dramatically.

I think the CPI market is just pretty bad right now. It's not like I can go out and say to you that I think VDM is rolling in cash right now, because of the stronger dollar or weaker Euro or any of the – at the more higher volume or lower grade material land that if Nippon Yakin or is anybody in Japan or something is really rolling in the money.

The CPI business is just extraordinarily slow. Remember, about a year and a half ago I came back from China and I told you guys that – it was slowest site seen it’s sense when I lived over there and we had the Asian financial crisis. That's still occurring. Our China business I’m ever telling you two quarters ago or something was down 90%.

It's probably now operating at about 60% off of peak levels. So it's come back some – but it's less than half of where we were seeing things before. And I'm not getting a lot of reports that we're losing business. We're getting some – they’re definitely some areas where we are not going after business because the prices are so, so low right now.

And it's so hard to get your pricing backup. But that's not like something or it’s happening daily or cash on hand I think it's happening monthly, once in a while I have my VP of Sales or one of the people from the field give me a call to say that we lost the piece of business based on pricing.

Is that helped you?.

It does. When I talk about revising – you talk about of revising hours to match order patterns, and when these bets on nickel stop and based on the comments in aerospace. I'm wondering how fast you can ramp up and bring those hours back on having removed them a little bit this year based on the lower demand..

I’ll tell you what it – if you remember in – I think it was 2011 and then it happened in 2013, we kind of went through a little bit of a down cycle and then up cycle and we remained staffed pretty well and just cut back hours. So we were able to respond very quickly.

And I think I remember talking to you guys back in those periods that looking at the data, I think it was one of the first times that Haynes ever really caught the front end of the cycle.

Haynes usually lack the cycle the ATI’s, and the Carpenter’s, and Special Metals usually caught that front end of the cycle and Haynes picked up as the cycle was going on. So that’s always present in our mind. We are making our difficult decisions and cutbacks here and there.

Just to give you an idea, we’re probably down about 5% or 6% in employment in the last 10 months. So I mean we are making adjustments and we’re cutting back over time. We’re cutting back hours in various areas of the plant. And again it gets back to that dichotomy a little bit that there are some areas of plant where we’re still really, really busy.

Aerospace building is still really, really busy, aerospace sheet is still very, very busy. But areas where you have the chemical or the industrial gas turbine, it’s slowed dramatically. So we’re cutting back severely on ours there. I think we’ll be able to come back and meet the front end of the demand curve.

I think we’ve got enough people in the field and we were in touch with customers. Customers gave me a lot of positive sentiment over the last six or eight weeks. And then I’ll be honestly, one of the things I said to them was, I’m sorry, but I need you to place orders.

I mean I’ve got a business to run and I’ve got to watch the order book and we’ve got to make decisions on staffing, et cetera, based on what the order book looks like. So I think some people get it as to what’s happening. And so we’ll see our things, but I still think it’s going to be at least this quarter.

I don’t see a lot bouncing back on the transactional side this quarter, because people are playing their end of the calendar year games. But we’ll see how things flush out as we go into our second quarter or the first calendar quarter, we’ll see the things start to pop..

In aeros inherently awful and managing these inventory and the supply chain. And I guess the engine size a little bit better and I appreciate your comments on frame versus engine. I share those thoughts.

But I’m curious, do you feel like you’re closest to that inflection point where that, that demand pull from these new engine programs really starts to accelerate. I mean I don’t want to get too much bullish for comments behind it.

But I’ve heard from the fabricators they are starting to get closer and closer to potentially that inflection point that ultimately with that surge of just inherently bad inventory supply chain..

I hear that as well from customers. I think a lot of my peers are very bullish about how quickly this is going to happen. And I think that I’m kind of more conservative when I talk to you guys and I always get back to my order book, when I see that order book start to pop. That’s when I’ll say, you know what it’s really turning.

That being said, on the aerospace side 8.7 million pounds versus a record year of 9.2 million pounds last year, and then the prior records were I think 8.9 million pounds back in 2008 and 2012. And remember, we’re doing a lot more cut part these days. So it’s a lot I’ll say fewer pounds than it used to be.

So actually our aerospace businesses, I would call our 8.7 million pounds this year busier than the 8.9 million pounds 2008 or 8.9 million pounds in 2012, because we’re doing a lot more cut parts. So I think aerospace is it still busy, it still busy, it still very busy for Haynes.

I am looking forward to when these new engine platforms kick in and the spares have to kick in and the restocking of the supply chain. But I think we’re pretty busy as it is right now. So we’re ready. We’re waiting for it to kick into the next level. But I think it might be a more gradual uptick than a lot of people are talking about..

Got it..

I hope I’m wrong, I hope I’m wrong, I hope it’s a big block that comes through..

Last question I apologize and then expect to go this long, but 8.7 million pounds, do you think that you’ll pass that in fiscal 2017?.

I hesitate to speculate it. I'll tell you what at right now, the order book, right..

Right..

I’ve got a good order book. Aerospace is almost half of our business, but you guys look at the numbers the same way I do. Aerospace is half of our business for a lot of that reasons. It’s half of our business because I need CPI to kick in and I need IGT to kick in..

Got it, thanks. Thanks, guys. Appreciate it..

Thank you. Our next question comes from the line of Chris Olin with Rosenblatt Securities. Please proceed with your question..

Hey, good morning. Thanks for taking my call..

Good morning, Chris..

Hey, Chris..

I apologize if I missed it, but did you provide thoughts on what the actual impact the tornado had on either revenues or cost.

Is there way we can break that out as a number?.

Dan will give you the number on the cost, he actually did say that..

It’s really just our accrual for the deductible on our insurance. So that was $250,000 at SG&A over the quarter. But as far as impacts on revenue or impacts on production as Mark mentioned in his script that we were able to recover quite quickly from that. And get product back to our customers.

So we really don’t feel like that was a material impact at all to the P&L other than the insurance deductible..

And just to let everybody know I mean there’s damage, again the extreme southern end of our operations here in Kokomo. There is damage to the building where the tornado hit. And so we’ve got temporary structure in place to make sure that the weather stays out, et cetera.

And we’re going through with the insurance company right now and the State of Indiana and the engineering groups to make sure that the repair work is going to be up to code, and then what we’ll do is – the nice thing is that area of our mill can pretty much out produce anything else in our mill.

So what we’ll do is, we go on a good run of that material or through that operation. Then we can take it down for a week and catch up or repair this section of the building. Then we’ll go on another run of material then we take another section.

So it’s still going to be – let me think six months, eight months, I think probably over gradual repairs into that section of the operation. I think that’s fair, Dan..

I do..

Yes. That’s probably a good way to think of it. But it’s not been impacting..

Yes, that helps..

It’s been impacting operations look at, the guys on the plant drives them crazy, but they really, really stepped up and they got things up and running quickly.

And we had some fits and starts and some things that we had to change as we went through out there and found more damage in some areas, but that’s typical when you go through something like this. But as you saw it didn’t really impact deliveries. We had pretty good revenue performance through the quarter..

Okay, thank you. Kind of a big picture question here, in some of the other products in markets, I track there has been no frequent reference to the election last month, and then you had many companies talking about massive pauses or slowing down of orders just due to lack of uncertainty on which candidate was going to win the election.

I guess when you speak to your customers, do you think of that had an impact on some of your transactional business as well that’s kind of pushed out demand that perhaps comes back in early 2017?.

Couple of our customers said, they feel their customers were sitting on their hands until they found out what’s going to happen with the election. But to be honest with you Chris, I really go back to – I’d like to see Asia-Pacific get busier. I’d like to see Europe get busier.

People talk about the infrastructure projects and will that – excuse me – yes, I mean we’re typically thought of as a late cycle type of supplier. So if those early cycle guys can get things up and running and get busy, it's going to be good for all of us.

But right now to be honest with you, I always like to listen to what GE is saying or Pratt & Whitney or General Motors or Apple computer as oppose to what’s going on in the political round..

Interesting. Just final question. It’s actually stretch it, I’m good. Thank you very much..

Thanks, Chris..

Thanks..

Thank you. [Operator Instructions] Our next question comes from the line of Tyler Kenyon with KeyBanc Capital Markets. Please proceed with your question..

Hey, it's Phil Gibbs.

How are you?.

Hi, Phil..

Hey, Phil..

Hey, good morning. I had a question on maybe providing some color on the 18% production decline, you had a Kokomo during the quarter clearly some cost impacts you had given us some impacts from nickel mismatch in the quarter being about $2 million.

And any help you could provide us there in terms of what the impact was from the production maybe being misaligned with the shipments..

Sure. As we tried very hard to reduce inventory, production rates come down along with that. And there was an unfavorable absorption related to that. But that really wasn't a huge impact. When I look at the margin in Q3 it was 13.1%, Q4 was 12.4%. The biggest delta there is really the product mix that we’re shipped.

So when I analyze that, I see that impacting the margin percentage by about 2.3% percentage points unfavorable. So that was a huge decline, what pick that backup was nickel as I mentioned in my prepared remarks we had a less of a nickel impact in the quarter, this quarter versus the third quarter. So that was better by $2 million.

So that picks up about 1.9% percentage points. So that's about 0.4% of the compression and the full compression from Q3, Q4 was 0.7%. So the additional 0.3% is what you mentioned, partially the unfavorable absorption. But also it was just a lower transactional business in general.

So kind of those two combined would impact margins I would estimate around 0.3% or 30 basis points. So not significant the mix was by far more significant.

Is that help?.

That's really helpful. Yes, it's very helpful. I appreciate it. I read something in your K [ph] about some lump sum distributions being paid out to retirees. I think it was the $209 million or so.

Was that in the numbers for your fourth quarter? Is that something that's going to be a cash impact this year?.

That's in the numbers for the fourth quarter. However it's out of the pension plan. So that $8.5 million to $9 million was paid out of the pension plan. So the assets go down by that amount, and the liability goes down by a similar amount. So really no major impact to the P&L or anything like that.

The main reason for it is really just to reduce the volatility of the pension plan going forward and more importantly to try to reduce the PBGC premiums that we pay in the future. Some of those are based on headcount in the plan. So these were just people that had no longer work for Haynes, but are not yet drawing on the pension.

So what we call terminated invested employees or terminated invested participants I should say. So we offer it to them, it's their decision whether it’s a take it or not and we had a great response it was almost 70%, so just one of those small steps to try to control the pension going forward..

And clearly a pretty big knock on the liability because of the discount rate change. But I think your timing on the reset was just unfortunate, right, because rates of have since moved higher..

Yes..

Where have the rates you think moved currently relative to where you settled your year-end?.

Well, for the plan we valued the discount rate drops three quarters of a point, which is a huge drop. So I haven't gone back to look at where that would be if we valued it today. But I think maybe it probably appreciated maybe 25% to 30% from where that low was. So we value it – that October 1 every year, and we go from there.

So what it does during the year really has no impacts on the financials or the expense. But, yes, three quarters of a point reduction in the discount rate was a very large drop..

Are you looking at the tenure on there or are you looking at corporate – excuse me corporate yields?.

Corporate yields..

Okay. And then out of that $4.4 million upside.

And then on the pension expense, how much of that’s typically between COGS and SG&A between the breakout?.

Yes that’s estimated about 70% is cost of goods sold, 30% would be SG&A..

Okay, appreciate that. And Mark, high level question for you. So we've kind of been the lot of impacts clearly from the pension on the margins and the bouncing around of the mix, so how should we be thinking about your margins on more of a near-term probably one to three-year structural perspective, if the business mix picks up.

Is the drag really on the margins that we see in outside nickel related to just the pricing environmental role, as it related more of the volume. Because I just remember when this business what used to be a kind of 25% gross margin business and we’re just trying to think about what gets us, what gets us even half way back of the full year..

So one thing I think I’ve said to you guys in the past is volume makes us all look like geniuses, we get tremendous absorption.

And when we start getting up into the 5.5 million pounds per quarter type of number is when we start to see money really flow through to the bottom line and when we’re above 5.5 million pounds on a quarters is typically when we make a – so it's – I think volume is a very big part of what drives the profitability.

As thus nickel levels and frankly they go hand and hand. I mean when we’re at 18 million pounds and nickel was coming down. Those things go hand and hand. It's exciting than it’s a tough market for everybody out there.

So Dan you have anything to add?.

Yes. I mean if you think about nickel as $13 million of impact this year for that compression that’s 3.2 or 320 basis points on the margins. So that’s a pretty substantial impact on the margin that you could, I guess add back when you are looking and thinking about 2017.

Now of course when nickel drives up we should get some wind at our back and maybe some expansion even from there. So that’s going to be helpful. Of course depending on where nickel goes, but nickel over $5 is a pretty good issue. And for us, it really impacts us directly given that we’re on FIFO.

So when you are looking at some of our other competitors that are on LIFO, you are going to have a little different picture, but being FIFO we feel that to our P&L right away..

Got it. And I know I’ve taken a lot of your time. So I appreciate this. But Mark, are you anticipating that you are going to be in the – modestly your call it anomaly in the right for the first quarter of this year..

I’d stay away from that. So I think we mention that it’s going to be really difficult to give you concrete guidance..

Okay..

I watch transactional activity very carefully and you know that first quarter especially is extremely difficult for us on absorption historical..

Yes. In transactional business in the fourth quarter usually we say it’s about 33%, the fourth quarter was 21%, so substantially weaker transactional business. So if that carries into – to our Q1, it's going to be difficult especially with the holidays November, December are difficult months for us.

So it is the visibility just very tough to really give you concrete guidance as Mark….

Appreciate it guys. Thanks so much..

Thanks, Phil..

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Comerford for closing remarks..

Thanks very much, Michelle. Thank you for your time today everybody and thank you for your interest and support at Haynes. Please be safe over the holidays and we’ll look forward to updating you again next quarter..