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

Edward Marshall – Sidoti & Company Chris Olin – Longbow Research Tyler Kenyon – KeyBanc Capital Markets.

Greetings, and welcome to the Haynes International second quarter of fiscal year 2017. [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. You may begin..

Thank you very much for joining us today. With me today are Mark Comerford, President and Chief Executive Officer of Haynes International; and Dan Maudlin, Vice President and Chief Financial Officer. Before we get started, I would like to read a brief cautionary 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’ve all seen the press release and had a chance to review it. We’ll follow our standard agenda in today’s call. I’ll open with comments about the business and our end markets and then Dan will give you greater detail on the financial results.

Rather than give you a lot of macro information on today’s call, I thought I’d focus on some very Haynes- specific situations.

I’ll still mix in some of the macros on the commentary, but I think, for the most part, you all see what’s happening on the broader scale in our industry so I thought I’d give you more of how things are impacting Haynes and what we’re doing as we go through today’s call.

Second quarter started off with a good revenue month in January last time we spoke to you. But as we got deeper into the numbers the profitability just wasn’t there. The rest of the quarter, as you can imagine, was really a battle and an attempt to get Haynes back to breakeven and we fell short.

As you’ll see in the Q and press release, pricing in the quarter was impacted by mix and a lower level of specialty projects.

But just to highlight for you how things went during the quarter, and I won’t give you this level of detail too often, our average pricing in January, inclusive of our tolling operations, was just over $19 a pound and that compares with the quarter’s average of over $21 per pound.

I hope that gives you an indication of just how poor our mix was in January, and Dan will give you more color on this as he gets into the financial commentary.

We mentioned in the Q that we made some pricing adjustments during the quarter based on the improving backlog we’ve been seeing over the last quarter and throughout this quarter as well, which we believe is going to help us in restoring our profitability.

All areas saw higher shipping volumes sequentially and all areas saw higher sequential revenues with the exception of our chemical processing market. It’s the same story in the backlog. It was all pretty much good news in the backlog in the quarter with, again, with all areas showing an improving overall backlog with the exception of the CPI business.

But even within the CPI, we saw some of the higher volume alloys, and those higher volume applications start to come back to life after, gosh, after probably about 2 years of being dormant, but that was offset during the quarter by the depletion of some of our higher value special project work, again I think a story we’ve been reiterating to you for probably at least the last quarter or two.

On the special project front, right now we’re starting to see some higher quote activity again, which is great news. I’ll get into more detail on backlogs, projects, things like that as we discuss the individual markets. I think with the positive macros we’re seeing, like the continued strength in the PS – PMI or the ISM Index here in the U.S.

as well as in Europe, along with improving reports we’ve seen of some of our peers in the industry, I think, they support for the concept of a stronger operating environment as we move deeper into 2017. Moving to the numbers. For the quarter, net revenue was $103.1 million, up 0.6% from the $102.5 million last year.

Volume was 4.8 million pounds in the quarter, an increase of 1.8% from last year’s similar level. Pricing inclusive of our other revenue, which is primarily our tolling business, was $21.28 per pound, down about 1.2% from last year’s $21.54 per pound. The net loss was $1.9 million as compared to last year’s net loss $1.2 million.

Looking at the end markets. Net revenue in the aerospace market for the quarter was $49.5 million, representing 48% of our total revenue. Sales were down about 5.4% from last year’s $52.3 million.

Volume in this market increased 0.3% to $2.3 million pounds compared to last year, but pricing was slightly off, about 5.7%, primarily due to transactional business competition and the lower value of the mix of products that we had going through. Sequentially, revenue was up 8.2%. And the backlog, on top of this, increased another 5%.

And I think it’s worth noting that the second quarter volumes were higher than at any time in all of fiscal 2016, and that $2.3 million pounds we shipped is roughly equivalent to our record level run rate we saw in fiscal ‘15.

Oddly, I think if you asked me during the quarter if I felt we were having a strong aero quarter, I probably would have said no. And it was mainly because the mix of products we were shipping in the quarter appeared to me, when I look at the shipping backlogs, to be well below our normal mix.

Again, that’s strictly kind of a qualitative view I’d give you as opposed to a quantitative look. The bookings that came in were often for future deliveries as opposed to in-quarter shipments. That gives you an idea of backlog increasing.

But when we talk about transactional volumes being pretty low, it means essentially that we’re getting some orders that are for out-months as opposed to inside the month that we’re currently operating. And again, that’s evidence of the increasing backlog.

I think the price levels we saw in the quarter were supportive of the subjective qualitative view that wasn’t – it was a great volume quarter, don’t get me wrong, great volume quarter in aerospace. But the mix was relatively poor. I’m thrilled with the work our people did in getting the 2.3 million pounds out this quarter.

Running at a record output level is always a good thing. But I’m looking forward to a better mix as we move deeper into 2017. Also on the good side, I know we’re more capable now than ever of handling the increased volumes once this market moves to the next level of production. I think everyone knows the macro story in commercial aerospace.

Backlogs are extremely strong. The engine supply chain is transitioning to the next-generation engines, I think primarily we talk about the Leap and the Pratt & Whitney 21000 as well as the GE9X. There have been some hiccups in the supply chain, but we feel we’re ready with the capabilities and material, well positioned to meet the increased demand.

We also, you know, continue to successfully develop a lot of new applications on next-generation engines with our proprietary alloys, and I’ve spoken to you previously about HAYNES 282 and HAYNES 244 nickel-based alloys.

In our chemical processing market, net revenue for the quarter was $18.1 million, up 37.9% from last year’s the $13.1 million Volume shipped was 741,000 pounds, 18.8% from last year’s $649,000 pounds Average selling prices of $23.45 per pound in the quarter was also up over last year’s $20.20 per pound a 16.1% primarily due to the higher-value product mix with special project work.

Sequentially, revenue fell about 5.5% in spite of the volume being up 27.4%, again indicative of the mix shifts we’re seeing from quarter-to-quarter as special projects come and go.

In the second quarter of ‘17, we shipped our final shipments of some key project work, and as a result of that and the higher shipping level, our backlog in CPI dropped during the quarter by almost 21%. We’re starting to see some quotations and activity for higher-volume materials.

Again as I mentioned earlier, many of which – these have been dormant since the crash in the market a couple of years ago. We’re also seeing some better activity on the project side. Neither is resulting yet in a stronger order book, but I think we’re in the early stages of this market starting to recover.

If you recall, when this market started to head down, it was about 2 or 3 quarters after many of our peers started feeling the collapse in the oil and gas business. As the rig count is increasing in oil and gas, I think we’re starting to see more positive signs in the base business of the chemical processing industry.

We didn’t expect the magnitude of the direct impact that we had when things went down, but clearly we felt the pain of the industry in this market. In my opinion, in spite of our higher shipping levels in the second quarter of ‘17, this market is still off about 25% to 40%, what I would call normal operating volumes.

Again, it’s too early to tell where we are in the recovery, but we’re seeing some indications of recovery at our account base. By the way, a large part of our business in China is targeted at the CPI market, and April was the best booking month we’ve had from our Chinese operations in about 2 years.

A lot of it is longer- term ordering, not transactional. And not all of it is – by the way, not all of that in China is CPI. But our Chinese operations had a very strong booking month, which was great to see. And by the way, they’re also working on some project opportunities for applications that we haven’t seen in probably 2-plus years.

So we’re hopefully going to be able to convert some of that project work into orders soon as well. Moving to the industrial gas turbine market. Our sales in the quarter totaled $17.8 million, down 6% from last year’s $19 million, but up sequentially 22% from last quarter’s $14.6 million.

Volume shipped into this market was 1.4 million pounds, up almost 3% from a year ago. Average selling prices were $12.71 per pound, down about 8.5% from last year’s $13.18 per pound. IGT comprised 17% of our revenue in the quarter. And along with the sequential increase in sales, the backlog increased over 8% during the quarter.

As we discussed last time, we’re about 3 years into the downturn in this market, and whereas we’ve been seeing application wins for materials like HAYNES 282 along with better activity on the large- and medium-frame engines, the market for smaller engines is still very slow. Most of the activity that we’re seeing in IGT right now is MRO business.

It’s very lumpy, very unpredictable order patterns. We’re doing work with new materials and new applications, both on the OEM and MRO side, but right now the OEM side is still very quiet. We’re very close to key players in this market.

We’ve done an excellent job in penetrating the supply chains with our proprietary materials, and parts manufacturing capabilities are also very well accepted in this market. We believe we’re well positioned for the up cycle.

Sequentially, we responded well to the increase in volume and we managed to book a strong backlog as well, but we still aren’t seeing a consistent rebound in this market. Not yet, it’s still very spotty.

Finally, our other markets and other revenue accounted for $17.7 million during the quarter, about 17% of our total revenue and down about 2.4% from last year’s $18.1 million, but up sequentially a little over 27% from last quarter’s $13.9 million. Backlog increased as well, up about 6% in the quarter.

Some oil and gas applications are starting to flow through. And we finally saw some new releases for some consumer electronics applications we won a year, maybe 2 years ago Core markets like flue gas desulfurization, industrial heat treating, brazing and renewables are still slow. Quote activity is actually pretty good in some of those areas.

But in addition, our tolling business picked up dramatically during the quarter as we had our second-best tolling quarter in the company’s history. And by the way, we look at our tolling business as one of the lead indicators in the industry.

When we see people we toll for getting busy, it’s usually a good sign for all of us associated with the later-cycle industries that are supported by nickel- and cobalt-based alloys. Anyway, hopefully, that’ll be the case here as well. On our operating side, we’re just about finished with our major capital projects at our Kokomo operations.

We’re up and running on the refurbished cold-rolling mill. And the equipment is in place with some programming done on the new modified annealing line. This line is going to give us the surge capacity we’ll need as business starts to return. It also gives us better efficiency and productivity in feeding our downstream operations.

On the IT project, we’re in the home stretch, getting our wire operations online. And we’re doing some additional programming and refining as well in that area. I’d expect to be closing these projects out by the end of the fiscal year so that we’re fully operational for fiscal ‘18.

We’re also making progress on centralizing our distribution efforts into our LaPorte operations.

We’re starting to qualify equipment and relocate some equipment from other locations into LaPorte and we expect this will take place over the next, I’ll say, 15 months or so as we phase down operations in Lebanon and relocate some of those operations and personnel to other Haynes facilities.

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

Thank you, Mark. The slow start to this quarter was more of a headwind than we anticipated, not from a volume perspective, but more from a product mix perspective, which impacted our average selling price per pound and our gross margins.

To further highlight this impact that Mark was referencing, the average selling price per pound including conversion revenue in the month of January was a low $19.13 per pound as compared to the quarterly average of $21.28 per pound.

Similarly, gross margin, as a percentage of revenue in January, was a low 5.4% as compared to the full quarter gross margin percentage of 9.5%. The better product mix in February and March generated gross margins over 11% in each of those 2 months. Our average selling price per pound in the second quarter of fiscal year 2017.

was lower than each quarter of fiscal 2016 and sequentially declined from the first to the second quarter of fiscal 2017 Sequentially, we had lower levels of specialty application projects that contributed to the lower average selling price per pound and to the gross margin compression.

Conversely, shipping volumes in the second quarter of fiscal 2017 were favorable with overall pounds shipped being higher than the best quarter of fiscal 2016 and a solid sequential 21.9% increase from the first to the second quarter of fiscal 2017, which includes increases in each of our market categories.

These better volumes drove better absorption of fixed costs, helping to offset the unfavorable product mix and fewer specialty application projects previously noted. Gross margin as a percentage of sales was 9.5% in the second quarter of fiscal 2017.

SG&A costs, combined with research and technical costs, were $11.5 million in the second quarter of 2017, which is slightly higher than the $11.3 million for the first quarter of fiscal ‘17 and it was $1.1 million higher than the $10.4 million in the second quarter of last year.

The increase from last year was driven by a few factors such as a prior year expense reversal of performance-based restricted stock expense, which did not occur this year that was approximately $400,000, unfavorable foreign currency impact was $200,000 with the remaining $500,000 being items such as planned higher spending to develop better information reporting for our operations, spending related to selling and marketing activities; and higher pension and postretirement medical expense.

To elaborate on the latter, pension and retiree health care expense, which impacts more cost of sales, but some in SG&A, increased to $1.1 million this quarter compared to last year due to the reduction in discount rates at our valuation at 9/30/2016.

This is a full year expected increase in expense of $4.4 million from 99 fiscal 2016 to $23.4 million in fiscal 2017. This $4.4 million increase is on top of a $6.4 million increase from fiscal 2015 to 2016. This $10.8 million pretax increase over 2 years is a significant headwind to earnings.

Financial results for the quarter also included unfavorable also included unfavorable tax adjustments resulting in a very low effective tax rate, which, compared to a normalized tax rate, impacted the quarter approximately $600,000 or $0.05 per fully diluted share. The tax adjustments related to 2 items.

First, the 10- year expiration of out-of- the-money stock options now requires us to write off the deferred tax asset that was created over the vesting period in quarter that the options expire, which was March, because the tax deduction will not get realized due to the expiration. This was approximately $300,000 in tax expense.

And the second item, a reduction in the full year expected effective year rate, which includes the loss of the manufacturing deduction, which resulted in an unfavorable $300,000 to tax expense. All in, the net loss for the second quarter of fiscal 2017 was a net loss of $8, 90,000, compared to last year’s second quarter net loss of $1,162.

Outlook for next quarter. While the visibility under the pace of the anticipated market recovery is difficult, we expect revenue and earnings in the third quarter to be higher than the second quarter of fiscal 2017 Backlog was $170.8 million at March 31st, 2017, an increase of $3.6 million sequentially.

Even with product shipments increasing sequentially from the first quarter to the second quarter of fiscal2017 backlog dollars increased due to the order entry rates increasing 14%.

Updating the backlog number to current, the April 30, 2017, backlog increased from $170.8 million to $181.3 million and increase of $10.5 million was 6.1% increase driven by solid April order entry. Cash flow and liquidity.

Net cash provided by operating activities was $11.2 million for the first 6 months of fiscal 2017, and capital expenditures were $9.8 million for a positive free cash flow.

Inventory increased over the 6-month period as we carefully manage inventory levels in light of increasing order entry rates, which we expect will position us well for when our markets recover. Our cash balance was $44.8 million including restricted cash, and our revolver balance remained at 0 borrowings.

Going forward in the fiscal year, we expect cash balances to increase. Our strong balance sheet positions us well for capital allocation opportunities and future value creation. In conclusion.

While this quarter’s financial results were unfavorable, we are encouraged by the improving order entry rates and backlog levels as well as the improvement in base business demand in our markets and across the specialty metals industry. Mark, I will now turn the discussion back over to you. .

Thanks, Dan. I hope we laid out a pretty good view of what we’re seeing in the business right now. I’m enormously disappointed with the loss we generated during the quarter. But I’m also encouraged that we’re starting to see better and order entry as we move deeper into 2017.

I think you all know we’re in front of customers constantly, and our market position is very solid. I think the aerospace run rate and the pickup in IGT bear that out as does the increase in our tolling and return of some of the relatively dormant applications in our other market areas as well as CPI. I think you know CPI always concerns me.

It’s, without a doubt, without a doubt, the area where we see the most volatility and the most market skirmishes on a weekly and even daily basis. It’s one of the reasons we spend so much time developing new applications with our customers so we can have that solid element of differentiation and quoting a broader bill of materials.

Overall, broadly, pricing is soft right now, as it always is at this stage of the cycle. But with the stronger order entry levels, I think we’re addressing it early and appropriately. I’m still not happy with our transactional business levels.

Transactional business is kind of the unexpected orders that indicate that a customer might have been caught short on the material needs. We haven’t seen that pick up yet, let alone strengthening. And I think all of you know that, to me, that’s one my biggest indicators of whether or not markets are truly strengthening.

A lot of the order entry we’ve had in second quarter of ‘2017, as Dan mentioned even in April, it’s for longer term. It’s like blanket types of requirements. It’s not the kind of orders all the time all the time that come in and go out inside the same month as we would define as transactional.

As a result, I still feel this recovery could have some fits and starts associated with it. I don’t think we’re out of the woods yet. It makes giving me that firm guidance very difficult. I think you know we count on that transactional business to be transactional business to be about 1/3 of our business as we enter a month.

So just to give you a rough idea, when we enter a month, we expect roughly 1/3 of our business is not booked yet and we expect that 1/3 to come in transactionally. And when things are getting busy, it goes up to 40% and even over 40% of our business in a solid up cycle.

Lately, it’s been less than 30% and occasionally down into the 20% types of levels. And just to give you an idea, April was a very difficult transactional business month. It came in right about 20% of revenue. We don’t have the final numbers April yet, but I don’t like what I saw in April.

I like what I saw in order entry, I don’t like what I saw in the shipping level. Again, we’re seeing orders coming in for longer-term orders, people reserving their place in the queue, but we’re not seeing that stronger transactional that stronger transactional volume yet. I’m seeing a lot of call reports though, a lot of activity on special projects.

We’re booking some small projects right now as a matter of fact and we’re quoting some substantial ones, as I mentioned to you especially in the chemical process area. We’ll keep you posted on those as we move ahead.

When I look at the record run rate in an era when a decent quarter in IGT is strengthening and other markets and – all with increasing backlogs, and even that CPI, it seems to have made a little bit of a bounce off the bottom, although it’s an awfully low bottom, I’m encouraged.

And I think I mentioned to you last time and I still feel this way, I feel better about the business today than I did a year ago. A year ago, we were in the black and making money, but I didn’t like where the order book was and I didn’t like what I was hearing from customers. And it’s kind of the kind of the opposite now.

We’re kind of in that in- between area where volumes are starting to come through and now we’ve got to clear out some of the lower-priced items and get our pricing and our mix back to where we want it to be as we look forward.

I need to see that transactional business pick up, and we need to see more of that project workflow from the designer or a prototype phase into actual application wins before I feel that we’re really entering in a solid up cycle. With that, Donna, let’s open up the call to questions..

Thank you. Before as now open for questions [Operator Instructions] Our is Our first question is coming from Edward Marshall of Sidoti & Company. Please go ahead..

Hey guys, good morning.

How are you?.

Good morning Edward..

So I want to talk about the weak transactional orders that you kind of just highlighted and wondering if I can get your sense as to maybe what might be causing that? Is there any industry capacity or under-absorption of the utilization out there? Is there additional stock in the channel? I guess, the bigger question is, is there a potential? It’s hard to talk about spot and transactional in this manner, but any loss of market share in that particular environment?.

I’ll tell you what, Ed, when I look at it, just the first thing you do is you start with the data and you see the 2.3 million pound run rate in aerospace, so – again, it’s a record run rate. And remember, too, our record year was 2016. I don’t think any of our peers had their record rates in aerospace in 15.

I think most people have to go back to 08 or 07 for record run rates. And as I mentioned, the mix wasn’t great. So I think there’s even more aerospace out there for us once things stabilize. You’re seeing – I think we’re starting to see the aerospace come back.

I heard some of the guys on the forging side talk about how busy they were, which, again, that usually leads us a little bit. So I’m real pleased and I think we’re real well positioned there.

Moving to IGT, just to give you an idea, and I’m sure you’ll look at the numbers in the Q, I think we saw close to a 14% sequential lift in the pounds shipped in IGT. A lot of it was heavier section materials, so you saw the pricing not particularly great.

But for us to be able to respond to a 40% increase in the quarter was really, really good work by a lot of people in the service centers and plants. But more importantly, it says to me there’s no share loss there, we’re in good shape. You know where I am on CPI. CPI is constant skirmishes.

And the fact that we’re still below 1 million pounds in the quarter bothers me, but I don’t hear anybody out there right now screaming from the rafters that their CPI business is fantastic. I’m hearing guys talk about the oil and gas finally coming back, and I love hearing that. It says investment’s coming back.

And also where I get concerned is, I think, it also means the supply chain is refilling itself and I’d rather hear more about the pull-through demand. And remember, we own our distribution system, so our distribution system we kind of keep level-loaded. That’s how we were able to respond to things like that 40% jump in IGT.

So we don’t really get as much of a feel for when the distributors restock. We’re our own distributors. So we don’t get that extra bump all the time. But CPI is where I am concerned the most. Our European operations on the CPI side, I’d be lying to you if I didn’t tell you they were impacted by the stronger dollar.

But again, it’s not like I’m seeing a ton of lost projects. I mentioned one last quarter and there’s constant skirmishes. But everybody I talk to, every customer I meet with, we’re still in great shape on CPI.

In fact, I had some chemical people in last quarter right before the call and actually some of them are coming back in next week and we’re talking about some new applications in CPI. I think we’re in good shape. I think we’re just still seeing a chemical business that’s just way off from peak.

Oil and gas, the small business we do there and the other things that we call in our other markets are starting to rebound. We’re starting to see some of those applications come back to life. I don’t think FGD is ever going to be what it was 5 or 6 years ago.

That was a $35 million a year market for Haynes back in those days, and in the last 5 years, it’s been a $5 million to $10 million market range. I think that’s where it’s going to be.

But we’re picking up some new applications in that other market area, especially oil and gas and some consumer applications as well as some medical applications that have really, really helped us out. And you know the story on the tolling.

The tolling really bounced nice for us in this most recent quarter, second best in the company’s history, and we’re still very busy on the tolling side of the business. I hope that gives you a little bit of where I feel we are in market share..

It does.

And when I think about 35%, 40% rates of -- quarterly rates of transaction business in the quarter, what specific market is generally stronger and leading that 35% to 40% as opposed to where you are right now?.

Usually, you’ll see that aerospace customer who used to take in about 2,500 pounds a month or something like that, he’ll coming in for 3,000 or 4,000. That’s when we know they’re starting to really rebuild that supply chain. I think the aerospace supply chain -- good news is I think the aerospace supply chain is still pretty lean. Same thing with IGT.

IGT and CPI have been off at such low levels now for 2-plus years that if we just start to see a little bit, and I think I said to you Ed and I’ve said on the call, if I can get those markets to move up absolutely horrible to just bad, boy, we’d see a real nice volume and a real nice absorption pickup and probably more so than anything.

I know we’re capable of handling that volume..

And you talked about prior that base volume recovery of the commodity materials into CPI is typically the beginning of a healthy recovery. Do you feel that way right now? I know it’s -- I know you’ve got to be brave to say it, but.

I think I’d feel great about anything in CPI when I’m still running -- I think last quarter was 600-and-some thousand pounds and this quarter was 771,000. I like that number over 1 million pounds.

And I’m just not – it’s funny, we’re starting to see like we’ve – I mentioned that we’re working on some project work and that’s really what we need to see bust out for some of the baseline volume to come through. And not just for us.

When we pick up 100,000-pound project work, that means some of the bigger mills are doing some of the lower-priced, higher-volume alloys. When we pick up 100,000 pounds or something like that, the bigger mills are going to be picking up 400,000 or 500,000 pounds, which is great. You start to see everybody load up.

And we’re really in touch with all the projects that are out there right now. And we’re quoting. It’ll be whether or not we see those projects get let, and if they get let, I think we’re in good position to pick them up. So I’m confident from the point of view, Ed, that the quotation activity is great.

But I’d be lying to you if I told you I had a great order book on the CPI side..

And then, finally, if I look at your volume for the quarter of $4.8 million, you seem like you’re off about 25% from the peak volumes. I just kind of wanted to get your feet on that. Is that optically it looks closer than what probably the results feel? I know it was probably a weaker mix, so you probably had maybe more billet in there.

But maybe kind of talk about what the potentiality of peak kind of volumes could be at this – at Haynes relative to kind of where you are right now..

What I’d like to tell people is when we’re in that 4.5-million to 5-million pound range, we’re hovering around breakeven. It depends on whether or not you run out of days in the quarter typically or if somebody asked you to hold an order back or something a lot of times.

When we get into the 5 million pounds we start making money and when we get up to 6 million pounds, that’s when we start making hay. Again, I think these markets are growing. And I think they will grow. I think you’ve got a situation in oil – I mean, oil and gas, at least the rig count is finally getting back to what I call normal.

I mean, it’s still – if you ask me, the rig count has, what, almost doubled from the low point. It was down to 400 rigs and I think it’s up around the 700 or 800 rigs now and I’d like to call normal up around 1,100 and I think the last peak was up around 2,000 and I think that drives a lot of investment.

But we’re still at real low levels, operating levels. And I think most people would tell you in IGT we’re still in low operating levels. And in chemical, I think we’re in very historic low operating levels. And in chemical, I think we’re in very historic low operating levels. So I think there’s a lot of room left to run on the upside..

Got it. Thanks very much..

Thanks. Our next question is coming from Chris Olin from Longbow Research. Please go ahead..

Hi good morning..

Good morning, Chris..

Good morning, Chris..

I just want to make sure I understand the mix issue within aerospace and exactly what created this unfavorable mix for January. Does this imply jet engine demand was weak that month? Or I’ve also heard that, from some other companies, that the MRO business was unusually strong early in the year.

I guess, what are your thoughts there? And then also can you talk a little bit about what was going on in the tubing business and how that influences mix?.

I’ll tell you what, let me start with the tubing business. The tubing business for us typically in aerospace, the bulk of ours is in the hydraulics systems. And just to let you know, we’re doing very, very well there. That business is up pretty dramatically over last year. In fact, I was just checking the numbers.

And the way I look at that is typically the key accounts that we saw. And I was just looking at that, those numbers, as a matter of fact, yesterday and I was very happy with the numbers I’m seeing in that area. So that’s doing extremely well.

When you talk about what happened last quarter, I think the best way for me to explain it, Chris, is I tend to look at the alloys that we’re selling inside of – when I’m inside of a market.

So for instance if I’m seeing a lot of our proprietary materials or our patented materials going out, I know I’m going to see a good mix and I’m going to see a great pricing. Now the other alloys, what we call commodity, are still very high-priced alloys, but there are low-priced alloys at Haynes, they’re high-priced alloys for some of our peers.

And as I looked at last quarter, especially late in the quarter, I saw a lot of sales of some of what I call our lower-end alloys, more competitive alloys, as opposed to the proprietary materials. Those lower-end alloys, it’s good to see that volume coming through.

It’s great to see that volume coming through because a lot of those go into combusters or seals or rings for applications, which means okay, great, we’re starting to see more of a demand, more of a pull-through on the engine building side whereas the proprietary alloys are typically for real hot sections, very niche applications inside the engine where, let’s face it, people don’t want to buy those alloys unless they have an immediate order to get the product they’re manufacturing back out because they’re very expensive alloys.

But what it says to me is the demand for those alloys should be coming because, again, I don’t think people are buying these higher volume alloys just have parts sitting around. I think they’re going to want to start assembling the whole thing and putting it through. So I’m kind of giving you a stretch on that.

But the way I really look at it is the best way to think about it is a lot of the higher-value, higher-priced materials that Haynes would normally sell in an even mix type of aerospace quarter was really diluted by what we saw as far as a lot of, I’ll say, the higher-volume, lower-priced alloys that go into aerospace..

Does some of that high-volume alloy business, is that what goes to the forging channel first?.

We don’t ship a lot into the forging channel. So a lot of what we would manufacture goes to guys that are going to form products out of it. So they might go somewhere and a guy will stamp it or laser cut it. Sometimes we laser cut it or waterjet cut it.

And then it gets welded and formed into a product as opposed to the – more of the Alleghenys or Carpenter or even Special Metals of the world would ship the large ingots that go to be it a Wyman-Gordon or someone like that to make the big shafts or somebody else for the blades and the forged types of products, the rotating products..

Helpful.

Last question, can you just give us a bit of a progress report on the introduction of HAYNES 282 alloy and where we’re at now?.

I think what I mentioned the last time we got together – it’s funny. If you came to me a couple of years ago, I would watch Defense sales and that’s where we saw it. I mean, it was just everywhere in Defense.

Spec-ed into the Pratt & Whitney 1000 now, so we’re seeing a lot of supply of that product going into that supply chain and I think you’re well aware there are some fits and starts in that supply chain. So we might have a very heavy shipping quarter of it and then all of a sudden we back off a little bit.

I will tell you that the forecast for the product look very good, we’re very much encouraged by interesting thing about HAYNES 282, and I mentioned it, I think each of the last two quarters is it’s been about 5% of revenue in our IGT business because it’s been very well accepted, again for people that have either fabrication issues using higher-temperature materials or just looking for material that has excellent strength at a higher operating temperature.

Some of the other alloys actually have better strength at lower temperatures. 282, HAYNES 282 has excellent high-strength capability at higher operating temperatures. So we’ve actually won quite a few applications in the gas turbine side with 282 in addition to the aerospace. So it’s doing quite well.

I want to say last year it was somewhere near double the year before. I don’t think it will double again this year, but I think it’s – a lot of it’s going to depend on the supply chain for the Pratt & Whitney 1000, I think how it’ll do this year, but it’s – we’re very pleased with what we’ve had from the alloy. .

Okay thank you..

And by the way, there’s another alloy out there, Chris, too. HAYNES 244. It’s a steel alloy, which has excellent high-strength characteristics compared to 242, even higher temperature capabilities than 242. Excellent coefficient of expansion capabilities. And if you think of things like Thermo-Span, 242 and now 244 is out there.

So it’s another excellent alloy that we’ve got out in the market..

[Operator Instructions] Our next question is coming from Tyler Kenyon of KeyBanc Capital Markets. Please go ahead..

Hey good morning Mark and Dan. .

Good morning..

Good morning..

First question here, I guess we’ve seen some interesting dynamics at play here more recently just on the side of raw materials. Alloy cost up pretty materially while nickel is weakening aggressively again here.

How does that mix interplay with the price-cost match as we move forward here?.

Well, certainly this was a big issue that we wrestled with last year and that was a $13 million compression on gross margins across the whole fiscal year. And then we’ve kind of started this fiscal year saying nickel-neutral. And for the most part that holds true, but we were talking nickel-neutral at nickel prices near $5 a pound.

Of course, they have floated down since then, so that reduction and that floating down over the quarter, that hurts the alignment as you might assume. So that does have an unfavorable impact on us. It’s not material, but if it keeps floating down it can certainly become a headwind like it did last year.

I wouldn’t say we’re necessarily neutral right now, but we’re near neutral..

Yes, and on the other side of the collar. As far as I think you know that we make adjustments to our price book essentially weekly, so the spike you’ve been seeing in [indiscernible] and some of the other materials, those are in the price book.

We talk it over with customers and we say we’re sorry we don’t own the mines, so we have to make those adjustments. So transactional business gets it immediately, and then based on contracts, price letters, et cetera, other adjustments are made either monthly, quarterly, some are made annually.

So as Dan has often said, we are kind of metal value long because of our supply chain. So you can get hurt a little bit in the short run. But again, it gets back to like an area under the curve type of situation..

Okay, got it. And just with respect to some of the price increases you’ve announced on the transactional side, I would imagine some of that has to do with just some of the moving pieces we just discussed.

But how much of your business would this apply to? And would it have any impact on some of the existing LTAs that you have out there?.

Yes, contracts come up and you renegotiate them. You push through to get the increases. But you’re right, it goes right into the transactional business immediately and we talk about, like I said, transactional business right now is 20% or so. And we’re in that situation right now, right? Volumes are increasing. Dan gave you the backlog look.

And just to give you an idea, I think it was March was the best order entry month we’ve had in over a year and April was just a hair below March. But again, I said on the shipping side, I wasn’t happy with what I saw in April. But order was excellent in April.

But we’re in that kind of in-between area now where we’ve got to flush out some lower- priced items, get the mix back looking the way we want it to look and start to push some of these products through over the next quarter or 2 to kind of restore the profitability and get things going again.

So I think it’s going to be a little bit of a long slog as we go through it. But hopefully, in giving you a long answer to your question, but the fact that we pushed through the pricing largely March 1 and then we saw great order entry in March and excellent order entry in April, we’re very encouraged..

Because that’s one of the key things. When a market starts to recover, if we don’t get pretty quick with the price increase, we fill up our backlog with very low- priced products and that will take us 3 or 4 quarters to flush all that out. So we had to be very careful not to do that. So when the market recovers, it’s a decent pricing.

Certainly, volume is a good thing for us right now, but pricing is not. So we needed that to turn around quite quickly..

And when you think about just some of the project-oriented business as a whole. I mean, I know you mentioned seeing some improvements just in the quoting, but that’s for probably some longer-term business. Could you speak perhaps to any differences that you might be seeing just with respect to the dynamics you’re seeing in maybe the U.S.

project-oriented business versus what you might be seeing internationally?.

Yes, typically what we’ve been seeing has S. projects are still continuing to flow through, so there are some neat technologies that are coming through, especially on the chemical side. But the projects have been like, for instance, we had one that flowed through last quarter and quarter before.

I want to say it was probably close to $4 million project on essentially incineration type of application, a really neat project. But a smaller might be best way to put it. Excellent projects, but those are the types of projects that we’ll get a couple of them here and there and they’re $1 million, $2 million, $4 million’s an excellent one.

Where some of the international projects that we’ve seen, and I’m going now over, let’s say, the last 5 years, some of the international projects that we’ve been getting have just been monstrous. We had one couple of years ago that was $15 million.

We had one a couple of years ago that ran into last year and part of this year that was over $20 million. So the magnitude you see in some of the projects is quite different.

A lot of the domestic projects include a lot of materials, not only our proprietary materials, but we’ll also see a lot of activity for some of the lower-priced, higher-volume materials that go along with it. We’ll get the entire project might be the best way to put it.

And some of the international projects that we’ve been doing lately have had some – have largely been proprietary materials Very, very – real good pricing on those proprietary materials because of the complexity of the application..

Okay, thank you. I’m jump back into you..

Thank you. At this time I’d like to turn the floor back over to management for any additional or closing comment..

Thanks very much for your time today. Really appreciate your support of Haynes and your interest in Haynes. I did also want to mention for those of you who may not have known our CFO Marcel Martin, who retired a few years back, passed away during the quarter. And God bless Marcel. We miss him horribly.

And he did some great things at Haynes International. So again, thanks very much for your time today, and we look forward to updating you next quarter..

Ladies and gentlemen, thank you for your participation. You may disconnect your lines at this time, and have a wonderful day..