Greetings, and welcome to the Haynes International Third Quarter Fiscal Year 2017 Earnings Conference. [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 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'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'll give you greater detail on the financial results..

As you saw on the release, our third quarter was very disappointing. The transactional business we expected to rebound just simply did not occur, and in fact, it worsened slightly. Aerospace and our other markets performed extremely well, but industrial gas turbine and chemical processing remain very slow. .

As I've mentioned to you previously, in rough numbers, we enter each month expecting transactional business out of our distribution facilities to comprise about 30% of our revenue plan. This quarter, in each month, we ran about 20%. We mentioned in the last call that April was off to a very poor start with low invoicing level.

But whereas the invoicing level improved over the balance of the quarter, the profitability remained very poor as we continue to flesh out some of the lower price levels we have in our backlog.

Without that better transactional activity and specialty projects, we're feeling the full impact of that lower price mix of products, especially in the chemical processing area at this point in time. .

Overall, the news in specialty metals continues to improve, and aerospace activity appears to be strengthening. Our peers in long products reported excellent activity in their forgings business. We were a little bit off our record run rate on shipments in the quarter, but we had our strongest increase in backlog all year in aerospace.

Also, activity at the Paris Air Show was excellent, and industry sentiment remains very positive..

In gas turbine, we're starting to see some requests for expedites, but there's still no marked improvement in that market as a whole. In chemical process, we saw some volume improvement but still only at the lowest end of the pricing spectrum, and activity is still very choppy.

Also, we've still not seen any major specialty applications in chemical processing area get [ let. ] There's some large projects being quoted, but so far, they've not been converted into any large significant orders..

In our other products and revenue area, we saw some excellent activity in energy-related applications along with solid order patterns in consumer-related applications. In our tolling business, which had its second-best quarter ever last quarter, followed it up with a third-best quarter this quarter.

Tolling, as we've discussed previously, is usually a leading indicator for us, so whereas we still think we have some difficult periods to fight through, we're optimistic at what we're seeing on a broader scale for the industrial markets..

Let me move to the quarterly results and some more market comments. Net revenue in the third quarter was $98 million, down 3.2% from last year's $101.3 million. Volume shipped was 4.6 million pounds, up 4.5% from last year's 4.4 million pounds.

Average selling price, inclusive of our other revenue, which is largely our tolling services, was $21.41 per pound, down 7.4% from last year's $23.12 per pound. Our net loss for the quarter was $4 million compared to a net profit last year of $2.8 million..

Looking at our end markets. Net revenue in the aerospace market for the quarter was $47 million, roughly flat with last year, and aerospace represented about 48% of our net revenues.

Volume in this market increased 8.1% to 2.2 million pounds compared to last year, but pricing was off about 7.8% primarily due to a lower-value product mix and some competition. .

After shipping 2.3 million pounds in the second quarter, which is equivalent to our record run rate of 9.2 million pounds in a year, I was pleased to see us ship another 2.2 million pounds in the third quarter. Essentially, there was no let-up..

Customers are telling us that we're starting to see the new engine platforms kick in. Internally, we're getting our new annealing line up and running, so we expect to be well positioned as we enter calendar 2018 to take advantage of the aerospace demand. And we're looking to get our lead times down to a level that will benefit our customers greatly..

Also, on top of the last 2 solid shipping quarters, the backlog in our aerospace business increased during the quarter by 9.4%, which is our largest increase in that backlog this year. I think there'll be some ups and downs as the new engine platforms ramp up, especially as things get lumpy through the supply chain.

But we feel very strong about our position to serve this market as we move into 2018..

I think most of you know we're also transitioning into our expanded facility in LaPorte, where we'll be consolidating our largest North American distribution operations. We expect to have this completed as we move into 2018 as well. .

A lot of moving pieces right now, but I think the investments that we've made in upgrading our cold rolling capabilities, our tubular products capabilities, our flat products capabilities, along with the consolidated finishing and service capabilities in LaPorte, will further solidify our position in the value-added space supplying into the aerospace market.

We're very pleased with what we're seeing in the aerospace market right now..

In our chemical processing market, net revenue for the quarter was $15 million, down 26.6% from last year's $20.5 million. And this market accounted for 15.3% of our revenue in the quarter. Volume shipped was 858,000 pounds, up 15.2% from last year's 745,000 pounds.

Average selling price of $17.50 per pound in the quarter was down 36.3% from last year's $27.48 per pound, indicative of higher volume, lower price mix that we're currently booking and the absence of specialty application projects..

Backlog fell during the quarter by 12%. I mentioned last time that quote activity is increasing in this area. I think higher oil prices and the increasing rig count will eventually find its way down the supply chain to our chemical business, just as it did when oil collapsed in 2014, about 3 years ago.

And if you remember back then, Haynes actually held up pretty well through 2014 and 2015. We really didn't feel the collapse of oil and the latent effects into the chemical process market until we got into late 2016 and this year..

The conversations I've had with customers indicate that they're busy right now with carbon, stainless and even some lower-end nickel alloys. In summary, they told me to be patient because this is how things typically evolve as we come out of these bottoms.

I know we lag this market, and I think we're feeling the pain that some of our peers, who have large oil and gas positions, felt in 2014 onwards. But if I'm going to listen to our customers, I need to be patient. .

There's been a lot of increased quote activity on project work, and that's a good sign. But so far, that's only a sign. We have not converted those quotes into orders just yet. We're still very scant on the number of specialty product applications that we have right now in our order book.

The pipeline in design and quoting is active, but so far, we have not been able to convert these into orders..

Also on the specialty projects side, there are some very large pipeline projects being planned and quoted overseas that are similar to one that a couple of our larger peers shared a few years ago.

I think these projects, should they be spec-ed into these alloys on the high-end nickel side of the alloy spectrum, will be very helpful in the industry as a whole as far as increasing the level of chemical process volumes. .

When we give guidance right now, the lack of clarity in this market is probably the biggest reason for our pessimism. We just do not have the order book right now to say with any confidence that we've seen this market turning around in the short term.

A number of macro indicators, like oil prices, chemical investment numbers, the ISM number; and more directly, the project activity we see on the quote side; are very positive, but we just don't have the order book at this point in time for me to say that this has turned positive..

Moving to the industrial gas turbine market. Our sales in the quarter totaled $14.7 million, down 8.6% from last year's $16.1 million. And this market totaled roughly 15% of our total revenue. Volume was 1 million pounds, down 17.6% from last year's 1.2 million pounds.

Average selling price was $14.57 per pound, up 10.9% from last year's $13.14 per pound, indicative of a better mix and raw material pricing..

Backlog fell during the quarter by 4.5% mainly due to the timing of orders. Activity is still running well below historical levels. We're running right now at a shipping rate of about 4.5 million pounds per year.

And if you recall, our peak volumes in this market were around 6.5 million pounds, and I'll say normal volumes are in that 5.5 million to 6 million pound level..

Medium and large-frame applications are slowly increasing in activity, but the activity is very lumpy as evidenced by the change we saw in volume from second quarter into third quarter. If you remember, second quarter was up to 1.4 million pounds, and here we are in third quarter, back at about that 1 million pound level..

We've won several new applications on medium and larger platforms as well. Smaller engines are still slow, but again, similar to what we talked about in chemical, if we see a sustained strengthening in oil and gas, we would expect to see demand for the smaller engines improve.

In fact, we are working with a number of the smaller engine manufacturers, and they do seem to believe that things are getting a little bit busier right now. .

We're constantly in front of these key accounts at the design and fabrication level, so I'm confident that we're very well positioned. But similar to CPI, this market remains very soft, and we just don't have any clear indications of a significant strengthening at this point in time..

Finally, our other markets and other revenue accounted for $21.3 million during the quarter, about 22% of our revenue and up 21% from last year. It was our third-best quarter since we made the acquisition of the LaPorte operations back in 2015, very solid quarter as backlog also increased 10.8% in addition to that strong shipping level. .

We're a pretty small player in oil and gas applications, but this area, oil and gas, along with other energy-related applications, led the quarter for us. We also had some good activity in consumer electronics, welding and industrial applications on the product side..

On our services side, revenue from tolling was also excellent during the quarter as we recorded our third-highest quarter in tolling since acquiring LaPorte. And remember, our second-highest quarter was last quarter. So the services or tolling side, which we view as a leading indicator, is doing quite well right now. .

On our operating side, I think I pretty much touched on a lot of the key topics. We're getting the new heat treatment line up and running now. We're surveying the furnace temperatures and working out some of the bugs there. We've got most of the mechanicals and synchronization working extremely well.

Our rolling mill upgrade is complete, and we're actually producing production material off that rolling mill area. The tubular products work is complete. And I think we've mentioned previously that our aero tubing business is one of the brightest spots we have in this tough economy. Corrosion tubing, however, is still very, very slow. .

On our IT project, we're doing a lot of programming work to get better on the reporting side and manage the business better. And we're scheduled to install the final leg of the IT project at our wire operations in October, and then we'll have all of our manufacturing sites on the same platform.

That's a big difference compared to 5 years ago, when we had multiple platforms for our operating businesses..

Finally, as I mentioned earlier, we're in the process of moving our Lebanon operations into our LaPorte facility so that we have a more centralized service capability for serving our customers more efficiently and quickly. We'll have one fewer site in the Haynes network.

I think I've mentioned before we're constantly looking at the footprint of the business to find better efficiencies for serving our customers, and we'll continue to do so..

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

Thank you, Mark. We faced greater headwinds this quarter than we anticipated, resulting in a challenging top line and significant near-term margin pressures. Our revenue at $98 million reflects low specialty application projects this quarter, sluggish transactional business, low nickel prices and a challenging competitive pricing environment. .

Our average selling price per pound, including conversion, was $21.41 per pound as compared to the third quarter last year of $23.12 per pound. This decline is most notable in our chemical processing market.

This quarter, CPI average selling price was $17.50 per pound as compared to $23.45 in the second quarter and $27.48 last year third quarter and was even over $30 in the 2 quarters in between. .

This decline is primarily reflective of less of the high-value specialty application projects driving a lower value mix and competitive pricing, both issues that squeeze gross margins. Our gross margin this quarter was significantly lower than we've seen in prior quarters..

To provide you some color on this margin compression, let's look at a sequential bridge explaining the $6.1 million decline in gross margin from last quarter, Q2, to this quarter, Q3 of fiscal 2017. First, less of the high-value specialty application projects impacted margins negatively by approximately $1.2 million.

Second, overall lower base volumes, pounds shipped, impacted margin dollars by an estimated $1 million. Third and the largest item, competitive pricing, combined with impacts from product mix, reduced margins by an estimated $2.4 million.

And lastly, the adjustment incurred this quarter related to inventory valuation, lower of cost or market and slow-moving reserves impacted margins by $1.5 million. .

The price of nickel weakened over the past 2 quarters, where we ended December 31, 2016, with a 30-day LME average at $5, dropping to $4.64 at March 31 and further dropping to $4.05 at June 30. Post June 30, nickel prices seem to be strengthening, and it remains to be seen if that increase will be sustainable.

Aside from nickel, cobalt has also been moving with significant increases lately. All in, we estimate that raw material fluctuations had an offsetting impact and only moderate compression on margins this quarter..

A few additional items impacting operations and costs include the following. The first is our strategic action to expand our service center footprint at our LaPorte location. As we previously disclosed, the cost to move our largest U.S.

service center from Lebanon, Indiana, to LaPorte, Indiana, is expected to cost approximately $2.3 million to $3.6 million that is not capitalizable but rather charged to cost of goods sold. Up to June 30, we have charged approximately $900,000 of these cost to cost of goods sold.

And looking forward, we are estimating a $1 million charge to cost of goods sold in the September quarter and an additional $1.3 million charge in the December quarter..

The second item is the CapEx investment to install and upgrade the cold finishing equipment to increase sheet capacity and better enable us to service customers, especially in the aerospace market. The construction is in the final innings, and commissioning is beginning with benefits expected to materialize in the next few quarters.

We have been impacted by start-up and commissioning costs. In addition, mill production levels and inventory levels have been impacted during the construction phase and will continue to be impacted through the commissioning phase..

Third item is one I keep reiterating, which is the significant increase in pension and retiree health-care expense, which increased $1.1 million this quarter compared to last year's Q3 due to the reduction in discount rates at our valuation at September 30, 2016.

This is a full year increase in expense of $4.4 million from $19 million in fiscal '16 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 continues to have a significant impact on our earnings.

The potential good news is interest rates are currently higher than last year, thus we are expecting a favorable valuation this September that could reduce fiscal 2018 expense. .

Back more specifically to the quarter, SG&A costs combined with research and technical costs were $11.5 million in the third quarter of fiscal 2017, which is even with the second quarter of fiscal 2017 and $1.4 million higher than the $10.1 million in the third quarter of last year.

The increase from last year was driven by unfavorable foreign currency impact of $1.5 million with an FX loss this quarter of fiscal 2017 of $629,000 compared to an FX gain of $883,000 in the third quarter of last year..

The effective tax rate for the quarter was 50.6%, which includes an adjustment to make the 9-month rate 39.8%. The out-of-quarter favorable adjustment is quantified at approximately $850,000. Prior quarters of this year had an abnormally low effective tax rate due to the near-breakeven taxable income from the projections we had at that time.

All in, the net loss for the quarter of fiscal 2017 was $3,967,000 compared to last year's third quarter of a net income of $2,792,000..

Outlook for next quarter. Long term, we have confidence in the strength of the markets we serve. However, we expect the current soft market conditions in industrial gas turbines, chemical processing and high-value specialty applications will continue through the calendar year.

This, combined with lack of visibility on transactional business, makes near-term guidance difficult. Thus, our best view at this point in time is that revenue and earnings in the fourth quarter of fiscal 2017 will likely be similar to the third quarter of fiscal 2017..

Backlog was $180.9 million at June 30, 2017, an increase of $10.1 million sequentially. Aerospace and other markets had higher order entry and improving backlog levels during the quarter. Beyond quarter-end, backlog at July 31, 2017, decreased slightly to $179.2 million..

Cash flow and liquidity. Net cash provided by operating activities was $11.8 million for the first 9 months of fiscal 2017, and capital expenditures were $14.1 million. Inventory increased over the 9-month period, driven by increasing order entry rates and managing inventory levels through the CapEx project in cold finishing.

We expect inventory levels to decrease over the fourth quarter of fiscal 2017. .

Our cash balance was $48.5 million at June 30, 2017, and our revolver balance remains at zero borrowings. Our credit facility has a limit of $120 million with an accordion feature to increase to $170 million. 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 demand across the specialty metals industry.

The headwinds are expected to persist for us through the end of the calendar year, but we see potentially promising specialty application projects in the quoting stage and the longer-term order entries already building in the backlog as being catalysts for improvement in 2018..

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

Thanks, Dan. I just want to reiterate for everybody what Dan and I have pretty much discussed so far. The IGT and CPI business are really running at very, very low levels. They're 2 of the key markets for advanced nickel and cobalt-based materials, so their struggles are essentially our struggles. .

Aerospace is holding up extremely well. And if you look at the investments we've made over the last few years in the cold finishing area for our sheet business and our coil business, a lot of that is targeted at where the aerospace business goes through.

Same thing as we look at the finishing operations with consolidating Lebanon into LaPorte and, frankly, the purchase of LaPorte so that we can offer a higher-quality product into the marketplace and really control that processing for ourselves..

So a lot of -- I feel very good about the investments we've made and where we're going as we go into 2018, especially with the aerospace market seeming to be ramping up.

CPI and IGT, those are typically heavier gauge applications, larger section businesses, and that's really where we're struggling, is in those areas where we just don't have the volume running through the plant the way we would if those businesses were operating at what I'll call a normal level.

I think I said last time, if I could get those 2 businesses to go from horrible to just bad, we'd be in pretty good shape. But they're really operating at extremely low levels right now. .

Pricing is still very soft as it typically is at this stage in the cycle. Demand's still running below that 5 million pound per quarter level. I think we're going to struggle for the next quarter or 2 as we just don't have the special project backlog or the transactional activity that I feel we need before we can say we're out of the woods.

I'm encouraged by that stronger backlog, but remember, that backlog at this point is still very much biased towards the aerospace and those other markets which have already been pretty solid for us. We're still not seeing it in the IGT or CPI area..

As I mentioned last time, last time we had the call, I'm encouraged. I'm still a little bit paranoid about that business transactional level, and I need to see that transactional business pick up. I need to see a little bit more project work moving from design-in and prototype phase into actual applications.

I think I'll feel better about the business when we start to see those things pick up a little bit..

With that, Donna, let's go ahead and open the call to questions. .

[Operator Instructions] Our first question is coming from Chris Olin of Longbow Research. .

Question about the tubing business.

Does that segment have exposure to the Airbus A380? Do you think these recent cuts could have a negative impact on volumes for that business going forward? And I guess maybe to expand about that -- beyond that, are we still seeing pressure from like widebody production cuts on some of the orders?.

No, not a lot, Chris. We have a little bit of business that goes through the distribution channel that may find its way into Airbus applications. But Airbus is clearly a target for our tubular expansion. We're not a big player with Airbus at all. Most of our product goes into defense applications and Boeing applications. .

I thought I heard you mention during your presentation something about increased competition within the aerospace markets, and I was wondering if you could expand upon that a little bit in terms of like maybe where this is coming from, from like a regional aspect. .

Yes. Most of what you have in the aerospace side of the business is on long-term agreements. That's pretty much sheltered from a lot of, I'll say, day-to-day transactional pricing skirmishes.

But you still have a lot of business -- we have a lot of business that goes through the normal supply chain to a myriad of subtier fabricators, and that becomes a little bit more transaction oriented. So you'll see a little bit of price cutting out in the marketplace when everybody's a little bit soft. It's not a big part of the aerospace business.

If you take a look at our business when we really talk about transactional business, if you look at the aerospace business, that pricing holds up pretty well, might be the best way to put it. Where we're really seeing a lot of dramatic, I'll S-A-Y- price-cutting is in the CPI side of the business.

That's where people really are making some pretty deep cuts in pricing.

Now remember, too, when you look at our CPI business, the biggest thing impacting our average selling price in the CPI business is the absence of these massive special projects that we've had for -- it seems like we've had 1 or 2 of them for each of the last 5 years, 6 years with the exception of 2013.

As we got into late 2013, we were kind of in the same spot in CPI as far as not having a lot of special project work. But back in 2013, it was covered up a little bit by the fact that our IGT business was still very, very good.

So really, what's impacting us right now is that lack of specialty project, and that's really dramatically impacting what we're seeing on the CPI average selling price. .

Okay, that's helpful. Just last question.

In terms of the orders in the transactional business, do they correlate with nickel pricing at all? Is there a way to think about -- like has there been a pickup in July, August activity versus what we saw in May and June just from the commodities moving?.

You saw the backlog increasing. So I don't know if that's people trying to beat nickel or not. When I look inside those orders, really, what I'm seeing, Chris, more so than anything, if you think of what's happening on the long product side, you're seeing the forging business get really, really busy.

And if you look what -- in my opinion, what I think that is, is there's not a lot of forgers out there, so you better get in and reserve your place in the queue with a forger very, very quickly and get those orders in and get them placed.

Now as you move into more with our business, we're not a big player on the forging side of the business, but you're talking about fabricators now. There are more fabricators out there. You don't have just 5 or 8 forgers. You've got 35 fabricators making combustors. So there's not that immediate necessity to get your orders in.

But we have seen loading of orders, especially with a bias towards the aerospace side of the business. And we've seen it in what we call our other products, which has been the oil and gas or the industrial heat treating or the brazing and welding area, where we're seeing longer-term orders. That's a little bit of what's frustrating.

If you remember, in the past, as we get up to around $200 million in backlog, I'm usually the first guy out there telling my salespeople get out and raise prices; get out and raise prices; get out and raise prices.

But when I look at the backlog now, it's more about people reserving their spot in the queue out into the future than it is this increase in transactional activity and moving out of lead times. So I hope that gives you a little bit of a flavor for what I'm talking about. .

Our next question is coming from Edward Marshall with Sidoti & Company. .

Mark, I can't help but notice that despite lower performance in the quarter, you sound a little bit more optimistic than you did in the 2Q.

Is that a fair read?.

You know what, Ed, the story, like I -- I think some of my board members think I'm crazy. I say to them that if you came to me a year ago, I was looking at a declining order book, and I was looking at peers that were absolutely struggling.

If you remember, the last 2 years, we were making money and pretty much everybody else was really not making money. I felt horrible about the business a year ago, and we talked through some of the things we had to do. If you remember, we pretty much put a freeze on hiring.

And really, we're down about 80 or 90 people from that period, just making sure we try and be profitable as we went into this period, and we just haven't been successful. Margins have dropped dramatically.

But getting to your question, and it's almost counterintuitive, I feel better about the business today because I like what I'm seeing in the backlog. I like that our peers are getting busy. I told you the story about me meeting with customers and them telling me to kind of relax.

And our market manager kind of talked me off the ledge a little while ago on the CPI business, that this is the normal evolution, the carbon, stainless and the low-end nickels, the 800Hs and things get busy first, and then our products start to come back. We're seeing a lot of activity. So I'm very frustrated right now, Ed.

But I think in general, I look at the macros, and I say, okay, this should work itself out as we get into the future as opposed to -- last year, you could almost see this thing coming, and it was more about battening down the hatches.

And we were very pleased with the special project work we had in the Q, and of course, the aerospace that's held up well as well as some of the tolling businesses that held up well for us. .

Got it. And to touch on CPI for a second, I'm curious if you can kind of put the pen to the page and tell me what you think.

Is it market demand? Is it market share loss? Is it mix? Is it mix in requests, meaning more requests for stainless that you don't produce versus the high-performance that you do produce? I'm just trying to really get my arms around exactly what's going on. .

I think number one is just general volume. The entire market is down. I'd be -- look, there's some good special projects happening out there right now. There's one over in Asia Pacific that's going to be fairly large. There's 2 in the Middle East right now that are just gigantic.

If you remember, about 3, 4 -- 3 years ago, I think it was, 2 of our peers landed a very, very large pipeline project, 1 European and 1 North American. And I think it really helped their businesses. I think there's 2 more of those out there right now. I'm not sure. One of them might be the lower-end materials.

But there is talk of them upgrading into higher nickel-based materials. I don't know if it'll be an 800H-type application, or it may go 625. If it goes 625 -- by the way, those are alloys, 800H and 625. It goes 625, it's going to be a real help to -- not so much to Haynes.

If you think about it, like that one that was 3 years ago, I think we were quoting in the area of about $10 to $12 a pound, and we were up about $17 a pound, and our peers were more at $10 to $12. More importantly, we wouldn't have been able to handle that volume.

I think it was 14 million pounds, and we're a 20 million pound a year mill, so we wouldn't have been able to handle it. But I think those'll be very helpful.

It's also indicative to me of the activity that we're seeing to finally start to happen, be it in pipeline projects, where we're seeing more of the activity in fabricator levels on some of the ethylene projects that are coming.

And remember, when you think of Haynes, you almost have to think of ethylene as an input to manufacturing the types of products that use Haynes materials. And again, that's where our market manager kind of walks me through and say, hey, we're in the normal process of the evolution.

So summarizing it, I think we're just in a general very, very low-volume area for highly specialized nickel- and cobalt-based alloys in CPI. But we're also in that thing, we're in the early innings.

And I get back to when oil and gas fell apart 3 years ago, we were fine for 2 years, and then it just started hitting us late last year, and it has absolutely murdered us this year. So I think we've got to work through the pain. We're seeing the rig count has doubled from last year. The natural gas rig count has doubled from last year.

There's still a long way to go. I think we're at 900 North American rigs in total, and last peak was 2,000. I don't think we'll hit 2,000, but I think 1,200 is reasonable. I do. And I think we're just starting to build up, and then our types of products will follow after that. .

And one thing I'd add on to that is the base volumes of CPI -- because this quarter, keep in mind, we had very, very little special projects, but we still had an increase in volume in CPI. So that base business is starting to increase slightly, which is a good sign.

Not that we like the pricing that we're seeing, but it's a good sign that volumes are coming back. I mentioned the lack of special projects having a large impact on our margins from Q2 to Q3, but it's even more dramatic if you look at Q3 this year to Q3 last year.

The difference in special projects Q3-to-Q3 impacted margins over $5 million, so a much more dramatic impact when you look at it in that direction with the lack of special projects. .

And a question on that point. When you look at that $17.50 a pound in chem, which, quite arguably, is the lowest I've seen in a long, long time, I'm curious if that's price competition from maybe low across regions of the world as currencies had adjusted lower but now are kind of going the opposite way. .

It's more mix than anything, Ed. It's the lack of specialty projects, and it's the idea that what we are getting right now is the very lowest end of the nickel spectrum that we're bringing in. And there is definitely price competition in there. But most of what we've seen has been -- it's been U.S. manufacturer on U.S.

manufacturer as far as the pricing competition so far. .

Okay. Switching to aero real quick if I could. I think -- and correct me if I'm wrong, but I think in your capacity on the sheet business as well this quarter as you were last quarter.

As you -- as we move forward with that expansion, first, how fast can you bring that online? And two, what's the size of the backlog there that you could potentially clear in Haynes if you have that availability?.

We are in the late innings of the construction, kind of starting the commissioning now. So we've mentioned previously that our volume in production across that type of equipment right now is around 13 million pounds, maybe a little higher.

And with this new capacity, it'll go up to 18 million pounds, so a good, I think, 36 million -- or I'm sorry, 36% increase in production pounds. So I think that's going to take a while to ramp up. That would be selling out our additional capacity, so we'll see how we go down the ramp of that.

But we certainly do have a higher percentage of our backlog is against aerospace and again to those type of products than what we have right now. .

I guess another way to asking that question is what are the lead times on quoting right now for your aerospace sheet? And where have they been historically?.

We're quoting right now about 26 weeks on aerospace sheet, and some of our peers are -- they have much more capacity than we do. They're quoting in the 14 to 16. Now we do have -- as you know, we have a distribution network, and we stock material midway through.

So if it's a fairly common alloy, what I'll call market inventory as opposed to custom-made inventory, if it's a market inventory, we're still responsive. We're competitive with that 12- to 14-week lead time. And more importantly, we'll have it in the distribution centers to get out.

But just to let you know, Ed, too, right now, we are seeing great aerospace activity, but I can't really say that my transactional aerospace has really taken off would be the best way to put it. If XYZ Company is ordering 3,000 pounds every month, we haven't seen them really come in and say we need 4,000 pounds a month. We haven't seen that yet.

So we still think that's out there and that's coming. But I think, again, I think everybody reserves their place in the queue with the forgers. They'll start ramping up on our side shortly -- hopefully, shortly after that. .

And do you think the added capacity in the sheet market plays a big difference in industry pricing given the last comments?.

I don't think it will, Ed, on this. I mean, I think it's going to -- I think we're just in the bottom of that cycle right now, so you're seeing a lot of people being very competitive. Again, CPI and IGT more so than anything.

But I think as far as the aerospace, we've got a pretty good niche in there, more so than anything with some of the alloys we produce, the proprietary materials. There's a heavy bias towards the proprietary materials when we talk about our aerospace business. I think we're going to be in -- I'm really looking forward to when we have these capacity.

Like I said, we have a lot of moving pieces right now. We've got to get this annealing line up and running, and I'm pleased with where we are with that. The rolling mill has gone better than I anticipated, and we've got to get the LaPorte operations consolidated so we can be ready to go when we head into 2018. .

Our next question is coming from Phil Gibbs of KeyBanc Capital Markets. .

I don't know if there's much left after the 8 questions that Ed asked, but I'll try. The Allegheny Brackenridge asset may be getting its sea legs right now, Mark.

How much of that do you think is impacting the nickel product -- the nickel alloy market, rather, right now on the flat-rolled side?.

I think it'll be a new entrant. It might be the best way into some wider-width applications. But we've always had competition in there before. And if you think about it, Phil, for the most part, where we win those applications is with our service and especially with the value-added capabilities down at the cutting end side of the business.

So I think we're still in real good shape there. It is definitely, though -- it's not like somebody -- we've got our first competitor on some of these. Remember, the other mills can manufacture these products in wide width, et cetera, so we've always been forced to compete in these areas.

I'm hopeful that some like Allegheny will be more successful in winning a lot of these -- again, these larger-volume projects that we wouldn't have the capacity to produce anyway. And even -- I'll even say that I don't know for sure.

I'm getting beyond my -- I'm getting out of my lane a little bit, but I think maybe they'll be more successful, too, with some of these lower-end alloys that we don't manufacture that come in pretty big volumes. And now I'm talking more about applications that would go into this ethylene crackers and things.

But I think they might have an opportunity to fill up pretty good on those. .

I appreciate that.

On the next-generation engines, can you talk a little bit about where you're positioned on that, whether it's new alloys or how you expect to grow?.

Yes. If you're talking about seals and plug-and-nozzle applications or combustors, we've got alloys that go into those. We've got some newer high-temperature materials that are going to some of these applications. We've got a win specifically with HAYNES 282 on the geared turbo fan, the Pratt 1000 series.

So again -- and by the way, too, that's going to be for more than just sheet, those applications. Those are more towards a long product, which is an area where we have a lot of capacity. So that'll be very helpful to us as that ramps up in 2018.

But I think a lot of it is going to continue to be the usual skirmishes that ourselves, Allegheny, Special Metals have a lot on normal, I'll say, nonrotating aerospace components. And again, I think our big differentiator there is the value-added services that we offer, a lot of it on the aerospace side. .

One of your competitors, maybe not directly but indirectly, sees the jet engine market growing high single digits over the next 12 months in terms of year-on-year growth. And maybe that's more mix of OE and MRO. Curious as to how you guys see that outlook and if that's pretty much consistent with the 9% increase you see in the backlog. .

I think it's mid-single digits to maybe high single digits. I wouldn't go as high as a 9% or something like that. And remember, typically, long products usually has a little bit more content than the flat products do, the nonrotating components. So we'll see how it goes, Phil.

But we have a pretty good backlog right now in the aerospace side, and I can't say enough how much I'm looking forward to getting this cap line up and running and the -- so we can work the material through that we're feeding off the rolling mills.

And even once we get LaPorte running, once we get that fully integrated, I'm real excited about where we are, where we're set for the aerospace business. More importantly, I also look at the CPI and the IGT business. As I said, I need them to just come off the bottom a little bit, and I think we'll be in pretty good shape. .

Our next question is coming from Jonathan Brolin of Edenbrook Capital. .

You continue to sound optimistic about aerospace, and we understand why that is. But when you talked about what happened in this last quarter, I think you said that the volume was up 8-and-change percent but the pricing was down 7-and-change percent.

When do you think those start to move in the same direction?.

If you look at it, too, what happens in aerospace right now -- and we had a little bit of this last quarter as well. And really, what happened was it leaked into this quarter. We saw a real run on some of the lower-priced materials in aerospace late last quarter. And it really picked up the volume late last quarter, but it leaked into this quarter.

So you're really seeing just a lower price mix, not as many of our proprietary materials. So there's still cut parts that we're manufacturing, but it's like we were doing a lot of part-cutting for the real high-volume applications in the aero engine as opposed to the very niche-oriented applications.

Now one of those is related to a major manufacturer, who fabricates one of our proprietary materials, retired and essentially sold the business off to someone, so there's a transition going on there. So we'll -- and they bought a lot ahead 2, 3 quarters ago, which will then transfer to the new guy who's fabricating it.

And so we'll probably start to see that come back as we get later into this quarter but more as we get into the fourth calendar quarter and in the first quarter. So essentially, what you've seen is just a mix type of situation.

And as far as the volume change last quarter to this quarter, again, I think you're kind of within the margin of error when you look at that 2.2 million versus 2.3 million pounds. I'm looking more forward to once we get the new capacity running, and I think we can ramp that up. .

Okay.

And as you look at the backlog in terms of the quality of what's coming from aerospace, does that move more towards the higher-quality spectrum -- end of the spectrum? Or does that also contain some of this lower-quality mix that you've discussed?.

It definitely contains some of the lower-quality materials, I'll say, the higher-volume materials right now. But if you think about it, too, just in general, and you see it in our average selling price per pound, our aerospace business is clearly the one that typically has, in general, the highest proportion of proprietary or high-priced materials.

Where you really see the backlog make these tremendous moves in average selling price per pound is when we score these big specialty applications, which are typically in our chemical process area. For instance, we had a very large one a year ago.

The average selling price per pound of that material in that application was close to $200 per pound, and you can see where that made just a dramatic change in the backlog and the average selling price per pound in the backlog. .

At this time, I'd like to turn the floor back over to management for any additional or closing comments. .

one, a very difficult situation during the quarter that those of you who remember Francis Petro, Francis passed away during the quarter. So we offer our sincerest sympathies and condolences to Francis' family. He was a great leader for Haynes. And on the positive side, most of you saw we added Dawne Hickton to our Board of Directors.

I've known Dawne for about 15 years, and we're really looking forward to having her come on with her background in manufacturing and her financial acumen. I think she's going to be a real positive to all of us here at Haynes and the Board of Directors.

So again, thanks very much for your time today, and we'll look forward to updating you again next quarter. .

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