David Van Bibber – Controller and Chief Accounting Officer Mark Comerford – President and Chief Executive Officer Dan Maudlin – VP and Chief Financial Officer.

Edward Marshall – Sidoti & Company Phil Gibbs – KeyBanc Capital Markets Chris Olin – Longbow Research.

Greetings, and welcome to the Haynes International Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. At this time all participants will be in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to David Van Bibber, Controller and Chief Accounting Officer. Please go ahead..

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

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

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

Many of these risks are discussed in detail in the company's filings with the Securities and Exchange Commission, in particular, Form 10-K, for the fiscal year ended September 30, 2016. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that, let me turn the call over to Mark..

Thank you, Dave. Good morning, everyone, and thanks for joining us today. Hopefully, you'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.

Fiscal 2017 was a difficult year at Haynes. We finished the year with net revenue of $395.2 million, down about 2.7% from last year’s $406.4 million. Our net loss in fiscal 2017 was $10.2 million as compared to net income of $5 million last year.

Volume shipped in FY 2017 was up just under 1% to 18.1 million pounds against last year’s 18 million pounds. And average selling price in FY 2017, inclusive of our other revenue, was $21.81 per pound, down about 3.6% from FY 2016’s $22.62 per pound. I had a lot of good meetings with customers over the past two months, met with about 60 customers.

And I was just in Europe the last week for meetings. Most of the feedback was very positive. The notable exception was in meetings regarding the OEM side of the IGT industry. Overall, the feedback in aerospace is very positive.

That market has held up well and I think it's fair to say that our customers are expecting it to strengthen as we progress through fiscal 2018. Our tolling business is also doing well and likewise expected to continue to strengthen as we move into next year.

Our smaller markets like the energy related applications also did well in fiscal 2017, and they're helping us on the projects side of the business. On the chemicals side, we mentioned in the press release a pretty good quarter for booking some special project work. We're seeing better project-related order entry coming off of very low levels.

The base business -- and by the way, by base, I'm referring to the higher volume, the off-the-shelf transactional activity, that base chemical business is still slow. Although, as we've mentioned, we do see some larger volume lower-priced project work being quoted in the marketplace for pipeline applications, which we're hopeful will be [led] [ph].

I think this will be good for our whole industry if these applications start to flow through again. Finally, in industrial gas turbine, much like the chemical industry, we saw a lot of M&A activity over the past year or so. And the primes are pretty much trying to get their house in order and adjust their capacities.

There are some pretty big restructurings that are necessary and they're happening and that will disrupt the OEM market, but it'll probably result in somewhat stronger MRO business. Over the past three years, just to give you an idea, remember, we've talked about the IGT business.

About 60% of our business has been MRO in this market, and we'll get into all of this a bit more detail as we touch on each of the market segments. As we expected, the fourth quarter was another difficult quarter in a very difficult year.

But I believe the work we've done to develop new applications and the work we've done to drive out waste are paying off. Comparing sequentially to the third quarter, revenues, volume and margins all increased, Dan will have more detail for you on this.

And perhaps more importantly, the quality of our bookings in the quarter – and I should clarify that the quality of our bookings late in the quarter, we saw a strong order entry as we got later into the quarter. As you know, early in the quarter, we have a lot of the summer holidays, especially over in Europe.

But the quality of our bookings late in the quarter was very good. We're not out of the woods yet. We've said before and it still holds, we expect the current quarter to also be very difficult, especially with the short holiday weeks and customers doing all they can to get their balance sheets in order for year-end.

But I believe we're finally starting to see broader activity and some strengthening in some of our key markets. Moving to those end markets. Net revenue in the aerospace market for fiscal 2017 was $192.5 million, down 2.5% from last year's $197.4 million. Volume in this market was 8.8 million pounds, up 1.5% from last year’s 8.7 million pounds.

Average selling prices into this market for fiscal 2017 were $21.76 per pound, down about 3.9% from last year’s $22.64 per pound. The aerospace market comprised about 48.7% of our net revenues in fiscal 2017. Customers are reporting an expectation for increased activity as we move through 2018.

Sentiment is very bullish around demand for next-generation engine platforms and virtually every customer I met would express an expectation for expedited material as we enter the New Year. In fiscal 2017, we saw some strength for higher volume alloys.

And we mentioned this in previous calls that the aero activity was good, but the mix wasn't as strong as we would have expected. In fact, we saw some declines in the higher-value products. Already this year, we're seeing a reversal in that trend as we're seeing heavier request for expedites in some of our higher-value proprietary grades.

Our backlog in aerospace increased about 13% during the year, although it fell slightly about 2% in the last quarter as we had our strongest shipping quarter of the year. Broadly, the signs are very positive for this market.

Several customers indicated that lead time expansions that they're seeing in the forging supply chain and in some titanium-related applications had given them some concern. And as I mentioned, we're seeing a lot of expedite requests already this year, along with some better activity in some of our proprietary grades.

We're still heavily booked on the mill in the aerospace market and we have some catching up to do. We've got our new flat roll products upgrades completed and they're up and operating in our plants, along with the tubular expansion that we were working on the last few years.

We expect to have our key North American finishing and distribution consolidated into our LaPorte facility by the end of next quarter. So we feel that we're more than ready to handle the anticipated demand increases from our key accounts. Sales for the chemical processing industry comprised 17.8% of our total sales in the year.

Net revenue in CPI for fiscal 2017 was $70.5 million, down 2.6% from last year's $72.3 million. Volume in this market was 3.2 million pounds, up 12.3% from fiscal 2016, 2.8 million pounds. Pricing for fiscal 2017 was $22.28 pound, down 13.2% from the prior year and indicative of the lack of specialty project applications in 2017 as compared to 2016.

It may still be too soon to say, but this market area may be starting to move off the bottom and we're hopeful that this trend continues. I think you may have noticed in the 10-K that we shipped over 900,000 pounds into the CPI market in this quarter, which is about 50% over what we shipped two quarters ago.

And it is our best quarter in over two years. And just framing it for you, 900,000 pounds is still about 30% below the levels we were shipping in the 2013, 2014 year before the crash in oil prices. Perhaps even more encouraging in this market, new project work is starting come in, albeit in smaller project quantity levels.

We saw excellent order activity late in the quarter for our HASTELLOY B-3 alloy and applications that have been dormant for roughly two years or more. I think we mentioned, we were quoting this applications in our last call. We're also seeing some stronger heat exchanger quotes and activity in other alloys.

And as we mentioned the last time, we're seeing better activity out of the Asia Pacific region. Also we're seeing some pipeline project work starting to come back to life.

These pipeline projects are typically for higher-volume, lower-priced alloys than where Haynes would normally participate, but they're usually a good indicator for the industry and there's always some specialty applications associated with these pipelines that require our materials.

Typically, they're in welding applications or fitting applications, and frequently, we see some applications inside there for some of our proprietary materials. In addition, we're starting to see some new applications and designs coming out of pharmaceutical industry, possible another indicator that overall activity, globally, is starting to pick up.

There've been a lot of consolidations in the chemical space over the past three years and, subsequently, quite a bit of rightsizing of capacities and delays in new project work.

It's still too early to say if we'll see a sustained return to investment in new applications and systems, but the last three months activity has been excellent as compared to roughly the prior 15 months. On top of the higher 900,000 pound shipping level in the quarter, our backlog in the quarter improved 28%.

But here's a little bit of my paranoia kicking in, remember, that that's off of a very low figure, of a very low levels. Nonetheless, I think it's indicative of the activity we saw in the quarter, especially late in the quarter. And I think the recovery here is going to be choppy. It's going to be choppy with respect to mix.

I think it's going to be very choppy as a result, with respect to pricing. But I was very pleased to say – see the higher shipping activity, the higher project activity, the higher order entry activity and the higher quote activity that we saw in the last quarter. Moving to industrial gas turbines.

Our sales in FY'17 into this market totaled $61.5 million, down about 9.6% from last year's $68.1 million. In FY'17, IGT accounted for 15.5% of total revenue. Volume shipped in FY'17 decreased 10%, £4.4 million pounds from FY’16's £5 million pounds. Average selling price was $13.70 per pound. It's roughly flat with last year's $13.71 per pound.

And looking in our key markets and having discussions with our key customers, I believe this market maybe our biggest concern entering fiscal 2018. In short, customers associated with the medium and large frame OEM side of the business expect another down year.

And I think we're seeing a lot of the restructuring of the business at the OEM level in the press right now. Those associated with MRO business have been more optimistic. The phrase "urgent maintenance" came up more than once in my discussions with customers. On smaller-frame applications, there also appears to be more optimism.

And in fact, some have said they are seeing demand increases from applications associated with pipeline driver systems, and it's probably the first time we've seen increases in that submarket in the past two or three years, again, since we saw the crash in oil prices. Overall, the news out of GE and Siemens, is pretty negative.

But I think most people expected it after the consolidations we've seen in this industry and the order entry levels that have been reported at the OEM level. As a result, we expect this business to remain very competitive and very challenging in FY’18. We've done excellent work on new applications and penetrating new accounts around the world.

I think I mentioned last time that even in this difficult OEM market, HAYNES 282 alloy managed to grow about to roughly 5% of total sales or sales in this market indicative of the new application wins for proprietary alloy. However, we still feel the overall macros for this market will be difficult next year.

And again, remember, right now as we've defined it over the last few years, we look at the MRO market being roughly 60% of our business, the OEM market being about 40%. And we're going to see – I think we're going to see a lot more weakness in that OEM market in the next year.

But I think it'll be offset a little bit by increased activity that we'll see in MRO and even – we may see some increases coming out of the smaller-frame turbine side of the business. Finally, our other markets and other revenue accounted for 17.9% of sales in the year. Net revenue of $70.7 million was up 3.2 % over last year's $86.5 million.

Product sales were solid in the oil and gas and other energy-related applications. And our tolling business was up about 17%, indicative of strengthening in the broader industrial economy. By the way, just to give you an idea, about 15% of last year's revenue in this area – and by that I mean, at fiscal '16.

About 15% of fiscal '16 in this area, was do the three large nonrepeating application, that's about $10 million of the revenue that we had replaced in this relatively small market – in a tough market for new applications.

But I think it gives you an idea of just how critical our incubator of new projects is and new applications is as we enter any fiscal year. This year, this area, along with our CPI business is most dependent on new application and project wins. Right now, as we've mentioned, we have a good incubator.

And as I mentioned earlier, we had a very good quarter in the fourth quarter of 2017 for converting projects into orders. Although, just to note for you, most of that application activity that was converted into projects and converted into orders in the quarter was in the CPI business and in the aerospace business.

On our operating side, we're up and running with our flat roll upgrades in our mill, primarily doing breakdown processing as we get our operating procedures in place. And we're already seeing improved flow of product. I'm sure there'll be bumps in the road, there always are within equipment.

But between the upgrades we've done in our heavy plate area and tubing area and flat roll products area, we've had very few disruptions. Same thing in our IT platform, the consolidation of our largest North American distribution center into our finishing operations in LaPorte.

Both projects are very near completion and once completed, we'll be optimizing our product flow and service capabilities to our customers. Great feedback from our folks in Europe, by the way, on the IT platform.

Excellent system for linking information throughout the entire process, minimizing duplicate transcription and opportunities for errors as well as having the whole company essentially linked on one system now. We still have more we can get from the system in optimizing our speed to customers and it's the same story with the – with LaPorte operations.

We feel centralizing these operations will take a week or more out of our response time to key accounts. And it should help further optimize our material flow. With that, let me turn it over to Dan for details on the financials..

Thank you, Mark. As we previously anticipated, this was another challenging quarter financially. Continued headwinds on our top line revenue, volumes and pricing reflect low specialty application projects this quarter, sluggish transactional business and the challenging competitive pricing environment.

These were difficult headwinds during the quarter, but we stayed focused on execution and we're beginning to see some positive indicators. When viewing the fourth quarter results sequentially comparing to the third quarter, we increased volumes, increased revenue and increased gross margins.

Revenue in the third quarter was $98 million and increased sequentially in the fourth quarter to $100.8 million on higher pound shipped. Sequentially, revenue was up in the aerospace market and up in our chemical processing market. Also gross margins improved 200 basis points from 3.7% in the third quarter to 5.7% in the fourth quarter.

The sizable portion of this margin improvement was due to the previous quarters' inventory valuation adjustments for lower of cost – or market in slow-moving reserves in Q3 that did not repeat in Q4, which impacted margins by $1.5 million in Q3. Also contributing to the improved Q4 margins were better volumes and a more profitable product mix.

Gross margin dollars in Q4 were $5.8 million, which represents an improvement of over $2.1 million from Q3.

However, comparing to last year, gross margins in the fourth quarter of fiscal 2017 as they compare to the fourth quarter of the year before, were down $7.6 million, primarily due to less specialty application projects, a lower value product mix and higher pension expense hitting cost of sales.

SG&A cost, combined with the research and technical costs, were $11.96 million in the fourth quarter of fiscal 2017, which is $300,000 higher than last year's fourth quarter due to a $700,000 unfavorable impact from foreign currency and a $100,000 unfavorable impact from pension cost hitting SG&A.

This was partially offset by $500,000 of favorable savings from spending controls and cost reductions. For the full year, SG&A in fiscal 2017 was $2.8 million higher than fiscal 2016, primarily due to the change in the impact from foreign currency of $2.1 million and the higher pension cost hitting SG&A of $400,000.

The effective tax rate for the quarter was 42.6% and for the full year it was 40.8%. The net loss for the fourth quarter of fiscal 2017 was $3.66 million compared to last year's fourth quarter net income of $3.16 million. The full year net loss was $10 million – $10.19 million compared to last year's net income of $5 million.

A few additional items impacting operations and costs include the following. First, our strategic action to expand our value-added capability that our service center in LaPorte, Indiana includes moving operations from Lebanon, Indiana to LaPorte at an estimated cost of $2.3 million to $3.6 million.

We have charged $1.4 million thus far to cost of goods sold and could charge an additional $2.2 million in fiscal 2018 as we complete the project. Second, our upgrade to the cold finishing equipment designed to increase ship capacity in shipments in the aerospace market is beginning to ramp up.

Production in the fourth quarter of this product form increased nearly 9% from the third quarter. Mill inventory levels have elevated during the construction and commissioning phase and are expected to improve in fiscal 2018.

Third, the significant increase in pension and retiree health care expenses, which increased $10.8 million pretax over two years, that's $4.4 million in fiscal 2017 on top of $6.4 million in fiscal 2016, this had a significant unfavorable impact on earnings. And it was primarily in cost of goods sold but some in SG&A.

The good news is, the September 30, 2017 valuation was solidly favorable, driven by higher interest rates and better-than-expected return on assets. Our long-term liability on the balance sheet for pension and postretirement benefit declined $46.8 million and our fiscal 2018 expense is expected to decline by $9.2 million.

Fourth, raw material prices are beginning to increase. While the market price of cobalt has increased dramatically, cobalt usage in our overall shipments is below 10%. Nickel usage in our products is more impactful at approximately 50%.

Looking at some recent history for nickel, the average LME price for nickel starting in fiscal 2014 was $7.51 per pound and declined 20.9% to $5.94 per pound during 2015. Then declined an additional 30.3% to $4.14 per pound average over fiscal 2016, and then moderated – increased slightly to $4.7 – I'm sorry, $4.70 over fiscal 2017.

The LME price for the 30 days ending September 30, 2017 was $5.10 per pound and has continued to rise through October and November. We utilized FIFO inventory costing, therefore, this increase provide the tailwind for margins in 2018 if it continues. Backlog was $177.3 million at September 30, 2017, a decrease of approximately 2% from June 30, 2017.

Backlog dollars decreased during the fourth quarter of fiscal 2017 due to lower order entry early in the quarter, which is typical during the summer months, partially offset by better order entry late in the quarter especially for our patents at HASTELLOY B-3 alloy.

Beyond the quarter-end, backlog at October 31, 2017 increased solidly to $185.9 million. Cash flow and liquidity. Net cash provided by operating activities was $13.1 million for fiscal 2017 and capital expenditures were $15 million.

Inventory increased over the fiscal year, primarily due to elevated levels from the CapEx project in cold finishing, our earlier mention. Our cash balance was $46.3 million at September 30, 2017 and our revolver balance remained at zero borrowings. Outlook for next quarter.

We expect the current soft market conditions in industrial gas turbines, chemical processing and high-value specialty applications will continue in the near term although we continue to be confident in the strength of aerospace market and the improving outlook in calendar year 2018 for chemical processing specialty application projects.

Our first quarter results are typically impacted by holidays, planned maintenance outages and customers delaying shipments beyond calendar year-end. These issues, combined with the lack of visibility on transactional business, make near-term guidance difficult.

Our view at this time is that revenue and earnings in the first quarter of fiscal 2018 will be lower than the fourth quarter of fiscal 2017.

While we continue to push through these periods of unfavorable financial performance, we are encouraged by the improved order entry rates and backlog levels, especially in certain specialty application projects utilizing our patented alloys.

This combined with strengthening raw material prices, are favorable signs for improvement in calendar year 2018. In addition, the CapEx investments we've made over the past few years provide ROI potential for operating leverage to be realized if volumes improved in the future, which is our expectation.

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

Thanks, Dan. I'm not the greatest guy in the world that – putting a shine on a bad year. And I think the best thing we can say about FY 2017 is that it's over. I was extremely disappointed with our results. We're still in a difficult marketplace. And I think there'd still be challenges in the next quarter or two as we push to get back to profitability.

As Dan mentioned, some very positive signs out there with backlog and nickel. And I think it's important to remind everybody too, it usually takes us a quarter to filter through some of the lower-priced items as we start to move into the higher-priced mix as we get into these rebounds.

At least what we're hoping is going to be a rebound in the business and appears to be a rebound from what we're seeing in the order entry. I like the volume increases and activity we're seeing in the CPI business. I'm still concerned about the industrial gas turbine business. I think it gets worse before it gets better, especially on the OEM side.

So we have to make sure we're in front of these customers in trying to get every available ounce of business. And especially, I think, we're in real good shape and we'll continue to keep fighting at the secondary period, the MRO levels, which I think could very well have an up year.

In our other markets, we're seeing better activity on the energy-related applications. But I need to see more project work converted into orders. On the tolling side, we're seeing good activity and appears to be increasing. I think we're very well positioned for aerospace in FY 2018.

The work we've done to upgrade our operations and streamline our processing should help solidify our position with our targeted key accounts. The meetings I had over the two months with customers reinforced my confidence in this area.

We're seeing stronger project activity right now that only comes from a lot of hard work from our people in the plants and our applications people getting in front of key customers to help make their ideas into a reality.

Our investments in tubing, the flat roll products capabilities, the IT platform, centralizing North American service center operations are just about complete and should further entrench us in our customer supply chain. By the way, we had a record year in our tubular products area for our aero tubing output, that's a lot of tubing footage to ship.

Just when a – a couple of years ago, if you remember, we're killing customers with our extended process lead times. And I'm excited to have the flat roll work essentially up and running. You know our story there. We used to have about an 8 million pound per year capability on that flat roll product, our core product.

We upgraded it and we started shipping about 12 million pounds per year. Then we modified some equipment, did a couple of tweaks and some upgrades and we got it to 13.5 million pounds. And now we feel at this mix, the current mix that we're running through the product that we're probably at a 15 million pound a year capability.

And with a little help from things like the CPI market, and then maybe even in the gas turbine market as the MRO business improves, we can get that up to 17 million or 18 million pounds. I like the leverage we get when volume returns. And we've discussed that on previous calls.

We've also discussed where we are in this current cycle, in our typical timing of a couple or three quarters to move out lower-priced mix of products as we start to see some pricing relief. Nickels, finally moving up, as Dan mentioned.

Finally, our balance sheet remains very strong and most of the heavy lifting internally as far as equipment reinvestment is complete. We still have the occasional furnace rebuild here and there, which will be disruptive. But I think the real heavy internal reinvestment has set us up well as we look ahead.

Also with the large internal CapEx projects largely behind us, that will afford us the opportunities to look for profitable acquisitions and add to our capabilities to better meet our customers' requirements. With that, let us – let's open up the call to your questions..

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Edward Marshall with Sidoti & Company. Please proceed with your question..

Good morning, guys..

Good morning, Ed..

Good morning, Ed..

So post quarter, I wanted to talk about the – I guess, two things. One, I wanted to see what your transactional business kind of look like in the first couple of weeks in the first quarter here.

And then secondly, as you talked about the backlog at 185, what was the market that was driving that?.

Yes. Ed, on the transactional activity, it's still very soft. I think we used the rule of thumb for people who might be new to the call. We used the rule of thumb that we enter every month anticipating about 30% of our bookings that come – and during the month.

We defined transactional activity as essentially orders that are not in the system that come in and go out within 60 days. And so you can imagine, as I said to you, that if we enter a month then we expect to do $40 million worth of business in that month.

We typically enter that month with about $27 million or $28 million booked, and we expect another 30% coming through, 30% or 40%. And when times are really good, that number goes up to 40% and sometimes over 40% of transactional activity. Ed, just to let you know, in October, it was still 20%.

So we're seeing better activity, better bookings coming through. Good order entry coming through, but a lot of it is continuing to be, I'll say, planned order entry, blanket order entry, people getting their orders into the queue. So they're coming in for – we'll get orders that are coming in October for delivery in February or March type of items.

And those are typically, as you can imagine, those are reorder points in the aerospace supply chain or chemical project type of applications.

Very little – most of our transactional activity when it is really going well is for kind of those off-the-shelf types of projects that are happening in the chemical space or industrial gas turbine, especially in the MRO side of the industrial gas turbine business.

And the MRO side of the industrial gas turbine business has not been bad, but it's been very spotty. If you remember, a couple of quarters ago, we had a quarter where we did 40% over of what we've been doing in a normal quarter.

And the only reason we were able to do that is we had the material on the shelf, and we were able to handle the transactional side. But so far, the transactional activity has still not come back with any strength. It's still hovering around that 20% mark of the revenue monthly.

And as I’ve said, what we’ve seen then as a result is we’re seeing very good order – aerospace order activity. And just to let you know too, the backlog that Dan cited for you, I still think there’s $5 million to $10 million of aerospace orders that are just miss-timed that we’ll see coming in.

So I think the backlog is actually a little bit stronger than what’s showing up at this time. And we’ll probably see some of those orders come in late in the quarter. But again, these are short week months than the rest of the quarters. So I don’t expect a tremendous increase overall in backlog.

But I do think the aerospace added a backlog right now, it’s a little lighter than it should be.

Did that help you out?.

It does. And so to follow up on that, I wanted to talk the pricing. I mean, so a lot of price increases in the industry. I noticed that you guys haven’t put out a press release yet, but I imagine you’d. I think you did talk about reducing kind of discounts in the past, so there’s been a lot of surcharges, nickels up again.

Are you kind of saying that we’re not seeing customers kind of react to that price increase, try to get in front of anything that’s coming down the pipeline? I mean, is there – just not a lot of demand there? Or – help me – what’s your kind of thought process maybe at some of your customer level?.

I think it’s almost bifurcated right now, Ed. I do think the strong order entry we saw in September and October might be some of the people who can project their demand, aerospace people, getting ahead of price increases and getting ahead of nickel increases.

But I think the situation on the – I’ll say, the larger chemical business, the more transaction-oriented chemical business, it’s just indicative of how little of that business is out there. But I will also say, Ed, too. You’ve asked me in the past, is it market share, et cetera, et cetera.

And remember, my reply on that has typically been, there are some prices being offered out there in some of the chemical applications that are just so low that we aren’t participating in some of those opportunities right now. I just came back from Europe and I don’t think – I still don’t think there’s lot we’re missing.

But there are some very low prices being offered out there, which might also indicate why that transactional activity is still running in the 20%. We’re just not seeing – we haven’t seen the prices rebound in the chemical industry yet the way we’re seeing a little bit of price relief in some of the other market areas.

Okay? And as far as price increases, we’re – as you know, we’re pretty quiet about those things. Yes, we’re passing through things like the electrode surcharges. And we are eliminating some discounts in some areas where the mill is busy would be the best way to put it.

So anywhere that the mill is busy, you get into that process of essentially buying your way into the mill..

And then finally, just to clean up. The $1.2 million, Dan, that you mentioned with the LaPorte move, charge equals margin.

Which quarter did that hit?.

It was throughout the year but it was probably heaviest in the second half of the year and probably between that, heaviest in the fourth quarter..

Got it. Thanks very much guys. I appreciate it..

Thank you, Ed..

Our next question is from the line of Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question..

Hey, good morning..

Good morning, Phil..

Mark and Dan how are you?.

Good..

Good. Question was just on fiscal 2017. When we look at the full year impact from raw material timing, so call it the FIFO mismatches between nickel and cobalt and realized surcharges in timing.

What was that – roughly full year impact for you in 2017?.

Well, for us in 2017, it wasn’t as dramatic. If you look at nickel on average over the full year, it increased slightly. So I would say, there was probably some impact but have been immaterial. We certainly felt the impact much greater last year in 2016.

In 2016, we quantified that to be $13 million, and then we kind of entered the year pretty much nickel-neutral. And it went up and it went down. But overall, it wasn’t, I would say, a material impact now. With nickel going up in the beginning of our fiscal 2018 year, I think that’ll be a nice tailwind to margins.

Nickel driving up to 5.50-ish will be nice when it was previously in the mid-4s.

Did that help?.

Okay. That’s helpful. And when I looked at your K last night, just in terms of trying to piece out some of the cost of sales impacts between raw materials and other, the non-raw material cost of sales to us looked up about $15 million year-on-year.

I think you pointed to the pension being about a $4 million impact and the LaPorte rationalization piece being a little over $1 million, so call that maybe a third of the year-on-year increase in that number.

Was there any other spots in the business from a non-raw material COG standpoint that were – that would have explained that difference given your volume is relatively flat that you have heavier startup costs or electricity, consumable costs? Just trying to understand why that was up so much..

Right. So overall, our base business volume was up slightly. I would quantify our base business year-over-year to be up about 382,000 pounds, which would increase costs by about $6.4 million. Now the big deduct there is special projects.

So I would quantify this year's special projects to be about 234,000 pounds less than last year and impacted COGS pretty significantly as well. But overall, base volumes are up a bit and, of course, you've got back up those special projects as well. So that would be a big driver on the cost of sales.

Obviously, with the CapEx projects in the cold finishing area, that, I mentioned the elevated kind of inventory a bit, it also – there were some startup costs and some disruptions related to that as well.

Probably not too material but that would have an impact on cost of sales as well as some variances as we get that lined up and running as we get the scrap rates normalized and that kind of things. So that has some impact on cost of sales as well..

Okay. Great. And then, Mark, on the outlook. I know you said Q1 is going to be tough, typically lower shipping days, I totally understand.

Any line of sight in your mind with the backlog improvement that we've seen thus far? And it sounds like mix at the margin is getting a bit better in both the aero OE and chem processing on some of these project – some of these projects.

If you had to take a stab right now, would you think that you'd be back in the block in the first calendar quarter here? Or is it going to be more so in the middle of the year in your mind..

Yes. We don't give that forward guidance, no. But if you remember, last quarter, we kind of went out and said that we're going to have two tough quarters and we're sticking to that. I need to see the transactional business and what happens there but I think you know. Look, we're pretty focused, right – 2016 – fiscal 2016, we saw the storm coming.

And I think I've said this to you before, we really kind of went to work immediately, trying to take cost out of the operation without blowing the place up. And we didn't do a good enough job, might be the best way to put it. We didn't expect margins to drop the way they did. We'll see how it looks as we go into the new year, Phil.

That is obviously – that's the target and get this thing swinging around to profitability. And I like the way the order book looks right now, but I'm very paranoid about that transactional business and what happens after the new year. I don't like seeing transactional business only at 20% of the mix. I want to see that improve a little bit..

You said typically that's about half the mix or 40% of the mix? Is that right?.

In transactional? When we enter a month, we expect 30% of our business to come in and go out essentially that same month. And lately it's been 20%..

Okay. Thank you. .

[Operator Instructions] The next question is from Chris Olin with Longbow Research..

Good morning. So question. You probably saw the leap delivery targets come out from GE on Monday, some pretty strong production goals.

I'm – can you remind us if you have any content on that particular engine?.

Absolutely. And just to give you an idea, Chris, when you get into things like the wind static components in the engine. So we're not in the rotating. And so I remind people on the static components since ourselves, Allegheny and Special Metals are essentially going through either direct into customers or through distribution.

And there's a myriad of manufacturers, one guy does combustors, another guy does plug and nozzle, another guy does rings, another guys does seals. And there's 10 of these guys in each of those sub-component manufacturing areas. And there's a myriad of alloys.

You could say on essentially Pratt aircraft, it's – or Pratt engines, there's a lot more waspaloy; and in GE engines, there's a lot more 718. But we're all competing for those typically – for those applications inside on the static components. And each of us is relatively strong with our series of customers.

We compete and skirmishes all the time on pricing and delivery, et cetera. But that's typically how that whole thing work. So yes, we have – we continue to have content on the leap just as we do on the legacy, the CFM56's or if you want talk about the new Pratt engines.

Now the big difference would be on the new Pratt engines, that's where we do have the proprietary alloy HAYNES 282 alloy to specify where it's displacing other materials, some of it, which was our material, our 718 going into those applications.

But it's also displacing some competitive 718 going into those applications and other alloys, just to give you an idea. But we are all constantly in skirmishes with each other at various levels of the supply chain for applications on these static components.

And I think you know, the rotating components are still – it's Allegheny and Special Metals, but then instead of Haynes on the rotating side, you'd have Carpenter in there. So there's really three major competitors in each of those areas inside the engine, the hot sections of the engine..

Okay. That's helpful. So just kind of shifting gears a little bit. I apologize if you said something early in the call, I might have missed it.

But did you give an update on where we are in terms of the special project revenues, kind of where we ended in 2017? And maybe any help on how we should think about modeling that for fiscal 2018?.

Dan, do you have that?.

Yes. The way we quantify special projects over the course of the year, we had about, what we would say, around $15 million in revenue in special projects. And to frame that a little bit, the same kind of definitions of the year before was about $32 million. So essentially, it was a big cut in half this year.

So definitely, an issue with specialty application projects. And in this year, it was very skewed to the beginning of the year. So Q1 and Q2, pretty heavy, I can give you the numbers, $9.4 million in Q1, Q2 I have about $3 million that would call special projects. But then in Q3 and Q4, it's just $1 million, $1.5 million per quarter.

So much lower levels than we've seen in the past. And going back even further, if you go to 2015, we quantify that to be – special projects to be over $50 million. And 2015, we had kind of great special projects every quarter over the whole four. And then in 2016, it was moderate in Q1, Q2 but heavy in Q3, Q4.

And then FY 2017 pretty low in one and two and really low in three and four.

Does that help?.

Yes.

Any thoughts on 2018? Could it be back to that $30 million level?.

Well, we are feeling good about the B3 coming back to life that Mark mentioned going in the backlog. And we're feeling pretty good about the pipeline of specialty application projects. It's hard to say if those become wins and if the – and when they do, when they're going to ship. So a lot of times – these are kind of long-lead-time-type items.

So that could be – if we won something today, we may not even ship that until the beginning of 2019. So it really depends on the cadence of the shipment, so that's a hard one to forecast..

Yes. Chris, just give you an idea too. A number of these projects, specially if they're energy-related are frequently government money, government-sponsored, not just U.S. but around the world. And so you can have a project that's pretty much done and the engineers who told you that the orders coming through.

And all of a sudden, you hear about a budget thing or – all of a sudden, just the order doesn't come through for six or eight months. And we had a huge project a couple of years ago that was exactly the case. We were expecting it to come in probably three quarters before it really came in.

And it was a situation where – a budget funding type of situation. So we're very reluctant to ever go out and say that we know this project's coming in and that project's coming in.

In fact, we have one right now that we're dealing with a company overseas, not a huge project, couple of million dollars, and they're looking at going to a different alloy because they didn't like the expensive – one of our proprietary materials.

And it was interesting, our engineer came in – to me and said, "Don't worry, we'll get it in two years because for what they've designed, as far as the operating parameters, it won't fail catastrophically, but it will fail." And they'll have to come back to us, which is another thing that happens sometimes.

We think we've got this project locked up and they go to an alternative material, and a year later, two years later, they're coming back because there was a failure in the operation, maybe the product that they put into place didn't last as long as they have anticipated it would. Okay? I hope that gives you a little bit of color on it..

Yes. I guess the reason I asked it is you had that the hurricane in Houston and a lot of your CPI-related customers are there, and I imagined there are some reconstruction going on.

Would any of that be considered special project? Or would there be a benefit from that kind of rebuild?.

They will be special projects when they come in. And it's funny, we met with some investors a few months ago, and actually, one of the investors had charted that kind of thing out and he said, looking at this type of activity, I don't know. This is strictly qualitative information.

One of our investors came out and said, yes, it's usually nine months after these things that you guys start to see order entry for these projects, these replacement projects come in. So it was interesting to me to hear that from one of our investors that it goes to that level of charting this activity for us..

Okay. The last question I have for you, Mark, and it’s a little more abstract. I’m just kind of interested in your views. Are you changing your thinking about titanium supply as it relates to this kind of risk of Russian sanction, and potentially overlapping VSMPO.

I mean, are you locked- in with your supply? I mean, does that impact your tubing business at all? Any kind of thoughts will be helpful..

Yes, we’re locked-in. We’ve got a contract now through, I think, it’s 20121. So I think we’re in good shape but it’s – clearly Chris, if you – just larger picture titanium, you’re hearing a lot of rumors about that type of thing. I’d – me, personally, I don’t think it’ll ever be embargoed or anything like that.

But I do hear people essentially saying they are looking at domestic sources or European sources other than coming out of Russia..

Okay. Thanks a lot..

Your first question is from the line of Edward Marshall with Sidoti & Company. Proceed with your question..

I think I know the answer to this, but I’m curious to what you guys think. Last year, you talked about $32 million in special project work this year was $15 million. So basically cut in half.

As I look at your chem processing revenue for the year and volume, for that matter, it’s not down that much, maybe $2 million or so in the revenue line, up actually on the pound. You talked about transactional that’s been relatively weak in that.

Have you just accepted a lot of very, very poor margin business? How do I think about kind of the revenues in that space? And then ultimately, as we move into 2018, do you continue to take that type of work?.

Yes.

If you look at it, Ed – I mean, when we – I guess the best way to look at it is when we have that baseline volume coming through in the CPI, and what you’re really getting in with the lack of specialty projects that we saw in the last half of the year, you’re getting a – I think you’re getting a very good view of what average selling prices are for that higher volume, more traditional chemical process industry applications.

The higher volume alloys, the C series alloys, those types of things. So when you normally see it – and we have our projects mixed in there as well, you’ll see that average selling price go well north of $20, whereas lately – gosh, I think the last quarter, it was like $17.50 and this quarter was $19 and change maybe.

But – that’s giving you a better view of what that baseline chemical business looks like without the large projects. And we’ve talked about this before, we need that baseline chemical business coming through.

That’s the stuff that helps keep the lights on and works well for us getting towards that 5 million pounds per quarter type of number of 5.5 million pounds per quarter type of number where we start to make money, we have appropriate absorption, et cetera.

And I think I’ve said to you in the past, when we start to make hay is when we’ve got that good baseline volume coming through and we have some of the special projects mixed in there. And if you look at it over the last two years, I’ll say, 2016 and even in the early 2017, we didn’t have the baseline business.

I want to say, it was two quarters ago, we did 600,000 pounds in CPI something like that. I mean, that’s just terrible baseline business, and we didn’t have the chemical business. And so 2016, we had the specialty project coming through without a lot of baseline.

And 2017, we didn’t have specialty project but we saw a strengthening in the baseline going from that 600,000 to 900,000 in this quarter. But you really can see the stark differences in that baseline pricing compared to when we have a couple of these big specialty application wins..

And one thing I’ll to add to that, Ed, is be a little bit cognizant that special projects are not always in CPI. We have special projects as well that can fall into the other markets category. So keep that in mind as you analyze that, but as Mark mentioned overall, our base volume while it’s getting a bit better, 18.1 million pounds is extremely low.

Last year, it was 18 million pounds, but prior years to that, it was well into the 20s. So we’re still experiencing this very low volume and that hurts absorption, that hurts everything and especially when there is competitive pricing on some of the commodity great alloys. So it’s painful to the margin line..

Got it. Thanks guys..

Thank you. At this time, I will turn the floor back to management for closing remarks. .

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