David Van Bibber - Controller and CAO Mark Comerford - President and CEO Dan Maudlin - Vice President and CFO.

Edward Marshall - Sidoti & Company Phil Gibbs - KeyBanc Capital Markets.

Greetings. And welcome to the Haynes International First Quarter of Fiscal 2018 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this call is being recorded.

It is now my pleasure to introduce your host, David Van Bibber, Controller and Chief Accounting Officer. Thank you. You may begin..

… 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, 2017. 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.

As you saw on the release, our order entries strengthen quite a bit during the quarter.

The momentum we talked about in our last call in November has continued with stronger specialty project orders, particularly in our chemical processing area, along with good oil and gas, and some other energy-related special projects and applications in our other market area. We also saw strong booking activity in aerospace market during the quarter.

I will touch on these as we get into the markets, but the net results is that our backlog is now over the $200,000 -- $20 million threshold. I think it’s also important to note the uplift we are seeing in the commodity prices.

As we mentioned in the last call, we started pulling back on price discounting and now we are starting to see some better acceptance of higher pricing in the marketplace.

We are still working through some lower shipping volumes and lower price products within these volumes, but I think it’s fair to say the turnaround in several of our key end markets is starting to take hold. Moving to the first quarter results, net revenue was $89.7 million, down 3.9% from last year’s $93.4 million.

Notable on this number is that we had a very substantial specialty project a year ago that more than made up the difference here, without that specialty application the remaining business was actually up about 5%.

Our first quarter is always impacted by holidays and planned maintenance shutdowns, and customers managing their balance sheets for the end of the year. But the big difference this year and I think we outlined in our calls in August and November was that we had very little in the quarter as far as the high priced specialty applications.

We are also still, as I mentioned, flushing through some of the lower price products we booked during a very difficult 2017.

Volume in the quarter was slightly lower than last year by 1.5% at approximately 3.9 million pounds and pricing in the quarter was off about 2.5% from a year earlier, again reflective of the lack of specialty project applications.

As a result of this along with the tax law change, the net loss in the quarter was $22.5 million as opposed to a loss of $672,000 in the fourth -- first quarter of 2017.

As we mentioned in our last call in November, we won some specialty applications recently and some high-end applications that have been relatively dormant over the past two plus years especially in our chemical processing area are becoming active again.

So as we get deeper into the second quarter and into the third quarter, we expect to begin to see this richer mix impact. We still have some pain to navigate during the front-end of this quarter, but as we get into March and April, I think, we will start seeing higher volumes and a richer mix in our invoice shipments.

Moving to our end markets, net revenue in the aerospace market for the first quarter was $46.8 million, representing 52% of our total revenue. Sales were up about 2.3% from last year’s $45.8 million. Volume in this market was also up slightly just over 2 million pounds.

Average selling price was up 2% to $23.15 per pound from $22.07 per pound last year. The backlog in aerospace also increased in the quarter 12.1%, as we are starting to see better activity flowing in from the new engine platforms.

The activity we have seen on the leading end of the -- leading edge of the engine market as evidenced by activity of key forgers is now starting to flow deeper in into a more broadly into the fabrication supply chain. We expect demand for marquee customers to continue to ramp as we progress through fiscal 2018.

The work we have done to design and get specified into these new platforms, along with the upgrades and expansions we have done supporting our aerospace-related operations have us very well-positioned to meet the anticipated growth needs of this market.

As many of you know, Boeing and Airbus have backlog of roughly seven years on their order books and are continuing to look for opportunities to ramp their production, driving demand for the engine manufacturers and subsequently Haynes.

I am very confident that the investments we made in our tubular products area, our flat roll products area, our distribution and value-added operations areas, and in R&D, that we are more than ready to take on the anticipated ramp in demand.

By the way we had a meeting earlier this week with the large specifier for our HAYNES 282 high temperature material earlier this week. They told us they expect the ramp for this alloy in application increased 25% this year.

They also mentioned to us that some of the engines they are manufacturing for smaller commercial aircraft that they expect HAYNES 282 to displace some existing alloys due to some temperature requirements. So, again, in aerospace, I am very pleased with our market position and our service capabilities as we enter the up cycle.

In our chemical processing market, net revenue for the quarter was $13.4 million, down 30% from last year’s $19.1 million. CPI accounted for about 15% of our revenue in the quarter. Volume increased 13.6% during the quarter to almost 700,000 pounds from last year’s 600,000 pounds.

Average selling price was down 38.5% to $19.44 per pound, compared to $31.62 per pound. I think in this market, you can clearly see the importance and impact of special projects, and that impact they have on our business. Dan will get into this a little bit more in his talking points and speaking specifically about specialty projects bookings.

But as we have relayed you over the past two calls, we saw this ahead of time, we saw that we had significant gap in specialty applications and it hit our CPI business very hard over the last two quarters.

On a positive side, we mentioned last time, we are not seeing huge projects rolling in right now, but we are seeing better activity in specialty applications and we are seeing a broader number of specialty applications.

As a result, backlog in this area increased over 32% during the quarter, supporting some of our optimism as we move more deeply into 2018. We also mentioned last time that there were some large applications being quoted in alloys Haynes does not produce and some very substantial volumes.

One of these projects was let during the quarter, providing a substantial uplift in bookings for some of our peers. More importantly, we believe that this type of application is indicative of better confidence and a positive turn in the overall industry.

I think we are far from out of the woods in this market, but the market has definitely started to turn positive over the past six months or so. As I mentioned, our special project activity has increased. We have also seen some better activity in our baseline products and flat roll and wire.

I’d like to see stronger transactional activity, as I believe that might indicate that some of the distribution supply chain is seeing stock outs, but as of yet, this is still an area that has not seen much of an uplift.

By the way, in my experience that increase in transactional activity, I think I’ve mentioned this before, it’s also typically the best indicator of a strong -- stronger pricing environment.

One last thing on the chemical processing area and on the specialty projects, as overseas markets start to improve, this area also starts to improve, a lot of this industry will work with domestic specifiers and designers on these applications, and frequently, the first stage or two of fabrication is also in the U.S.

But very frequently, end product and the end application is in Asia or the Middle East or Europe, so the demand shows up in bookings and sales in the United States, but the real driving force for that demand is overseas and the improving economies we are starting to see overseas as we see in Asia and Europe getting busier, we expect to see broader improvements in demand for these higher end applications.

Moving to the industrial gas turbine market, our sales in the quarter totaled $13.4 million, down 8% from last year’s $14.6 million. IGT accounted for roughly 15% of sales during the quarter. Volume shipped into this market was down 15.7% to approximately 900,000 pounds from last year’s just over a million pounds.

Average selling price during the quarter was $15.32 per pound, up 9% from last year. Backlog during the quarter also increased just slightly though at 2.3%. I think the issues in the gas turbine industry have been pretty well documented with the restructurings announced at GE, who now owns Alstom and Siemens.

This has dramatically impacted the large frame OEM side of the business and it will likely continue to impact demand there for at least the upcoming year. MRO activity is still pretty good and activity in smaller frame applications appears to actually be strengthening with better demand from oil and gas.

However, the overhang of the larger frame issues has created a little bit of a sit on your hand situation throughout the industry. Right now the uncertainty is causing a reluctance to buying activity and I am sure the cash concerns are also a big part of what’s going on.

As a result, until the restructuring has become more clear I think a significant level of activity in this market is on hold. I’ve mentioned previously our work to develop new applications and work with designers on driving higher efficiency, utilizing higher temperature capability materials and our work here has been very successful.

However, I expect that the shakeout in this industry will likely take all of 2018 to get sorted out, and as a result, we expect this market to continue to face a very challenging environment throughout the upcoming year.

Finally, our other markets and other revenues accounted for $16.1 million during the quarter, up 16% from last year’s $13.9 million. This area is roughly 18% of our revenue.

Sales of both products and tolling services were up over last year, with the product side being primarily carried by some project work and some repeat applications becoming active in the oil and gas market. The uplifting in the toll processing business was very broad, the broad increase in activity across the customer base.

In short, I think that just goes hand in hand with most metal processors now getting busy as the economy gets bigger -- busy again. On the operating side, we have completed the major CapEx projects in flat roll and the IT platform, and we are nearing completion in our transition to centralizing our value-added distribution capabilities in LaPorte.

Strategically I think these moves were well timed and that we are starting to see activity in our key markets, and we expect these upgrades and expansions will position us well to meet the anticipated growth we expect in these markets.

These changes I think will make us quicker with better quality and broader capabilities to penetrate deeper into our customer supply chains. We feel confident that we are better prepared than ever to be a resource to our customers, all the way from the alloy, design and specification to parts, manufacture and processing for their components.

Also, perhaps, less strategic and more on the tactical side of the execution, I think, these large capital upgrade projects are difficult to manage and at times disruptive to material flow and continuity of the business.

We managed to complete a fairly significant list of project upgrades over the last few years with no business interruptions and the equipment we put in place is actually doing what we expected it to do and what we designed it to do. I think that’s an expectation, but I think most of you know in this industry, it’s really no easy achievement.

It comes only with a lot of good people doing the specification work, the building, the implementation and the commissioning of these projects. I am extremely thankful to our employees and our contractors that work tirelessly to get these projects over the goal line. With that, let me turn it over to Dan for some more details on the financials..

Thank you, Mark. As we have historically mentioned, the start of our fiscal year typically is unfavorably impacted by lower volumes due to holidays, planned maintenance outages and customers managing their calendar year and balance sheets. Sequentially, volume dropped 16.9% in the first quarter fiscal 2018 from the fourth quarter of fiscal 2017.

Volume this quarter compared to last year’s first quarter was 1.5% lower. This was driven by lower specialty application projects this quarter, as last year we had approximately $8 million higher revenue in special projects as compared to this quarter.

Margins this quarter improved to 7.8%, as compared to the third quarter’s 3.7% and fourth quarter’s 5.7%, even on lower overall revenue levels and similar sequential special project levels. This margin expansion is driven by improved product mix and lower inventory reserves due to more favorable market conditions.

Overall, average selling price per pound increased sequentially 7.2%, driven by higher raw material prices and pricing strength.

In addition, we are expecting further pricing strength moving forward, as pricing under many of our customer long-term agreements increased according to annual escalation clauses related to the market price of certain raw materials beginning in January.

Our backlog increased significantly over the first quarter with backlog at $205.7 million at December 31, 2017, an increase of $28.4 million or 16% from the $177.3 million at September 30, 2017. Backlog pounds increased 25.1% over the quarter.

This backlog strength underlies our optimism for increasing revenue and profitability as we progress through 2018. Beyond the quarter end, backlog continued to increase with the January 31, 2018 backlog at $207.6 million.

Looking forward, we expect continued improving gross margins, driven by higher volume levels, pricing strength and improving levels of specialty application projects, utilizing higher margin proprietary alloys that our company produces.

Additional items impacting operations and costs include the following; first, our strategic action to expand our value-added capabilities at our service center in LaPorte, Indiana is essentially complete including moving operations from Lebanon, Indiana to LaPorte.

We expect improving productivity as we move forward and we expect less cost related to the move in the second half of fiscal -- of the fiscal year and eliminating duplicate costs as we bring the project to closure. We incurred approximately $800,000 this quarter and expect a similar amount next quarter as well.

Second, our upgrade to the cold finishing equipment designed to increase sheets and coil capacity primarily for the aerospace market is expected to drive higher aerospace shipments over fiscal 2018. Production of this product form in the first quarter increased nearly 25% from the same quarter last year.

Third, the relief in expense from pension and retiree healthcare costs after increasing $10.8 million pretax over two years is expected to decrease this fiscal year by approximately $9.2 million. This will ease into the P&L as a portion is capitalized into inventory and thus hits the P&L when the inventory is sold.

Fourth, raw material prices have increased. The most impactful change is nickel. Looking at some recent history for nickel the average LME price for nickel starting way back in fiscal 2014 was $7.51 per pound and declined 20.9% to $5.94 per pound during fiscal 2015.

Declined an additional 30.3% further to $4.14 per pound average over fiscal 2016 then increased moderately to $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 December to $5.18, and up over $6 in portions of January.

If this rising trend continues, this should provide a tailwind for margins into fiscal 2018. Lastly, the recently weaker dollar has contributed to the nickel increase, as well as the increase in the price of oil, which is a side note we hope will impact the demand in our chemical processing market.

The weaker dollar may also improve our competitiveness in our European markets, which conversely would like to create a charge to SG&A related to our U.S. dollar monetary net assets at our foreign locations. In fact this SG&A charge is roughly estimated to be over $650,000 unfavorable in January due to the recent foreign currency fluctuations.

SG&A cost combined with research and technical costs were $11.7 million in the first quarter of fiscal ‘18. For the full year fiscal ‘18, SG&A is expected to be slightly less than $47 million, excluding any foreign currency impact.

Based upon a normal 40% effective tax rate, which is likely used in your models, our adjusted net loss was $2.9 million or $0.24 net loss per diluted share, excluding the significant tax adjustments this quarter. The Tax Cuts and Jobs Act signed into law this quarter reduces the statutory U.S. federal rate from 35% to 25%.

Since we are a September year end company, our prorated statutory rate is reduced from 35% to 24.5% for our full fiscal 2018 then further reduces to 21% thereafter. The largest impact is the revaluing of our deferred tax asset to account for the future impact of the lower tax rate on this deferred amount.

We performed an analysis of our first quarter tax provision as compared to a previous effective tax rate of 40% and quantified the $19.6 million, which impacted earnings per share by $1.58 per diluted share. Our effective tax rate going forward will likely be a bit unusual.

This year, since we are expecting a shift from pretax losses to pretax income during the year, our effective tax rate is currently estimated at only 4%. But this is subject to change as the year progresses.

Beyond fiscal 2018, assuming normalized market conditions and a solid income environment, our effective tax rate is expected to be in the mid-20% level. Other aspects of the Tax Reform could impact us, such as the repatriation of accumulated foreign earnings.

Further analysis is needed such as a full foreign operations E&P study to determine if any adjustments are needed which will be completed before our year end. Cash flow and liquidity, net cash used in operating activities was $6.3 million for the first quarter fiscal 2018 and capital expenditures were $3.2 million.

Inventory increased over the quarter by $22.5 million, driven by our higher backlog levels, higher special project material and production, and higher raw material costs. Our revolver balance remains of zero borrowings and our cash balance was $34 million at December 31, 2017, with $19 million in the U.S. and $15 million outside the U.S.

Additional cash required to ramp up business activity levels is expected in the second quarter, and will come from U.S. cash balances and it required borrowings against our revolving credit facility.

Outlook for next quarter, given the positive trends we are seeing in order entry rates, backlog and pricing, we expect higher revenue in the second quarter, as well as earnings closer to breakeven than those of the first quarter of fiscal 2018.

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

This combined with strengthening raw material prices will drive better pricing levels and are favorable signs of improvement in fiscal 2018. In addition, the CapEx investments we have made over the past few years provide potential for improving operating leverage to be realized on higher volume levels.

And Mark I will turn the discussion back over to you..

Thank you very much, Dan.

I think six months ago when we had the call with you, I think, it’s the only time we ever gave you more than a quarter’s view on things, we looked out and mentioned that we didn’t see much of a specialty project backlog and we told you things were going to be very difficult for that six months through the end of last calendar year, might be the best way to put it.

And but we also gave you some hope when we looked at some of the macros or larger scale things. We saw some of our peers who have forging businesses starting to come out of the doldrums and do better and we felt that was a good indicator of where things were going.

We saw things like aluminum prices and iron ore, and subsequently, carbon steel, and just a lot of things that were making the economy a little bit busy or starting to do better. So we kind of gave you hope that things were getting better for us. That’s kind of where we were.

Where we are is I think you’ve seen it in the backlog levels now and the key thing for us is to transition that backlog into better invoice levels.

As Dan mentioned, January was kind of tough from the foreign exchange hit that we took, backlog increased again in January, invoice levels were pretty good in January as well, so I think we are definitely starting to move out of the doldrums, might be the best way to put it.

I think I’ve used the phrase in the past when things are getting tough that nickel is telling you something and I think now that things are getting better, I think, nickel is also telling us something. I think we are seeing that opposite impact right now that things are starting to get better. Asia and Europe appear to be coming out of their doldrums.

The U.S. seems to be moving into a broader expansion that includes applications utilizing more of our types of advanced materials. Haynes is ready. We have done the base work to get our products specified on next-generation platforms and new applications, and those applications are starting to gain traction, increasing demand in the marketplace.

One of the discussions I had recently with people was about the backlog at $200 million and I don’t know that Haynes has ever seen a backlog of $200 million when nickel was essentially $5 a pound, and we had a very, very difficult IGT market, and baseline CPI is still difficult, so I think it’s one of the highest quality backlogs we have had in quite some time.

I like where we are right now. I like where that backlog is. I like the quality of the products I see in it. I like the way our equipment has been brought online.

As Dan mentioned and I mentioned, I still think we need to fight through a little bit of this upcoming quarter, but I look at the layers in the order book and the backlog, I think, we are seeing a good transition into 2018. With that, let’s open the call to your questions..

Thank you. [Operator Instructions] Our first question comes from Edward Marshall from Sidoti & Company. Please proceed with your question..

Hey, Mark, Dan, David. Good morning.

How are you?.

Good morning..

Good morning..

Doing great..

So I wanted to talk about the chemical business, aside from bookings and customers, and the inquiries, discussions with sales, it’s global business.

So I am curious what kind of benchmarks do you guys pay attention to, so that we can kind of look, because we have seen this market give a several headaches, I guess, over the last call it four years or five years, so that we will have to wait for the kind of the quarter results to kind of really understand this markets change one direction or the other?.

I think as a macro more so than anything we look at the American Chemistry Council numbers and specifically our people look at a lot of the CapEx spending that’s going in -- on inside of those numbers into the chemical market. What we also tend to look at is the types of chemicals that are being produced and I think everybody knows.

I mean we have a little bit of a roll in some of the big ethylene crackers, but we are really more downstream into the more advanced chemicals.

So a lot of that comes with direct discussions with the manufacturers and that’s where the project side of the business has really driven it and I think that’s probably the toughest thing for you guys to model is this project business, and I think this quarter probably -- comparing this quarter to first quarter of last year is probably one of the most dramatic impacts you see of it.

We have that huge chemical project that came through last year and an excellent project for one of our more advanced proprietary material, so it was a very, very high priced type of project, et cetera and now we are starting to see more project work coming through and it’s nicer.

So we are starting to see broader applications come through, and we are starting to see some reorder points come through which is nice. But if you’re looking for that baseline chemical activity, I am sure some of the bigger guys look at things like just oil prices and where that’s going.

And that’s not a bad macro indicator to look at for where things are going especially on the front-end of the chemical side of the business.

But for us, it’s more dependent on more advanced chemicals and the big, big driver for us is always when we can score these projects that come through or the more advanced applications for things like HASTELLOY G 35 or HASTELLOY B 3 or HASTELLOY HYBRID-BC1.

When we land those types of projects, that’s when we see big differences come through in our CPI business..

Got you. You mentioned 282 as a percent aerospace volume today. You mentioned a customer so that could be up 25%....

No. What I said is….

… year-over-year?.

Yeah. I didn’t mention 282 as a percent of aerospace volume. What I said is that’s a proprietary material we have on the Pratt & Whitney 1000 engine. That family of engines might be the best way to put it. And we are told to get ready for a 25% ramp this year.

And not only that one of the things that’s being driven in there is, we have a number of applications where we are specified in, but due to some heat profiling that they’ve done, we have actually won a few more applications inside that engine..

Got it.

I guess my question was what percentage of aero volume was it today?.

We don’t discuss that..

I don’t think so..

I am sorry..

I asked the question wrong. Anyway, aero backlog, you said 4% increase in the quarter.

I am assuming that’s the revenue number?.

Yes..

What -- which volume, looks like volume is up much more?.

Overall -- you mean overall volume?.

Yeah..

In the backlog?.

No. No.

I mean volume for [inaudible] (29:45) December?.

I don’t know that we have released that out by….

Yeah..

I don’t know that we break out the pounds by market to discuss..

As a percentage that you gave?.

Yeah. We just did -- I just give you the revenue increase in the backlog, yeah..

Okay. So volume increase looks relatively large and due to the fact that pricing went down sequential basis in backlog and it’s minor.

My question is, were some of the aerospace customers getting in front of price increases and maybe you can kind of comment to that a little bit?.

Well, one thing I did mention in my prepared remarks is, we have quite a few long-term agreements that are on escalators. That’s both annual agreements, as well as ones that adjust quarterly and biannually. And so in January, those annual ones especially are stepping up a bit with higher raw material prices.

So those escalators always help us, because we may already be feeling the impact of the increased nickel. We have already purchased the nickel and produced the product. And then this will give us a bit of pricing strength that goes along with it..

Got it.

Well, regardless 8 million pounds, they haven’t seen it over three years, so it’s a good number?.

It’s a great backlog right now. We are feeling really good about it at..

And one other point on the kind of the quality of the backlog, if you’re just looking at the average selling price in the backlog, as you mentioned, they went down slightly. But think about the mix in there, a lot of what causes that is you’ve got a long lead time of titanium and per pound titanium is quite high versus nickel.

So, as Mark mentioned in his script, we are quite happy with the quality of the backlog, even though you see that ticking down slightly on the average selling price overall we are happy with it..

Thank you. Guys, appreciate it..

Yeah..

[Operator Instructions] Our next question comes from the line of Phil Gibbs from KeyBanc Capital Markets. Please proceed with your question..

Hi. Good morning..

Good morning..

Good morning, Phil..

Hey, Mark. The inventory in the first quarter, I think you had planned to take down at least per your commentary last call or at least that’s what I thought was going to happen in it and it did build a good bit.

Does that reflect just the complexity in the current business, meaning some of the orders like you’re taking on are of, you call an increasing variety and just wanted to get that disconnect relative to what you were thinking? And then, do you expect the inventory to call it increase further into your second quarter as business improves?.

Yeah. So the big difference is the uplift we saw in the backlog and a lot of it being special projects, which essentially is not off the shelf type of material. But we saw a good uplift in aerospace and in the specialty project side of the business.

And the aerospace side that we saw a lot of the uplift in with the non-titanium, so the backlog you’re looking at right now, that’s why we talk about it as a higher quality backlog than normal. I think we’ll start to see some more of the titanium orders rolled in later, but we have got a lot of that inventory planned.

As far as we look at the balance of the year I think it’s going to depend on what types of orders we see coming through. Six months ago, if you remember, we didn’t have a lot of specialty application sitting in the backlog but we were quoting a lot.

Now we have got a lot of specialty applications sitting in the backlog and the thing is we are still quoting more. So I can’t make a guarantee that inventory is going to come down. The objective is to bring it down and start generating that cash.

But if we have the high quality problem of a lot more specialty applications getting booked, I can’t make a guarantee on it, we love seeing those specialty applications coming in..

It sounds like you’re waiting a bit to let some of the titanium inventory out as the year progresses.

So it sounds like you’re pretty well stocked on that and most of the inventory that you’re seeing was a surprise and mostly the CPI side it sounds like?.

Yeah. The titanium side of the business is very predictable and what we saw is an uplift essentially in the non-titanium, be it special projects in chemical or in our other products area.

For instance we had a huge application about three years ago that was essentially coal related, if you don’t mind my saying, a coal related application that was huge about three or four years ago and we had a huge reorder come through not as big as that one was, but a huge reorder come through and it was one of those things where, oh, gosh, it’s a great material, it’s a great alloy, it’s a great product, but it’s not the kind of thing we have sitting on the shelf.

So that was one of our big uplift that we saw in our other market’s area as far as order entry. So it’s a brand new application three years ago and we essentially got a big order for spares and things along that line that came in during the quarter, and obviously, we would book the order and then we have got to start melting..

Other thing that may impact inventory is, keep in mind the cap line, we have that CapEx complete, we are starting to ramp up production on that. As I mentioned in my remarks, production on the cap line was 25% higher this quarter versus a year agos first quarter, so more going through WIP.

So WIP numbers are the ones that really are up right now and as we complete the production on those, some of those have some very long production cycles depending on what alloy it is, then we get that out into finished goods, we get that into topline revenue..

Okay. And then I have a couple more for clarity. I think the tax commentary was helpful but also a little bit confusing probably somewhat for you as well.

But what should we be modeling for an effective rate for the remaining three quarters of the year?.

The remaining three quarters this year, we are expecting a very low 4% effective tax rate.

Now that can bounce around, so that’s why I say it’s subject to change, but right now as we look at how the shift from pretax losses, which we are currently in into pretax profits we hope later in the year, that really makes the effective tax rate kind of funny, because you’re kind of zeroing in around breakeven, so the permanent items really mess with your effective tax rate.

So right now we are modeling around 4% which I know is strange. But once we get into stronger profitable area and a normalized market then our effective tax rate we are expecting it to be in the mid-20s.

So mid-20% is what we kind of are feeling going forward with the new tax law, much better than what we had had before in the 40% range, but this year is going to be a little strange, so I would model around 4% at this point..

Okay.

And did your SG&A guidance for the year include or exclude research and development?.

Includes research and development. Yeah, that’s….

Include..

SG&A including research and technology, yeah..

Okay. And your pension declined year-on-year is $9.2 million.

How much of that is in SG&A and cost of goods sold?.

Yeah. The split is -- it’s mostly cost of goods sold. We would estimate split to be around 90% cost of goods sold and 10% SG&A..

Okay. Very helpful. And then just one follow-up on Ed’s question on the pricing some of your escalators, you said annual, quarterly and biannual.

Can you give us a feel for how we should think about average pricing per pound in the second quarter versus the first quarter, I mean, are we thinking about it up $1, up $2, flat, how do we think about that?.

Certainly, the escalators are going to help us and right now our product mix is quite skewed to the aerospace side as you can see. So we have previously told you that our LTAs are something in the range of 30% of our business, maybe the annual ones in that maybe 20% of our business.

Well, now with this current mix, it’s quite different than that, so this past quarter, which may not be indicative of the full year by any means, but this past quarter, our annual LTAs were about 36% of our revenue.

So as we -- as those step up with raw materials, we are expecting maybe a 3% or so escalator due to raw materials, which will be very helpful. Because as I mentioned, we may -- we are already feeling kind of the sting or the impact of the higher raw materials in general.

I mean, this recent January move maybe not, but nickels increased and cobalt increased for a while now, and we are already feeling that somewhat in our cost of goods sold. So when you hit that annual adjuster timeframe that really helps..

Yeah. It’s probably a good number that Dan gave you that type of 3% number Phil and be cognizant, and again, I know it’s very difficult for you guys to model, but there are some special projects coming through as well which….

Yeah..

… tend to help us quite a bit..

Okay. Thank you..

There are no further questions at this time. I would now like to turn the floor back over to Mark Comerford for closing comments..

Thanks very much. And everyone thank you very much for your time today and your support of Haynes International. We’ll look forward to updating you in the next quarter. Thanks again..

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day..