David Van Bibber - Controller & CAO Mark Comerford - President & CEO Dan Maudlin - VP & CFO.

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

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

I will now like to turn the conference over to your host, David Van Bibber, Controller and Chief Accounting Officer..

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, 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.

The momentum we talked about in our last call in February continue to strengthen this quarter. Sequentially, we move from just under $90 million in shipments to over $110 million in shipments in the quarter and on top of that, we saw the backlog for unfulfilled orders increase.

As we mentioned last time, we're still invoicing some of the lower margin orders we took two or three quarters ago, so we have not yet seen the corresponding uplifting profitability.

We still have another quarter of lower margin products to work through, but as we mentioned in the press release, each month during the quarter got better, ending with March being our best month in about two years for transactional business, along with being our best order entry month in about that same timeframe.

And if I'm not mistaken, I think our backlog is the highest it has been in probably two years -- might even be almost three years and with the IGT business being so soft, it's a very high quality backlog that we're looking there right now. Returning to the second quarter, net revenue was $110.2 million, up 6.9% from last year's $103.1 million.

Volume in the quarter was 4.7 million pounds, down about 3% from last year's 4.8 million pounds. Average selling prices in the quarter were $23.46 per pound, inclusive of our other revenue, up about 10% over last year's $21.28 per pound.

Our shipments into the aerospace, chemical processing and our other smaller markets increased significantly both year-on year-end sequentially in the second quarter, but those games were upset by poor shipping levels in the industrial gas turbine market.

As we mentioned last time, we expect the IGT market to remain soft as the large OEMs restructure their businesses over the next years or so.

I'm pleased with how quickly we were able to ramp up shipments into aerospace and CPI to cover the shortfall in IGT and we'll have to continue to push in that direction to make up for the expected lack of volume in the IGT market.

Again, with the ramp we made in the quarter from $90 million to over $110 million in revenue and the backlog is still expanding beyond that ramp and revenue, I think we'll be able to make a transition. With that, let me move to our key markets.

Net revenue in the aerospace market for the quarter was $59 million, representing approximately 53.5% of our total revenue. Sales were up about 19.2% from last year's $49.5 million and this quarter's $59 million is our second highest shipping quarter in aerospace in the past four and-a-half years.

Volume shipped in this market was 2.6 million pounds, up 11.1% over last year's 2.3 million pounds. Average selling price was up almost 7.4% to $22.90 per pound from last year's $21.33 per pound.

We finally moved through the startup and commissioning phases in our tubular products area, our cold finish strip and sheet area and our primary distribution and finishing operations.

I think we're now beginning to see a smoother flow of material and better capability to meet increased demands that we're seeing and we expect to see in the aerospace market as the new engine platforms ramp up their production rates. By the way, in spite of the increased shipping levels, we also saw the aerospace market.

Our backlog increased sequentially from Q1 to Q2 by about 4% during the quarter. Overall, very solid performance in aerospace and we need to keep driving forward in this market.

As I believe you are aware, Boeing and Airbus have backlogs of roughly 7-8 years in their order books and they're continuing to look for opportunities to ramp production driving demand for the engine manufacturers and subsequently Haynes.

I'm very confident that the investments I mentioned earlier in the tubular products area or flat-roll products area are distribution and value-added operations areas, as well as in R&D that we're more than ready to take on that anticipated ramp and demand.

I was very pleased with how our operations responded this quarter to the increased step up in shipments. Again, in aerospace, I'm very pleased with our market position and service capabilities as we enter this long-awaited up cycle.

In our chemical processing market, net revenue for the quarter was $21.1 million, up roughly 17% from last year's $18.1 million. CPI accounted for 19.2% of our revenue. Volume was 1 million pounds of 29.7% from last year's 771,000 pounds. Average selling price was $21.15 per pound, down about 10% from last year's $23.45 per pound.

The backlog in this area fell slightly, about 4.7%, but remember, that slight drop in backlog was after we ramp shipments over 45% sequentially from the first quarter of '18's 687,000 pounds. As we discussed last time, we're starting to see better activity in both areas of our CPI business.

On the higher volume, lower priced applications, some of our peers have reported better activity in large applications, most notably some large pipeline repair projects. Following that [ph] we're also seeing more investment repair work along with the project work with some of our larger chemical customers and fav shops.

I think I mentioned last time that we're seeing better activity out of the Asia Pacific region -- in particular cold activity and some applications that have been dormant were starting to come back. Also some repair work that had been relatively dormant this coming back in Asia Pacific. We had a very good quarter in CPI in the Asia Pacific region.

Likewise in our specialty applications area, the activity we discussed over the past few quarters are starting to bear fruit as new applications are starting to move out of the potential column and into the order column.

Specialty application projects are very sporadic, but they are also one of our best avenues for moving our alloys into the market and gaining a better profitability outcome. Activity remains very brisk in this area. And by the way, two new special projects came in last week -- both of them significant to us.

Not huge, but about $1 million a piece or so, which is always great for us to see when our customers are moving these concepts into actual applications.

I think activity will remain sporadic in this market, but the bias appears to be up as the world economies are getting busier and all the prices appear to be holding up and reports from our customers indicate that there's quite a bit of under investment over the past four years.

This area benefited most during the quarter from higher transactional activity. We're seeing some lead times moving out in the industry. I think if this holds up, we'll see better transactional activity as we move deeper in 2018. It will be sporadic, but it definitely feels like the bias is upward.

Similar to aerospace, I'm very pleased with our people in the plants and distribution centers responded this quarter. A 45% increase in demand insight of one quarter is difficult to meet and it's difficult to schedule. I don't expect this market to move smoothly upwards, but as I mentioned, I think that overall bias is finally trending back up.

Moving to the industrial gas turbine market, our sales in the quarter total $11.8 million, down 34.1% from last year's $17.8 million. IGT accounted for roughly 10.7% of sales during the quarter, volume shift into this market was down 54.4% to 640,000 pounds from last year's 1.4 million pounds.

Average selling price per pound in the quarter was $18.37 per pound, up about 44% from last year's $12.71 per pound. Backlog in this area increased over 20% in the quarter, but as you can imagine, that is up a very low level.

As we discussed last call, the restructuring announcements from the large OEMs have pretty much frozen demand in the large and medium trend turbine markets. Just to give you an idea, a lot of the work for MRO work seems to be put out on hold or at least it's moving a lot slower than it was I'll say six months or a year ago.

I think that will be something we see and continue to see as the year goes out. Our customer opinions on consolidations and the duration of the pain in this market differ widely, as their opinions on where the market will emerge and when it emerges.

The one thing that came to be unified in saying is, 'don't expect to bounce back in 2018.' Smaller frame applications could see a pick up as investment in oil and gas applications start to increase, but the over gain [ph] in the large and medium frame applications will likely to continue to dampen this industry in the next few quarters.

Interestingly, two of the areas where our backlog increased in IGT over the past quarter were in orders for new applications and orders from some relatively new customers.

We need to stay in front of these decision-makers as the industry -- and make sure we're prepared for any transactional opportunities that present themselves, as well as renew applications.

Again, we are seeing more development work for higher efficiencies and I think as you know, that typically means for people like Haynes, that means higher operating temperatures, it means more severe operating environment and it means better demand for pains of types of products.

Finally, our other markets and other revenue accounted for $18.3 million during the quarter, up 3.4% from last year's $17.7 million. This area was roughly 16.6% of our revenue. Sales of products into our smaller markets led to weigh this quarter, jumping about 37% sequentially and 28% over last year.

We're not a big player in the oil and gas applications, but those applications led to weigh this quarter. On the toll processing side, business fell a bit as we process more material for our own internal shipments and replenishments, but we also saw some slight adjustments that customers are making in corrections of their own stock levels.

Operationally as I mentioned earlier, we're stepping up shipping levels on the revenue side with the fall on the IGT business. We're seeing less ingot, billet and slab demand which in our business, those product forms are your fastest-turning highest shipping volume types of products.

Translating that means that we're shipping a more complex mix of products right now, which means lighter gauge thicknesses, more precise requirements, more demand and quality requirements, that type of thing.

We're still below that 5 million pound per quarter shipping threshold that I've mentioned to you previously that's critical to getting us back to profitability. We made a pretty solid push this quarter versus the first quarter, but now we have to finish the job and get to that next level.

The mix, while more complex is a better mix, more aerospace, more specialty applications work. Having a $200 million plus backlog with an IGT market that's on its back is surprising and very encouraging to me.

The backlog has high quality, high-price products in it and as we bleed out the lower price items, as I mentioned earlier, I think we'll continue to do that this quarter and I think we'll start to move into the transition into profitability.

Finally, I'm very proud of the work our people have done to respond with changes of work and the increased demand we're seeing.

With the new equipment we've put in place along with consolidation of our primary service center and our La Porte operations and the subsequent manpower moves that were concurrent with that process, I'm very pleased with the focus our people showed to get that work done safely, on-time, on-budget and while we're ramping up shipments in aerospace, CPI and some of our smaller markets like oil and gas.

As a result -- and I've mentioned this previously, we feel confident and we're better-prepared than ever to be a resource to our customers all the way from alloy design and specification to parts, manufacturing and processing for their components.

We're meeting that ramp in demand, our backlog is testament that our customers want to place more business with that. With that, let me turn it over to Dan for more details on the financials..

Thank you, Mark. Gross margins this quarter have continued to recover, improving to 10.4%, which is better than the past four quarters. Margins are not yet where they need to be, but they are moving in the right direction.

This margin expansion was driven by improved product mix, pricing strengths and more favorable market conditions in aerospace and chemical processing, partly offset by the continued shipments of lower value orders from the backlog that were taken in prior quarters.

As Mark mentioned, it typically takes two to three quarters to cycle through these lower margin orders from the backlog in a period of market recovery, thus resulting in a lag of P&L margin recovery. Our specialty application project sales improved this quarter to $6.7 million, compared to only $1.1 million in the first quarter of fiscal 2018.

This higher level of special projects drives a higher margin.

In addition with the strength of our aerospace shipments and chemical processing beginning to improve, our product mix has shifted over the first six months of fiscal 2018, with higher production levels of sheet, coil and plate products and lower levels of ingot and forge products, which are tied a bit more to the industrial gas turbine market.

While lower overall volumes are a headwind to margins, the shift in product form is favorable to margins. Also strengthening our ability to ship higher value products is the expansion of our value-added capabilities at our service center in La Porte Indiana, which is favorable to margins.

However, this quarter was partially offset by an expense of $360,000, related to the transition, which is expected to diminish as we move forward. Regarding overall gross margins, continued improvement is expected over the second half of fiscal 2018 with strengthening volumes and market prices, better product mix and rising raw material prices.

SG&A cost including a research in technical cost were $13.2 million in the second quarter of fiscal 2018. This includes a charge of approximately $650,000 to increase our bad debt reserve to a customer in Italy filing for the equivalent of bankruptcy. In addition, SG&A includes approximately $450,000 of unfavorable foreign currency impacts.

Going forward, we had a new foreign currency hedging program in place beginning in April that should help to mitigate future foreign currency impacts in SG&A.

Our effective income tax rate for the second quarter was negative 2.9%, partly driven by a stock option forfeiture in March and a full-grant from 10 years ago, creating an unfavorable income tax start of over $150,000.

Our effective tax rate going forward will continue to be a bit unusual as we're expecting a shift from pre-tax losses, to pre-tax income during the year. Our effective tax rate is currently estimated at only 4%, but that 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. The Tax Cuts and Jobs Act signed in the law on the first quarter reduces the statutory U.S. Federal rate from 35% to 21%.

In the first quarter, we had a significant charge from the reduction in our deferred tax asset value. Going forward, other aspects of the tax reform could impact us such as the repaid creation of accumulated foreign earnings.

Further analysis is under way such as a full foreign operations E&P study to determine if any adjustments are needed, which should be completed before year-end. Our net loss for the quarter of 2.068 million was impacted by a tough start to the quarter and the items I previously mentioned driving that loss.

Four items to reiterate are the charge to increase bad debt reserves $650,000 pre-tax, unfavorable foreign currency of $450,000, cost-related for expansion of $360,000 and a tax charge for the forfeited stock options of $150,000. We hope to the majority of these cost do not recur going forward.

Turning to backlog; backlog increased significantly over the first half of fiscal 2018 with backlog at $212.3 million at March 31, an increase of $35 million or nearly 20% from the $177.3 million at September 30, 2017. This backlog strength underlines our optimism for increasing revenue and profitability as we progress through 2018.

Beyond the quarter-end, backlog continue to increase with April 30, 2018 backlog at $217.6 million, an increase of $5.3 million for the month. Liquidity; in conjunction with this backlog increase and the corresponding increase in production levels, working capital also increased.

Inventory increased resulting in a use of cash of $21.5 million at accounts receivable increased $2.9 million, partially offset by increased accounts payable and accrued expenses of $2.3 million during the first six month of fiscal 2018.

This working capital investment contributed to a decrease in cash of $28.8 million over the first six months of fiscal 2018. Cash balances are expected to improve over the second half of fiscal 2018 as cash collections increase from higher second quarter sales.

In addition, the inventory levels are expected to decrease as current work and process inventory is complete and shipped. Our revolver balance remains at zero with the size of the untapped credit facility at $120 million with an accordion feature to $170 million.

Outlook for next quarter; given the positive trends we're seeing in order entry rates, backlog and pricing, we expect third quarter revenue and earnings to be better than those of the second quarter of fiscal 2018.

We are encouraged by the improving market trends in aerospace and chemical processing including our overall improved backlog levels and improves specialty application project activity, utilizing our patented allows.

This, combined with a higher value product mix capability is strengthening price environment and lead times extending across the industry are favorable science for improvement in the second half of fiscal 2018. Our capital expenditures target for this year is $12 million, which is well below our forecasted depreciation levels of $23 million.

We believe key equipment is in place and the focus is now on obtaining a return on investment. The CapEx investments we have made over the past few years provide an upside for improving operating leverage to be realized on higher volume levels going forward. With that, Mark, I will turn the call back over to you..

Thanks, Dan. Book-to-bill was over $1 million in the quarter where we increased revenue almost 23% and we also pushed through a price increase. Also in that quarter, we had a very, very difficult IGT business. That business falling to the lowest level that I can recall.

One of the things to think about, as we talk to you a lot about nickel and when things are tough, we tell you that we think some customers are holding out for a lower nickel price. I think it would be disingenuous to not point out that it's likely that the reverse-phenomenon is occurring right now.

I think some people are getting their orders in, trying to make sure they're reserving their place in the queue.

I also mentioned that there appears to have been an upset a little bit in the aerospace forging supply chain and I think that has made some of our customers a little bit nervous there as well, even though we're a very, very small supplier into the forging supply chain, I think the number of aerospace customers are saying, 'let's get our orders in and get our place in the queue and make sure that we've got them booked.' Very, very strong order entry over the last two quarters.

That being said as Dan mentioned, April held up extremely well. We have to fight through this lower price product mix. I will also tell you about April transaction activity, we don't have the final numbers yet, but the April transaction didn't look great. It pulled back a little from March.

But as I mentioned and Dan mentioned that April bookings number was very good. Again, I think that's indicative of the aerospace market and I mentioned to you some specialty projects, those are not going to be transactional type of orders. Those are orders that are typically placed into the queue for future deliver.

So it still looks very, very good and continuing to strengthen.

As I mentioned and Dan mentioned, we still have to fight to another quarter of this lower price product mix, but as I looked the layers and the order, the book and in the backlog, I think the momentum that kicked in last quarter is clearly continuing and I think we're seeing a good transition beginning here in 2018.

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

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

Good morning, guys.

How are you?.

Good morning, Ed..

Good morning..

I'm curious. Mark, you mentioned April at the end of your prepared remarks.

I'm curious, was April stronger than March? You talked about the cadence of the year that's coming to your respect [indiscernible] March?.

Don't have the final numbers yet, Ed, but no. Was April better than the first month of the quarter? Usually, yet it was. Especially in the order entry side. But not the preliminary numbers that I look at, not on the invoicing side. And a lot of it, again, it's qualitative information at this point.

We don't have the final quantitative information, but the transactional activity looked more like January-February, not like March..

Got it.

And is there any way you can quantify the traction that you're seeing in the transactional orders? Is it mid-cycle, early -- any way you can identify so we can have an idea to the strength of that?.

Still early cycles. The thing that I like to look at is -- and again we're peripheral to oil and gas at best. We're more deeper into the chemical supply chain, but you're seeing a lot of activity coming back in the oil and gas area and we will typically lag that by nine months.

That's why it's good news when I see some of our peers starting to ship pretty heavy volume levels into the oil and gas area. I think we're starting to see it. Really this last quarter, we also started to see Asia pop and Asia is still a big area for us for the chemical side of the business. In particular, the specialty chemical side of the business.

We saw that come through. A lot of it being -- I don't want to confuse it with specialty projects, but more like project outage replacements. That's metal that we put into the supply chain and shipped last quarter for a project that will probably be completed late spring or into the summer month.

We'll have an outage at a chemical plant and do that work. I'm real pleased. You know how I am, I'm a little bit paranoid. I got like one or two good data points right now, but what I really like that I'm saying is that oil and gas side and oil prices holding up.

I've heard from more than one person about the lack of reinvestment over the last four years. I think we're going to start to see a better chemical business. I think it's going to be lumpy. I don't know what the rest of this quarter is going to look like. I think it's going to be lumpy, but I think the bias is definitely upwards..

Got it. And the spread -- I was surprised the spread over rows wasn't as strong this quarter as given the move in nickel. I can understand you talked about some of the lower volume shipments coming out of backlog.

Is that all related to maybe the difference between those orders versus what you've seen on the spot market and that's more with Q3, Q4 event for you?.

Yes. If you think about it and we talk about this a lot. Every time we go into an up cycle, this time we're lagging everybody because the specialty project work wasn't real strong a couple of quarters ago whereas last time in the upside where I think we let it because we had a really good specialty project.

So this is more like a traditional up cycle where we'll lag some of the other bigger industries. Think about it, I think every time we do lag coming out of these things, we talk about how we got essentially three quarters of business that we are at lower price levels or lower mix levels that we have to flush out. That's part of what's going on.

The other thing to remember too, Ed, is you have the situation reprice as reset either monthly, quarterly or annually and that's when those contracts are, but you're always going to have that lag on the nickel side either a month, quarterly, or semi-annually or annually.

Again, as we move into a new quarter, we'll get a little bit more uplift on those pieces of business.

Anything to add, Dan?.

Yes. I'm just going to reiterate that a lot of these adjusters do take time to adjust and get reflected in the shipping values. Nickel ended the quarter at $6.08, which was actually only up for about $0.90 from the $5.18 of the quarter before.

So that $0.90, you think about 50% contained nickel in our product so you can take that $0.90, say about half of it, $0.45 or so should be a bit of a driver for some stronger ASPs [ph] going forward into the next quarter. It's a bit of a lag before we really start seeing it..

Got it. And then finally, I think IGT, I'm surprised, the MRO is slowing. I can understand what's going on at the OE side.

Any insight into maybe what's going on in that market volume and -- I mean, why the replacement demand isn't there?.

I think I used the phrase in the last call that people are sitting on their hands and I think that's that. You really have people especially the largest players in that market on the heavy frame, the large frame side of the business, they don't even know if they're going to have jobs next.

There's a tremendous cash conservation effort going on and we're seeing it all the way through the supply chain. Now, a number of our customers, fabricators are able to migrate their business into aerospace and we're doing really well there. It's been great for us from that point of view.

Some are able to migrate into more defense-related applications, not as good for us. They're buying more carbon or aluminum, or those types of products. But really what we've seen on the OEM and the MRO side is it's colloquialism, but people are sitting on their hand. People are afraid to place any kind of an order.

Typically when these things do bounce back, they bounce back with a vengeance. I don't see that happening for another year..

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

Mark, I'm just curious in terms of what happened in terms of what may have surprised you. I think you are talking about potentially getting back to the breakeven or hopeful that you would for the quarter and March sounded really strong relative the other two months.

Can you help us bridge the gap between what happened maybe relative your expectations?.

I think we mentioned last time on the call that we had a pretty tough January that we are coming out of. We've been hit pretty hard by foreign exchange and pretty low transactional activities. We were a little concerned going through the quarter and so I feel great about the order book.

It's one of those situations right now that I hate where we are, but I like where we're going. I really like what I see in the order book and the layers that I see in the order book, but it gets back to that and I think we had these discussions in 2013 and going into 2014.

We typically take three quarters to bleed out the lower margin stuff and I think this will be the third quarter of it, moving that stuff out in time to start to take advantage of that better order book. The other thing, Phil, to me, and I say this a lot is volume.

We've got to have some volume going through the place and we've got to get over that 5 million pound per quarter type of number. Otherwise, we'll really struggle and these higher margin types of products are forced to bear a lot more cost structure. We've got to get that number, we've got to get over that 5 million pound mark..

And clearly, I think some of the things I mentioned, Phil, in my script were surprises. The bad debt reserve for the bankruptcy in Italy was a surprise. It was almost $700,000.

The foreign currency that we mentioned at the last call, that we were seeing some high numbers there ended up -- if you look from one quarter to the next, that was about $300,000 higher than Q1, so that was a bit of a surprise.

And a couple of things that Mark mentioned in his script was the conversion revenue or other revenue was a bit lower than we expected, some inventory corrections with some customers going on there I think was impacting, things that we didn't quite expect, and of course, IGT being as weak as it was.

That was a bit of a surprise that it was going to be that low this quarter..

That's helpful. Yes, it does. Can you give us any flavor in terms of what the gross margin recovery could be? I think you are a little north of 10% this quarter because obviously, that's a big lever on the mix and things get regulated through your system in terms of timing wire [ph].

So, can you give us a sense of where that can go if the revenues play out like you think the next couple of quarters?.

Well, we don't give guidance on our margins, but clearly, we need to get back over that 5 million pound per quarter level that Mark was mentioning. If we can do that as well as flushing out those lower margin orders, then we'll certainly start seeing some strength in margins going beyond the 10% that we have.

So clearly, we're moving in the right direction as I mentioned. What that cadence is going forward as we get back to what we might consider normal, that's still very unclear. But if you look back at the last time we had a very strong market, maybe 2012, we were at that 20% gross margin level.

And since then, we've invested some CapEx that should give us capabilities to exceed that. We're not quite to a market such as that yet, but I think we're headed in that direction..

Thanks. And Mark, can you qualify a little bit of the commentary you were making on the forging disruptions and people trying to reserve their plus in the queue and some of the volatility associated with that. I was just trying to understand it better in terms of what you were trying to qualify..

I think you know, Phil, we're a few steps away. We've got some specialty applications going into forging supply cane. We're in touch with the forgers kind of on the periphery compared to the bigger metals who are supplying huge volumes into the forging industry, the aerospace forging industry and we lag that industry with our products.

But just during the quarter, we've heard some things in the industry from some customers.

Obviously when they're placing orders with us and they're placing them and they're used to place them for a month or two, now all of a sudden, they're looking to place some for the next four to five months, the logical question is, 'hey, I get that you're placing these, thank you very much, but why are you all of a sudden placing them so far out for us?' And it's two things.

One, we at times moving out in the industry in general, which I think will be good for pricing and it's one of the reasons we feel so bullish about things; but the other kind of qualitative or anecdotal thing has been, look, we're seeing some disruptions out of the forging supply chain. I think most of that is cleared up.

I'm not sure, but I think over the last two quarters, there were some disruptions in the forging supply chain that have made some of the people in the aerospace side of the business a little bit skittish. I think that has helped us from the point of view of placing a stronger order book with us..

Thanks very much..

You got it..

[Operator Instructions] Our next question comes from the line of Christopher Hillary from Roubaix Capital. Please proceed with your question..

I just wanted to ask.

You had a strong move upward in your AFPs and as you look out over the next 12-24 months, how do you expect that to continue and how much capacity do you have and then higher value of that product to continue to meet that demand?.

one, we are in the stronger pricing environment; we're passed through price increase in February as did most of the market; you're seeing stronger raw material pricing or commodity pricing starting to load into those price levels now and you're also seeing that mixed shift, the IGT, which is the lowest average selling price is a very depressed market right now where as aerospace and specialty applications are probably two strongest markets and those are highest priced areas where we're selling.

I hope I answered your question. That gives you an idea of how the pricing weighted average is, the pricing work out in the system and it also gives you a little bit of an idea of what we're seeing on the marketplace right now..

And Mark mentioned that aerospace, one of the higher average selling price markets that we have, we did just finish a CapEx project for our cold finishing operations, which is not all aerospace, but it's skewed towards aerospace. It's the synergauge [ph] sheet and coil products. We're ramping up our capacities and our utilizations on that.

The capacity and outline used to be about 13.2 million pounds. And now with this CapEx that we spend, it's around 18 million pounds. Once we're fully ramped up on it and we are stepping that up, the production rates on that equipment increase over 17% this first six months versus the first six months of last year.

We're starting to see a nice ramp up on that capability which is driving a bit of a higher average selling price as well and should continue to in the second half of the year..

Okay. And maybe just one more question in your aerospace business that you allude to be, ramp some production from your major customers.

To what extent is your business predictable and scheduled there? To what extent is it just sort of coming in with order rates like other end markets?.

In macro terms, you can feel the change in the market when you talk to customers. When they start talking about how busy they're getting and like I said, starting to make sure they have their spot in the queue. Again, it's more of a qualitative situation.

Quantitatively, as far as trying to directly correlate it to the number of commercial aircraft shipped in the quarter or the number of commercial engines shipped in the quarter, that never seems to work out and it's because there is so much of a whipsaw effect in the supply chain.

Typically, the guy who is manufacturing combusters versus the guy who is manufacturing seals, or plugs, or nozzles, these things, they'll move at different rates might be the best way to put it, depending on how many fabricators are in that supply chain and what the buying patterns are plus fabricator.

It's more of you have to be in front of people every day to book their orders as opposed to being able to draw our line between the number of engines built or the number of aircraft ship..

Thanks so much. Have a nice weekend..

You bet. Thank you..

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Mark Comerford for closing remarks..

Thank you, Dana. Thank you, everyone. Thank you for your time today and thank you for your interest in support of Haynes. We'll look forward to updating you again next quarter..

This concludes today's conference, you may disconnect your lines at this time. Thank you for your participation..