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Haynes International Inc. (NASDAQ:HAYN)

F4Q08 (Qtr End 09/30/08) Earnings Call

November 25, 2008 9:00 am ET

Executives

Stacy Kilian - VP and General Counsel

Mark Comerford - President and CEO

Marcel Martin - VP and CFO

Analysts

Edward Marshall - Sidoti & Company

Mark Parr - KeyBanc Capital Markets

Michael Gambardella - JPMorgan Chase

Nat Kellogg - Next Generation Equity

Mark Kaufman - MOK Capital

Jonathan Brown - ROL Capital Markets

Operator

Greetings and welcome to the Haynes International Incorporated fourth quarter 2008 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).

It is now my pleasure to introduce your host, Stacy Kilian, Vice President and General Counsel for Haynes International Incorporated. Thank you. Ms. Kilian, you may begin.

Stacy Kilian

Thank you, Rob. Good morning. Welcome to the Haynes International Inc. earnings conference call for the fiscal year ended September 30, 2008. This call is also being broadcast over the Internet. With me today are Mark Comerford, President and Chief Executive Officer of Haynes International and Marcel Martin, 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 could contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words believes, anticipates, expects, plans, and similar expressions are intended to identify forward-looking statements.

Although we believe our plans, intentions, and expectations reflected or suggested by such forward-looking statements are reasonable, such forward-looking 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 filing with the Securities and Exchange Commission, in particular, in its Form 10-K for the fiscal year ending September 30, 2008.

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. Thank you.

I will now turn the call over to Mark.

Mark Comerford

As many of you are aware, I joined the company on October 1st and while I certainly had easier months in my professional career, I’m delighted to be part of Haynes and back home with a company where I started as a manufacturing metallurgist some 23 or 24 years ago.

In light of the economic turmoil we've seen since late summer, Haynes had a very solid fourth quarter to finish fiscal 2008. As we reported in the press release yesterday, revenue was $160.8 million in the quarter. Gross profit was $34.4 million. Net income was $16.1 million. The balance sheet also remained strong, and I believe that enables us to focus on long-term growth opportunities.

For the full fiscal year, revenue was a record $637 million. Gross profit was $144.7 million, and net income was $62.8 million

In addition, we experienced several milestones in fiscal 2008. The upgrade of the sheet finishing operations in Kokomo was substantially completed. We entered into an agreement expanding our Chinese operations, and we saw advancements in the commercialization of Haynes-282, Hastelloy C-22 HS, Hastelloy G-35 and Hastelloy Hybrid-BC1 alloys.

Overall, I believe very few companies in the specialty material segment were able to turn in with strong results for the most recent quarter. Our financial results were similar to those achieved in fiscal 2007, and I believe fiscal 2008 was a much more challenging commercial environment.

Let me walk through a little bit of the highlight on our specific markets.

Long time, we see positive demand drivers across all three of our primary end markets. This will be tempered by the current global economic uncertainties, especially in the first two quarters of 2009. In aerospace, our revenues in fiscal '08 increased 17.1% to $247.3 million. The industry continues to report strong backlogs for aircraft and engines for the long term.

The short-term view is clouded, but we've yet to experience material project postponements or cancellations in this market. The following strike, however, among other things, has created uncertainty in the aerospace supply chain, making it more difficult to rely on previously published backlogs.

We do expect that in the first and second quarters of fiscal 2009 the aerospace supply chain will have to work through inventory levels, which remained worse by the Boeing work stoppages and the slowing economy.

In the chemical processing industry, our revenue increased 12.3% to $166.1 million. This market is still holding up relatively well. Yet, as we discussed in prior calls, we continue to experience pricing pressure as our larger competitors become more aggressive in this market to compensate for lower volumes in their core products dedicated to automotive and housing applications.

In the land-based gas turbine market, our revenue increased 20.5% to $124.1 million, although the energy market overall is facing uncertainty in the face of declining oil prices, especially with respect to exploration projects and geographies.

The power generation and energy delivery markets remain strong with industry publications reporting strong backlog and good OEM and MRO activity. In the short term, we do expect volumes to lessen based on our current level of order entry.

These three core markets represent roughly 85% of revenue for Haynes, and we are well positioned worldwide with the right alloys, the right value added capabilities and the right service capabilities, both technical and commercial to remain established as a critical link in these supply chains. While we expect demand in the short term to be volatile, demand in these markets long term remains strong, as these markets provide for the very basic need for improving quality of life worldwide.

Entering fiscal 2009, we are facing a challenging period in the high performance alloy marketplace. I've urged several of our peers and customers discuss the time as unprecedented, especially with respect to the global aspects of our business and the depth of the effects of the credit and equity markets. How all of those factors will manifest themselves in our end use markets is still unclear.

As the economic crisis worsened in our fourth quarter, we expected to see some countless difficulty in opening letters of credit. We expected to see cancellation in the supply chain. We expected pushouts and order rescheduling. However, in our fourth quarter, these events were not as dramatic as we expected.

To-date, and in the first quarter of fiscal 2009, supply chain cancellations have still been relatively spotty and seemingly related to adjusting schedules for the Boeing strike, which has since seen resolved. Pushouts and order rescheduling have not yet been significant, and appear to relate primarily the customers and the supply chain, mainly second and third tier fabricators adjusting their order, quantities and pattern to right size inventories and wait for some stability in the commodity price levels especially nickel.

New order entry has, however, slowed and we're seeing supply chain smooth out its flow in preparation for the uncertainties that we're seeing. We're continuing to see aggressive price competition from competitors who have seen their core business in housing appliance and automotive markets slowdown.

As stated previously, this has been most prevalent in the chemical process industry. The land-based gas turbines and aerospace markets are also seeing some price deterioration but to a lesser degree.

Over the past six weeks, I've spent quite a bit of time in front of our core customers and specifiers. I have been traveling quite a bit here in the states. I just returned from China and Singapore. I will be at Powergen next week and I will be in Europe in early December.

Across all markets, there is concern for the tightening credit situation. But events such as China's announcement of an economic stimulus package have created a feeling that the current environment might be a time frame for infrastructure build and investment.

We want to be ready for that upside and we believe that our capital investments, our efforts to diversify our global footprint, our key markets along with the flexibility afforded by our balance sheet should give us an advantage during this slowdown.

Returning to the current economic situation surrounding us, we've already instituted the hiring freeze. We've also reduced overheads at the satellite facility by roughly 15%. We expect this type of disappointing cost cutting activity to continue, and so we began to see order entry levels increase.

We're also undertaking a comprehensive review of our global cost and operational structure and reviewing our target markets geographies, applications and accounts to ensure that we're aggressively pursuing all opportunities for both revenue growth and cost control. In addition, we're reviewing all expenditures including the timing of our plant capital projects.

At Haynes, I believe there is significant opportunity for improvement in our results. We can implement a better process for serving our customers more reliably and more quickly, which should result in better results at both the top and bottom line.

Before I turn over the call to Marcel, I'd just like to state for you our objectives in hand: First, operational excellence. We've invested in our facilities. You've heard the people at Haynes discuss it in prior calls and presentations. Having worked here in the 80s, I was concerned about the status of the plan. When I saw the results of the recent investments, things like new controls in the melt shop, new furnaces and finishing, new lightings just about everywhere, and a clear commitment to clean in-phase etcetera, those types of things, that's when I decided this is where I wanted to be.

Haynes now has a foundation we can build on. We've commissioned a consulting firm to aid us in developing statistical methods to benchmark our internal business processes and this is going to lead us down a path to lean manufacturing mentality and lean manufacturing results. Define, measure, analyze, improve, and control are the basic tenets of operating a safe, reliable, effective, and efficient operations. We're embarking aggressively on that path. We know we have to improve our reliability and our velocity and we're building on a new foundation to move in that direction.

Second is innovation. Haynes is synonymous with innovation. Five new alloys and materials were introduced in the 80s, seven in the 90s; six have been introduced since the year 2000. We will continue on this path. Working with customers and specifiers to resolve their performance and fabrication issues is at the core of what Haynes does. Haynes creates materials to solve problems, and Haynes creates materials that sell.

About 25% of fiscal 2008 revenues are the results of these materials that I've mentioned and have been introduced since the 80s. Many companies will talk to you about new products. Typically in specialty materials, they're discussing new applications and new product forms. At Haynes, new product forms and new applications are in addition to the new alloys that I've mentioned. There is no company in my opinion in specialty metals that is as innovative as Haynes. I felt this way before I joined Haynes, and I'm committed to continuing on this path.

Third is service. As with innovation, our technical capabilities expand the serving customers and helping them with fabrication issues. Be at the right heat treatment for the right filler metal, for the right fabricator to help them with their project, this is what Haynes does to serve the customer.

Service is also the ability to do this everywhere in the world. Technical staff in Asia, in Europe and in the US ensures that we are at the first call that the specifier makes when he/she needs to solve the technical problem. When we get that call, we know we are achieving our objectives. When we get a customer a strong material solution at the lowest total cost, that's when we all win.

Finally, is financial strength. We're committed to growing our business by helping our customers to grow, complexity is their niche and specialty materials are our vehicle. Our core competency is service, and our ability to meet those needs necessitate that we commit to continuous improvement and develop a capability that is attractive for investment and growth.

Those four basic strategies, operational excellence, innovation, service and financial strength will allow us to compete as a world-class supplier of material solutions.

I'll now turn over the call to Marcel and he'll review the details of our financial performance.

Marcel Martin

Thank you, Mark. Good morning, ladies and gentlemen. I'd just like to discuss few items just very briefly. The first thing I want to speak to is our fourth quarter performance as relates to gross margin.

One of the things we had done is anticipated or forecasted a gross margin of approximately 24.5% for the fourth quarter. What happened was that we were a bit optimistic in what we could achieve after the conclusion of our equipment installation on our annealing lines. We ended up with the gross margin of approximately 21.5%, 3% short of our target. 2 percent points was associated with the shortfall we have relative to the commissioning of our equipment in that fourth quarter, and also the development of SOPs, standard operating procedures as related to that.

New equipment and the capabilities of that new equipment, for example some of the issues we had were the programs are related to fund fees, pension fees and also the development of new programs, how to process new product forms on our new equipment. Again, although we through the course of the quarter improved our performance from beginning to end, the overall performance that we were overly optimistic and that contributed again as I said about 2% of our 3% shortfall.

The other item we continued to be challenged by was the recurring competition and an increase in competition during the quarter in our product and in our market segments, and that contributed about 1% of our shortfall through the quarter. The next line I would like to focus on is the trends relative to our backlog. As you can see in our 10-K press release, our operating results relative to sales by quarter is very good, very solid.

What we need to look to and as I said in the past, is the issue relative to our backlog and what's that indicate. And for this past year if you look at our backlog year-to-year, there wasn’t a significant change in the level of backlog. However, the more important trend to look at is what happened from June 30th to September 30th. And from a revenue and comp perspective, we were down about 9% with our selling price being approximately flat.

When you look at what happen from June 30th to 10/31 or October, we were down approximately 13% during that time period. Again, I think this is a trend that we've experienced in the past. This is not unusual. The difference is that we do not expect the backlog to begin to pick up in the second and third quarters as they've done historically.

It's uncertain as to how much impact the markets will have and the credit situations will have, but it's our feeling at this point that we will not see that return to the level that turns up in the second and third quarters.

To provide a little bit more color relative to what happened within that backlog by market segment. If you look at the aerospace side of the business, our backlog between June and October was down about 13%. The land-based gas turbines were down approximately 12% with CPI being down 24% and the other category being essentially flat during that time period.

So again, I think it's important that we understand the backlog as it relates to our market than what we anticipated in the past. The next item I'd like to speak to just very briefly is the renewal of our revolver in our subsequent to September 30th, one of the things that we feel strongly is that we'll be able to operate in the black or utilize our revolver.

However, because of the environments that exist today, we felt that it was important to have that flexibility because of the uncertainty going forward. And what we view the revolver as is an insurance policy. We don't anticipate using it. However, we want to make sure it's been the case we do or R&D of it.

Another item I'd like to focus on just very briefly is our working capital as a percent of sales. What has happened over the course of the last several years is that -- if you looked at the first quarter of '07, our working capital as a percent of sales was up 47%, and through the course of the year that deteriorated, primarily because of the working capital projects we had undertaken.

By the end of 2007, we were up to 52% with working capital as a percent of sale, and we reached a high in the first quarter of 2008, where it was 57.6%. Coming forward from that quarter, we've continued to improve our position, and we finished the year with our working capital 53.2% of sales. So, as far as we are trying to improve our working capital position and the same holds true relative to our inventory churns. What we have done over the past year is worked to improve those churns through the course of the year, and we talked about, we were hampered during this time period because of the capital projects that we have started and undertaken.

So, back in 2006 and beginning of 2007, our churns have approximated almost 2, and during the course of through '07, early part of '08, we dropped out to 1.47, and through the course of the year, and particularly in the last quarter, we were able to improve our churns up to almost 1.7. And if you look at inventory '07 to '08, our inventory dollars went up about 6.5%, pounds went up about 2.5% with the average cost of inventory increasing approximately to 3.9%.

However, the key is to look at what's happened from the third quarter to the fourth quarter. When we begun to make these improvements, you get the contribution of RE, conclusion of the equipment upgrades plus the contribution of this equipment upgrades, and during that time period, our inventory declined by 5.3%. Our pounds have gone down 2.2% and the average cost of the inventory declined by 3.2% during that period.

Another item just to comment briefly on, during the course of 2008 we spent on capital additions approximately $18.7 million, half of which was related to the annealing line and the pilger mill in Arcadia. In addition to that, we spent $3 million on acquiring marketing company in China, in Asia to expand our presence there and we continue to leverage our strength relative to the distribution.

For fiscal 2009, we anticipate spending approximately $15 million, primarily on maintenance site CapEx projects, related to improving reliability of the equipment. Essentially, I think relative to the course of this past year, we're beginning to see the improvements in our operating working capital management relative to our capital projects. We look to push those projects and those improvements through fiscal 2009.

Thank you ladies and gentlemen. I return it to Mark.

Mark Comerford

Thank you, Marcel. In closing, thank you for you support of Haynes. Francis and the Board really have given us a good foundation to build on. As we are all aware, the current economic environment will be challenging for the foreseeable future. Our order entry patterns are being affected by the effect of the credit crunch on our customers and our ultimate end users.

Slowing worldwide economic growth and to some extent falling commodity prices, and in certain markets you need to clear out the supply chain. Haynes serves markets that improve the quality of life for people worldwide which should positively impact long-term demand. Our balance sheet is strong. Our service capabilities are better than ever before.

Our innovative materials are finding homes in our target markets and our global footprint has taken hold. In short, Haynes is in better position today to manage this economic storm than ever before. We've grown and improved our business without extensive use of debt and that will serve our customers, employees and shareholders well in going forward.

Let's open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from the line of Edward Marshall of Sidoti & Company. Please go ahead with your question.

Edward Marshall - Sidoti & Company

My first question is surrounding the equipment issues that you had on the annealing lines that you discussed earlier. Is that behind you or what have you done to put that behind you?

Mark Comerford

Fortunately, we can respond in a positive relative to that. What we anticipate in the fourth quarter was to complete some of this commissioning process much more quickly than we had and completing the SOPs much more quickly than we did. This was something that ran through the fourth quarter and actually ran through part of the fourth quarter, but we are at a point now where all these processes relative to commissioning are completed. And all the new SOPs relative to our product have been rewritten, and so again we can say positively that not completed and we are moving forward from.

Edward Marshall - Sidoti & Company

You said positively not completed or…

Mark Comerford

Is completed.

Edward Marshall - Sidoti & Company

Is completed, okay. I mean obviously the competition in the stainless market is going to continue and I'm assuming when you say the competition of 1%, I mean that's from the stainless market?

Mark Comerford

Yes, it is.

Edward Marshall - Sidoti & Company

Okay. And then discussing kind of inventories you are on a FIFO basis. As the inventories you have worked off, do you expect to see the margins to continually to decline here through the first half of the next year, as you work off some of that old inventory?

Mark Comerford

Well, it's interesting we find ourselves in a situation where you read the risk factors and it indicates that on when raw material cost rises and that's an unfavorable effect and when raw material drops that's a favorable effect. However, I think which transpired over the past several months is the additional factor relative to the market and a price compression, but also how quickly prices are falling.

So what I would expect for us to experience is not the traditional trend of unfavorable when raw material rises and favorable when it drops. But I would like to what we at least would anticipate happening through the course of the upcoming year is that because of our improvement we're accelerating our churns because of our contracts. We are able to pass on cost to our customers.

We have the opportunity to lever our backlog which is a relatively high average selling price to match up against the higher cost inventory, and we have an opportunity to actually buy cheaper materials to fulfill orders that were in our backlog at higher average selling prices as compared to when they originally placed.

So what we'd like to think we can achieve of the upcoming next several quarters and currently through the end of the year is a matching, we're neither favorably or unfavorably impacted. Try to maintain a neutrality there.

Edward Marshall - Sidoti & Company

So there are opposite forces working against each other.

Mark Comerford

Exactly.

Edward Marshall - Sidoti & Company

So the margin guidance that we kind of discussed the previous quarters of the first half of '07 or the first half of fiscal '07, that’s unlikely to be achieved in fiscal '09?

Mark Comerford

That’s true.

Edward Marshall - Sidoti & Company

Okay. All right. Any idea as far as the outlook for cash flow? Obviously as inventories are coming down it seems to be improving; but can you give us any commentary on where you think that the cash flow for next year is going to be going?

Mark Comerford

Well, I think in the past we've talked about, again generating a positive cash flow, we certainly did this past year, we started the year a revolver at about $35 million, we ended the year about $12 million, a slight improvement in cash and that was to a very challenging year relative to the price impression and relative to the capital projects and the required investment in inventory. As I've indicated, you can be certainly want to operate in the black and not utilize our revolver.

Short of that, I think the cash generation is nevertheless impacted by the environment we find ourselves in and the uncertainties we have to face. But again, yes, we're doing all those things which we need to do to improve cash flows. We've seen it in working capital improvement. We'll see it with I think the continued opportunity to focus on specific parts of the market as we've done in the past, this is optimized what we do. And so again, specifically I think that we'll do the best we can and I think we'll continue to trends we started in 2008.

Edward Marshall - Sidoti & Company

And maybe I can ask you another word on, and I know and I would respect the fact that you don’t give guidance and it's very difficult to look at the cash flow to give us an indication. But maybe we can look at it from an inventory perspective and we see inventories coming down, the capacity additions will decrease the efficiency. Do you have any idea as to the outlook for inventories on a year-over-year basis? Will they improve, will they get lower?

Mark Comerford

As we talked about in the past, we clearly look for inventories to come down. And what we've said in past calls and it's no less true today than it was then, and do we look for inventories to come down anywhere from $50 million to $75 million.

Edward Marshall - Sidoti & Company

Over the next year?

Mark Comerford

Over the next year.

Edward Marshall - Sidoti & Company

Okay, that's good. Thank you. And then the backlog pricing is held up despite the lower levels of pounds that are in backlog. Suggesting demand has slipped a little bit. But my question is, do you expect the prices to continue to fall? And then further, the second and third quarter that you mentioned that you don't expect to see the year-over-year increases that you've seen in the past, do you expect to deteriorate further or do you expect it to be flat from the current levels?

Mark Comerford

First of all, relative to the backlog, what we've historically seen is that the backlog from the end of September through the end of December has remained relatively flat. However, when we have an uptake in the second and third quarters, what we don't anticipate is that uptake in the second and third quarters at this point in time.

Beyond that I'm not sure we can comment much further than that.

Edward Marshall - Sidoti & Company

I understand. Okay, thank you guys. I'll get back in line.

Operator

Thank you. Our next question is coming from the line of Mark Parr, KeyBanc Capital Markets. Please go ahead with your question sir.

Mark Parr - KeyBanc Capital Markets

Hey, good morning.

Mark Comerford

Good morning, Mark.

Mark Parr - KeyBanc Capital Markets

Mark, welcome to Haynes and Marcel, good to talk with you again.

Marcel Martin

Thanks very much.

Mark Parr - KeyBanc Capital Markets

Look forward to seeing you in a couple of weeks.

Marcel Martin

Yes.

Mark Parr - KeyBanc Capital Markets

I had a couple of questions, and again, we're all trying to get incremental color and Marcel, first of all I just want to thank you for the magnitude of color that you've provided on the margin issue. I think it's really helpful and provides a lot of clarity.

And I just… Mark, one thing I wanted to ask you. You've clearly got the operational strategy set. I think you articulated it very well and very distinctly and I thank you for that. Is there anything more you can tell us at this point in terms of what your expectations would be for Haynes from your… how the strategy translates into operational upside over the next three to five years. I mean I recognize that we can't figure out exactly where this economy is going to go near term but I mean if you look at the long term what do you think the company is really capable of based on your due diligence thus far?

Mark Comerford

Yeah, Mark just walking through, if you take the old time way of doing things and you walk through the plans and I mentioned if I had to refer…

Mark Parr - KeyBanc Capital Markets

I like that.

Mark Comerford

Yeah, I had concerns coming here having been a floor engineer 25 years ago and some of the equipment was kind of old back in those days, but you clearly see the investments have been made in the equipment here. So, naturally my expectation is then to see an improved reliability. You've heard the conference calls and the presentations prior to this one and even in this one where we are talking about outages, season planned or unplanned.

I’ll expect to see a reduction in unplanned outages and we are putting together some real nice metrics now to talk about the efficiencies of the equipment, up time of the equipment and taking a look at where our bottleneck operations are and where our reliability is an issue. Meaning unplanned outages and that will be then possible we have to continuously improve and continue to invest. I think we're going to have to continue to invest in certain areas of the other plans. There are some old analog controls out there that need to be upgraded and things like that but how does that manifest itself in the business process?

If you take a look at inventories, working process and things like that Haynes has been forced to fight reliability issues with metal and as we get more reliable equipment and we can improve the velocity through the plan and reliability through the plan, you can imagine, that will allow us to takedown not only working process inventories, but finished goods inventory. And that’s really the target and I appreciate that you put something like a five frame of reference around that.

Obviously, we’re going to continue and push as hard as we can to achieve these goals as quickly as possible, but I think what it does is it positions us much better for an upturn to take advantage of opportunities. You can imagine let’s rework the lower unplanned outages it’s going to result in not only higher quality and higher reliability, but also higher capacity. So as you can imagine my vision for is it to do what our customers want us to do from the point of view of getting them their metal when they wanted in an efficient period of time.

Mark Parr - KeyBanc Capital Markets

Is it fair to say that given all the deep bottlenecking that’s just been concluded and that were early days as far as seeing the upside of this process?

Mark Comerford

My opinion is yes, I mean, we’re still going through as Marcel has mentioned. The commissioning of the furnaces and things like and if you think about it, that’s an absolutely vital, critical piece of equipment, everything runs through the furnaces not once but several times.

Mark Parr - KeyBanc Capital Markets

Right.

Mark Comerford

And it’s also at the endpoints of the operation, or close to the endpoint of the operation. So all your upstream materials and downstream capability to ship is affected by any kind of a reliability issue you might have there. So I am thrilled with the work that our manufacturing people have done in the last couple of months getting a lot of the SOPs put together. Frankly, cleaning up some of the bugs in the equipments as far as bridal system roles and hot zone issues and things like that. I think we’re really starting to see the light at the end of the tunnel there.

Mark Parr - KeyBanc Capital Markets

Okay, terrific. Hey, thanks very much. I’ll get back in the queue here. I’ve got a few more questions, but I’ll let somebody else come on. Thanks.

Mark Comerford

Great.

Operator

Thank you. Our next question is coming from the line Michael Gambardella with JPMorgan Chase. Please go ahead with your questions.

Michael Gambardella - JPMorgan Chase

I have a question; could you give us some color on where you’re seeing the most competition coming in from say, non-traditional players?

Mark Comerford

Historically, what we’ve seen is that, that would come in the CPI or your chemical processing, basically your… initially your projects in the flat products. What we’re seeing and have seen over the last six months is actually the competition really entering all the product forms. We’re talking about everything from slab and billet forging to tube product, wire product. Again, it’s really across all the forms, still primarily in the CPI, but we are seeing some extension over into aerospace and land based gas turbines, particularly on larger projects. So, it’s a wider array of competition today than we’ve ever seen before.

Michael Gambardella - JPMorgan Chase

Okay. And then, just two other kind of small questions. How much are you paying for this consultant to come in?

Mark Comerford

Well I’m not sure we’re going to disclose this (inaudible) but I got to tell you, it’s a relatively modest amount; it really isn’t as significant as it might sound. I have been here, I don’t know, for the last 25 years, and I got to tell you, this is the most efficient and the most productive consultant that I’ve seen. We’ve had consultants in here over the past several decades and we paid a lot of money to, and came away with very little. These (inaudible) are very, very good. They’re very, very focused. What we are paying them is a nominal amount for the return we are getting this is not a, this is in millions and millions of dollars kinds of thing.

Michael Gambardella - JPMorgan Chase

Okay. And then last question, how should we think about the effective tax rate going forward?

Mark Comerford

I think the effective tax rate will probably range between 36% to 38% and that will be a function of the entity or the area generating the taxable income and also our portion and factors here in the US relative to states. So, I think that’s the range, 36 to 38.

Michael Gambardella - JPMorgan Chase

Okay. Thank you very much.

Operator

Thank you. Our next question is coming from the line of John (inaudible) of Fundamental Equity. Please go ahead with your question.

Unidentified Analyst

Mark, could you tell us how you saw business generally in China and specifically how was your business over there, and is this holding up better than domestic business?

Mark Comerford

Yes, John. It was real life. I spent a lot of time in China. When I worked in Carpenter Technology, I lived in Singapore for a couple of years and then when I moved over to Brush Wellman again I lived in Singapore for a couple of years. I spent 5 years in Singapore. During those five years, I was in China, at least every month, if not, a couple of times per month and you heard the stories, just a massive building boom and cranes and concrete everywhere so you can imagine.

China is definitely experiencing a slowdown and you can see it. A lot of our businesses, height of the chemical process industry over there, so we have increased competition as Marcel has mentioned a couple of times from other competitors, who are now willing to move into these smaller quantity type of business, which are strong too. So, we are definitely seeing a lot of competition in China right now. Our business has backed off a little bit in China from previous levels and we are taking look at the key area that we are looking at, where we should be more aggressive in moving after business. But you can definitely see that China right now there is a heck of lot of uncertainty especially with respect to large capital projects. And still they begin to see the direction of their stimulus and things like that. I think this will be a continued period for the next I’ll say, a couple of months until we can get through this clouded picture.

Unidentified Analyst

And you think Mark it will increase your investment in China this year and next?

Mark Comerford

I think as far as we put a nice footprint on the ground with the acquisition of HW Limited over there.

Unidentified Analyst

All right.

Mark Comerford

And we’ve got some great people on the ground. The key is now to continue to support them, pick out the target markets we go after and you can imagine and that’s all question of backwards integration. Find the customers, get them up and active once we get into repeat receipt business, start putting metal on the ground to support more aggressively etcetera. Keep adding value eventually cutting etcetera, etcetera. Follow the Haynes business model that worked extremely well in North America and in Europe and then essentially transplant that model over to Asia-Pacific.

Unidentified Analyst

All right.

Operator

Thank you. (Operator Instructions). Our next question is coming from the line of Nat Kellogg with Next Generation Equity. Please go ahead with your question.

Nat Kellogg - Next Generation Equity

Just Mark again welcome and congratulations on the CEO post. Just a couple of quick questions. Marcel you give us some good color and sort of margins I just what I’m trying to get a sense of look at the pricing number of dollars per pound in the backlog and it seems to be holding up pretty well.

And I’m just wondering if given the fact that we not just seen nickel, but also moly and chromium some of the other input. Comment a little bit you could help us understand how that holding steady and maybe talk a little bit about how mix of taxes versus competition although (inaudible).

Marcel Martin

Relative to the adverse sign right in our backlog it has held up very well. Nickel has been coming down and the other raw materials that we utilized cobalt, chrome and moly. I am not so much cognizant at this point the chrome, moly and cobalt are coming off there high. So, we expect to see that impact the average selling price. The good thing relative to good thing if there is such a thing in this market.

Moly and cobalt is the factor it’s not falling at the same rate at nickel declined. It’s a more I think measured decline in that’s what we really like to see. That’s helps us. I think it’s creates a good timing relative to producing orders buying material for those orders and taking new orders and how we manage that price. So, relative to that we will see decline in the average price in our backlog with a decline in materials, but will that impact us negatively. At this point, if maintain the steady pace and its next approach like it I had been, it should be minimal effect.

Nat Kellogg - Next Generation Equity

Okay. That’s helpful. And then (inaudible) you guys have early $15 million of backlog reduction you expect over the next 12 months?

Marcel Martin

We were talking about reduction in inventory.

Nat Kellogg - Next Generation Equity

Sorry, that’s what I mean, I’m sorry. And that’s you said you say expected to do--

Marcel Martin

Typically yes, we’ve talk about that this in the past would be upgrade and we look to reduce inventories at least $50 million to $75 million over the next year.

Nat Kellogg - Next Generation Equity

Okay. Now I guess on that obviously because you guys have 85% of your business grows through grown service centers, you need to keep probably a little bit more inventory than maybe guys, who were just new. So, I just wondered if you guys could give us a sense of how you look at that, how you manage that, and where are you keep the inventory versus (inaudible) service in the level and what is upside down, what is the best you think you could possibly achieve given the fact in order to assume we need to have a little bit more inventory just because obviously the service center fulfilled that role having inventory on the customers?

Marcel Martin

Well, one of the things unique about Haynes is that we not only have a mill, which has one set of metrics just to how you measure inventory. We also have service centers, and not only domestically, but in Europe, in the area another element of the process. So, I think overall one of the things we'll achieve through the next year's fairly removal of safety stock relative to that, which we had to build, that’s already beginning to come out. I think the improvement and reliability of the equipment will enable us to also reduce inventories further.

What we're doing is evaluating how we stage our inventory. Part of what's taking place in this market is the ability to respond quickly to customers' needs. So, historically what we've done is probably carry a bit more inventory in the service centers than we've needed because of the projects over the past year and the less than accessible reliability on equipment. What we find ourselves is evaluating the process, where will probably carry less inventory in the service centers and probably stage it differently at the mill level, prepare our put slabs on the ground, coils on the ground.

So, that we can respond more quickly to customers' requirements in our manufacturing process, that’s part of what we're endeavoring to evaluate, now that we've completed our CapEx project, we're working with our consultant to evaluate that process, yet to measure what's the best place and how do we stage our material? I think, again, we're still learning that process. We're still evaluating it. Clearly the trend is, we will reduce inventories. But we're not certain to what extent over the course of the year except to still levels we've already talked about.

Nat Kellogg - Next Generation Equity

Okay. That's helpful. And then, just last I know in your press release you’re taking about new credit facility you have did mention that this allows you to buyback, profit and dividend and I realized over the next couple of quarters you guys definitely have some uses of cash as far as the tax payment and funding the pension one. But I mean, I guess, is there anything that we need do, is something you guys are now obtaining a little bit more, maybe you would get towards this time next year that dividend or buyback might be more part of the thought process for uses of cash and rewarding shareholders?

Marcel Martin

I think it's always something we discussed and it's something that we discussed with the Board. The property, capital structure and the proper use of capital in the company, and ensuring that we look at the new agreement and things like that is really allowing us to have more options for improving shareholder wealth through growth, through any of these potential vehicles that we've mentioned and discussed here. So, they are constantly things that are around the mind of the Management Team, as well as the Board, and we are currently, we're developing plans to review those types of things as we speak.

Nat Kellogg - Next Generation Equity

Okay. Thanks very much. I'll hop back in queue, and as always, I appreciate the color, guys. Thanks very much.

Operator

Thank you. Our next question is coming from the line of [Stephan Micus] (inaudible) Capital Management. Please go ahead with your question.

Unidentified Analyst

Just a couple of comments getting back to the gross margins, Marcel, I guess, from what you have said before, we should expect kind of the two points of gross margin that hit you in the fourth quarter due to the equipment issues should come back to us. Is that a fair statement?

Marcel Martin

Well, what I think the issue related to the equipment certainly will come back to us. However, as we have seen over the past 18 months, this issue of price compression and competition from some of the stainless producers who also produce high performance alloys clearly had been occurring over the past 18 months. I think over the past several months, over the last six months it's intensified and now because of the credit issues that are taking place we will see more of that competition, and that's a significant uncertainty so for us to provide.

We just don't know. I don't think anyone at this point. Again, it's a significant unknown, how much more competitive the environments could become. We are seeing it across more product for us we've seen it before and certainly we are working to counter those issues, but as to how much it might be and how much we might get back, that's clearly unknown at this point.

Unidentified Analyst

Okay. I think in terms of the backlog progression, I think what you are saying is historically the backlog increased sequentially in the second, third quarter and now you are saying that you don't expect to see that increase?

Marcel Martin

We don't expect to see that increase.

Unidentified Analyst

Right, okay. That's right. In terms of like recent order trends, is there anyway to dissect how much of the weakening has been from the economic uncertainty or the Boeing strike or things like that versus kind of these stockings that's going on because of the declines in the raw materials. Because it seems like some of the distributor companies and some of your what I would call loosely defined as your competitors talked about the fact that if nickel comes down so dramatically, a lot of the customers are starting to de-stock or kind of hold off hoping that they’ll get a better deal. But in anyway you kind of dissect what's going on in your order trends based on those factors?

Marcel Martin

Well, I didn't talk to or spoke to the -- and we do them let's say relative to the backlog, I mean that's where you need to look to and we've seen the order trends slow for aerospace and land-based gas turbines about 12% over fourth-month period, CPI was off the most. The other category remained relatively flat now crosses the e-trading markets, the FTD markets, energy-related markets. Those are the times we’re seeing our backlog now as to how much more I think about the individual, think about yourself. This environment I think the fact is that people want to conserve cash.

There is so much uncertainty out there probably a little less than there was a month ago. And so I think you’re going to see some of this pullback on restocking, you're going to see service centers run their inventories down at lower say possibly 10. Fortunately, I think everyone recognizes the fact that we’re not leveraging off of the high inventories that you saw back in the 90s or even in early 2000, and no one had gone back to those levels.

So anything it won't be as long as period before people need to restock. Again, there is a lot of things going on out there, one of the things that where we benefit by is the fact that a lot of our product is in support of the maintenance market. That's a recurring level of business as far as our service center support. So, it's not OEMs so much that were impacted by, although we certainly are, the MRO provide some solid base. So again, it's a complex environment today; it's a complex question, and I’m not sure there’s a simple answer. So I think I’ve talked about that one pretty much.

Unidentified Analyst

Okay. Mark, any color to add to that based on the fact that you’ve been out on the road talking to customers.

Mark Comerford

Yes, key factor right now, and it's really tough to get your hands around this. We talked a little bit earlier about service center inventories, and just anecdotally, we picked up a beautiful order day before yesterday or I should say, Friday of last week, and it was a transactional order because someone else in the supply chain had essentially de-stocked that item.

So there's the type of thing where because we had some metal on the ground, we’ve picked up a very nice order, 6-figure order at very attractive price levels. But at the same time, as you enter the end of the calendar year, and most people's fiscal year, you have normal conservatism and purchasing material. Add to that this thing where God knows where the bottom is and nickel and some of the other commodities, and people don't want to keep adding.

More importantly, a lot of people are trying to purge drilling; go through their high value inventory as quickly as possible right now, and add to that the economic situation. My feeling is, until we get into the first quarter of next calendar year, second quarter of next calendar year we won't have a real good feel for exactly what the steady state inventory levels or order levels are going to look like.

It's that crowded right now. I think most of us in the industry for instance are waiting with bated breath to see the revised forecast from Boeing which I think the Wall Street Journal said is going to come out in December.

Unidentified Analyst

Okay, thank you. And then Marcel on this working capital reduction, you've talked about the 50 to 75 million of the inventory reduction but I mean that was a number you threw out, I think you first started talking about a couple of quarters ago. Since then it seems like nickel prices have come down dramatically, some of the other raw material prices are coming down. Shouldn't that actually create a larger dollar, I mean assuming the pounds you take out in inventory are the same as what you talked about a couple of quarters ago. Shouldn't be dollar actually be larger now because the raw material are much lower?

Mark Comerford

They could be. We are not going to, I’m going to speculate further than what we have talked to. I think clearly raw material cost comes down and so were the average cost of inventory. But at this point, I'm going to be careful as to what we provide guidance on.

Unidentified Analyst

Okay, fair enough. Thanks very much.

Operator

Thank you. Our next question is coming from the line of [Mark Kaufman of MOK Capital]. Please go ahead with your question.

Mark Kaufman - MOK Capital

Good morning, gentlemen. Statistically, I know everybody has been talking about the inventory, someone mentioned the share repurchase. As your cash flow dropped $50 million and you could buy your stock here either through the reduction in inventory, having some of the new revolver you have. That's a 33% return on investment. I don’t know where else you’re going to get that and that's just assuming that all you're going to make is $50 million in current facility. So if you really believe that there is a future for this company in three years, five years just for a few million dollars, why not take advantage of that.

Mark Comerford

Well I think it's a good point, good observation.

Mark Kaufman - MOK Capital

Thank you

Mark Comerford

But, however, I think that they’ve just come off year where we made significant progress. We also find ourselves in a situation that there is significant uncertainty ahead of us. And so I think we need to work through that. We are not going to over commit. Once we have an opportunity, if you believe that we are going to be raw for 35. However, in other way if you believe we are going to raw for another 100 years then I think we’ll up with an opportunity to enhance shareholder value.

Clearly what’s on our agenda that we reflect, although we think about what we are planning for is enhancing shareholder value, that's what the previous five years is about. There is different approach to take going forward, but before we make any commitments, we have to work through the next, at least for the uncertainty of the future. Marcel talked about it, he has indicated that it's part of the agenda or the thinking for the board for the management here. So it is not going unattended as to the timing of how much, that's going to be dictated by the economic environment we find ourselves in.

Mark Kaufman - MOK Capital

Well, I appreciate that but $14 versus maybe $28 in the future is just something to think about.

Mark Comerford

We firmly do. We do think about.

Mark Kaufman - MOK Capital

Okay, I appreciate it.

Operator

Thank you. Our next question is coming from the line of [Jonathan Brown of ROL Capital Markets]. Please proceed with the question.

Jonathan Brown - ROL Capital Markets

Can you explain a little bit about how the competitive dynamics work in terms of the pressures that you are seeing on pricing versus A, the counterbalancing impacts of the MRO business on the one hand, and the proprietary products that you have on the other hand, specifically the ones you stated in the past at different times 45% plus that have no real competitive offering out there?

Mark Comerford

Well, I think it’s important to look in this context. Where were we 15 years ago, 10 years ago, five years ago and today? If we were in, if we have not altered what we do or how we do it through enhancing our service centers adding value and continue to support our R&D program new outlook, we clearly wouldn’t be doing as well as we are today. We are significantly ahead of anywhere we’ve been in past downturns in the market and we’re doing very well in that context. However we still do see competitive situation particularly because of the CPI market.

And that learns itself to the particularly the achieving aspects or valves and fittings plate and sheet for vessels. Those are the kinds of places where we see the head-to-head competition at large project business and smaller project business. Our retrofit type business and we’re seeing that now across the board, you’re also seeing a creep into anywhere you’re having large project.

We will see business competition, very active competition and create price compression. So it’s pretty much what you find in an environment like this where if the company has the capability to do things one of those things is taken away from him, who look to do the other at a higher level do that create that utilization of the equipment and the asset that processes that’s we’re facing.

Jonathan Brown - ROL Capital Markets

And with the margin issue created by the commissioning issues in the same operating procedure issues. A factor that exacerbated the competitive pricing issue because you weren't able to sell products that you otherwise would have.

Mark Comerford

Through the course of ’07 and ’08 where we’re going through the capital program that certainly did make that process more challenging, exacerbated it, to use your word. However, even though we've come through that now, we'll have continue to occur over the past 18 months is the situation has become more competitive. Look what's happened to the auto market, with the home market, the commodities market, so the situation all things being equal, we could have returned to a higher level of margin.

However, that competitive environment intensified. It didn’t remain a status quo. It became more competitive and it's slightly in the short term and possibly the long term, that becomes even more so.

Jonathan Brown - ROL Capital Markets

Right. But checking out, you mentioned housing and auto, which are not one part of your big three specifically. Yet, of course you costed up the CPI pricing issues in the past, but on this call you're talking also about aerospace and land-based gas turbine pricing issues. Could you explain why that has occurred and why again the proprietary allies that you're selling into those areas and in certain areas where you can effect into why would those be subject to the same type of price competition that you're seeing in other areas?

Mark Comerford

I think there's about four or five questions in there. So try to pull them apart a little bit. Now you talked about first of all, we, all competitors are people who can make famous steel products, and they make high-performance alloys. If the stainless markets have declined for the housing market or for the automotive industry and for the CPI markets, because a lot of stainless steel products, those get used in chemical processing facilities.

So when those markets decline, they gravitate to the high-performance market, because the market has remained a bit more robust. So that’s where that competition comes into play.

Now like everything else and we do have some opportunities from our proprietary specialty type products, they do retain their profitability or their margin better than the commodity type performance but that's not to say that they don't come under pressure to the extent that if projects being considered for retrofit or new project, there is a cross benefit analysis done and if somebody has a budget and they can get it done less expensively by using a commodity type alloy or even a stainless steel type alloy, they may choose it because of their own budgetary constraint. But again, the complex process or the factors to it. I hope that clarifies some point a bit.

Jonathan Brown - ROL Capital Markets

Let me ask you another question in terms of competitive environment. First as in cash part presented last week, I gave some commentary that was actually very consistent with your last quarter, as well in terms of the market but they are seeing for gas turbine, what's going on there. Is there any reason why you should be seeing a different landscape than they are? Is there something different about the type of customers you are selling into? The type of alloy that you're selling, that would make what environment you described different from the environment they've described?

Mark Comerford

Well to the extent that, processing taskforce part is primarily forging, operation where we provide some price on relatively small basis where we provide product is in the plate and sheet form. But to that extent, those markets still remain healthy. We have some extent, we have seen decline in the backlog order entry, probably more so from the de-stocking process then an actual decline in bills. But we see competition in those products also from the likes of ATI or BDM or even Special Metals which is part of precision cash process. We are not saying that market is and not sure what you are referencing in context of that market. It remains

Jonathan Brown - ROL Capital Markets

There is specifically saying as I am continuing to see strong order strength there and they noted specifically that those types of projects we are seeing an increase in level and the usage of high performance alloys.

Mark Comerford

And again where we can… the issue of form or primary a forger and it’s the issue of what exactly high performance alloy are we talking about. Again there are different kinds of high performance alloys in the context of titanium, zirconium even high nickel type alloys. So, I am not sure what they are doing. Again, I can’t speak for them I can just tell you about what Haynes is doing.

Jonathan Brown - ROL Capital Markets

Okay, I appreciate that. I will turn back in queue, thank you.

Operator

Our next question is coming from the line of Mark Parr of KeyBanc Capital Markets. Go ahead with your question sir.

Mark Parr - KeyBanc Capital Markets

Hi, Thanks again. A couple of questions. I was wondering, Mark, do you have any expectations or color you can give us on potential contribution from your Chinese acquisition over the next 12 months.

Mark Comerford

Essentially Mark, it’s a marketing organization and a sales network and distribution network. We've seen slowing over there most recently due to a lot of competition and some delays of capital projects that we are seeing in China. And my answering the question for you along those lines I mean essentially what we are believe our sales and revenue in China in the last year were in the order of $60 million.

Mark Parr - KeyBanc Capital Markets

Okay.

Mark Comerford

So, I mean that’s we are looking at those types of numbers possibly a little bit of an effect from the slowing that we’re seeing right now.

Mark Parr - KeyBanc Capital Markets

All right. So the acquisition was basically bringing in independent reps in house and essentially just requiring the marketing organization.

Mark Comerford

Yes. That’s pretty much exactly, yes.

Mark Parr - KeyBanc Capital Markets

Okay, all right. Now, I had another question I was wondering and I don’t know if Mark this is better for you or for Marcel, but Marcel are you seeing any differential in terms of the level of competition in the international order book versus the domestic order book?

Marcel Martin

Of course service continues to perform very well, particularly in Europe. And again, we haven’t seen nearly a level of other competitive not to the extend we’ve seen in the US decline in their backlogs have not been as significant as much as in the US.

Mark Comerford

And its more market related Mark than geography. I mean, it’s easy to take a look at baskets and break them out geographically. But if you think about our Asia Pacific business it is still very heavily CPI dependent, where the European businesses allow a lot of power generation and aerospace type business which the aerospace and power generation businesses are still doing very well. We’ve seen reductions in backlogs and things like that in order entry as we see the people I think right size their inventories and right size their supply chain for concerns in the above the macro economic environment.

But essentially, I think everywhere you look and we mentioned it earlier in the call the land-based gas turbine backlogs look real good, you know they’re tracking with me and Rolls-Royce and GE and everybody reporting in Aerospace side, the engine backlog still looks real good. I think a lot of it is second, third geo fabricators and the distribution network are just real concerned about inventories, and I think that’s really why we’ve seen any kind of a slowdown in those markets.

Mark Parr - KeyBanc Capital Markets

Okay. Right, that’s really helpful. I appreciate that. I had another question on, your fixed costs or quality of the non-raw material decide your cost of sales. Can you talk a little bit about the flexibility that you’d have in moving say, the fixed cost side of your operations up or down, like say in 5% or 10% reduction in shipments in fiscal ‘09.

Marcel Martin

With the extent we’re obviously taking steps to manage that cost as aggressively as we can through the consultant we’ve hired, look to make improvements there. There is a certain amount of over time relative to our manufacturing operation that we can manage, and provide with some flexibility to reduce that cost.

Mark Parr - KeyBanc Capital Markets

Okay.

Mark Comerford

It’s Mark and I think it’s fair to say though that just in a very broad picture, if you take a look at our volume compared to the volume tonnage or pounds compared to some of the big guys out there. We’re much more volume sensitive operation.

Mark Parr - KeyBanc Capital Markets

Okay, all right. And one last question I had, and again I appreciate this call, it’s been really helpful. Mark, I was just curious that to what extent you could give us your philosophy on executive compensation or say management compensation. Would you expect to see the compensation become more or less variable as we go forward and what incentives you think are most important to make sure that your management teams got their eyes on the right ball, so to speak?

Mark Comerford

The objective, when you’re in a managerial role with a company, especially when you’re in a strategic management role is the shareholder value and I think that is the key component. And frankly someone in my role or my direct reports and keep when the Board, I think it’s pivotal that we be tied to that shareholder value, over both short and long term.

Mark Parr - KeyBanc Capital Markets

Okay, terrific. Thanks again.

Operator

Thank you. Our last question is from the line of Edward Marshall, Sidoti Company. Please go ahead with your question.

Edward Marshall - Sidoti Company

Thanks again for taking my call. As we talk about credit issues, there is a question, what risks do you see to your receivables going forward from your customers?

Marcel Martin

We are very aggressive, I mean we’ve got a very good credit process. We’re very aggressive in our credit. The most part for example, when we deal in Asia, we deal on [LC] primarily. We do in fact have credit insurance for our export receivables. We haven’t seen any deterioration up to this point. We are drawing a hard line relative to our customers as to terms. So, again, at this point, we’re fine and we’re going to continue to be aggressive in our application of our credit policy.

Edward Marshall - Sidoti Company

And is there any shift in the capacity that you assume that you can achieve, I believe in the last comment it was 0.35 million pound by fiscal 2010? Has that shifted to the right maybe a little bit or?

Marcel Martin

I think what we are talking about, we talk about capacity and we currently have through the process. We have the capacity issue at 0.35 million pound. I think the issue is how do you fill that capacity and this is the environment which we find, that question we have, and it’s a difficult environment, the capacity there, and clearly for the long-term, well situated to deal with a lot of additional capacity, but in the short-term, the function of just beginning to operate the business and it continue to pursue orders.

Edward Marshall - Sidoti Company

Okay. And certainly back to cash flow question that come up couple of times throughout the call here. Would you be surprised the cash flow wasn’t stronger than it was this year or operating cash flow?

Marcel Martin

Stronger than?

Edward Marshall - Sidoti Company

Than fiscal 2008?

Marcel Martin

I think we did very well in 2008 in our cash flow.

Edward Marshall - Sidoti Company

Do you think it will be stronger next year?

Marcel Martin

I’d like to think that depending on what happens we should be able to at least match that absolutely.

Edward Marshall - Sidoti Company

Okay. And then the last question I have understanding you made a perfect clarity there is uncertainties in the market. Which market would you think would be the first to show pocket of strength and which will be the biggest concern if it continued to deteriorate?

Marcel Martin

The market at this point that shown the most deterioration is the CPR chemical processing industry that clearly is the one is deteriorated or soften the most. I think what will be important for us is what will be the Boeing airbus forecast.

Edward Marshall - Sidoti Company

Yes.

Marcel Martin

And I think that’s a function of what happens with the less orders. Commercial carriers don’t buy planes, they lease and based on the credit environment that exist today that the challenge that’s the significant unknown. So, if that can be resolved and the order book of 7000 planes I’m sure there will be some cancellations, some pushout, but that materially stays intact, that funding at both aerospace business in the long-term.

Mark Comerford

If you remember the last time we went through this, the first thing that seemed to get canceled were I think the corporate jets and then private jets, executive jets then regional jets and then the big items started to go. So, those are the kind of things we are watching in the aerospace industry. Myself has refer to CPI industry is probably our largest concern right now that’s where we’re seeing the most softness, that’s where we’re seeing the most competition.

Those are typically tied very large capital project. So, it will be interesting to see how that changes in the next three to six months, to see if there are big project delays or not. Or if indeed the world takes this is an opportunity to invest in infrastructure and then in land-based gas turbine business. Long-term I don’t think too many people are projecting decrease needs for energy. So, I think it’s going to be some question of what is the supply chain look like in that market.

Energy needs have constantly been increasing, but I think most people will recall I think was back in the 2001, 2, 3 timeframe that all of the sudden somebody open the garage door and there were heck of lot of land-based gas turbines and inventory everywhere. I think shutdown for a while. So, right now we’re not seeing that situation aerospace and land-based gas turbines. We think we’re in pretty good shape. The CPI industry have a lot of concern for us right now. But again it will holding up a heck of lot better than a lot of other people in the industry at this point.

Edward Marshall - Sidoti Company

So, based on that commentary about the aerospace and land-based gas turbines, would you be surprised that the reduction backlog is a temporary scale in those two markets based on the yearend inventory control and some of the customer basis.

Mark Comerford

Yes, and that’s we’re really waiting to see what kind of clarity is offered by the new Boeing forecast and how that will affect the supply chain and then we will keep our eyes on things like the backlogs for the land-based gas turbine businesses as well. That’s going to be really the defining issue as to whether or not we’ve got a temporary supply chain issue or if we have a demand issue going forward.

Edward Marshall - Sidoti Company

Perfect, thanks guys I appreciate it.

Operator

Thank you. Ladies and gentlemen we reached the end of our allotted time for questions. Now I would like to turn the floor back over to management for closing comments.

Mark Comerford

Just want to thank everybody one more time for joining us and thank you very much for your support of Haynes. As I've stated previously, I'm absolutely thrilled to be with the company and the people I've met with in my first six, seven weeks, the customers, employees, the management team, Board, etcetera. I'm just delighted to be here. So, I know we're going through a pretty tough economic storm right now along with everybody, but again, I think we've got a real strong product pipeline in place.

I think we've got great relationships with our customers. I think the issues that we have we've talked a little bit about the liability and things like that. I think we understand them. We're focused on them. We've certainly in the last few years put capital towards resolving those issues and I think we've got a real good story to tell in the next few years. So, again, thanks very much for your support. Hope everybody has a great holiday season and look forward to talking to you and meeting you all again very soon.

Operator

This concludes today's teleconference. Thank you for your participation.

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Source: Haynes International Inc. F4Q08 (Qtr End 09/30/08) Earnings Call Transcript
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