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Haynes International, Inc.(NASDAQ:HAYN)

F1Q10 (Qtr End 12/31/09) Earnings Call

February 09, 2010 09:00 am ET

Executives

Stacy Knapper- Vice President & General Counsel

Mark Comerford - President & CEO

Marcel Martin - VP & CFO

Analysts

Edward Marshall - Sidoti and Company

Mark Parr - KeyBanc Capital Markets

Nat Kellogg - Next Generation Equity Research

Dan Whalen - Capstone Investments

Tony Rizzuto - Dahlman Rose and Company

Operator

Greetings and welcome to the Haynes International Incorporated’s first quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Stacy Knapper, Vice President and General Counsel. Thank you. Ms. Knapper, you may now begin.

Stacy Knapper

Thank you, Jackie. Good morning everyone. With me today are Mark Comerford, President and Chief Executive Officer of Haynes 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 1933 and Section 21E of the Securities 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 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 to 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 particularly in its Form 10-K for the fiscal year ended September 31, 2009, the company undertakes no obligations to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Thanks and I will now turn the call over to Mark.

Mark Comerford

Thank you, Stacy. Good morning everybody and thanks for joining us. I will open the call today with comments about our results by market along with what kind of activity we are seeing in the market place. I will also update you on some of our operational activities before handing the call over to Marcel for more in depth look into the financials. Overall we’ve seen an improvement in order entry activity and our backlog has expanded. This trend has continued into January.

Moving to our markets starting with aerospace, this market represents approximately 35% of our first quarter business with revenue of $28.4 million down 43% from first quarter of ’09. Order entry in the first quarter in this segment improved from fourth quarter ’09 and that trend has continued into January. At [engine] products our largest aerospace end market, we are not yet seeing high volume blanket orders but we are seeing stronger demand with smaller short lead time deliveries.

Order entry in the air frame market which is primarily hydraulic tubing for us was very low in late fiscal 2009 and first quarter '010 but we’ve seen some improvement here at the beginning of our second quarter in January. In 2010 passenger miles are projected to increase 4% to 5% and freight miles are expected to rise 7% as I mentioned we are seeing an increase of the rush orders in this segment and my recent visits to the West Coast and Japan some of our customers are also reporting rush requests for their products serving aerospace industry.

In prior calls, we’ve discussed the working engine manufactures did in the past 15 months to lean out the supply chain. That effort appears to have alleviated the excess inventory. On the airframe side, however there still seems to be excess work inventory in the chain. Specific to Haynes, our overall aerospace order entry levels have increased over the past eight weeks or so favorably impacting the backlog. It will be interesting to watch this market over the next six months to see if its transactional activity yields the larger blanket orders. If and when that happens, we will note some level of confidence has returned to the supply chain.

In land based gas turbine market which represented roughly 18% of our business in the first quarter, the de-stocking and weakness we mentioned in November continued in the quarter one. Revenue in this market was $15 million down 53% from first quarter '09. If you recall we saw the downward trend in this market in fourth quarter '09 and sequentially revenues were essentially flat. Both OEM and MRO activity has declined interesting that we have seen some one-time rush of orders.

Jointly with certain customers we have responded well to pickup small levels of new business over the past 6 to 12 weeks. We are also starting to see some reorders for key materials for which order was extremely low for about six months due to over stocking in the supply chain. Broadly, it looks like this market will be at depressed levels in 2010 and the anecdotal information I just relate to you is indicative that we believe demand in this market will be very spotty necessitating speed doing whatever orders are out there in the market.

Our sales into the chemical process industry were $20.8 million in the first quarter which was approximately 26% of our business. Net revenues were down 33% compared to first quarter of '09 pricing in this market remains very competitive or 45% year-over-year. Our first quarter results also included a mix shift to higher volume lower price business due to the timing of some specific project related business. This market has also recently been a contributor to our expanding backlog as we landed our large project in the December January time frame.

Finally our other markets have revenue over $13.1 million which was approximately 16% of our business in the first quarter. This revenue was up 32% compared to first quarter 09. [Quarter] activity and FGD has been strong and in discussions have had with key accounts they feel once the economy improves a bit more on these projects will be reopened.

Order entry in the automotive and industrial heat treating markets remained at very low level but it appears to have bottomed. Our net revenues of $81 million in the quarter were up about 40% compared to 1Q ’09 and up about 5% compared to the prior quarter, backlog dollars in the first quarter grew 3.5% sequentially a net trend of higher order entry continued through January. But it’s still too early to tell whether this trend will hold, we are pleased to see that backlog level is finally improving and order activity strengthening.

Also notable gross profit margin improved to 8.5% in the first quarter compared to 5.7% in the fourth quarter of ’09 and a negative 8.3% in the third quarter of ’09. The sequential improvement in 1Q '10 occurred despite the revenue level that was 5% below the fourth quarter of ’09 and 18% below the third quarter of ’09. Marcel will give you a lot greater detail into this.

Operational as we finish calendar 2009 with our best safety performance ever reporting no loss work at the cases that are Kokomo, Arcadia and Mountain Home manufacturing facilities. We are also building our Haynes history of continuous improvement by implementing lean techniques in our facilities and incorporating the project management and problem solving riggers at Six Sigma. Haynes has always had a strong commitment to quality and waste reduction for utilizing principles of statistical process control and continuous improvement. However, we have recognized that there are some things we can learn and efficiencies we can gain by implementing lean techniques in Six Sigma methodology.

Our UK operations have improved there responsiveness by introducing lean and significantly reducing debt time between operations that we are taking those cases and expanding them where applicable across our other operations. We have also incorporated in the last 12 months, the methodology of Six Sigma problem solving and project charters that are Kokomo operations. Our Black-Scholes and process engineering programs are contributing to the gains we are seeing in our operations but we recognize we still had tremendous opportunity as drive waste out of our processes take advantage of our CapEx investments and try to offer a better product especially with respect to lead time and reliability to our customers.

During the fourth quarter, we completed the initial phases of our upgrades to the 4-high Steckel rolling mill by rebuilding the main drive motors and updating the electronic drive systems. This will improve our reliability and throughput and broaden our capabilities while providing a higher quality, more consistent product to our downstream operations.

I just want to take a second to make a comment on the 4-high project. Our people did a remarkable job maintaining and improving our cost structure quarter-over-quarter during a two-week outage on the mill and as many of you know that mill is the centerpiece of our manufacturing.

We really had some great people doing some great planning and great execution to [attack] such a project and get the results they achieved with minimal impact on our customers. With that let me turn it over to Marcel for more details on the financials.

Marcel Martin

Thanks Mark. The key items I want to comment on are the effects of volume and pricing on growth margin, backlog, working capital management, liquidity and our outlook for the next two quarters. Net revenues in the first quarter of fiscal 2010 were $81 million, a 39.7% decline from a year ago. This $53.3 million decline is the result of an 18.2% decline in volume which accounted for $24.4 million of reduced revenue and a $26.3 million decline in average selling price per pound which accounted for $28.9 million of reduced revenue.

Gross profit margin in the first quarter of fiscal 2010 was $6.8 million compared to $18.8 million a year ago which was a reduction of $12 million. Our gross margin profit as a percentage of net revenues was 8.4% in the current period compared to 14% last year. The items that contributed to the reduction in gross profit margin between periods were reduced net revenues caused by significantly lower volumes and selling prices which had the effect of reducing the gross profit margin by approximately $8.6 million.

The lower fixed cost absorption due to reduced volumes, particularly that of sheet compared to last year with reduced gross profit margin by approximately $3.4 million. In comparison, the performance for the first quarter of fiscal 2010 compared to the fourth quarter of fiscal 2009 represents an improvement in gross profit margin of $1.9 million sequentially between the fourth quarter of fiscal 2009 and the first quarter of fiscal 2010, volumes were flat at 3.9 million pounds and the average selling price per pound declined by $1.11 between quarters which was offset by a reduction in the average cost of (inaudible) per pound of a $1.61.

Reduction in cost per pound is equally attributable to lower material and raw material cost between quarters. The reduction in raw material cost reflects the effects of cost reduction efforts in improving the equipment efficiencies. At December 31, 2010 the backlog increased from a $106.7 million to $110.4 million or about 4% and backlog pounds increased 9% from 4.5 million pounds to 4.9 million pounds.

We continue to believe that backlog is a very good indication of the level of future revenue. The change by individual markets of the US backlog dollars from December 31, fiscal 2008 to December 31, 2009 and from September 30, 2009 to December 31, 2009 are as follows.

Year-over-year aerospace declined by 52% compared to last year. The backlog for CPI declined by 55%, land-based gas turbine backlog was down 40% and the other market was actually up 8.6%. On a quarter-over-quarter basis from 9/30/09 to 12/30/09. aerospace was down by 1.5%, chemical processing was down by 3.4%, while land-based gas turbine was up 22.2% and other markets was up almost 15%.

At the end of January, backlog dollars increased to $121.6 million from the end of December and pounds increased to 5.5 million pounds from 4.9 million pounds. The increase in backlog for January was primarily at aerospace and airframe applications and to a lesser degree in CPI project business, which really represent one-off type business, and will come and will be recognized probably in the latter part of fiscal 2010.

Based on the current level of order in trend sales is anticipated at the backlog will increase moderately to the second and third quarters of fiscal 2010. The improvement in backlog may begin to positively impact net revenues in the fourth quarter of fiscal 2010. Our key focus has been to position ourselves; so that the inventory bill requires to support the eventual economic upturn will not be as demanding as it was in fiscal 2007 and 2008.

Inventory and cost reduction efforts continue to be a high priority in the organization. We finished fiscal 2009 with controllable working capital which consist of inventory, AR,AP, net of tax AR and AP as a percent of net revenues at 59.4%, and we're able to maintain that same percentage to 21/31/09.

The goal of the next several years is to reduce the ratio to 45% which is similar to levels of fiscal 2006 or 2007. And that can be achieved as soon as the raw material cost remains steady, the company will be able to increase sales without any additional cash requirement for working capital. Our liquidity position remains strong. Haynes has generated significant cash since our restructuring in fiscal 2004.

During the five years, subsequent to the restructuring Haynes generated a $161 million in cash from operations which was used to reduce the [914] revolver debt of $85 million to 0 and to fund $77 million in CapEx projects. In addition, the company also generated a total of $102 million in cash from the 2007 stock offering and the proceeds from the TIMET conversion agreement.

Currently we have availability of a $120 million subject to reserves and borrowing base along with cash of $97.5 million at 12/31/09. The reduction in cash from the beginning of the year received a CapEx of $5.1 million and dividend of $2.4 million. Of the CapEx spending in the first quarter, approximately $3 million of the $5.1 million was spent on the 4-high equipment including motor room upgrade and furnish rebuilds.

$900,000 was also spend on Arcadia at our two wheeler facility upgrading our [pilfering] and pickling operations. Based on our current operating plan, and adjusted for the newly initiated dividend it is our objective to finish the year with approximately $90 million in cash which is approximately $10 million lower than our previous guidance due to the initiation of the dividend.

For at least the next two quarters, net revenue should be similar to the revenues in the first quarter with net income at breakeven to a slight loss in the second quarter and breakeven to a slight profit or small profit in the third quarter.

Pounds shipped in the next two quarters should cost approximately equal the pounds shipped in the first quarter. In summary significant progress has been made at Haynes over the last five years, we are focusing on the current environment to optimize our position and most importantly we are planning our next five years in order to continue the process of creating value for the shareholders.

As noted the company generated significant cash in the most recent five years and it’s management’s opinion that despite the current challenges, the company will generate significant recurring earning and cash flow to fund all corporate requirements including working capital, CapEx spending, pension funding, dividend payments and also increase our liquidity on a prospective basis.

With that let me now turn it back over to Mark.

Mark Comerford

Thanks Marcel, we have mentioned you previously that work we have been doing in the energy sectors its [solar], advanced ultra supercritical turbines, fuel cells and also some work we are doing in the chemical areas supporting the nuclear and pharmaceutical supply chain, among our myriad of other things. Our HASTELLOY G-35 hybrid BC1, Haynes NS163, Haynes 282 and HASTELLOY C-22 HS was gaining traction with orders on the books. Some of those orders are production orders and some of them are build in the prototype stages. Along with several new applications we are developing for established alloys.

I think you can see we are committed to at having success and broadening the demand for nickel base and cobalt base alloys world wide. In short our new product and new application pipeline is strong and we are investing further in broadening and deepening it. I think also we've noticed you may have heard recently the Carpenter announced an introduction of a premium material and from longer term initiatives with nano materials. Allegheny also announced the success we are having with ATI 425 to 718 plus and the ATI 500-MIL.

In my opinion all of these things are great advancements in specialty material. I know there is other companies with new things coming as well and really what we are seeing is a real commitment to advancing core application and continuing to expand the overall market for high performance alloys. In my opinion technology like this is good for all of us in this industry.

Finally summarizing what Marcel and I just covered with you, we are seeing solid progress in our operating results as we paddle through these lower business levels, order entry is increasing as is core activity. And of course we are seeing a stronger backlog. Our pipeline for new products and new application is very strong. We still have more work to do in driving waste out of our processes and developing new markets and with that being said, Jackie lets open the call to questions.

Question-And-Answer Session

Operator

Thank you. We’ll now be conducting a question-and-answer session. (Operator Instructions). One moment please while we hold for questions. Thank you, our first question coming from Edward Marshall of Sidoti and Company.

Edward Marshall - Sidoti and Company

My first question is, it surrounds pricing. We saw the quarter-over-quarter and year-over-year pricing on the individual segments but could you comment on kind of where you see pricing go over the next couple of quarters and as volume stabilize, do we expect that we’ll also stabilize the pricing alignment?

Mark Comerford

Ed I think our pricing is starting up a bit, alloy contents and things like that are starting to pull back reasonably but that seems to have been calming a little bit as well, we like what we are seeing from the point of view of I cant really say that I will say that the aerospace supply chain is booming but it sure looks like the engine manufactures have maybe hit bottom, so that the reorders are nice to see.

All of these things really contribute to us, probably having a little more pricing leverage in the future and being able to see things firm up a bit. That being said everybody in this industry is still operating at 50% type capacity numbers. There is still going to be some [dog bites] out there not only in existing applications but substitution is clearly a factor right now as well as the end users have more of downtime. And I am talking mainly about chemicals process. Add more downtimes so they can put in a less expensive material if they want to, as they have more ability to change out and make those changes.

So I think we are going to continue to see some pricing pressure in the chemical process industry and it's still going to be tough out there but we are encouraged with the things that are starting to firm up a little bit. Marcel anything to add.

Marcel Martin

I think that’s my on point.

Edward Marshall - Sidoti and Company

Okay and then the second one refers that you have gone through is there any loss revenue or did you take advantage of the reduced demand downtime.

Marcel Martin

Actually just leveraging off to what Mark had said the first that we were responsible for that and a lot of upfront planning and we typically taken out this during that time of the year anywhere with the holiday, a little bit of carry over into January. They did a great job planning, there was literally no loss revenues. It was very efficient, no extraneous costs, it was all very well done so it didn’t really impact the company at all negatively.

Operator

Thank you. Our next question is coming from Mark Parr of KeyBanc Capital Markets.

Mark Parr - KeyBanc Capital Markets

Just a couple of quick ones, I think if my memory serves me right, you had a base price increase announcement of 6% to 8% in the not too recent past. And Mark your comments saying that pricing is looking a little better, could you speak specifically around those price increase announcements as to whether or not they are actually sticking.

Mark Comerford

Just to give you an idea Mark when we said the backlog is firming up a bit in December and January, you can imagine that gives a kind of directive to the people in the field that right now its time to test price points. So, we are doing those things. The impact of the price increase, we announced it in December, take affect with orders entered in January. The impact of the price increase itself we don’t think it really hit us until it hit the top line, hit the revenue line and so probably our fourth quarter probably the best way to characterize it.

Mark Parr - KeyBanc Capital Markets

Okay, all right. So if it does your comments would indicate that some of those higher numbers are moving into the backlog right now?

Mark Comerford

Yeah, and I guess you might even say too Mark that on occasion some of the transactional business, if its not hitting the price points that we are offering maybe someone else is picking enough but we have been holding pretty firm to our price points over the last, I would say over the seven or eight weeks.

Mark Parr - KeyBanc Capital Markets

It’s just a point of clarity there, I would hope you would not anticipate to see 6% to 8% outlook in that quarter Mark. We are really talking about some percentage of that 6% to 8% starting to be reflected in that fourth quarter an increasing amount over the balance of 2011?

Mark Comerford

So, if everybody take that upfront you clearly didn’t raise it enough.

Marcel Martin

I want to make sure, this is general Mark. I think you realized the cash we've raised there are usually a bit lower than that.

Mark Parr - KeyBanc Capital Markets

Yeah, I got a couple of other if you wouldn’t mind. The Steckel mill outage that you did can you talk about any capacity enhancements, productivity enhancements, something other than just required maintenance that might have a positive impact on underlying profitability over the next call it 12 to 18 months?

Mark Comerford

Yeah, we will kind of both of us will talk a little bit to this Mark, I'll start it on.

You can imagine when you are running an operation like that, it's huge now great separating force. And by allowing the electronics and the drive systems to what really just never be upgraded since they were put in at 1982, you had a situation where maybe you weren’t hitting the gauge that you were targeting when you were rolling the product. By upgrading these things, now we're pretty much nailing the gauges we were targeting. How does that manifest itself downstream? You can imagine if you are aiming for let's say quarter inch or 0.200, so you're aiming for a 0.220 type of gauge and the materials coming off and they're known as 240 or 250, that results an increased operations downstream, called rolling session those types of things to get your self down to the finish gauge where you have to meet the customers objectives.

Mark Parr - KeyBanc Capital Markets

Was the mill hydraulically controlled prior to this upgrade?

Marcel Martin

Yes it has.

Mark Comerford

Yes. It's really what we are taking principally here is maybe the feedback system and the electronic system. There were analog systems and we've upgraded all the drives to digital now. We've also sequenced things like detention systems between the Steckel boxes and the rolling mill itself. So, we've also had a great mill here and just that now we're moving it out and then upgrading in to today's technology like to be the best way.

Mark Parr - KeyBanc Capital Markets

I mean it's the round numbers thinking in terms of 8% to 12% productivity improvement.

Marcel Martin

I think how we characterized it is with the better gauge control, more reliability on hitting those gauges off the floor high. We've seen the dramatic improvement its really downstream operations in the cold rolling operations. When you think in terms of, if you have a five-session product for example, well that's five session through the cold rolling mill, probably several session through the kneeling line. Now what you're doing is removing potentially one whole session as a 20% reduction in operating cost and then additionally it impacts your velocity through the facility. So it's really not only the cost but its also the reduction in lead time or working capital management as well.

Mark Parr - KeyBanc Capital Markets

Could be more than 10% on some products.

Marcel Martin

On some products absolutely. And that’s for key through markets, its product specific you know we beat up some pretty high separating force materials here. We have got some very strong materials at high [temperatures]. Its what we do for a living. So you can imagine if we run a soft material through that mill, we had the tendency in the past to butcher it pretty badly. And this is introducing a better level of precision and control so that we can run a broader variety or even our own range of alloys much more efficiently with a much better shape coming off the mill like I said much better dimensional control coming off the mill which improves the quality and the efficiency all the way through the downstream operations.

Mark Parr - KeyBanc Capital Markets

That’s really helpful. Thank you very much. One last question I had and I will get back in the queue after this. On the sequential backlog commentary, I think you had indicated that the aerospace and the chemical processing markets were down a little bit from the end of September to the end of December But the land based gas turbine backlog was up pretty meaningfully. And I was wondering it seems like there is given your commentary about pickup in the after market aerospace business it seems like there is a little bit of a disconnect there and also the kind of our thought process here is that their land-based market is extremely late cycle in nature and probably was going to be the last place that you would expect to see a meaningful sustained pickup in backlogs. So I was wondering maybe if you could talk to those two issues and just provide a little more color on some of the recent changes in backlog momentum.

Marcel Martin

I think part of what you are saying, Mark with the particular land-based gas turbines, that’s very susceptible to project business, one-off type business and it’s oriented right now primarily to MRO type business. We are seeing a higher level of activity there although at a very low level it is increasing but it is still very spotty, so we will get bumps from quarter-to-quarter based on just some project business relative to that. A lot of pounds, but it’s very quick turnaround times and have to have the material with the next 30 days kind of process.

Operator

(Operator Instructions). Our next question is coming from Nat Kellogg of Next Generation Equity Research.

Nat Kellogg - Next Generation Equity Research

It sounds like maybe you guys have just given more color, but it sounds like there’s been a little bit more quick turn, a little bit more transactional business in the quarter so I was just wondering if you could maybe give a little bit color on how that mix shift has been over the last quarter, this quarter and maybe what you see it over the next quarter or two?

Mark Comerford

We have had a higher level of transactional business over the past quarter, but it’s from primarily oriented in the other category and we are talking about wear, corrosion, waste incineration, geo thermal, new healer flue gas, oil and gas heat treating, so we are seeing more transactional business there I think it’s a reflection of the suppliers, the fabricators working, not really replenishing their inventories working specific projects.

You see it there just because it's typically again quick turnaround, it’s not blanket or replenishment where, it’s I have a job, I need to get it done, can you help me out right now? I don’t think we are seeing as much of that, all though we are seeing it in the aerospace and chemical processing business, the primary theory is in the other category.

Nat Kellogg - Next Generation Equity Research

Mark I wonder if you could maybe just give us a little bit of a color on some of the other opportunities out there and maybe a little bit sort of what you think might be the biggest opportunity and then maybe what you think is most likely to be sort of most significant near-term opportunity?

Mark Comerford

As far as the total markets, or just the other markets that we are looking at?

Nat Kellogg - Next Generation Equity Research

The other markets that you are looking at, you guys gave some nice color on the total markets, but just some of the other applications, obviously I realize they are going to be smaller and it’s going to be a long time to get sort of big, but a little more color, that will be great.

Mark Comerford

I think a lot has to do with alternative energy and you can further segment that down and as Marcel just mentioned to you we had a lot of activity this last quarter and other markets might be the best way to put it and the mix changed quite a bit. In other markets, things like our automotive business, our industrial heat treating business and even FGD business has not been extremely strong, we had a real strong quarter this past quarter and shipping things into its chemical application, but it’s supporting the solar industry and then another one for really a heat transfer or a storage application in the solar industry.

So, the alternative energy does present a real good opportunity for us going forward and there is lot of small things going on, as people talk about engines burning hotter and engines of course jet engines, but all the way down to automobile engines too burning hotter and burning off more [effluence] might be the best way to put it, that’s going to create better demand or at least people who never looked at our types of materials before starting to look at our materials because of these higher temperatures.

So there’s some new application work going on in that area. In fact there is one application going on that is an old application but it’s a new one for us than it’s a new, its one of our new materials that they are looking at as well so there’s really just as things run hotter which is a lot of this clean energy that people talk about and as chemicals get more aggressive as we talk about and things like pharmaceuticals and their turnaround times and things like that. There’s just a broader demand I think coming on for these types of materials.

Another good example too, Nat, I don’t mean to bore you with that but I get excited about the application side of it, our gas is deep wells, there’s an area that’s starting to look real hard at a lot of the newer materials that Haynes is putting out, things like the C-22HS so as they go deeper into more solid environment a lot of our materials could be potential solutions we are being looked at in those types of areas too.

Nat Kellogg - Next Generation Equity Research

On the CapEx side, in Q4 call, you guys gave the-two year plan, but I am just curious if you are getting any update on sort of what CapEx is likely to be this year and I know that’s been $5 million in the first quarter and just what you might expect over the next couple of quarters.

Marcel Martin

I think the guidance we had provided at the beginning of the year was, we were looking to spend approximately $15 million this year and I think we are on track with that, $15 million to $16 million with probably $5 million to $6 million of that on the four-high specifically. So I think that’s pretty much tracking at this point where we thought we would be.

Operator

(Operator instructions). Our next question is coming from Dan Whalen of Capstone Investments.

Dan Whalen - Capstone Investments

My question is more of a follow-up question to Mark, as far as on the capital and efficiency programs you have underway. Do you any cost reductions for pound or profit improvement for pound targets, you can share with us, any order of magnitude?

Mark Comerford

I think we really typically don’t give that specific relative to the guidance we’ve provided. I think the thing is that a part of what impacts that is the timing, the product mix that we produce to, but we really haven’t provided that kind of specific guidance. I think the guidance that we did talk about if you think about what we do here at Haynes and the number of sessions and the difficulty in producing our product. We can take a session out of a rolling session and kneeling sessions. Those are pretty specific items and they are pretty dramatic, and we talk about something that takes four sessions or five sessions, can reduce a session.

That’s pretty dramatic, that’s 20% and remember sheet is our primary product plate, that 70% of what we do here and you get the flavor for the direction if not the specific pound impact.

Dan Whalen - Capstone Investments

Then just regarding your expenditures, you mentioned pension plan funding, any color you can add on that in terms of your anticipation for the year?

Mark Comerford

For this year. As far as pension goes, we are looking over the course of this year to fund approximately $15 million to the pension plans. In the liquidity section of our MD&A, there is a cash obligation schedule that indicates over the next five years. We are looking to fund our pension plans to the tune of about $80 million, all plans are fully funded, so essentially we are right in that process.

Operator

Your next question is coming from Tony Rizzuto of Dahlman Rose and Company.

Tony Rizzuto - Dahlman Rose and Company

Could you refresh my memory on the terms of the time that titanium [whole] processing agreement you've at the Steckel mill and I wonder how long this runs, and with the upgrade that you're making here in terms of gauge controls, are you able to secure other agreement such as these?

Mark Comerford

As far as the time, that agreement goes, it was initially 10 years to renew and run over 20 years was a $50 million upfront payment. And then from that perspective on a perspective basis, we will convert material for them up to 20 million pounds, and we have a schedule a conversion rate schedule that will let charge for that product converted, so it’s much like any other conversion agreement, now that they made the initial payment. So it's 20 years, up to 20 million pounds at a predetermined rate schedule.

Tony Rizzuto - Dahlman Rose and Company

With this upgrades, you guys are making to the Steckel mill now, does this, lot of questions have been asked about the productivity enhancement. You guys must have a number that you talk about in terms of what this could do to further optimize the capacity there?

Mark Comerford

As far as the 4-high goes, we took on to TIMET agreement we had, what we did is monetized excess capacity. So even that will happen is that with these upgrades on the 4-high, we will have additional capacity, but as far as the titanium goes, we're limited in what we can do from a conversion perspective relative to titanium. As to other sheet products, rolling slabs or other non-titanium products that’s always a possibility.

Operator

Thank you. There are no further questions. I would like to hand the floor back over to management for any closing comments.

Mark Comerford

Thank you, Jackie. In closing we just want to say thanks everybody very much for your support of Haynes. We would also like to wish our employees, customers and friends in Asia a healthy and prosperous New Year and again thanks everybody and we look forward to talking to you in a couple of months.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Haynes International, Inc. F1Q10 (Qtr End 12/31/09) Earnings Call Transcript
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