Haynes International, Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Greetings and welcome to the Haynes International, Inc. Third Quarter 2015 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. (Operating Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. David Van Bibber, Controller and Chief Accounting Officer. Thank you, sir. You may begin.

[David Sean van Bibber:]

Thank you very much for joining us today. With me today are Mark Comerford, President and CEO of Haynes International and Dan Maudlin, Vice President and Chief Financial Officer. Before we get started I’d like to read a brief cautionary note regarding forward-looking statements. This conference call contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities and Exchange Act of 1934. The words believe, anticipate, plan and similar expressions are intended to identify forward-looking statements. Although we believe our plans, intentions and expectations regarding or suggested by such forward-looking statements are reasonable, such statements are subject to a number of risks and uncertainties and we can provide no assurance that such plans, intentions or expectations will be achieved. Many of these risks are discussed in detail in the company’s filings with the Securities and Exchange Commission, in particular Form 10-K for the fiscal year ended September 30, 2014. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. With that let me turn the call over to Mark.

[Mark Comerford:]

Thank you, Dave. Good morning, everyone and thanks for joining us today. Hopefully you’ve all seen the press release and had a chance to review it. We’ll follow our standard agenda in today’s call. I’ll open with comments about the business and our end markets and then Dan will give you greater detail on the financial results. As we mentioned in the press release, we benefited from continued strength in our specialty niche project applications along with strength in our core aerospace business, which offset some of the headwinds impacting the industry. In Haynes case, we saw the land-based gas turbine market continue to stay very flat at low levels. We also saw much softer commodity chemical process business and we felt the negative impacts of the tax change which is expected to be a positive in the long-term, negative impacts of foreign exchange and continued decline in commodities, in our case most notably nickel. For those of you new to Haynes, one of the things we discuss frequently is our core strategy of working with the design community on new applications. Over the past few years, we have highlighted some broad areas where we’ve benefited from our materials, participating in new technologies in various markets including our core markets of aerospace, gas turbines and chemicals but perhaps more importantly, we’ve also won projects and applications in markets beyond our core, like consumer devices, wielding and a myriad of energy-related applications. In 2015 specifically, we’ve benefited from many of these design wins turning into significant project -related orders and shipments. When I mention that we’ve benefited from continued strength in our specialty niche project applications, I am referring to this work that we do to win projects typically in new technologies that necessitates the use of better materials like those we manufacture here in Haynes. I wanted to highlight that because I feel this is a key source of differentiation of Haynes. I will discuss this a little bit more as we talk about each of the markets. With respect to the details of third quarter, overall revenue in the third quarter was 121.3 million, down 4% from last year’s 126.3 million and I think most of you realize a lot of that change is due to the problems in nickel during the year, the slow degrading of nickel. Net income in the quarter was $6.6 million, including the tax charge, up 215% over last year’s $2.1 million. Volume in the quarter was soft at about 4.8 million pounds, down about 21% from last year’s 6.1 million pounds but that was offset by overall higher average selling price including our other revenue, which is primarily our tooling business of $25.34 per pound this year, against $20.85 per pound last year, a change of 21.5% and again indicative of a stronger mix, primarily comprised of aerospace products, the specialty niche products and as I said our tooling business. We saw much slower order entry levels during the quarter as many customers conserved cash and watched their buyer pattern in light of their demand needs and lower commodity price levels. This has pretty much been the theme all year as nickel has fallen from about $8 plus per pound about a year or 15 months ago to levels in the $5 range during the most recent quarter. Also in many cases, production lead times in the industry for certain products remained very short. The customers were able to make adjustments quickly if their needs change and they see almost no impact to their supply chain dynamics. At Haynes was still very heavily booked on our aero tubing business and our flat rolled coil and sheet businesses, both of those product points are booked into 2016. We are encouraging our customers to get their business booked. However, in light of continued downward trend in commodity prices and available capacity in the industry, we expect slower buying patterns and low visibility to remain the norm through calendar 2015. Moving to each of the key markets, net revenue in the aerospace market for the third quarter of 2015 was $56.5 million, up 4.3% from the third quarter of ‘14. Volume was 2.4 million pounds in the third quarter, down 5.4% from the third quarter’s 2.6 million pounds. And by the way, if you recall, last year, we mentioned that we had that special one-off [indiscernible] order in the aerospace market. If you pull that out, our volume in aerospace was actually up quarter-on-quarter. Aerospace comprised 46.6% of our net revenue in the quarter. Our backlog in aerospace fell about 8% during the quarter. However, we are sure our current booking level in aerospace is somewhat under-booked on the aerospace tubing side compared to how we normally have that level booked up. We are probably a few months short of the booking level we normally have in that area. And that is something that we are working on right now, so it is really an issue. In other words, I think we believe that our backlog in the aerospace area on an apples-to-apples environment is about flat. Overall the aerospace business remains very strong. Similar to last quarter, when we did about $60 million, we continued to see excellent signs of this market improving as we move into 2016. The engine makers reported somewhat mixed results with GE reporting very strong conditions, Pratt & Whitney [ph] [0

[Daniel Maudlin:]

Thank you, Mark. Our financial results in the third quarter reflected the challenging environment in the specialty metals industry. As we had anticipated and mentioned in our previous guidance, our revenue and profitability were lower sequentially than last quarter Q2. However, on a favorable note, we were able to hold average selling price and margin over the quarter. Our average selling price per pound for product related revenue, which excludes other revenues such as tool conversion was $23.56 per pound this quarter. This is sequentially 5.7% higher than Q2 and 16.6% higher than last year’s Q3 during a year where the LME market price for nickel has declined over 30%. This is primarily due to a solid product mix of high value proprietary and specialty type alloys that drives strong pricing and a strong margin. While we did have less of these types of special projects in Q3 versus Q2, it was still a favorable product mix in the quarter. We believe this continues to showcase one of our foundational strength and a key part of the Haynes strategy, which is leveraging our technical applications development with our proprietary and specialty alloys in value-added product form. This also highlights that our pricing discipline that strives to garner economic value even in a challenging market environment. Lower volumes - volumes were lower in each market due to lower global demand and our customers managing their inventory levels presumably due to softer nickel as Mark just described. Our gross margin percentage this quarter 19.9%, down only 20 basis points compared to Q2 of 20.1% and up significantly compared to Q3 of last year of 11.1%. These results show our success in holding margin in a challenging environment. Clearly certain headwinds continued to persist, such as declining commodities, especially the price of nickel. We estimate that margin was compressed by approximately $1 million to $1.5 million in the quarter due to declining nickel and we are expecting a more significant compression to margin from declining nickel in our upcoming fourth quarter. SG&A cost combined with research and technical cost were $13.3 million for the quarter, which includes unfavorable foreign currency translation that impacted SG&A by 2.3 million compared to the impact in the last quarter ‘s Q2. Compared to the last year, higher incentive compensation accruals are included in this year’s SG&A as compared to the same period last year. SG&A as a percentage of net revenues was 10.9% in the third quarter compared to the last year’s third quarter of 8.7% and the full 2014 fiscal year of 9.3%. Operating income was 10.9 million compared sequentially with Q2 of 17.3 million and last year’s third quarter of 3.1 million. A discrete tax adjustment was recorded in the third quarter that is considered unusual and non-recurring. During the quarter legislation was passed in Indiana related to the throwback rule that initially had an unfavorable impact on our Q3 earnings of 1.1 million but after 2017, it is expected to have a favorable impact on our tax rates and earnings. The 1.1 million impact is immediate as we carry a sizable deferred tax asset on our balance sheet that is valued based on the company's future effective tax rate, lowering the expected future tax rate, lower the value of the deferred tax asset, which has to be booked in the quarter in which the law was passed. Outlook for next quarter. We expect lower nickel market prices to unfavorably impact our product selling prices and margin percentage in Q4. However even with lower nickel and the other noted headwind, we expect Q4 to be similar to or slightly higher in revenues and earnings compared to that of Q3, excluding the previously mentioned tax adjustments. Backlog was 192.1 million at June 30, 2015, a decrease of 27.5 million or 12.5 % from Q2. Mark provided commentary on backlog already but I wanted to update the numbers till July 31. The backlog at July 31, 2015 increased $5 million over the month to 197.9 million. The forecast for capital investment in fiscal 2015 remains at 33.4 million, which includes the completion of tubular and fat product investment as well as the acquisition of Leveltek LaPorte assets. The integration of the LaPorte continues to go well and continues to be accretive to earnings. The net cash provided by operating activities was 38.9 million in the first nine months of Fiscal 2015, which represents a more than 60 % improvement from the same period last year, driven by stronger net income. Controllable working capital was 276. 2 million at June 30, 2015, which is nearly 10 million improvement over the quarter. Our revolver balance remains at zero borrowings and our cash balance at June 30, 2015 was 47.2 million, an increase of 15 million over the quarter. Our projected free cash flow in fiscal 2015 is expected to be positive. In summary, we continue to navigate this challenging environment. We will stay focused on the things that differentiate Haynes and creates value. This includes, one, leveraging our technical applications development expertise; two, carefully managing our pricing discipline; three, mix management to higher value alloys and product forms; and four, capturing the ROI on the capital investments and acquisitions included in our capital allocation strategy. As always, we will stay focused on creating shareholder value. And Mark with that, I will turn the discussion back over to you.

[Mark Comerford:]

Thanks, Dan. I think most of us in this industry expected 2015 and ‘16 to be a transition period in specialty alloys. In fact I think it is also fair to say that expectations were for a far better transition to a stronger industrial gas turbine and chemicals process market activity in ‘15 as well as a growing aerospace market. The gas turbine and CTI market remained very soft but we have definitely gotten a stronger aerospace market. And whereas the transition subsidiaries hasn’t gone exactly to plan for the industry, I think at Haynes 2015 has definitely shown additional signs of transition, in view of the successes we’ve had in developing new applications in both our core markets and some new markets. We had very good success in developing these new projects all over the world. I think we position ourselves extremely well for one of those core market industries, we always talk about the late cycle markets of chemical process and industrial gas turbines, I think, the most, I call, the more platform markets, the most platform markets start to kick in a little bit, I think we will be in pretty good shape. I am very pleased with the new application we’ve been developing. I know we have also expanded our service capabilities with the addition of new equipment like the lasers we use for producing parts in our service centers as well as the addition of our LaPorte operations and we are servicing Aerospace a lot better with our aero tube expansion and I think most of you know the story on the flat-rolled side as well. And I will remind you that both of those areas, aero tube and the coil and sheet side of the flat rolled areas are very well booked into 2016 already. We still have a list of projects that can help us get better. On the mill side, we additional opportunities to drive out waste and become even more efficient. On the marketing side, we are continuing with R&D to develop new materials and new applications and financially, I think we have a balance sheet that allows the flexibility to take advantage of the opportunities when they arrive. 2015 in my opinion is indeed a transition year in many ways. We think we are building a stronger and more viable that is a resource for our customers. We have got a lot more work to do but I think we have proven that we are up to the challenge. With that, let me turn the call over to the operator for your questions. Question-and-Answer Session

[Operator:]

Thank you. At this time, we will conduct the question and answer session. (Operating Instructions) Our first question comes from Michael Gambardella with JP Morgan. Please proceed with your question.

[Michael Gambardella:]

Yes, good morning. I have a question on nickel. How much of your nickel requirements do you purchase with buying virgin nickel as opposed to through getting stainless steel scrap?

[Mark Comerford:]

Yeah, Mike. We usually don’t talk to people about that but I think we are like just about anybody that is in the nickel industry, you typically base your price levels on an LME number plus some levels added, same way the nickel companies do when they sell us the virgin nickel. And then the objective, it is based on this, you can imagine, Mike, that depending on what we are melting, if we are melting commodity materials or I’ll say easier alloys, you can usually melt a lot more scrap and the objective has always to melt as much as scrap as you possibly can because it is common. And if you remember, it has been kind of an odd year, we have got so many of these specialty projects and if you remember last time we talked, we talked about how - I think we mentioned how some of our raw material numbers and the inventory numbers were pretty high and that was because these specialty projects typically require a lot more virgin nickel, whereas if you go out and get - at some of the areas where we are slow right now, the largest section products [indiscernible] engine things that are going to get reworked a lot more heavily and when I talk about commodity or higher volume chemical process industry, those are typically alloys that consume a lot more scrap for us. So kind of gave you a long answer to a short question but the short answer is, we don't tell people how much virgin nickel we buy and one of the reasons is it varies is pretty dramatically month to month and in an year like this, it is [indiscernible] because our mix is still highly valued right now.

[Daniel Maudlin:]

And you can imagine through our process we do generate a lot of scrap as we produce our product, so that reversed scrap, of course in the recycling, and we put that back into the melt as much as we can. And we do try to buy our own scrap back from the market place, from our customers and so on. We can bring back that back into the melt that is very cost efficient as well.

[Michael Gambardella:]

Alright. Because I was just trying to get to this issue that you mentioned about the lower nickel pricing compressing your margins and my understanding is that last year when Indonesia put a ban on nickel export and virgin nickel prices slightly around the LME, the subsequent move by stainless steel producers around the world was to try to buy even more of their nickel from stainless steel scrap which pushed up the nickel cost in stainless steel scrap higher than the virgin and squeezed some people that were buying lot of their nickel from the scrap. So that is why I wanted to understand if that is what is compressing you margins now that the nickel prices which are embedded in stainless steel scrap have actually gone up more than virgin nickel?

[Mark Comerford:]

No. We see those moving really in tandem, so we don't see that. It is much more related to the fact [indiscernible] nickel and we are on a FIFO inventory methodology, so we do see that squeeze in margin as nickel is going down. We are selling the, what you might say, higher cost nickel that we melted in a previous period, we are selling it against selling prices that may be getting squeezed because of the lower nickel market prices, so it is really the timing issue related to that. And we do have some contracts that vary quarterly, some vary every six months and some are spot prices. So it is more of a matchup between the cost of melting and the selling customer contract.

[Daniel Maudlin:]

Hey, Mike, I think you also understand still whether those are not - in fact I know you understand this but we always sight the nickel and talk to it in our K and Q and it is because the mix of alloys that we make, stainless guys are typically 10% to 12% nickel and here we are at 55%, 57% is a difficult estimate.

[Michael Gambardella:]

What - just last thing on this nickel, currently what is the discount of nickel prices embedded in scrap versus buying it on the virgin?

[Daniel Maudlin:]

It is pretty similar. So it is really - I mean there is maybe 80% versus raw but it is moving in similar way, so we see the LME for nickel going down, we will see the scrap prices going down on a similar margin, so.

[Michael Gambardella:]

But if you add about the 20% discount from the virgin price?

[Daniel Maudlin:]

Yes, about a 20% discount would be a good estimate, so 80 % of the price, yes. Remember again, Mike, we also have limitations on the kind of scraps that we can buy. It is even like you hear a lot of talk about NPI, the nickel pig iron. We are not big consumer of nickel pig iron because a lot of that goes into the stainless melts, we are more the pulverized more pure vacuum grade materials.

[Michael Gambardella:]

And then on the end market and your products, you mentioned the kits, I remember you have been doing that for years as a way to differentiate as opposed to just selling the metals, you are selling [indiscernible] what percentage of your business are kits and can you kind of quantify what percentage of your business you think you can truly differentiate from other competitors.

[Mark Comerford:]

I think well it has increased a lot. We really talk about it in the form of cut parts and if you think about it, it gets almost back to the most complex the industry is the more that type of work we’re do doing. So on the aerospace side of the business is probably where we are doing most cut parts followed by land-based gas turbine, very little in CPI industry. But we don't tell people exactly what the number is and again because it varies but quite a bit of our aerospace business is [indiscernible].

[Michael Gambardella:]

Okay. Thanks.

[Mark Comerford:]

You bet.

[Operator:]

Our next question comes from [indiscernible]. Please proceed with your question.

[Unidentified Analyst:]

Thank you. Is there a thinking about the [indiscernible] shipments in the end markets you’re your aerospace business, and you get done engine shipment from GE or Rolls Royce. How should we think of reading through that data to your aerospace demand?

[Mark Comerford:]

I would love to tell you there is a direct correlation but anybody in this industry would tell you, no, there is not. The complexity of the supply chain is such that you see pretty dramatic variations. All of this, if you think of the aero engine side of the business, where they have non-rotating components, our primary competition will be Special Metals, which is a division of Precision Castparts and of course Allegheny and then a myriad of distribution channels within that. So all of this will through the distributors, Allegheny and Special Metals will make cut parts through some of their distribution partners, they don’t do themselves. But it gets very complex as you go through and that is why you see these fairly dramatic swings in demand with respect to engine count themselves. Typically what we see is, you really see a buildup and bleed off. And if you look at our aerospace industry or really pretty much anybody in the nickel side of the aerospace industry supplying a jet engine, you will typically see very dramatic increases in demand at the front end of the cycle followed by pretty dramatic call option demand as you get into a mature level in the aerospace cycle. And these seem to go in two, three, four year increments. If look at our business and in the industry, we saw tremendous demand ‘06, ‘07 and ‘08 and you saw it fall off the cliff in ‘09, ‘10 and started to pick up in ‘11 and ‘12, fell off dramatically in ‘13, early ‘14, started picking up again, I will say, in the middle of ‘14 and when we do $60 million or $56 million in a quarter at $5 or $6 in nickel, those are pretty high output tonnage levels that we are doing right now. I will say they are very comparable to record levels back when we did set revenue records in aerospace, which was back in the days of $18 and $20 nickel. So again giving you a long answer there but you can go through and spot these things, I have done it, but there are very broad swings, a whipsaw effect, if you will, in the supply chain.

[Unidentified Analyst:]

Got it. Thank you.

[Daniel Maudlin:]

Thanks.

[Operator:]

Our next question comes from Edward Marshall with Sidoti & Co. Please proceed with your question.

[Edward Marshall:]

Hi guys.

[Mark Comerford:]

Good morning Ed.

[Edward Marshall:]

So I wanted to kind of address, at the end of your prepared remarks you said something like Haynes is becoming stronger and more competitive company. And looking at the margin in the quarter, historically I would have thought that with nickel coming down, your margins would have gotten crushed, I guess, for the lack of better word. But they held in pretty well and I know there is a broadly a timing difference and you kind of alluded in the guidance. But when you talked about the maybe the testament to what is going on from the equipment side and more on efficiency, and maybe I see the mix as well is probably relatively strong and the backlog looks like the mix is strong too. Can you kindly talk about maybe why that margin kind of held up as well it did in the June quarter?

[Mark Comerford:]

Yes, I would let Dan talk to this but Ed, if you think about it, it held up well because of the mix of product. We had a very good aerospace quarter, very good niche product quarter and the tooling business is holding up well. And those are brilliant, if I could do nothing but sell those types of products and fill the mill with just those products, I would be the happiest guy on the face of the earth. What does concern me is when we have a shipping quarter that is only 4.8 million pounds and I have sent this on these calls before, I don't expect Haynes to be making any below 5 million pounds and that is an area of concern for me. That is when I look at quarter with the chemical process industry at only 850,000 pounds that is when I need to get out on the road and start talking to people and figure out what is going on in the world. That's why I was over in Asia this quarter et cetera. So that is an area - again maybe I am too conservative or two negative, I am talking like this but I think you pay me to do that. That is where I get concerned. I take a look at the quarter that I think was pretty good that feel could have been a lot better. Dan, do you want to add?

[Daniel Maudlin:]

Yeah, I mean, just looking at our mix, it is clearly - I have mentioned this before that proprietary and specialty alloys garner a much better margin some of the commodity grade alloys that other people can produce. So I think we are leveraging our expertise in that area and getting some great project business with solid margins because of the type of products it is. So if you just kind of look at the variations in this quarter’s revenue versus a year ago, the mix improved revenue by a good $25 million, volume of course took a lot of that away and that was a reduction of about $25 million. The raw material reduction, I mentioned the impact on margin, the impact on revenue was well over 5 million, it was quarter-on-quarter what nickel was doing. So nickel certainly depressed our top line and squeezed our merging but that favorable mix made up for it.

[Mark Comerford:]

And it is funny, Ed, we said about a year ago that we thought that when the markets are coming back and Mike Gambardella mentioned the spike in nickel last year, again if you remember that is when our order book spiked as well and we were able to get to work on mix and pricing and all of those good things but it is still - we said at that time, we thought that is coming out of the downturn of ‘13 and early ‘14. We felt that this market was going to be - it wasn’t going to be all line up into the right, we felt that this is going to be some fits and starts, some good quarters and some okay quarters and things like that. I think we are feeling some of that impact now. I am not crazy about the strong dollars, that has some concern for me. Again I like who we are as far as most of the competition is US dollar based, most of the markets we serve are US dollar based but I would like to see some of these, what we call traditionally, late cycle markets start to kick in a little bit better, I feel a lot better then and until then we are going to just make sure that constantly in front of customers trying to get as much as we can.

[Edward Marshall:]

Will you buy opportunistically on nickel? I know that now historically what Haynes does and maybe a year ago, you would have bought at 8 or 6 and thought that was opportunistic but I am curious.

[Mark Comerford:]

We don't own the mine, we buy the nickel and we change the price and pass it on to the customers. And I always think that if I'm not there trying to buy opportunistically on nickel, there is some guy in New York who is a hell a lot smarter than me placing a counter buy and he is going to be the guy who makes the money.

[Edward Marshall:]

Alright. On the SG&A line, what happened there in the quarter, it looks unusually high especially with the down revenue quarter, on an absolute dollar value?

[Mark Comerford:]

Dan?

[Daniel Maudlin:]

I think what you are saying is in Q1 and Q2 you are seeing a favorable foreign currency impact, keep in mind this is the SG&A line, so the FX element that I'm talking about here is really in our foreign locations, their net monetary assets not in their functional currencies translates back and hit the SG&A. So we actually had favorable about $1 million a quarter in Q1 and Q2. Where in Q3 that reversed and it was $1.261 million unfavorable, so that swing from Q2 to Q3 is a 2.3 million swing that I mentioned before in FX. And the other item I highlighted in SG&A was the incentive compensation this year is in that number and maybe it was kind of hard to see with that favorable foreign currency in Q1 and Q2 but we had been reporting that all year where last year it was much lower.

[Edward Marshall:]

Got you. You were talking about the CPI industry and historically, I guess for the last couple of years here it has been driven by MRO activity and based on what your comments were, did the MRO activity dry up just as - I mean soft, as the OE side, which has been pretty slugging for some time? And also I guess you have been talking about some project work that was lining up into 2016. I know you talked about some coating activity, are they still kind of there or are they getting pushed to the right.

[Mark Comerford:]

No, they are still there. The project activity in fact we are talking, Dan gave you a backlog number for July, July order entry was almost half of what total order entry was in the whole third quarter. And we did pick up some specialty project s in there, one real nice one. We also closed - in part of that July order entry number as we closed on a pretty big contract of blanket order for the whole year but [indiscernible] and blanket orders, I mean, we get those every month. So July was a pretty good order entry month. But answering your initial question, yes, it is pretty slow right now and I'm not kidding when I say when I went to China - you know when I came back from Asia, really the first thing I did was to writing out to the Board that I have been moving back and forth for 20 years to China, this was about as slow as I have seen. It is pretty slow over there right now and you have got a lot of fabricators and it is throughout the region now that are really at war with one another about what the available projects are. And that just says to me that that is an indicator of just how slow things are on building vessels, reactors, heat exchangers et cetera right now at this point in time, so it is pretty slow. In fact the US market tends to be doing a heck of a lot better than that market. And it was a real eye opener for me to see it that bit of slow down, I expected that but it was slower than I have seen it since I was living over there during the Asian financial crisis and things got a little bit crazy at that time and this kind of reminded me of that type of a period from the point of view of how slow some of the fabricators were that I saw over there.

[Edward Marshall:]

And then I guess finally, last time we talked or we talked quite a bit about acquisitions and fabrication and wanted to get a bigger value add for the customer and I was just kind of - I know you are still digesting Leveltek but where are we in that process? I mean are there other targets, other thoughts if we kind of just digest Leveltek and then maybe some of the opportunities that you might be looking at?

[Mark Comerford:]

Yeah, say, whatever, we are digesting Leveltek and we’re also trying to make sure we sell out the new capacity that we have added into the tubular operation, the aerospace side of that is doing really well, the corrosion side have some special project where they are getting some good outlook but it is nowhere near the weight or tonnage that I think they could be processing through there, so you can imagine summary of what I am driving the sales people crazy about is to get some more corrosion projects in the tubular side and anything on the flat rolled. Thank God, we did the flat rolled, I mentioned that we’re booked out into the new year in our coil and sheet area but again getting back to the heavier section, so plates, those type of projects products that is where I want to see some push to fill out that flat roll capacity that we’ve added here. So, yeah, we are digesting the Leveltek, we are also digesting the CapEx we put in and trying to get those things for the lack of a better phrase sold out as quickly as we possibly can. But we are always looking at things. We have pretty rigorous capital allocation discussions and not just acquisitions, not just equipments but a myriad of topics when we get into Board meetings on how to constantly keep increasing the value of the company in the eyes of the shareholders, employees and customers.

[Edward Marshall:]

And when you are ready what markets do you think that Haynes will have the best opportunity to add the most value to the market, that will give you the biggest bank for the buck.

[Mark Comerford:]

Ed, I think we are always ahead of the game when we are doing stuff other people don't do. So I am always looking for places where there is minimal competition and there are value-added opportunities. I am not really interested in our average selling prices are $20 or $25 per pound, I am not going to get real, real excited about some company out there that is struggling to make their product sell, maybe fits our portfolio but it is $5 to $6 a pound. We are going to look for things that add value and go more on the complexity side of the supply chain. That is kind of our metric here.

[Edward Marshall:]

Gotcha. Thank you very much.

[Mark Comerford:]

You bet.

[Operator:]

(Operator Instructions) Our next question comes from Phil Gibbs with KeyBanc. Please proceed with your question.

[Phil Gibbs:]

Hi, Mark.

[Mark Comerford:]

Good morning, Phil.

[Daniel Maudlin:]

Phil.

[Phil Gibbs:]

Hi, Dan, morning. I had a question just largely on the comments you made on the aerospace tubing piece. I think you said backlog there has gotten a bit weaker on just in the very near term but you're confident that you’re booked out through most of the next year, so I am just trying to put those comments together, I guess.

[Mark Comerford:]

I guess I can give you a little more clarity on that, Phil. I mean, we usually like to keep that area of the business booked out about 18 months and I think we have got it booked out right now to about 14 or so. And it is just that we are rebalancing orders and pushing them through to try and figure out what sizes. I have mentioned you that our customers have been great on that side of it. We disappointed them for three years, we got the capacity and we’re finally getting our time with our deliveries do them and they are looking great even honoring us with more orders, it has been wonderful. So really what we are in is that kind of phase where okay, now we got to re-balance what they really, really want versus what we are making and so I am confident we will be able to get that. If we want to book it out for 18 months we could but that is what I meant, apples-to-apples I think in the aerospace the backlog is pretty flat that is because there is a four or five month gap so to speak than what we would normally have called our aerospace tubing backlog.

[Phil Gibbs:]

Okay. That’s helpful. On the question that I had asked about the FX, I think Dan gave some really good color on that. You benefited from a couple of quarters of tailwinds there, was it a $2 million swing or just a $1 million swing because I remember you said it was about a million and a quarter in Q1 and then switched over to negative, so was that swing 2 million or was that swing 1 million?

[Mark Comerford:]

Well in Q2 the favorable impact was 1 million and in Q 3 it was unfavorable 1.3 million, so the swing, the difference between FX in those two periods are 2.3 million. So if you were to assume a neutral impact on FX, you would adjust the SG&A this quarter by 1.3 million.

[Phil Gibbs:]

Gotcha. Okay, so is that SG&A impact going to continue to the extent if currency rates stay where they are right now?

[Mark Comerford:]

Only if they move, so if they stay flat that would be a neutral impact, if they move then it will have an impact here.

[Phil Gibbs:]

Okay. So basically we should expect to see the SG&A run rate from this quarter stay where it is at unless things move in the other direction.

[Mark Comerford:]

It should go a little wider actually, 1.3 million.

[Phil Gibbs:]

Okay.

[Mark Comerford:]

The normal run rate assuming neutral FX would be a little wider than what you see here by 1.3 million [indiscernible].

[Phil Gibbs:]

Why would it go back to neutral if the currencies have already moved?

[Mark Comerford:]

Yeah, moving from where they were at the end of June or the average over the quarter, you are right but assuming a neutral, then it would be different by 1.3 million. But you are right, if you are looking at when currencies are doing out into July and here in August then that could have an impact.

[Phil Gibbs:]

Okay. What currencies have impacted that calc?

[Mark Comerford:]

Mostly the pound sterling and the euro.

[Phil Gibbs:]

Okay, I appreciate that. And on the chemical processing business, just the last one from me, the chemical processing business in China, Mark, you said weakest that you have seen in a while but you feel really good about your own mix. How do we see that whole dynamic in your mind playing out here over the next 12 to 18 months?

[Mark Comerford:]

We are still looking at pretty good project work, Phil, and when you say - we booked some at the end of the last quarter, we just booked some last month, not huge projects but good projects. I think that is going to be a key for us. We will see how the chemicals, how the CPI business comes back when and if it bounces back. It is pretty competitive right now and it is very low volume right now. Talking to customers, hey, we are losing shares, we are doing something wrong? No, it is just pretty bad right now.

[Phil Gibbs:]

Okay. Thank you.

[Mark Comerford:]

You bet.

[Operator:]

Thank you. Our next question is a follow-up from Michael Gambardella with JP Morgan. Please proceed with your question.

[Michael Gambardella:]

Yes, I just wanted to - what were your exports as a percentage of sales in the quarter?

[Daniel Maudlin:]

Typically our exports run around 42% but this quarter it went down to 37%. So we are certainly seen the impact of heating in some of these foreign markets with the strong dollar, little over the 5 point decline.

[Michael Gambardella:]

Are most of your exports to Europe?

[Daniel Maudlin:]

Yes, if you take a look at that 40% of our business, about 60% of that 40% or roughly 25% is European and then the other 15% of the 40% is typically Asia Pacific.

[Michael Gambardella:]

And I know Allegheny is running into the same problem in their high performance segment because they export about 43% and most of that is high performance, I think, out into Europe. How much competition do you have from Europe-based competitors?

[Mark Comerford:]

Not a whole lot Mike but if you think about chemicals and CPI business, right now right now VDM is enjoying good advantage compared to let's say 18 months ago or you could say me enjoyed pretty good advantage for five years when we at $1.42 per euro for a long time. So yeah on the transactional side, there is definitely an advantage there and I will say the more higher volume corrosion types of materials for someone like VDM in Europe.

[Michael Gambardella:]

And in terms of your exports in the quarter and lags in the contracts that you have, do you think you have quarter represents the full impact of the currency and where the currency is today?

[Mark Comerford:]

Yeah, I think it would. I don’t think the lag would really impact that. I mean the - I do mention the nickel decline and lag that will have, we do expect Q4 to have a bit heavier impact in compression on our margin than we saw in Q3. So I mentioned 1 million to 1.5 million in Q3, in Q4 that is going to be a little greater. But from a foreign currency point of view, I think we are okay.

[Michael Gambardella:]

Okay. I was just curious if you had like annual contracts that maybe before the dollars started to really rally or going to be renegotiated shortly?

[Mark Comerford:]

Most of the long-term contracts that we might have in Europe would be probably in the aerospace business and most of those are US dollar denominated.

[Michael Gambardella:]

Okay. Thank you.

[Operator:]

At this time, I would like to turn the call back over to management for closing comments.

[Mark Comerford:]

Thanks very much for your time today everybody. Kind of a difficult time in the industry. You know we mentioned a year or a year and a half ago when this started that we expected that this rebound was going to have some fits and starts to it and I think we are seeing that. As I’ve mentioned, I’m very pleased with the specialty applications work we are doing and we’re continue to do, I think that is a big key. I think we are always going to be ready when that platform repeat business comes back and we are seeing it in aerospace now, I think we will start to see it in gas turbine and hopefully in the chemical process business as we move into '16 and global economies get a little busier. But again, thanks very much for your time. We will look forward to updating you again next quarter

[Operator:]

Thank you. This does conclude today’s teleconference. You may disconnect at this time and have a great day.