Feb 3, 2012
Operator
Greetings, and welcome to the Haynes International, Inc. First Quarter Fiscal Year 2012 Earnings Conference Call.
[Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Maudlin, Controller and Chief Accounting Officer for Haynes International, Inc.
Thank you. Mr.
Maudlin, you may begin.
Daniel Maudlin
Thank you very much for joining us today. With me today are Mark Comerford, President and CEO of Haynes International; and Marcel Martin, Vice President and Chief Financial Officer.
Before we get started, as always, I would like to read a brief cautionary note regarding forward-looking statements.
Daniel Maudlin
This conference call could contain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1933 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 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, 2011.
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.
Daniel Maudlin
Thank you very much for listening. And now I will turn the car -- call over to Mark.
Mark Comerford
Thank you, Dan. 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 some comments about the business and our end markets, and then Marcel will give you a greater detail on the financial results.
Mark Comerford
First quarter of fiscal 2012 closed with net revenue of $128.9 million, up 21.2% from the first quarter of fiscal 2011. Net income was up 60.6% to $8.4 million or $0.68 per share.
Backlog fell slightly in the quarter to $261.8 million.
Mark Comerford
Sequentially, we mentioned in our last call that we expected our first fiscal quarter to be slower than the fourth quarter of fiscal 2011 as customers clear their inventories for the calendar year, kept a close eye on developments in Europe and watched nickel prices. Within our order book, what we saw was fewer large blanket orders with multiple releases.
We saw more transactional business. And if you recall a year ago, in early 2011, that's when we started to see order books firming up with large blankets.
So essentially, what happened during the fourth quarter is we saw fewer of those blanket type of orders. In short, our customers' views that they gave us on the directionality of order volumes has been spot on.
The softening occurred pretty much exactly when they told us it would in time. The magnitude of the correction was larger than expected.
But essentially, the story our customers had given us and we gave you played out as they had said.
Mark Comerford
By the way, as a quick update, January came in strong on both net revenue and order entry. And our backlog at the end of January is north of $271 million again.
Marcel will probably give you more detail on that. So again, this falls very much in line with what our customers have been telling us would happen.
Mark Comerford
Now looking back at prior first quarters in Haynes' history. The first quarter of 2012 is among the top 3 or 4 from the perspective of revenue and net income.
However, that being said, I think all of us at Haynes feel we could have done even better.
Mark Comerford
We mentioned to you in the last call that we anticipated the lower volumes, revenue and net income in the quarter, but we finished the quarter below our own internal expectations. On the positive side, looking at our order book and end markets, we expect to make up the shortfall during the course of the year.
In fact, we expect to make up most, if not all, of the first quarter shortfall during the current second fiscal quarter.
Mark Comerford
Also on the positive side, during the first quarter of 2012, we completed some critical maintenance and upgrade work in our plants, spending $7.4 million in capital projects. For those of you new to Haynes or unfamiliar with our normal CapEx expanding, $7.4 million is about half of what we spent all of last year.
So we took on some pretty important projects in the first quarter of 2012, and we got them done. These projects are critical to positioning us for larger volume capabilities, better quality and as a more reliable supplier to our customers as we move into the upturn in our key markets.
Mark Comerford
Finally, also on the positive side, pricing held up well in the quarter, and it appears the large famous [ph] mills are projecting some better strength in their markets moving forward. We see that as a positive factor for firming up pricing in 2012.
Mark Comerford
Looking at our key markets. Net revenue in the aerospace market for first quarter of 2012 was $52.7 million, up 18% over first quarter of 2011.
Aerospace accounted for roughly 40.9% of our revenue during the quarter. Aerospace volumes in order entry are holding up well as end-user requirements are flowing through the supply chain.
Mark Comerford
Following in Airbus, ramp-ups continue. And a need for greater fuel efficiency and subsequent cost efficiency is driving demand for better engine design and materials.
We expect this innovation and demand to continue, and both Airlink [ph] and Airbus had made it clear to us that they expect this aerospace cycle to expand beyond the peak of the last cycle. Our conversations with the engine manufacturers have confirmed this as well.
Boeing delivered about -- I think it was 477 planes in '11, Airbus about 534, and both of them expanded their backlogs. I believe the total backlog is now over 8,000 planes.
Our backlog in aerospace expanded 3.3% during the quarter on top of a strong invoicing level, and we remain very confident that 2012 will be strong year for our aerospace products.
Mark Comerford
Now our chemical processing market. Net revenue for the first quarter was $29.7 million, up 44% from one year ago.
CPI accounted for 23% of our total revenue for the quarter. Business in this market remains very competitive for large project-related applications.
Our backlog in this area fell in the quarter, about 15%, as customers watched the nickel market and expressed concerns with respect to what's been happening in Europe.
Mark Comerford
As I've mentioned previously, our application engineering, R&D, manufacturing, process engineering and field sales groups had done a remarkable job in new application development in this area. We expect several of those applications to invoice this year.
As always in this market, the exact timing of when those applications will invoice is unclear. Our new products and applications in HASTELLOY C-22HS, HASTELLOY G-35 and HASTELLOY HYBRID-BC1 are continuing to expand globally.
C-22HS especially, has garnered very strong interest in the oil and gas area, and we already have some appointments set up at NACE. So I think we're going to be talking quite a bit to customers about new applications for C-22HS at NACE next month.
By the way, CPI orders also are -- that's one of the key areas that picked up in January.
Mark Comerford
The land-based gas turbine market totaled $30.1 million in net revenue in the quarter, up roughly 40% from last year. This market was 23.4% of our total revenues for the quarter, and backlog decreased slightly during the quarter about 6%.
This market has been very transactional over the past year or so, but it appears to be firming up.
Mark Comerford
Qualitatively, customers are indicating greater confidence in the past 3 or 4 months than they had in the prior 2 years. Quantitatively, it looks like GE had a very good quarter for order entry.
I believe they'd booked about 50 gas turbines so far. And there was a great article in the trades about a week or so ago about Siemens investing for the upturn.
I think that was a Bloomberg report. Also, Alstom mentioned solid bookings up 20%, citing demand in U.S.
and Iraq. Our expectation is for strengthening in this market as 2012 progresses.
Mark Comerford
Finally, our other markets had net revenues of $12.7 million in the quarter, down 16% from the first quarter of fiscal '11. These markets accounted for about 10% of our total revenue in the quarter.
Backlog in this area fell about 6%. However, if you recall, I reported last time that backlog had more than doubled in fiscal 2011, up almost 138% during the year.
Mark Comerford
So much of the decline in this market was due to inventory adjustments at our customers. This market, especially industrial heat treating and flue gas desulfurization, remains very competitive from a pricing standpoint.
The pricing gains we've made in this area have largely been mix-related and by that, I mean, typically new applications and newer, more advanced materials related.
Mark Comerford
With that, let me turn it over to Marcel for more details on the financials.
Marcel Martin
Thanks, Mark. I will start with the year-over-year comparisons of revenues, gross margin and costs between the first quarter fiscal 2011 and fiscal 2012.
Net revenues in the first quarter of fiscal 2012 were $128.9 million, a 21.2% increase from the same quarter a year ago. This $22.5 million increase in net revenues is a result of a 16.3% increase from product volume, which accounted for $17.6 million of the revenue increase, a 5.6% increase in average selling price, which accounted for $5.7 million of the revenue increase, and a decrease of $853,000 of other revenue in the non-product category.
Marcel Martin
The year-over-year improvement in performance reflects both the favorable change in the economic environment from last year, which favorably impacted all our markets, and the ability of the company to take advantage of this market improvement.
Marcel Martin
Cost of goods sold in the first quarter of fiscal 2012 was $105.4 million, a 19.1% increase from the same quarter a year ago. The $16.9 million increase is a result of a 16.3% increase from product volume, which accounted for $14.8 million of the cost increase and a 2.3% increase in average cost of goods sold per pound due to higher cost of product mix, which accounted for $2.1 million of the cost increase.
Marcel Martin
The combination of the noted revenues and cost changes between quarters resulted in a gross profit margin in the first quarter of fiscal 2012 of $23.5 million compared to $17.9 million in the same quarter a year ago, an improvement of $5.6 million between periods. Gross profit margin as a percentage of net revenues was 18.2% in the current quarter compared to 16.8% a year ago.
Marcel Martin
SG&A, including research and technology, for the current quarter was $10.6 million, an increase of $700,000 compared to the prior year first quarter. Factors contributing to higher SG&A costs in the first quarter of fiscal 2012 included additional headcount between quarters, salary increases and increased marketing costs due to the increased level of activity.
From last year first quarter to this year's first quarter, SG&A plus R&D as a percent of sales declined from 9.2% to 8.2%. Looking forward, fiscal 2012 SG&A, including R&D, is forecast at approximately $45.2 million for the year.
Marcel Martin
For the first quarter of fiscal -- for the first quarter of the fiscal year, pretax income was $12.9 million compared to pretax income of $8 million in the first quarter fiscal 2011. For the first quarter of fiscal 2012, there was tax expense of $4.5 million versus a tax expense of $2.8 million in the first quarter of fiscal 2011.
The effective tax rate for both quarters approximated 35%, and it is anticipated that the rate for fiscal 2012 will approximate between 34% to 35%.
Marcel Martin
Net income for the first quarter of fiscal 2012 was $8.4 million or $0.68 per diluted share compared to net income of $5.3 million or $0.43 per diluted share in last year's first quarter.
Gross margin trend [ph] between the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012. Gross profit margin declined by $6.5 million from the fourth quarter of fiscal 2011 to the first quarter of fiscal 2012. The reduced gross margin between quarters is attributed primarily to 3 things
first, approximately $1.7 million of the lower gross margin is due to reduced absorption of fixed costs caused by reduced production days attributable to holidays, vacations and equipment projects in the first fiscal quarter. Another $1.7 million of the lower gross margin is due to pounds produced but not shipped.
And lastly, the remaining $3.1 million in lower gross margin is due to lower plant shipments due to fewer production and ship days, representing the recurring issues of holidays, vacations and equipment projects in the first fiscal quarter.
Gross margin trend [ph] between the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012. Gross profit margin declined by $6.5 million from the fourth quarter of fiscal 2011 to the first quarter of fiscal 2012. The reduced gross margin between quarters is attributed primarily to 3 things
As a point of comparison, the fourth quarter performance of fiscal 2011 against which the first quarter performance of fiscal 2012 is being compared was the best quarterly performance since fiscal 2008. It was the quarter in which 6.7 million pounds of product was shipped and $30 million in gross margin was generated.
Also, the goal in the first quarter of fiscal 2012 was to improve from last year's first quarter and, in addition, complete a very comprehensive list of projects, which we did.
Gross margin trend [ph] between the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012. Gross profit margin declined by $6.5 million from the fourth quarter of fiscal 2011 to the first quarter of fiscal 2012. The reduced gross margin between quarters is attributed primarily to 3 things
Although not as good as planned, the quarter's performance was very good by historical standards, and the shortfall from the planned gross margin is expected to made up in the -- in quarter 2 in addition to the already planned margin.
Gross margin trend [ph] between the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012. Gross profit margin declined by $6.5 million from the fourth quarter of fiscal 2011 to the first quarter of fiscal 2012. The reduced gross margin between quarters is attributed primarily to 3 things
Backlog. As of December 31, 2011, backlog dollars had decreased 4.2% from September 30, 2011, as a result of backlog pounds decreasing 5.4%, offset by an increase in average selling price of 1.3%.
The primary contributor to the 4.2% decline in backlog dollar was the reduced level of order entry activity starting in the fourth quarter of fiscal 2011 due to the uncertain economic environment.
Gross margin trend [ph] between the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012. Gross profit margin declined by $6.5 million from the fourth quarter of fiscal 2011 to the first quarter of fiscal 2012. The reduced gross margin between quarters is attributed primarily to 3 things
As there [ph] in the past, we believe the backlog continues to be a very good indication of the level of future revenue. The January backlog moved up from the end of December, with the balance of the backlog at January 31, 2012, equaling $271.1 million, an increase of $9.3 million from December 31, 2011.
The backlog pounds at January 31, 2012, were approximately 9.2 million pounds, with an average selling price of $29.66.
Gross margin trend [ph] between the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012. Gross profit margin declined by $6.5 million from the fourth quarter of fiscal 2011 to the first quarter of fiscal 2012. The reduced gross margin between quarters is attributed primarily to 3 things
The order entry rate for January was the highest order entry rate since June of fiscal 2011 and included continuing solid order entry for aerospace and land-based gas turbine plus strong CPI order entry activity. The order entry for January reflects a broad product mix of project business and build up product, which contributed to the reduction in backlog average selling price of $0.97 from December to January.
Gross margin trend [ph] between the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012. Gross profit margin declined by $6.5 million from the fourth quarter of fiscal 2011 to the first quarter of fiscal 2012. The reduced gross margin between quarters is attributed primarily to 3 things
The company continues to focus on improving working capital management with the emphasis on inventory through initiation of full and lean manufacturing techniques plus capital improvements. However, inventory did increase by approximately $19.3 million during the first quarter due to an increase in finished goods, a portion of which is material produced but not shipped, and an accumulation of production scrap or revert inventory during the quarter due to the capital upgrades was reduced melting during the quarter.
This increase in finished goods and raw materials was partially offset by a reduction in working process, which occurred for the same reasons, reduce melting due to the capital upgrades in the mill shops.
Gross margin trend [ph] between the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012. Gross profit margin declined by $6.5 million from the fourth quarter of fiscal 2011 to the first quarter of fiscal 2012. The reduced gross margin between quarters is attributed primarily to 3 things
Capital spending. The company has begun increasing the amount of capital spending from traditional levels in order to enhance its capabilities to increase capacity commensurate with the expansion of the markets the company services and also improve the customer service in the form of accelerated deliveries and expanded value-added products and services.
In the first quarter of fiscal 2012, the company spent $7.4 million on capital projects, including the continuation of work on the 4 high stock rolling mill, the upgrade of the vacuum melt furnace processing systems and instrumentation, upgrades of the research and technology laboratory equipment and the upgrade of the information technology system. These projects are expected to improve quality, enhance working capital management, reduce cost and increase capacity.
Gross margin trend [ph] between the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012. Gross profit margin declined by $6.5 million from the fourth quarter of fiscal 2011 to the first quarter of fiscal 2012. The reduced gross margin between quarters is attributed primarily to 3 things
Liquidity. In addition to the cash available, the company has working -- has a working capital facility of $120 million, which can be increased to $170 million at the company's option.
This provides total liquidity of $224.1 million, which is expected to enable the company to continue taking advantage of the improving economic environment and any other growth opportunities that become available.
Gross margin trend [ph] between the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012. Gross profit margin declined by $6.5 million from the fourth quarter of fiscal 2011 to the first quarter of fiscal 2012. The reduced gross margin between quarters is attributed primarily to 3 things
Outlook for the second quarter of fiscal 2012. It is anticipated that net income for the second quarter of fiscal 2012 will equal and possibly exceed the net income of the fourth quarter of fiscal 2011 and, in addition, include as much as $1.1 million more in net income related to the shortfall for the first quarter of fiscal 2012 from material produced which did not shipped.
Typically, we'll provide 2 quarters of guidance
guidance for the second quarter, as just noted, and the third quarter. However, we are limiting guidance to only the second quarter for 3 reasons.
The first and primary reason is that there are -- there is project business due to ship in the second half of the year, which is significant enough that, depending on when the projects is completed and shipped, could shift net income between the third and fourth quarters. The other 2 reasons, hence with a lesser degree, are the uncertainty of the current rate of order entry and the possibility of a recession in Europe.
However, the original outlook for the fiscal year, as a originally provided for fiscal 2011 year-end reporting, remains appropriate, as we expect net income for the -- for fiscal 2012 to exceed net income for fiscal 2011.
Typically, we'll provide 2 quarters of guidance
In summary, although the order entry rates slowed in the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012 in comparison to the second and third quarters of fiscal 2011, we consider this slowing in order entry owning [ph] a short-term delay by our customers in committing to larger and longer blanket orders. It appears, at least for January, that in addition to our aerospace and land-based gas turbine customers having confidence in the future, our CPI customers have, at least for January, started increasing the size and duration of their orders.
The result, after the robust shipments and order entry in January is a January backlog equivalent to what it was in September, a solid place to start from for the balance of fiscal 2012.
Typically, we'll provide 2 quarters of guidance
With that, let me turn it back to Mark.
Mark Comerford
Thanks very much, Marcel. The direction of our end markets is good.
Our relationships with our customers are also very good. I think what happened in the last quarter, we projected, we missed on the magnitude, but it -- pretty much exactly what our customers told us would happen did happen.
We're pleased with our position in our manufacturing capabilities and service capabilities as we enter the upturn.
Mark Comerford
We got some exciting things going on with new applications for old alloys and new applications for our new alloys. Customers remain very receptive to new materials.
I mentioned this last time, more so than any other time in my 28 years in metals, customers are very receptive in this upturn to new technologies and new materials. I think a lot of it is being driven by the efficiency requirements for jet engines.
That's also translating through into the power generation side, things running a lot hotter than they did for greater efficiency. And on the energy side, as far as oil and gas, I think that it's fair to say that they're getting into some more difficult environments, and the need for higher strength and better corrosion resistance is out there.
Mark Comerford
And again, we're seeing just tremendous new design and new specing activity. A lot of samples out there, and a lot of work going on with our technical staff.
My feeling is that Haynes' new materials, our global technical and distribution capabilities have us very well positioned for meeting those needs.
Mark Comerford
With that, let's go ahead and open up the call to your questions.
Operator
[Operator Instructions] Our first question comes from the line of Edward Marshall with Sidoti & Company.
Edward Marshall
The first question. I just wanted to clarify the guidance.
You had mentioned a $1.4 million in net income. The verbiage in the press release last night almost made it sound like you are reiterating your guidance, which I think you did.
And you're also saying that you're adding an additional $1.4 million to the net income line. Is that right for that?
Marcel Martin
I think Ed what we're saying is we reiterated our guidance, original guidance for the second quarter. And we -- I think I said $1.1 million.
Edward Marshall
$1.1 million, okay. And that's on top of it, assuming that you ship everything in 2Q that you missed out on shipping on -- in 1Q.
Marcel Martin
That's exactly right.
Edward Marshall
Okay. You -- it looks like that's about, say, anywhere between $15 million and $20 million in sales.
Is that about right?
Marcel Martin
You mean, the shortfall?
Edward Marshall
Yes.
Marcel Martin
It was probably -- it was the mix. It was a pretty rich mix, so it was actually -- I would -- it was probably about $10 million.
Edward Marshall
$10 million. Okay.
Wow, it's pretty -- it is pretty rich. What caused it?
I mean, I know you had some upgrades, and then you were moving -- you were doing something on the stock [ph]. What caused the production delays on your side?
Marcel Martin
Very ambitious list of things we wanted to get done in the first quarter. I mean, one of the things we talked about is clearly just increasing our level of sales beyond what we did last year.
So we started on the process to ship at a relatively high level in comparison with what we've typically done. Maybe in that 5.5, 5.6 range, 5.7 range with total pounds.
In addition to that, we had just a list of projects that had to get done, that we needed and wanted to get done because they are important to the future of the company, not only in the long term, but also in the short term. In addition to that, there's always things that go on during the course of the quarter that are unplanned in nature.
You break down a piece of equipment to repair it, upgrade it and you find more things wrong than you thought you would find. You have to make a decision.
It seems like I got this piece of equipment broken done. You know what?
I'm going to fix everything that needs to be fixed. May take a little longer, a little bit more difficult to come back up again, so that slowed the process for us.
I think part of it also is the nature of the product that we ran short on time to get completed. This is, again -- it's aerospace, land-based gas turbine type product.
It's not only sheet and plate type products, but it's the additional value-added things we're doing to those sheet and plate items, like taking sheet and cutting to size, but more importantly, laser cutting, water jet cutting, plasma cutting. Just a longer process, and we just ran short of time relative to getting it completed and out the door.
Edward Marshall
Okay. Now as you look at your backlog and kind of your CapEx plans for the remainder of the year, are there any kind of tight -- other tight windows that may fall -- this may fall on -- we may see this occur again in the future quarter?
Marcel Martin
Yes, probably not. And I'd say it, we do have some outages planned for the summer.
We always do, but nothing as -- that's 1 or 2 outages. Yes, not quite as robust as the list of outages we had in the first quarter.
But the balance of -- we'll continue spending money on some of the things we started on relative to the 4 high stock old mill, some other equipment upgrades. But a lot of the spending over the balance of the year will be on the new IT systems upgrade, when we plan to spend approximately $5 million on that project this year.
We spent $1 million in the first quarter. We've got the ESRs, the ASR at the end of the year, probably in the fourth quarter.
That's a $5 million project that will come in at the end of the year. But again, this is a new ESR furnace.
It doesn't disrupt what's already operating so it doesn't really impact the business. We've got spending on the distribution process, the processing center, spending over the course of the year.
So we still got a lot of money to spend, a lot of things to get done, but they're less intrusive into the manufacturing process.
Edward Marshall
And correct me if I'm wrong, December is usually the time where you do a lot of heavy maintenance anyway because of the time due to the seasonality?
Mark Comerford
That's exactly it, Ed.
Edward Marshall
And then lastly, I missed what you said, and this will be the last one. Highest order entry was in January, you said it was the strongest since...
Marcel Martin
June of last year.
Mark Comerford
June of last year.
Operator
Our next question comes from the line of Dan Whalen with Auriga USA.
Daniel Whalen
Just so I understand it 100% here that the unplanned equipment outages, essentially, just the maintenance and the upgrades took longer than anticipated. It wasn't due to a response to demand conditions.
Mark Comerford
No, not at all. Dan, I mean, this is one of those situations that there were -- if there were 4 more days in December, we would have been in good shape.
Daniel Whalen
Okay, okay. Can you tell us where your utilizations are now?
Mark Comerford
It depends on the product. I see our core product like a sheet type of product, just probably right about 80%.
If you talk about plate, that's backed off a little bit. We had a big project last year.
And so we got a little breathing room right now in plate. That's probably operating around 70%.
Tube, seamless tube is at capacity. Welded tube, we've got capacity available.
And wire, we've got a lot of capacity available. That gives you a rough idea.
But in general, if you ask me, overall, what are we running at? We're running at about 75%.
Daniel Whalen
Okay. And I was -- my sense is that number will be probably be higher next quarter.
Mark Comerford
Probably should be, yes.
Daniel Whalen
Okay. Probably closer to 80% or something.
Mark Comerford
Yes.
Daniel Whalen
Okay. Now when we look at Europe, can you kind of help us frame in terms of Europe, in terms of this -- certainly, aerospace is a significant portion of that.
But can you help us in terms of Europe kind of an end market breakdown, roughly speaking?
Mark Comerford
Yes, if you take a look at Haynes in general, I mean, the end markets that we supply; aerospace, CPI and land-based gas turbine being the main items there. The aerospace and land-based gas turbine, I think -- typically think of those as global markets.
The demand is global. There is a finite number of manufacturers involved, a finite supply chain, and those products move around the world, from one fabricator to another.
So they're more driven by the end-use demand cycles. I don't think local -- I don't really typically think of them as local manufacturer for local consumption.
So those, I think, have some level of insulation. Airbus and Boeing are going to drive the demand on the aerospace and all the engine manufacturers.
And, yes, they may move around some of the manufacturing but, essentially, it's going to be driven by the end user. The CPI side of it is, I think, more constrained into local manufacturer, local demand, local growth rates, et cetera.
So our CPI business, we do a lot of CPI business out of our Zürich facility. And it has definitely been impacted, some projects being delayed, things like that.
But on the other side, we also do quite a bit of a power generation work or land-based gas turbine work out of the Zürich facility, and that's been doing quite well. So it kind of almost goes more end market-related than it does to geographic-related, but the geographic component definitely comes in when you talk about things like the CPI types of products.
Daniel Whalen
Okay. And did you say earlier that CPI was picking up in January?
Mark Comerford
Been a good month for order entry in CPI in January, yes.
Daniel Whalen
Okay. And your conversations with customers would imply that will likely continue?
Mark Comerford
That's a tough one to answer because it's so spotty. On the project work comes in or the -- yes, the maintenance type work.
Daniel Whalen
Right, right. And then lastly, if I may, just in terms of -- it's very encouraging to see you adding headcount.
Is that something that will probably continue as well?
Marcel Martin
To a certain extent. If you look at our overall headcount, we really -- I break it into 2 categories: you've got your SG&A bucket, and you've got your production bucket.
We really haven't added a lot of people. I mean, you think about it, the $700,000 increase quarter-over-quarter is not very much.
It's essentially a few people. It's increases in some activity with a higher level of activity.
Now you think on the production side, we've been a bit more -- adding people in that process. If you look year-over-year, last quarter to this quarter, we've added 50 people globally in our production manufacturing processes.
We're doing more things. We're making more complex products, and that's the reason for that.
Okay?
Operator
Our next question comes from the line of Tim Hayes with Davenport & Company.
Timothy Hayes
Thanks for the detail on what impact of the quarter that you gave. I think you gave out sort of 3 numbers out.
One of them, that second one, the $1.7 million, I just want to clarify, is that -- how does that compare to the $1.1 million? Is one a pretax, one an after tax or?
Marcel Martin
That's exactly right.
Timothy Hayes
Okay. And the first and third factors, the first one again being $1.7 million and the third being $3.1 million, those struck me as almost the same.
Can you clarify what the differences on -- are on those 2, please?
Marcel Martin
The first item I talked about, the $1.7 million, would recur under pretty much any set of circumstances. Now in that quarter, we have a reduced number of production days available to us because of the holidays, because of the vacations and the projects we typically plan.
So if you go back quarter-to-quarter historically, that number is approximately the same. Now that number will grow every year because we typically add more people.
And if they are fixed cost-oriented, you're not to going to be able to absorb that cost. The second item, the $3.1 million, really relates to product that we didn't plan to produce.
We just didn't forecast to produce and operate at the same level we did in the fourth quarter, which was a very robust fourth quarter. Does that help?
Timothy Hayes
It does, yes.
Operator
[Operator Instructions] Our next question comes from the line of Alan Brochstein with AB Analytical Services.
Alan J. Brochstein
I just had a question on how -- natural gas prices are very low in the United States. And I was wondering if you would expect in the intermediate to longer term, is that -- how that will affect your business in terms of your customers.
And I'm thinking, obviously, land-based gas turbine is, but also maybe in the chemical industry, where natural gas prices are high overseas, obviously. Are you starting to see anything yet?
Do you agree that this could be favorable for you guys in the longer run?
Marcel Martin
I'll start, and then Mark will finish up if he wants. We've talked about that internally quite a bit.
And I read the literatures out there. First and foremost, the low natural gas price is just good for the economy overall.
But I do think that you've focused on, really, 2 things. We were -- the order activity, the sales right now for our land-based gas turbines is really leveraging off of the historical 1,000 units per year kind of build rates.
What I -- what we anticipate happening, and we know will happen at some point in the future, low natural gas prices can't be anything but very favorable for our land-based gas turbine market. I don't know when that tipping point is going to come, but I suspect it will be within, obviously, the next several years.
And I think, you think about what's happened in China or with Japan with the nuclear side of the business, if you think about environmental regulations, reading the article that was about Siemens and Bloomberg, it spoke to a lot of the specifics as to why low natural gas prices is going to be favorable for the land-based gas turbine business. So longer term, it's a very, very good thing.
You also touched on the other aspect of the process. Natural gas is probably 1/3 of the cost of feedstock for the chemical processing industry.
So ultimately, once the consumer side of the business starts to pick up, that will also be very favorable. But I think it's not only limited to the U.S.
though. This whole issue of unconventional natural gas is really a global opportunity.
It impacts Europe. It impacts China.
There's substantial reserve globally relative to that. So overall, I really think it's a good thing for all world economies, and that's the global look.
Mark Comerford
Yes, Alan, talking to our customers, a lot of feedback on exactly that topic, and I don't want to get too much into detail. But if you haven't had a chance to read that Bloomberg article, it came out in the middle of January, very brief article, maybe 2 or 3 pages talking about a Siemens $1.3 billion investment to take -- essentially, compete with GE on the land-based gas turbine side.
And it also mentions Alstom and some things going on in Mitsubishi technologies that are out there, really very, very good article talking about migration over to natural gas and land-based gas turbines.
Operator
[Operator Instructions] Our next question comes from Edward Marshall of Sidoti & Company.
Edward Marshall
I have a quick follow-up on CPI. One of your competitors had reported earlier this earnings season and talked about the fact that aftermarket is now being shifted toward new facility demand.
Is it -- and if I'm correct, I think that's a little bit more stable demand. Have you -- can you confirm that?
Have you seen that kind of going on? Or do you -- can you see the difference based on the way you ship to your clients, et cetera?
Mark Comerford
You do see, we're seeing good bid project activity out there. But one of the things we always talk about is how competitively priced some of the larger projects are out there right now.
It's one of the areas, if you took a look at today versus 2007-type of numbers, you can see the fact that some of the larger mills that are -- their capacities aren't filled with stainless steel products and things like that. You can see where that's keeping kind of a cap on price levels.
So I -- we are still doing a lot of transactional business. We have some good project business, especially in new applications in CPI.
But I think things like FGD business and some of the larger project items, some of those prices are still being captured lower than where we're comfortable participating right now.
Edward Marshall
So let me just see if I understood you correctly. You're basically saying to me that you're foregoing some CPI business because the profit -- the margin is not there for you.
Mark Comerford
I think some people are underbidding us, and they're winning some of those projects, yes.
Operator
Our next question comes from the line of Jeff Bernstein with AH Lisanti.
Jeffrey Bernstein
Just a follow-up to a couple of the priors. You're saying in the press release that backlog is reflecting a significant amount of higher-value alloys compared to previous quarters.
So what are the implications there for margins? Sounds like you're cherry picking business a little bit in terms of avoiding some of the more commodity stuff out there?
Is there a net positive to margins? And how should we be thinking about that?
And then I had a follow-up.
Marcel Martin
Yes, you're absolutely right. The reality is that the average selling price within the backlog is moving up because it is reflective of higher-priced products.
And these are -- higher-priced products is in the context to more valuable products, more value-added work. And we're orienting toward cut parts, a lot of value-added net context, tubular type products, again, more value in that product.
It's a higher-priced product. It's also a higher-cost product.
But overall, if you track back against what's happened over the last 2 years, you can see an improvement in the margins overall, and that margin is reflective of, obviously, a number of things. Number one it's reflective of just the improvement in the economy.
It's reflective of an improvement in our own increased efficiencies to operate our facility. But -- and as importantly, it's attributable to the improvement in the product we're producing and selling and how we're being more selective in moving toward a richer product mix from a margin perspective.
Very similar to what Ed was asking, and what we commented on. We're not pursuing every order out there.
Where we pursue it, we listed [ph] points, choose not to take them, so we're really managing everything we do from a product perspective. Does that help?
Jeffrey Bernstein
Yes, that's great. I appreciate that.
And then just in terms of chemical industry investment in the U.S. There have been, I think, 5 worldscale ethylene crackers announced, planned to be built here over the next few years.
What kind of content would you have in there? And I guess currently, pricing is tough in the chemical business, but with that kind of scale investment coming on, does that kind of tighten up the market at some point?
Mark Comerford
Yes, we had a question similar to this a couple of quarters ago, and I went and talked to our chemical people about it. We wouldn't have a lot of content necessarily in something like that, unless we see a bill of materials come through and there are other parts or fittings and things like that where we participate.
Typically, because in large projects like that, some of those alloys, though high end, are typically at the lower end of our pricing spectrum. Where we tend to participate, where we're more heavily involved is there's a lot of bidding going on right now, also in things like phos [ph] asset-type things and acidic asset-type plants, and that's where, for the lack of a better phrase, we're holding a lot of our capacity into those areas.
And those are higher alloy-types of materials, like our HASTELLOY B-3 and things like that.
Operator
Our next question comes from the line of Mark Parr with KeyBanc Capital Markets.
Mark Parr
I think you guys have done a great job of helping people understand kind of how the year's unfolding. I had one question.
This is a little bit strange, but have -- has Haynes ever produced amorphous steel that could be used in electrical transformers?
Mark Comerford
I'm not familiar with it, Mark, and I think you know I was here back in the Cavett [ph] days, 20, 26 years ago, 28 years ago. But I think you're talking about member [ph] 2, I think Allied Signal used to produce that kind of stuff down in Conway, where it was cast over a drum, and they used a lot of that in magnetic applications and stuff.
I'm not familiar with Haynes ever doing those things.
Operator
There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.
Mark Comerford
Thanks very much. Thank you, everyone.
Thanks for your interest and support of Haynes. We've got a lot of work to do.
We're cognizant of the economic environment, especially of what's occurring in Europe. But we're also very bullish about our end markets and our customers.
As I've said, we're staying very, very close to our customers and discussing their new applications, as well as their ongoing needs. And I think right now, the information we're getting from our customers is still very bullish.
So again, thanks very much for your time, and we look forward to updating you in the -- in 3 months. Thanks again.
Bye-bye.
Operator
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.