Aug 9, 2013
Executives
David Sean Van Bibber - Chief Accounting Officer,Controller Mark M. Comerford - Chief Executive Officer, President and Director Daniel W.
Maudlin - Chief Financial Officer, Vice President of Finance and Treasurer
Analysts
Edward Marshall - Sidoti & Company, LLC Philip Gibbs - KeyBanc Capital Markets Inc., Research Division Daniel M. Whalen - Topeka Capital Markets Inc., Research Division
Operator
Greetings, and welcome to the Haynes International Third Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, David Van Bibber, Controller and Chief Accounting Officer for Haynes International. Thank you, Mr.
Van Bibber, 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 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 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, 2012. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Thank you very much for listening. And now let me turn the call over to Mark.
Mark M. 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 will open with comments about the business and our end markets, and then Dan will give you greater detail on the financial results. Net revenue in the third quarter was $123.6 million, down roughly 13% from 2012's $141.6 million.
Net income in this quarter was $5.3 million, down just over 61% from $13.7 million in the third quarter of '12. Overall, visibility in our end markets is very poor, with lead time short, nickel prices still soft, customers remain very conservative, delaying order entry and keeping order quantities at absolute minimum levels.
We expect this pattern to continue through the fourth quarter. The macroeconomic picture in the U.S.
appears to be getting better. I noticed the July PMI jumped quite a bit, up to 55.4 , which I think is the best number we've seen in over a year.
Hopefully, that will hold up, so those of us in these late cycle markets will begin to see some improvement. And I think we, hopefully, will begin to see some improvement in Europe and Asia as they follow us out of this slow period that we seem to have been in now for roughly a year or so.
Turning to our markets. Our net revenue in the aerospace market for the third quarter was $51 million, down roughly 9% from last year's $55.9 million.
Aerospace accounted for 41.3% of our total revenue in the quarter. Activity in our structural aerospace tubing area continues to operate at full capacity.
Demand for our products for aero engine application remains slow as customers continue to manage their requirements very tightly. There's a pretty large disconnect right now between what's happening at the commercial aircraft delivery end of the supply chain and the demand for jet engine materials at our end of the supply chain.
I think it's fair to say that right now across the marketplace, we're seeing most of the engine materials industry being impacted by this lower demand supply chain de-stocking situation. Our aerospace backlog in the quarter held up with no change.
Actually I think it was up just nominally, about 0.1%. But I think it's the first quarter this fiscal year where we saw the aero backlog hold steady and not decrease.
That being said, we had a pretty good blanket order, if you remember, we updated you last time, we had a pretty good blanket order come in early in the quarter for aero tubing. So we're not saying the aero engine de-stocking is complete.
We think aero engine materials market will stay very conservative in their demand through the balance of the year. By the way, too, also some good news on the aero side.
We struck a couple of LTAs during the quarter for HAYNES 282 and 242, guaranteeing that those will be on, I guess the best way to put it is a major next-generation commercial family of engines. So some good news on that.
We've been working hard to get those materials spec-ed into some of these new applications. Turning to the chemical processing side.
In our chemical processing market, net revenue for the third quarter was $31.8 million, down just over 2% from the $32.6 million we did in the third quarter of '12. CPI accounted for 25.8% of our total revenue for the quarter.
Our backlog decreased about 7% during the quarter, as some projects shipped out and new projects have not yet come in to fill the pipeline. We expect this market area to remain very competitive, especially in the lower-end materials which are being priced very competitively right now.
We're still seeing demand for our higher-end products such as HASTELLOY B-3. In fact, gosh in the last quarter, maybe 6 months, we've probably seen $10 million in orders in B-3 between plate and tubing products.
However, the price erosion at the lower-end has taken average selling prices in this market much lower as we progress through the year. As we've mentioned in the past, perhaps more so than any other markets we serve, this market gets heavily impacted when the larger metal mills have little of their own core commodity products to run.
Also some good news in the CPI area. G-35, which we've spoken about, one of our newer materials, HASTELLOY G-35, has really picked up some traction and replacing some -- it's replacing some HASTELLOY G-30 but it's also replaced some Alloy 31 and even some graphite in phos acid applications.
So I think we'll see some more good news coming in the next few years as more of these plants come in for retrofits. Just to give you a rough idea, I mean, these aren't gigantic but they are significant.
These projects usually run about $500,000 or so of tube when they're done, and I think we were getting probably 1 every 2 years. We expect that, that's going to increase now to 1 maybe even 2 per year in the next couple of years.
So some good news done by our specification, application, engineering and production people getting out and talking about the value in the life of these products as they move forward. Turning to land-based gas turbine.
That market totaled $24.2 million in the quarter, down roughly 13.5% from the same quarter last year. We mentioned last time that we had concerns regarding an inventory overhang in the pipeline in this market area, especially after shipping a record level in fiscal '12.
We believe we are seeing some of that de-stocking occur right now. In fact, if you look at the mix or average selling price that we had in the quarter, you can see the mix was slanted more toward ingot, billet-type applications as opposed to sheet for transitions and things of that nature.
We had more transitions in the second quarter than we did in the third quarter. But, anyway, our first quarter revenue this year was about $22 million to $23 million, and we spiked up in the second quarter to $30 million, and now I think we're seeing the market make those adjustments again.
By the way, too, as I mentioned, we shipped a record level in fiscal '12. Fiscal '13 is probably still going to be our fourth or fifth best year in the company's history in this area.
So even though we're seeing that overhang or seeing the pullback and de-stocking, it's still a pretty good year. In addition to the lower sales level, we also saw the backlog in this market decline roughly 23%, competition remains intense in this market.
These products have the quickest turnaround lead times that we manufacture. As a result, the visibility will remain very poor.
It's going to be very critical. It's going to be a transactional market as we continue to move through the balance of the year.
And it's going to be key for us to stay in front of customers to win whatever business is available. Longer term positives in this market, as we mentioned last time, we're seeing a lot of activity on the quote side, new application side and looking for better materials so that they can run in things hotter and have better efficiencies.
And I'm sure that some of you have also seen, this is good for probably everybody in the industry. People like Long Island Power Authority, Dominion, Duke, have all announced projects that will be gas -- industrial gas turbines in the -- they'll announce projects in the last quarter.
So again, longer term, I think this is going to be an excellent market area for us. Finally, our other markets category, net revenues of roughly $14.7 million in the quarter, down 31% from $21.3 million in the third quarter of fiscal '12.
The difference there is the oil and gas. We had that large oil and gas project quite a bit of a chip last year in the quarter.
This market accounted for about 12% of our revenues during the quarter. Key components in this area like solar energy, industrial heat treating and flue-gas desulfurization remain very sluggish.
I think FGD is going to stay sluggish for quite a while, at least here domestically in the States. We still have not seen a large replenishment order for the HASTELLOY C-22HS material which we qualify in an oil and gas downhole application.
We've seen some small quantities being used in similar qualification lots, more on the drilling side as opposed to the completion side. However, we do not expect any significant orders for the application over the balance of the fiscal year.
Let me move onto the production side, the capital projects. Kokomo flat roll upgrade and expansion, as we mentioned a year ago when we announced this project.
The flat roll area is the core of the products we produce at Haynes. About 70% of our product mix is flat rolled sheet, coil and plate.
We ran this area very close to capacity in 2007 and 2008. And then again in 2011, 2012.
In order to meet the anticipated long-term needs of our key markets, this expansion is necessary. And we expect to have this project completed by the end of 2014.
During the quarter, on the primary end, we completed work in commissioning one of the pre-heat furnaces as well as 2 of our remelt furnaces. We've also completed upgrades to 2 of the control units in the pre-heat area.
We have a third completed, but it's not yet signed off by engineering on the finishing end. Also on the finishing end, we've completed the electrical upgrade work to one of our existing facilities, which is going to house some of the flat roll finishing equipment that we're bringing in.
And we've also completed the foundation work and taken delivery of a large corrective leveling piece of equipment that we'll have here, a flattener, stretcher essentially. The equipment base has been installed.
We're about half way completed, if you ask me for a number, about half way completed with this project. And as I mentioned, we should have this completed by the end of 2014.
On the Tubular Products expansion down in Arcadia, we've completed the excavation of the new furnace pit. We put in the footers and the new expansion and heat treating and the finishing areas.
We're now taking delivery of the building materials to build those buildings. We've also laid the pads for the building structure foundations.
As all of you know, this expansion is primarily for our aero tubing business, which has been operating at capacity for over a year now. Like the flat roll project, we expect this equipment to be installed and commissioned by the end of 2014.
On distribution project, as we mentioned last time, we've been assessing our needs globally on distribution while looking at several of the regions we serve and the needs of our customers and markets in those regions. We've also assessed our in-house capabilities along with several of our conversion partners.
I updated you last time in the improvements we've made in Europe, the upgrade for our U.K. facility will largely be complete by the end of the calendar year.
And if you remember, we've relocated some of our value-added equipments from other locations into that facility. We're changing the floor plan to optimize the processing.
We've got some very critical aerospace and land-based gas turbine accounts we serve from that facility. And we've won a number of supplier awards in the last year that we're very proud of.
However, we think that we can still improve our service and our speed and the inventory management, especially in serving those accounts. So we're taking actions to make sure we continue to solidify our position with them.
In Zurich, we'll have the facility modifications there completed this month. If you remember, the big part of that was really reroofing the facility.
In fact, our people also got some grant money for the roofing of that facility. So that's coming in way under budget.
And in the U.S., we pushed out some of the changes we plan to make in our North American facilities until we fully assess the needs as I mentioned above. Some of you noticed the CapEx changes, and Dan will get into that in more detail.
This is a big part of that we essentially pushed out some of that spending, until we get that project looking exactly the way we want it to look. On the IT Project, I can't even begin to tell you how appreciative I am of our IT people and the partners we're working with for the time and effort they put in to this implementation.
Anybody who's put in an IT structure knows what you go through in trying to do this thing. We'll be going live in North America during fiscal '14.
The lessons we've learned in merging the systems we have in Europe into our new single system have been invaluable. Like any major platform changes, it hasn't been easy, but we've got the systems up and running in Europe, and we're seeing some of the areas where the system will help us develop further.
I think I mentioned to you in one of the calls, maybe 2 or 3 calls ago, we did just like a process map of our order entry process and we found that we had about 50 steps in the order entry process, some 30 to 35 of those in which we created a piece of paper. So we had 3 or 4 systems that we're using that weren't talking to each other.
So we're really noticing things like just a common reporting, the elimination of redundancies, those simple things that we're finding this system is going to help us with, in addition to the real reason for the system which is the speed, the planning, the working capital management, those types of things that we think are going to help us long term. With that, let me turn this over to Dan for some more information on the financials.
Daniel W. Maudlin
Thank you, Mark. I'll begin his financial discussion with the comparisons of our third quarter results this year to the prior year third quarter.
Net revenues of $123.6 million represents an $18 million decrease or 12.7% from the third quarter of last year. Volume was 5,540,000 pounds, which is down 3%, impacting revenue approximately $4.2 million.
We believe this decrease in volume is a result of continued de-stocking of inventory within the supply chain, sluggish demand from the ongoing uncertainty in the economy and customers continuing to delay orders as the price of nickel decreases. We continue to see lower levels of order entry, delays on project type orders and significant competition.
From a volume perspective, we did see some increases to prior year in the chemical processing market and land-based gas turbine market, but these increases were offset by decreases in aerospace and in the other markets. Pricing for the third quarter was down 10% impacting revenue approximately $13.8 million with an average selling price of $22.31 per pound.
Average selling price was down across each market compared to Q3 of last year. The lower nickel price put a significant downward pressure on our selling prices, plus we continue to experience a significant price competition in the marketplace relative to fiscal 2012, particularly in the commodity-type alloys.
This competition requires us to aggressively price orders, which continues to unfavorably impact average selling prices resulting in margin compression. In addition, the short lead times for the mill direct product continues to put downward pressure on prices for the service inter-transactional business.
Gross profit margins and margin percentages declined in the third quarter of fiscal 2013 compared to last year due to the lower volumes and the weaker pricing causing substantial margin compression. Gross profit margin as a percentage of net revenues was 15.1% in the current quarter compared to 22.9% a year ago.
And as we navigate through the softer market, we are carefully reviewing discretionary spending and reducing costs where possible, along with adjusting production schedules and lowering inventory levels. We are also communicating closely with our customers so that we are well positioned when business conditions strengthen.
SG&A combined with research and technical expenses were $10.6 million, which is a decrease of $600,000 compared to the prior year third quarter. Reductions are primarily due to reduced cost for the incentive compensation programs, and SG&A as a percentage of sales increased from 7.9% to 8.6% compared to a year ago due to lower net revenues.
Tax expense in the third quarter was $2.7 million or an effective tax rate of 33.8% versus $7.5 million or 35.2% in the third quarter last year. The effective tax rate was slightly favorable this quarter, due to the reversal of certain tax reserves no longer required.
Net income for the third quarter was $5.3 million or $0.43 per diluted share compared to the net income of $13.7 million or $1.11 per diluted share in last year's third quarter. I'll comment on the sequential quarters comparing Q2 to Q3 of fiscal '13.
The third quarter results resulted in lower volumes, about 41,000 pounds. Average selling prices decreased 3.6%, resulting in revenue being lower by $5.6 million.
The gross profit margin dollars declined by $1.5 million and gross profit margin percentage declined from 15.5% to 15.1%. While this margin compression is a result of the same factors already discussed, the rate and magnitude of compression seems to be slowing, with less compression than we've seen in the other quarters over fiscal years '12 and '13.
Backlog was $189.6 million at June 30, a decrease of approximately $17.4 million or 8.4% from March 31, 2013. Backlog pounds decreased 16% for the quarter, partially offset by a 9% increase in the average selling price due to the mix of products in the backlog.
The reduction in backlog was predominantly from reduced order entry volumes as de-stocking continues in the supply chain and customers continue to delay making purchases due to the decreasing cost of nickel, as we have already discussed. The backlog for the land-based gas turbine and chemical processing markets declined in the third quarter of fiscal '13, while the backlog for aerospace remained flat.
The July backlog decreased from the $189.6 million at the end of June to $186.0 million at July 31, 2013. The backlog pounds, at 6.8 million pounds with an average selling price of $29.88 per pound.
Our capital investment strategy is continuing even during this period of low demand because management continues to believe in the long-term growth potential of our markets. Capital investment in the third quarter of fiscal '13 was $10.9 million, which brings capital investment to $33.7 million for the first 9 months of 2013.
The forecast for capital investment in fiscal '13 and fiscal '14 are approximately $48 million and $50 million, respectively. The execution of our major capital projects continue to be on schedule, and the company continues to believe that these investments will help the company improve efficiency and meet the expected long-term customer demand for increased volume and quality improvements.
And we reiterate our commitment to the expected benefits of these capital projects. An initiative has been implemented that is designed to delay spending on nonstrategic projects.
Each planned capital project has been analyzed to determine if, given our current low business volumes, if the timing of project execution is proper. In addition, this initiative refresh the timing of the expected cash payouts of the major projects underway.
As a result of this analysis, spending has been deferred to 2014 and even 2015. Our forecast of capital expenditures have been reduced from $70 million to approximately $48 million in fiscal year 2013 and has been increased in 2014 from $39 million to $50 million.
Cash flow. During the third quarter, the company's cash balance declined from $48 million at March 31, 2013, to $43.6 million at June 30.
Net cash provided by operating activities was $38.2 million in the first 9 months of fiscal '13 compared to $14 million last year. At the lower business levels, we are expecting to further reduce inventory over the next couple of quarters.
The company continues to make discretionary payments to its defined benefit pension plans and other postretirement plans in which total is suspected to equal $21 million for all of fiscal year 2013. Net cash used in investing activities was $33.7 million for the first 9 months of fiscal '13 compared to $17.1 million as a result of higher capital expenditures.
And net cash used for financing activities in the first 9 months of '13 included a dividend payment of $8.1 million, which is consistent with prior year. Our liquidity remains strong with a 0 balance on our revolver.
In addition to the $43.6 million cash on hand, the company has a credit facility of $120 million, which can be increased to $170 million at the company's option. And management believes this liquidity will be sufficient to fund planned capital expenditures and take advantage of future economic recovery and other growth opportunities that become available.
Guidance. Due to the recent lower order entry volumes and pricing, management currently expects that net income for the fourth quarter of fiscal '13 to be lower than the net income of the third quarter of fiscal '13.
Net income is expected to continue to be unfavorably impacted by lower volumes and weaker pricing, similar to that experience during the second and third quarters. Visibility in the marketplace remains poor, and based upon continued uncertainty, level of bookings to date and feedback from our key customers, management does not anticipate a recovery during the fourth quarter of fiscal '13.
And in summary, while this period of continued sluggish demand is challenging, we are well positioned for the future recovery. With the completion of our current capital investments in fiscal year 2014, we have significant potential to achieve future improved operating leverage and earnings power.
Now with that, I'll turn the discussion back over to Mark.
Mark M. Comerford
Thanks, Dan. The economic environment right now is still very cloudy, and I think you're seeing in some of the results here, you see that sensitivity that we talk about all the time to volume that we have especially.
Feels like the broader economy is getting better, PMI seems to be reinforcing that. However, at this point in time, we haven't seen a rebound in our order books.
We're very optimistic about the long-term growth expectations of our core markets. In the short term, we have a plan and we're working it.
We're eliminating waste in our manufacturing processes and facilities, we're working with customers on new applications in driving the business towards more value-added offerings, and we're very selectively upgrading and adding capacity where we've proven we've needed in the past 5 to 10 years in preparation for the next 10 years. Our objective, as Dan has just mentioned, is to ensure that Haynes is well positioned for the growth we anticipate in our target markets when the upturn arrives.
With that, let's open the call to your questions.
Operator
[Operator Instructions] Our first question is coming from Edward Marshall from Sidoti & Company.
Edward Marshall - Sidoti & Company, LLC
So for me, looking at the cost structure, it sounds more like you're, looking at it from maybe saying it as curtailment than it would be saying outright restructuring, I don't think you have identified that you actually need to restructure the business. Is that the right way to view kind of just the overall -- your thoughts?
Daniel W. Maudlin
Yes, I believe that would be correct. I think it's a careful review of everything spent, and looking at can we push out spending, do we need to order so much, that kind of thing.
And looking at the plant and the production levels, and reducing levels and doing some rolling layoffs and that kind of thing throughout different departments, saves on some labor cost but also saves on a lot of operating costs, electricity and so on, if we're talking about the melt shops, for example. So I think it is a careful review.
The challenge that we have of course here is too big of a restructuring will impact us when the business recovers. And we're trying to avoid the detriment of that impact.
So it is more of a review and a careful review of everything we have going forward.
Mark M. Comerford
Yes, it's kind of fascinating right now too, Ed, and I'm sure you're hearing this from everybody, but I've been in this 30 years, and I don't know that I've seen lead times or competition for lead times as short as they are right now. So there's a sensitivity to making sure that we're staffed appropriately to win the orders and turn the product around especially in some key areas as quickly as we possibly can.
So we're -- it's a tough balance we're working especially with the manufacturing facilities right now. As Dan had mentioned, doing some rolling furloughs through the operations but at the same time, saying we've got to be quick and wiry and able to respond to some of these quick needs that are out there.
Edward Marshall - Sidoti & Company, LLC
So I mean that was the root of my question, how fast can you get back. And it sounds like you're positioning yourselves to kind of recover pretty quickly if markets recover.
But you mentioned something that stands out about lead times and kind of the industry as a whole, is it a function of the capacity that was added maybe through the good times of '06, '07, that really have lead times as short as they are today, or is it more a function of excess material in the channel and de-stocking and the dramatic drop in price of nickel?
Mark M. Comerford
I think right now, Ed, if you look at it, it's both. I think there was a -- and I'll talk mainly and just first about the aerospace supply chain.
We had that real spike in demand. I think everybody saw it as we went through 2011 and carried into '12.
And that was really that restocking of the entire supply chain. And so we're seeing a lot of de-stocking in that area.
I think that's a critical component of what's occurring right now. I think if you look at the land-based gas turbine area, there's some de-stocking occurring there as well.
More importantly though, in my opinion, in the land-based gas turbine, is we just haven't seen global demand pick up for industrial products such that the power requirements are so great that they're adding more and more as it goes on. I think that will occur as we move out into the future.
But right now, I think there's sufficient, I'll say, power generation capacity out there that we just haven't seen a lot of the new business rolling through yet. That's why it's nice to see some of these things changing, and as we move into the future and we see conversions from coal over to natural gas units, I think we'll see demand pick up as these things move forward into the future.
The chemicals side, there was just an overbuild of capacity in the, I'll say, '07, '08, '09 time frame, and we're seeing a lot of MRO work coming through with retrofits like I mentioned with the G-35. But there's still -- I don't think anybody in the industry right now are saying they're seeing large chemical projects coming through the way they did 1.5 years ago or, more importantly, 5 years ago.
But I do see a future for those things. We talked last time about people like Sasol and some of the plants that are going to be going up in North America because of lower natural gas prices.
I don't know when these things are going to occur, but there's some real good indicators out there that industrial materials, high-performance materials, have a pretty good future coming.
Edward Marshall - Sidoti & Company, LLC
I've been following some of the engineering firms, the comments that they're receiving from Salesforce, et cetera, have been very promising about the orders coming down the pipeline. I mean, a really healthy market through most likely 2017.
You mentioned capacity in the industry. I assume that if the excess capacity will be soaked up based on just the strength of the order book that's ultimately coming.
I mean, I understand it's not unusual for it to be choppy in this particular place in the cycle. But you don't sound like you have -- you feel the momentum is building.
Maybe there's -- there seems to be a disconnect based on the engineering firms and what you're actually saying today, am I reading that right?
Mark M. Comerford
Yes, I think, Ed, right now, we're sitting -- we're really just sitting in a very slow period and you can say, okay, it's the recession we just went through and the de-stocking that's occurred, you can say that it's what's happening in Europe and you can say it's the slowdown we're seeing in China. I mean Japan is actually doing pretty well and we're seeing some nice orders come through from there.
So it's kind of an up and down situation with quick response times required. But I think just in general, the industrial economy is it's almost like we're back to the old days, when we emerge from a recession, automotive and construction would lead us out and guys like us who are tied to the industrial economy would lag by 9 months.
That didn't really occur in '11 and '12. We almost kind of led things out, while automotive and construction were still kind of stuck in a malaise.
But it seems like we're almost back to those old times where, you know what, automotive and construction and housing are going to lead us -- lead the economy forward and then the what used to be called the late cycle guys like us are going to lag this thing by 6 to 9 months.
Edward Marshall - Sidoti & Company, LLC
Okay. Finally, inventories, you pulled them down, I mean, in the de-stocking world, not an easy thing to do but it looked like you've done a decent job so far.
How much -- did you quantify how much more inventory you plan to take out of the system here?
Daniel W. Maudlin
Well, we're looking at the melt shop very carefully and reducing how much we are melting. And we ended this June period with 18.3 million pounds and we could easily see that probably something like 17 million by the end of the next quarter.
Mark M. Comerford
And just to give you an idea -- think about too, we negotiated the labor agreement so we had a little bit of a build going there through the quarter that we're talking about now. And so now we can back off a little bit as we go forward as Dan just mentioned.
Edward Marshall - Sidoti & Company, LLC
Was there any production difficulties due to the steelworkers' or the union workers' contract?
Mark M. Comerford
No. And I think the fact that we struck a five-year agreement I think is kind of testament to both sides are real happy with the agreement and the relationship and, frankly, the investments we've been making in the company and where we think this markets are going.
Operator
[Operator Instructions] Our next question is coming from Phil Gibbs from KeyBanc Capital Markets.
Philip Gibbs - KeyBanc Capital Markets Inc., Research Division
Mark, with lead times as short as they are right now and nickel still trying to find a bottom and the fact that you've got to reprice product essentially in line with where nickel is today, does that dynamic, that repricing dynamic, impact your gross margins as you work down some of this inventory? Should we think about that as one of the impacts that we're seeing on the P&L right now?
Mark M. Comerford
I fight with Dan all the time about this, about being FIFO, and then he always gets back to me and says but it's how you'd run your own business if it was yours. So, yes, we have the natural flushing out of materials as we go through the system.
So it's kind of tough on us when we're into this down markets a little bit, it compresses things. I don't know if you can say it exaggerates the compression.
But if it does, it also exaggerates the margin on the way up, too, so that's a little bit of a factor. We've said before, the nickel market is always telling you something on the broader economy.
To me, the bigger thing is I would like to see some of the more commodity-related materials doing a heck of a lot better so that some of the big mills wouldn't be trying to fill their capacity with our types of small order quantities. And I think it's complicated a little bit right now, there's a big mill out there right now that's for sale and they've got to have a good backlog to make sure they're appealing.
So there's a little bit of a perfect storm on some of the lower-end materials right now that's driven some of those prices. One, demand is low, one guy is for sale, the nickel's low, a lot of large projects are not being let just yet.
So there's a little bit of a perfect storm on that end of things that are really compressing margins. I'm not going to blame nickel fully, right now, it's more of a competitive marketplace than it is a commodity.
I wish I could blame the commodity, but I can't. It's more of just a price-competitive marketplace.
Dan, do you want to...
Daniel W. Maudlin
No, I totally agree with that. And I think the nickel price we're able to pass-through for the most part really depends on how quickly nickel declines.
And in this case, over a quarter, it declined 15%. So that is a pretty rapid decline in nickel.
So that will impact us. There is a timing difference there that will compress our margins, but I think certainly our margin compression is a lot more related to the competitive nature of the market than it is commodity price risk.
Philip Gibbs - KeyBanc Capital Markets Inc., Research Division
Okay. And related to -- I appreciate that.
And related to some of your more proprietary, call it, niche alloys. Mark, can you give us a feel for how much your mix do you think is really in those proprietary alloys and then also give us some color on some of these long-term agreements that you signed during the quarter that may be using some of those materials?
Mark M. Comerford
Yes, on the proprietary, so we really don't release that information. We put it in the K.
I don't know if it was last year or a couple of years ago. But we essentially said that these proprietary materials, and that includes things that are off patent but other people tend not to make because they're extraordinarily difficult to make, I think we said something along the order of 25% to 30% of the volume that goes through here but about 40% of the profitability.
So they're very good to us. They're key.
When you're Haynes and you're trying to be -- they're also a big reason a lot of people meet with us to talk about other materials and it's one of the biggest reasons we get to meet with all the engineers at the end of the supply chain, the pull-through marketing side of things. So that's kind of a rough picture on that.
With respect to the LTAs, I hope you don't mind, but we don't get into a habit of talking about LTAs. I mentioned these 2, because I know I've given you a lot of color on 282 in the past.
And I just want to let you know, some people have asked questions about are they going to be on some of these new engine platforms, and I just want to give you just that flavor that, yes, 282 is going to be on the new engine platforms.
Philip Gibbs - KeyBanc Capital Markets Inc., Research Division
When does that material start to pull through and is it incrementally meaningful for you guys or is it just -- are we just on the front end of what it could be?
Mark M. Comerford
It's on the front end. It's on the front end, but just to give you an idea, 282 sales, they doubled a year ago and they tripled this year.
So 282 is gaining some traction.
Philip Gibbs - KeyBanc Capital Markets Inc., Research Division
Okay. And then I just have a last question for clarification.
For Dan, or Mark, you had talked about the backlog at the end of July. I just wanted to make sure I have that number correctly.
I thought you said 180.6 and I didn't catch the pounds.
Daniel W. Maudlin
It's 186.0.
Mark M. Comerford
It went down another $3.5 million or so.
Philip Gibbs - KeyBanc Capital Markets Inc., Research Division
186.0. Okay, and then did you say 6.8 million?
Daniel W. Maudlin
No, 6.2 million pounds.
Daniel W. Maudlin
And $29.88 per pound.
Operator
[Operator Instructions] Our next question is coming from Dan Whalen from Topeka Capital Markets.
Daniel M. Whalen - Topeka Capital Markets Inc., Research Division
So you kind of just touched on my question there just in terms of some of the large companies going after smaller projects that they historically kind of not been as aggressive on. When we look at that 16% decrease in backlog pounds, I mean, is that element represent a few percent, or how should we try and gauge that, so to speak?
Daniel W. Maudlin
As far as, like, what, markets?
Daniel M. Whalen - Topeka Capital Markets Inc., Research Division
Well, I mean, there's certainly some soft dynamics, demand dynamics out there. But there's also I think an added element of some of the larger companies out there bidding for some of the smaller projects that they historically probably haven't gone after in more normalized times.
So out of that 16% decline in backlog pounds, is that kind of -- did that bring it from a decline of 12% to 16%? Or help us kind of gauge what the impact that had on the backlog.
Daniel W. Maudlin
Well, I think, one thing that Haynes has always been good at in markets that are stronger is we can do quite well those smaller lot size projects. So that was might be a bit of our specialty, is being able to do that where some of the larger mills would rather have the large volume, large run type projects.
But in softer demand times, you're exactly right, they will dip into this area where they are taking some of the smaller ones and at very competitive prices. As we've mentioned many times, we're a very fixed cost operation and so are the other mills.
So when volume is softer, they will get volume anywhere they can as we all do in the marketplace. But probably one market that maybe has impacted a little greater than some of the other ones in this respect is land-based gas turbines where we have some smaller lot sizes, some product forms that are quick lead times where it can go through the plant quite quickly.
I think that was impacted quite greatly in that respect. I mean, we mentioned the backlog in that market dropped substantially.
That was a larger drop versus other ones as well as the other markets.
Mark M. Comerford
Yes, just to give you an idea too, Dan. I don't know if this is where you're headed with it.
But for instance, anecdotally, discussions with customers, things like that, there's not a market share shift occurring. Essentially, the backlog drop is a function of quicker lead times, people don't have to place orders for a longer period than they need to.
If the nickel people aren't going to place, nobody wants to be the last guy to buy at the high price. So as long as nickel continues to soften and doesn't firm up, you're going to see people leave orders off the books until they absolutely have to.
But as I say, anecdotally, it's not like we've had a situation where any customers come to us and say, now, we've shifted the business over to XYZ. Nothing like that has occurred.
Market share is still, I think, largely right where it always was and when we begin to see business comeback, I think we'll be in good shape. You do see -- one of the biggest things you see from some of the larger mills, the quicker lead times, there's less of a need to buy through a distribution center, so you begin -- you just lose more on the price level, might be the best way to put it.
You're not losing volumes when we're in a situation like we are right now. I think right now, the decrease in backlog right now is largely due to quicker lead times that are out there right now, and just the fact that people are holding off on order quantities and there just not the demand, the push for demand out there right now that there is when we start to see a construction boom, an industrial construction boom, be it for in fabricated parts.
There's good indicators out there, by the way, too. Some of the MRO business, some of the spares, I should say, at the OEMs look like that's starting to kick back in.
So we might begin to see some of that demand come through. But again, what we always get back to is we don't see it get in our order books.
So the fact that we give you guys backlogs forces us to speak very candidly and honestly about right now, we're just not seeing it in the order book.
Daniel W. Maudlin
And as we -- the element of this, that is the decreasing nickel price and the customers delaying orders due to that, we watched nickel very carefully, and as Mark says, I think it's telling us something. But as it decreases down, people are delaying their orders, and we think that's dipped below $6 a couple of times, but bounces right back quite quickly.
So we're hoping we see some solidification there in the nickel price. Time will tell, but if we get some stability there, even at low levels, if we get stability there, I think we'll start to see some increases in the order volumes.
Daniel M. Whalen - Topeka Capital Markets Inc., Research Division
Okay, great. Did you guys indicate what you're utilization rates were in the quarter?
Mark M. Comerford
No, we didn't.
Daniel M. Whalen - Topeka Capital Markets Inc., Research Division
Either for flat roll or is it corporate?
Mark M. Comerford
No, we didn't. But just to give you a rough idea, just off the top of my head, we've always talked about things like the aerospace tubing running at capacity, but that is indeed running at capacity.
If you ask me about the HASTELLOY or nickel tubing area, that's probably running I'll say 50% to 60% of capacity. And if you look at things like flat roll section of the company, that's probably running right now also in about the 60% or 70% of capacity at maximum.
The wire company is probably running, I think, they've got all the capacity they need. It's probably running about 50% of capacity right now.
Daniel M. Whalen - Topeka Capital Markets Inc., Research Division
Okay. And in terms of if there's a further down tick in utilization rates next quarter, probably more on the flat roll side of the business?
Mark M. Comerford
Yes. I think that will be fair.
I think the guidance we've given and the backlog reductions, when it's CPI and when it's land-based gas turbine, it's the flat roll and it's also some of the heavier products. And again, on land-based gas turbine, the visibility is so short and the lead times, a lot of those are ingot, billet types of application.
Those are in and out of here at 5 weeks. That's -- it's difficult to say what the visibility, but those will be areas, so I'd say the flat roll and things like ingot and billet will be the areas that if this stays soft, we'll see the area soften a little bit more.
Operator
We've reached the end of our question-and-answer session. I like to turn the floor back over to management for any further or closing comments.
Mark M. Comerford
Thanks very much for your time today, everybody. And thank you for your interest and support of Haynes.
We look forward to updating you again next quarter.
Operator
Thank you. This does conclude today's teleconference.
You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.