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Executives

June Filingeri - President Investor Relations - Comm-Partners

Dennis M. Oates - President and Chief Executive Officer

Richard M. Ubinger - Vice President of Finance; Chief Financial Officer and Treasurer

Christopher M. Zimmer - Vice President of Sales and Marketing

Analysts

Michael Gallo - C. L. King & Associates

Edward Marshall - Sidoti & Company

Mark Parr - Keybanc Capital

Lloyd O'Carroll - Davenport & Company Llc

Nat Kellog - Next Generation Equity Research

Nat Kellogg - Next Generation Equity Research

Universal Stainless & Alloy Products, Inc. (USAP) Q4 2008 Earnings Call January 29, 2009 10:00 AM ET

Operator

Good morning. My name is Shardae (ph) and I will be your conference operator today. At this time I would like to welcome everyone to the Universal Stainless Fourth Quarter 2008 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator instructions) Thank you. Ms. Filingeri, you may begin your conference.

June Filingeri

Thank you, Good morning. This is June Filingeri of Comm-Partners. And I'd also like to welcome you to the Universal Stainless & Alloy Products conference call. We are here to discuss the company's fourth quarter results and first quarter outlook, as well as the Melt Shop capital project all which were reported this morning.

With us from management are Dennis Oates, President and Chief Executive Officer; Chris Zimmer, Vice President of Sales and Marketing; Paul McGrath, Vice President of Administration; and Rick Ubinger, Vice President of Finance and Chief Financial Officer.

Before I turn the call over to management, let me quickly review procedures. After management has made formal remarks, we will take your questions and the conference operator will remind you of procedures at that time.

Also please note that in this morning's call, management will make forward-looking statements under the Private Securities Litigation Reform Act of 1995. I would like to remind you of the risks related to these statements, which are more fully described in today's press release and in the company's filings with the Securities and Exchange Commission. With these formalities out of the way, I'd like to turn the call over to Denny Oates. Denny, we are ready to begin.

Dennis M. Oates

Thanks June. Good morning everyone, thanks for joining us today. Our fourth quarter sales were $57 million generating fully diluted earnings per share of $0.18. In relation to our guidance sales were stronger and EPS was within our updated guidance. The fourth quarter includes $0.04 per share in adjustments relating to inventory reserves, tax rate change and the receipt of CDSOA funds. Rick will detail our financial performance in a moment.

Full year were sales were a record $235 million with diluted EPS of $2.05 per share, and a solid cash flow from operations of $18 million. The main driver of our fourth quarter sales growth over last year was the more than doubling of our sales to forgers fueled by global power generation markets.

Aerospace was the only market that did not show year-over-year sales growth. Our aerospace sales declined 5% as service centers sharply reduced buying activity amid falling commodity prices, the lingering effect of the Boeing work stoppage and in deteriorating economic and credit conditions.

We ended the year with a consolidated backlog of $75 million. The reduced backlog was attributable to lower order entry during the quarter for most product lines, coupled with stronger than expected shipments. Buying patterns reflected downward trends in raw material cost, uncertainty regarding the underline level of demand, lack of credit availability and a desire to pay our inventories accordingly.

Our fourth quarter income was adversely affected by the rapid and unprecedented decline in raw material prices and the resulting timing imbalance between surcharges and raw material cost incurred. I am going to hand the call over to Rick for a closer look at our financial performance with more detail on the effect of the unprecedented drop in commodity prices in the quarter. I will return in a few minutes to review our end markets and discuss our plans going forward, including our capital program at the Melt Shop which we announced this morning. Rick.

Richard M. Ubinger

Thanks Denny. Sales for the fourth quarter of 2008 were $57.1 million and net income was $1.2 million resulting in diluted earnings per share of $0.18. Our sales exceeded our expectations for the quarter because of higher than expected shipments of semi-finished products to our forger and reroller customers.

The increased volume of semi-finished product shipments was partially offset by lower than expected shipments to service centers and OEM's as well as lower surcharges. We estimated the drop in surcharges had a $1 million negative impact on Dunkirk sales and operating income. Year-over-year sales increased 15% based on an overall 19% increase in total tons shipped to customers. Low shipments of VAR product were partially offset by increased shipments of tool steel and ESR products used for power generation applications.

Our sales were down 1% sequentially, primarily due to lower shipments and surcharges in Dunkirk, partially offset by higher shipments of semi-finished products in Bridgeville. The Universal Stainless segments sales were up 22% from the fourth quarter of 2007, primarily due to a 17% increase in tons shipped and higher selling prices. Dunkirk sales declined 39% based on a 35% decrease in tons shipped and lower selling prices in comparison to the fourth quarter of 2007.

Our gross margin of $3 million for the 2008 fourth quarter included a $248,000 charge for the relocation of the round bar finishing line from Bridgeville to Dunkirk, and an $807,000 increase to inventory reserves, primarily due to the drop in commodity prices.

From September to December, the average price of nickel and chrome both declined 46%, while moly declined 70% and iron declined 56%. Excluding the relocation charge and reserve increase, our gross margin was 7.2% of sales in the 2008 fourth quarter, versus 17.1% in the fourth quarter last year and 12.5% in the 2008 third quarter, after excluding a relocation charge of $586,000. The decline in the latest quarter in comparison to both prior periods, primarily resulted from reduced shipments of VAR products and the effect of lower raw material prices on surcharges.

Despite falling commodity prices, our material cost as a percentage of sales before the impact of inventory reserve charges, increased for both the Universal Stainless and Dunkirk segments compared to the 2007 fourth quarter and the third quarter of 2008 due to the timing material procurement. The combination of these factors led to a decrease in consolidated operating income for the fourth quarter of 2008 to 0.9% of sales from 10.9% in the year ago quarter, and from 6.5% sequentially.

Other income for the quarter included the receipt of $599,000 related to import duties. We expect these payments will decline in future years as the remaining balance of collected import duties through the September 30, 2007 expiration is disbursed.

Finally, we lowered our effective income tax rate for 2008 from 32% to 29.9% during the fourth quarter. The lower rate which generated a $0.06 per diluted share benefit in the quarter is primarily based on reporting lower income versus -- for the year versus our September 2008 original estimate. Our cash flow from operations was $5.8 million for the fourth quarter of 2008 and $17.7 million for the year. Our managed working capital consisting of accounts receivable and inventory minus accounts payable, fell by $4 million due mainly to a $7 million reduction in inventory.

Capital expenditures in the quarter of $3.3 million were primarily focused on our expansion activities in Dunkirk and additions and additions to our annealing and finishing operations in Bridgeville. That completes my review of the financials I will now turn the call back to Denny.

Dennis M. Oates

Thanks Rick. Let's talk about our end markets. Our sale to Aerospace were 5% lower than the fourth quarter last year but rose 5% sequentially. Aerospace which remains our largest end market represented 34% of total fourth quarter 2008 sales compared to 42% in the fourth quarter of 2007 and 32% in the 2008 third quarter.

As we've discussed before part of the challenge in looking at Aerospace performance and demand is that most our sales in Aerospace move through services centers. Services centers are balancing a precipitous drop in commodity costs and a deterioration in economic and credit conditions. Therefore it is not surprising that services centers are being as conservative as possible in their purchasing and inventory management.

Generally speaking we remain bullish on Aerospace over the long-term but expect erratic demand over the next several quarters. Yesterday Boeing reported that its contractual backlog for commercial airplanes rose to a record $279 billion, which approximate 8 times their annual revenues for these products.

They reported a few aircraft cancellations at a normal level of deferrals in the fourth quarter. However they also anticipate an increase in cancellations and deferrals in 2009 which may result in additional adjustments to the metal supply chain. In fact right before the conference call we learned of some cancellations from our Russian carrier.

Our sales to power generation -- to the power generation market increased 51% from the fourth quarter of 2007 and 14% from the third quarter of 2008. Power gen represented 15% of total fourth quarter sales versus 11% of the fourth quarter last year and 13% in the third quarter. Power gen is our strongest end market at present and the outlook for 2009 is generally good.

On their earnings call last week GE reported that they received orders for another 70 gas turbines in the fourth quarter. By contrast they reported receiving 33 new gas turbines orders in the 2008 third quarter.

Our sales to the petrochemical market rose 50% from the 2007 fourth quarter, but were down 15% sequentially. Petrochemical sales represented 17% of total fourth quarter 2008 sales, compared with 13% in the fourth quarter of 2007 and 20% in the third quarter. This performance shows the success we have had in developing new opportunities in the oil and gas segment during the year, offset by decreased demand in the fourth quarter associated with plummeting oil prices and excess inventories in the supply chain.

Our tool steel sales were up 8% year-over-year, but down 24% from the 2008 third quarter. Tool steel represented approximately 14% of total fourth quarter sales in both 2007 and 2008, an 18% in the third quarter. Demand for tool steel plate has fallen sharply due to the well publicized problems in the domestic automotive industry, compounded by the short-term challenges facing the heavy equipment market worldwide.

We would agree with the Caterpillar announcement earlier this week indicating there is future growth opportunity driven by low interest rates globally, infrastructure needs, and obsolete capacity in the mining and energy industries. We're all waiting to see the scope and details of the stimulus package both here and abroad, before modeling it in any short term growth.

As I said in today's earnings release, there is no doubt that current business conditions are challenging, which is clearly evident in our first quarter forecast. We expect first quarter sales to range between $32 and $42 million, with diluted earnings per share ranging from breakeven to $0.10. This compares with sales of 57 million and diluted EPS of $0.70 in the 2008 first quarter.

Our guidance is based on the $75 million backlog at year end, and an anticipated $6 to $8 million negative impact from lower surcharges compared to the first quarter last year. We are taking all the appropriate actions to adjust production to a level of incoming business, to control inventory, to reduce costs, and to maintain our healthy cash position.

Let me also underscore that we intend to move forward with our long-term strategy despite current conditions. We have positioned the company in diverse end markets with excellent long-term growth prospects. Within these markets, we are committed to delivering unparalleled customer service through reliable one-time delivery, short lead times, and quality products. We will invest $13 million in the Bridgeville Melt Shop in support of these initiatives.

Today's press release describes the scope of our investment. The combination of existing cash balances, future cash flows, and a new credit facility, which we are finalizing with PNC Bank are expected to be more than sufficient to fund this capital improvement as well as other future cash needs of the company. One year ago, in my first call as President and CEO of Universal Stainless, I said that the real challenge and real opportunity for this company was to build on its solid foundation and accelerate profitable growth to build shareholder value. While the world has changed dramatically since then, our plan to do so continues unabated. That concludes my formal remarks, we're now ready to take your questions.

Question-and-Answer Session

Operator

At this time, I would like to remind everyone, (Operator Instructions). Your first question comes from Michael Gallo of C.L. King.

Michael Gallo - C. L. King & Associates

Hi good morning.

Dennis Oates

Good morning Mike.

Michael Gallo - C. L. King & Associates

Question I have I guess centers around power gen which -- obviously look like your strongest market in the quarter, I mean obviously the other markets are well documented. It seems to be holding up well but one of your peers indicated recently in their call that they expected demand for large gas turbines to decline or be pretty weak over the next couple of quarters. So, I wanted to get your take I guess going forward on that market would you expect this to continue to be as resilient or would you expect to see that market also slow as we go through 2009?

Dennis Oates

Well we've characterized the outlook in 2009 as good. The bell-weather we monitor very closely is GE. We talked about the level of incoming business their at GE. In our conversations with our customers, basically forgers; they are generally optimistic about 2009. Couple of them indicate some softness in the first half of the year but they are universally upbeat about the second half of the year.

Michael Gallo - C. L. King & Associates

Okay that's helpful. And then again tools, just to come back to tool steel plate, obviously its been very strong in the last couple of years for you, could you just walk through how much you expect that, that market might be down in 2009?

Dennis Oates

clearly tool steel, if you look at the last 12 months here at Universal in the tool steel market, we had a very god run for three quarters. Tool steel business was growing itself, plus we were capturing additional share during that period of time. During the fourth quarter the business really took a dive, as we look at the first quarter of 2009, and order entry continues to be very weak, and now we expect the entire year 2009 to be weak. It's -- the largest driver is automotive and some of the other markets that we've talked about before which support tool steel are also indicating some weakness.

We talked to our customers, their basically layout of the year, is again first half weak, with some acceleration pick up and demand in the second half of the year but nothing near the levels we saw early in 2008.

Michael Gallo - C. L. King & Associates

All right, okay that's very helpful. Thanks a lot.

Dennis Oates

You are welcome.

Operator

Your next question comes from Edward Marshall of Sidoti & Company.

Edward Marshall - Sidoti & Company

Good morning guys.

Dennis Oates

How are you doing, Ed?

Edward Marshall - Sidoti & Company

Good. The service center activity, for the first month of January here, what is the pulse there. I mean have those started to buy again replacing some of their inventory, and kind of soft then?

Dennis Oates

How we've characterized service center business is continuing to be relatively anemic. We haven't seen any marked improvement compared to what we saw in December and the latter part of November.

Edward Marshall - Sidoti & Company

So, from the Aerospace kind of business I mean is that giving you any indication of what's going to happen there?

Dennis Oates

Well I think it's largely driven by the general uncertainty in the economy. When we talked to our service center accounts, their biggest concern is what's going to happen to end use demand, they're very focused on the inventory levels and basically driving inventory down. My personal view of that -- this situation is that they are doing that. If history is any indicator, the inventories will be driven down to a point well below demand and things will snap back very quickly. The million dollar question is -- and very sharply. The question is when will that snap back occur; in our estimates we are not expecting that until second half of the year.

Edward Marshall - Sidoti & Company

Okay, the -- what's the breakout backlog as far as the different segments. Is that heavily weighted to something?

Richard Ubinger

It is heavily weighted to the semi-finished side which is typical of our backlog.

Edward Marshall - Sidoti & Company

Okay

Richard Ubinger

The bridge -- I would say the Dunkirk backlog is -- about 23% of our total backlog, which would be mostly the finished product.

Edward Marshall - Sidoti & Company

So would it be fair to say that if semi-finished, we're looking at more toward power gen?

Richard Ubinger

Yes.

Dennis Oates

Yeah if you look at the back log you are going to see the strength will be in reroll product and product going to the power gen market. If you look at the Dunkirk business which is as Rick indicated is more the finished product, finished bar for example and look at the trend. Our back log quite frankly during the third quarter was fairly flat, so they didn't see the deterioration we saw in the other products.

Edward Marshall - Sidoti & Company

I see. And the second announcement that you guys had today on the melt, is that in addition to maintenance CapEx? I mean should we be expecting an additional 4 to 5 million here so 17 to 18 million next year in CapEx?

Dennis Oates

Yes.

Edward Marshall - Sidoti & Company

Okay. So you are burning cash with 2009, based on my projections here. So when cash is king I guess the question is why now?

Dennis Oates

Well, here's our view of that. We have some issues that we need to address in our melt shop, question comes down, when's the good time to do that. Candidly from a pure operational standpoint, inflation standpoint now is a great time to do that because you don't run as much risk of interference in your day-to-day operations, you don't run the risk of irritating your customers, and quite frankly I look at it as that positions us. So that when things come back and we do believe things will come we'll be ready to pounce on an reinvigorated market.

So if you look at our balance sheet it is very clean, we have excess cash on the balance sheet, we have banks willing to loan us money as we indicated in the press release. So I think, quite frankly right now is the perfect time to be doing this kind of thing. I do understand the issue about everybody else conserving cash, we are going to work very diligently from a working capital standpoint and an earning standpoint to minimize everything, but I think this is an investment that is critical to a long term success of this company and now is as good a time in fact a better time to do it.

Edward Marshall - Sidoti & Company

I see. So to clarify demand is coming down you're just taking advantage of that and upgrading your equipment accordingly?

Dennis Oates

Yes, this is an investment we'll be making anyway.

Edward Marshall - Sidoti & Company

Right. The $7.5 million in costs savings that was announced in that press release?

Dennis Oates

Yeah.

Edward Marshall - Sidoti & Company

What's the timing? Should we expect that second half?

Dennis Oates

No, full if you look at the full scope of the investment we indicated that the automation packages (ph) won't be done till 2007.

Edward Marshall - Sidoti & Company

Okay so its more of a 2010 event?

Dennis Oates

Excuse me. So the full board will be the third quarter of 2010 before we'd see all those savings. A lot of the equipment will going in during the first half of 2009, okay. In fact if you take a look at our current operations for the first quarter we have a major outage plan for the latter part of March of this year to begin that process.

Edward Marshall - Sidoti & Company

Okay.

Dennis Oates

So by the time we to the fourth quarter of this year, we would expect to get a third of that $7 million in costs savings, continue to ramp up to get two-thirds by the middle of next year and then during the third quarter we'll be ready to go and hit the full seven.

Edward Marshall - Sidoti & Company

Okay. And then finally just a couple of housekeeping questions here. The after tax benefit of the dumping charge, Rick if you have it?

Richard Ubinger

$0.06.

Edward Marshall - Sidoti & Company

$0.06 and the relocation, the charge of the relocation what was the after tax there?

Richard Ubinger

Three.

Edward Marshall - Sidoti & Company

Thank you very much, thanks guys.

Dennis Oates

You are welcome.

Operator

Your next question comes from Mark Parr of Keybanc Capital.

Mark Parr - Keybanc Capital

Hey thanks very much. Hi, Denny?

Dennis Oates

How are you doing Mark?

Mark Parr - Keybanc Capital

Hi Rick.

Richard Ubinger

Hello.

Mark Parr - Keybanc Capital

One thing is really curious. I don't think I've seen any company so far say revenues were ahead of expectations for the fourth quarter. So, I am just I am a little bit surprised, either you guys are just like so conservative that, its unbelievable -- but I think you guys are pretty okay as far as concerned, could you -- Denny could you talk a little bit about the shipment activity in the fourth quarter and why things were better than what you were looking for?

Dennis Oates

We had some business come in from our reroller accounts, and then there was power gen. Those two areas are the ones that drove the better than expected sales volume.

Mark Parr - Keybanc Capital

Alright, so even with.

Dennis Oates

And don't forget we had a 100 million plus backlog coming into the quarter.

Mark Parr - Keybanc Capital

Right.

Dennis Oates

So we're able to feed off of that backlog, get some business in, which we're able to turnaround quickly and get out of the door. If you put that altogether, it came in strongly than we expected.

Mark Parr - Keybanc Capital

Okay, alright. The -- so part of this was just a deliberate move on your part to, kind of speed up production or to try to move through some of that backlog, before the end of the year. Is that fair?

Dennis Oates

Well our customers are for it. So we had promise bids (ph) on this material.

Mark Parr - Keybanc Capital

Okay.

Dennis Oates

There was some ketchup. If you remember, we had some labor issues in the third quarter.

Mark Parr - Keybanc Capital

Yes.

Dennis Oates

So we did have some of that rollover into the fourth quarter as well.

Mark Parr - Keybanc Capital

Okay, alright. So that is that's helpful. In terms of the you talked about the backlog both with and without alloy surcharges and even if you look at that, it would appear as if the it's kind of taken away the reduction in alloy surcharges in the first quarter. Your volume momentum in the first quarter relative to the fourth could be down a fair amount. Is that fair?

Dennis Oates

Yeah. If we take a look let me make sure, we don't separate in our backlog the base value versus surcharge. The comment we made was as we look at the first quarter and look at our sales estimates, sales dollars, you've got a rapid decline in raw material costs during the fourth quarter and most surcharges have a two month lag in them. We expect a significant drop in our surcharge revenue and we quantified that in a range of 6 to $8 million depending upon what goes out the door in the first quarter.

Mark Parr - Keybanc Capital

Okay.

Dennis Oates

That's making sense to you. So as you look and compare on a straight dollar-for-dollar basis to our sales in the first quarter of 2008 versus the first quarter we're expecting now, we thought that was a important number to try and break out.

Mark Parr - Keybanc Capital

Are you -- from a volume perspective are you looking for much difference in 1Q versus 4Q at this point, from a shipment standpoint?

Dennis Oates

We would expect to see some lower reroller volume and tool steel plate volume in the first quarter, relative to the fourth quarter. Power gen should be on par, petrochemical will be down somewhat. And the bar business looks flat to us.

Mark Parr - Keybanc Capital

Alright, so overall it's probably down a little bit from the fourth quarter

Dennis Oates

Volume wise?

Mark Parr - Keybanc Capital

Yes.

Richard Ubinger

Yeah, yes.

Dennis Oates

Yes it is.

Mark Parr - Keybanc Capital

Yes, so I mean it seems though your guidance for the first quarter is relatively consistent with the fourth quarter guidance you had, I know I realize the fourth quarter end came a little better. But I guess what I am curious about is there anything that's different from an execution standpoint or from a productivity standpoint that's helping to create perhaps, a better expected earnings outcome in the face of further weakening of end demand volumes?

Dennis Oates

You've got a situation of lower volume, lower realized pricing due to surcharges. We've addressed productions levels to get ourselves in line with the incoming business. So, we backed off on our melting plan, for example.

Mark Parr - Keybanc Capital

Okay.

Dennis Oates

You saw the inventory reduction in the fourth quarter and we're doing the same thing on a day-to-day basis. These are those times we have to watch everything on daily basis. We'll also be taking steps to flex our workforce, make sure labor cost stay in control. The other big issue is material cost. As we come out of this last year and we come in to this year, we're expecting lower surcharges at the same time we are also bleeding off higher cost inventories and replacing that with lower cost inventories which would help. That'll be a positive on our margins and also be a positive from an inventory level and a cash flow stand point.

Mark Parr - Keybanc Capital

Right, so you'll get a little bit of a pick up 1Q versus 4Q as far as the relationship between the cost of inventories flow on through the P&L, and the pricing in the products that are being shipped?

Dennis Oates

Right

Mark Parr - Keybanc Capital

Okay.

Dennis Oates

The other comment I would just make with regard to just general operations, I mentioned it earlier is that we do expect a two week outage, we're planning a two week outage in March to begin the some of the capital work associated with the melt shop.

Mark Parr - Keybanc Capital

Alright so that, that could theoretically mean a little more activity in the melt shop in front (ph) of the shut down?

Dennis Oates

Yes we will plan that so that we have the adequate inventory so we don't hurt customers in that whole process and we think we will go right through the two weeks without seeing any significant impact from a sales standpoint.

Mark Parr - Keybanc Capital

Okay. Alright. Can you talk a little more about your expectations regarding the credit line with PNC. I mean in the past you guys have had a very modest amount of credit availability what should we expect to see from, as far as the new line is concerned?

Richard Ubinger

Our current plans are to have -- maintain the $15 million revolver and we're also looking at securing a term loan on top of that, which we are currently projecting to be a $12 million loan.

Mark Parr - Keybanc Capital

Okay.

Richard Ubinger

And we're also investigating the possibility of fixing the rate to take advantage of current interest rate conditions.

Mark Parr - Keybanc Capital

Any sense on changes in pricing for your revolving line, new line versus old line or any changes in covenants or in restrictions on the ability of the Board to do things like repurchases or declare dividends?

Richard Ubinger

No we do not anticipate any changes in covenants or any restrictions at this moment.

Mark Parr - Keybanc Capital

Well hey, congratulations on the quarter. I mean I realize the end markets are not very good but you guys seem to be doing a really solid job of weathering the storm to this point and I think you should be congratulated for that, great work.

Dennis Oates

Thanks Mark.

Operator

Your next question comes from, Lloyd O'Carroll of Davenport & Company.

Lloyd O'Carroll - Davenport & Company Llc

How are doing Denny?

Dennis Oates

Great, Lloyd, how about you?

Lloyd O'Carroll - Davenport & Company Llc

I'm surviving.

Dennis Oates

Glad to hear that.

Lloyd O'Carroll - Davenport & Company Llc

Which is about all you can do these days. How yours how is international sales effort doing, are you beginning to get much bite in that at this point?

Dennis Oates

We're working on a few things, so we are not ready to announce yet, I would just say if you look at the last year, we're -- just about 5% of our revenues will be direct export. You firmly used the term we are in courting stage and I think we're still in that courting stage. If you look at the exchange rates and the level of demand overseas, that slowed the process down a little bit.

Lloyd O'Carroll - Davenport & Company Llc

Okay. On your melt shop, is there any significant capacity increase here or is this all productivity and cost driven.

Dennis Oates

Virtually all productivity and cost driven.

Lloyd O'Carroll - Davenport & Company Llc

Okay. The -- in the power gen, you don't do super alloys (ph) so where all the turbine -- are your products going?

Christopher Zimmer

This is Chris Zimmer.

Lloyd O'Carroll - Davenport & Company Llc

Yes.

Christopher Zimmer

Most of the products that going to the forgers are going into blades.

Lloyd O'Carroll - Davenport & Company Llc

Okay.

Christopher Zimmer

It would be the ESR remelted stainless grades.

Lloyd O'Carroll - Davenport & Company Llc

Okay and then a little housekeeping sales for a couple of categories, your petrochemical sales and the heavy manufacturing year-over-year percent?

Dennis Oates

Petrochem is 30.6%. Wait a minute. I'll stay out of the numbers. I'll let Rick do that, or I'll screw it up Lloyd, go ahead Rick.

Richard Ubinger

Petrochemical sales was 50% from the 2007 fourth quarter, but were down 15% from the third quarter 2008.

Lloyd O'Carroll - Davenport & Company Llc

Okay and then heavy manufacturing?

Dennis Oates

By that you mean tool steel.

Richard Ubinger

Tool steel?

Lloyd O'Carroll - Davenport & Company Llc

Yeah.

Richard Ubinger

Tool steel was up 8% from the 2007 fourth quarter. Down 24% from the 2008 third quarter.

Lloyd O'Carroll - Davenport & Company Llc

Okay, that takes care of the numbers for now and thank you.

Dennis Oates

Thank you.

Richard Ubinger

Thank you.

Operator

Your next question comes from Nat Kellog from Next Generation Equity Research.

Nat Kellog - Next Generation Equity Research

Hi guys. Nice quarter. How are you doing this morning?

Dennis Oates

Thank you. Doing great. How about you?

Nat Kellog - Next Generation Equity Research

Good. Just given the guidance that you guys have given versus may be the guidance for the fourth quarter. It does sound like, I think you mention it briefly, but you guys aren't going to solely benefit from the fact that metal costs are coming down. Obviously you guys did a nice job working down the inventory little bit in the fourth quarter. I guess if you could just help us get a sense of how long it will take you guys to sort work off the rest of that sort of higher cost inventory that might have been procured over the summer, sort of before the metal markets kind of fell apart?

Dennis Oates

I think you are talking about getting most of the high cost stuff out as we exit the first quarter of 2010 and then into the second quarter -- excuse me of 2009.

Nat Kellog - Next Generation Equity Research

Okay. So was it in the fourth quarter -- first quarter as we move into Q2 which would start to roll off in a pretty material way?

Dennis Oates

Right.

Nat Kellog - Next Generation Equity Research

Okay, that's helpful. And then I guess just, how much cash do you guys, feel like you need on the balance sheet. If I go back few years ago, I mean you guys you basically you had a little bit of debt and you worked up revolver (ph) and you had no cash around and I would think that given the cash you guys have now plus your expectations that you could lower working capital a little bit plus that, it would be some cash generation to shareholder (ph) may be not as much in years past. That -- you guys might be able to fund most of this just out of cash on hand plus a little bit of work -- cash from operations.

I mean I just trying to get as sense of as you said you do think that there is some point to have some liquidity, so I guess just go with more kind on how you guys are looking at that?

Dennis Oates

I think if you look at the numbers directly, you can make an argument that we can fund this out of our existing cash balance because that's pretty clear...

Nat Kellog - Next Generation Equity Research

Yeah that's clear and that was sort of my point I guess yeah.

Dennis Oates

Sure. But as we look at liquidity, we feel more comfortable and we think its advantageous for us to put some fixed money on the balance sheet given current interest rates and so forth and we quantified that as Rick said that we're at $12 million.

Nat Kellog - Next Generation Equity Research

Okay, that's helpful and then just I mean -- as far as the timing of CapEx spending on this project, I mean is it going to be pretty even over the next four or five quarters or is it tended to be sort more front end loaded or more backend loaded?

Richard Ubinger

I think most you are going to see about 3 or 4 million here in the first quarter, you are going to see a big spike in the second quarter, and then have it drop off in the third quarter and then the balance I think would be relatively stable through the fourth quarter and first six months of 2010.

Nat Kellog - Next Generation Equity Research

Okay that's helpful and then just lastly, I mean the inventory that I look at on the services center and I think to be honest its more accurate and more closely falling on ferrous versus the non-ferrous side. But it seemed to be that service certain levels are awfully low at this point. I am just curious if you guys could comment on whether there is any difference for guys who are little bit more focused on the specialty metals like yourselves, and whether that also tends to be working pretty lean these days and -- I know, I'm not asking you to predict when its going to come back but I am just curious if you think that business seems to as their services centers seem to be as lean as some of the more traditional ferrous guys?

Dennis Oates

Well I this is a general statement. I think its fair to say that all service centers are looking at every item in their inventory and striving to maintain the bare minimum amount of inventory. If you look at the individual components of it, if you understand your question right, I think service centers would say that in some areas like some of the oil field products they still have excess inventory given what they see is near term demand are still looking to working things down. Aerospace has been cut pretty severely but there's a lot of uncertainty about what the level of demand is there. So they're not willing to place any significant additional business. And that's why I say when we look at the service centers I personally think, that we'll come to a point when things will start to snap back, and they will find that they do not have enough inventory. And we'll go back you know, where those cycles where its orders will pick up very sharply as they try to rebuild those pipelines. Okay is your question hold that...

Nat Kellog - Next Generation Equity Research

Yeah.

Dennis Oates

I don't see any big difference in the way they're viewing inventory and buying.

Nat Kellog - Next Generation Equity Research

Yeah, no absolutely, I think that's.

Dennis Oates

This is the basic carbon metals and so forth.

Nat Kellog - Next Generation Equity Research

Right, right. No that's very helpful. Alright, well congrats on a nice quarter guys obviously and good luck as we move into 2009 and thanks for taking my questions.

Dennis Oates

Thank you.

Operator

your next question comes form the Larry Southam (ph) of My Broker LLC.

Unidentified Analyst

Good morning.

Dennis Oates

Morning, Larry.

Unidentified Analyst

Some of these things got picked up but, following you don't -- have not put into place or even actually (ph) you have not put into place a new representation, I gather?

Christopher Zimmer

No. This is Chris Zimmer. We don't have a dedicated body in Europe. The sales efforts internationally are being handled from our sales back here in the U.S.

Unidentified Analyst

Okay.

Christopher Zimmer

They're actively out there internationally traveling.

Unidentified Analyst

Okay. Yeah well I caught (ph) about 5% of revenues were from foreign.

Dennis Oates

Facts per se (ph) we're direct sales internationally yes.

Unidentified Analyst

What sort of products?

Christopher Zimmer

The majority of products that are going overseas tend to be more of the finished board products, some of the higher value added products which will lend themselves to our Dunkirk facility and the finished bar.

Unidentified Analyst

Okay and then, you indicated what market it is going into, what the some of the -- based on the product?

Dennis Oates

The products are going primarily to Aerospace.

Unidentified Analyst

Okay.

Dennis Oates

There is also I'd be -- we missed to probably mention the forging activity as well too. So, we see it on the Aerospace side and we do also see some of it in power gen. Those would be the two meters (ph) in the international side of the business.

Unidentified Analyst

Okay very good and then the last time around I believe you had a new representative working down in -- directly on the royal (ph) pad with petrochemical, how is that going and what sort of, what are your petrochemical products into at the moment?

Dennis Oates

This its we're very happy with the ad and the initial feedback that we've been getting has been a positive one that's allowed us to uncover some opportunities in some areas that we may not have been actively participating in. But again we're still about probably three or four months into those markets with our new person here. So we're still on the developmental stage. But there is for sure some petrochemical pockets of business that we were not participating in previously that we're now working on for the future.

Unidentified Analyst

I seem to recall a fair amount of product in that area was going into...

Dennis Oates

Exploration primarily.

Unidentified Analyst

What's the word?

Dennis Oates

Exploration.

Unidentified Analyst

No, I was thinking it was more in the valve market et cetera, valve bodies et cetera?

Dennis Oates

Are we're talking downhaul applications primarily?

Unidentified Analyst

You are.

Dennis Oates

But it's tied to the explorations then.

Unidentified Analyst

Okay. Very good. I think does it. Thank you.

Dennis Oates

Okay.

Operator

(Operator instructions). Your next question comes from Edward Marshall of Sidoti & Company.

Edward Marshall - Sidoti & Company

Hi, again guys. If you could do me a favor, and just kind of talk to raw materials for a second. I see nickel is showing some signs of stability as the miners are taking some of their capacity offline, but now you see moly, chrome and the vanadium kind of hit in November, and December as well. Can you kind of talk about what you're seeing in January and how that's going to ultimately effect the business?

Dennis Oates

I guess the one word that we use with great trepidation is a little bit of stability. Obviously, all these raw material commodities absolutely great (ph) Rick went through all the numbers there in the fourth quarter.

Edward Marshall - Sidoti & Company

Right.

Dennis Oates

For the last six weeks or so, they appear to have established some stability. I guess the one thing I would add to that in the scrap business given the decrease in production throughout the country availability of scrap has become has become a modest concern of ours, just getting our hands on material. But beyond that it's very difficult to forecast these things. What we have said basically in our planning looking forward is, we assume that we're about at the level things are going to be for the next six months. We're not anticipating any big run up. We're not anticipating any further decrease.

Edward Marshall - Sidoti & Company

Can you remind me what the impact of the surcharge decrease was in the fourth quarter here?

Richard Ubinger

It was a $1 million for Dunkirk.

Edward Marshall - Sidoti & Company

For Dunkirk and nothing on Bridgeville?

Richard Ubinger

I am sure there was some impact on Bridgeville. Our inventory reserves increased by $400,000. There was our material cost to sales did go up some but we didn't quantify a specific number.

Edward Marshall - Sidoti & Company

I guess what I am getting at is we see an acceleration here in the decrease and the surcharge as this new lower base kind of steps in. Which is fine once we see stability in the raw material market which I think is, as you just said is starting to stabilize. So we should start to see and I think another caller hit on this earlier, we should start to see the margins kind of widening out again as we start to take advantage of the way you guys run the inventory for the P&L?

Dennis Oates

Yeah the problem is the timing.

Edward Marshall - Sidoti & Company

Right.

Dennis Oates

It's perfect while we have the surcharge basically hitting the same month we're replacing raw materials, unfortunately in the real world that doesn't happen. So as we look at the first quarter, you are going to see surcharges come tumbling down. January will be based upon November timeframe okay. But we still have material in our inventory that was melted back in late summer or early fall. And my answer to the earlier caller was essentially the over course of the first quarter we would expect a majority of that higher cost stuff to be going out to door and come back in the balance as we go into the second quarter of 2009. So, that's when you will start to see the margin spread improve.

Edward Marshall - Sidoti & Company

Okay, and then can you talk about the cancellation which you kind of mentioned earlier in the call that you had today?

Dennis Oates

There wasn't a cancellation to us. The cancellation I was just referencing Boeing's comments about their backlog and the fact that they hadn't had material cancellations and early typical deferrals. That I did see this morning that a Russian carrier did cancel some planes that were on the schedule for 2014 delivery.

Edward Marshall - Sidoti & Company

Right.

Dennis Oates

The reason that I mentioned that is they also trying kind of hinted in their comments, in their release that they do expect some increases in cancellations and deferrals in 2009, which would have been impact on the metal supply chain. So we watched that very carefully but they didn't have any quantification of that obviously.

Edward Marshall - Sidoti & Company

Thanks for the clarification. Thanks guys.

Dennis Oates

Alright, you are welcome.

Operator

your next question comes from Nat Kellogg of Next Generation Equity Research.

Nat Kellogg - Next Generation Equity Research

Hi guys, Rick just one quick question, did you mention what you thought tax rate would look like in '09?

Richard Ubinger

We're anticipating the tax rate for '09 to be 35%.

Nat Kellogg - Next Generation Equity Research

35%. Okay Thanks very much. That's all I got.

Operator

There are no further questions at this time. Mr. Oates I'll turn it back to you for closing remarks.

Dennis Oates

Well thanks again for joining us today as I said we're determined to move forward in 2009 and meet its challenges. I'll look forward to updating you on our progress at our next quarterly call. Have a good day.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Universal Stainless & Alloy Products Q4 2008 Earnings Call Transcript
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