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Universal Stainless & Alloy Products Inc. (NASDAQ:USAP)

Q2 2008 Earnings Call

July 24, 2008 10:00 am ET

Executives

June Filingeri - President, Comm-Partners LLC

Denny Oates - President and CEO

Chris Zimmer - VP of Sales and Marketing

Rick Ubinger - VP of Finance and CFO

Analysts

Michael Gallo - C.L. King

Luke Folta - Longbow Research

Kevin Money - Cleveland Research

Mark Parr - KeyBanc Capital Markets

Nat Kellogg - Next Generation Equity Research

Tim Hayes - Davenport & Company

Operator

Good morning. My name is Felicia and I will be your conference operator today. At this time I would like to welcome everyone to the Universal Stainless & Alloy Products Second Quarter 2008 Conference Call and Webcast. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded today, July 24. Thank you. I would now like to turn the call over to Ms. June Filingeri. Ms. Filingeri you may begin.

June Filingeri

Thank you, good morning. This is June Filingeri of Comm-Partners. And I would also like to welcome you to the Universal Stainless & Alloy Products conference call. We're here to discuss the company's second quarter 2008 results and third quarter outlook, which were reported this morning.

With us from management are Denny 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. The conference operator will remind you about 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 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 would like to turn the call over to Denny Oates. Denny you may begin.

Denny Oates

Thanks June, good morning everyone. Thanks for joining us today. We reported this morning second quarter sales were a record $63.5 million, yielding net earnings of $5.3 million or $0.77 per diluted share. This performance is better than our guidance, mainly because of strong sales of tool steel plate. Additional second quarter drivers were strong power generation sales and record sales to the petrochemical market, which is an area we are emphasizing as we energize our sales effort under the leadership of our recently hired Vice President of Sales and Marketing, Chris Zimmer. This sales effort also contributed to the 10% increase in our backlog, which reached $97 million.

Our cash flow from operations for the second quarter was $4.7 million. Capital spending was $2.3 million. And working capital increased from $89 million at March 31 to $95 million on June 30. Included in these working capital balances was the cash-on-hand of $11 million on March 31, and $13 million on June 30th, respectively.

Before turning the call over to Rick for his financial review, let me give you a closer look at our sales by end market. Our sales to aerospace represented 32% of our total sales for the second quarter, off 6% from the first quarter of 2008 and 24% year-over-year. Service centers and their customers remained conservative in the second quarter, as we expected. The sharp drop in nickel prices during the quarter has caused some further pushback in order entry, by those betting the decline will continue and result in lower surcharges in the near future.

Reliance Steel confirmed this impact of lower nickel prices on their investor call last week, and we're hearing the same from some of our other customers. We expect that nickel ultimately will bounce around in the $8 to $11 range, but that remains to be seen. There has been a lot of negative talk about aerospace in recent weeks. Nevertheless, we view the aerospace market as very healthy with strong production levels and growing backlogs at Boeing and Airbus. The rate of new orders far exceeds any cancellations.

Financially troubled domestic carriers only represent about 10% of the market's backlog. The current backlog is dominated by airlines serving developing economies in Asia and carriers in the Middle East. Carriers in both regions added to their orders at the Farnborough Air Show last week. Short-term we continue to expect service centers to return to more normal order levels for aerospace grades of steel before the end of the year, based on their current inventory levels and strong demand.

Our sales to the power generation market were up 11% sequentially and 15% year-over-year. They included a partial shipment of the $3.7 million international order I discussed on our last call. We expect the positive trend to continue based on order entry and backlog. Industry news is generally very upbeat. Both GE and Alstom reported increased gas turbine sales and very favorable outlooks in their most recent earnings reports.

Petrochemical market sales were up 40% sequentially and 29% from the second quarter of 2007. In addition to the good job our sales team is doing, we also benefited from a return to more normal industry demand after a period of destocking at the service center level. On Friday Schlumberger pointed to strong growth in oilfield services in the U.S. and much stronger natural gas drilling in North America than they originally expected. This further reinforces our positive outlook and focus on the oil and gas marketplace.

Our sales of tool steel plate increased 28% sequentially and 81% year-over-year. This was due to a combination of continued strong end use demand for global infrastructure investments and a broad range of metal fabrication markets, including general tooling, cutting applications, food processing, defense and automotive. Although automotive production is down, model changeovers continue to drive fairly healthy demand for tool steel. Current dollar exchange rates and increased market share are also positive contributors. We're seeing no effect from the problems in the U.S. economy on the tool steel markets we serve.

We continued our effort to establish our sales in international sales in the second quarter as part of our strategy to accelerate growth. Last quarter I mentioned the visits we received from potential customers, representatives and partners and the number of countries in Europe and from Russia, India, and South America. In the second quarter Chris Zimmer and I traveled to Europe to take the next steps in building relationships and introducing the Universal brand. While we view this as a very long-term process, we can report that our international quote activity is increasing.

On the domestic side we remained focused on solidifying our position with existing customers, while pursuing new customers and new product opportunities. Improving our customer service levels and our operational efficiency are major strategic priorities for us. In the second quarter we moved forward with our capital projects targeted at improving reliability, enhancing productivity, eliminating waste, and reducing cycle times.

For example, our new high temperature annealing system is now up and running at Dunkirk. We expect to ramp up to full production levels over the next few quarters. Relocation of our round bar finishing operation from Bridgeville to Dunkirk is underway. It is scheduled to be installed and operational by the end of September.

The improvements to our melt shop are moving forward on schedule, which will help increase productivity and yields, while accelerating cycle times. These projects are scheduled through the first quarter of 2009. The collective bargaining agreement covering the hourly employees at our Bridgeville facility expires on August 31, 2008, and negotiations are currently in process.

Let me pause here to turn the call over to Rick Ubinger for a closer look at our financial results for the second quarter.

Rick Ubinger

Thanks Denny. As we reported in our earnings release, sales for the second quarter of 2008 where $63.5 million, and net income was $5.3 million, resulting in diluted earnings per share of $0.77. Our sales which slightly exceeded our expectations were up 2% from the 2007 second quarter. The year-over-year increase was mainly due to a 1% increase in total tons shipped to customers, plus the sale of excess scrap that generated $1.1 million of revenue during the quarter, and is included in other sales.

Our sales were up 12% sequentially, even though total tons shipped to customers decreased 3%. This was achieved through a favorable shift in the mix of products shipped. If you look at sales in comparison to the second quarter of 2007 by customer category, you'll see an increase in sales to service center, OEM and reroll customers, offset by lower sales to forgers and redrawers. Sales to service centers benefited from an increase in tons shipped of tool steel plate products, more than offsetting lower shipments of vacuum-arc remelted and other bar products to this market. Lower shipments of vacuum-arc remelted products, mainly for aerospace applications, also contributed to the reduced sales to forgers.

As we discussed in our last conference call, service center conservative buying practices, especially within the VAR product category, negatively impacted our shipments to both the forger and service center markets during the first half of 2008. Although our second quarter shipments to forgers increased from the first quarter, benefiting from higher power generation and petrochemical demand. On a sequential basis, sales increased in all customer categories, with the exception of rerollers, due to higher shipments.

The Universal Stainless segment sales were down 4% from the second quarter of 2007, primarily due to an 8% decline in tons shipped, partially offset by favorable shifts in the product mix. Specifically, higher shipments of tool steel plate to service centers, partially offset lower shipments of semi-finished products to forgers and rerollers, including Dunkirk, and of bar products to service centers. Dunkirk sales declined 1%, while tons shipped increased 4% compared with the second quarter of 2007. Higher shipments of rod and wire products to service centers and OEMs and of finished bar products to OEMs offset lower shipments of vacuum-arc remelted finished bar products to service centers.

Our gross margin as a percentage of sales was 16.5% in the 2008 second quarter versus 20.3% in the second quarter last year, and 17.7% in the 2008 first quarter. The decline in the latest quarter in comparison to the year ago period primarily resulted from a reduction in shipments of VAR products and the absence of a FIFO benefit in the Dunkirk Specialty Steel segment results. We estimated that the impact of surcharges on Dunkirk shipments resulting from the rise in nickel prices through the first half of last year generated a $1.2 million benefit in the 2007 second quarter. In comparison, our estimate of the impact of surcharges from the subsequent decline in nickel prices generated a charge of $157,000 in the 2008 first quarter, and had no effect in the 2008 second quarter.

Sequentially, our gross margin as a percentage of sales was negatively impacted by a $1.5 million increase to our lower of cost or market reserve in the 2008 second quarter, related to the decline in average nickel prices from $14 in March 2008 to $10 in June 2008. Our selling and administrative expenses for the quarter decreased $773,000 in comparison to the second quarter of 2007, and decreased $441,000 in comparison to the 2008 first quarter. The decreased in cost year-over-year primarily related to an $800,000 pre-tax charge related to a legal settlement last year.

The decreased cost sequentially, primarily belated to additional audit fees incurred during the first quarter as a result of complying with the Sarbanes-Oxley Section 404 requirements for the first time, as well as higher legal fees resulting from the company's defense of a contractor litigation matter, and the recognition of a reserve for a product claim matter. The combination of these factors led to a decrease in consolidated operating income for the second quarter of 2008 to 12.3% of sales from 14.8% in the year ago quarter, although our operating margin was consistent with the 2008 first quarter.

The remaining items on the income statement had a positive effect on our second quarter net income. We recognized lower interest expense in the 2008 second quarter as a result of retiring our PNC term loan in December. In addition, we did not have to access our revolver during the quarter, and generated interest income from the excess cash balance, we were able to maintain throughout the quarter.

Finally, our lower estimated effective income tax rate of 33% for 2008 in comparison to 35% recognized in the year ago period generated a $0.02 per diluted share benefit. The lower rate is based on additional New York State income tax credits we anticipate recognizing from capital equipment additions at our Dunkirk facility, as well as certain favorable state tax law changes that became effective in 2008. In total, we reported net income of $5.3 million or $0.77 per diluted share, which was $0.02 ahead of the high end of our forecast.

Turning to our balance sheet. Our working capital at June 30, 2008 approximated $95 million versus $89 million at March 31, 2008 and $86 million at the end of 2007. As we discussed in our last call, the $7 million increase in accounts receivable from December 31, 2007 is directly related to our increased sales activity in comparison to the fourth quarter. Our receivables remained level sequentially though due to improved collections during the 2008 second quarter. The $6.9 million increase in inventory between June 30, 2008 and March 31, 2008 is primarily the result of increased order entry activity, and is substantially offset by an increase in accounts payable.

That completes my review of the financials. So, I will now turn the call back to Denny.

Denny Oates

Thanks Rick. As noted in our earnings release, we expect sales for the third quarter of 2008 to range from $60 million to $65 million, and diluted earnings per share to range from $0.78 to $0.83, representing another quarter of incremental improvement.

In summary, the second quarter yielded record sales and our earnings were above our guidance. We are experiencing positive momentum in incoming business as reflected in our growing backlog. Our commercial and manufacturing initiatives are essentially on plan. Based on the outlook for our end markets we plan to continue our progress for the balance of 2008 and beyond.

That concludes our formal remarks. We will be happy to take your questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Michael Gallo with C.L. King.

Michael Gallo - C.L. King

Hi good morning.

Denny Oates

Good morning, Mike.

Michael Gallo - C.L. King

A couple of questions. Rick, did I hear you say right that you sold $1.1 million of excess scrap in the quarter, and that was booked as other revenue?

Rick Ubinger

That's correct.

Michael Gallo - C.L. King

What was the earnings impact, if anything significant, as a result of that?

Rick Ubinger

I think Michael, we made a couple of about $200,000 on that.

Michael Gallo - C.L. King

$200,000 net?

Rick Ubinger

Yes.

Michael Gallo - C.L. King

Okay. Second question I have is for Denny. Obviously I know earlier you had anticipated that we would start to see some service center restocking starting in the second half of the year. It seems like that is getting pushed out somewhat. And it seems like service center customers are continuing, at least from what they're stating publicly, to indicate that they're going to continue to manage their inventories of stainless product very carefully. So, I was wondering, I guess we come back to that question here. If you're continuing to see them cautious on behavior as we enter the third quarter, they typically are always cautious about their inventories at the end of the year. What gives you confidence that they're going to come back in a meaningful way in the second half of the year and restock?

Denny Oates

As we look at the trends and their end use demand, the demand they are seeing from their customers, we see a very strong demand picture in the second half of this year. Actually, it has been pretty strong all year long. The level of their inventories, if you go back over the last several quarters, you can see those inventories coming down pretty consistently. When you put together the strong demand that's out there, they're still making airlines despite all the negative things you read about in the news. And look at where their inventories are today. My view is they're going to have to start buying.

Are they going to be very conservative in their buying and very risk averse? They certainly are. They are looking, as I mentioned in my prepared comments, at nickel prices and making that judgment call, and will nickel prices be going down over the next couple of months, should I defer a buy that I need and try and get by with slightly lower inventories in order to have the benefit of those lower surcharges?

Michael Gallo - C.L. King

Okay. that's helpful. And then a final questions for Rick. Rick, There was a big spike in accounts payable on the balance sheet. Can you just walk us through what drove that? Thank you.

Rick Ubinger

Sure. Michael, the spike in accounts payable will be tied to our increase in raw material inventories in Bridgeville. We did purchased some material at the end of June that is the primary reason for the increase in inventory, as well as payables.

Michael Gallo - C.L. King

Okay. So, I guess it was surprising, given that even with the decline in pricing that it's still went up as much as it did. Would you expect that to kind of normalize down again at the end of next quarter?

Denny Oates

I would think, as I look at that Mike, we're doing everything we can to manage our working capital very aggressively. So, as you look at our inventory, I think you can expect to see our inventory continue to go up as we see higher business levels and stronger backlogs. And a large portion of that increase will be funded through accounts payable.

Michael Gallo - C.L. King

Okay. And that's helpful. Thanks a lot.

Operator

Your next question comes from the line of Luke Folta with Longbow Research.

Luke Folta - Longbow Research

Good morning gentlemen.

Denny Oates

Good morning.

Luke Folta - Longbow Research

I had a question first on stainless business. For 3Q in your guidance what are you expecting to happen with stainless base prices?

Denny Oates

Selling prices, you're talking about, or nickel prices?

Luke Folta - Longbow Research

Base prices actually.

Denny Oates

Let me turn that one over to Chris Zimmer, our VP of Sales and Marketing.

Luke Folta - Longbow Research

Sure.

Chris Zimmer

We expect the selling prices that we've seen in second quarter, in addition to the price increases of 3% to 5% that was announced, to hold in the third quarter. So we see some stability and some gains from the increase coming in the third quarter.

Luke Folta - Longbow Research

So you would say that if the pricing initiatives weren't as successful or if base prices turn around there is a possibility we might not hit the target that you set out for?

Chris Zimmer

The pricing that we have in place is being accepted by the marketplace. So we expect those pricing trends to continue moving upwards with the price increase.

Luke Folta - Longbow Research

Regarding energy costs, can you remind us, are there hedges in place there on natural gas at all? And can you give us an idea of how much your products have in energy pass-through?

Denny Oates

If you take a look at our energy costs right now, natural gas has been up about 30%. Electricity much less so, if you look at the current trends, by current I mean the last several weeks, it appears as though that has moderated somewhat. So, some of the fears about very, very significant increases in natural gas costs this upcoming winter don't seem to be real. But nevertheless, we're still working through a 30% increase we have had over the last six months or so. As far as our hedging practices, we do go out and partially hedge our positions for natural gas. We're not 100% covered.

But where we think it is advantageous, we do go out and do that. We do have an energy surcharge, which allows us to recapture a portion of that. Which when in combination with our base price increases we announced, should make us whole from an energy standpoint overall.

Luke Folta - Longbow Research

And just one last question on your VAR sales, what grades are you selling of those the products of the remelt products? And can you give us an idea of what is going on with base pricing in that market?

Denny Oates

We're selling 17-4 or 15-5 PH grades are the most popular items going through there. As far as base prices, Chris just mentioned the 3% to 5% increase that was put in place effective July 1.

Rick Ubinger

That's correct.

Luke Folta - Longbow Research

Thanks a lot guys. Good luck.

Rick Ubinger

Thank you.

Operator

Your next question comes from the line of Kevin Money, with Cleveland Research.

Kevin Money - Cleveland Research

Good morning.

Rick Ubinger

Hey, Kevin, how are you?

Kevin Money - Cleveland Research

Good, questions on tool steel. What exactly is driving that demand there and do you see that as sustainable?

Denny Oates

We do see it as sustainable. There is a couple of fundamentals that are occurring. One macroeconomic phenomena is the whole value of the dollar situation. That has opened up some opportunities for us in the domestic marketplace because imports are down. It has also led to some manufacturers who were previously outsourcing some of that material to bring that back to the US, where we have a much stronger market position.

So the exchange rate of the dollar has helped. I think if you look at the fundamental demand in some of the markets that I mentioned in my prepared comments, that's the factor. It is pretty broad-based industrial markets that I alluded to. And really tool steel goes into any market where you're basically fabricating a piece of metal.

So you can almost run the gamut. But the principal markets there, as I listed, were some of these global investments in infrastructure, agricultural equipment, defense applications, cutting applications. It is a pretty broad range of industries that are driving the demand. It appears to be pretty solid. We have not seen any letup in incoming orders. Our customers are unanimously optimistic as we look over the next six to nine months. There has been some changes in the supply chain with some suppliers who previously supported this market kind of withdrawing, which has also opened some doors for us.

Kevin Money - Cleveland Research

With inventories out there being a little heavy, could you give us an update on the industry wide remelt capacity situation?

Denny Oates

From a remelting standpoint, we have capacity here from a VAR standpoint, we have additional capacity from an ESR standpoint. We are fairly tight and that is reflective of the power gen business. As far as the industry capacity there are some additional furnaces coming on stream at the Carpenters and Latrobes of the world, later this year and the early part of next year. We currently do not have the plans to put additional remelt capacity in here at Universal over the short term.

Kevin Money - Cleveland Research

Okay. Thanks, guys.

Operator

Your next question comes from the line of Mark Parr, with KeyBanc Capital Markets.

Mark Parr - KeyBanc Capital Markets

Hey good morning.

Denny Oates

Good morning Mark.

Mark Parr - KeyBanc Capital Markets

Not bad, nice quarter.

Denny Oates

Thank you.

Mark Parr - KeyBanc Capital Markets

I wasn't able to listen to all of your comments. And so if I ask a few questions you have already commented on, I will apologize in advance.

Denny Oates

Not a problem.

Mark Parr

Denny, did you talk at all about the composition of the backlog growth in terms of whether it was consistent with the pickup in the tool steel business?

Denny Oates

If you look at what's driving our backlog it is the primary areas of pick up are in power generation and tool steel. And the third category is the petrochem market. They are the three categories that we see continued growth. It has been building all year and we would expect that to continue for the rest of the year.

Mark Parr - KeyBanc Capital Markets

So, is it fair to say that a lot of people might have looked at Universal as somewhat of a proxy for the momentum in the aerospace market, but what in fact is emerging is something that's much broader than that? Is that fair to think about you in those terms?

Denny Oates

I think that is a fair way of putting it and you guys realize, I'm a fairly newcomer to the company. But as I look at the business over the years, management has done a great job of diversifying the product portfolio and the market portfolio. So whereas aerospace has always been a very dominant percentage of sales, ranging anywhere from a low of 30% to a high of 45% over the years. There is a healthy amount of business in other markets where the company has positioned itself. And those markets are all slated for some pretty substantial growth as you look down the next several years.

Mark Parr - KeyBanc Capital Markets

Okay. Given the current momentum in the tool steel and the power gen markets, do you have any sense of where aerospace might be from a mix perspective in '09? And I would look for those markets probably to grow faster than aerospace.

Denny Oates

We are anticipating that aerospace will come back stronger in the second half of this year than the first half of this year. If you look at our current mix, it's in the low 30 percentages 32%, aerospace business. So I'm fairly optimistic about aerospace, I would say that you would probably see something in the mid-30s. If I was modeling us that's the way I would look at Universal.

Mark Parr - KeyBanc Capital Markets

Okay, mid-30s for '09. Because it certainly didn't seem like there was anything incrementally negative in Boeing's outlook yesterday and you had mentioned also the outlook from GE and Alstom as being quite robust as well. The second quarter is the second quarter, but looking out it would certainly seem as if we have got some growth ahead. At least there is going to be more planes built. And you would look for global growth in actual revenue, passenger miles or the actual number of flights that are driven.

Denny Oates

When I look at all those drivers of the aerospace cycle right now, they all still are fairly positive. As I said in my comments, some negative stuff in the news here over the last month, month and a half or so. But as you talk to people in the industry on the metal side and throughout the aerospace supply chain, I'm sure you're getting the same thing I'm about to say, which is they are a little surprised at the negativity.

Mark Parr - KeyBanc Capital Markets

Boeing had a decent quarter and reaffirmed its outlook, and the stock was down on the news, which I just found interesting. It doesn't seem as if you're seeing anything that's incrementally negative from a fundamental perspective. If anything, you are seeing the market on the front end of an inflection point to the positive side. I think I am characterizing your comments correct, aren't I?

Denny Oates

I would agree with that, yes.

Mark Parr - KeyBanc Capital Markets

Okay. All right, that's really helpful Denny. I had one other thing I wanted to try to get some more color on, if you could help as. You have a lot of activity going on at Dunkirk. You put in new annealing capacity. You've got some more capital changes and asset changes slated for that operation over the next six to twelve months. Could you talk a little bit about the financial impact of Dunkirk in the second quarter, say relative to the previous several quarters? And how you think that financial impact could unfold over the next year or so with the changes going on?

Denny Oates

I think Dunkirk is a critical part of the company obviously. If you look at their performance financially, that is one part of the company that has been hurt by the slowdown in aerospace, which we attribute to the service center inventory situation. So that is the VAR product that Rick was alluding to in his comments that goes through there. Looking forward though the reason why we are making those capital investments is we're very pleased with the performance we have up at Dunkirk.

We see opportunities to grow the business in the markets that operation serves. We see opportunities to reduce costs fairly significantly by making these investments. We also see opportunities to shrink cycle times, which is critically important in today's markets so that we can be more responsive to our customers, deliver on time, deliver quicker than the competition. So, all these investments are geared towards that. So, at the end of the day, as I look at Dunkirk I look for good things as we go down the road here, growth on the top line, better margins and improved profitability.

Mark Parr - KeyBanc Capital Markets

Okay. Any color you can give on the magnitude of margin upside for that operation from the changes that are going on? We know there is freight savings involved, but what other big savings opportunities are there?

Denny Oates

In terms of putting the VAR finishing line up there, for example, you're saving significant material handling. And I'm not talking about the freight, I just mean within the operation. Better yield improvements, we'll be able to eliminate certain other equipment so there will be labor cost improvements. There's a whole range of positives that are tied up in just that one capital investment.

Mark Parr - KeyBanc Capital Markets

Could it be 400 or 500 basis points on that business up there? Is that possible? I'm not going to hold you to it, but is that the kind of order of magnitude that we're thinking about?

Denny Oates

Did you say you're not going to hold me to that?

Mark Parr - KeyBanc Capital Markets

I am not. I won't. I promise. At least not today.

Denny Oates

That's a possibility. If you're looking at where they are today to where it could become, I don't see any reason why it couldn't get to that range.

Mark Parr - KeyBanc Capital Markets

Okay, all right and then just lastly, if I could, you said that you had taken the next step as far as the international growth initiatives. Where do you see the international book? Is 2009, could we see a big pick up in international business or is that perhaps a bit premature still?

Denny Oates

I think you should see steady improvement in that. And I will keep coming back to it each quarter to let you know. I don't see 2009 as a year where all of a sudden we will be announcing that 25% of our revenues are international sales or anything like that. My experience in this business it is a very slow slog to try and get your name out there, get approvals, get people comfortable doing business with you. And it is incremental process.

And that's the way we are approaching it here. Letting all the customers over there know that we are deadly serious about it. We tend to support the international markets through thick and thin going down the road. They are going to challenge us as we go through 2009 and give us opportunities and probably make it the very difficult opportunities to make sure that that we can deliver and provide the service levels that they need. And it will be growing from there. So 2009, I just seek continued incremental improvement.

Mark Parr - KeyBanc Capital Markets

Okay, terrific. Go ahead. Thanks for all the color and congratulations on the results and the great outlook.

Denny Oates

Thank you.

Operator

Your next question comes from Nat Kellogg, with Next Generation Equity Research.

Nat Kellogg - Next Generation Equity Research

Hi, guys, very nice quarter. Just a couple of questions, you gave aerospace as a percent of total business, but did you give power gen and petrochemical as well? Or if not, could you do that?

Denny Oates

We did go through that. Let me.

Nat Kellogg - Next Generation Equity Research

I know you gave the year-over-year and quarter-over-quarter growth, but I didn't catch whether you guys broke out what percentage of total business that was.

Denny Oates

We have that. Hang on one second, hang on.

Rick Ubinger

Year-to-date?

Nat Kellogg - Next Generation Equity Research

In the quarter or year-to-date, whatever you've got. In the quarter would be great, but if you got year-to-date, I will take that too.

Rick Ubinger

Quarter, power gen was 13%.

Nat Kellogg - Next Generation Equity Research

Okay.

Rick Ubinger

And petrochemical was 17%.

Nat Kellogg - Next Generation Equity Research

Okay, great. And I think you might have mentioned it briefly, but on the tool steel side it continues to look like that part of the growth there maybe that another player in this space is just starting to focus on that business a little bit less or back off a little bit and that is opening up some opportunities for you. Would that be a correct assessment?

Denny Oates

That is part of the positive, yes. It has really come down to you've been strong end use demands, you've got the impact of the exchange rate of the dollar on imports coming in, and also with demand that is driving the domestic marketplace. And you have got changes in market share, some of which has to do with people not as focused on this market as they once were.

Nat Kellogg - Next Generation Equity Research

Okay, Great. And then less question, I know these guys touched on it before, but just on the petrochemical side, can you give us just a couple of examples of the applications for where the Universal Stainless product is being used in the petrochemical side that's driving some of this demand?

Chris Zimmer

Most of this product is actually going through the forging market that we sell to for some of the larger fittings and different applications for exploration and other processing industries.

Nat Kellogg - Next Generation Equity Research

Okay, that's great. So it is mostly on the E&P side of things?

Denny Oates

Yes.

Nat Kellogg - Next Generation Equity Research

Okay, all right that's great. That's all I have got and congratulations guys, on another nice quarter. It seems like things continue to tick along pretty nicely even in a tough economy out there.

Denny Oates

Thank you.

Operator

Your next question comes from Tim Hayes, with Davenport & Company.

Tim Hayes - Davenport & Company

Hey, good morning.

Denny Oates

Tim, how are you.

Tim Hayes - Davenport & Company

I’m fine, how are you?

Denny Oates

Good.

Tim Hayes - Davenport & Company

Two questions. On your price increases, you announced one in July and then in the second quarter. How long did those take typically before they are fully excepted?

Chris Zimmer

From an acceptance standpoint, we felt that the market has accepted both of the increases. The way that they were put in place was effective for new orders. So essentially you do not see the impact of those increases for at least about a four to six month period after they going to affect.

Tim Hayes - Davenport & Company

Okay and then, taking the equipment up to Dunkirk, was there any building of any finished good inventories while that equipment is out of service?

Denny Oates

Very minor amount. We try to do this very sequentially. We've got a very detailed plan on how to move it. So, we didn't have the necessity to build any significant inventory and still meet our customer commitments.

Tim Hayes - Davenport & Company

Okay. Very good, thank you.

Denny Oates

You're welcome.

Operator

Your next question comes from Chris Olin, with Cleveland Research.

Chris Olin - Cleveland Research

How are you doing guys?

Denny Oates

Good Chris, how are you today.

Chris Olin - Cleveland Research

Good. I just have a big picture question for you. It goes to the aerospace side. I guess the concern on this marketplace is that ultimately the Boeing backlog or the Airbus backlog becomes cancellations, and there are some at risk out there. But I guess I am more concerned on the potential I guess retiring of these planes or landing of these jets reducing the capacity out there. Presumably that would lower the aftermarket for materials as you are going through less wear and tear on the jets. I'm just wondering, what your exposure to that would be? Are you a big aftermarket player or is it more direct OEM type of business? Do you have any thoughts or concerns on that?

Denny Oates

It is difficult for me to put an exact number of percentage on the amount of our sales that goes to the aftermarket, because so much of our business goes to service centers. We're not going direct. But knowing the applications and the metals, I would say in excess of 75% of ours goes towards the new applications. So we are focused more on the backlog side, the build rates for the new planes. As far as the planes that are retired, I understand what you're saying.

The other side of that coin though is these new planes are so much more fuel efficient than the older ones, I still don't see that as being a reason why you're going to see a lot of cancellations or backing away from what is already in that backlog. And that backlog is a very strong one that, if you run it out, is anywhere from four to six years depending upon the assumptions you make.

Chris Olin - Cleveland Research

Fair enough. That's all I need. Thanks a lot.

Operator

(Operator Instruction). There are no further questions at this time.

Denny Oates

Okay. Thank you very much for joining us. We will look forward to seeing you or talking to you at the end of the next quarter. Have a good day.

Operator

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

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Source: Universal Stainless & Alloy Products Inc. Q2 2008 Earnings Call Transcript
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