Universal Stainless & Alloy Products Inc (USAP) 2008 Q4 法說會逐字稿

Good morning. My name is Sade 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 speakers' remarks, there will be a question-and-answer session. (Operator Instructions). As a reminder, ladies and gentlemen, this call is being recorded. Thank you. Mr. Filingeri, you may begin your conference.

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 are here to discuss the Company's fourth-quarter results and first-quarter outlook, as well as the melt shop capital project, all of 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 procedure. 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 would like to turn the call over to Denny Oates. Denny, we are ready to begin.

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, a tax rate change and the receipt of CDSOA funds. Rick will detail our financial performance in a moment.

Full-year 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 a 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 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 productlines, coupled with stronger than expected shipments. Buying patterns reflected downward trend in raw material costs, uncertainty regarding the underlying level of demand, lack of credit availability and a desire to pare 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 costs incurred.

I'm 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?

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 OEMs, as well as lower surcharges. We estimate 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. Lower 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 segment 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 costs 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 of 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 date is dispersed.

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 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 to our annealing and finishing operations in Bridgeville.

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

Thanks, Rick. Let's talk about our end markets. Our sales 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 have discussed before, part of the challenge in looking at aerospace performance and demand is that most of our sales to aerospace move through service centers. Service centers are balancing the precipitous drop in commodity costs and the deterioration in economic and credit conditions. Therefore, it is not surprising that service 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 approximates eight times their annual revenues for these products. They reported a few aircraft cancellations and 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 a Russian carrier.

Our sales to the power generation market increased 51% from the fourth quarter of 2007 and 14% from the third quarter of 2008. Powered represented 15% of total fourth-quarter sales versus 11% in the fourth quarter last year and 13% in the third quarter. Powered 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 turbine 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 and 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 are all waiting to see the scope and details of the stimulus package both here and abroad before modeling 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 million 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 million to $8 million negative impact from lower surcharges compared to the first quarter last year. We are taking all of the appropriate actions to adjust production to the 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 on-time delivery, short leadtimes 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 on 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 are now ready to take your questions.

(Operator Instructions). Michael Gallo, C.L. King & Associates.

Hi, good morning. The question I have I guess centers around Powergen, which obviously looked like your strongest market in the quarter. I mean obviously the other markets are well-documented. It seemed to be holding up well, but one of your peers indicated recently on 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 it to continue to be as resilient or would you expect to see that market also slow as we go through 2009?

Well, we have characterized the outlook in 2009 as good. The bellwether we monitor very closely is GE. We talked about the level of incoming business there at GE. In our conversations with our customers, basically forgers, they are generally optimistic about 2009. A 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.

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

Well, clearly tool steel, if you look at the last 12 months here at Universal in the tool steel market, we had a very good run for three quarters. The 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 in order entry, it continues to be very weak and I would expect the entire year 2009 to be weak.

The largest driver there is automotive and some of the other markets that we have talked about before, which support tool steel, are also indicating some weakness. If you talk to our customers, basically out of the year is, again, first half weak with some acceleration and pickup in demand in the second half of the year, but nothing near the levels we saw early in 2008.

Okay, that's very helpful. Thanks a lot.

Edward Marshall, Sidoti & Co.

Good morning, guys. The service center activity through the first month of January here, what is the pulse there? Are they starting to buy again, replacing some of their inventory, (inaudible)?

I would characterize service center business as 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.

So from the aerospace business, is that giving you any indication of what is going to happen there?

I think it is largely driven by the general uncertainty in the economy. When we talk to our service center accounts, their biggest concern is what is going to happen to end-use demand. They are very focused on inventory levels and basically driving inventory down. My personal view of that 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 snapback occur? In our estimates, we are not expecting that until the second half of the year.

Okay. What is the breakout in backlog as far as the different segments? Is it heavily weighted to something?

It is heavily weighted to the semi-finished side, which is typical of our backlog. I would say the Dunkirk backlog is about 23% of our total backlog, which would be mostly the finished product.

So would it be fair to say that if the semi finished, we are looking more toward Powergen?

Yes.

If you look at the backlog, you are going to see -- the strength will be in reroll product and product going to the Powergen market. If you look at the Dunkirk business, which, as Rick indicated, is more the finished product, finished bar, for example, and look at the trend, our backlog, quite frankly during the third quarter, was fairly flat. So we didn't see the deterioration we saw in the other products.

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 million to $5 million here, so $17 million to $18 million next year in CapEx?

Yes.

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

Well, here is our view of that. We have some issues that we need to address in our melt shop. The question comes down to when is a good time to do that. Candidly, from a pure operational standpoint, installation 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 it positions us so that when things come back and we do believe things will come back, we will be ready to pounce on a 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 a perfect time to be doing this kind of thing. I do understand the issue about everybody else is conserving cash. We are going to work very diligently from a working capital standpoint and an earnings standpoint to minimize everything, but I think this is an investment that is critical to the long-term success of this Company and now is as good a time -- in fact, a better time -- to do it.

So to clarify, demand is coming down; you are just taking advantage of that and upgrading your equipment accordingly?

Yes. This is an investment we would be making anyway.

The $7.5 million in cost saving that was announced in the press release, what is the timing? Should we expect that second half?

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

Okay, so it is more of a 2010 event?

'10, excuse me. So the fullbore would be the third quarter of 2010 before you would see all those savings. A lot of the equipment will be going in during the first half of 2009. In fact, if you take a look at our current operations for the first quarter, we have a major outage planned for the latter part of March this year to begin that process. So by the time we get to the fourth quarter of this year, we would expect to get a third of that $7 million in cost savings, continue to ramp up to get two-thirds by the middle of next year and then during the third quarter, we will be ready to go and hit the full $7 million.

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

$0.06.

$0.06. And the relocation? The charge for the relocation, what was the after-tax there?

$0.03.

Thank you very much. Thanks, guys.

Mark Parr, KeyBanc Capital.

Thanks very much. Hey, Denny. One thing I was really curious, I don't think I have seen any company so far say revenues were ahead of expectations for the fourth quarter. So I am just a little bit surprised -- I hear that you guys are just like so conservative that it is unbelievable. But I think you guys are pretty okay as far as that is 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?

We had some business come in from our reroll accounts and then it was Powergen. Those two areas are the ones that drove the better-than-expected sales volume.

Right. So even with --

And don't forget, we had $100 million plus backlog coming into the quarter, so we were able to feed off of that backlog, get some business in, which we were able to turn around quickly and get out the door and you put that all together, it came in stronger than we expected.

Okay. All right. 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?

Well, our customers were asking for it, so we had promise dates on this material. There was some catch-up. If you remember, we had some labor issues in the third quarter, so we did have some of that roll over into the fourth quarter as well.

Okay, all right. So that is -- that is 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 has 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?

If you take a look -- let me make sure -- we don't separate in our backlog the base value versus surcharge. The comment we made was is we look at the first quarter and look at our sales estimates, sales dollars. Given the rapid decline in raw material costs during the fourth quarter and you know most surcharges have a two-month lag in them, we expect a significant drop in our surcharge revenue. And we quantified that in the range of $6 million to $8 million depending upon what goes out the door in the first quarter, if that is 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 are expecting now, we thought that was an important number to try and break out.

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

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

All right. So overall it is probably down a little bit from the fourth quarter.

Volume-wise?

Yes.

Yes, yes it is.

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

You have got a situation of lower volume, lower realized pricing due to surcharges. We have addressed production levels to get ourselves in line with the incoming business, so we have backed off on our melting plants, for example. We saw the inventory reduction in the fourth quarter and we will be doing the same thing on a day-to-day basis. These are those times where you have to watch everything on a daily basis.

We will also be taking steps to flex our workforce to make sure our labor costs stay in control and the other big issue is material costs. As we come out of this last year and we come into this year, we are 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 will be a positive on our margins and also be a positive from an inventory level and a cash flow standpoint.

All right. So you will get a little bit of a pickup 1Q versus 4Q as far as the relationship between the cost of inventories flowing through the P&L and the pricing in the products that are being shipped?

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

All right. So that could theoretically mean a little more activity in the melt shop in front of the shutdown?

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 can go right through the two weeks without seeing a significant impact from a sale standpoint.

Okay. All right. 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 as far as the new line is concerned?

Our current plans are to maintain the $15 million revolver and we are also looking at securing a term loan on top of that, which we are currently projecting to be a $12 million loan and we are also investigating the possibility of fixing the rate to take advantage of current interest rate conditions.

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?

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

Perfect. 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.

Thanks, Mark.

Lloyd O'Carroll, Davenport & Co.

How are you doing, Denny?

Great, Lloyd. How about you?

Surviving.

Glad to hear that.

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

We are working on a few things that we are not ready to announce yet. I would just say if you look at the last year where just about 5% of our revenues will be direct export. You have heard me use the term we are in the courting stage and I think we are 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.

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

Virtually all productivity and cost-driven.

Okay. And the Powergen, you don't do super alloy, so where on the turbine are your products going?

This is Chris Zimmer. Most of the product that going through the forgers are going into blades.

Okay.

It would be the ESR remelted stainless grades.

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

Petrochem is 30.6%. Wait a minute. I will stay out of numbers. I will let Rick do that or else I will screw it up, Lloyd.

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

Okay. And then heavy manufacturing?

By that you mean tool steel?

Yes.

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

Okay. That takes care of numbers for now. Thank you.

Nat Kellogg, Next Generation Equity Research.

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

Thank you. Doing great. How about you?

Good. Just given the guidance that you guys have given versus maybe the guidance for the fourth quarter, it does sound like -- I think you maybe mentioned it briefly, but that you guys are going to slowly benefit from the fact that metal costs are coming down. Obviously you guys did a nice job working down the inventory a 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 of work off the rest of that sort of higher cost inventory that might have been procured over the summer and sort of before the metal markets fell apart.

I think you're talking about getting most of the high cost stuff out as we exit the first quarter of 2010 and into the second quarter -- excuse me -- 2009. (multiple speakers).

Okay, okay. So (multiple speakers) first quarter, but as we move into Q2, it should start to roll-off in a pretty material way.

Right.

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 a few years ago, you guys basically had a little bit of debt and you worked off a revolver 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 less, there would be some cash generation this year, although obviously maybe not as much in years passed. You guys might be able to fund most of this just out of cash on hand plus a little bit of cash generated from operations. I mean I guess just trying to get a sense of -- as you said, you do think that there it is importance to have some liquidity, so I guess just a little bit more guidance on how you guys are looking at that.

I think if you look at the numbers directly, you can make an argument that we can fund this out of our existing cash balances. That is pretty clear -- (multiple speakers).

That was sort of my point I guess.

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

Okay, that's helpful. And then just any, 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 of more front-end loaded or more back-end loaded?

I think you are going to see about $3 million to $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.

Okay. That's helpful. And then just lastly, the inventory data I look at on the service centers, and I think, to be honest, it is more accurate and more closely (inaudible) on the ferrous side versus the nonferrous side, but it seemed to me that service center 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 a little bit more focused on the specialty metals like yourselves or whether that also tends to be looking pretty lean these days. I know -- I'm not asking you to predict when it is going to come back, but I am just curious if you think that business seems to be -- if service centers seems to be as lean as some of the more traditional ferrous guys?

Well, this is a general statement. I think it is 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 I understand your question right, I think service centers would say that, in some areas like some of the oilfield products, they still have excess inventory giving what they see as near-term demand, are still looking at working things down. Aerospace has been cut pretty severely, but there is a lot of uncertainty about what the level of demand is there. So they have been unwilling to place any significant additional business.

And that is why I say, when we look at the service centers, I personally think that we will come to a point when things will start to snap back and they will find that they do not have enough inventory and we will go back into one of those cycles where it is -- orders will pick up very sharply as they try to rebuild those pipelines. Does that answer your question a little bit? I don't see any big difference in the way they are viewing inventory and buying.

No, absolutely. I think that is --

This is the basic carbon metals and so forth.

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

Thank you.

[Larry Southam], My Broker LLC.

Good morning. Some of these things got picked up. But you have not put into place or internationally have not put into place a new representation I gather?

This is Chris Zimmer. We don't have a dedicated body in Europe. The sales efforts internationally are being handled from our sales staff here in the US. We are actively out there internationally traveling.

Okay. I think I caught this, about 5% of revenues were foreign.

5% were direct sales internationally, yes.

What sort of products?

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

And then any indication of what markets it's going into based on the product?

The products are going primarily into aerospace. There is also -- I would be remiss if I didn't mention the forging activity as well too. So we see it on the aerospace side and do also see some of it in Powergen. Those would be the two leaders in the international side of the business.

Okay, very good. And then last time around, I believe you had a new representative working down in -- directly on the oil pad with petrochemical. How is that going and what sort of -- what are your petrochemical product going into at the moment?

We are very happy with the add and the initial feedback that we have been getting has been a positive one. It has allowed us to uncover some opportunities in some areas that we may not have been actively participating in. But again, we are still about -- hardly three or four months into those markets with our new person here. So we are still in the developmental stage, but there is, for sure, some petrochemical pockets of business that we were not participating in previously that we are now working on for the future.

I seem to recall a fair amount of product going into that area was -- what do I want here -- was going into --

Exploration primarily. Is that what you --

What's the word?

Exploration?

No, I was thinking it was more in the valve market, etc., valve bodies, etc.

We are talking downhole applications primarily.

You are?

But it's tied to the exploration spending.

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

(Operator Instructions). Edward Marshall, Sidoti & Co.

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 miners are taking some of their capacity off-line, but now you see moly, chrome and vanadium kind of hit a November and December low. Can you kind of talk about what you are seeing in January and how that is going to ultimately affect the business?

I guess the one word that we use with great trepidation is a little bit of stability. Obviously, all these raw material commodities absolutely cratered and Rick went through all the numbers there in the fourth quarter. 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 a modest concern of ours, just getting our hands on material. But beyond that, it is very difficult to forecast these things. What we have said basically in our planning looking forward is we assume that we are about at the level things are going to be for the next six months. But we're not anticipating any big run-up. We're not anticipating any further decrease.

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

It was $1 million for Dunkirk.

For Dunkirk and nothing on Bridgeville?

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

I guess what I am getting at is we see an acceleration here of the decrease in the surcharge as new lower case 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 start widening out again as we start to take advantage of the way you guys run the inventory through the P&L.

Yes, the problem is the timing. In a perfect world, you have the surcharge basically hitting the same month you're replacing the raw materials. Unfortunately, in the real world, that doesn't happen. So as we look at the first quarter, you're 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, early fall. And my answer to that earlier caller was essentially over the course of the first quarter we would expect the majority of that higher cost stuff to be going out the door and come back into balance as we go into the second quarter of 2009. So that's when you would start to see the margin spread improve.

Okay. And then can you talk about the cancellation that you kind of mentioned earlier in the call that you had today?

It 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 only typical deferrals. But I did see this morning that a Russian carrier did cancel some planes that were on the schedule for 2014 delivery. The reason I mentioned that is they also kind of hinted in their comments in their release that they do expect some increases in cancellations and deferrals in 2009, which would have an impact on the metal supply chain. So we watch that very carefully. But they didn't have any quantification of that, obviously.

Thanks for the clarification. Thanks, guys.

All right. You are welcome.

Nat Kellogg, Next Generation Equity Research.

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

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

35%? Okay, thanks very much. That is all I have got.

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

Well, thanks again for joining us today. As I said, we are 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.

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