Universal Stainless & Alloy Products Inc (USAP) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Universal Stainless third quarter 2011 conference call and webcast. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host for today, Miss June Filingeri. Ma'am, please go ahead.

Thank you, Karen. Good morning. This is June Filingeri of Comm-Partners and I'd also would like to welcome you to the Universal Stainless and Alloy Products conference call. We are here to discuss the Company's third quarter 2011 results, reported this morning.

With us from management are Denny Oates, Chairman, President and Chief Executive Officer; Paul McGrath, Vice President of Administration and General Counsel; Doug McSorley, Vice President of Finance and Chief Financial Officer; and Chris Zimmer, Vice President of Sales and Marketing.

Before I turn the call over to management, let me quickly review procedures. After they have made formal remarks, we will take your questions. The conference operator will instruct you on 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 now 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 business activity stayed unusually strong this summer and exhibited little of the normal seasonal softness. Third quarter sales reached a record $67.3 million, that's an increase of 30% from last year's third quarter on 9% higher volume and a 6% sequential increase in sales on 2% higher volume.

The shift in our sales mix to higher value products is evident in this sales versus volume trend. The favorable mix shift can also be seen in the continued high level of sales and volume in our Dunkirk Specialty Steel segment, which represented 38% of total company sales in the third quarter. Among our end markets, aerospace and power generation were especially strong.

Our consolidated operating margin was 13.2% of sales in the third quarter before startup and cost related to the acquisition of our North Jackson operation, which closed on August 18th. As noted in today's release, base business operating margins in the past two quarters have been at their highest level in the last 15 quarters despite the continued downward trend in nickel prices. This reflects a new level of earnings power resulting from the shift in our sales mix, combined with cost reductions and pricing actions.

Third quarter net income was $0.83 per share, excluding $0.28 of acquisition and startup expenses, as well as the tax effect of the North Jackson acquisition. Very close to our guidance on dilution provided back in June and on our last call.

Backlog at the end of the quarter remained strong at $92 million. Essentially we refilled the record sales in the quarter with new orders, giving another indication of the solid level of business activity in spite of the negative economic headlines. Third quarter cash flow from operations was $1.9 million We invested $3.2 million in capital projects including about $300,000 for North Jackson. Doug will discuss the financing of the North Jackson acquisition and its effects on our cash position and taxes in his review.

We ended the quarter with total debt of $96 million or 35% of total capitalization.

Before giving an update on our progress at North Jackson, let me take a closer look at our end markets. Aerospace remained our largest market in the third quarter at 42% of total sales, which is up from 40% in the 2011 second quarter and 37% of sales in the third quarter of 2010. Our sales to Aerospace rose 46% from the third quarter last year and 11% from the 2011 second quarter on volume increases of 19% and 7% respectively.

Trends in the commercial aircraft production continue to be positive, both for single engine and light body airplanes. Boeing recently forecasted air carriers in North America will take delivery of 7,530 new airplanes over the next 20 years, primarily focused on single aisle jetliners. They've now increased their production rate on the next generation 737 to 35 airplanes a month and plan to increase that to 38 per month in the second quarter of 2013, and 42 airplanes per month in the first half of 2014. Overall there is a very healthy level of business for aerospace suppliers right now, which can be seen in our latest results.

Petrochemical sales represented 23% of total third quarter sales compared with 24% in the second quarter and 21% in the third quarter of 2010. While petrochemical sales were level sequentially they increased 46% from the third quarter of 2010.

In their earnings report last week, both Halliburton and Schlumberger reported high activity in the North American market. Schlumberger cited strong performance in the liquids rich basins here as well as growth in the deepwater areas of the Gulf, while Halliburton also noted increased drilling activity in the Gulf. Both companies acknowledge that the recent financial turmoil has added uncertainty to their near-term outlook, but they also both expect current concerns to be short-lived. From our standpoint, demand remains strong and channel inventories remain in balance.

We saw strong sequential and year-over-year growth in our sales to the power generation market in the third quarter, specifically our power generation sales are up 20% from the 2011 second quarter and up 36% from the third quarter last year. As a result, power gen sales increased to 18% of total third quarter sales compared with 16% in the second quarter and 17% in the third quarter of 2010.

Our growth in the third quarter was primarily due to the maintenance business we continue to win for our quick turn capabilities. We have not seen a robust recovery in new turbines as yet, but GE had some good news last week when they announced orders for 16 new gas turbines. We see continued strength in the maintenance business with worldwide power needs driving investment in new turbines as we move through 2012.

Service center plate sales represent 8% of third quarter sales versus 12% in the 2011 second quarter and 14% in the third quarter of 2010. Our service center plate sales were 27% lower both sequentially and from a year ago. Excess inventories in the tool steel plate supply chain, coupled with a reemergence of economic uncertainty have led customers to become very conservative in their buying decisions. It is estimated that the automotive industry accounts for more than half the domestic tool steel market with the main drivers being production levels and model changeovers.

Auto production news has continued to be very positive. For the first nine months of 2011, GM's vehicle sales in the US were up 17% from the same period of 2010, while Ford sales of vehicles for the year-to-date period were up 11%. Off-road demand is another driver of plate.

Caterpillar just reported very positive third quarter results on Monday as well as an all-time high order backlog. Cat is adding to the workforce in the US and has raised their sales outlook for the fourth quarter. On balance the news from the end users of tool steel is very positive and we expect improvement as we move into 2012.

Let me turn to our North Jackson operation. As most of you know, we acquired a substantially completed greenfield facility in North Jackson, Ohio which includes a state of the art radial forge, an 18-ton vacuum induction melting furnace, two vacuum-arc remelt furnaces and related equipment for heat treating and finishing long products.

Our integration team is doing a great job. The construction projects and equipment commission in North Jackson are on schedule. Our new radial forge is open for business and we're taking orders including processing internal material and doing conversion work for customers. About 2.5 million pounds have been forged since our delayed closing on August 18th.

Our backlog for North Jackson has begun to grow and stands at 3.2 million pounds and $9.5 million with 60% new business and 40% internal material formerly outsourced.

Major construction in the vacuum-induction melting furnace is essentially complete, with work remaining on auxiliaries and supporting systems. Electrical, mechanical and cooling water system checkouts are underway. We remain on track to produce our first heat in December, followed by further commissioning work in 2012.

The two vacuum-arc remelt furnaces have been received and installation is underway. Our Board just approved the purchase of two additional vacuum-arc remelt furnaces for North Jackson. We expect to take delivery on those furnaces in the third quarter of 2012 and be producing in the fourth quarter. Demand in our major markets is strong and outstripping our vacuum-arc remelting capacity company wide. When completed, Universal will have 11 vacuum-arc remelt furnaces. Heat treating furnaces, the peeler and the straightener have all been commissioned and are working on customer orders.

Earlier this month we named Jeff Daw as your Universal Vice President of Business Development, a position he held at Patriot Special Metals. Jeff will lead our efforts to market the products and process of North Jackson, add additional technical expertise to the Universal sales force and assist operations with process improvement and product expansion. We're very pleased to have Jeff join us.

Let me turn the call over to Doug at this point for his financial report.

Thank you, Denny. As Denny said at the opening, sales for the third quarter were a record $67.3 million. This represents an increase of $15.4 million or 29.7% compared to sales of $51.9 million for the same period a year ago. Continued strong demand drove a 9.1% increase in shipments, while increased pricing and a more favorable mix of higher value products also contributed to the sales increase.

Sequentially sales increased by $4 million or 6.3% and for the first nine months of 2011 our sales increased by $52.6 million or 38.2% over last year to $190.4 million.

Our gross margin in the third quarter was $12.6 million, an increase of $2.3 million or 21.9% from the same period last year. Current year third quarter gross margin includes $400,000 of initial startup costs at North Jackson. Compared to the second quarter results, the gross margin improved sequentially by $400,000 or 3.3% despite the impact of the initial North Jackson startup costs in the third quarter.

For the first nine months of the year the gross margin was $35.5 million or 18.7% of sales compared to $24.9 million or 18.1% of sales for the same period last year, representing a year-over-year improvement of $10.6 million or 42.6%. Once again, with the current year results including the impact of initial North Jackson startup costs.

The selling, general and admin expense in the third quarter was $5.3 million or 7.9% of sales. After excluding $1.2 million of acquisition related cost and North Jackson SG&A, the adjusted SG&A is $4.1 million or 6.1% of sales in the third quarter, compared to $4 million or 7.7% of sales a year ago. Sequentially third quarter selling, general and administrative costs were $1.6 million higher than second quarter SG&A expenses of $3.7 million due to $800,000 in higher North Jackson startup and acquisition related expenses and higher employee costs.

For the first nine months of the year, SG&A expenses were $12.9 million or 6.8% of sales as compared to $9.9 million or 7.2% of sales for the same period a year ago. Excluding the impact of $2.2 million of North Jackson startup and acquisition related expenses in the current year, recurring SG&A costs were $10.7 million or 5.6% of sales for the first nine months of 2011.

The operating income for the quarter was $7.2 million in the third quarter, or 10.7% of sales. After adjusting for $1.7 million of expenses related to the acquisition and startup of North Jackson, the adjusted operating income is $8.9 million or 13.2% of sales. The similarly adjusted operating income as a percentage of sales in the same quarter last year is 12.3% and 14.2% in the second quarter of this year.

Through the first nine months, our operating income as a percentage of sales, excluding expenses related to the acquisition and startup of North Jackson was 13.3% compared to 10.9% for the first nine months of last year.

Interest in the quarter increased to $609,000 from $126,000 in the third quarter of last year and from $116,000 in the second quarter of this year. The increase is due in part to our increased debt in support of the North Jackson acquisition and we also had onetime adjustments associated with closing our previous debt. The total impact of these nonrecurring adjustments in the quarter was $300,000.

As a result of the North Jackson acquisition, the company now projects that its 2011 tax rate will increase to 37% from 35%. The increased rate is due to the accelerated tax depreciation deduction that will result from the commissioning of the North Jackson assets. Further, as a result of placing the North Jackson assets and service in the third quarter and accelerated depreciation due to the 2010 Tax Relief Act, we expect that we will generate a loss for federal tax purposes in 2011.

A consequence of the expected loss for the year required reversing the previously recognized domestic production activities deduction tax benefit that will no longer be available to the company. The deduction no longer available caused the increase in our effective tax rate. The cumulative impact of the increase on third quarter results is an effective tax rate for the quarter of 41.6% which equals a $0.06 per share impact on the quarter and is included in the previously reported $0.28 a share dilution resulting from the North Jackson acquisition.

Our effective tax rate for the remainder of the fiscal year will be approximately 37%. Shifting our view of the tax impact to our cash tax position and as we expected, instead of being a cash tax payer in 2011, we will have an opportunity as a result of the tax loss generated post acquisition, to carry back our expected tax loss for this year to obtain a cash refund for federal taxes paid in 2010 and estimated payments made in 2011 prior to the acquisition. This expected recovery is $10.5 million and is expected in the second quarter of 2012.

The number of shares used in computing the diluted earnings per share for the quarter was 7.2 million. This was an increase of 204,000 shares as a result of the convertible note provided as consideration for the North Jackson acquisition. The impact of the increased number of shares on the EPS in the quarter was $0.02 per diluted share and is included in the $0.28 per share dilution. Because North Jackson was acquired on August 18th or approximately midway through the quarter, the full quarter impact of the number of shares that will be included in subsequent quarters will be 427,000 shares.

The EPS reported in third quarter was $0.55 a share. Dilution adjustments totaled $0.28 a share related to the impact of the North Jackson acquisition. In total, these adjustments include $0.20 a share for the transaction costs and startup costs for North Jackson, $0.06 a share for the increase in the tax rate and $0.02 a share for the increased number of shares. Excluding these adjustments, the earnings per share is $0.83 a share.

Turning to the balance sheet, the company's cash position at the end of the quarter decreased to $295,000 from $28 million in the second quarter as a direct result of the acquisition of the North Jackson operation. The total consideration for the North Jackson operation of $115.8 million was funded with internal cash, $20 million in convertible notes issued to the seller and funds from our new $115 million financing facility. We borrowed $40 million of term debt under the facility and $35.6 million under the revolver. At the end of the quarter our total debt was $95.6 million and debt to total capitalization is 35.3%. We had $37.3 million of availability under our revolver at September 30th.

Our managed working capital as of the end of the third quarter which includes receivables and inventory, less accounts payable, was 36% of annualized sales, representing an improvement from 37% at the end of last quarter and 38% at the end of 2010. Capital expenditures for the quarter were $3.2 million which included new capital from North Jackson of $300,000, for a total company year-to-date of $7.9 million.

That concludes my report. Denny, I'll turn the call back to you for concluding remarks.

Thanks Doug. In summary then, sales reached a record $67.3 million in the third quarter and the consolidated operating margin on our base business remained high at 13.2%, reflecting our focus on higher valued products and our continuous efforts to reduce costs. Despite the return of economic concerns this summer, our business remains healthy and we ended the quarter with a backlog of $92 million.

With the closing of our acquisition of North Jackson on August 18th, ramp up of that facility has begun in full. The forge and related equipment are operational and we are taking orders. We are also on schedule to produce our first heats in the vacuum induction melting furnace and each of the new vacuum-arc remelt furnaces in December. We added North Jackson to broaden our production capabilities, expand our product range in higher value, higher margin products and enable our entry into new market niches on a global basis. This is an essential part of our strategy to accelerate growth. Our effort to realize the potential at North Jackson is now well underway.

That concludes our formal remarks. We're now ready to take your questions.

(Operator Instructions) Michael Gallo, CL King.

Just want to delve in a little bit on the Patriot acquisition. I guess if I look at the quarter, the acquisition closed about three weeks later, which obviously resulted in lower G&A, lower interest expense; how much of that has the effect - yet the dilution was kind of in line with your original expectations, so I guess I'm surmising that that would have been a positive impact? Was this we should think about that as it was $0.22 dilutive excluding the tax stuff, which seems like it was incremental to what your original thinking was in the quarter, but still would have been $0.30 had it closed on July 31st? Is there something different than what you thought in terms of the accretion/dilution profile?

You're right, it did close a little bit later. The impact of that was we did have some lower interest expense from an earnings per share standpoint. We didn't have the full quarter impact in calculating earnings per share; we just had basically a month and a week for that calculation.

As far as the raw numbers go, we were pretty close to our original estimates. The other operational effect of the delay though did get us off to somewhat of a slower start in terms of generating sales, getting approvals from customers, getting tests done with customers to do conversion work, that kind of thing. So we've been scrambling since then to make up for that lost time.

All in all I don't think it's even meaningful, I mean a big difference in the dilution number if we had closed on July.

What were the revenues from Patriot in the quarter and do you expect you'll break out Patriot as a separate segment as you kind of go forward?

Most of the activity that went through Patriot, Mike was internal support work between Bridgeville and Patriot, so the production activity and the internal recorded streams were conversion work in support of Bridgeville. The external sales was negligible, and I'm sorry, the second part of your question?

Whether you're going to still segment that out as you go forward, obviously it's going to become a lot more meaningful.

We're certainly looking at how we want to present our information. We think it gives us a good opportunity to provide perhaps a different way of looking at our company, and that's something we will do our very best to let you folks know well ahead of time, how it's going to look.

Final question, you mentioned you got off to a little slower start in kind of ramping those things. I think I heard Denny say you had about $9.5 million backlog. I wasn't sure if that was currently or if that was at the end of the third quarter, so if you could just clarify that. I was wondering what kind of--?

That was as of September 30th.

Should we expect all of that is going to ship in the fourth quarter, a $10 million kind of number or any change in how you expect that to ramp?

I think that would be a safe assumption that we'd be somewhere in that range.

Dan Whalen, Auriga.

I realize most of your revenue is domestic based, but just qualitatively, if you could take a look at your backlog, how is it looking domestically versus internationally? Is the international side lagging dramatically versus domestic side on the backlog?

Currently our backlog for international business is still in that 5 to 10 range. I characterize it as moving sideways, but there is some upward momentum there. Most of the opportunities that we have growing the business continue to be domestically but we still have a focus on growing internationally as well.

Okay, so there's not a huge variance between the domestic and the international backlog?

Not a meaningful one, no.

Okay. Then you recently announced some price increases; how is that going, are you getting much resistance?

No, we're not. The announcement was well received and so far we've gotten full capture rate on that announcement in the marketplace.

Great. Should we be factoring in some sort of lag or is that pretty immediate?

It's effective with orders on October 1st, so you'll start to see that flowing through really as we get into the first quarter of 2012. On average, you might see a little bit in December.

Great. You went through in pretty good detail, I may have missed it, but on the tax issues, what should we be looking for in 2012 in terms of a full year tax rate? I know you went through exhaustively on 2011. I may have missed it on 2012.

A lot of that, Dan will depend on what our 2012 plan will be, the rate of capital deployment and the continued recognition of the current Relief Act as it relates to how to capture bonus depreciation on commissioning these assets. I would say your best basis would be the 37% that we expect to realize for the remainder of this year.

Great. And then if I could ask one last one, you touched on it earlier, but can you just comment in terms of as you're making the step change in terms of your value added product mix, just the customer acceptance, the certification process, how things are progressing on that front?

The customer interest in what we've done with Patriot has been very strong, stronger than I expected, to be candid with you. We've had a lot of exchanging with customers, visits to our new facility as well as our former facilities, so we're working through all those issues of getting acquainted and getting the approvals lined up that we need to get.

The big area there really comes down to vacuum induction melting and we'll have our first melt done in December, and then I mentioned that further commissioning in 2012. So as we move through 2012 you'll see customers coming in checking out the new furnace and the facility, we'll be doing test heats for them and getting appropriate approvals. We're starting out with the easier grades, if you will, ones that don't necessarily need the very stringent approvals, so we'll learn our way into operating the VIM furnace and work our way up from a mix standpoint once we get established.

Dan, I would add to the point on the tax rate, at a 37% rate, that reflects the fact that we will continue to not be able to take advantage of the production deduction credit. It also speaks to the fact that we expect not to be a cash tax payer through 2012 as well. So on one hand the 37% is our book rate, but the other side of that is we expect to continue to benefit from the Tax Act and our position in deploying these capital assets.

Tim Hayes, Davenport & Company.

Several questions. You gave the sequential volume increase for aerospace products; can you do the same for the other three categories, again the sequential change in volume?

From an aerospace standpoint we had an 11% sequential increase; petrochemical we're basically level on a sequential basis with a 46% increase compared to last year's third quarter; power generation--.

If I can interrupt; I wanted to get the volume sequential increase. I think for aerospace you gave volumes were up 7% sequentially.

Okay. Volumes were up 7% in aerospace; 14% for power generation; service center plate was down 27%; and petrochemical was down 5%.

Then you referred to the GE orders. I actually kind of looked at that as maybe a yellow flag on that. They were down a little bit from a year ago and down a lot from Q2. I know they're lumpy, but any concerns about the trend in those orders, given that I think there were like 13 orders versus 16 a year ago and 40-plus in Q2?

As the year 2011 unfolded, six months ago the general direction was up. The feeling was that you'd see a significant increase in new turbine business in 2012 early on and we would start to see the benefits of that material buy in the second half of 2011. As we said the last conference call, there seems to be less optimism coming out of the main producers.

We use GE as kind of to give us the leading indicator if you will but if you talk to the Siemens people you hear the same kind of thing, kind of reduced optimism about 2012 pushing things out six months to nine months. And we've continued to hear that theme over the last three months since the last conference call. So as we look at the business, we've positioned Universal to pick up more of the maintenance business, that's why you see our power generation business being relatively strong both compared to last year as well as sequentially. The new turbine business we still anticipate a positive year-over-year 2012 to 2011 based upon what our customers are telling us, but not to the same degree that we would have told you six months ago.

A lot of this is project work and when credit markets loosen and get tight you see a direct impact in some of those numbers.

Then to go a little bit deeper in the aerospace business, do you have a feel for how much of that goes to defense and then of that that goes into aerospace, split between what is engine versus the rest of the plane?

We don't have great visibility to be able to give you a real hard answer on that, because our aerospace sales go through service centers and forges primarily, so we're not dealing with the end use buyer. But I would tell you based upon what I know, the order of magnitude, the military end of our business is relatively small. I would say upwards of 85-90% of our aerospace volume is commercial. I can't give you a precise number, because we're two or three levels away from the ultimate user.

Lastly, any further acquisition or startup costs in Q4 for North Jackson?

We're not anticipating any significant numbers there.

Mark Parr, KeyBanc.

Your stock's doing well, so congratulations. Good quarter. Was curious, I wanted to get into a discussion on the backlog. On the surface the number looks up from the June quarter. If you back out the 9 million at Patriot at the end of September, it would imply a bit of pullback call it in the pre-Patriot backlog. I don't know if that's a correct way of looking at it but could you just give us some color around how the backlog's unfolding in business outside of Patriot? I'd appreciate that.

You're going to see three streams of revenue for North Jackson. One is going to be conversion business with third parties, second will be new business that we're able to capture because we now own North Jackson, and the third part would be products that we already sell into the marketplace but for which we use outside conversion type work. So as we're starting to ramp-up here, what you're seeing there is basically those three items kicking in.

The third party direct business has started off and that's really ramping up from basically nothing and since the acquisition we've been offloading material that used to go to third parties and moving it over to the North Jackson facility. So all three of those sources are in that $9.5 million, so it is not correct to back all $9.5 million out. A piece of that was already in the backlog because we already had that business going to third parties. That's the 60% versus 40% I alluded to in my formal remarks.

If we didn't have North Jackson and you took everything out of the equation and we just were the old Universal, we would have had a modest decrease in our backlog, you're correct in making that statement. Some of that has to do with conservatism out there that I mentioned with regard to nickel prices and people pulling in their [horns] largely in the service center world. Some of that has to do with frankly we are at 100% from a remelt standpoint, so if we had those vacuum-arc remelt furnaces available to us today, we probably could sell some more. But there's the two underlying issues I guess that we're wrestling with. And you see what our plan is; we have basically four more vacuum-arc remelting furnaces coming in so we can supply our customers.

It seemed like nickel prices really fell out of bed in September and you've seen nickel back, at least the cash price I'm looking at this morning's closer to $20,000 a metric ton than last week, which was more like $18,000 and it may be too early, but are those the kinds of things that you would like to see in terms of getting service centers to perhaps feel a bit more comfortable about the conclusion of destocking and getting back to more normal order patterns?

Yes, I think there is this nervousness about the overall economic outlook just based upon what we all hear on the news all the time. As far as nickel itself goes, you need a couple--.

They're good at that. They like to tell us what's going to happen tomorrow, right?

Right and then they make it come true, right? But as far as nickel itself goes, you need a couple of months of stability to modest increase to get that mindset to change.

So if we saw these nickel prices say 20,000-plus through the balance of the fourth quarter, you'd probably see a reemergence of order momentum in 1Q as it related around the inventory conservatism you're seeing now.

Absolutely. I would even say if you see it hold steady through November you might see it pick up in orders in December.

Based on what you're seeing right now, would you think that backlogs would have a chance of staying level in 4Q versus 3Q?

I would think they'd be at a minimum level, probably up.

Okay, terrific. Hey, congratulations. It's got to be really exciting to get Jackson up and running. Look forward to your thoughts about how you want to recast the company and present it to us. It's a really exciting time for you guys, so good luck.

My CFO is giving me the high five that I screwed up with the last caller. I don't expect any significant increase in M&A spending but we still, if you remember back in June, we announced there will be further dilution in the fourth quarter of about $0.10 a share, so we're still looking at that. I was looking at the wrong number.

We don't expect any increase; we expect it to go down, but we still expect there will be some modest dilution in the fourth quarter and we expect to be fully accretive in the first quarter of 2012. So that hasn't changed. Just to make sure I didn't confuse anybody.

Charlie Smith, Fort Pitt Capital.

First of all, my compliments to the management team on the timing of the Patriot deal and its effect on cash taxes; that's a real homerun. Question on the power gen area; what are any changes in trends in margin in your maintenance business, I see the unit numbers are up 14% sequentially. What's it look like for profitability in that segment the next couple of quarters?

We see modest improvement in our margins, largely on the cost side. So I would say flat, pretty healthy margins to up would be our bias.

Okay. And in energy, your sales to people like Halliburton and Schlumberger, can you give us a couple of the end applications for your products; does it have anything to do with their growth in frac'ing?

No, not really. And our sales largely go through service centers so it's not all direct sales to Schlumberger and Halliburton. We use them as the leading indicators of market activity, so that's why we go through that. Good applications for us, it's basically on the exploration side, mostly offshore, but anywhere where there's a hostile environment, temperature acidic environments that they're doing drilling in; you need corrosion resistance specialty metals that we manufacture.

(Operator Instructions) Michael Gallo, CL King.

Just a follow-up question. I guess I would just go back to your commentary at the end of August, I think you had indicated that your backlog was 91 million and that didn't include anything from North Jackson and I was wondering just if you look at the month of September, it would seem like you saw falloff in the order rate there in the core business. Can you just sort of clarify that? Because obviously I presume most of that backlog at North Jackson was built in the month of September. Thanks.

Hang on while we check those numbers, Mike. Our backlog was actually up in the month of September.

That was excluding North Jackson?

That's including.

What I was driving at was with the core business did you see a decline in the backlog? I presume most of the backlog that was built at North Jackson was built in the month of September, given the closing late. So what I was driving at was what did you see in the core business ex North Jackson in the month of September?

We saw some modest increases in the service center business, largely on finished products. And that has to do basically with this whole issue about conservatism in buying.

Any concerns as you kind of head into year-end? Normally you see conservative buying patterns at year-end anyway, particularly in the service centers. Do you think that could be more pronounced this year given the general level of uncertainty or do you think we've kind of seen it earlier and just kind of see it's normal buying patterns, just any thoughts on how you think the next couple of months plays out from that standpoint?

You know, the word normal is a little crazy in this business anymore. As we look at our fourth quarter, we've done our best to plan out what's going to happen in December, and normally in the month of December you have a lot of people that will decide they have enough inventory and push things out to January. So we've tried to plan for that.

As I look at the underlying business that's coming in though, I'll go back to the comments with Mark. If nickel prices kind of stabilize here, looking at the ultimate use of metals and the amount of metal that's being chewed up, people are going to have to start buying. So we're not looking at the fourth quarter as a down quarter. We're not pessimistic about the fourth quarter. We're fairly bullish.

But it sounds like we should expect to see the same kind of normal seasonal patterns, is that fair?

Yes, but let's amplify it. I'd point you to the third quarter. Typically the third quarter and the fourth quarter are light compared to the first and second quarter if you look at seasonality. This is one of the few times in my career that the third quarter is actually stronger than the first and second quarters of the year. I think some of that will bleed over and some of that's unique to Universal because we are picking up business in certain markets we didn't do business in before.

Gregory Macosko, Lord, Abbett.

Forgive me for focusing too much on the backlog, adding questions here, but with regard to your comments on the second quarter, you said that you'd seen some softness in orders in the service centers and I'm sensing that it has been going on for at least four or five months. Does that imply that those inventories at their locations much be getting pretty low?

Yes, that's what I was suggesting in my last comment, Gregory. If you look at the ultimate chew up rate of the metal, it's pretty high when you look at all the markets that we serve. So service centers because of trends in nickel prices or conservatism can put off buying for a couple of months, but they can't do it forever, because their customers are going to need metal. So in our view, that's why we're not pessimistic about an exceptionally bad fourth quarter or heavy seasonality in the fourth quarter. We feel that the end use markets are still there, they're still using metal and service centers will have to service their customers, therefore, they will buy.

I think the amount of which they try and get ahead of things in anticipation of the first half of 2012 is really what we're talking about here. You know, if you're running a service center, you're trying to gauge what sales you're going to have in January and February when you're placing orders on the mill in the fourth quarter, I think that's where they're being a little conservative. So to the degree nickel prices tend to flatten out or maybe rise a little bit here during the fourth quarter, that would be a big plus because it would give service center customers the confidence to go out and know that they're buying product that isn't going to be instantly devalued by lower surcharges a couple of months down in the future.

Okay, but at the same point in Q2 you talked about - I thought you talked about inventory being built perhaps by your other customers, so are you seeing the inventories at your non service centers area; do you feel those inventories are in good shape this point or are they still perhaps needing inventory to be built?

I would say they're generally on balance. When you look around at aerospace, clearly it doesn't even compare to three years ago when there was excess inventory in that supply chain. I just walked through the petrochem, primarily oil and gas is in balance and I would say the power gen is pretty much in balance, based upon our conversations with customers. We don't have the big inventory overhang out in the marketplace in general.

Okay, so what you were saying is basically they built some inventory in the third quarter and they're balanced now and that was what some of the orders were for that you had gotten and so other than service centers, that's the only issue.

That's a fair statement.

I show no further questions in the queue at this time. I'd like to turn the conference back to Mr. Oates for any concluding remarks.

Thanks for joining us today. This is a very exciting time for Universal. We're actively installing and ramping up the assets which will accelerate future growth and compliment and improve our existing base business. We'll be looking forward to updating you on our progress in our next call. Thanks again for joining us. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.