Universal Stainless & Alloy Products, Inc.
Q4 2012 Earnings Call Transcript

Published: 29 Jan 2013

[Operator:]

Good day ladies and gentlemen and welcome to Universal Stainless Fourth Quarter 2012 Conference Call and Webcast. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. June Filingeri. Ma’am, you may begin.

[June Filingeri:]

Thank you, Saeed. Good morning. This is June Filingeri of Comm-Partners, and I also would like to welcome you to the Universal conference call. We are here to discuss the company's fourth quarter 2012 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 management has 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 the formalities out of the way, I would now like to turn the call over to Denny Oates. Denny, we are ready to begin.

[Denny Oates:]

Thanks, June. Good morning everyone. Thanks for joining us today. As expected, sales for the fourth quarter of 2012 were $47.2 million as customers in our major markets stayed on the sidelines. Fiscal and economic uncertainty caused an unusually strong focus on inventory control and reduction. Short mill lead times also had a depressing effect on buying patterns. As a result, the expected pick up in order entry in the fourth quarter did not materialize. Our shipments in the quarter were essentially limited to those previously scheduled with virtually no quick turn business. Backlog at quarter end was $52 million, which is down $14 million in the third quarter. We were able to reload some but certainly not all of our backlog during the fourth quarter. We and our customers, whether forgers, service centers or re-rollers, continue to be optimistic about the long-term growth dynamics in aerospace, petrochemical and power generation markets. However, short-term concerns about inventory levels in the various supply channels has sharply lowered activity rates at the mill level. 2013 has begun with mixed signals. We expect January bookings to finish in the $13 million to $14 million range. That’s a 40% improvement over the fourth quarter monthly average but about 50% below the record orders received in January of 2012. Right now, our expectation is that demand recovery will build in the first half of 2013 and pickup more momentum in the second half of the year. Despite the challenging conditions in the fourth quarter further operational progress was achieved company-wide. New re-melting equipment, support equipment for our new vacuum induction melting operation, heat treating equipment and support systems were commissioned during the quarter. We continue to work our plan to achieve industry certifications with Nadcap Laboratory Testing accreditation for Bridgeville lab being the latest example. All of these certifications are critical as we are move into more technologically advanced products. The 25% decrease in our shipment volume along with continued investment in the ramp-up of North Jackson resulted in a consolidated operating margin of 3.7% of sales. Before including North Jackson, the operating margin was 6.8% in the fourth quarter of 2012 versus 8.9% in the 2012 third quarter and 12.8% in the fourth quarter of 2011. After $0.12 per share of North Jackson related expense in the fourth quarter and a $0.04 tax adjustment benefit, our net income totaled $1.1 million or $0.16 per diluted share. That brought full year diluted earnings per share to $2.02 including $0.20 of North Jackson expense. Full year sales of $251 million were in line with $252.6 million of sales in 2011. Cash flow from operations for the fourth quarter was positive at $12.7 million even after continued investment in capital equipment and working capital to support North Jackson. Total inventory of $95.7 million was reduced $6 million during the quarter. Of the $96 million in inventory approximately $10 million is for VIM produced product. Total operating spending was reduced 21% in the fourth quarter versus the third quarter to align with lower activity levels. Capital spending for the fourth quarter was $4.3 million of which $3 million was for North Jackson. The ramp-up of North Jackson is reaching its final stages. Our progress in the past year has been considerable. Our vacuum induction melting furnace melted its first heat in December 2011. Over the course of 2012, we melted another 144 heats consisting of over 15 alloys. Crews were trained in auxiliary equipment like crucible preheating and mould cleaning equipment were added as the year progressed. Today, we have the state-of-art melt shop in North Jackson and we are in the process of obtaining approval by industry leading OEMs in our major markets. We also have four new vacuum-arc remelt furnaces in North Jackson that are fully operational, commissioned and already produced over 800 heats in 2012. We now have 11 vacuum-arc remelt furnaces company-wide. That’s a 40% increase in capacity over the past 15 months. In addition to reliving the capacity constraint we experienced during 2012, these furnaces are fully capable of supporting the requirements for VIM bar products in the future. Our hydraulic radial forge is the first major asset that became operational following our acquisition of Patriot Metals in August of 2011. The forge processed almost 40 million pounds across the size during 2012 including grades in the stainless, nickel alloy, tool steel and titanium families. Forge production increased every quarter since startup through the third quarter of 2012. Activity was down in the fourth quarter. We completed installation of our fourth clam heat treat furnace in the fourth quarter and it is now operational as scheduled. In addition, we expect to earn Nadcap heat treat certification this quarter. Over the past year, we also achieved most of the critical industry certifications necessary for North Jackson, including AS9100 for the forge vacuum induction melting and vacuum-arc remelting, and both ISO 17025 and Nadcap accreditation for the Chem Lab. The final phase of the North Jackson ramp-up is underway. That’s the various customer approvals we have been working on. Although this can be a slow tedious process, we expect to see approvals by mid-year. Going forward, you can expect North Jackson to make an increasingly positive contribution to our results. A quick update on the Dunkirk union contract that was in negotiation at the time of our last call. As we announced on November 12, we did reach an agreement on a new five-year contract that maintains the flexible work rules and profit sharing incentives contained in prior agreements. Let me take a moment and talk about our end markets. Aerospace remained our largest market in the fourth quarter, represented 54% of our sales. That compares to 53% of sales in the third quarter of 2012 and 46% of sales in the fourth quarter of 2011. Our sales to aerospace decreased 21% sequentially and 10% from the fourth quarter of 2011, although there was a favorable shift towards higher value aerospace products in our fourth quarter 2012 sales mix. Aircraft build rates and backlogs continue to represent a substantial true-up rate for our metals. However, the supply channel inventory issues I mentioned earlier and also in our last call continue to play out during the balance of the fourth quarter. Despite these inventory issues, our sales to aerospace increased 21% for the full year 2012. Recent aerospace headlines have been dominated by Boeing’s Dreamliner battery issues. To-date there is not been an impact on the 787 production schedule or on our business. In addition, Boeing recently reported that the production ramp-ups for both the 737 and 777 remain on track. Production of the 737 has been successfully increased to 35 planes per month and Boeing said they are making investments to make that rate 38 in the 2013 second quarter and 42 per month in the first half of 2014. Production of the 777 also has increased to 8.3 per month or 100 airplanes per year. Meanwhile, Airbus confirmed that they plan to ramp-up production of the A330 to 10 aircraft per month in the second quarter of this year. To accelerate our future growth trajectory in aerospace, we are fully focused on obtaining customer approvals for North Jackson, including from leading prime and first year aerospace manufacturers. These customers want us to succeed as quickly as possible in line with our multi source strategies, as do our service center and forger customers who also supply these OEMs. Petrochemical market sales, which are mainly oil and gas related, represented 16% of our fourth quarter sales compared with 19% of sales in the 2012 third quarter and 21% in the fourth quarter of 2011. Our petrochemical sales were down 36% sequentially and 42% from the fourth quarter of 2011. In addition to supply chain inventory management, a drop off in the land rig count in North America created some specific headwinds in the fourth quarter. However, offshore drilling in the Gulf of Mexico has rebounded. Schlumberger, Baker Hughes and Halliburton also have growth in international operations in the quarter, and E&P spending is forecasted to increase in 2013, all which point to eventual recovery and demand this year. Power Generation represented 12% of fourth quarter sales compared with 14% of sales in the 2012 third quarter and 18% in the 2011 fourth quarter. Power generation market sales were down 29% sequentially and 49% from the fourth quarter of 2011. Quick Turn Maintenance business was mainly sidelined in the quarter and there were no signs of pick up in the new gas turbine demand. In fact, GE reported that their orders for new gas turbines were down in the fourth quarter. In total, GE had orders for 108 gas turbines in 2012 versus 134 in 2011. Even this lower level will create opportunities in 2013 but maintenance and overhaul will likely be the main driver of demand and also of our power gen sales in 2013. Service Center Plate sales increased to 10% of our fourth quarter sales compared with 8% in both the 2012 third quarter and fourth quarter of 2011. Sales dollars were essentially level with both prior periods. The news from the automakers continue to be positive as it has been all year. For example, Ford reported that its U.S. sales in December was the best since 2006. Likewise, GM reported that their U.S. sales in December were the highest in five years. However, in the off-road market, Caterpillar reported lower fourth quarter results and lower production levels as their dealers work to reduce their inventories in the quarter. We expect 2013 to be on a par with 2012 subject to the normal quarterly fluctuations in this market. Let me turn the call over to Dough for his financial report.

[Doug McSorley:]

Thank you, Denny. As Denny said our fourth quarter sales were $47.2 million. That’s a decrease of $15 million or 24.2% from the fourth quarter of 2011 on a 24.9% decrease in shipments. Sequentially, sales decreased by $14.2 million or 23.2% on a 23.6% decrease in shipments. Our gross margin in the fourth quarter was $6 million, a decrease of $5.9 million from the same quarter of 2011. Sequentially, it was lower by $3.4 million or 36.1% than the gross margin recorded in the third quarter of 2012. As a percentage of sales, the gross margin was 12.7% compared with 19.1% in the fourth quarter of 2011 and 15.2% in the 2012 third quarter. The drop in gross margin is primarily due to reduced volume and lower production levels. Cost directly associated with the North Jackson operation and reduced operating rates reflect increased expense of $800,000 in the fourth quarter of 2012. Selling, general and administrative expense for the fourth quarter was $4.2 million, a decrease of $676,000 or 13.8% from the fourth quarter of 2011 and $470,000 or 10% below the 2012 third quarter. The decreased costs are primarily due to reduced compensation and employee related cost. As a percentage of sales, SG&A expense was 8.9% in 2012 fourth quarter versus 7.9% in the same quarter last year and 7.6% in the third quarter of 2012. Operating income was $1.8 million in the fourth quarter of 2012, a decrease of $5.3 million from the fourth quarter of 2011 and down $2.9 million from the 2012 third quarter. The operating margin was 3.7% in the 2012 fourth quarter compared with a 11.3% in the 2011 fourth quarter and 7.6% in the third quarter of 2012. Operating income in the 2012 fourth quarter included $1.3 million of expense for North Jackson. Before including North Jackson related expenses and income for each period, our operating margin was 6.8% of sales in the fourth quarter of 2012 compared with 12.8% in the fourth quarter of 2011, an 8.9% in the third quarter of 2012. Our effective tax rate in the fourth quarter of 2012 was 4.8% after discrete tax benefits as compared to 32.7% in the third quarter. The benefit to our tax rate was due to reduced state tax rates and a receipt of a Pennsylvania R&D tax credit. Based on our current tax position, we expect that the effective rate next year to be 34.2%. Our net income for the fourth quarter of 2012 was $1.1 million or $0.16 per diluted share. This included operating expense for the North Jackson operation of $0.12 per diluted share and the benefit of reduced state tax rates of $0.04 per diluted share. In the fourth quarter of 2011, net income was $4.3 million or $0.59 per diluted share including $0.07 per diluted share of initial operating ramp up expenses for North Jackson. In the third quarter of 2012, net income was $2.7 million or $0.38 per diluted share including a total of $0.06 per share of operating income related to North Jackson. Turning to the balance sheet our managed working capital as of the end of 2012 fourth quarter which includes receivables and inventory les accounts payables were 58.1% of annualized sales compared with 35.3% in the fourth quarter of 2001 and 48% in the third quarter of 2012. The balance of $109.6 million was reduced to $8.1 million or 6.8% from the third quarter of 2012 levels. Capital expenditures for the fourth quarter were $4.3 million including $3 million for the North Jackson operation. At the end of the quarter our total debt was $106.7 million and our debt to total capitalization was 35%. Denny, I turn the call back to you for your final remarks.

[Denny Oates:]

Thanks Doug. In summary then, dropping industry activity levels directly impacted our results in the fourth quarter of 2012. While end market headwinds were a factor, market demand was also a sideline by heightened customer cautiousness in the face of fiscal and economic uncertainty. That led most of our customers whether forgers, service centers or re-rollers to carefully manage and, in most cases, reduce their inventories. Thus far in 2013 they’re remaining cautious. While we have seen some pick up in order entry since the beginning of the year with considerable improvement thus far in comparison to the fourth quarter, order entry are still well below first quarter of last year. Remember that 2012 first quarter was an especially strong quarter for us. Until see something stronger confirmation about inventories coming into balance in the supply chains, we think it is prudent to expect sequential recovery in our sales to progress slowly as we move through the first half of 2013 and then pick up momentum in the second half of the year. In the meantime, we are pressing hard to moving forward in executing our plan to fully realize the new capabilities we have added in North Jackson. That plan includes fully leveraging the strength and capabilities of our Bridgeville, Titusville and Dunkirk facilities in combination with North Jackson to drive additional profitable growth. It also includes increasing our market share through best-in -class customer service and through expanding the range of new products we can offer. With our progress in North Jackson we are already moving up the value chain with more technically advanced alloys. Completion of the customer approval process is a critical next step in our plan for unlocking the potential North Jackson to transform our business. Our focus on that objective remains relentless. Achieving that objective combined with a return to more normal business conditions will put us firmly on track to accelerate our growth and build substantial shareholder value in line with our since the beginning. That ends our formal remarks. I’ll now look forward to answering some of your questions.

[Operator:]

Thank you. (Operator Instructions). Our first question comes from Michael Gallo from C. L. King.

[Michael Gallo:]

Couple of questions just around what you see in terms of inventory in the supply chain. Obviously, GE had some fairly cautious comments on power gen in the turbine market. I was wondering what you see in terms of inventory in power gen? Is there still some de-stocking you think have to occur this year based on the fall off in turbine orders? And then also, are we at the point where aerospace is de-stocked enough that we should just track demand going forward or are customers starting to restock or is there still further de-stocking to go? Thank you.

[Denny Oates:]

Generally speaking that our customers are telling us they need the first quarter to get back into balance. So, most of them that I have talked to in the last two or three weeks have said give us in March you will start to see some pickup. That's generally speaking. As you look at it market-by-market, Mike, I think aerospace is closer to being in balance. When I look at our bookings that have picked up most of those are aerospace. I would say power gen still has some liquidation of inventories to go and they would be number two, and then oil and gas to break it down by market. So, overall I think, there is still some room to go to reduce, but I think aerospace is closer than any other markets to being in balance based upon our customer base, and that's somewhat confirmed by our order entry.

[Michael Gallo:]

Second question I have is just on Patriot. It sounds like it continues to move along. Obviously, the number of tons came down a little bit on the forge of the fourth quarter, but I was wondering where you stand in terms of starting to see measurable increases in VIM and VAR shipments? Is a lot of that still off to the second half or is it still sort of gradual customer approvals and sort of small loss in going through that process? When do you expect that to really kick in a meaningful way in terms of VIM and VAR shipments?

[Denny Oates:]

Well, if you look at VIM shipments, what we've said consistently is as we move through the quarter-by-quarter in 2012 we will start to see some revenues in the third and fourth quarters. And if you look in the fourth quarter vacuum induction melted product shipments totaled about $3.2 million in the fourth quarter, not a big number but that's very much where we said we would be. As you look at 2013, we would expect that to accelerate rapidly as we get customer approvals. We expect those customer approvals to start rolling in here as we exit the first quarter, get into the second quarter and by mid year have some meaningful approvals that we can sell from in the second half of the year. So, you will see acceleration in that in the second half.

[Michael Gallo:]

And then, final question, I mean, I don't know if you can break it down, but how much of the revenue in the fourth quarter was at Patriot? What was the backlog related -- how much of the backlog was related to the Patriot at the end of the year?

[Denny Oates:]

We really cannot back that out because essentially, we are using that facility. It has become part and parcel of our manufacturing system. As many of you know, we disclosed of SEC documents our intention to go to a single segment reporting because it is so intertwined. So, business at Bridgeville used to get, which used to go to a third party forger now stays in house and goes to North Jackson. So, what happens to that and as I try to answer your question, does that become a North Jackson sale or is that a Bridgeville sale. It is business we would have had to a third party but it's a cost reduction. So, we really --

[Michael Gallo:]

All right. I'm just trying to get a feel for where we have Patriot as on the revenue side relative to the kind of way you thought it would be at this point?

[Denny Oates:]

I think, it is on the VIM side its tracking along just about where we though it would be. We start to see some revenues come in as we exited 2012. We see a build-up each quarter of 2013 as we got these approvals. And we are working very hard on the approvals. There isn't a week that goes by and there isn't customer in North Jackson it seems doing audit work. And also, in Bridgeville, in Dunkirk for that matter because many of them are using products that are going to touch North Jackson but be stared in Bridgeville and finished up in Dunkirk. So, there is a tremendous amount of activity right now working with our customers to get those approvals.

[Operator:]

Thank you. Our next question comes from Dan Whalen from Topeka Capital Markets.

[Dan Whalen:]

Just I may have missed this. But just in terms of ramp-up costs for the first quarter I mean, are those pretty much out of the way now or should we factor some more into the first quarter, for North Jackson?

[Doug McSorley:]

Based on the current or activity Dan we would expect that those ramp-up cost to diminish as our production rates improve.

[Dan Whalen:]

So, for first quarter it should be half of it what it was for the first, just order magnitude here. I mean, we saw a $0.12 in the fourth quarter I mean, should we cut that half for the first quarter?

[Doug McSorley:]

It would be in that range Dan.

[Dan Whalen:]

And then, a bit longer term out. In terms of as we work for it is getting those average selling price per pounds up to the 20% of the portfolio so to speak. I mean, when do we think we can kind of reach those levels? Is that kind of 2014, 2015? When should we be targeting that?

[Denny Oates:]

Well, 2012 was the year basically to build, get everything commissioned, operational, prove out the technology, trained that’s behind us. 2013 is really the year to start getting these approvals, to getting out in the market working with the various customers that the OEMs will direct us too various forgers and so forth that will actually be our customers. So, to see the real meaningful numbers from that the vacuum induction melting produced product you are talking 2014 and 2015.

[Dan Whalen:]

Okay. So, probably starting second half of 2014, first half of 2015 is maybe a fair way to look at it?

[Denny Oates:]

I would like to say it’s faster than that. We should see some meaningful improvement in the second half of 2013 as we get approvals.

[Dan Whalen:]

Great, great so --

[Denny Oates:]

And many of these approvals will require - you will start to see the sales from these approvals beginning January of 2014.

[Dan Whalen:]

Great. So that kind of --

[Denny Oates:]

It takes a while for companies to transition supply and so forth.

[Dan Whalen:]

All right. So that’s kind of your inflection here than so to speak.

[Denny Oates:]

Yes.

[Operator:]

Thank you. Our next question comes from Lloyd O'Carroll from Davenport & Co.

[Lloyd O'Carroll:]

What was your average monthly order rate in Q4?

[Denny Oates:]

Sales or bookings you are talking about Lloyd?

[Lloyd O'Carroll:]

Bookings, bookings, orders?

[Denny Oates:]

It’s like $9 million, its 40%. We are up 40% in the first quarter. So it’s about $9 million or $10 million per month on average in the fourth quarter.

[Lloyd O'Carroll:]

Okay. So, January it was $13 million, $14 million so we are up meaningfully but way below where you were last year then?

[Denny Oates:]

Yeah. Last year in the month of January, our bookings were in the range of $25 million, $26 million.

[Lloyd O'Carroll:]

Okay. So, the worst is over we hope fingers crossed.

[Denny Oates:]

That’s the way we are looking at it based upon what we are seeing. All right, it’s very hard to sit here for three and a half weeks but basically maybe a little more than that in the month of January and say that’s a trend right but clearly activity level in the first three or four weeks of 2013 are better in terms of incoming business as compared to the fourth quarter.

[Lloyd O'Carroll:]

Okay. And you said that your customers are telling you that March might be where things begin to meaningfully improve from here?

[Denny Oates:]

Yeah, generally speaking, the conversations goes something like we still have some things to do on inventory. We feel we will be okay by March but that doesn’t mean we are not going to be buying anything in the first quarter.

[Lloyd O'Carroll:]

Right.

[Denny Oates:]

Which tells me they are starting to see some holes in their inventory, which indicates that they have got to be getting close to being in balance.

[Lloyd O'Carroll:]

Okay. Your re-roller customer in what end markets in your [kit] being used by customer matrix where is that - how does that get allocated to end use markets. What did they do with it?

[Denny Oates:]

Well we look at the end use market basically by the grade of metal that we are supplying. So, I would split that probably three quarters aerospace and 25% oil and gas. We have got more than one re -- I think you said one re-roller customer. We have more than one re-roller customer.

[Lloyd O'Carroll:]

Yeah. Yeah.

[Denny Oates:]

Okay.

[Lloyd O'Carroll:]

Sure. Yeah one big one and then some others?

[Denny Oates:]

Well, the others think they are just as big as the other ones. So, I will leave that up to them to talk about.

[Lloyd O'Carroll:]

Okay. Orders, how about, bookings and pounds in Q4 in January if you have that handy?

[Denny Oates:]

Yeah running towards $11 million. Hang on one second versus (inaudible) average in the fourth quarter was £7.7 million a month and we are trending towards the £11 in January.

[Lloyd O'Carroll:]

Okay. I think that’s it for now. Thank you.

[Denny Oates:]

That’s pounds now Lloyd, right, okay?

[Lloyd O'Carroll:]

Yeah, pounds, yeah, not Dirhams.

[Operator:]

Thank you. Our next question comes from Phil Gibbs from KeyBanc Capital?

[Phil Gibbs:]

Can you here me okay?

[Denny Oates:]

Hi, Phil, yeah.

[Doug McSorley:]

Hi, Phil. We hear you now.

[Phil Gibbs:]

Just my question is fairly general I am just curious why what type of concerns your customers may have in this market. I mean, I know that there is some clear inventory management issues but I guess I am just surprised in a market like aerospace that even the decline in that business has been submarket given the growth that we are seeing right now. So, anything else that you can point to as far as why they maybe cautious and you know, and again, I guess, I am just surprised that they are trying to manage inventories aggressively right now?

[Denny Oates:]

The general view a lot of people have long memories and they remember 2009 very clearly when things dropped off the cliff so to speak in late 2008 and we had a year plus of very tough times because everybody had to liquidate an awful lot of inventory. The concern that customer generally voice to me is that they look at 2013 they think things are going to get better certainly the dynamics in the market would suggest they get better but they are very concerned about things going on Washington whether that can have a depressing effect and they don’t want to get stuck with a lot of inventory. And they are comforted by the fact that lead times at the mill level have become very short. So, there is really no need to place a lot of orders, but you can get something in 4 weeks, 8 weeks, 12 weeks; whereas a year ago it might have been double that amount of time. So, that's a general psyche as I see it. No one has said to me in the market they see if you want to talk about aerospace, aerospace declining. The only issue out there right now, is the question mark, is the whole -- this whole Dreamliner thing which, there is a lot of chatter about but there has been no impact from it at this point.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from Jon Evans from Edmunds White Partners.

[Jon Evans:]

Can you just you alluded to the Dreamliner I know you don’t have a tremendous amount of insight into kind of the end use of the product. But is the 787 essentially, if it was grounded or anything would that have any major negative ramifications for you or I assume that you are not that big on that program is that fair?

[Denny Oates:]

We can't you give you an exact number. Certainly the grades of metal that we make are used on the Dreamliner. They are used on all the commercial airliners. So, I just can't tell you, x-number of pounds of our product goes to this plane versus that plane because of the channels our product goes through. That said generally speaking, in the metals business the view is that Boeing has an issue they need to resolve it. If they resolve it the next six to eight weeks, it should have no effect whatsoever on the metal supply chain. If it becomes a major issue and production gets slowed or stopped that could have a depressing effect across the board of the metal supply chain.

[Jon Evans:]

Okay. And then may I just ask you. So if you kept this, this kind of $13 million, $14 million a quarter that gets you to you know basically an order intake of about $42 million to $45 million in the quarter, your back log was 51. So, should revenues for the first quarter kind of be where they are in the fourth quarter and then they ramp from there or how should we think about Q1?

[Denny Oates:]

Yeah I think Q1; you can look at the third quarter and get an idea of what the first quarter is going to be like. It's not going to be a significant rise. I would emphasize on the bookings numbers. Remember we also surcharge products. So, that's not, they are not equivalent numbers when you look at our sales and bookings. We don’t know what the surcharge is going to be.

[Operator:]

Thank you. Our next question comes from Gregory Macosko from Lord Abbett.

[Denny Oates:]

Gregory.

[Gregory Macosko:]

With your conversation regarding the ramp-up and the approvals that you are working on if you were just to look out into the marketplace, how many potential approvals could you get for the VIM - for the VIM in North Jackson and how many are you talking to just to give us a feeling of where we are kind of in that arena?

[Denny Oates:]

We are talking about -- I'm doing some quick arithmetic in my head about seven or eight specific customers.

[Gregory Macosko:]

That or is kind of the reasonable but the total potential customers that are out there that you could serve ultimately?

[Denny Oates:]

There is more than that. But these are customers who deal in the products that we want to begin manufacturing. So, I am not saying that's the entire universe no. And I am also don't interpret that as they are the only customers we would be selling product to. There is other opportunities out there is well. But these would be the folks would be the meat and potatoes of what we want to sell, products we want to sell, and the markets we want to serve, and the customers within those markets.

[Gregory Macosko:]

Okay. And are you talking -- are you in approvals with all of them or how many are you in approval with?

[Denny Oates:]

Seven or eight of them.

[Gregory Macosko:]

Okay. So, you are in discussions for approval with all of the meat and potatoes of this market?

[Denny Oates:]

What we want. There are some customers who are not potential customers three or four years down the road that we are not talking too. But you can't deal with everybody at the same time. So, we have looked at this very carefully about what products we feel there is opportunities in we want to pursue those products and who are the folks that are big in those products and that's who we will deal with.

[Operator:]

Thank you. (Operator Instructions). I am showing no one in queue at this time. I would like to hand the conference over to Mr. Oates for concluding remarks.

[Denny Oates:]

Okay. Thanks again for joining us today everyone. The second half of 2012 was the most challenging period we have had really since 2009. However, we move forward in the continued ramp-up of North Jackson and in executing our plan to achieve future growth and build shareholder value. We are looking forward to updating you on our further progress on our next call. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect. And have a wonderful day.