June Filingeri – IR Denny Oates – Chairman, President and CEO Mike Bornak – VP-Finance and CFO Chris Zimmer – VP, Administration and General Counsel.

Michael Gallo – CL King Dan Whalen – Topeka Capital Markets Phil Gibbs – KeyBanc.

Good day ladies and gentlemen and welcome to the Universal Stainless Second Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference is being recorded.

I would like to introduce June Filingeri. Ma’am, you may now begin the conference..

Thank you, Marcus. Good morning everyone. This is June Filingeri of CommPartners, and I would also like to welcome you to the Universal Stainless conference call. We are here to discuss the company’s second quarter 2014 results reported this morning.

With us from management are Denny Oates, Chairman, President and Chief Executive Officer; Chris Zimmer, Executive Vice President and Chief Commercial Officer; Mike Bornak, Vice President of Finance and Chief Financial Officer and Paul McGrath, Vice President of Administration and General Counsel.

Before I turn the call over to management, let me quickly review procedures. After management has made formal remarks, we will take your questions. And Marcus, 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..

Thanks, June. Good morning everyone. Thanks for joining us today. As we reported this morning, our results for the second quarter 2014 continued to show marked improvement. To summarize, top-line growth was strong and included a meaningful level of premium allow product sales.

We realized a sizable step-up in our gross margin and operating income in dollars as a percentage of sales. Backlog also continued to grow even after the strong quarterly sales. At $61 million, before surcharges, is up 4% sequentially and 30% since December 2014.

Our net sales of $52.3 million in the second quarter increased 12% sequentially and 22% from the second quarter last year, reflecting double-digit growth across each of the primary end-markets of aerospace, power generation and oil and gas. Let me point out a few noteworthy items regarding sales.

You will recall, late last year we had a large customer decided to move production in-house, which historically amounted to 8% to 10% of Universal sales. Adjusting for this change, our second quarter sales actually increased 15% sequentially and 33% compared to the 2013 second quarter.

In the 2014 second quarter, premium alloy sales reached 8.1% of sales versus 5.8% of sales in the first quarter and 4.4% of sales in the second quarter last year. The recent addition of General Electric, Aviations, S-400 and S-1000 approvals for our laboratories and quality systems companywide reinforces our strong position in aerospace.

We’re now certified by three of the largest aircraft engine manufacturers in the world, GE, Pratt & Whitney and Rolls Royce. This is another major step forward in our plan to grow premium alloy products to 20% to 25% of our sales by the end of 2015.

The 5% base price increase on premium melted grades that went into effect in April had little impact on the second quarter. As we mentioned on the last call, its effect should be more fully evident beginning in the third quarter.

The strong improvement in our profitability in the second quarter of 2014 was driven by a solid manufacturing performance including improved yields, lower scrap rates, controlled spending and activity rates on par with the first quarter of 2014.

The favorable product mix as well as better matching and surcharges to raw material costs were also favorable contributors. As a result, our gross margin reached 16.1% of sales and our operating margin reached 6.2% of sales, the highest level since the second and third quarters of 2012 respectively.

Raw materials continued the increase which began late last year with nickel up 19% and molly up 46% during the quarter. The markets have settled down in recent weeks and we expect a sideways movement in raw materials and related surcharges as we go through the third quarter.

On the last two calls, we discussed unusual cost of about $600,000 pre-tax or weather related issues in the first quarter of 2014. Primarily related to increased natural gas prices. Unfortunately we did not experience any measurable softening in gas prices during the second quarter.

So, while gas remained a drag on earnings in Q2, we are seeing a downward trend in recent weeks. We completed a major two-week planned outage at our hard-rolling mill in Bridgeville designed to upgrade controls, ensure long-term reliability and provide the foundation for future enhancements. That capital investment will total about $2.4 million.

Looking at highlights of the second quarter 2014 balance sheet and cash flow, you will note that we have reduced bank debt about 14% over the last 12 months. However, we did report a slight increase in bank debt during the quarter to fund working capital needs associated with growing sales and backlogs.

Capital spending for the quarter was $2.2 million compared to quarterly depreciation of about $4 million. We continue to operate well within the covenants of our lending arrangements. Turning to our end-markets, aerospace remained our largest market in the second quarter at 58% of total sales.

That’s essentially in line with both the first quarter of 2014 and the second quarter a year ago. Our aerospace sales were up 13% sequentially on a 3% increase in tons shipped. They were up 21% from the 2013 second quarter or 13% higher tons.

Our bookings in aerospace remained strong to date and demand momentum appears to be building as airplane build rates ramp up and the aerospace after market activity recovers. The recent Farnborough Air Show earlier this month cornered a considerable amount of analyst commentary and news headlines.

Our takeaways from the show were generally very positive. There was a focus on the supply chain and our ability to meet demand given the record ramp-up of new aircraft engines and models that is currently underway. Those two models now include the A330 new engine option which Airbus announced at the show along with a host of new orders.

There was good news for Rolls Royce and the Airbus announcement given that their Trent 7000 engine was chosen exclusively for the A330 anyhow. In total Airbus reported more than $75 billion worth of new orders and commitments at Farnborough.

As expected, Boeing captured a smaller piece of the Farnborough pie with a total of $40 billion of orders and commitments. In an update in their earnings report last week, Boeing noted that they booked 264 net orders in the second quarter with another 282 airplane order added since the beginning of July.

That brought their backlog to over 5,200 airplanes which represents about seven years of production. GE came away from the Farnborough show with $36 billion of new orders. Those orders came from the Emirates, EZ Jet and American Airlines. There was a considerable discussion at the show about heightened activity in the aftermarket.

In the latest reports, GE reported a 16% increase in commercial spare part orders, Pratt & Whitney reported a 10% increase attributed and “the continued trend in heavy overhaul is going through their shops”.

Clearly the ongoing growth in passenger traffic and easing of destocking in the aerospace supply chain are contributing to this growth in demand. At the end of the day, most aerospace suppliers came away from Farnborough concluding the demand dynamics are very favorable currently and we can cut with that assessment.

Power generation remained our second largest market in the second quarter of 2014 at 13% sales which is also fairly consistent with 12% of sales in the 2014 first quarter and 11% of sales in the 2013 second quarter. Power Gen sales increased 21% sequentially on a 25% increase in volume.

They rose 45% from the second quarter last year on 34% higher shipments. Even with the strong increase in sales and volumes, the main factor in our growth was our maintenance business rather than new turbine builds. The news from GE continues to show only muted progress in new turbine demand.

GE reported adding 10 new turbine orders in the second quarter, while that was considerably below the 24 turbine orders they received in the second quarter a year ago, GE attributed the lower number to the timing of orders and confirmed their expectation of 125 gas turbine orders for the year.

GE also noted that their service orders rose 12% in the second quarter on strong demand for service and parts. We will continue to focus on winning quick-turn maintenance opportunities while positioning Universal for the inevitable recovery in new turbine activity.

Oil and gas sales represent a 10% of second quarter sales compared with 9% in the first quarter of 2014 and 10% of sales in the 2013 second quarter. Our oil and gas sales increased 27% sequentially or a less than 1% increase in volume. They increased 21% in the second quarter last year on 12% lower volume.

As the comparison suggests, we saw a positive shift in product mix in the quarter, specifically initial nickel alloy business. Market demand was strong overall amidst positive industry news.

All three of the leaders in oil service reported second quarter revenue growth including in North America as well as positive outlooks for the balance of the year. Schlumberger specifically noted strong offshore activity in the U.S.-Gulf. Offshore drilling is a major market for most of our grades of steel.

As we mentioned on the last call, our customers expect the second half of 2014 to be stronger than the first half of the year. Heavy equipment market sales were 7%, our second quarter sales compared to 8% of first quarter sales and 13% of sales in the second quarter of 2013.

Second quarter 2014 sales were down 7% sequentially on 9% lower volume and down 33% from the 2013 second quarter on a similar decline in volume. Our tool steel plate sales which represent the majority of the sales in this category do tend to be lumpy from quarter to quarter as most of you know.

Timing and higher imports were the main factors that reduced these sales in the second quarter. New automotive model introductions and changeovers are proceeding at an active pace, both of which are positive for our tool steel demand. Based on our backlog and recent order entry, we expect to see a pick up in the second half of the year.

Now, let’s have Mike give us the financial review.

Mike?.

Thanks Denny. We continue to see increased demand for our products during the second quarter of 2014 as we posted net sales of $52.3 million which is an increase of $5.6 million or 12.1% when compared to the first quarter of ‘14.

If we look at our primary end-markets, we saw double-digit growth in almost all our end-markets during the second quarter compared to the first quarter and our premium alloy products which are sold primarily with the aerospace increased approximately 58% over first quarter levels.

Looking at our gross margin, our gross margin in the second quarter of 2014 was $8.4 million or 16.1% of sales compared to $6.1 million or 13% of net sales in the first quarter, and 3.7% of net sales in the fourth quarter of 2013.

Our continued gross margin improvement over the last two quarters is primarily due to higher shipment volumes and production levels, better mix of products sold, improved yield and scrap rates as well as a better alignment of surcharges, the raw material cost as Denny noted.

Our selling, general and administrative costs for the second quarter of 2014 were $5.2 million or an increase of approximately $500,000 from the first quarter of 2014, primarily due to employee related costs. However, as a percentage of sales, SG&A remained flat at 10% of net sales when compared to the first quarter.

As a result of our increased sales levels and improved gross margins, we posted operating income of $3.2 million in the second quarter of 2014 were more than double the first quarter of 2014 operating income of $1.4 million.

Our effective tax rate returned to a more normalized rate of 34.4% in the second quarter, as we incurred two state-tax charges in the first quarter of 2014 that approximated $900,000 in secured or effective tax rate. We anticipate our effective tax rate to remain at our second quarter level for the remainder of 2014.

Now, turning to the balance sheet and our working capital, on June 30, 2014, our managed working capital defined as accounts receivable plus net inventory minus accounts payable increased by almost $9 million to $101.4 million compared to $92.5 million at March 31, 2014.

Our net accounts receivable increased approximately $4 million due primarily to the 12% higher sales levels in the second quarter.

And our second quarter total inventory levels rose by almost $5 million as we strategically increased inventory on certain grades of material to position ourselves for increased customer activity and sales level in the second half of 2014. Our accounts payable levels remain flat in the second quarter compared to first quarter levels.

Capital expenditures for the first half of 2014 were $3.5 million. We anticipate increase in your discretionary capital spending in the last half of 2014 as we deferred certain projects until business conditions improved.

We anticipate third quarter capital spending to be in the range of $4 million to $6 million and full year levels to be in the range of $10 million to $12 million. Over the first half of 2014, our depreciation expense was $7.4 million, and we anticipate full year depreciation expense of approximately $15 million.

During the second quarter of 2014, our debt levels increased by approximately $3.7 million from the end of the first quarter primarily due to the timing of vendor payments as well as our investment and working capital to support increased sales and operating activities.

As Denny mentioned, we are complaint with all of our bank covenants as of the end of the second quarter and we do not foresee any bank covenant issues in the foreseeable future. With my financial report complete, I’ll turn the call back over to Denny..

Thanks Mike. So, in summary, our sales growth was strong in the second quarter across all our primary markets where momentum appears to be increasing with a ramp up of build rates and entity stocking and a more active way to market. The recent approval from GE Aviation reinforces our position in the aerospace and expands our opportunities.

We are continuing to press hard to gain additional customer approvals and introduce new products across our primary markets. The increase in our premium alloy sales in the second quarter contributed to a favorable product mix.

That mix in combination with further operational improvements, healthy activity levels and better managing our raw material costs and surcharges produced a strong step up in our profitability during the quarter.

We continue to invest in working capital to support current manufacturing levels along with increased selling activity and bookings in the second quarter. We are working well within our bank covenants and total debt has been reduced from last year as planned. We ended the second half of the year with a backlog of $61 million excluding surcharges.

That’s up over 30% so far this year. July books reflect seasonality that are running one third higher than they did in July of 2013. While world headlines continue to underscore global risk, our customers have not changed their views for a stronger second half.

At the same time, we remain focused on making further progress and executing on our long-term strategy and seizing our growing market opportunities. Let’s stop now and take your questions..

(Operator Instructions). And our first question comes from the line of Michael Gallo from CL King. Please proceed with your question..

Hi, good morning Mike, Denny, how is it going?.

Good Mike, how are you doing today?.

Good. Couple of questions. I guess question for Mike, nickel prices rose during the quarter kind of ended at the peak there around $9 recent peak.

How much did that help gross margins in the quarter? And I was wondering with the decline that we’ve seen in nickel off late, whether you think you can still maintain a 16% plus gross margin here in the third quarter?.

Mike, I don’t have an exact number on how much nickel actually helped the quarter. But I mean, we still intend to go in the next quarter at the gross margins where we had posted during the first quarter and that’s what we’re looking at and even improving on them even further..

Okay, great..

Just a quick point, some broader perspective if you think about the last couple of years, if you recall during 2012 and ‘13, we built a fair amount of inventory as we ramped up North Jackson test material and so forth. And as we move through 2013 well, the negatives, was we were flushing that out of the system.

And obviously nickel and other raw materials were – some of those were higher costs and those raw material costs started to go down over the course of last year, surcharges went down and we got pinched. And we’re seeing some kind of the opposite here as we go through the first six months of 2014.

And that seems to be stabilizing at this point in time..

Denny, when we look sort of Q1 to Q2, the backlog was relatively stable. The order entry was I’ll call it relatively stable, excluding the probably a little bit forward buying in March ahead of the price increases that you took.

Should we expect similar levels of shipments in Q3 to what we saw in Q2 or do you expect orders to improve which would drive a meaningful sequential up-tick?.

We’re still looking at a better second half than the first half. When we look at our backlog it’s at $61 million. Again, going back to last few years, if you recall we talk about an early summer slowdown, we did not see any of that this year.

And as we sit here now with July essentially done, as I mentioned in my prepared remarks, we’re seeing some seasonality, say it another way, bookings in July are little bit lower than they’ve been in the last few months. But they are well ahead of where they were in 2013 and 2012.

So, we’re still in the opinion that we’re looking at it as well as unusual years, we have a good shot at having a better second half than the first half..

Right. If I guess, just as we look at the third quarter, fourth quarter obviously you always get into, that was a service center inventory considerations.

But I guess Q3 versus Q2, would you expect a sequential increase and do you expect the second half overall to be better?.

Right now I would expect it to be positive, yes..

Okay, great. Thanks very much..

Our next question in the queue comes from the line of Dan Whalen – Topeka Capital Markets. Please proceed..

Great, thanks. Good morning guys..

How are you doing Dan?.

Good, good. Hi, just deposits as you mentioned as I get on the call consulate (ph) there. But you mentioned that premium product sales increased to 8% of total sales.

Can you update us with your latest thoughts in terms of where that number would be either year end or kind of your latest targets on that?.

Our plan as we fit see, continuing increases in our premium melt as we get approvals and as we continue to introduce new products into the marketplace. Utilizing North Jackson but also hitting a lot of our plants.

Our longer term trend is that basically to answer your question, I would draw a line from where we are today to the end of 2015, where our long-term target is at 20% to 25% of our sales be premium melted product..

Okay..

So, we’re 8% now, it’s up to each quarter we would expect to continue to see that rise. It will be a little spiky at different times – at different quarters between now and then I would suspect. So it’s not a straight line. Hopefully that gives you a sense for where our heads are..

Okay. So still kind of 20% to 25% basically..

Yes..

In the 2015.

So, you mentioned gas was still a little bit of a headwind in the quarter, but I think you mentioned in incremental $600,000?.

Well, the negative, the $600,000 was really what we had called out going into the year looking at the first quarter. And that was basically what we saw, so we hit that number. But last call we had said that we expected natural gas prices to decline with the warmer weather. My point today is that we did not see that reduction.

Our natural gas prices were essentially the same as they were in the first quarter. Our usage was down a little bit because it is warmer so we generally don’t use this much natural gas. But the pricing was still what I would characterize is a headwind or a drag on earnings.

As we sit here today, in the last three or four weeks we have started to see a decline in natural gas prices as we go into the third quarter..

Okay.

So it could be a little bit of a tailwind for you in the third quarter?.

It could be, yes. But just have to make sure that everybody understood that the improvement in margin was not due to fluctuation in natural gas prices, they stayed relatively flat at the high levels we incurred in the first quarter..

Got it. That’s a good point. And then, just lastly if I could, what are you trying to hearing in the heavy equipment market out there, just I guess customer sentiment or incremental color you can have.

You have on that in terms of when that may turn around a little bit?.

We still see that improving in the second half of the year. Let me ask Chris Zimmer address that one for you Dan..

Great. Thank you..

The markets that tend to drive that activity for us are largely automotive based. So with the mild changeovers there is positive activity that suggests the stronger second half of the year. Markets like mining, Caterpillar just recently came out and said that that continues to be a struggle for them.

But there is another other markets construction actually appliances are going to kitchens. But at the end of the day, it’s that automotive demand, model changeovers in particular is that we believe is going to drive us a better demand profile in the second half of the year for us..

Okay.

I mean, do you think yet to kind of – the flattish type numbers versus the 9% down this quarter?.

Yes, the product flows through distribution. So the demand from our standpoint, shipments tended to be up and down. But we do expect that trend to pick back up as we move into the third quarter here, rebuilding of inventories.

We are very vigilant about imports in this product line but still see opportunities for us to continue to bounce back in the second half of the year. So, I do expect to pick up from second to third quarter..

Okay. All right, great. Thanks for all the added color..

No problem..

(Operator Instructions). Our question in the queue comes from the line of Phil Gibbs from KeyBanc. Please proceed..

Good morning..

Hi Phil, how is it going?.

Okay.

I had, I just had this general thoughts on just looking for your general thoughts, excuse I mean the aerospace market as we move into the second half of this year and how you envision the cadence as we move into ‘15?.

Clearly activity level was picked up, I think destocking is largely behind us. And things are picking up, looking at an even better 2015 in my view. It is not an overheated market, it is not something that’s going crazy as we’ve seen in prior cycles where lead times are blowing out and raw materials are going through the roof.

It’s a much more disciplined type of recovery, this time around in my opinion. So, I look at that and say second half again should be better than what we saw in the first half. And I think we’re building towards an even better 2015, when you look at build rates, when you look at passenger miles.

And you look at what’s obviously going on in the overhaul markets, in the part sales. So we continue to be optimistic on our largest market, and we’re not looking at it getting overheated but continuing to improve quarter by quarter, subject to some of the seasonality you’ll see is Mike mentioned on the first quarter..

Okay, perfect.

And how do we think about the balance sheet and the networking capital moving in the back half or are we expecting net debt de-leveraging or should we think about the net debt as being relatively consistent through the year?.

I think still it would be relatively consistent through the balance of the year. As mentioned on our call, we’ll have some step-up in CapEx as well during the second half of the year..

What’s the – I’m sorry I just missed the part on the CapEx, what was the step-up relative to the first half?.

First half we spent about $3.5 million that we’re looking at about in a range of $10 million to $12 million for the full year but more or less back half loaded..

Okay.

And what growth projects are embedded in that and again, I’m sorry if I missed that?.

There are projects embedded there to upgrade our hot rolling capabilities to address some pinch-points in heat reading and some capability for atmosphere heat reading. They will be the two majors as we look in – going into 2015, we’re looking at some additional re-melting..

Okay. Thanks a lot. I appreciate it, Denny. Good luck..

Thank you..

(Operator Instructions). We are showing no further questions in the queue. At this time, I’d like to turn the call back over to Mr. Oates for closing remarks..

Okay Marcus, thank you. Thanks again for joining us today and your interest in Universal. The second quarter marked the quarter of substantive progress in transforming our company into a world-class supplier in advanced specialty metals for critical applications in growing markets. We’ll be looking forward to updating you on our progress in October.

In the meantime, have a great day and enjoy the rest of your summer..

Ladies and gentlemen, thank you for attending today’s conference. This does conclude today’s program. You may all disconnect. Have a wonderful day..