June Filingeri - CommPartners Denny Oates - President and CEO Mike Bornak - VP, Finance and CFO.

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

Good day ladies and gentlemen and welcome to your Universal Stainless Third Quarter 2014 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 follow at that time. (Operator Instructions)]. As a reminder this conference is being recorded.

I'd like to now hand the call over to Ms. June Filingeri. .

Thank you, Roland. Good morning everyone, this is June Filingeri of CommPartners, and I'd also like to welcome you to the Universal Stainless conference call. We are here to discuss the Company’s third quarter 2014 results, which were 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. The conference coordinator 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'd 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 here today. As we reported this morning, our sales for the third quarter of 2014 advanced 3% sequentially and 11% year-over-year to reach $53.6 million, the highest level since the third quarter of 2012.

Strong aerospace and total steel plate sales were the main drivers in the third quarter, and more than offset somewhat lower power generation in oil and gas sales. I'm pleased to report that order entry picked up in both these markets in the month of September.

Our gross margin remained at a two-year high of 16.1% of sales, matching the strong level we achieved in the second quarter of 2014. Operating income of $3.1 million, net income of $1.4 million and earnings per share of $0.20 were also in line with our second quarter results.

A solid pickup in bookings in September brought our quarter-end backlog to $61 million, also a match to our backlog at the end of the second quarter. In fact our bookings in September were the second highest this year and the second highest since early 2012. Our premium product sales represented 6% of sales in the third quarter and 7% year-to-date.

As I mentioned last time, we expect premium melt sales to ultimately reach our plan of 20% to 25% of our total sales but expected to be spiky along the way. It is worth noting that our premium melt shop was very active in the third quarter with vacuum induction melting up 30% sequentially and more than triple 2013's third quarter.

Additionally the 5% base price increase on remelted grades that went into effect with new orders on April 1 is holding. This quarter I mentioned the operational progress we achieved including improved deals and lower scrap rates. Those improvements remained intact in the third quarter, even with somewhat lower planned activity levels.

Our Dunkirk facility shipped at a rate 20% higher than the third quarter of 2013 reflecting our planned efforts to sell more finished high margin product. Additionally, our Dunkirk team did a great job opening up bottlenecks which will serve us well as growth continues into 2015.

We completed a $2.2 million capital project on our hot rolling mill in Bridgeville, installing state-of-the-art controls for much improved reliability and to serve as a foundation for future improvement programs to enhance product quality and lower costs.

Normally the third quarter is a seasonal element to it, leading to softer sales, bookings and plant activity levels. This year we benefited from sequential sales improvement, reasonably healthy bookings and cost improvements that more than offset somewhat lower plant activity levels, primarily in our air melting operations.

Since the beginning of the fourth quarter, we have all witnessed geopolitical crisis, stock market volatility and significant drops in the price of oil and major commodities such as nickel. In fact nickel, when I checked it early this morning was trading around $7.07 a pound which is down some 20% from the May high of $8.82 a pound.

There's a laundry list of causes for that decline, including higher supplies of nickel and nickel pig in China, a less than expected impact from Indonesia's ban on nickel ore exports and record aluminum inventories among other issues. All that combined to quickly shift market expectations from a nickel deficit globally this year to a surplus.

However we anticipate the move to a deficit position will take longer than originally expected but will occur in 2015. In the meantime, we are staying extremely close to our customers to assess any short-term impact of these issues on their plants for the fourth quarter or the first quarter of 2015. Our bookings thus far in October have been solid.

As mentioned in today's release, our customers continue to expect 2015 to be a better year than 2014, and as evident in our results, 2014 year-to-date has been better than 2013. Let me turn to our end markets.

Aerospace remains our largest market in the third quarter, moving to 60% of total sales, compared with 58% of sales in the 2014 second quarter and 59% of sales in the third quarter of 2013. Our aerospace sales were up 6% sequentially and a 12% increase in tons shipped. They're up 11% from the third quarter of 2013 on 6% higher shipments.

Boeing has continued to deliver positive news in the third quarter, adding to the continued robust outlook for commercial aerospace demand.

In their earnings reported last week, they confirmed their planned production rate increases over the remainder of the decade based on continued strong growth in the commercial airplane market and their record backlog of more than 5500 aircraft, which they noted represents more than seven years of production at the current production rate.

Earlier this month Boeing announced another step up in 737 production to 52 per month by 2018. That’s up from the current rate of 42 per month and the previously announced increased to 47 in 2017.

They also plan to increase production of the 787 from today’s 10 per month to a previously announced rate 12 month in 2016 and up to 14 per month by the end of the decade. Production of 767 is scheduled to double to two per month in 2016.

As for the engine manufacturers, Rolls Royce recently reaffirmed its guidance of 2% to 5% civil aerospace revenue growth in ‘14. GE reported 3.8 billion of new orders for the GE GEnx engine, which was designed for the Boeing-777 and $1.3 billion in new orders for the CFM LEAP engine, which will power next generation narrow bodies.

In total, their Aviation equipment orders were up 35% in the third quarter. United Technologies and their positive earnings reported the first flight of the Airbus A320neo with Pratt & Whitney's new turbofan engine. The news is also positive in the commercial aircraft spare parts market.

UTC said their orders for large commercial spares were up at Pratt & Whitney and commercial spares were up 11% at UTC’s aerospace systems. Meanwhile GE reported a 29% increase in spare parts orders in the third quarter. Taken together, the news in aerospace continues to be very positive.

Power generation remained our second largest market in the third quarter of 2014 at 11% of sales compared with 13% of sales in both the 2014 second quarter and the third quarter of 2013. It’s a very strong growth in the second quarter. Our power generation sales in the third quarter were lower by 13% sequentially and 22% lower volume.

Power gen sales were lower by 11% compared to the third quarter of 2013 30% lower shipments. The negative comps reflect fluctuations in quick-turn ingot sales for non-turbine applications. With regard to the new turbine business, the news from GE remains muted at best.

While GE plans to ship 105 gas turbines this year compared with 85 to 90 they previously planned, they’re expecting unit orders in 2014 to be in the range of 105 to 110 versus their earlier forecast of 125. They know that this is partly due to disruption in the Middle East, by also to the shift by some customers in the U.S.

to the new H class technology which will require re-permitting and hence can delay the orders. However, GE service orders were up 10% in the quarter, which is a good sign for our maintenance business. We continue to expect maintenance to be the main driver of our power gen sales for the foreseeable future.

As I mentioned earlier we saw a pickup in power generation orders in the month of September. Oil and gas remained to 10%. Our third quarter sales the same level both the second quarter 2014 and third quarter of 2013. Our oil and gas sales increased 5% sequentially a 2% decrease in volume.

They increased 2% from the 2013 third quarter last year on 34% lower volume. Debt convergence between year-over-year sales in shipments reflects the positive shift in product mix that we have seen this year, specifically with addition of nickel alloy business as I mentioned on the last call.

The recent drop in oil prices has got everyone’s attention, however the consensus we have heard thus far is the oil service measures including Baker Hughes, Schlumberger, and Halliburton are in the best position to withstand any disruptions.

In their third quarter report Baker Hughes forecast improved revenues in North America for the fourth quarter, in part due to the return of normal equity levels in the Gulf of Mexico. Schlumberger made the point that based on the strength of the U.S.

economy and ongoing efforts to stimulate and manage growth in Europe and China, they believe the slow but steady recovery in the world economy is intact. Halliburton said that it increased its dividend 20% last week because of their confidence and the strength of their long-term business outlook.

Of course from our standpoint to best measure the impact of lower oil prices on market outlook is what we hear directly from our customers. At this point their views are that we should not expect any short term impact of the recent drop in oil prices.

Heavy equipment market sales increased to 9% of sales in the third quarter of 2014 from 7% of sales in the 2014 second quarter. There were also 9% of sales in the third quarter of 2013. Third quarter 2014 sales were up 26% sequentially on the similar increase in volume. They’re up 12% from the third quarter of 2013 on 14% higher shipments.

New automotive model introductions and changeovers are continuing at an active pace which are positive for [indiscernible] as I've noted many times before. Based on our backlog and order entry, we expect to see continued strength through the remainder of the year. Now, let’s have Mike go through the financial review.

Mike?.

Thanks Denny. We continue to see an increase in demand for our products during the third quarter of 2014 as we posted net sales of $53.6 million, which is an increase of $1.3 million or 3% compared to the second quarter of 2014 and 11% better than the third quarter of 2013.

Excluding our conversion sales and conversion pounds, we saw our average product selling price per pound increase to $3.01 in the third quarter of 2014, compared to $2.58 in the third quarter of 2013, an increase of 17%.

This increase in average selling price is being driven by a more favorable product mix, including higher re-melted products, the base price increase on the melted grades that became effective on new -- with new orders in April and higher surcharges compared to this time last year.

For the first nine months of 2014, net sales increased 9% to $152.6 million with premium products comprising 7% of net sales, which was 32% higher than the same 2013 period.

Looking at our gross margin, as Denny mentioned, our gross margin in the third quarter of 2014 was $8.6 million or 16.1% of the net sales, which is essentially the same as the second quarter of 2014 and well above the gross margin of $2.4 million or 5% of sales in the third quarter of 2013.

As a further comparison, our gross margin in the first quarter of 2014 was $6.1 million or 13% of net sales.

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

Our selling and general and administrative cost for the third quarter of 2014 were $5.5 million or 10.3% of net sales compared to $5.2 million or 9.9% of net sales in the second quarter of 2014 or an increase of approximately $300,000.

This increase was due primarily to recruitment fees that amount to approximately $200,000 to strengthen our management team for future growth as well as an accrual of $252,000 related to our variable incentive compensation plan. Our SG&A cost for the first nine months of 2014 were $1.5 million higher than the same nine month period in 2013.

The increase is primarily related to accrued cost of $1.3 million associated with our variable incentive compensation plan on increased profitability levels compared to 2013.

With our increased sales level, steady gross margins with slightly higher SG&A cost, we posted operating income of $3.1 million in the third quarter of 2014 or approximately the same level of operating income as the prior quarter, but substantially higher than the $2 million operating loss posted in the third quarter of 2013.

Our effective tax rate increased slightly to 35.7% in the third quarter of 2014, due to the effect of some discreet charges related to R&D tax credits, but we expect our fourth quarter tax rate to return to our second quarter rate of 34.4%. Turning now to the balance sheet and our managed working capital.

At the end of the third quarter of 2014, our managed working capital defined as accounts receivable plus net inventory minus accounts payable increased by $5.2 million to $106.6 million compared to $101.4 million at June 30, 2014.

Our net accounts receivable increased by approximately $1.6 million primarily due to September being our highest sales month of the year. Our third quarter 2014 inventory levels decreased by $2.4 million compared to the second quarter, due to the higher sales level and slightly lower manufacturing activity.

Our accounts payable in the third quarter of 2014 decreased by $6 million from the second quarter to $20.8 million, primarily due to the timing of vendor payments between the periods. Capital expenditures for the first nine months of 2014 were $6.1 million with $2.6 million incurred in the third quarter.

We originally anticipated spending between $4 million and $6 million in the third quarter, however we decided to push certain projects back into the fourth quarter. We now anticipate fourth quarter 2014 capital spending to be in the range of $3.5 million to $5.5 million and the full year level to be in a range of $9.6 million to $11.6 million.

Over the first nine months of 2014, our depreciation expense was $11.2 million. We anticipate full year depreciation expense of approximately $15 million. Moving to third quarter of 2014, we generated cash from operations of $3.8 million which was primarily used to reduce the accounts payable balance.

We ended the third quarter with debt-to-capitalization of 31.2%. That concludes my financial report, Denny I'll turn the call back over to you..

Thanks Mike. In summary, in the third quarter we overcame normal seasonality that were encountered to lower performance reported in the specialty metal space. Specifically our third quarter revenues increased 3% sequentially to reach their highest level in two years and we maintained our gross margin at 16.1% of sales, also a two year high.

Our operating income, net income and earnings per share also matched the seasonally stronger 2014 second quarter as did our backlog, which is up 52% from the third quarter of 2013. Actually our backlog is up 67% for the third quarter of 2013 if you adjust for a large customer who has since in-sourced all their requirements.

While the 2014 fourth quarter started with unexpected global volatility and a sharp decline in commodity prices, the outlook for our primary markets remains favorable. Our October bookings are tracking above monthly 2014 averages. We expect aerospace to continue as the main driver of our sales in the fourth quarter next year and beyond.

We're staying in close contact with our customers to gauge any short term impact from current market conditions. Thus far their optimism for 2015 remains unchanged.

We also remain focused on achieving further progress on our long term strategy and ceasing our market opportunities which continue to expand as we introduce new products and win new customers. We're ready to take the questions..

Thank you. (Operator Instructions). Our first question comes from the line of Michael Gallo from CL King. Your line is now open..

Question on the book, what was the absolute level of bookings for October, where you expect it to be, and then obviously there's been the big price decline in nickel as well as some commentary suggesting some of the service center inventories might be too high.

So would you expect to be able to maintain the level of bookings that you had in October or do we start to run into between the year-end guys managing inventory and decline in nickel prices that you might see orders fall off over the next couple of months. Thanks..

Okay. I mentioned in my comments Mike that our October bookings are tracking higher than our average. So we’re going to be in at $16 million, $17 million range although we haven’t closed that in the quarter at this point in time, right. And I would remind you they are dollars and that’s before any surcharges.

With regard to the nickel and the commodity issues, clearly our customers will see a reduction in their surcharges in the month of December.

I can’t point to any specific customer I talked to in the last few weeks that said we’re pushing our order book around, we’re changing our purchasing because of that decline anticipated in December but history would indicate that we should expect to see some kind of movement, deferring some shipments until the lower surcharges take effect and this does have the potential to amplify what happens at the end of the year.

That said we have on our books and scheduled to ship sales that are in the same range the third quarter of 2014 in the fourth quarter..

Okay, great.

And then just wanted to delve in on power gen, a little bit of pick up in the shipments in September, is there any reason to believe that maybe there is turn in the maintenance business there or it’s just been at a pretty low level obviously all year, and is that just the normal kind of volatility or bouncing around that we should kind of expect more of the same over the next one to two quarters..

On the power gen business, you've heard me describe that as lumpy and the reason why I describe it as lumpy over time is that portions of our business are ingot sales that go into non-turbine application.

So if you look at our second quarter of this year, you saw a nice bump in shipments and a corresponding decrease in shipments in the third quarter and that was all reflection of what was happening on the turbine business.

As far as the month of September goes, we did see a nice increase in our bookings -- our incoming level business and frankly I assume that for the end of the cooling season and the beginning of the heating season that kind of [indiscernible] time period when people are unbuttoning turbines, doing maintenance work and replenishing their inventories.

So it’s not unusual for us to see the little pick up in the fall in the power gen business.

Longer term I’m not seeing anything with regard to steady consistent improvement in the new turbine end, but on maintenance, when I look at the big players in the industry, they have double digit increases in their services business, which bodes well I think for our level of sales to the maintenance into that market..

Thank you. Our next question comes from the line of Dan Whalen from Topeka Capital Markets. Your line is now open..

Denny, did you say your fourth quarter sales are -- or are you kind of tracking comparable to the third quarter levels?.

I said we have -- on our books we have sales in that volume scheduled for the fourth quarter. The $1 million dollar question that Mike was asking is, what’s going to be the impact of nickel and what's implicit in that is the normal year-end window dressing as to how much customers will take.

But right now I guess we have that on our books scheduled for the fourth quarter..

Okay. And then secondarily, if you can appreciate -- the trend is going to lumpy in terms of getting that 20% to 25% by year end in the special area the premium side. Can you just maybe add a little bit more color? I think last quarter premium alloys were about 8% of revenue and this quarter is 6% or 7%.

How backend loaded are you envisioning that trajectory?.

I'd usually answer that by saying it’s so difficult to do that, just take a straight line and you can see that if you look at our 2014 performance Dan. In the second quarter for example, premium metal of vacuum induction melted products was up 73% sequentially and then it backed off in the third quarter somewhat. That’s what I mean by the spiking.

So you’ve got a big pop in the second quarter followed by a contraction in the third quarter. So clearly as we look at the end of 2015, there's going to be more of that backend loaded.

I will tell you upfront and probably pull the numbers somewhat out of the air but I think you’re talking about two thirds of that being somewhat backend loaded, that last couple of quarters of next year, second half of next year, as we build momentum gain traction and continue to get more approvals..

Thank you. (Operator Instructions) Our next question comes from the line of Phil Gibbs from KeyBanc Capital Markets. Your line is now open..

I missed a lot of it because I've been running around this morning, but in the oil and gas business, do you see any changes there positively or negatively? I think a lot of the calls that we've been on suggested that energy was fairly strong in the third quarter, maybe from an inbound standpoint, but what maybe do we see moving forward with some pressure on pricing or is it just too early to tell?.

Well, if you look at -- I guess the good news is everyone feels that their inventories are in good shape. So, we've talked about that destocking in oil and gas as compared to aerospace lagging somewhat, but it appears to me that inventories are in good shape. All I talk is about what's going to be the impact of the decrease in oil prices.

To a person all of our customers indicate they don't see a short term impact, but they also put a caveat on that, that as you get into 2015 with a decrease of that magnitude it is maintained, that they would expect to see some reduction in E&P budgets and therefore some reductions in their business, which I've got to interpret could meet some softness as we get into the second quarter, third quarter of next year from a demand standpoint.

From our standpoint, we continue to have some new products we're developing, which we will be marketing to that market in 2015. So even in the face of some clouds in the sky so to speak on oil and gas, that is clearly a market of opportunity for us in 2015, particularly the second half..

Okay. And I know you talked about some spikiness in the trend but moving in the right direction ultimately on the Vim.

Do you still anticipate by the end of next year being at a 20% to 25% as a percentage of sales into that market and how are customer approvals to commercialization moving along?.

Well, it's an aggressive bogey, but we're still committed to that target. So that would be the answer to the first part. As far as approvals, go it continues, the march continues. We -- in fact we had customers in here all day yesterday in our Bridgeville facility. They're out at North Jackson working on some further approvals.

So that process continues and we're basically earning our stripes so to speak with customers that have already approved us and to whom we are shipping product. I believe I announced that on Rolls Royce we would expect $4 million to $6 million in sales this year and we're tracking right towards the middle of that number.

So as I've described, this is a process of getting the approval and then as you start to ship products basically gaining your stripes and getting comfortable with each other and then working on expanding our share with each of these new customers. .

Okay.

And if they are existing customers -- with our expanded products, for those existing customers..

And as far as the SG&A, was there anything goofy in that relative to the second quarter? It looked like it's snuffed up a little bit. I know you pointed something out as far as placement fees.

I'm not really sure what that meant, but is this a level that we should be expecting moving forward?.

There was an increase in the accrual for our variable compensation plan which impacted the third quarter an increase and that's just due to performance and profitability. And the placement fees is simply the fact we're committed to having the best organization possible.

So where we can attract talent, we're going to go after that talent and the placement fees are really recruiting fees. So we have made some changes and added some capability to our Company over the course of the third quarter and that's what that -- those dollars were for. So that's going to happen from time-to-time.

We would not anticipate anything of that magnitude quarter in and quarter out. So it's not a new level to forecast from..

Thank you. (Operator Instructions). We have a follow up from Michael Gallo from CL King. Your line is now open..

Hi good morning Denny. Maybe I missed it but whatever [indiscernible] you talk much about was tool steel.

Can you give us an update on what you're seeing there?.

Bookings in September for tool steel were the highest of the year. Again ultimately that's fueled mostly by automotives in the off road business which continues to operate at a fairly healthy clip. Our expectation is the fourth quarter should be very similar to the third quarter..

Thank you and I'm showing no more questions in the queue at this time..

Okay, thanks again for joining us everyone. We appreciate your interest and support of Universal. We look at the third quarter as another transition quarter with some solid results and our usual downtime of the year. Fourth quarter has begun with some global volatility and a sharp decline in commodity prices.

Even so our customer's optimism for 2015 remains intact, as does the outlook for our primary markets. In any event we'll remain focused on executing our long term growth strategy and we'll look forward to updating you in the New Year. If I don’t talk to you, have a great holiday season. Thank you..

Thank you, ladies and gentlemen for your participation. This concludes the presentation, you may now disconnect..