June Filingeri - CommPartners Denny Oates - President and CEO Chris Zimmer - Executive VP and CCO Mike Bornak - VP, Finance and CFO Paul McGrath - VP of Administration and General Counsel.

Michael Gallo - CL King Tyler Kenyon - Keybanc Capital Markets.

Good day ladies and gentlemen and welcome to your Universal Stainless Fourth 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 call is being recorded.

I would now like to turn the conference over to Ms. June Filingeri of CommPartners. Please begin..

All right, thank you Victoria. Good morning everyone, this is June Filingeri of CommPartners, and I also would like to welcome you to the Universal Stainless conference call. As Victoria said we are here to discuss the Company’s fourth quarter 2014 results, which we 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. Victoria 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 complete, I would now like to turn the call over to Denny Oates.

Denny, we are ready to begin..

Okay, thanks June. Good morning everyone and thanks for joining us here today. As we reported this morning, the fourth quarter of 2014 was a very solid quarter and capped [ph] the year recovery for Universal Stainless.

Our team overcame a typical year end slowdown to produce fourth quarter net sales of $53 million which were up 31% from the fourth quarter of 2013 and nearly matched the strong 2014 third quarter. In fact, our fourth quarter sales were the second highest in nine quarters.

Full year sales rose 14% from 2013; excluding the loss of a major customer late in 2013 our full year 2014 sales increased 24%.

Another fourth quarter highlight was our progress in moving to a higher sales, higher value sales mix reflected on our sales dollars per pound in the fourth quarter which were our highest ever despite the fall in surcharges associated with lower raw material prices.

We reported increased sales for our vacuum induction melted products which were up 8% [ph] sequentially, 26% from the fourth quarter of 2013 and up 30% for the full year. It also included a richer mix in our core products. We are targeting more growth in our higher value product sales in 2015 consistent with our long term strategy.

Our fourth quarter sales mix along with improved cost performance and yields contributed to our gross margin for the quarter of 16.8% of sales, the highest since the second quarter of 2012.

Margin improvement has been a major priority for us all year and a step up in the fourth quarter was achieved in the face of lower surcharges as nickel prices and other commodities have declined.

Net income for the fourth quarter of 2014 was $0.21 per diluted share excluding a tax benefit of $0.03 per share relating mainly to the reinstatement of the research and development tax credit.

Earnings per share for the full year was $0.66 excluding the fourth quarter tax benefit as well as the tax charge of $0.12 per share in the first quarter due to legislative changes, research and state income taxes. Cash flow from operations increased to $8.5 million in the fourth quarter, the highest level in 2014.

We reduced total debt by $3 million for the year while funding increased working capital requirements to support sales growth and higher capital spending. Our debt to total capitalization was 29.9% the lowest level since 2011 the year we acquired North Jackson. From an operational standpoint, progress was made on a number of fronts in 2014.

A high performance culture is essential to our strategy for growth. Over the past year we have deepened our management team with a continued emphasis on building the core competencies and leadership skills necessary to design, produce and reliably deliver increasingly sophisticated products to a very demanding market place.

New product introductions are essential to our move to higher value product mix. We added 11 new products in 2014 that’s in addition to the 11 new products introduced in 2013. One of our top priorities has been earning customer certifications and we added two in 2014 that are critical to our focus on aerospace.

We were recognized by Pratt & Whitney's with LCS approval in March, and S-400 and S-1000 approvals from GE Aviation in July, added to our previous certification for Rolls Royce that gave us certifications from three of the largest aircraft engine manufacturers.

Additionally, we have numerous source approvals from other mostly aerospace OEMs and developed methods of manufacturing which meet industry specifications for a range of other products to be introduced this year.

Our $11.2 million in capital expenditures in 2014 featured capital projects to add automation on our hot rolling mill in Bridgeville, de-bottle neck constrained operations, expand internal testing capabilities for new and core products and streamline product flow.

Our Dunkirk operations posted record shipments during the fourth quarter another sign of growing value added products. I was also pleased with our team’s effort to reduce scrap rates and improve yields by refining manufacturing processes and working collaboratively to reduce variation and manufacturing execution.

Let’s talk a little bit about the end markets. Aerospace remained our largest market in the fourth quarter of 2014, increasing the 61% of total sales compared with 60% of sales in the 2014 third quarter and 57% of sales in the fourth quarter of 2013.

While our aerospace sales were up less than 1% sequentially they reached $32.1 million, the highest level in nine quarters. Aerospace sales jumped 40% from the fourth quarter of 2013, while shipments increased 22% showing a much richer mix of products we shipped in the most recent quarter.

We’ve heard some comments of late on de-stocking in the aerospace channel; frankly we are not seeing much of it. The news from the airframe and engine manufacturers remains positive.

Boeing reported record commercial aircraft deliveries for 2014 along with record bookings which totalled 1432 net orders and brought their backlog to a record 5,789 airplanes. Boeing noted that the next generation 737 and 737 MAX accounted for 1100 of those new orders followed by 777 and 777X had nearly 300 orders.

While Boeing -- claimed record deliveries in 2014, Airbus won the category of new aircraft orders booking 1,456 net orders in 2014. That included 1,321 single-aisle airplanes and 135 wide bodies. In total, Airbus has a backlog of 6,386 aircrafts.

Last Friday, GE reported that their aviation equipment orders were up 80% at year-end including a 23% increase in orders for their GEnx engine with large orders from America and Air France. GE also noted that the LEAP engine is now on 79% of narrow body aircraft and their orders for commercial spare parts were up 37%.

The decline in oil prices has led to much discussion of its impact on future aircraft orders. In Boeing’s recent comment, they saw the glass is half full. They know that it’s the plus side of the cheaper oil is that it is and I’ll quote tail end for profitability of their customers as well as giving a boost to economies that would sustain jet demand.

In the meantime one of the drivers of aerospace business now and for the foreseeable future is the build rates of aircraft, current production rates and the rolling of higher production levels over the next few years appear to be firmly on track. The aftermarket is active as evidenced by GE spares orders up 37%.

Therefore oil related discussion is not withstanding we see our aerospace business on the right growth trajectory for 2015 and beyond. Power generation remained our second largest market in the fourth quarter of 2014 and 11% of sales in line with the 2014 third quarter and compared with 12% of sales in the fourth quarter of 2013.

Our power generation sales increased 2% sequentially and were up 16% from the fourth quarter of 2013, 17% [ph] and 3% lower volume respectively. At the risk of sounding like a broken record, new turbines are not yet a factor in our market. Our growth in power generation is driven by our maintenance business which is reasonably healthy.

The message from GE on their fourth quarter is in line with what we are seeing. They booked orders for 41 guest turbines in the fourth quarter which was flat with the fourth quarter of 2013 before the large order they received from Algeria late last year. Their service orders were up 9% and they expect service orders to grow in 2015.

Oil and gas sales were at 9% or fourth quarter sales compared with 10% of sales in the third quarter of 2014 and 8% of sales in the fourth quarter of 2013. Our oil and gas sales were 8% lower sequentially on 3% lower volume; however they were up 53% from the fourth quarter of 2013 on 6% higher volume.

If anyone needs a reminding that the oil and gas industry can be cyclical I guess we got that message loudly and clearly over the past few months. There is no doubt that the significant drop in oil is only beginning to play itself out. We heard a fairly consistent message from the oil service majors on their recent earnings call.

Their customers are ratcheting down capital budgets in tandem with falling oil prices. Conditions are expected to be influxed with the next several quarters until a new equilibrium is reached. Land rigs in North America are being especially hard hit. On the other hand drilling in the Gulf of Mexico where our products are used is faring somewhat better.

In fact, Baker Hughes made the point that of the three key deepwater basins they think the Gulf of Mexico could be the most stable. Each of the old service majors have successfully ridden through past cycles. [Indiscernible] said they are confident in their ability to outperform in any part of the cycle including current market conditions.

For our part, we are focussed on doing the same by staying close to our historical and new customers and by continuing to advance our portfolio of products. Heavy equipment market sales increased to 11% of sales in the fourth quarter of 2014 compared with 9% of sales in the 2014 third quarter and 11% of sales in the fourth quarter of 2013.

Heavy equipment sales in the 2014 fourth quarter were up 25% sequentially on a similar increase in volume. They increased 27% from the year ago fourth quarter on a 29% volume increase. The automakers all reported higher vehicle sales in the U.S in December contributing to their best year since 2006.

GM expects industry sales of light vehicles in 2015 to range from $60.5 to a level in 2014 upto $70 million. If they should hit $70 million, it will be the first time since 2001. Low interest rates, higher employment, recovery in home prices and while we guess lean prices are all positive factors supporting lot of demand.

To keep their sales momentum going, they are introducing what [Indiscernible] reported quote of flood and quote of new models. New models and change overs required new tooling for manufactures which as you know was good for tool steel demand. We are continuing to see that in our backlog.

Now, let’s have Mike give us a financial review for the quarter and the whole year 2014.

Mike?.

Thanks Denny. We continue to see an increase in demand for our products during the fourth quarter of 2014 as we posted the second highest quarterly sales level of $53 million despite normal year end seasonality. Our fourth quarter sales were in line with the previous two quarters of 2014 and 31% higher than the fourth quarter of 2013.

Excluding our conversion sales and conversion pounds shipped, we saw our average product selling price increase to $3.02 for the fourth quarter of 2014, compared to $2.48 in the fourth quarter of 2013, an increase of 21%. This increase in average selling price is primarily driven by a more favourable value added product mix.

For the full year of 2014, net sales increased approximately 14% to $205.6 million with premium products comprising approximately 7% of net sales. Our sales of premium products were 30% higher in 2014 than in 2013.

Now looking at our gross margin, as Denny mentioned, our gross margin in the fourth quarter of 2014 was $8.9 million or 16.8% of the net sales, the best performance of 2014.

This compares with a gross margin of $8.6 million or 16.1% of sales in the 2014 third quarter and a gross margin of $1.5 million or just 3% of net sales in the fourth quarter of 2013. The strong improvement was primarily driven by a favourable product mix, improved yields, higher operating levels and our management teams cost controlled efforts.

For the full year of 2014, our gross margin was 15.6% of sales were more than double our gross margin of 7.7% net sales reported in 2013. Again higher shipment volumes and production levels of better product mix sold improved yields and controlled spending all contributed to this major recovery in our gross margin during the year.

Our selling and general and administrative cost for the fourth quarter of 2014 were $5.8 million or 11% of net sales compared to $5.5 million or 10.3% of net sales in the third quarter of 2014. Our SG&A cost for the full year of 2014 were $21.1 million or 10.3% of net sales which is $3.2 million higher than the same period last year.

The increase is primarily related to accrued cost associated with our variable incentive compensation plan based on increased profitability levels compared to 2013 and administrative cost associated with our self insurance medical plan as we switch from a full premium plan to being self insured this year.

With our solid Q4 sales level, improved gross margins to slightly higher SG&A cost, we posted operating income of $3.1 million in the fourth quarter of 2014 or approximately the same level of operating income as the prior two quarters, but substantially improved from the $2.6 million operating loss posted in the fourth quarter of 2013.

For the full year of 2014 we posted an operating profit of $10.9 million versus an operating loss of $4 million last year. That’s an improvement of nearly $15 million in one year.

Our effective tax rate decreased to 24.5% for the fourth quarter of 2014 primarily due to the positive impact of the recently passed legislation extending R&D tax credits retroactively back to January 1st.

R&D tax credits have been a normal part of our quarterly tax provisions for years, however we called it out in the fourth quarter because of the impact it had in our effective tax rate for the quarter. While it is discrete for Q4, it is normal for the full year of 2014.

For the full year our effective tax rate was approximately 44% and included tax charges of $0.9 million or $0.12 per diluted share, did occurred in the first quarter of this year. Now if I turn to the balance sheet and our managed working capital.

At the end of the fourth quarter of 2014, our managed working capital defined its trade accounts receivable plus net inventory minus accounts payable decreased by $1.4 million to $104 million compared to $105.4 million at September 30.

Our net accounts receivable decreased approximately $4.5 million primarily due to strong collection efforts throughout the quarter and especially year end. Our fourth quarter 2014 total inventory levels increased by $7.2 million compared to the third quarter due to anticipated higher sales levels in the first quarter of 2015.

Our accounts payable for the fourth quarter of 2014 increased by $4.2 million from the third quarter of 2014 to $25 million primarily due to the timing of vendor payments between periods and increased fourth quarter capital spending.

Our capital expenditures for 2014 were $11.2 million with $5.1 million incurred in the fourth quarter which was in the range that we outlined in our last call. In 2013 we spend $11.8 million on capital expenditure.

We anticipate total 2015 capital spending to be in the range of $11 million to $15 million as our capital spending is discretionary in nature. Our depreciation expense in 2014 was $14.6 million and we anticipate depreciation expense in 2015 to be in the range of $15 to $16 million.

Going to fourth quarter of 2014, we generated cash from operations of $8.5 million which was primarily used for capital expenditures and debt reduction. We ended the fourth quarter with total debt-to-capitalization of 29.9%, compared to 31.4% at the end of 2013. That concludes my financial report. And Denny, I'll turn the call back over to you..

Okay, Mike. Thank you. In summary then, our fourth quarter was a solid quarter has been a year of strong recovery for Universal Stainless. Our team is leisure focused on execution and delivered a richer sales mix than ever before, improved cost performance, high yields, lower scrap rates, and as result, higher gross margins.

We also achieve several critical customer certifications and approvals primarily aerospace, our largest market. As we entered 2015, we have a solid backlog and improving end markets with the exception of oil and gas, which represents 8% to 10% of sales.

We feel recently developed relationships at an expanding product offering will partially mitigate the effects of any downturn in oil and gas activity. 2015 is an important year for our company. We’re looking forward to it and we’ll continue to relentless in pursuing our goal to move to higher value products, expand margins and build value.

Thanks a lot for your attention. Now we’re looking forward to taking your questions.

Operator?.

Thank you. [Operator Instructions] And first question comes from Michael Gallo of CL King. Your line is open..

Hi. Good morning..

How are you doing, Mike?.

Good. Couple of questions. Denny, it looks like the revenues have bounced around the $53 million for the last few quarters. Obviously backlogs also bounced around a steady level as well. Given in the normal seasonality you see usually Q4 comes down a little bit.

Would you expect to see an increase in overall revenue in Q1? Or would you expect that to continue to kind of be in that same range? I think it’s been $53 to $54 million for the last few quarters?.

As I look at where are bookings are in our backlog and if you look take a look at our movement in inventory during the fourth quarter, I think what it tells is we’re expecting our first quarter to see some improvement in sales. So we’re not looking for flat sale or decrease in sales in the first quarter..

Can you expect them up, I mean, would you expect them up meaningfully or you expect them to kind of uptick, okay. Second question I have is on oil and gas, I know it was still up in the fourth quarter, look like it was about 9% of sales.

I was wondering, how much of the backlog is in oil and gas? Any rough frame or expectation for what we should expect to see at oil and gas in 20115?.

Let me kick that to Chris Zimmer. Chris, you want to take that one..

Sure, yeah. Our backlog right now I would consider it is moving sideways. So our expectation is we move to the first part of 2015 and stability in oil and gas both with those existing customers and new opportunities that come on board as we expand our product offering.

So the visibility into the first part of 2015 based upon our current backlog is that we’re looking to move sideways for oil and gas..

Okay. Great. And then final question, obviously nickel has come down quite a bit here over the couple months. I was wondering if you can give us any context around what kind of bookings you saw on January..

Chris, you want to take that one..

Yes. I think that – while customers are vigilant about what’s going on with nickel and the impact that has on surcharges, large feedback particularly from our service center customers is that they’re buying to demand.

They do typically moderate inventory levels at the end of the year, which is one of the drivers for a strong first quarter, but when we look at how they buy based upon the nickel patterns, there is vigilance, there is concern about what’s going to happen.

But general we see them buying to demand, so we don’t necessarily see any major change in buying habits due to what nickel has been doing recently..

And in terms of just any context around what you saw in terms of the bookings for January? Should we see – have you seen a sequentially step behind and we normally see that coming out of the fourth, but any context you can put around that?.

Yes. I’d say that we’re still in the January bookings that will continue and remain at the same strong fourth quarter levels that we had, generally moving sideways with the modest uptick..

All right. Okay. Thanks very much..

And I would add to that – been a continuing improvement in mix..

Thank you. The next question is from Tyler Kenyon of Keybanc Capital Markets. Your line is open..

Hey, good morning..

Hey, Tyler, how are you doing today?.

Good, good.

So I guess just kind of assuming we’re in a stable nickel price environment as we move forward here and maybe taking into account some obviously expected oil and gas weakness, where do you envision gross margins kind of as we progress throughout the course of the year?.

As we look down the road our focus is on continue to drive improvement in margin through cost reduction, new products, okay and mixed management, I mean, that’s the core of our strategy. As we sit here today, we’ve seen a significant drop in nickel as you know.

As a result with the surcharge mechanism when that happens you can get pinched on gross profit margin. So as we sit here today in January, we will struggle, frankly to maintain those gross profit margins you saw on the fourth quarter in the early parts of the first quarter. And things will reset as we go through this quarter.

So right now we’re going through a little bit of dip, that’s not a disaster but I would – as we look at the next year I would look at sideways movement with the slight downward bias in the first quarter and continue to expansion as we get into the second, third and fourth quarters of 2015..

Okay. Great. Very helpful.

And then just a question on them actually any update you can provide us on kind of where some the new capacity might be coming from within that particular market and the timing of these ramps?.

Well the new capacity and those recent stuff would be, the equipment that we put in which is three years old now. Carpenters putting in their acting [ph] facility and that’s ramping up as we speak and they are working to get their certifications and approvals. I can’t give you any clarity.

I know they got call later today on where they stand with theirs. We continue to see improvement. We’d like it to be faster. We’re pushing like how to make it faster and we’re just grinding through getting approvals and translating those approvals into topline sales and profit dollars. Q – Okay. Great. Well, that’s it from me.

Thanks for taking the questions..

Thank you. And the next question is from [Indiscernible] of Cowen and Company. Your line is open..

Hi. Good morning..

Good morning..

I was hoping you could just expand on your comments on the – you’re not seeing jet engine, channel destocking and have you seen any change in order patterns by the various OEMs, you mentioned GE is looking pretty strong there, I mean, are you seeing any kind of differences you can point or changes over the last six months?.

That really anything that we can put our finger, I would point out that we have a higher mix of distributor business compared to our peers. And clearly you can look at our bookings and our sales trends and we’re not seeing any -- in our view destocking in that channel basically seized about a year ago. And we’re seeing continuous good activity there.

From the engine guys we’re looking at and we’re starting to get into that into the market in a bigger way. Our targets have all been met where we’ve agreements and had some estimations of what our sales should be in 2014.

I think we published some example on Rolls Royce that we would expect to get $4 million to $6 million of incremental revenue from Rolls in 2014 and I believe we’re at $4.3 million. So we’re in a low end of the range. But fundamentally we’re within the bracket that we felt we would get. So we haven’t had any cancellations.

We haven’t had any broadcast that we’re pushing things away or pushing things out. Everybody is always looking at our inventories, so you heard, chat [ph] from time to time about inventory reduction programs. But we haven’t seen it reflected in a big way in our order book..

Okay.

And could you remind me again when you sale to the major jet engine OEM, do you sale to their forging kind of intermediaries or do you usually sell direct to the OEMs?.

It’s normally to an intermediary..

And within the intermediaries have you seen any – you haven’t seen any revise schedules down over the last couple of months? Have you seen any indications of any increases down the road or I’m just wondering if we’re just going to kind of truck along inline with underlying consumption or if there is any pickup that you’re seeing perhaps because of inventory realignments?.

I’m not aware as any one and Chris you jump in here if you seen anything recently, but I have not seen any cancellations, push outs or any significant change in buying patterns from the forges that we deal with. If we look at our bookings and our backlog I would characterize it as slightly up as we look into 2015. It’s stable with an upward bias.

Do you have anything to add Chris..

Yes. I agree what you saying there Denny. We experienced inventory corrections that began in 2012 and ran their course through 2013. We did see return in normalcy in 2014 and all indications for 2015 are the same. Those forgers in intermediary suppliers to the engine manufacturers continue to lay in new blanket orders for 2015.

The release schedules are consistent if anything we probably see more pull-ins than we push-outs. So our expectation is that 2015 should not bring in environment of destocking, that’s larger behind us..

Okay. And the last one to follow-up on question from earlier, with oil and gas softening, I mean protected are you in terms of kind of your sales to distributors on base prices.

Do you anticipate any base price erosion as one of the more profitable end markets softens, is that kind of exacerbate in over supply conditions? What protection do you have? If you could just relate us your spot versus contracted mix and maybe any other color you can provide?.

If you look at our business we’re largely transactional in the oil and gas world. We don’t have a lot of long term fixed price type arrangements like some of the other larger players in our space do. So any movement in price obviously we’re going to have some issues there.

As we’re looking at the market we’ve not seen any significant deterioration in pricing. I look at 2015 as I mean, this business is a tough business. You’ve got to be able to compete and I would not be surprised to see some compression there. But I don’t expected to be dramatic and we’ll just have to fight it out as we go through 2015..

Thanks a lot and good luck..

Thank you..

Thank you. [Operator Instructions] There are no further questions in queue. At this time, I’d like to turn the call back over to Mr. Oates for final remarks..

Okay. Well, thank you all again for joining us today. And I also want to thank you for your interest in Universal Stainless. After a year of recovery and progress we’ve entered 2015 with encouraging levels of business in three out of four end markets, including aerospace, our largest market.

We intend to pursue all those market opportunities as we work towards our goal of moving our company into these higher value products. And we look forward to talking to all in April and updating you on our progress after the first quarter. Hope everybody has a good day. Take care..

Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good day..