June Filingeri – CommPartners Denny Oates – President and Chief Executive Officer Paul McGrath – Vice President of Administration, General Counsel and Secretary.

Michael Gallo – CL King Taylor Kenyon – KeyBanc Capital Markets Gautam Khanna – Cowen and Company.

Operator:.

Good day, ladies and gentlemen, and welcome to Universal Stainless First Quarter 2015 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 would like to introduce your host for today’s conference June Filingeri. Ms. Filingeri, you may begin..

Thank you. Good morning, 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 first quarter results reported this morning.

With us from management are Denny Oates, Chairman, President and Chief Executive 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 operator will instruct you on procedures at that time. Also please note that in this morning’s call, management will make forward-looking statements.

Under the Private Securities Litigation Reform Act of 1995, I would like to remind you of the risks related to these statements which are more fully described in today’s press release and in the company’s filings with the Securities and Exchange Commission. With these formalities, out of the way, I would now like to turn the call over to Denny Oates.

Denny, we are ready to begin..

Okay, thank you, June. Good morning everyone thanks for joining us here today. For the first quarter of 2015, our team produced strong top line growth and a higher sales, higher value sales mix, even as the overcame increase in market challenges, including falling commodity prices, and growing concern about the impact of the drop in oil prices.

In total first quarter net sales were $56 million, which is up 20% from the first quarter of 2014, and up 6% from the 2014 fourth quarter. It was our highest sales level in ten quarters. We also made progress in moving to higher value sales in the first quarter.

Sales of premium products which we defined as the advanced alloys produced on our vacuum induction melting products increased 87% from the first quarter of 2014 and 42% sequentially to reach a record $5 million or 90% of sales. Last quarter I noted our average sales dollar per pound was our highest ever at $2.81 per pound.

Average selling prices in the first quarter of 2015 remained at the record level despite of roughly 10% reduction in surcharges during the quarter, due to the continuing downtrend in commodity prices. The lower surcharges were essentially offset at the top line by the richer mix of premium and core product shipments.

We called out the magnitude of the key commodity price declines in today’s release. Nickel prices were down 14% in the first quarter, and down 24% over the past six months. While the price of iron scrap dropped a very large in sudden 31% in the month of February alone.

Material costs are calculated at the time of melting, while surcharges are calculated at the time of shipments with a two-month lag. Only 15% of our first quarter 2015 shipments were actually melted in the first quarter. 50% were melted in the fourth quarter of 2014, 20% in the third quarter of 2014, and 15% prior to June of 2014.

The drop in commodities took a substantial fall in our first quarter gross margin. We slipped at 10.2% compared to 13% in the first quarter of 2014 and 16.8% in 2014 fourth quarter. We expect our surcharges and material costs become better aligned as we move into the second half of the year.

Additionally, we’re taking proactive measures to reduce operating costs, reduce inventory and certain capital expenditures. Selling, general and administrative expenses reduced sequentially to $4.7 million or 8.4% of sales due to controlled spending coupled with lower incentive accruals.

Operating income in the first quarter of 2015 totaled $1 million or just under 2% of sales. Our effective tax rate was 34.2% yielding net income of $0.02 per diluted share, as we indicated in our pre-announcement last week.

Turning to our financial position, managed working capital defined as accounts receivable plus inventory minus accounts payable was $108.7 million at March 31, an increase of $3.6 million from year-end 2014.

The increase was driven by a $4.4 million increase in receivables associated with higher first quarter sales, especially the strong March shipping month. Inventories reduced $2.6 million to $98.4 million and we expect further reductions this quarter. Accounts payable of $23.2 million was down $1.8 million compared to December 31, 2014.

Capital expenditures totaled $3 million regarding our outlook for capital spending in 2015, last quarter we gave an expected range of $11 million to $15 million given current conditions we were most likely come in at the low end of that estimate. Depreciation and amortization is running at $4.6 million per quarter.

Total debt at March 31 was $91.8 million, up $4.9 million from year-end. The increase in debt was mainly to support higher receivables to increase sales in the quarter. Our debt to total capitalization was 31% at quarter end. At March 31, our backlog before surcharges totaled $58.5 million compared to $61.1 million at the end of 2014.

A few comments about operations in the first quarter. I want to begin by recognizing the teams at each of our facilities for efforts and coping with another winter of frigid weather conditions, especially our team in Dunkirk. Dunkirk enjoyed the coldest winter since records have been get beginning in 1871.

It’s snowed everyday during the first quarter but for two days. The average temperature was 10 degrees before the windshield coming off the late. Across the company we’ve identified an equivalent of $0.04 per share in variable out of pocket expenses directly driven by the weather excluding the absorption impact of lowest production intense.

Our guy did a great job under some very challenging conditions. Our volume process across the dyes on the hydraulic radial forge and melt down from our vacuum induction melting furnace in North Jackson, with the highest achieved in any of quarter since start up.

Also continued development of our forges capabilities was a major contributor to our stronger power generation sales in the first quarter. Our retail facility activity level was on par with the fourth quarter of 2014.

The melt sharp running about 50% to 60% of capacity and our rolling mill demonstrated improved productivity and reliability following the major controls upgrade we completed last year. Activity on the customer approval front continued strong with some additional wins outside of aerospace specifically in power generation.

We also revamped our commercial organization adding talented individuals with deep experience in our major strategic markets to accelerate customer penetration and approvals.

These moves compliment the ongoing development of our metallurgical engineering competencies over the night towards bringing new products to market faster and streamlining our manufacturing processes for profitability. Turning to our end markets, let’s start with aerospace.

Our sales to the aerospace market reached $33.8 million in the first quarter of 2015. That’s an increase of 26% from the first quarter of 2014 and 20% higher shipment volume and up 5% from the 2014 fourth quarter on 6% higher volume.

As you can see in the year-over-year comparison our sales mixed aerospace has become richer due to the increase in addition of vacuum induction products. Aerospace sales represented 60% of total sales in the first quarter of 2015 as it remained our largest market.

That’s inline with the fourth quarter of 2014 and compared to 57% of sales in the first quarter of 2014. As we heard from companies throughout channel this earning season in the aerospace market remains robust. For example on their investor call last week, Boeing management reconfirmed their plan for production increases for the rest of the decade.

Saving strong airline profitability, healthy global air traffic trends in their backlog of more than 5,700 aircraft were approximately eight years of production by their major. They also described their first quarter order rate is healthy. And they are with that lower oil prices have not changed to the customer plans for their fleets.

Fuel efficiency is only factor in the calculation of return on a new aeroplane. Boeing had a so much stronger quarter than Airbus in both deliveries and net orders.

Although Airbus said intense in our quote to recapture the global ground for deliveries this year unquote, Airbus also underscore the continued strength in the aircraft market and should they may increase production there must popular airlines as this strength continues.

General electric comments in aerospace on the first quarter call were also upbeat, they reported a 36% rise in total orders with equipment orders up 64% due to higher commercial engine orders with they noted a more than double our level a year ago. The orders for commercial spare parts were up 31%. We said demand remains robust.

So the aerospace market remains fully active for a record Boeing these remain very good time for our industry.

We also saw strong growth in our sales for the power generation market in the first quarter of 2015, were sales up 35% from the first quarter of 2014, when 24% higher shipments, and up 26% from the 2014 fourth quarter on a 37% increase in volume. At 13% of total sales power generation remained our second largest market in the quarter.

That compares to the 11% of sales in the fourth quarter of 2014, and 12% of sales in the first quarter of 2014. Our growth in power generation sales was driven by our maintenance business which we expect to continue to remain healthy. The main positive drivers are the environmental concerns of coal, plentiful attractively priced natural gas supplies.

In Universal we have made in the market utilizing the unique capabilities of the Radial Forge in North Jackson. Oil and gas is a another strong market for us in the first quarter of 2015, sales were up 44% from the year-ago first quarter and 35% higher shipment volume and up 30% sequentially on 42% higher shipments.

Our sales to oil and gas represented 11% of total sales up from 9% of sales in both the first quarter and the fourth quarter of 2014. In contrast the aerospace market the news from the oil and gas market grew increasingly negative in the first quarter.

As Herbert [ph] noted that global recount dropped 19% in the quarter with North America experiencing unprecedented decline in drilling activity. Exploration budgets are being slashed price pressure in the oil service firms intense, and alloy and industry are continuing to map.

For good reason level of concern the channel is also mounting with destocking when the increase in competition strong for the remaining business. Our circumstances have grown more negative we are continuing the strategy I discussed in our last call.

We’re staying close to our historical and new customers and continuing to advance our portfolio of the products. Demand in heavy equipment markets softened in the first quarter was sales essentially flat when the first quarter of 2014, on 2% higher volume, down 31% from the strong fourth quarter 2014, on 29% lower shipments.

As a result, heavy equipment represented 7% of total sales from the first quarter of 2015, versus the 11% of sales in the fourth quarter of 2014, and 8% of sales in the 2014 first quarter.

Our demand in the tool steel market tends to be a needing because of normal channel inventory management, we expect 2015 to be another good year, overall for tool steel based on the confidence we are hearing from our customers and reasonably healthy automotive production levels.

Back on March 24, we announced that Mike Bornak, our Chief Financial Officer had notified us there is intention to resign. I want to take this opportunity to acknowledge and thank Mike for his contributions to Universal. He has continued to work with us for a smooth first quarter closing and transition. The search for his replacement is underway.

We all wish Mike great success and his future endeavors. In summary, then during the first quarter, our team achieved strong topline growth with tangible progress in our strategy to move to a higher value sales mix. That progress can be seen in record vacuum induction melting sales and record sales dollars per pound.

Despite our topline growth, the substantial drop in commodity prices especially nickel and iron scrap and resulting this alignment of surcharges with material cost of product shipped in the quarter for the substantial fall in our gross margin. We expect surcharges and material cost the better aligned in the second half of the year.

While the outlook for most of our targeted end markets remained strong, concerned about the effect of the drop in oil is growing throughout our industry. That will present challenges for all of us as competition intensifies. Additionally, the strong dollar is bringing more imports to the U.S. which adds the competition it can affect pricing.

Given these conditions we’re taking proactive measures to further reduce operating costs, inventory and certain capital expenditures, although we will continue to invest in our strategic move to higher value products.

We continue to add key personnel in commercial product management and metallurgical engineering to further support our new product development and commercialization.

Because of the dedication of our team and despite all the concerns about commodity prices and stability in oil and gas market and the strength in dollar, our order entry and backlog today remained solid and stable and our confidence that we will move forward in our strategy this year is high. Let’s say thank you for your attention.

Let’s take some questions now operator..

Thank you. [Operator Instructions] And for our first question, we have Michael Gallo, CL King. Mr. Gallo, your line is now open..

Hi, good morning..

How you doing, Michael..

Good. I just wanted to drill down a little bit on the gross margin and kind of the composition of the different factors. How much was the gross margin impact from nickel versus the drop in iron scrap and how would you expect that to changes we kind of move some of that older inventory into Q2.

Do you think we can move back into the mid-teens or do you think with where scrap prices and surcharges are that giving your current level of mix that it will be harder to get back that?.

Let me take your question and expand a little bit, Mike. As far as the squeeze from material cost goes, I would quantify that at about $1.9 million in the first quarter.

That was the impact if you look at what material cost squeezes did to us in the first quarter relative to the fourth quarter of last year and we think that down to the bottom line, or per share basis about $0.18 per share.

Into our last call, our last where we saw we did call out that we would see some shrinkage in our margins in the first quarter because the movement in nickel prices during the fourth quarter, what’s happened during the first quarter is nickel prices have continued to move down and equally important iron scrap move down significantly in the month of February.

We were paying roughly $0.16 a pound, we taking pounds here, and it went done to $0.11 a pound between January and February.

So a net result of that is surcharges continue to decrease fairly rapidly and when I went through when we melted the products we shipped in the first quarter that gives you a feel for our products are moving through our inventory.

Looking to the future you are going to start, you will continue to see lower surcharges if you look at our web page we published a surcharges since it is two month lag you can see where the surcharges be moving in April and May and it will be decreasing more than a half over the first quarter.

At the same time, we will be blending some lower cost – melt cost in lower shipment cost. So as I look at things right now, we are going to continue to be under pressure in the second quarter.

Things should balance out, during the order forecast late in the second quarter early in the third quarter, and we start to rise back up to where our margins were in the second half of last year..

So, I mean, just based on mix, then what you’ve seen assuming you know nickel and other things don’t change dramatically from here, would you expect it could be a similar kind of margin of that 10% in Q1 or would you expect it will be up a little bit?.

Do you say Q1, you mean, Q2, am I correct?.

Yes, I think Q2 versus Q1, could you expect to be up a little….

I will explain. Margin would be very, very modestly over the first quarter..

Okay.

And then just want to just drill on the top line a little bit, I think orders are bid in $53 million, $54 million range for the last few quarters, clearly the back drop in oil and gas is weak, although you had some nice increases here even in the first quarter, as we kind of look to the balance of the year, should we expect that your level of sales is going to start a more closely resemble your level of bookings? Or would you expect to continue to kind of modestly work down backlog, stay somewhat higher?.

I would just point out that when you look at our bookings keep in mind that that those figures do not certain not include any surcharge numbers at all. So it is not a direct correlation with our quarterly sales, even our surcharges are coming down our store surcharges in our sales dollars.

But if you look at activity level by market we expect aerospace to stay strong, power gen to be reasonably strong.

Oil and gas to weaken as we go through the year and the tool steel business I think which is most of the heavy equipment market is coming off some pretty high comps so percentage wise it doesn’t look like good perhaps but still it’s a very reasonable level of business for this year.

So as you look at our business I would expect sales to be kind of flat, with may be a downward biased in the second quarter with improvements as we get into the third and fourth quarter..

All right, okay. That’s helpful. Thanks very much..

Okay, thank you, welcome..

Thank you. And for our next question we have [indiscernible] from Jefferies. Your line is now open..

Good morning..

Good morning, Luke [ph].

So just a follow-up on the aerospace side of things. As we look across the various metal products that are sold into the channel.

In many cases we’re starting to see the other side of the inventory cycle, where there has been some destocking has happened over the last couple of years and now we’re starting to see order – purchasing pick up, lead times are starting to extend.

In terms of your business, you know you’ve got the nickel, headwinds that are sort of working against the buying activity I’ll get in the short-term, folks are looking at surcharges going down I’m sure they are in a rush to buy.

But can you just give a sense of where lead times are and I guess how much pent up buying activity you think there could be as nickel stabilizes or if we should get some sort of bounce back in the second half?.

My view the aerospace frankly when you look at the inventory in the supply chain and I get the feel from that simply from talking to customers. How was your large customer last week? I think the inventory is pretty slim out there.

So any kind of improvement as we look 16, 17 I think you’re going to see a pretty severe snapback in aerospace, positive snapback. Right now the feeling is before looking that goes you just said, and you’re looking at lead times which I would characterize it is still pretty short.

I know there is some talk about lead times going out or lead times aren’t going out, we’re keeping them as close as possible so where they’ve been over the last several months. I think people have some flux in their operations given the level of business in other markets contiguous aerospace.

So I don’t see lead times has been initially going out therefore if you’re buyers you look at nickel. Try to access where that’s going to go when it’s going to start to go up. You’re looking at lead times has been very, very reasonable I think.

So that reason a real strong instead of the start to buy, that said inventories levels are not that high and the business starts to pick up when I look at some of these percentages like coal from GE and some of the other OEM’s. My expectation is you’re going to see continuing acceleration in business in aerospace world..

Okay and if that plays out when you look at your business in terms of how much is contract during its bottom I’d say if there is a base pricing cycle that plays out on aerospace really products over the next couple of years.

How much leverage do you have there versus how much is sort of blocked in the long-term agreements?.

When you look at Universal we don’t have a lot of long-term agreements. So I mean we are kind of the new kid on the block when it comes to nickel alloy segment. So we have some annual pricing agreements, but we’re no where I would say less than 10% of our business. I would consider contractual at this point. That level will grow in the future.

You talk about pricing right now. Pricing is a challenge, because on a transactional side, because as you look at what's happening there is excess capacity out there, given let’s go in oil and gas, you’ve seen some stronger competition in the other markets like aerospace. And obviously from a contractual side, it’s a good time to be a buyer..

Yes, right. Okay. And then just on I guess on oil and gas, when you look at inventory levels relative to consumption rates currently how much do you think is in the channel here to work through..

In oil and gas?.

Yes..

I think there is another three to six, another couple of quarters, I don’t know..

Okay. And Denny just one last one, you see relatively optimistic on gas turbines and just looking at some what are the engineering and construction companies were saying about combined cycle gas opportunities there seems to be a pretty decent opportunity set over the next couple of years.

And I guess my question is may not be able to answer this, but what is a new plan worth the Universal in terms of content or like how big of leverage do you think that you might have to some of these plans as they, as new stuff gets build..

Well, I report a number out of the air, to tell you what the impact of the new plan would be for us. When you look at our business today in power gen, it is primarily maintenance business given the higher utilization of turbines out there.

With the new investment in North Jackson, we’ve been able to do some new things and capture some additional business. We’ve gotten some additional approvals on specific products, so that is helped our sales volume in the power gen. I’m not calling out any significant increase this year in new turbine business it will be associated with the new plan.

We’ve been focusing on as maintenance and as the new turbine business and I agree with you, its I feel is that growing kind of demand for power gen I’m almost reluctant to talk about, because we’re talking about for two years.

But clearly, all the indicators which you get over the next two to four years, you are going to see some nice improvements in that business.

Our plan is the life stack continue to work towards approval the selected OEMs our board approved a new electro-slag remelting furnaces which we have not pulled the trigger on, but probably has a nine months to 12 months lead time, which we’ll going out in North Jackson, which would help to support the existing four years all units.

And most of these products do get electro-slag remelted. That’s kind of our strategy. We sit here in a second quarter of 2015..

Right. Thanks a lot, Denny..

You’re welcome..

Thank you. And our next question comes from the line of Phil Gibbs from KeyBanc Capital Markets. Your line is now open. Please proceed with your question..

Hi, good morning, Taylor Kenyon stepping in here for Phil Gibbs. Hi, Denny..

Hi, Taylor.

How are you today?.

Good, good, Denny just a question for you on the VIM.

Any sense you could provide us in terms of the quarterly progression of the utilization of the North Jackson facility at this point as we progress through the year here?.

Talking about terms of percentage of sales or you talking about the absolute utilization of the facility?.

Both would be helpful..

So [indiscernible] say when you look at the utilization of the vacuum induction melting furnace we still have a long way to go. I would say we’re still in the 20% to 25% range capacity utilization. So we have a long way to go to continue and we’re continuing to get approvals so we can work towards filling up that facility.

Our target has been get up to 20% of our sales from vacuum induction melting as we exit 2015. So we’re still focused on that..

Okay. Great and then….

I think we were at 9% in the first quarter, so have a ways to go, but that’s still our target..

Okay great and then any sense for how we should be thinking inventory this year I know you mentioned your expectation for reduction here in the second quarter but any sense on the magnitude and then where from there?.

I would say, we’re looking at several million dollars reductions this quarter in inventory as we look at the second half of the year, you can expect some further reductions.

Keep in mind as we’ve been working on a start up in North Jackson so if you recall past conference calls as we’ve talked about inventory that we had to build in order to get approvals to select the products. So we’re working that inventory down overtime. As we get those approvals.

So if you looked at level of business out there our ongoing desire to improve trends this is a matter of course coupled with some of that older inventory that will be purging, that’s why we expect to see year-on-year inventory reductions for 2015..

Thanks, Denny. I appreciate the color..

You’re welcome..

Thank you. [Operator Instructions]. Our next question comes from the line of Gautam Khanna from Cowen and Company. Your line if now open..

Yes, thank you.

I was wondering if you could, last quarter I think I asked you about Rolls Royce, I was wondering if you talk specifically about, how demand is trending with that customer, and if you seen any schedule changes either ask that request or deferral requests over the last three or four months?.

We have not seen any change in a business, we said, we would do $46 million of business with the Rolls Royce supply chain, we were basically in that range last year and we continue on that half in the first quarter, so we haven’t seen any change one way or the other in the first quarter..

Okay, and with respective to your comment on the pricing in the nickel alloys based been a little tougher have you experienced this yet or, is this something you anticipate will have that? I just trying to get some sense for whether this is already played out in your results for Q1 or if this is something on the forward look that we should be worried about another leg down..

I think its more anticipation. As you look at it from Universal’s perspective though keep in mind that those products are relatively new to us with the vacuum induction melting furnace.

So as we average those in to our shipment mix and bring those products into our portfolio commercializing, you’re going to see increases in our average selling prices..

Good point, and one another thing, if you could just comment on what the share opportunity is, have you seen any of your competitors, maybe incrementally weaker or any of your customers coming to you, looking to place more work your way or suppose to do with your existing suppliers.

You have seen any anecdotal evidences of that yet?.

Nothing beyond and not a given take I mean this is a very competitive business, so I won’t say there is any significant change in that regard, we’ve had very spirited dialogue with customers, existing customers and potential new customers really since North Jackson was acquired, interesting in giving us approval, when we’ve been working very diligently with them, but I can’t really say that anything is changed meaningfully from that..

Okay, thank you very much..

You are welcome..

Thank you. [Operator Instructions] And at this time I’m showing no further questions, I would like to turn the call back over to Denny Oates for closing remarks..

Okay. Thank you. I want to thank everybody once again for your interest and support for Universal Stainless. In the first quarter, we achieved strong sales growth and further progress towards our goal of moving our company to higher value products.

Hopefully I have explained what’s going on from a commodity standpoint and the impact that’s had on our company during the quarter and how that will play our as we see it over the rest of this year and will look forward to updating everyone in our progress in our next call. Have a good day..

Ladies and gentlemen, thank you for your participation on today’s conference. This concludes the program. You may now disconnect. Everyone have a great day..