Good morning, ladies and gentlemen, and welcome to the Universal Stainless Third Quarter 2019 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 your host, Ms. June Filingeri. Please go ahead, ma’am..

Thank you, Mary. Good morning. This is June Filingeri of Comm-Partners, and I also would like to welcome you to the Universal Stainless conference call and webcast.

We are here to discuss the company's third quarter 2019 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; Paul McGrath, Vice President of Administration and General Counsel; and Chris Scanlon, Vice President of Finance, Chief Financial Officer and Treasurer.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 as Mary said, she 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 regarding future events and financial performance.

We caution you that such statements reflect management's best judgment based on factors currently known and that the actual events or results could differ materially.Please refer to the company's documents that are filed from time to time with the SEC, in particular the Form 10-K, 10-Q and Form 8-K filed today with the company's press release.

These documents contain and identify important risks and other factors that may cause actual results to differ from those contained in management's forward-looking statements.

Forward-looking statements made during the call are being made as of today.If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. The company disclaims any obligation to update or revise any forward-looking statements.

Management may provide guidance on today's call but will not provide any further guidance or updates on the performance during the quarter unless it is done in a public forum.During this call, management will also discuss non-GAAP financial measures.

These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the GAAP and non-GAAP results is provided in today's press release.With the formalities complete, I would now like to turn the call over to Denny Oates. Denny, we are ready to begin..

Thank you, June. Good morning, everyone. Thanks for joining us today.

The progress we achieved in the first half of 2019, especially in the second quarter, was slowed in the third quarter by unplanned downtime on critical equipment including the hydraulic forge in North Jackson and the bar and rod mill in Dunkirk.As a result, we reported sales of $56.6 million, down 20% from last quarter and 18% from the third quarter of 2018.

The 18% sales decline from 2018 includes an $8.8 million or 67% reduction in plate sales.The equipment issues reduced shipments by 2 million pounds and sales by $6 million.

Another $1.4 million of international sales was shipped physically but did not reach their destinations in time to be included in third quarter revenue.Premium products were particularly hard hit by the forge issues reflecting a $4.8 million sequential drop in sales to $8 million or 14.2% in sales.

Year-to-date, premium alloys sales totaled 30.2 million or 16.1% of sales.Our aerospace sales remained strong in the third quarter and accounted for 72.3% of total sales.

Year-to-date, aerospace sales were up 16.8% from the same period of 2018 reaching a record $132.8 million.Third quarter order entry of $53 million before surcharges increased 5% compared with the second quarter indicating very little seasonal impact and continued strong aerospace demand.

Tool steel plate bookings were essentially equal to the second quarter but 34% below the near record level of 2018.

Order backlog finished the quarter at $118.3 million compared to $116.9 million at June 30 and $111.4 million one year ago.Net income for the third quarter was $800,000 or $0.09 per diluted share and included a $0.04 per share insurance recovery related to the fire in the pickling area of the Dunkirk facility back in September of 2017.

That compares to net income in the second quarter of $2.1 million or $0.24 per diluted share, including charges of $0.03 per diluted share for the hydraulic forge at North Jackson in June.In the third quarter of 2018, net income totaled $3.9 million or $0.44 per diluted share.

EBITDA totaled $6 million compared with $8.2 million for the second quarter of 2019 and $10.1 million for the third quarter of 2018.Cash flow from operations remained positive at $6.6 million in the third quarter and managed working capital fell $2.9 million.

Total debt was reduced $2.1 million to $66.1 million or $3.1 million and $64.9 million net of cash. Chris will cover cash flow, managed working capital and other related financial items in his remarks.Let me review the issues that impacted third quarter results; the good, the bad and the ugly.

Reduced sales took a toll in margins in the third quarter with gross margin at 9.4% of sales compared with 12.8% of sales in the second quarter of 2019 and 15.1% of sales in the 2018 third quarter.In addition, to reduce shipment volume; a less profitable product mix, lower production levels due to equipment issues and continued surcharge versus materials cost misalignment were the principal negative drivers of lower margins.

The ramp up of the new Dunkirk bar cell and the outstanding cost performance in vacuum induction melting were partially offsetting.Let me highlight the commodity situation first. Nickel prices jumped during the quarter rising from $5.43 per pound in June to $8.02 in September, a 48% increase.

As a result, surcharges on major nickel bearing AOD produced grades like 15-5 bottomed at $0.56 per pound in August and will rise to $0.67 per pound in November.Similarly, surcharges on popular nickel bearing premium grades like 13-8 bottomed at $0.94 per pound in August and will increase to $1.10 per pound by November.

In September, this trend contributed towards an easing in the misalignment between surcharges and commodity prices, which has been pressuring margins most of this year.

Even though nickel has retreated to the $7.35 per pound range, we expect to see continued easing in misalignment on nickel grades in the fourth quarter.Other important commodities continued to weaken during the third quarter. Moly was down 3%, chrome down 12%, vanadium down 15% and 71% on a year-to-date basis and scrap was down 8% during the quarter.

So pricing of the tool steel grade like A2 reflects surcharges which have fallen from $0.75 per pound in January to $0.41 per pound in September and will continue to fall to $0.38 per pound in November.Keep in mind that tool steel typically sells for $1.50 to $1.75 a pound, so short-term surcharge swings to this magnitude can have a significant impact on margins.

We anticipate these commodities stabilizing as we move through the fourth quarter.To summarize, misalignment eased during the third quarter but negatively impacted margins by $0.5 million or 0.9%.

We expect continued easing in the fourth quarter due to the recent rise in nickel, slowing price reductions of other key commodities and monthly reductions in material costs as high cost inventory sells through.Let me turn to the facilities and operations. We had our challenges with equipment downtime during the quarter.

There were two areas of note in terms of impact on shipments. First and most importantly, the Radial Forge in North Jackson. You’ll recall that we had a fire on June 14th at this facility.

Our team rallied working with third parties and the mill builder to get back into production quickly.On the last conference call, I reported that we planned a major one week outage in September and would do expansive diagnostic work to ensure all elements of the system were working as before the fire.

Unfortunately, we experienced deteriorating performance in July and early August and decided to accelerate the one week outage to replace a cylinder and other degraded parts.The net result of the planned outage acceleration and intermittent unplanned downtime during the quarter were delayed shipments of 2 million pounds and $6 million or a margin impact of $1.5 million and an impact on gross profit margins of 2.4%.

I am pleased to report that the forge has been processing material at record levels over the past month, and already processed more material in the first two and half weeks of October than any month in the third quarter.Secondly, we planned an outage at the bar and rod mill in Dunkirk to complete a $400,000 capital project on an in-line furnace.

During the teardown of the furnace, we uncovered serious structural issues caused by a collapsed water jackets and related floor and foundation damage.

The outage was extended to three weeks and had a negative impact on cost and production flows in the Dunkirk facility.I'm pleased to report that Dunkirk reported record throughput across all operations, including the bar and rod mill in September as we recovered from this extended outage.

I would be remiss if I didn’t address some of the offsetting positive trends during the quarter.Insulation of the new bar cell in Dunkirk is complete as are most of the outstanding items on the punch list that I mentioned during the last call. The new phased array inspection system will be in place this quarter.

As a reminder, the $10 million bar cell capital project involved modernization of our intermediate bar processing operations by consolidating six discrete processing steps into one fully functioning automated workstation.Third quarter production on the cell was double Q1 and up 17% versus Q2, despite some of the operating challenges we faced.

The cell added $0.5 million to margins or 0.8% positive impact on gross margins.

Year-to-date inventory reduction totaled $2.2 million as we liquidated inventory positions according to obsolete production ramps.Each quarter going forward we expect to see positive effects on our margins as we continue up the learning curve and drive more product through the line.

We maintain our expectation of a two-year payback on the project which was financed in a tax-advantaged manner utilizing new market tax credits.Our vacuum induction melting operation established new records with throughput, campaign life and operating costs in Q3, supporting our corporate strategy to expand the premium melted products.

After the extended outage at the bar and rod mill in Dunkirk was completed, that facility achieved a new record monthly production level in September to partially offset the unplanned downtime experienced in August.Lastly, we received approval from two major aerospace OEMs for critical bearing and gearing steels which will continue to grow our premium alloys consistent with our long-term strategy.Let me turn to our end markets for a second and start with aerospace, our largest market.

Our aerospace sales totaled $40.9 million or 72.3% of sales in the third quarter of 2019 compared with a record $49.3 million or 69.5% of sales in the second quarter of 2019 and $37.3 million or 54% of sales in the third quarter of '18.

Year-to-date aerospace sales increased 16.8% from the same period of 2018 reaching a record $132.8 million for the first nine months of the year.Even with the continued issues plaguing Boeing 737 MAX demand from our customers remained on track in the third quarter.

While uncertainly continues regarding when the 737 MAX will be returned to service, we are not seeing a major impact on our order book. Rather we see segments of the aero metal supply chain getting caught up after a strong 2018.

I would note that there were a couple of order push-outs recently, but they seem more related to year-end inventory adjustments specific to those customers.The consensus among our customers and several Wall Street analysts is that Boeing will achieve recertification in the U.S.

late in the fourth quarter this year with other countries following throughout 2020. As that plays out and with their current production of 42 airplanes per month, there is continued expectation of a ramp to 57 airplanes at some point next year.

It is also expected that the first 777X will be delivered in 2020, despite recent issues that came up in testing.More broadly, the IATA in their last report on global air traffic reported that August passenger traffic grew 3.8% year-over-year, somewhat below the long-run average of 5.5%.

Load factors, however, reached a record 85.6% which bodes well for the aftermarket.

In fact, Honeywell in their third quarter report cited demand in the commercial aftermarket as contributing to their growth in aerospace for the period.On the minor side, freight traffic continued to decline in August with the U.S.-China trade dispute being a major contributing factor.

Overall, aerospace continued to be a bright spot in the third quarter both for Universal and for our customers and is expected to remain strong going forward, although given the near-term crosscurrents and uncertainties we’re all monitoring the situation very closely.The oil and gas end market remained our second largest end market in the third quarter of 2019 at 10% of total sales.

Third quarter oil and gas sales totaled 5.7 million versus 7.7 million in the 2019 second quarter and 8.9 million in the third quarter last year. In general, we would characterize the oil and gas market as moving sideways to softening.

However, it remains an active market for Universal because of our introduction of new products and incoming orders remain level with the second quarter bookings.Schlumberger reports somewhat mixed results in their third quarter report on Friday.

They noted that international activity drove their overall growth, but North America sales were strong offshore while growth on land was minimal due to lower fracking activity and pricing weakness. In their outlook, they pointed to market uncertainty stemming from challenges to global economic growth due to trade concerns as weighing on oil demand.

Our strategy for Universal continues to be expanding market penetration, utilizing unique capabilities North Jackson.The heavy equipment market was our third largest market in the third quarter of 2019, representing 7.7% of sales versus 10.1% of sales in 2019 second quarter and 19.4% of sales in the third quarter of last year.

Third quarter 2019 heavy equipment sales, which are primarily tool steel plate, have been anemic this year versus a record year in 2018.

Heavy equipment sales totaled 4.4 million compared to 7.2 million in the second quarter and 13.4 million in the third quarter of '18.After a pickup in the second quarter, we saw reduced demand for tool steel in the third quarter.

The effect of dropping commodity prices and surcharges compounded the issues I noted this quarter including automotive production cuts, somewhat fewer model changeovers in the pipeline, short lead times of roughly six weeks and service center inventory adjustments.

Going into the fourth quarter, we’ve seen a modest improvement in bookings and expect sales to be more in line with the second quarter of 2019.Third quarter power generation market sales were 2.9 million compared with 3.2 million in 2019 second quarter and 2.7 million in the third quarter of '18 or 5.1% of sales.

Our power generation sales continued to reflect maintenance spending for the most part and bookings were up 29% sequentially in the third quarter consistent with seasonal maintenance trends.

We see little change in market dynamics over the near term and intend to supply maintenance needs until they replace the market for gas turbines kicks in.In general, industrial market sales were 3.6% of sales in the third quarter of '19 at $2 million versus $2.4 million in the second quarter and $5.1 million in the same quarter last year.

Semiconductor infrastructure and general manufacturing markets remained slow.That concludes my summary for the end markets. Let me turn the call over to Chris for his financial report.

Chris?.

Thank you, Denny, and good morning, everyone. Let’s get started with the income statement.

As Denny discussed, third quarter 2019 sales of 56.6 million were down 20.3% or 14.4 million from the 2019 third quarter and down 18.1% compared with the 2018 third quarter.Third quarter sales were negatively impacted by unplanned downtime associated with repair activity at our North Jackson hydraulic forge relating to the fire that occurred in the second quarter.

Fire-related delayed shipments reduced third quarter net sales by approximately 6 million.2019 nine-month sales of 187.8 million were down 11 million or 5.6% compared to 2018 nine-month sales of 198.9 million.

The year-to-date decrease was due to lower sales in most end markets with the exception of aerospace, which was up 19.1 million and power generation which was up 1.3 million.Third quarter 2019 gross margin totaled 5.3 million or 9.4% of sales, down from 12.8% of sales in the 2019 second quarter and 15.1% of sales in the 2018 third quarter.

Our current quarter gross margin was negatively impacted by lower revenue and product mix. We also experienced misalignment of melt costs compared to commodity surcharges, as Denny noted earlier.

This misalignment negatively impacted the third quarter gross margin.Additionally, we incurred 500,000 of increased operations costs due to the second quarter North Jackson hydraulic forge fire, a portion of which negatively impacted our third quarter gross margin.

Lastly, we also reportedly a one-time non-cash impairment charge of approximately 200,000 related to the rust furnace components at our Dunkirk facility.

This charge was associated with the planned third quarter maintenance program at our Dunkirk bar and rod mill.Selling, general and administrative costs in the third quarter totaled 4.5 million or 8% of sales, a decrease of 1.1 million compared with the 2018 second quarter and a 606,000 decrease compared to the 2018 third quarter.

Employee-related costs drove the SG&A decline between periods on a sequentially and year-over-year.Current quarter other income included insurance proceeds of 350,000 related to the Dunkirk pickle room fire which occurred in September of 2017.

Specific to the third quarter, our income tax benefit was 577,000 driven by favorable discrete items, primarily increased research and development tax credits.For the nine months ended September 30, 2019, our income tax expense totaled $55,000 with a related effective income tax rate of 1.3%.

Net income in the third quarter was 766,000 or $0.09 per diluted share.

Second quarter 2019 net income totaled 2.1 million or $0.24 per diluted share and 2018 third quarter net income totaled 3.9 million or $0.44 per diluted share.Our third quarter EBITDA totaled 6 million with Q3 EBITDA as adjusted for non-cash share compensation totaling 6.3 million.

Third quarter EBITDA is 2.2 million lower than the second quarter of 2019 and 4.1 million lower than the third quarter of 2018.

The EBITDA and adjusted EBITDA calculations are provided in the tables to the press release.Third quarter cash flow from operations was again positive at 6.6 million, up 4.4 million from our 2019 second quarter cash flow from operations which totaled 2.2 million.

Related to the balance sheet, managed working capital totaled 144.9 million and decreased by 2.9 million compared with the second quarter of 2019.

Accounts receivable decreased by 4.6 million and inventory increased slightly by 568,000 or 0.4%, while accounts payable decreased by 1.1 million.Third quarter 2019 backlog totaled 118.3 million and is up 1.4 million from the 2019 second quarter.

Year-over-year, third quarter 2019 backlog increased 6.9 million or 6.1% compared to the 2018 third quarter. Capital expenditures for the third quarter were 3.9 million with nine-month CapEx totaling 13.3 million.Third quarter 2018 capital expenditures totaled 6.6 million with 2019 nine-month CapEx totaling 13.2 million.

2019 CapEx is expected to be above our 2018 levels and in total approximately 17 million. This includes 500,000 of capital spend related to the hydraulic forge fire and the bar and rod mill repairs.New markets tax credit program restricted cash receipts totaled 359,000 in the third quarter.

Our restricted cash was related to the financing of our mid-sized bar cell capital project. Additionally, within the third quarter, we received 750,000 of cash proceeds from a New York State development grant related to the Dunkirk bar cell capital project.

These funds were used to pay down credit facility borrowings.Lastly, looking at our debt, the company's total debt at September 30, 2019 was 66.1 million, a decrease of 2.1 million from the prior quarter.

Debt, net of cash, totaled 64.9 million at the end of the third quarter, a decrease of 3.1 million from the 2019 second quarter.This concludes the financial update. And Denny, I'll hand the call back to you..

Thanks, Chris. In summary, then, we were challenged by several equipment issues in the third quarter which lowered sales to a disappointing $56.6 million. Each equipment issue has been addressed and production over the past four to six weeks has rebounded to record levels.

The equipment issues overshadowed excellent progress in ramping up the new bar cell in Dunkirk which is delivering on cost and inventory reductions as planned.We also are encouraged by the melt cost reduction performance at our vacuum induction melting shop in our North Jackson facility.

Commercially, we were pleased to earn new approvals for bearing and gearing steels for major aerospace OEMs which underscores that our strategy to grow premium melted products continues to evolve.

Year-to-date record aerospace sales of 132.8 million and our 17% growth over 2018 also validates continued strength in the aero market and the long-term execution of our strategy.We anticipate easing in the misalignment between surcharges and material costs in the fourth quarter.

The easing is due to the firming in nickel prices, the sell-through of high cost inventory. And on the non-nickel bearing products like tool steel, we will continue to be challenged with misalignment due to declining commodity prices.

However, we see those prices basically stabilizing as we move through the fourth quarter.With major equipment maintenance behind us, we are focused on getting back on track in the fourth quarter. We have a strong backlog of $118.3 million.

Aerospace bookings have remained reasonably strong in the seasonally slower third quarter.On a separate note, we also received an unsolicited proposal to merge from Synalloy Corporation on October 14th and filed a related 8-K indicating our Board of Directors as well as our legal and financial advisors are carefully considering the proposal and will respond in due course.Before I close, I want to recognize the efforts of all of our employees to meet the substantial challenges we faced in the third quarter.

By confidence in our ability to build on our accomplishments and successfully execute our strategy continues to be based on their dedication and hard work.That concludes our formal remarks. Operator, let’s take some questions..

[Operator Instructions]. Our first question is from the line of Tyler Kenyon from Cowen. Your line is open..

Hi. Good morning..

Hi, Tyler.

How are you?.

Good.

How are you?.

Fine..

So, a lot to think about with respect to bridging the third quarter to the fourth just given the impacts from the production downtime as well as the delayed shipment impact and then some dynamics with surcharges and input costs.

Any help you could provide us with how to be thinking about fourth quarter sales and the trajectory of gross margins from here?.

Yes, let me take a crack at this. I realize we have a number of puts and takes, so here’s the way we’re looking at this situation. We had basically six unusual items that impact the third quarter. Five of them were negatives and one of them was positive. So as we look at it, we reported $0.09 per share and a gross profit margin of 9.4%.

The biggest impact was the problem we had at Radial Forge which prevented us from shipping some $6 million of product. That equated to $0.14 per share in the third quarter and impacted gross profit margins by 2.4 percentage points. We had another $1.4 million of sales that did ship, but they were international sales.

They did not arrive in time to be counted. That impacted the third quarter by $0.02 per share and impacted margins by 0.5%.We had continuing misalignment which was lower than the first half of the year, but still was there. That impacted the quarter by $0.04 per share and 0.9% on the gross profit side. Chris mentioned the write-off of the rust furnace.

This is a capital project of an in-line furnace. In doing a capital project, we had some undepreciated asset value which we wrote off. That’s $200,000 roughly or $0.02 a share and impacted gross profit margins by 0.4%.

And we had the issue with the B&R mill which did preclude us from doing some work there and impacted sales getting small here, but that was a penny a share and impacted margins by 2.2%.So if you take those negatives, that takes you $0.09 per share up in the range of $0.32 per share. We had a $0.04 per share positive.

So if I take that out, we’re looking at the third quarter adjusted at $0.28 a share and the equivalent gross profit margin of 13.8%. In the interest of fairness, if you look at the positive, we do have the die shell [ph] line which is contributing about $0.04 a share in the quarter and improving margins by 0.8%.

The die shell of course will continue into the future.

Hopefully that doesn’t cloud the issue and clarify some of the impacts that we solved during the third quarter.If you look at the fourth quarter to answer the other part of your question, obviously, we’ve got product that went out the door and has now arrived in port and will be counted automatically in the fourth quarter, we would expect to see our fourth quarter sales be higher than the third quarter and our margins be back in line with where we’ve been in the last couple of quarters.

For saying it another way, we’re not anticipating five of these negative adjustments.

Does that help?.

Okay. No, that’s helpful. That’s very helpful. And then also – even excluding the benefit that you had in SG&A, SG&A looked relatively low.

Is there any way to be thinking about that moving into year-end? Are there any accruals we should be mindful of?.

The trends that we have, Tyler, that you see should continue within the fourth quarter..

Okay. And then just lastly, generated some free cash in this quarter and just kind of wanted to get an updated view as to just the kind of debt reduction targets as we – free cash flow and debt reduction targets as we move into the close of the year? Thank you..

I think on the last call, I said we wanted to get down into the 50s, mid-50s. I think that’s going to be a stretch frankly, because if you think about some of the billings that we anticipate in the third quarter, they may not be collected.

So our goal is still to get down into the 50s, so we don’t expect to generate cash in the fourth quarter and pay down debt. But I think it’s going to be high 50s, 60-ish kind of a number by the end of the year not the mid-50s we were talking about last quarter..

Thanks very much..

You’re welcome..

Our next question is from the line of Phil Gibbs from Capital Markets. Your line is open..

Good morning..

Hi, Phil..

Thanks, Denny, for going through all the detail on the items there, I appreciate it.

The $6 million hit from the forge, should we think about that essentially as you had $8 million in VIM sales and you would have had 14 if the production had been on point with what you’re seeing now?.

The change in premium melted products is more like $4.8 million I think exactly and the majority of that was related to the 6 million. So it’s not the arithmetic you just did.

If you look at the change in premium melted products, it was $4.8 million in the third quarter compared to the second, that was the decline, and roughly 80% of that was tied to what happened at the forge..

Okay, so still probably close to $45 million and $50 million annualized rate but not at that 14..

Yes, the challenge we have on premium melted products is to get the product. It did go out the third quarter ready and shipped to a customer in time in the quarter so it can be counted in the quarter, and we still have the risk of people doing some window dressing at the end of the year.

But fundamentally, the majority of that product should go out in the fourth quarter..

You talked about some new wins in bearing and in gearing steels.

When do those start to enter into the fold and how meaningful are those for the business at the margin?.

Hi, Phil. This is Chris Zimmer. I’ll touch on that. We did begin to have some shipments in the third quarter. I’d characterize them as very modest. That’s a lot of the product that was put into inventory through the course of these trials and evaluations.

But now we’re moving full steam ahead to position our production and our inventory to break it to the supply chain in a more meaningful way next year. So a lot of these approvals that have taken years to get is a big milestone that we needed to hit in order to participate and now we’re at that level.

But I would expect these new products to really start to take hold as we move through the second, third and fourth quarters of next year..

So if I could just add to that Chris and Phil, we’ve talked in the past on these calls about some inventory that we had where we were holding the inventory, it was good inventory but we couldn’t really sell until we get the approvals. That’s probably in a range of $3 million or $4 million. So that’s the material that Chris was alluding to.

So we can start to sell off that material. And as I personally look at 2020, I’m very excited about these opportunities. I think it is very meaningful sales opportunities for the company.

It will take us a quarter or two to really get established with the customers in the supply chain, but I think by the second half of next year this will be a very attractive business for us..

Just trying to think about this from a high level, so let’s just say right now your rate on VIM sales or premium sales has been 40 million, maybe a little bit higher.

Let’s say you don’t have the operational issues at the forge, you’re able to get some product out the door and you start layering in some of these new contracts, because I know these are probably two nice ones but there’s more coming.

What should we think about just in the here and now without any more incremental approvals what your revenue potential in North Jackson is?.

For premium melted products just to make sure I’m answering your question correctly, there’s no reason to expect we shouldn’t see continued double-digit growth in 2020, so it will be up in the $60 million range..

And what is the biggest driver at the margin incrementally this newer business you’re talking about now in the bearings and gearings deals?.

That’s not the biggest driver of the margin. It’s continued expansion of premium products in general. These products will clearly help. I think some of the capital projects like the bar cells that kicks in, that’s going to help on the margin as well as we go into 2020.

What you’re seeing coming out of the P&L is not – we’re not done as far as – we’re just scratching the surface for the bar cell..

The $17 million CapEx you mentioned, some of that sounds like it’s spending that you had to do because of the fire..

Yes..

How much of that do you potentially view being reimbursed for, if any?.

We do expect to receive insurance proceeds as a result of the North Jackson fire. We are in contact with the insurance company. They have accepted our claim and we do continue to work with the insurer through the claims processing activities.

These things do tend to take a while as we work through and as we saw this quarter with receipt of the funds from the Dunkirk pickling which occurred back in 2017..

So is the focus --.

We can’t really give you a hard number on that until we --.

No, I can appreciate that but I just want to be clear in terms of – you had CapEx related to both North Jackson and Dunkirk it sounds like from some unexpected issues and I’m just trying to bench or bracket rather what that was? It sounds like something around $5 million.

Is that --?.

No, 500 – this year it was about $500,000, Phil..

Okay. So I added an extra zero, okay, minor mistake. Thanks, guys..

Our next question is from the line of Greg Weiss from Boston Partners. Your line is open..

Hi, guys.

How are you doing?.

Doing great.

How about you?.

I just wanted to kind of get your reaction on – obviously over the last couple of years you guys have done a good job increasing your exposure to the attractive aerospace cycle and you’ve certainly highlighted the potential for future improvements and continued growth with orders at play in North Jackson and more consistent execution.

But how do you kind of reconcile that just against the staggering low valuation you’re getting in the market today? You’re trading half book value, a low multiple of certainly potential earnings and just the urgency to create value for shareholders..

Well, what you just quoted in terms of valuation of the company is accurate. We are below book value. Our view of that is there’s a lot of concern about aerospace. We’re heavily weighted towards aerospace and there’s a lot of tentativeness out there with companies in our space right now.

As I look at everybody who’s public in our space, they’re all seeing that we’re seeing the same fundamental trends, perhaps more severely in the case of Universal as the smallest player in this space. But our view is we have to continue on our strategy, continue executing and the market will realize that as we start to put numbers on the board.

That’s why I said at the beginning of my comments here that there will be slowdown. The third quarter obviously doesn’t help with that.But the underlying strategy is still very evident.

It still hangs together and we’re still very optimistic about our ability to continue to grow the vacuum induction melted products and to continue to improve in the other products as well. We’re seeing more opportunities for AOD produced re-melted steels. So we will be spending some capital as we go into 2020 and 2021 to support those efforts.

And although they’re not premium melted products, they’re very high margin specialty alloys. So we see a continuation of margin expansion, adding value for stockholders and that will sooner or later be realized by the marketplace once we put a couple of quarters together to demonstrate that..

And just very quickly if I can follow up, last year you sold a little stock at 24.5 which in hindsight looks like a very wise move.

Given your stock is trading over $10 below that now, is there any thought of using some amount of capital to go back the other way and repurchase stock?.

Our Board is always considering different options as we meet, so that is one thing we consider. I’m not prepared to announce anything at this point in time though..

Okay. Thank you. We look forward to continued improvement..

Okay, Greg. Good talking to you..

Our next question is from the line of Phil Gibbs from Capital Markets. Your line is open..

Hello. This is Phil Gibbs again.

Heavy equipment, did you say that the fourth quarter sales are going to be similar to the second quarter, Denny, kind of a bounce back from the weak Q2 levels?.

Yes, weak Q3..

Yes, that’s what I mean..

Yes..

Q4 looks like Q2?.

Yes. I did say that and that’s the way we feel and that would be supported based upon some of the bookings we’ve seen so far in October. And remember that it’s pretty short lead time business. We do that stuff in five or six weeks..

Okay.

And this is the tool steel market essentially, right?.

Yes. That’s the vast majority of that. So we’ve seen 2018 was an all-time record. If you recall, things started to slow down in the fourth quarter. In hindsight, it’s always 2020. So I think the market itself got a little ahead of itself. So we’re in a middle of a destocking phase.

I think it’s further aggravated by the fact we’ve seen very sharp decreases in full price due to surcharges. If you think about what I said there, surcharges fell from $0.71 a pound back in January to $0.38 a pound here as we get into the fourth quarter and our product and sales were about $0.50 or $1.75 a pound.

So that’s a tough tool to swallow and to navigate through in a very short period of time..

I’ve got a couple of other questions before I wrap up, but I know you had raised base prices on certain alloyed materials maybe three to six months ago and I know those weren’t going to kick in anyways until 2020, but the vibe in the industrial markets has clearly changed.

Did you think that impacts that price increase announcement that you put out or you still expect to see that based on the products that you targeted?.

Phil, this is Chris. The acceptance in the marketplace with the price increase has been what we’d call 100% capture rate, so we are getting it with a lot of the new orders that are going in. It will be a 2020 event before we start to realize them. That was primarily on a low alloyed product..

Okay..

So we’ll start to see that benefit next year..

Okay. And I think I had one more but I don’t remember. Thanks, guys. I appreciate it..

You’re welcome..

[Operator Instructions]. Our next question is from the line of Cole Fiser from Forest Hill Capital. Your line is open..

Hi, guys. This is Cole.

How are you doing?.

Good, Cole.

How are you?.

Doing really well. So earlier on the call when you said that you were carefully considering the Synalloy proposal, I just wanted to confirm that as part of that that would be considering all strategic alternatives like shopping the company or taking it through a competitive bidding process and/or buybacks as well..

I would refer you to our 8-K filing. That’s all I’m prepared to say in this format..

Fair enough. All right. Thank you..

Our next question is from the line of Phil Gibbs from Capital Markets. Your line is open..

I remembered. Déjà vu all over again. As we kind of look out into next year, I know you’re a spot buyer of electrodes and pricing there has softened but most of the supply chain had build a level of inventory into 2019 given the scarcity that excited a couple of quarters ago.

Assuming these recent spot prices that we’re seeing now in the graphite electrode market persist, when can you better realize those lower costs in the future?.

I think clearly the third quarter was the high watermark. You’ll start to average down what’s in inventory with purchases in the fourth quarter. So you’ll start to see that bleed into our P&L as we go into the first half of 2020.

But I don’t think you’re going to get to the point where you basically liquidate the electrode inventory to the point where we’re back down to call it $3 a pound, $2.5 a pound until midyear next year..

Okay. And then last one, I just want to make sure I’m clear here, Denny. It sounds like there’s a bit of benefit on the nickel side in Q4, still some hangover in the vanadium kind of tool steel grades in terms of alignment but we could see a little bit of a benefit.

To the extent you had let’s say fair scrap prices started to stabilize and move higher and nickel stays in and around where it’s at and the vanadium piece stops falling, should we expect as we look out into the first half of next year that these misalignment issues will turn to some level of positive for you?.

I used the term easing in the fourth quarter for the reason you just alluded to, because we know nickel-based products will see higher surcharges in October and November. Those surcharges go down a little bit in December based upon the retreat that we saw in nickel so far. I think we’re at 7.35 I think the last time I checked on nickel. Okay.

So what we’re looking at in the fourth quarter is an easing compared to third quarter because we’ll have more positiveness on nickel bearing but we see continued misalignment on the non-nickel bearing steels, tools still being the most clearing. I don’t see that getting worse. I see that stabilizing. So we just said easing.

We didn’t say we’re going to turn positive. As we get into the first quarter, you’re asking me to forecast something that’s wild to forecast, but if the nickel holds up where it’s at today or rises somewhat as we get into the first quarter of next year, which would require really some increased activity in China in my mind --.

Sorry to interrupt, Denny. Let’s just say that things stay where they are now..

Things stay where they’re at right now, then I would say we’d be – in the first quarter next year – I’d say we’d be neutral in the first quarter next year..

Thank you..

You’re welcome..

I’m showing no further questions at this time. I would now like to turn the conference back to Mr. Dennis Oates. Please go ahead..

Thank you very much. Once again, I want to thank everyone for joining us this morning. We sincerely appreciate your ongoing support and interest in Universal. We’ll look forward to updating you on our progress during the fourth quarter on our next call in January. Have a great day and early wishes for Happy Holidays..

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect..