U.S. Markets close in 2 hrs 29 mins

Edited Transcript of USAP earnings conference call or presentation 26-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Universal Stainless & Alloy Products Inc Earnings Call

BRIDGEVILLE Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Universal Stainless & Alloy Products Inc earnings conference call or presentation Wednesday, April 26, 2017 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brian Rayle

* Christopher M. Zimmer

Universal Stainless & Alloy Products, Inc. - Chief Commercial Officer and EVP

* Dennis M. Oates

Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President

* Ross Cameron Wilkin

Universal Stainless & Alloy Products, Inc. - CFO, VP of Finance and Treasurer

================================================================================

Conference Call Participants

================================================================================

* Charles A. Smith

Fort Pitt Capital Group, Inc. - EVP, CIO, Treasurer, and Director

* Michael W. Gallo

CL King & Associates, Inc., Research Division - MD and Director of Research

* Philip Ross Gibbs

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Universal Stainless & Alloy Products First Quarter 2017 Conference Call and Webcast. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Brian Rayle. Sir, you may begin.

--------------------------------------------------------------------------------

Brian Rayle, [2]

--------------------------------------------------------------------------------

Hi. Thank you. Good morning. This is Brian Rayle with Libertatis Consulting, and I would also like to welcome you to the Universal Stainless & Alloy Products conference call.

We are here to discuss the company's first quarter 2017 results reported this morning. With us from management are Denny Oates, Chairman, President and Chief Executive Officer; and Ross Wilkin, Vice President, 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. The conference operator will instruct you on the 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 like to turn the call over to Denny Oates. Denny, we are ready to begin.

--------------------------------------------------------------------------------

Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President [3]

--------------------------------------------------------------------------------

Brian, thanks. Good morning, everyone. Thanks for joining us today. After 2 years of very challenging business conditions in our industry, we are encouraged by the strong start to 2017 in sales, order entry and backlog.

We expect the general increase in business activity to continue as we move through 2017, subject to normal seasonal trends. Bookings in the first quarter of 2017 were the highest in 5 years at $57 million and 24.4 million pounds. The bookings were broad based by end use market and by market channel, with a substantial increase in vacuum induction melted product produced in our North Jackson facility.

Let me briefly hit some specifics. Sales of $48.9 million were up 43% sequentially and up 23% compared to the prior year Q1. Sales of premium alloys totaled a quarterly record of $5.8 million or 11.9% of total sales.

Order backlog before surcharges of $57.1 million grew by 30% sequentially. The backlog of premium or vacuum induction melted product more than doubled during the quarter. We announced price increases for certain stainless and low alloy products, which are effective with order entry on April 1 and will begin to impact results in the July time frame.

While all of our end markets delivered top line growth, aerospace, oil and gas and general industrial were the most notable, contributing sequential growth in the 50% to 60% range.

Similarly, all major market channels delivered sequential growth. Service centers up 38%, rerollers up 110%, and forgers up 89%.

Our team has done a great job ramping up production levels in response to the sharp increase in demand. Plant activity levels are generally running at the highest levels since early 2015, with the electric arc melt shop in Bridgeville producing at a higher rate than any quarter since the first quarter of 2012.

These higher plant volumes in the current quarter are not only generating the normal favorable operating leverage on product cost but are also enabling added variable cost savings from improvement initiatives completed in recent years and projects currently underway. All of which will contribute positively to margins over the next few quarters.

Some additional highlights from Q1 include 3 new products were commercialized and an additional approval was received from Rolls-Royce. Customer service levels, as measured by on-time delivery, were maintained at record levels despite the spike in activity.

Safety metrics are tracking towards a fifth consecutive record year. The 20-inch bar mill installation at Dunkirk is in production, reducing cost, improving safety and expanding our size range. New productivity records were established in vacuum induction melting in terms of heat per campaign. Finally, virtually all operational performance metrics are flashing green.

Overall, commodity prices have continued to be relatively stable, albeit with nickel softening somewhat in recent months. Nickel is currently the low end of its recent range between $4.15 and $5 per pound and trending lower. Scrap iron is trading on the higher end of its recent range of $0.14 to $0.16 a pound.

Moly has stayed high across the first quarter at an average of $7.55 per pound compared with $6.85 per pound in the fourth quarter. Most notably, chrome has remained high in the first quarter at approximately $1.48 per pound, following a significant jump in the fourth quarter.

The relative stability in commodities has continued to maintain good alignment between surcharges and melting costs, which was a significant negative impact to profitability throughout 2015 and the first half of 2016. Despite the increase in our top line, gross margin of 8.7% in the first quarter of 2017 was approximately flat as a percent of sales compared with the fourth quarter of 2016.

The lack of improvement reflects 3 issues. First, a certain higher-margin legacy products were underrepresented in first quarter shipments. However, we have a strong backlog of these same products at March 31. Second, the sell through of product produced in the lower volume, higher cost fourth quarter of 2016. The majority of the efficiencies associated with higher first quarter production levels will benefit future quarters. Third, we elected to move some non-prime research and development material at lower-than-normal prices and margins but well above scrap value.

Going forward, we anticipate improving gross profit margins as the benefits of higher 2017, volume driven operating leverage, improving mix profiles, process improvements and selling price increases flow into our financial results.

Our net loss for the first quarter was $0.17 per share, an improvement from a net loss of $0.22 per share in the fourth quarter of 2016 and a net loss of $0.34 per share in the first quarter of 2016.

Included in the first quarter of 2017 net loss was $0.06 per share impact for unusual SG&A items and adverse tax rate impact, which Ross will discuss in a few minutes. EBITDA for the first quarter of 2017 was $4.2 million, substantially improved from $1.1 million in the first quarter of 2016 and $3.2 million in the fourth quarter of 2016. Total debt net of cash was $74.3 million, up $1.8 million compared with the end of 2016's fourth quarter, reflecting the impact of higher working capital to support increased business activity.

The overall demand environment has started 2017 on a positive note, and we are optimistic that it will continue. Mill lead times have moved out. Most customers are signaling real demand growth and adequate to slightly lean inventory.

Taking a closer look at the end markets. Our aerospace sales represented 55% of first quarter 2017 sales. Aerospace sales totaled $26.7 million in the first quarter, up $10 million or 60% sequentially compared with the fourth quarter of 2016 and up $1.3 million or 5% compared with the first quarter of 2016.

We remain very positive of our prospects in the aerospace market over the near and long term. The healthy backlogs of Boeing and Airbus are well documented with narrow bodies ramping about 12% this year. Boeing announced this morning that 2017 deliveries will be 760 to 765 planes versus 748 last year. Passenger and freight traffic growth continue to surprise on the upside, growing 68% depending on whose numbers you use, fueling improved expectations regarding the aerospace aftermarket. The supply chain is also adjusting for the growing likelihood of meaningful increases in defense spending. We see a further positive impact as our expanding product portfolio gains traction in the marketplace.

Lastly, from a mill perspective, customer aero inventories appeared to be in the lean side as we start 2017.

The heavy equipment market was our second largest market in the first quarter of 2017, representing 16% of total sales compared to 13% in full year 2016 and 20% in the fourth quarter of 2016. Heavy equipment sales totaled $7.7 million in the first quarter, up 13% compared with the fourth quarter of 2016 and up 91% compared with the first quarter of 2016.

Strong domestic demand for tool steel plate drove the increase in sales, primarily reflecting pull-through from automotive production and changeover activity, which has remained strong at around 17 million units, although somewhat less than previous projections of 17.3 million units. Off-road and heavy equipment markets are also showing some light as evidenced in Caterpillar's results announced yesterday.

Lastly, share gains from imported product continue to deliver growth. We continue to expect a solid 2017 year in the plate business.

The oil and gas end market continues to report modest improvement despite remaining depressed from previous highs. Sales in the first quarter of 2017 were $4.9 million, up 55% sequentially and represent 10% of total sales, up from 8% of total sales in 2016.

With oil prices range bound in the $50 per barrel area, customers report a modest loosening of E&P budgets and increasing hauls in their inventory after over 2 years of steep destocking.

The increased activity is centered onshore in North America with offshore and international markets still in the doldrums. Onshore rig counts were up 25% since year-end and about 70% year-over-year. We remain unchanged in our anticipation of an improving 2017 and gathering positive momentum heading into 2018. We are actively developing some new products focused on this sector and plan to be in a position of benefit as activity turns.

General and industrial sales were $4.7 million, up 45% sequentially or 10% of sales, increased from 8% of sales in 2016. The increases to this end market are a reflection of our improved participation in infrastructure-related projects and business development activities involving domestic manufacturing.

We expect this growth to continue into 2018. Power generation sales of $4.2 million were 9% of total first quarter sales and delivered 9% growth sequentially and 21% growth compared to the first quarter of 2016. Major players in the gas turbine space, like GE and Siemens, reported weak new turbine orders in Q1 but continue to call for flat year-over-year activity in 2017.

Our customers report steady maintenance business as natural gas slowly supplants coal as the fuel of choice and the existing turbine population works at higher activity levels.

Oil and gas weakness continues to be a drag on the power generation market. We expect to see these dynamics play out over the remainder of 2017.

Let's now turn to our financial report. Ross?

--------------------------------------------------------------------------------

Ross Cameron Wilkin, Universal Stainless & Alloy Products, Inc. - CFO, VP of Finance and Treasurer [4]

--------------------------------------------------------------------------------

Thank you, Denny. As Denny noted, first quarter 2017 sales of $48.9 million were up 43% sequentially compared with the fourth quarter of 2016, and up 23% compared with the first quarter of 2016.

The increase was broad-based across all of our end markets both sequentially and versus prior year. Gross margin for the -- in the first quarter was $4.2 million or 8.7% of sales, up $1.1 million compared with the fourth quarter of 2016 but approximately flat with the fourth quarter of 2016 on a percentage basis.

Gross margin in the first quarter was negatively impacted by adverse mix, the sell-through of product produced at lower volume, higher cost fourth quarter and also the sale of R&D material at lower-than-normal margins. Although first quarter 2017 production volumes increased by 23% compared with the fourth quarter of 2016, only 16% of first quarter shipments were melted in the first quarter of 2017, resulting in a significant portion of the efficiency associated with first quarter ramp up to benefit the second quarter and beyond.

As Denny has noted already, we remain confident in the benefit of volume driven operating leverage, improving mix profiles, process improvements and selling price increases will meaningfully improve our gross margin going forward.

Looking at selling, general and administrative costs. For the first quarter, SG&A was $4.7 million, up $200,000 compared with the fourth quarter of 2016 and included a total of $300,000 of costs related to both a bad debt for a customer bankruptcy as well as legal expenses associated with an ongoing claim with a supplier for the recovery of our previously recorded loss.

Operating loss in the first quarter of 2017 was $500,000, a $1 million improvement compared with the fourth quarter of 2016 and a $2 million improvement compared with the first quarter of 2016.

Our tax rate was 17.7% in the first quarter of 2017, significantly lower than the full year 2016 tax rate of 39.7% and lower than the standard corporate rate of 35%. With our first quarter being in a before tax loss position, the impact of having a low tax rate resulted in our after-tax loss per diluted share being adversely impacted by $0.03 per share relative to the standard 35% corporate tax rate.

In addition, our 17.7% income tax rate includes $50,000 income tax expense from the adoption of new accounting guidance related to stock-based compensation which resulted in additional tax expense that would have previously been booked to stockholders' equity. For full year 2017, tax expense impact of this is expected to be at least $300,000, assuming forfeiture of underwater options that expire this year.

The bottom line net loss in the first quarter, was $1.2 million or $0.17 per diluted share and includes $0.06 loss per diluted share associated with the SG&A items noted earlier, combined with the impact of a low income tax rate also noted earlier.

That said, reported first quarter 2017 results show improvement over both the fourth and first quarters of 2016, which were losses per diluted share of $0.22 and $0.34, respectively.

It remains our primary focus to return the business to profitability as quickly as possible. From an EBITDA standpoint, first quarter EBITDA was a positive $4.2 million, improved from $3.2 million in the fourth quarter of 2016 and improved from $1.1 million in the first quarter of 2016. Adjusting for noncash share comp expense, EBITDA was an adjusted $4.7 million in the first quarter of 2017.

The EBITDA and adjusted EBITDA calculations are provided in the tables of the press release. Turning our attention to the balance sheet. During the first quarter, managed working capital of $92.2 million increased $1.3 million compared with the fourth quarter of 2016 to support the increase in business activity, with backlog at quarter-end up 30% compared with the end of 2016 and up 44% compared with March 2016.

Despite the increase in working capital, overall managed working capital efficiency improved in the first quarter with managed working capital as a percent of annualized sales improving to 47% at the end of the first quarter compared with 67% at the end of the fourth quarter and 55% a year ago.

Capital expenditures for the first quarter were $1.4 million, roughly flat with the fourth quarter of 2016, which was $1.3 million, and up compared with the first quarter of 2016, which was $800,000.

Full year 2017, we continue to expect CapEx to be in the $8 million to $10 million range and is consistent with what is needed to support the business as we ramp up. Total debt net cash was $74.3 million at the end of the quarter, an increase of $1.8 million compared with the end of 2016, driven primarily by the working capital increase noted earlier.

Borrowing availability under our credit facility at the end of the first quarter was $21 million, a record high since entering into the credit facility 15 months ago. In addition, we are in the final stages of discussions with our existing bank group regarding securing additional availability to further support the growth of the business.

Importantly, we remain in compliance with all covenants under our credit facility at the end of the quarter of 2017 and anticipate remaining in compliance going forward for the foreseeable future.

This concludes my financial report. Denny, I'll turn the call back to you.

--------------------------------------------------------------------------------

Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President [5]

--------------------------------------------------------------------------------

Thanks, Ross. In summary, the past 2 years have been challenging in our industry, due to the adjustments made for significant price reductions and key input commodities, the collapse of the oil and gas sector and the evolution of the current super cycle in aerospace against a backdrop of political and economic uncertainty around the globe.

At the start of 2017, we are cautiously optimistic that we're experiencing a sustained upswing in activity and look forward to a continued improved operating environment in the balance of 2017.

Our focus at Universal remains on expanding our product portfolio with more technologically advanced products, maintaining competitive lead times and best-in-class customer service in a period of higher activity levels, driving process improvements across all facilities, improving first time through product quality, developing our organization and preserving a strong balance sheet and liquidity position.

We are excited about the increased business activity, the higher backlog and the prospects for meaningful increases in profitability in the current quarter. As one last data point, the positive momentum in order intake is continuing in April, and we expect month end backlog before surcharges to build to the $62 million to $64 million range.

Skylar, let's take some calls from the listeners.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Michael Gallo with CL King.

--------------------------------------------------------------------------------

Michael W. Gallo, CL King & Associates, Inc., Research Division - MD and Director of Research [2]

--------------------------------------------------------------------------------

Obviously, the improvement was broad-based and the sales in the backlog certainly showing progress. I just want to drill down a little bit on the gross margin line because obviously there was some noise there between nickel prices as well as shipping product that you melted last year. So I guess as you go to Q2, are you totally through that? What percentage of the product is going to be -- have been melted this year? Obviously, too soon to see the benefit from the base price increases, but do you expect we'll be back in double-digit gross margins in Q2?

--------------------------------------------------------------------------------

Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President [3]

--------------------------------------------------------------------------------

Yes, Mike, I think we are very confident we'll be in double digits. So I would say, to be specific and just cutting to the chase, somewhere in that 13% to 15% margin range.

--------------------------------------------------------------------------------

Michael W. Gallo, CL King & Associates, Inc., Research Division - MD and Director of Research [4]

--------------------------------------------------------------------------------

Okay. So you say you expect substantial improvement in Q2. And based on the improvement in backlog and bookings, is it fair to assume we should continue to expect sequential improvements in revenue here in Q2?

--------------------------------------------------------------------------------

Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President [5]

--------------------------------------------------------------------------------

Well, we came out to shoot stronger in the first quarter than most people anticipated, and that activity, that momentum has continued in the month of April. So as I mentioned, we expect to see our backlog continue to build in April, relative to the end of March. Bookings are holding up. Customers remain positive. So that's why we have a cautious optimism, I guess you always put a cautious sign on top of it about the rest of the year. So our expectations specifically would be sales will be higher in the second quarter than the first quarter, with a much improved margin profile as we discussed.

--------------------------------------------------------------------------------

Michael W. Gallo, CL King & Associates, Inc., Research Division - MD and Director of Research [6]

--------------------------------------------------------------------------------

And I guess, again, to come back to April, your commentary on April. It's notable given -- I think you're talking about the backlog before surcharges, and obviously, you had the base price increase. So certainly, it seems that, that did not slow demand and that base price increase seems to be sticking pretty well. I mean, is that a fair characterization of your comments?

--------------------------------------------------------------------------------

Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President [7]

--------------------------------------------------------------------------------

We have Chris Zimmer, our Executive VP of Sales and Marketing, here. So let me ask Chris to answer that one about the price increase.

--------------------------------------------------------------------------------

Christopher M. Zimmer, Universal Stainless & Alloy Products, Inc. - Chief Commercial Officer and EVP [8]

--------------------------------------------------------------------------------

Yes, we put 2 price increases out in the first quarter that went into effect for new order entry for noncontractual business, and what we call the capture rate has been very good. The marketplace has been very receptive to it, and it hasn't slowed our order entry pace that we've seen coming into the year. We've continued at a strong level.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

And our next question comes from Phil Gibbs with KeyBanc.

--------------------------------------------------------------------------------

Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [10]

--------------------------------------------------------------------------------

Denny, can you explain some of the competitive dynamics in terms of -- I know during the oil and gas downturn you said a lot of folks maybe moved material into your core markets away from that to sell capacity. Are we now seeing at least in the short term some of your competitors move away -- moving back more so to the oil and gas market, or is this more the industry just enjoying better volume momentum, you think, overall?

--------------------------------------------------------------------------------

Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President [11]

--------------------------------------------------------------------------------

I think it's more of the latter, Phil. I think this is pretty broad-based. Most markets are generally up as we see it. I can't point to any specific cases where people who may have moved into our space given what was happening in other markets have moved back and gone back to the old way of doing business. It's still pretty competitive out there. I just think that the fundamental demand has improved. If you go back historically, you and I have talked about this before, because we have a relatively high exposure to service centers and forgers, we tend to see an improvement sooner than the rest of the industry. By the same token, we see downturn sooner than the rest of the industry. And I think this just validates that phenomenon that we've seen several times over the last 10 years.

--------------------------------------------------------------------------------

Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [12]

--------------------------------------------------------------------------------

I appreciate that. Is the 2Q cost compression result of the fact that in the first quarter you had some pretty strong melting campaigns and so you're seeing that lag into Q2 in a positive way just as though you saw in Q1 sort of the other side of that coin from Q4 given maybe your work-in-process inventory cost. Is that a decent way to think about it?

--------------------------------------------------------------------------------

Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President [13]

--------------------------------------------------------------------------------

Yes. We run an average cost system, so the higher activity levels in the first quarter -- gives you 2 things. One is the straight operating leverage on fixed cost, plus many of the things that we've done over the last couple of years to improve performance -- it's been a little frustrating because you don't have the volume to put through to really capture the variable cost improvement on that so you get the benefit there as well. We expect a better mix beginning of the second quarter based upon what we see sitting in our backlog at the end of March. So that's the main -- they are the 3 main reasons we anticipate stronger margins in the second quarter compared to the first quarter. And as we move into the third, our production activities are remaining at a pretty crisp clip. We also have selling price increases that will start to kick in on a portion of the product portfolio there as we move into the July time frame.

--------------------------------------------------------------------------------

Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [14]

--------------------------------------------------------------------------------

Got it. That's helpful. Ross, any perspective you can provide on networking capital management moving forward? It looks like the inventory is built a little bit in terms of some positive reaction to improvement in business activity. You did have a pretty solid expansion in payables. How do we think about the net of those couple of things moving forward? Maybe some view on whether or not you think it's going to be a source or use for the year on the net working capital side.

--------------------------------------------------------------------------------

Ross Cameron Wilkin, Universal Stainless & Alloy Products, Inc. - CFO, VP of Finance and Treasurer [15]

--------------------------------------------------------------------------------

Yes. For the -- in the short-term we will continue to see a slight use of cash for working capital through to the end of the second quarter because we'll expand our receivables predominantly and maybe a slight expansion in inventory offset by payables, partially offset by payables. To the whole year, I would not expect a further expansion in working capital.

--------------------------------------------------------------------------------

Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [16]

--------------------------------------------------------------------------------

For the year relative to where you are today, you are saying?

--------------------------------------------------------------------------------

Ross Cameron Wilkin, Universal Stainless & Alloy Products, Inc. - CFO, VP of Finance and Treasurer [17]

--------------------------------------------------------------------------------

Relative to where we are today. That's right.

--------------------------------------------------------------------------------

Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [18]

--------------------------------------------------------------------------------

Got it. And then last question Denny. Can you remind us what the import sensitivity is for some of the products that you sell and whether or not that import and/or export dynamic has gotten more favorable, less favorable or about the same?

--------------------------------------------------------------------------------

Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President [19]

--------------------------------------------------------------------------------

Imports on the bulk of our products are about the same. The one area we're seeing some benefit is on plate, primarily tool steel plate. Where there is a plate case that's involved and we've seen a decrease in the influx of foreign tool steel plate into the U.S. market, the other products, we really don't compete on a commodity end, so there's really been no change there from a competitive standpoint.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

And our next question comes from Charlie Smith with Fort Pitt Capital.

--------------------------------------------------------------------------------

Charles A. Smith, Fort Pitt Capital Group, Inc. - EVP, CIO, Treasurer, and Director [21]

--------------------------------------------------------------------------------

Quick clarification, the last data point you gave. Did you say your backlog is up basically 10% since the end of March?

--------------------------------------------------------------------------------

Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President [22]

--------------------------------------------------------------------------------

It's not final yet, but based upon what we've already booked, yes, we expect our backlog to build during the month of April, should be in that $62 million to $64 million range.

--------------------------------------------------------------------------------

Charles A. Smith, Fort Pitt Capital Group, Inc. - EVP, CIO, Treasurer, and Director [23]

--------------------------------------------------------------------------------

You mentioned that you expect gross margins in the second quarter improve partly due to mix. Where do you -- is that because you're greater portion of premium alloys as a part of your mix?

--------------------------------------------------------------------------------

Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President [24]

--------------------------------------------------------------------------------

That's part of it. The other part of it is some of our legacy products, where frankly we had some customers, I'll use their terminology, they wanted to confirm that what they were seeing on the demand side was for real and not a hit fake. And as a result of that, they held back on some orders. We sold those orders in the first quarter. They're now in our backlog. So we do not anticipate any -- anticipate an improvement in the mix going back to more normal mixes on our legacy products.

--------------------------------------------------------------------------------

Charles A. Smith, Fort Pitt Capital Group, Inc. - EVP, CIO, Treasurer, and Director [25]

--------------------------------------------------------------------------------

Okay. Your sale of premium alloys basically grew at rates double the rest of your mix year-over-year.

Now at 12% of sales, where can that number go in 2017, do you think?

--------------------------------------------------------------------------------

Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President [26]

--------------------------------------------------------------------------------

We're seeing a stronger environment there. We're also gaining more credibility with each passing quarter in terms of our capabilities in that business. So if you're asking in terms of a percentage or actually dollars, we expect that growth rate to continue as we move through the year. We see no reason for it to drop off. We expect additional approvals in the year, which should result in the second half some improved opportunities for us to sell that product. So what will the number be by the time the whole year's up in terms of percentage, obviously, there's 2 numbers you're looking at, right, the absolute growth, I would say 15% to 18%.

--------------------------------------------------------------------------------

Charles A. Smith, Fort Pitt Capital Group, Inc. - EVP, CIO, Treasurer, and Director [27]

--------------------------------------------------------------------------------

Okay. Last question, power gen up 21% year-over-year with very little growth in sales of turbines. Can that MRO business continue to grow fast enough to keep your power gen sales growing at a healthy rate?

--------------------------------------------------------------------------------

Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President [28]

--------------------------------------------------------------------------------

I believe so. There is a major shift going on.

Obviously, with the disfavor of coal, the increasing benefits of people perceived with gas, the historically low cost of gas, the ready availability of gas is all driving more and more fuel sources to go towards natural gas. So I see no reason why it can't. The nice thing to see would be -- what I anticipate is building is at some point new turbines are going to have to start to sell.

The other comment I would make there, I made it in a little one sentence in my comments, is that a fair amount of the smaller turbines really go into the oil and gas market. So as you look at the oil and gas market recovering, their use of gas turbines will drive some additional gas turbine manufacturing by some of the smaller manufacturers like Solar Turbines, which is part of Caterpillar.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

At this time, I'm showing no further questions. I'd like to turn the call back over to Mr. Denny Oates for closing remarks.

--------------------------------------------------------------------------------

Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, CEO and President [30]

--------------------------------------------------------------------------------

Thanks, operator. And once again, thank you for joining us this morning. We sincerely appreciate your support and interest in Universal. And we look forward to updating you on our progress through our next call in July. Have a great day.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.