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Edited Transcript of USAP earnings conference call or presentation 23-Jan-19 3:00pm GMT

Q4 2018 Universal Stainless & Alloy Products Inc Earnings Call

BRIDGEVILLE Jan 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Universal Stainless & Alloy Products Inc earnings conference call or presentation Wednesday, January 23, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher M. Zimmer

Universal Stainless & Alloy Products, Inc. - Chief Commercial Officer & Executive VP

* Christopher Thomas Scanlon

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

* Dennis M. Oates

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

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Conference Call Participants

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* Lucy Guo

Cowen and Company, LLC, Research Division - VP

* Michael W. Gallo

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

* Philip Ross Gibbs

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

* June Filingeri

Comm-Partners LLC - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Universal Stainless Fourth Quarter 2018 Conference Call and Webcast. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. June Filingeri. Ma'am, you may begin.

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June Filingeri, Comm-Partners LLC - Analyst [2]

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Thank you, Lauren. 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 fourth quarter 2018 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, 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 procedures at that time.

Also please note that in this morning's call, management will make forward-looking statements under the Private Securities Litigation Reform Act of 1995. I would like to remind you of the risks related to these statements, which are more fully described in today's press release and in the company's filings with the Securities and Exchange Commission.

With these formalities complete, I would now like to turn the call over to Denny Oates. Denny, we are ready to begin.

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

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

As our results show, we hit a rough patch in the fourth quarter of 2018 after achieving 3 consecutive quarters of strong sequential and year-over-year sales growth, coupled with strong profitability and EBITDA. A stronger-than-expected seasonal order pattern was evident as several customers delayed shipments into the first quarter of 2019, contributing to a $12 million sequential decline in sales. That drop was against a backdrop of rising economic worries, a drop in oil prices and unresolved geopolitical issues, including the China-U. S. trade issue. On the plus side, the aerospace market remained on a strong growth track, and it helped us -- it helped drive our premium alloy sales in the quarter. We ended the fourth quarter with record backlog and a healthy order entry. In fact, order entry in January has continued on a strong track and is approximating $23 million to $25 million as we sit here today. That would be before surcharges. I'm also pleased to report that we achieved record sales for the full year 2018.

Taking a closer look at the fourth quarter details. Fourth quarter sales totaled $57.1 million, up 13.5% from the fourth quarter last year, although they were 17.4% lower than the 2018 third quarter. Full year sales increased 26.3% to a record of $256 million.

Fourth quarter premium alloy sales totaled $8.1 million, an increase of 10.7% from the fourth quarter a year ago or 11.4% lower than the third quarter of 2018. Full year 2018 premium alloy sales increased 50% to a record $41.1 million or 16.1% of total sales.

Gross margin declined to 11.3% of sales compared with 12.3% of sales in the fourth quarter of 2017 and 15.1% of sales in the 2018 third quarter.

We had 5 issues that negatively impacted our margins. First, general inflation on supply items continued with a noteworthy spike in electrodes, which are critical consumable in electric arc steelmaking. Electrode prices have risen from $2 a pound a year ago to a blended average of approximately $6 a pound today. While we do surcharge for electrodes, the rapid rate of increase temporarily exceeded our ability to recapture the higher costs. We expect this relationship to come into balance as the market stabilizes this year.

Second, as in the case of electrodes, commodity prices fell sharply, leading to a misalignment of surcharges and melt costs. Specifically, nickel ended the year at $4.92 per pound, a drop of 13% since September and a significant decline of 28% versus the 2018 high of $6.85 a pound. That occurred back in June of this year -- of 2018, rather. Nickel prices are on the rise in 2019 and currently stand at $5.25 a pound. The misalignment of electrodes and raw materials we estimate amounted to about 180 basis points in the fourth quarter and roughly $0.10 a share.

Third, while fourth quarter output from our manufacturing facilities was at the highest level since the second quarter of 2012, our productivity in terms of output per equipment hour and per labor hour were below past performance. Specifically, our melt shop in Bridgeville struggled through numerous maintenance issues during the quarter, which were resolved during a 1-week outage earlier this month. Issues related to negotiating our new labor contract are behind us as well. We estimated that impacted the fourth quarter by approximately 100 basis points or $0.05 a share.

Lastly, we recorded a $700,000 physical inventory adjustment, which amounted to 120 basis points in the quarter or $0.06 per share, which was related to physical inventories taken at 3 of our facilities in the first week of December.

On a positive note, our new bar cell in Dunkirk is coming to life as commissioning activities proceed. We processed about 100,000 pounds in the line, including some customer orders. In some cases, manufacturing cycle times, which currently take days, have been done in 20 minutes. Surface finish and overall quality of the product is proving to be substantially better than industry standards.

Fourth quarter net income totaled [$583,000 or $0.07 per diluted share] (corrected by company after the call) compared with breakeven performance in the fourth quarter of 2017 before a tax benefit and net income of $4.4 million or $0.44 per diluted share in the third quarter of 2018. Full year 2018 net income increased 940% to $10.7 million or $1.28 per diluted share] (corrected by company after the call).

With regard to our financial position, we entered 2019 much stronger because of initiatives in 2018, adding to our flexibility to pursue our long-term strategy.

Turning to our major end markets, let's start with aerospace. Aerospace sales represented 62% of total sales in the fourth quarter of 2018, up from 56% of sales in the fourth quarter last year and 54% of sales in the 2018 third quarter. Fourth quarter aerospace sales totaled $35.1 million, which is up 23.7% from the fourth quarter of '17, although 5.9% lower sequentially. Full year aerospace sales increased 33.2% to $148.9 million or 58% of total 2018 sales. The aerospace market remains on a strongly positive trajectory as evidenced by year-end production reports from Boeing and Airbus.

Earlier this month, Boeing reported delivering a record 806 airplanes in 2018, including 257 737 MAXs, and they booked a total of 893 net orders for the year. Meanwhile, Airbus delivered 800 airplanes in 2018 versus 718 the prior year, although their order rate was down somewhat from 2017. Even so, Airbus' backlog at year-end 2018 represented more than 9 years of production, while Boeings backlog represents an estimated 7 years of production. Both plane makers are scheduled to increase narrowbody production this year and are expected to announce even higher rates in 2021.

Another positive development, global passenger traffic is continuing at healthy levels according to the latest reports from the International Air Transport Association, which noted the revenue passenger miles grew 6.2% year-over-year in November. That trend supports continued aftermarket growth. IATA also reported that freight traffic remained level with a very strong October. Overall, we expect the aerospace market to continue to drive our growth for the foreseeable future.

The heavy equipment market remained our second largest market in the fourth quarter of '18, representing 16% of total sales compared with 15% in the fourth quarter of '17 and 19% of sales in the third quarter of '18. Fourth quarter 2018 heavy equipment sales, which are primarily tool steel plate sales, totaled $9.1 million, an increase of 20.8% from the fourth quarter last year but 32.1% lower than their record level in the third quarter of 2018. So the seasonality of our tool steel business, which I've described many times in the past, was especially strong this past year. However, total heavy equipment market sales increased 23% in 2018 from 2017. We expect additional growth in 2019, and bookings so far in early January support that view.

The oil and gas end market remained our third largest market in the fourth quarter of '18, representing 11% of total sales versus 9% of sales in the fourth quarter of 2017 and 13% of sales in the third quarter of 2018. Fourth quarter oil and gas sales totaled $6.3 million, an increase of 31.6% from the fourth quarter of 2017 but lower by 29.6% sequentially. For full year 2018, our sales to the oil and gas market rose 65%.

Sentiment changed rapidly in the oil and gas market in the fourth quarter caused by a substantial drop in oil prices as much higher-than-expected shale production combined with the affected geopolitics to create concern about the balance of global supply and demand. Schlumberger cited those factors in their recent earnings report. And although they also said that they expect a gradual recovery in oil prices over the course of '19, they added though that current oil price volatility is adding more uncertainty to the outlook for both drilling and production in North America, although they expect international markets to grow in the high single digits in the coming year. For Universal, we remain optimistic about prospects in oil and gas in 2019 as we continue to benefit from the capabilities of our North Jackson facility, where we have entered in a new year with healthy orders and backlog. While our customers acknowledge the current crosscurrents within their industry, the consensus is that 2019 will be a solid year, on par with 2018.

Power generation -- the power generation market sales represented 3% of total sales in the fourth quarter of 2018 compared with 9% of sales in the fourth quarter of '17 and 4% of sales in the 2018 third quarter. Fourth quarter 2018 power generation sales totaled $1.9 million, which is down 55.1% from the fourth quarter last year and lower by 28.5% sequentially. Demand in the power generation market continued to fade in the fourth quarter with little maintenance spending and no signs of new turbine build. We will continue to pursue any opportunities that arise but expect our power generation sales to be a small portion of our total sales mix for the foreseeable future.

Our general industrial market sales were 7% of sales in the fourth quarter of '18 compared with 9% of sales in the fourth quarter of '17 and 7% of sales in 2018 third quarter. General industrial sales totaled $3.8 million, a decrease of 19% from the fourth quarter of 2017 and down 25% sequentially. They rose 2.3% for the entire year 2018.

Our general industrial business serves the semiconductor, medical, infrastructure and general manufacturing markets. The slowdown in the chip sector in the fourth quarter, which was made more challenging by U.S.-China trade tensions, contributed to the softness we experienced in the quarter. The sector is expected to reach a trough in mid-2019, at least according to most analysts. Meanwhile, the World Semiconductor Trade Stats organization is forecasting 2.6% growth in the global semiconductor market in '19, with 1.4% growth in the Americas, that's versus 19.6% growth in North America in 2018 and 35% growth in '17. Fortunately, the growth outlook for the balance of the markets in our general industrial business remains positive.

Let me take a minute and turn the call over to Chris Scanlon. And Chris, would you give us your financial report, please?

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Christopher Thomas Scanlon, Universal Stainless & Alloy Products, Inc. - VP of Finance, CFO & Treasurer [4]

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Thank you, Denny. Good morning, everyone. Let's start with the P&L. As Denny noted, fourth quarter 2018 sales of $57.1 million were up 13.5% compared with the 2017 fourth quarter and down 17.4% or $12 million from the 2018 third quarter.

2018 full year sales reached a record level of $255.9 million and were up 26.3% compared with prior year sales. Increased 2018 revenues were driven by all end markets except for power generation. Our aerospace end market sales increased $37.1 million year-over-year.

Fourth quarter gross margins totaled $6.4 million or 11.3% of sales, down 380 basis points from the 2018 third quarter and down 100 basis points from the 2017 fourth quarter. As Denny noted, in the 2018 fourth quarter, our gross margin was negatively impacted by melt cost misalignment compared to our commodity surcharges. Additionally, the sequential decline in gross margin was driven primarily by supply item cost increases, which included increased electrode costs. We also experienced lower productivity associated with the labor contract negotiations as well as unplanned maintenance issues, primarily in the Bridgeville plant. Lastly, we recorded physical inventory adjustments totaling approximately $700,000 or $0.06 per share, which further reduced fourth quarter gross margin. These physical inventory adjustments decreased fourth quarter gross margin by 1.2%.

Turning now to selling, general and administrative costs. Fourth quarter SG&A was $5.6 million or 9.7% of sales, an increase of $428,000 compared with the 2018 third quarter and a $438,000 increase compared to the 2017 fourth quarter. Employee-related costs drove the SG&A change between periods driven by executive recruiting fees as well as year-end accrual activity true-ups increasing compared to the third quarter of 2018 and the prior year fourth quarter.

Our tax rate for the year ended December 31, 2018, was 15.4% and included approximately $900,000 of favorable research and development credit items, partially offset by the exploration of fully vested stock options. Specific to our fourth quarter, the income tax provision was a benefit of $441,000, primarily due to the favorable impact of R&D credit-related items and, to a lesser extent, updates to valuation assumptions related to state deferred tax assets.

Net income in the fourth quarter was in $583,000 or $0.07 per diluted share. Third quarter 2018 net income totaled $3.9 million or $0.44 per diluted share. 2017 fourth quarter net income totaled approximately $7.9 million or $1.06 per diluted share. Note the prior fourth quarter net income was driven by income tax benefit associated with the 2017 Tax Cuts and Jobs Act. Before that tax benefit, income in the prior year fourth quarter was at breakeven levels. Full year 2018 net income totaled $10.7 million or $1.28 per diluted share.

Take a look at EBITDA next. Fourth quarter EBITDA levels totaled $5.4 million, a decrease of $4.7 million or 47% sequentially and a decrease of $370,000 or 6% compared to the fourth quarter of 2017. Full year 2018 EBITDA totaled $35.6 million and increased by $12.7 million or 55.6% compared to the full year EBITDA -- full year 2017 EBITDA of $22.9 million. Adjusting for noncash share compensation expense, 2018 fourth quarter adjusted EBITDA was $5.7 million. The EBITDA and adjusted EBITDA calculations are provided for in the tables on the press release.

Turning to the balance sheet. At the end of the fourth quarter, managed working capital totaled $123 million and decreased by $13.9 million compared with the third quarter of 2018. Accounts receivable decreased by $11.6 million, and inventory increased by approximately $12 million, while accounts payable increased by $14.3 million. Our increased inventory levels supported our higher backlog, which grew by $14.8 million during the quarter, up to a record $126.2 million.

Capital expenditures for the fourth quarter were $2.2 million, with year-to-date capital expenditures totaling $15.4 million. Prior year fourth quarter capital expenditures totaled $3.3 million, with 2017 prior year capital expenditures totaling $8 million. Increased 2018 capital expenditures relate to strategic spend, primarily our new midsized bar cell unit at our Dunkirk facility. As Denny previously noted, our bar cell unit began commissioning in the fourth quarter.

Our year-end restricted cash balance totaled $400,000, which represents a $5.8 million reduction from the third quarter. The reduction in restricted cash favorably impacted our debt levels as restricted cash was used to pay down revolving credit facility borrowings. Our restricted cash is related to the use of the New Markets Tax Credit Program funds. These funds assisted in the financing of our midsized bar cell capital project.

Taking a look at debt. The company's total debt of December 31 stood at $46.7 million, a decrease of $15.7 million from the prior quarter. Net of cash and restricted cash, our debt totaled $42.7 million at the end of the fourth quarter. Our fourth quarter debt level reduction was primarily driven by favorable working capital changes. Additionally, as previously noted, restricted cash receipts also reduced our revolving credit facility at year-end. Lastly, our decreased year-end debt level, combined with our 2018 adjusted EBITDA, will allow us to achieve the lowest pricing tier within our PNC credit agreement.

This concludes the financial update. And with that, Denny, I'll turn the call back over to you.

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

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Okay, Chris. Thank you. So in summary, we wrapped up a challenging quarter recently. Let me say 4 things about it: first, strong aerospace fueled bookings and record backlogs, one of the highest output quarters in the company history and the highest since the second quarter of 2012; strong cash flows, which enabled us to reduce debt substantially; pressured margins, however, caused by a misalignment of surcharges and commodities, including electrodes, which we expect to stabilize this year; manufacturing issues, which have been addressed; and a onetime physical inventory adjustment.

From an annual perspective, we achieved record sales of $256 million. Group premium melted products over 50% to $41 million, reflecting the hard work over the years and garnering customer approvals for all those new products. Our balance sheet was strengthened significantly. Margins on the year did expand despite the decrease in the fourth quarter. We completed the installation and the initial commissioning of a state-of-the-art bar cell in our Dunkirk facility.

And lastly, I'd like to introduce Alyssa Snider, our new Vice President of Human Resources and Chief Human Resources Officer, a key addition to our staff, which I'm looking forward to working with Alyssa to continue to evolve our organization and build the skills into this organization that carry out the strategy we focused on in the future.

I also want to take this opportunity to thank all of our employees for their hard work, their dedication and their support during '18 and look forward to building on our successes in 2019, a year that begins with record backlogs, continued strong bookings and many opportunities to profitably grow our business, consistent with our long-term strategy.

With that, operator, we'd love to take some questions.

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Questions and Answers

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Operator [1]

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

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

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Denny, just to kind of dig in a little bit on the gross margins. Obviously, you back stepped a little bit in the back half due to a litany of kind of onetime items. So I guess, has anything from that lingered into the first quarter or first half of 2019? I look at nickel prices, which have been a headwind, surcharge misalignment, that seemed like that's reversed pretty sharply here early in January. Obviously, the inventory charge shouldn't reoccur. It would seem like the demand side continues to be pretty strong given your order entry and your backlog. So how quickly can you get back to a mid-teens margin? Are there any lingering issues that carry into the first quarter? Or do you think the fourth quarter was kind of just abnormally low, and it'll work its way out pretty quickly?

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

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Well, let me take those issues one at a time. I can give you my perspective on it. As far as the physical inventory adjustment goes, that's a onetime. It's done. It's past. That's not going to continue, okay? That was 120 basis points roughly, $0.06 per share. The manufacturing issues largely had to do with productivity in our facilities. Most of those issues were maintenance-related. We did take our melt shop down the first week of January and fixed a number of things such as the tilt mechanism in our electric arc furnace and so forth. So from my standpoint, we've addressed those maintenance issues in the melt shop. We also had some issues in our hot mill. We have an outage scheduled for the -- next week actually in our hot mill here in Bridgeville to address those issues. So my expectation is those issues are largely behind us. We still have some work to do in the first quarter, however, from a maintenance standpoint. As far as the misalignment goes, the first quarter, I don't think it'll be eliminated. It is true that nickel has improved. But if you look at the trend, our surcharge have a [2:1] lag, as you know. So the surcharge in January is based upon what we saw in November and February based upon what we saw in December. So we know that surcharges will continue to decrease modestly. If you look at nickel alone in the first month of the year here in January, it has increased. So you'll see an inflection in surcharges beginning in March of this quarter. So that's one piece of the equation. If you picture a curve, surcharges will continue to dip in January and February and start to increase in the month of March. We look at the cost side of that equation, with each passing month, we are shipping product that was made with lower input costs. That's the whole sources of the gap, so that should be easing as we move through the first quarter. So the conclusion of all that talk is I do not expect the misalignment to totally disappear in the first quarter, but I expect it to be smaller, perhaps in a range of half. So as far as margin goes, what does that mean in terms of margin? We're 11.3%. As we look at this -- and you said get back to the mid-range of gross profit margins. If midrange is defined in your mind as 14% to 16%, I think we have an excellent shot in the first quarter given the misalignment that will continue this year to get in the low end of that range. Does that answer?

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

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It does. Denny, just want to dig in a little bit on oil and gas. I mean, obviously, there's been a lot of questions about that area just given the volatility in the marketplace and some of the questions about that, particularly given your exposure to more deepwater kinds of markets. So I guess, you mentioned sort of you still feel pretty confident that, that can be pretty similar in '19 that it was to '18 in terms of sales and still seeing good order entry. And I know that, that can be pretty volatile. But can you just speak to just some of the increased capabilities, whether you're selling more products into new markets or more land-based markets? Or what gives you confidence that, that can be similar in '19 that it was in '18?

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

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Let -- I'll take a crack at that, and then I'll turn it over to Chris Zimmer, our Chief Commercial Officer, to add to my comments. As we look at our customer base, my comments relate basically to what our customers are telling us, which in summary would be, "We read the same stuff you're reading, Denny. We see the same stuff on TV. We do see the crosscurrents." It's the term I used in my script. But it's not as bad as what you're hearing and what you're seeing. And from their standpoint, they're looking at a year 2019 that's comparable to '18 in terms of level business they're doing with us. So that's the source of my commentary. Chris, you want to add anything about the products we're offering out of North Jackson?

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Christopher M. Zimmer, Universal Stainless & Alloy Products, Inc. - Chief Commercial Officer & Executive VP [6]

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Yes, I think the headlines are talking about what may be a leading indicator for out years, but what we see in 2019 both from our existing backlog coming into the year and continued strong entry here in January is that we see continued growth expansion in oil and gas. It's on the exploration side. It does go into offshore projects anywhere where there's a sour patch and an aggressive environment. The ability to grow on that business is coming primarily out of North Jackson off of the radial forge there and the new capabilities it brings to the company. So what we see for '19 is the support of projects that have already been launched and feel pretty good about '19 continuing to expand in oil and gas.

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Operator [7]

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Your next question comes from Lucy Guo with Cowen and Co.

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Lucy Guo, Cowen and Company, LLC, Research Division - VP [8]

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Good to have Q4 behind us, right?

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Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [9]

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Say that again.

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Lucy Guo, Cowen and Company, LLC, Research Division - VP [10]

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Shipment was also down sequentially. Still up year-over-year, but it's down sequentially kind of more than I thought given your order rates and your record backlog. Maybe if you can address that. And what was the orders number for Q4, please?

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

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Okay. I mean, the fourth quarter is always a seasonal lower -- slower quarter. Last quarter, I believe I said that I expected it to happen but not to the degree it actually did. So I was a bit surprised, to be candid with everybody, at the magnitude of the push-outs into the first quarter, and I was surprised with the seasonality given the strength in the overall marketplace. We had taken a look at the raw numbers. We're down $12 million. You can see that. It was mostly service center accounts that pushed it out. Large service centers basically hit all the markets that we serve. I don't know that any one market stood out to me in terms of what was pushed out. In terms of quantifying, it gets a little difficult to pick out individual orders and which ones could have gone and didn't go. I will just say that we had just under $4 million sitting on our docks ready to go at the end of the year, $4 million worth of product. Chris, I don't know if you have anything to add about the seasonality or what happened in December.

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Christopher M. Zimmer, Universal Stainless & Alloy Products, Inc. - Chief Commercial Officer & Executive VP [12]

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Yes, I'd echo that. When we look at how our product goes to market largely through service centers, there is a cyclicality to how they manage their inventories in support of their business. And traditionally, that is front-end heavy in the first half of the year. So any of the true-ups to their inventory, whether it's an internal inventory objective that they're trying to achieve or just truing up their inventory against what they're seeing for demand, the fourth quarter is always an adjustment period. But what we see and what we know going into the first quarter is a strong backlog. We've got WIP in motion to support it, a lot of that ready to ship and go out the first week of January and has shipped already. So that traditional seasonal first quarter bounce back in the fourth quarter is a part of what we expect to see happen here as we move into '19.

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Lucy Guo, Cowen and Company, LLC, Research Division - VP [13]

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That's good to hear. Would you have the orders number? The last 2 quarters were around $72 million per quarter, the order intake.

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Christopher M. Zimmer, Universal Stainless & Alloy Products, Inc. - Chief Commercial Officer & Executive VP [14]

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Yes, bear with me. So for the second quarter, order entry for the company was at record levels. I'm just pulling them together here. We may have to get back to you with that. From a historical perspective, the second quarter was the strongest that we've experienced, followed by our second biggest in the third quarter. We continue to see strength in the fourth quarter, and we haven't seen signs of order entry slowing down right now. So that's indicative of what's happening with our backlog at that $126.2 million number, millions of dollars in the backlog going in. So that order entry indicator is still strong. Denny has got some numbers here.

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Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [15]

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So Lucy, to go back to the first quarter of 2018, I'll give you the sales bookings. Just keep in mind these numbers exclude surcharges, okay? All right. So first quarter was $68.5 million. Second quarter was $71.5 million. To Chris' point, that was the all-time record. Third quarter was $69.2 million, and the fourth quarter was $66.6 million.

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Lucy Guo, Cowen and Company, LLC, Research Division - VP [16]

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That's good to know.

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Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [17]

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As I said in my prepared comments, we're tracking to just under $25 million so far this quarter -- this month, rather. So you can extrapolate from that about the level of activity in the market. Hopefully, that helped.

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Lucy Guo, Cowen and Company, LLC, Research Division - VP [18]

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Yes. And maybe just finally, if you can address a little bit specifically to the premium products, how you're seeing that shape up given the nickel prices, surcharge dynamics, et cetera.

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

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Well, I think we're very pleased with what we saw in 2018. I mean, everybody in this company has worked very diligently on the long-term strategy, and it was a very frustrating process to begin to start getting approvals. And then we entered a couple of years, we're relatively slow in the industry in '15 and '16. So it's been nice the last couple of years, particularly '18, to see a 50% growth in something we've been working on since the North Jackson acquisition. As far as 2019 goes, we see continued opportunities to build on that growth. It won't be the same percent obviously, but we still see opportunities to grow that business. We continue to get additional approvals and to hook up new customers for things that we're not doing in the prior years. Chris, I don't know if you have anything to add to that.

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Christopher M. Zimmer, Universal Stainless & Alloy Products, Inc. - Chief Commercial Officer & Executive VP [20]

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Yes, I'd echo that. The premium alloys are going to continue to be the fastest growing portion of our business, and we expect to see that continue in '19, not only transactional activity but long-term agreements that we're continuing to lock up, primarily with aerospace customers. So some major helicopter producers, bearings companies and multiple different product lines are coming online in '19. And we have more in the works for '19 that we'll realize in '20. So there is a tail to the development, the approvals, but it's exciting to see the shipments finally start to be realized and the revenue expansion in those products.

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Operator [21]

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(Operator Instructions) And our next question comes from Phil Gibbs with KeyBanc Capital Markets.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [22]

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Denny, the inventory adjustment that you pointed out, the $0.05 issue, what was that predominantly related to?

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Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [23]

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It was $0.06 and 120 basis points. It was $700,000, and it was a complete wall-to-wall physical inventory that we did in our Dunkirk, North Jackson and Bridgeville facility in the first week of December. So it wasn't a valuation issue or anything like that.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [24]

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No, I understand that. I'm just trying to piece together what the -- why you would have taken a charge, I guess, related to your inventory.

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Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [25]

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We took a physical inventory count, and that was the difference between what we had on our books and what we actually found in the shop. There may be elements of that, that may come back to us as we continue to process, but it was literally a difference between what we had on our books and what we counted.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [26]

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Okay. Got it. And then how are you looking to, I guess, manage the inventory moving forward? I think it was a little heavier than we thought. I mean, obviously, part of that was due to the -- some of the deferrals from the distributors in the fourth quarter. But maybe remind us of some targets of yours in terms of managing that down and what those expectations are for efficiency there.

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Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [27]

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Well, we're managing through -- we want to get our managed working capital, and that's... so, I'm starting with a bigger picture, managed working capital down to reach 40% of sales. So inventory is the key component of that. Our view on inventory is we do expect further growth in inventory in 2019. We expect that inventory value to be somewhat lower based upon where the raw material costs are, and we expect to have high returns. So we will expect to see higher sales in 2019 and lower inventory balances by the time we get out of the year. In terms of absolute turnover, our turnover is a little over 2. We will expect to get it up in the range of 2.4. And I would just mention, just a reminder, we have about $6 million, $7 million continuously of R&D inventory, which is product we've made. It's good inventory, but it's something we're doing as a part of our approval and research process to support the North Jackson, okay?

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [28]

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And then just a couple of confirmation items, Denny. You said first quarter gross margins, you would expect to be on the lower end of the 14% to 16% kind of range.

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Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [29]

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Yes, [Mike] had mentioned mid-teen margins, and that's kind of where my head is right now. So I do want to make sure we're defining everything right because everyone has got different definitions. So mid-teens is the 14% to 16% range. I would expect we'd be on the low end of that range. Why I feel that way is obviously the physical inventory is not going to be continuing. We expect improvement in manufacturing. And the misalignment I expect to ease, not go away.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [30]

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And then, Chris, you -- can you just remind me what your CapEx was for '18 and what the budget is for '19? And what's composed in that budget?

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Christopher Thomas Scanlon, Universal Stainless & Alloy Products, Inc. - VP of Finance, CFO & Treasurer [31]

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Sure thing. CapEx levels for 2018 were $15.5 million approximately. Our 2019 spend should approximate that dollar amount. 2018 had strategic spend related to the bar cell unit. That number approximated $7 million. We had activity related to maintenance expense that -- or maintenance CapEx that comprised the rest of that. Our strategic spend in '19 will continue with various projects, but we will not have a project like the bar cell. It'll be a series of other strategic spend-related projects. And maintenance spend should continue at roughly that $6 million to $8 million in 2019 as well.

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Operator [32]

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And that does conclude today's question-and-answer session. I would now like to turn the call back over to Mr. Oates for any concluding remarks.

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Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [33]

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Okay. Thank you. Once again, I want to thank everybody for joining us this morning. We sincerely appreciate your ongoing support and interest in Universal and look forward to updating you on our progress in our next call, which will be in April. Have a great day. Thank you.

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Operator [34]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.