Universal Stainless & Alloy Products, Inc.

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

We are here to discuss the company's third quarter 2012 results reported this morning.

With us from management are Denny Oates, Chairman, President and Chief Executive Officer; Paul McGrath, Vice President, Administration and General Counsel; Doug McSorley, Vice President of Finance and Chief Financial Officer and Chris Zimmer, Vice President of Sales and Marketing.

Before I turn the call over to management, let me quickly review procedure. After management has made formal remarks, we will take your questions.

The conference operator will instruct you on procedure 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 the formalities out of the way, I would now like to turn the call over to Denny Oates. Denny, we are ready to begin.

Thanks June. Good morning everyone.

Thanks for joining us here today. Sales for the third quarter of 2012 were $62.3 million which is 7% below the third quarter of 2011 and 8% lower sequentially.

As we reported in September increased order entry in August was not sustained post Labor Day. Instead, our customer base returned to adjusting their inventories and postponing purchases, in part to wait for more clarity on economic and fiscal issues.

For the same reasons some of our customers are seeing some push-outs in their order books.

Customer merger and acquisition activity is another factor to some degree as is normal seasonal softness in the second half of the year. The effect on Universal was that order entry approximated $12 million in September which only partially reloaded our backlog.

As a result, backlog at the end of the quarter decreased to $68.3 million. We expect order entry to be choppy for the rest of this year with recovery expected as we move to through 2013.

Although, nickel prices began firming after the announcement of quantitative easing last month, prices have slipped about 10% to 15% so far in October and stood at $7.39 a pound when I checked it just an hour ago.

Lower shipment volume in the third quarter impacted our operating margin, which was 8.8% of sales on a consolidated basis and included $600,000 of operating expense for North Jackson. Our continued investment in the ramp up of North Jackson included $3.5 million of increased work-in-process inventory to support VIM product and equipment development.

We are also continuing to get employees trained on the equipment and were successful in working through a temperature system problem on the VIM furnace, which caused a two and a half week unplanned maintenance outage in late July.

Earnings per share for the third quarter were $0.45 per share, which included $0.06 of North Jackson ramp up cost.

Cash flow from operations was positive $12.4 million for the quarter. It would have been higher, but for our investment in VIM inventory.

We have otherwise been adjusting our investment and working capital and discretionary spending to match the current lower level of order entry.

Capital spending for the most recent quarter was $10.7 million, of which $6.8 million was for North Jackson.

By way of additional update on North Jackson, the two newest vacuum-arc remelt furnaces are fully operational and commissioned, bringing the total number of VARs in North Jackson up to four and up to 11 throughout our company. These new furnaces coupled with upgrades in existing furnaces have increased our internal VAR capacity by over 60% in the past year, eliminating bottlenecks and meeting our commitment to better serve our aerospace customers.

Production of our radial forge is up 10% in the third quarter with most of that production for Bridgeville and Dunkirk; although, a portion was still for tolling services. External conversion shipments were only about half the level of the second quarter in line with the total business in general.

We have been making important progress in achieving the necessary industry certifications for North Jackson, including Nadcap Laboratory accreditation which was announced in September. We are on target to achieve Nadcap Heat Treat Certification early in 2013 based on an audit scheduled for next month.

Our fourth plant heat treat furnace is nearing completion and will become operational during the fourth quarter.

The vacuum induction melting furnace produced 800,000 pounds of premium product during the third quarter which was below our plan due to the 2.5 week unplanned outage related to complications from a temperature sensing system. Nevertheless, our Alloy Development Program continued with five new alloys melted including 718.

Critical auxiliary equipment like the crucible pre-heater and mold cleaning equipment were installed and became operational. Customer approval activity has continued unabated.

Given our success in getting approvals, commissioning equipment and training employees the first shipments of product directly to customers from North Jackson occurred during the quarter.

Before discussing our end markets, let me note that the current collective bargaining agreement with the hourly employees at our Dunkirk facility expires in October 31st as most of you know. Because negotiations are ongoing, we are not able to provide any commentary about them at this time.

Turning to our sales by end market, aerospace is the strongest market for us in the third quarter of 2012. It also remained our largest market at 52% of third quarter sales, up from 50% in the second quarter and 42% of sales in the third quarter last year.

Our sales to aerospace increased 15% from the third quarter of 2011, but sales were down 4% sequentially on level shipment volume. Even though our aerospace sales remained strong in the third quarter, we believe that supply channel inventory management is continuing to have some level of dampening effect on sales because current and schedule aircraft build rates remain strong positive.

For example, the production rate of the 737 increased to 35 airplanes per month in the 2012 first quarter and then that ramp up is scheduled for the second quarter of 2013. Production increases for the 777 are slated for the first quarter of 2013, and Boeing plans to double their current production rate of 787 by the end of 2013.

As I said before, current and schedule aircraft build rates represent a substantial queue up rate for our metals. Once the North Jackson ramp up is completed and we have obtained customer approvals, we will be able to more fully participate in the aerospace opportunity and do so with higher margin products.

Petrochemical market sales, which are mainly oil and gas related, represented 19% of our third quarter sales compared with 21% of sales in the 2012 second quarter and 23% in the third quarter of 2011. Our petrochemical sales were down 24% from the third quarter of 2011 and 16% sequentially.

For context, in earnings calls last week, Halliburton and Schlumberger and Baker Hughes all reported a lower U.S. rig count due to decreased gas directed activity, the disruptive effect of Hurricane Isaac on drilling in the Gulf for Mexico and a lower than expected rig count in Canada.

Looking in the fourth quarter, Halliburton was cautious based on seeing customers curtail spending compared to the first half of the year. They expect growth to resume in 2013, however even if it’s not necessarily on January 1st and that’s pretty consistent with our view at this point.

Power Generation represented 13% of second quarter sales compared with 12% of sales in the 2012 second quarter and 18% in the 2011 third quarter. While our power generation market sales were down 32% from the third quarter of 2011, they were in level with the second quarter.

We continued to win quick term maintenance business in the quarter, but they are not achieving end of summer maintenance pickup we expected.

Based on the earnings call last week, neither has GE. They described their power generation services business as lumpy in the third quarter with some maintenance deferral.

On the plus side they are also seeing more gas turbines run for base load, which ultimately requires either earlier maintenance or a deeper overhaul.

GE also reported strong growth in orders for new turbines which increased to 29 in the third quarter from 16 last year. While none for the United States, they described reporting activity right here as high with orders expected to follow in ’13 and ’14.

Ultimately gas is becoming the fuel of choice and growth in the gas turbine business appears to be inevitable. We are in good position, once that demand materializes.

In the meantime, we will continue to focus on maintenance business opportunities in this market.

Service center plate sales represented 8% of total sales in the third quarter, which is the same percentage as in the third quarter of 2011, but below the 2012 second quarter when they climbed to 10% of sales. And after spiking 53% sequentially in the 2012 second quarter, our service center plate sales in the third quarter were down 27% sequentially, and down 12% from the 2011 third quarter.

Despite those declines, our service center plate sales in the 2012 third quarter were at the highest level of the past four quarters. The whipsawing of plate purchases by service centers has become fairly routine, as we’ve noted many times before.

Even while news in the automotive industry, which is a major consumer of plate products, remains consistently positive. In fact automotive production in North America increased 15% in the third quarter, which is the 12th consecutive quarterly improvement.

However in the off road market Caterpillar introduced another question in September when they brought down a 2013 targets due to a global economic uncertainty. Add this to our existing level of uncertainty and service center cautiousness in buying is not surprising.

Let me turn the call to Doug at this point for his report.

As Denny had mentioned, our third quarter sales were $62.3 million. That’s a decrease of 5 million or 7.4% from the third quarter of 2011 on a 9.4% decrease in shipments.

As Denny had also mentioned, our volume and products for the aerospace market increased by 13.1%, which resulted in an improved pricing mix for our products in the third quarter.

Selling, general and administrative expense for the third quarter was 4.7 million, a decrease of$ 660,000 or 12.3% from the third quarter of 2011 for $420,000 or 9.9% above the second quarter this year. The decrease from last year is due primarily to $1.1 million recorded for the North Jackson transaction related cost in the third quarter of last year, offset by $600,000 for North Jackson selling, general and administration for the third quarter of 2012.

We also recorded a one-time charge in the third quarter of this year, $200,000 related to employee departure costs. As a percentage of sales, SG&A expense was 7.5% in the 2012 third quarter versus 7.9% in the same quarter last year and 6.3% in the second quarter of this year.

Operating income was $5.5 million in the third quarter of 2012, a decrease of $1.8 million from both the third quarter of 2011 and the 2012 second quarter this year. This represents a decrease of 25.1% and 24.3% respectively.

The operating margin was 8.8% in the 2012 third quarter, compared with 10.7% in the 2011 third quarter and 10.8% in the second quarter of this year.

Before including North Jackson related expenses and income for each period, we achieved an operating margin of 10.1% of sales in the third quarter of 2012, compared with 13.1% in the third quarter of 2011, an 11.4% in the second quarter of this year. Our effective tax rate for the third quarter of 2012 was 33.2% after discreet tax benefits as compared to 32.9% in the second quarter.

Based on our current tax position, we expect that the effective tax rate in the fourth quarter to be 36.3%.

In terms of cash taxes, as we had discussed previously, we generated a taxable loss in 2012 -- in 2011 rather due to the acquisition of North Jackson and the accelerated depreciation from placing those assets and service. In the third quarter, we filed to carry back the net operating loss generated in 2011 to the 2010 tax year and received a federal tax refund of $5.1 million.

The number of shares using computing, the diluted earnings per share in the third quarter was $7.4 million which is the same level as the second quarter of this year, but above the $7.2 million shares in the third quarter of 2011.

The increase is the result of the convertible note provided as consideration for the North Jackson acquisition. Our net income for the third quarter of 2012 was $3.3 million or $0.45 per diluted share.

This included an after tax operating expense for the North Jackson operations of $0.06 .

In the third quarter of 2011, net income was $3.9 million or $0.55 per diluted share, including $0.14 per diluted share of acquisition expense in initial operating ramp up costs for North Jackson. In the second quarter of this year, net income was $4.5 million or $0.62 per diluted share, including a total of $0.06 per diluted share of after tax operating income related to North Jackson.

Turning to the balance sheet, our managed working capital as of the end of the 2012 third quarter, which included receivables and the inventory less accounts payables, was 47.3% of annualized sales, compared with 36.4% in the third quarter of 2011 and 42.4% in the second quarter of this year. Our accounts receivable and inventory were reduced by 15% and 2% respectively from second quarter 2012 levels.

The small decrease in inventory was accomplished despite the continued VIM productions schedule on ramp up, which increased our investment and inventory by $3.5 million.

Also, as the quarter progressed and activity levels declined, we aggressively monitor spending which is reflected in reduced accounts payables levels at the close of the quarter. Capital expenditures for the third quarter were $10.7 million including $6.8 million for the North Jackson facility primarily for completing the installation of VARs an additional heat treating equipment.

At the end of the quarter, our total debt was $113.4 million and our debt-to-capital was 36.6%.

This concludes my report. Denny, I will turn it back to you for final remarks.

Thanks Doug. In summary, the strong increase in our August order entry was not sustained after Labor Day as our service center customers turned cautious again and postponed purchases.

As a result, our third quarter sales, margins and EPS were lower year-over-year and sequentially. Despite the challenging environment, we moved forward with our investment and the ramp up of North Jackson.

With our sights focused on achieving required industry certifications, gaining customer approvals for products produced on our VIM furnace, and getting our new Vacuum Arc Remelt furnaces operational as quickly as possible.

Progress was made on each of these objectives in the third quarter. We plan to continue our investment in North Jackson to make further tangible progress in the fourth quarter, even though most of our customers expect the quarter to be equally challenging.

There is also a general optimism that channel demand will gain traction as we move through 2013, when we will have completed the ramp up in North Jackson.

We also expect to be well along in gaining customer approvals in the coming year. Our reason for acquiring North Jackson was to enable Universal to capture more of the opportunities in the rent markets with higher margin products and to improve profitability.

We expect to gain traction in 2013 in that regard as well. I'll end my formal remarks here and look forward to your questions.

Denny when you look at obviously nickel prices have come down significantly here in the month of October, it seems that nobody wants to hold inventory into fiscal cliff and then you've got the normal service center inventory adjustments, should we assume order rates in the fourth quarter should be relatively similar to the third quarter, what would be your expectation based on what you've seen so far what you hear from customers.

I would look at the last couple of months and expect that to continue kind of a choppy up and down but basically moving sideways.

Second question I have is just on Patriot, I was wondering if you can give us what the revenues from Patriot were in the quarter and then also I thought I heard you say and correct me if I misheard this, that your sales of Patriot external customers were down by 50% so if you could clarify that and just to get a feel for what the backlog is at Patriot, where you are seeing things ramp, how much of it just a lack of customer approvals versus how much is a general sluggishness etcetera. Thanks.

Alright. The comment about the sales being down 50%, deals specifically with conversion business on the forge at North Jackson, and that's business where we are going to a third party, they are sending new material and then we are forging at the size and returning it strictly on the toll basis.

No material or sale is valid in that regard. Just to clarify that one point.

As far as the activity level going through the shop generally as I said the forge is up. We continue to melt in the vacuum induction melting furnace and we are basically building inventory at this point and working towards customer approvals, we are training crews and so forth and so on.

So we look at just the forge, you say what's the revenue coming from the forge, most of that material is going out as Bridgeville and Dunkirk sales. If you recall, it’s not a separate profit center the way we look at North Jackson.

It’s basically doing a step in our manufacturing process with product moving from Bridgeville, going out to North Jackson, being forged and now beginning to go directly to customers or going up to Dunkirk for final finishing into finished bar. So we're not breaking out a separate macro number for sales for North Jackson.

Just directionally though was it the similar level through what it was in the second quarter when you look at just, if you just looking at what you are doing at Patriot that you wouldn’t have been doing at the other?

If you look at forging activity, the actual forging weight going across the forge is up 10% in the third quarter versus the second quarter. If you look at the other facility out there, the heat treating, the finishing area it is down.

So it is trending down based upon what we're seeing in the overall market. The vacuum induction melt, the melt shops little bit different animal though because they were ramping up the facility and the only way to train people, the only way to get customers to approve you is to really get the equipment debugged and operate that facility.

So we're building some inventory which is a little bit unusual. As we said, we built about $3.5 million of working process inventory and doing that over the course of the third quarter.

It's all good material and will sell at some point in time but right now we're using that to develop that facility.

Would you expect shops to build further inventory in Q4 or as most of the built complete?

I think we will build some more. Probably not as much as we build in the third quarter but we’ll continue to operate the furnace and continue to train additional crews and keep in mind, we have an ongoing process of building the quality system there, working for certifications both in the industry as well as the number of different customers who are coming through, looking at how we're doing things so they can approve us as we get into 2013.

When looking at backlog or maybe some of the end market specifically, are there any seasonality impacts that may have kind of over impacted the sequential change in the backlog?

Clearly the third and fourth quarters are softer from a seasonal standpoint in the first two quarters just about every year I have been in the business. So there is a seasonal impact that does play a role but I think the overarching issue here is basically what’s going on in terms of inventory correction out there in various supply chains that we feed into.

So I can’t really quantify what the seasonal impact is we also have a unique somewhat unique I guess but we have got about a half dozen customers who are involved either in being sold, were acquired during the third quarter or are evaluating strategic options and all those customers that have really backed off on they are buying.

Okay. So there is an added element of kind of near-term supply chain management so to speak?

Yes.

You said that was about a half dozen customers.

Yes, specifically.

Could you take a crack at what that would, in terms of revenue, is that the particularly large customers or the 10% of revenue, 25%?

No, it’s not that figure. As I said its preliminary but I am looking for anomalies to answer your question, so the seasonal has an impact but I can’t really quantify that.

As far as the customers we are talking about I wouldn’t say it’s 10% it’s probably in the mid-to-high say single digits.

And then just in the fourth quarter when looking at North Jackson ramp up expenses, I think this quarter is about $0.06 a share. How should we be thinking about that for the fourth quarter?

We will be looking at turning that negative into a positive. We will be fighting two things; we will be fighting lower activity level and the possibility of further surprises as we ramp up new equipment.

Okay.

So we are not planning on having that again but we will be fighting some lower activity levels here as we go through the end of the year.

Okay, so if goes as planned it’s kind of a wash, there may be an incremental penny or two headwind?

Yes.

Two questions, first could you run through again the sequential volume changes for the 4 end markets please?

Shift to Power Gen would lower by 7%, Tim. Petrochem 14%, service center plates 23% and I think we mentioned aerospace was up by 13%.

Okay, and the aerospace is up sequentially by 13%?

That's right.

Okay and second question. I guess, a little surprised by the inventory adjustment going on for product going to the aerospace engine aftermarket and what is causing that, it seems that your air traffic demand isn’t that much different than expectations earlier in the year, are the airliners differing maintenance to a certain extend and I guess if so that, it just, it seems a little concerning if that's the reason, just little more on why that part of the supply chain is used to be having an inventory adjustments?

No, I am not suggesting for a minute that anybody is differing any maintenance among the airlines rising like this. In our view, it’s a very straight forward situation where the market, the way we go to market is about 50% to 60% through service centers, distributors if you will and the expectation in the latter part of last year, at the beginning part of 2012 was for a certain level of growth in their business and although their business is still very active, they did not achieve that level of growth.

And as a result, they found themselves with excess inventories at a time when raw material prices were falling.

This is something that happens from time to time in the business and they are adjusting their inventories down and their plan would be to replenish their inventories with lower cost nickel-based products if you will, as they get their inventories down more in line with the growth rate that they are actually experiencing. It’s not a case where the aerospace business is shut down.

They are still very active and when I use the rate chew up rate I mean there are people still going through metal. The inventories and the supply chain have gotten a little heavy.

I have heard all the comments. You said you thought orders would remain choppy, it’s been a pretty remarkable reversal in nickel.

Is there any color that you can give us on why you think nickel prices have rolled over so aggressively here in the last couple of weeks?

Well, if you look at, let me go back a few weeks and I guess the first question is why did they start to bounce back up last month and I think it was almost the exact same day that Bernanke announced his quantitative easing and there was some good news coming out of Europe and there was a little bit of euphoria. There were really no fundamentals that were driving that improvement in nickel and I think with the passage of just two, three, four weeks, that glow wore off and we were back down at some fundamentals at this point in time.

The fundamental demands, plus buying demand would not support an increase in nickel at this point in time. There is some rumblings about some new nickel capacity not coming on-stream next year, but nobody is pulling any nickel capacity off in any significant amounts that I am aware of.

So there is no supply coming out of the equation and I think a lot of people who are in the commodities from a financial perspective are just kind of scratching their heads, this is Otis’ opinion; you guys know more about this than I do, about where to put their money. And there was a feeling that maybe it was commodities, but maybe the time is not right.

So you saw them jump in and jump out.

I appreciate that. If I could ask another question; you talked about the progress that North Jackson is making; congratulations on that.

Could you give us a little color on what's the significance of being able to produce 718 and also could you give us some color on how you would expect to direct shipments out of North Jackson to unfold here over the next couple of quarters; what end markets, what kind of products?

Okay, we think of that in reverse order; one comment I made was we began to ship products directly to third-party customers from North Jackson in the third quarter, because we now have various AS9100 certification out there and some of the other lab certifications and things like that. As I think you know, we've been bouncing things back and forth from North Jackson to Dunkirk and Bridgeville for final inspection and then shipping.

So we're now moving into near -- where we can ship directly which saves us some transportation costs, a lot of headaches and basically North Jackson is becoming an entity onto itself in a sense in dealing with third-party customers.

I would see that picking up over the course of the next six months. More and more products will be going directly to third-party customers.

As far as what that product is, it will be intermediate size forge VAR, stuff that those now get down to smaller sizes we carry and go through Dunkirk. We also can make flats out there; access, we can make a broad range of products, so anything that’s little over three inches, up to 10 to 12 inches.

As far as markets go, it will be aerospace, oil and gas and power-gen, the three key markets; all three of those will be serviced down there and no tool steel to speak of.

And could you talk a little bit about the significance of being able to produce 718?

The 718, just a comment I wanted everybody to understand that as we talk about ramping up a pound is not a pound necessarily in the VIM furnace and I think the fact that we are already making some 718 speaks to the progress we are making in a relatively quick period of time from an operator standpoint. From an investor standpoint and might seem like it’s taking forever.

But it’s pretty unusual in my mind to jump into vacuum induction melting as a company, new technology and already making 718 before, basically within a year. And I don’t want to mislead anybody, it’s not like we are making heat, after heat, after heat of 718, but clearly it demonstrates that we have a technical know-how and the equipment capability to do that.

Okay. Well, congratulations on that and we look forward to more updates on the next quarter.

One thing you also mentioned on the financial side, the $5 million in tax refunds that you have got against the 2010 return; is there anything incremental that may be coming from that kind of activity and also anything we should read into your comment about the $200,000 of departure costs? Anything there it was mentioning?

On the tax side, Mark. This is Doug.

That does complete some of the advantages that we had with the North Jackson acquisition as it relates to prior year or previously filed returns. We are carrying forward an operating loss that will carry us through this year and through part of next year, which would be a cash tax shield.

It won't affect our rate going forward would, as I mentioned earlier it should be 36.3%. And we mentioned on the employee departure was for an officer who left in the third quarter that we had publicly announced.

Anything you can say Denny, just lastly, anything you can say on what you have seen as far as orders here in October and what you might expect from a shipment perspective or revenue perspective for the December quarter?

Bookings as we look at October it’s pretty much on par, where the run rate is very similar to September. And I think, if you take a look at our bookings over the last three or four months, you will get a pretty good idea of what we see in the fourth quarter, and we would expect sales to be lowered in the fourth quarter than the third segment based upon the bookings more or less three or four months.

Could you just help me to understand the $68.3 million that you have in total backlog, how much is that deliverable in Q4 and how much is deliverable in Q1-Q2 of next year?

Roughly $40 million to $45 million of that's deliverable in the fourth quarter. As I said, it’s on the right scheduled to be delivered.

And so if you are on a run rate…

I want to make sure I clarify something, don't take $45 million and say that's a sales forecast for the fourth quarter. We do a fair amount of quick turn business, so that's not a sales forecast from the fourth quarter, that's what's currently in our backlog scheduled for shipment in the fourth quarter.

The other aspect is, just to make sure that nobody misreads what I just said, is the sales numbers that we quote in our backlog are current pricing it doesn’t include surcharges. Those qualifiers answer your question.

Yes, that's helpful. And then just to understand so if booking stay the same you basically booked about, you’ll book roughly $45 million in this coming quarter, and so if you do roughly the same sales you’ll kind of exit with a $50 million backlog going into Q1, is that how you think about it or am I missing something?

We generally don't forecast our backlog, it really is a function of the choppiness I described. If you take a look at the bookings we put out on a monthly basis and look at the last three months, you'll see what I mean about choppiness.

Normally there is some pickup in bookings as you exit a year in anticipation of the new year and new requirements. There's a seasonal element to that in the first half there.

May I ask this question, I know you don't give guidance, but if you look at the streets, they have $90 million in Q1 of 2013, and I mean so do you guys just expect the spigot to turn on in order to really accelerate in December to get to $90 million because you are on a $60 million run rate going up $30 million or am I missing something there?

No, we've not given any guidance about any $90 million in the first quarter. What we see is a choppy outlook averaging going sideways for the rest of this year.

There are those who would argue that you will see a short pick up in the month of December. We have not said that, but there is that school of thought through the seasonality effect of the first quarter and the second quarter normally being stronger and the fact that the chew up rate continues to be relatively strong and inventories are falling at the distributor level, sooner or later that buying is going to have to take place.

And then the last question is do you believe at all, and I'm just curious, because your order rates, and I know you have a lot of distributors as your customers as opposed to some of your competitors, but do you believe you’ve lost share at all with your distributors since your North Jackson acquisition. I mean has that anyway encroached on a competitive standpoint or pissed them off or I am just curious?

No, I am not aware of any share loss related to the North Jackson acquisition. In fact, the North Jackson acquisition makes us a much stronger company and a much more attractive supplier for the marketplace in general including service centers.

Thanks, Shannon. Thanks again for joining us today.

The second half of 2012 has proven to be more challenging than expected. However, that has not prevented us from making progress in our ramp up of North Jackson which is key to unlocking additional growth opportunities for Universal.

We will look forward to updating you on our continued progress on our next call. Have a good day.