Universal Stainless & Alloy Products Inc (USAP) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Universal Stainless First Quarter 2018 Conference Call and Webcast. (Operator Instructions) As a reminder, this conference call is being recorded.

I'd now like to introduce your host for today's conference, Ms. June Filingeri. Ma'am, you may begin.

Thank you, 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're here to discuss the company's first quarter 2018 results, which we reported this morning.

With us from management are Denny Oates, Chairman, President and Chief Executive 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 this 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.

Okay, thanks, June. Good morning, everyone. Thanks for joining us today. The first quarter was a solid quarter for us. Strong sales growth and increased profitability were driven by continued upward marketplace momentum, which was broad-based, along with increased traction in our premium alloy strategy. First quarter sales, bookings and backlog were at their highest level in 6 years.

First quarter sales totaled $63.7 million, an increase of 30% from the first quarter of 2017 and 27% higher than the 2017 fourth quarter. Premium alloy sales reached a record $11.8 million or 19% of sales, which is more than double their level in the first quarter of 2017 and up 62% sequentially. The strong aerospace market combined with growing customer confidence in Universal premium melted products are driving this business.

Our backlog totaled $90.6 million at quarter-end, representing an increase to 17% sequentially and up 59% from the first quarter last year. Bookings kept pace during the first quarter and remained at a healthy level today. The demand environment remains positive, mill lead times are extending and customers are optimistic about 2018. There was further improvement in our gross margin in the first quarter, which increased to 14.5% of sales versus 8.7% in the first quarter of 2017 and 12.3% in the 2017 fourth quarter.

Major positive factors impacting the quarter included record production levels and productivity at our North Jackson vacuum induction melting facility and forging operations. Despite weather challenges, our Dunkirk facility generated the second highest quarterly production since the 2002 acquisition.

Shipments from our Bridgeville plant were the highest since the third quarter of 2013. Price increases announced in 2017 had begun to contribute, while surcharges for raw materials and electrodes are offsetting rising costs. In short, our margins are benefiting from an improving mix, better absorption on high plant activity, lower variable cost per pound stemming from cost-reduction steps taken in recent years and price recovery. We said on our last call that we drive margins to 15% or better by midyear, and we are well on the way there.

Taking a closer look at raw materials. Nickel, moly, manganese and scrap all remained on an uptrend and were at 2-year highs in the first quarter. The average price for nickel fluctuated between $5.84 per pound in January, $6.16 per pound in February and $6.08 per pound in March. More recently, nickel jumped to a 3-year high on concerns about Russian sanctions. Earlier this morning, nickel was trading around $6.40 a pound. On balance, material costs, and material surcharges are generally in alignment.

Net income for the first quarter of 2018 was $2.1 million or $0.28 per diluted share versus a net loss of $1.2 million or $0.17 per diluted share in the first quarter of 2017. In the fourth quarter of 2017, we reported net income of $7.9 million or $1.06 per diluted share, but that included a net tax benefit of $1.06 per diluted share, primarily attributable to the federal tax reform changes. Underscoring the improvement in first quarter profitability, EBITDA was $8.8 million more than double 2017's first quarter and up 53% sequentially.

Touching on a couple of balance sheet highlights. Total debt at March 31 increased to $99.9 million to support higher working capital levels and includes $8.6 million currently residing in restricted cash, which will be used to fund our new bar cell investment over the next few quarters. The bar cell financing was done utilizing our New Markets Tax Credit financing program. We also increased our credit facility with our lenders to $73 million from $65 million, adding to our flexibility in this very favorable marketplace.

Chris Scanlon, who joined us as Vice President of Finance, Chief Financial Officer and Treasurer on April 2, will cover these financing topics further in his comments this morning. Chris comes to Universal with a proven track record of accomplishment, very relevant public finance -- public company finance experience, a strong manufacturing background and a great deal of energy and focus. He's hit the ground running, and we're extremely pleased to have him on our team.

Moving to some additional operating highlights. The disruptions from 2 fires and the ramp-up issues, which impacted second half of 2017 are now well behind us. We anticipate wrapping up related capital projects in the second quarter and settling our insurance claim in the third quarter of this year.

The bar cell installation at Dunkirk is moving forward on schedule and on budget with completion slated for early fourth quarter. We are eager to capture the cost reductions, quality improvements, faster cycle times and lower inventory requirements afforded by this roughly $10 million investment.

During the quarter, work with new opportunities continued unabated with 2 new products developed, 1 new customer approval received and 14 new products in the pipeline.

Turning to major end markets, let's start with aerospace. Aerospace sales totaled $36.2 million in the first quarter of 2018, an increase of 35% from the first quarter of 2017 and up 28% sequentially, reflecting the richer product mix in the first quarter this year, including increased premium alloy sales. Aerospace sales represented 57% of first quarter 2018 sales versus 55% in the first quarter of 2017 and 56% of sales in the fourth quarter of 2017. Aerospace remains far and away our largest market. The major growth factors that have been driving the aerospace market remain intact, including healthier aircraft build rates, 8+ years of backlog at Boeing and Airbus, passenger traffic miles that continue to surprise on the upside and freight miles that continue to grow above trend. The aftermarket is strong and defense related spending is on the upswing.

Adding more specific detail on the current aerospace market, Boeing delivered 184 commercial airplanes in the first quarter versus 169 in the first quarter of last year. In a monster March month, Boeing booked 221 net new orders in the quarter. Boeing's book-to-bill ratio is running stronger-than-expected.

Airbus delivered 121 planes, down from a 136-last year. Nonetheless, the Airbus backlog remained strong. Meanwhile, on Friday, Honeywell reported that their first quarter aerospace sales were up 8% organically on strong growth in commercial original equipment and U.S. defense. Also on Friday, GE reported year-over-year aviation revenue growth of 7%, which included shipments of 186 LEAP engines versus 77 in the first quarter last year. They also realized an 18% increase in equipment orders in the first quarter. So overall, the aerospace market remains very healthy. Industry inventories are in balance and customers are buying to their strong immediate needs.

The heavy equipment market continues to be our second largest market in the first quarter of 2018, representing 16% of sales versus 15% in the 2017 fourth quarter and 16% of sales in the first quarter of 2017. First quarter 2018 heavy equipment sales totaled $10 million, which is a 33% increase from the fourth quarter of '17 and up 31% from the first quarter of '17.

Tool steel plate sales are the main component of our heavy equipment category, and demand picked up substantially in the first quarter after a temporary dip in the fourth quarter, as manufacturing activity continue to move higher overall.

In automotive, model changeovers our a big part of tool steel plate demand, and they are continuing their uptrend as well. Additionally, in March, U.S. light vehicle deliveries increased at a better-than-expected 6.4%, while the seasonally adjusted annualized sales rate of $17.5 million also beat analyst expectations by almost 700,000 units.

News in the machinery group also remains positive, despite some of the margin comments during their call yesterday, we see off-road dealers for Caterpillar and Deere pointing to very positive demand across the board, with extended lead times, especially for heavier equipment. General metal fabrication activity is also up, and the domestic tool steel plate market will remain very strong this year.

The oil and gas end market held its position as our third largest market in the first quarter of 2018. However, with sales reaching $8.5 million, representing an increase to 77% sequentially and up 73% from the first quarter last year, oil and gas grew to 13% of our total sales versus 9% in the fourth quarter of last year.

Activity levels are higher overall in oil and gas amid customer optimism based on the higher North America rig count, which is up some 10% in the first quarter combined with oil prices well above $60 per barrel. Because metal inventories remained low, they are more a hand-to-mouth orders. With the industry in recovery, we are seeing sizable oil and gas opportunities for the rest of the year, plus with the product capabilities of our North Jackson forge, we are seeing new opportunities for Universal. It is worth noting that Schlumberger in their earnings report last week said, despite weaker activity in the first quarter, they expect the U.S. land market to improve during the second quarter and therefore, they are continuing with their aggressive fleet reactivation and recommissioning program.

Our power generation market declined to 4% in the first quarter of 2018 sales, down from 9% of sales in both the fourth quarter and first quarter of '17. Power generation sales totaled $2.3 million in the first quarter, a decrease of 47% sequentially and 46% lower than the first quarter last year. Our power generation sales today are mainly for the maintenance market for installed gas turbines as they have been for the past several years. Despite our lower power generation sales in the first quarter, we have not lost market share in maintenance, and we expect it to continue to drive our power gen sales over the next couple of years, as GE and Siemens work through their restructuring programs.

In their call last Friday, GE described the power market as an "challenging and hard to predict," and they recorded just 4 gas turbine sales in the first quarter, although their plan for 2018 still calls for 30 to 34 heavy duty gas turbines, which will be on par with 2017.

Our general industrial market sales were 8% of sales in the first quarter of 2018 compared with 9% in the fourth quarter of '17 and 10% in the first quarter last year. General industrial sales totaled $5.3 million, an increase of 12.4% sequentially and 12% over the first quarter of '17. Main drivers of our general industrial sales in the first quarter were our new infrastructure-related products and our business development activities in markets like semiconductor, medical and general manufacturing. We continue to expect growth in this market in 2018 before including any benefit from a potential Federal Infrastructure Bill.

Let me turn the call over now to Chris Scanlon for our financial report. Chris?

Thank you, Denny, and good morning, everyone. It's been a great start here at Universal. I'm really glad to join the organization and work with Denny as well as with everyone here to deliver on the next phase of the company's growth.

This morning, I will provide the first quarter financial summary, and we will start with the recap of the income statement. As Denny previously mentioned, first quarter 2018 sales of $63.7 million were up 30.4% compared with the prior year first quarter. Q1 sales were also up 26.8% sequentially from the 2017 fourth quarter. The increase encompasses nearly all end markets, both sequentially and versus prior year.

Gross margin in the 2018 first quarter was $9.3 million or 14.5% of sales, up sequentially from the 2017 fourth quarter, which was 12.3% and also up from the prior year first quarter, which totaled 8.7%.

Margin improvement was driven by favorable product mix with increased premium alloy sales, base price increases, improved operating leverage on higher volumes as well as cost-reduction programs. Additionally, our melt costs were essentially aligned with commodity surcharges. As Denny noted, we continue to remain confident that our volume-driven operating leverage, improving mix profiles and cost-savings programs will continue our gross margin improvement going forward.

Turning now to selling, general and administrative expense. Our SG&A for the first quarter was $5.2 million compared to $5.1 million in the 2017 fourth quarter and $4.7 million in the first quarter of 2017. While SG&A expense decreased as a percentage of sales, increases in employee-related costs, including employee incentive compensation contributed to the increase in the dollar amount from prior periods.

Our tax rate for the 2018 first quarter was 26.8% and included approximately 235,000 of discrete tax expense items, primarily related to the expiration of fully-vested stock options. Excluding the discrete tax items, our underlying annual effective tax rate is 18.7%. Cash taxes paid were not material and this will continue to remain the case for the foreseeable future given the existence of the significant amount of loss carryforwards, which approximated $54 million at the close of 2017.

Net income for the first quarter was $2.1 million or $0.28 per diluted share. Prior year first quarter net loss totaled $1.2 million or a loss of $0.17 per share. Sequentially, our 2017 fourth quarter net income totaled $7.9 million or $1.06 per share. You will recall, 2017 fourth quarter net income was favorably impacted by the federal tax regulation changes, which produced an income tax benefit of $7.9 million. Excluding the impact of the change in tax regulations, Q4 2017 net income was at a breakeven level.

First quarter EBITDA totaled $8.8 million compared to $5.8 million in the 2017 fourth quarter and $4.2 million in the 2017 first quarter. First quarter EBITDA reflects an increase of $4.6 million or in excess of 100% compared with the first quarter of 2017. First quarter EBITDA also increased by $3 million or 52.5% compared to the fourth quarter of 2017. Adjusting for noncash, share-based compensation expense, EBITDA was $9.1 million in the 2018 first quarter. Our EBITDA and adjusted EBITDA calculations are included in the press release tables.

Next, we'll turn to the balance sheet. For the first quarter, managed working capital totaled $125.2 million, an increase of $18.4 million compared with the fourth quarter of 2017. This was reflected in higher accounts receivable and inventory levels and lower accounts payable. Accounts receivable increased $8.6 million with inventory increasing by $3.3 million and accounts payable decreasing by $6.5 million. The increase in accounts receivable was driven by the increase in our first quarter sales. DSOs have remained relatively steady at 47 days. Our inventory increase was driven by higher backlog levels, which have increased by 16.7% in the current quarter. Capital expenditures for the first quarter of 2018 were $2.5 million compared with $3.3 million in the 2017 fourth quarter and $1.4 million in the first quarter 2017. We expect full year 2018 capital expenditures to total $15 million. This amount includes approximately $10 million related to the Dunkirk, New York mid-size bar cell project, which we expect to complete in the fourth quarter.

I also want to provide some additional information regarding our funding of the bar cell project. During the current quarter, we entered into a financing transaction with outside banking and community development agencies related to the bar cell capital project. The company financed a portion of this $10 million capital project via the New Markets Tax Credit program. Utilization of this program enabled the company to secure low interest financing for this project. The New Markets Tax Credit program is sponsored by the IRS and was provided for in the Community Renewal Tax Relief Act of 2000. This program is intended to induce capital investment in qualified communities, of which Dunkirk, New York qualifies. Total New Markets Tax Credit program amounts approximate $10 million and are restricted for use in our bar cell project. The restricted funds were comprised of revolving credit facility borrowings and New Markets Tax Credit program investment funds.

The company drew $6.7 million on its revolving credit facility and also received approximately $3 million net of expenses in qualified New Markets Tax Credit Investment funds. The interest rate on the investment funds received approximates 2%.

To summarize, the March 31 balance sheet impact of the New Markets Tax Credit financing transaction, the company recorded $8.3 million of cash restricted for use in this project within other long-term assets, and we have also recorded the $3 million of qualified investment funds within long-term liabilities.

Next up, I'll summarize our debt activity for the quarter. Total debt stood at $99.9 million, which was an increase of $20.2 million from the prior year-end. Our debt net of cash and restricted cash totaled $91.3 million as of March 31, 2018. This increase was driven by borrowings on our revolving credit facility to support higher working capital levels as well as borrowings related to the bar cell capital project.

Also on April 24, we amended our credit agreement, increasing our revolving credit facility by $8 million to $73 million. This amendment will provide additional liquidity to the company. It includes the same favorable terms as the previous agreement. Additionally, regarding our revolving credit facility covenants, we remain in compliance with all covenants at the end of the first quarter, and we anticipate remaining in compliance for the foreseeable future.

Lastly, in the current quarter, we extended the maturity date of our subordinated notes to March 2020. With this extension, $2 million of these notes are payable in March 2019 and have been recorded within the current portion of our debt obligations.

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

Thanks, Chris. Nice job. In summary then, the first quarter was a strong quarter for Universal, with substantial growth in our sales, including record premium alloy sales and strong profitability improvement. Positive and generally broad-based market momentum continued in the quarter as the growing customer confidence in our premium alloys. First quarter sales, bookings and backlog were at their highest levels since 2012, while activity levels in most operations were at record levels or certainly the highest level we've seen in recent years. This contribute to further improvement in our gross margin, which increased to 14.5% of sales and a significant growth in our EBITDA, which totaled $8.8 million, more than doubled out of the first quarter a year ago.

As noted in our earnings release, with a strong start to '18, we look forward to a very solid year of progress as we further execute our strategic growth plan and seize ongoing market opportunities.

With that, operator, let's take some questions from our callers.

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

Welcome, Chris. My question is just on the margins, Denny. I guess, when I look at the incoming order rate, you didn't even really have the full benefit of the recent base price increases. You're filling up capacity, it would seem like getting the 15% on the gross margin line, which seem to be an awfully conservative target, at least relative to what we've seen in other cycles. So I was wondering if it's just conservativism around that, given some of the issue you had in the back half of last year? Or is there anything really out there from a cost perspective that should make us think that 15% is the right number, and if you hit that -- your target, you should be able to do a lot better than that?

Let me expand on your question a little bit, Mike. At the last conference call, we had a conversation about margins, and I indicated, I thought we could get to 15% by the middle of the year -- by mid-year. We're tracking ahead of that. I don't -- I didn't mean to infer that 15% was the ceiling. But we're actually fast approaching 15%. In fact, as we exited the first quarter, we're already above 15%. So my expectation is we will not only hit 15%, we'll get above that fairly quickly. There's nothing on the horizon in terms of large cost increases that would impact that. If you look at the cost structure, we are seeing inflationary pressures, I mentioned that on the last call, which -- things you would expect at this point in the cycle. Electrodes is probably the one area that we see significant price increases, but we have that covered via our surcharging mechanism. So as we look at the future margin-wise, we see improving prices, we see strong volume, we see good solid absorption and cost reduction in that result, that's going to be some higher margins.

Okay, great. And then just on...

So I didn't mean to infer that our long-term target is 15% margins.

That's helpful context. And then just a question on the sales, I mean, obviously, incoming order rate look like $76 million, $77 million, obviously. Nickel price is incrementally higher than they were certainly on average for the first quarter. I mean, is there any reason to think we shouldn't see sale level north of $70 million in the second quarter? And should we think about that as potentially a new run rate? Or is there anything about those orders that perhaps more elongated, maybe cycle times are kind of lengthening out as demand increases and we should think about sequential increases, but perhaps not quite as much as what the first quarter orders were?

I think what you're seeing in the marketplace is stronger activity. You're seeing mill lead times go out. And as a result, customers are placing orders with longer thinking. You remember during '15 and '16, I frequently said that we were seeing smaller orders very closely tied to lead times. People are ordering at the very last minute because lead times were so short. With lead times going out, you're seeing the opposite now. So some of that backlog is spread out a little bit more. It doesn't concern me to look at the second quarter in the high 6s pushing $70 million -- maybe $70 million is doable, but I would not anticipate something up in the high 70s. Given where bookings are today and the outlook for the year, it's generally optimism amongst our customers. Our bookings for the first 3 weeks of April have remained strong. We've modeled the year to look at the good solid year. There will be some seasonal -- seasonality. There always is in the third and fourth quarter. So there's some downturn a little bit in rate of incoming orders, we would expect as we get into the third quarter time frame.

And our next question comes from Phil Gibbs with KeyBanc Capital Markets.

Question is on the -- I guess, question is just on just supply chain replenishment, in general. I mean, we saw for industrials in '15 and '16, things were obviously very lean, and maybe a little bit so into the first part of '17. So I'm just trying to gauge how much of this upside we're seeing in volume momentum is related to the fact that a lot of your aerospace service center customers just were flush lean and now are just getting back to more, call it, more normalized inventory levels. And how long do you think that dynamic could persist? I mean, we know demand is pretty good, obviously, but how much of this is also due to the fact that people are getting more right on their supply?

I'm of the view that we're in the early stages still of this recovery. As I look at inventory levels, it's easier to Monday morning quarterback, but look back over '15 and '16. In my opinion, the supply chain probably reduced inventories too much. Most of our customers would probably argue with me a little bit about that, but fundamentally, I think that's the case. When I talk to customers today, they are talking about meeting demand, that their business has picked up. This is not about -- I think business is going to pick up in the fourth quarter, so I'm going to lay-in some general inventory, so I'm ready. This is largely -- business is already on their books, but they're pushing to meet their customer requirements, and therefore, pushing us to get product out the door. So I'm sure, there is some inventory replenishment going on, but I think the majority of this is a real pickup in demand on the part of their customers.

Got it. Okay. No. That's fair. And question 2 on the pickup. And in net debt, I think you guys had touched upon it in the prepared remarks because the numbers didn't really seem to make sense to me, given the EBITDA you generated. So part of the $20 million pickup in net debt is a reclass of some cash into restricted cash because I don't think you had restricted cash on the books before. Is that right?

Correct, Phil. That is right. We, as a result of the transaction with the New Markets Tax Credit, we have to record restricted cash, which is the sum of the borrowings as well as the investment funds received via the program. Those funds will remain on our balance sheet, as they get spent, the amounts will come down.

Okay.

So we'll draw the shadow of next 2 quarters basically.

Okay. Nice. The insurance claim proceeds potentially benefiting you guys from a cash perspective as the year goes on. Just trying to think about what the impacts were to the P&L last year, if you could kind of refresh my memory, I want to say, it was a couple million bucks, maybe $2 million, $3 million, but is that sort of what we're thinking about in terms of what could come back to you?

Probably, a little over $1 million, $1 million, $1.2 million pretax. That's the P&L. I'm going to make sure I'm clear here. When you say come back to you, you're referring to the impact on the P&L? Or are you referring to the insurance settlement?

It's just a general question in terms of what cash we should expect you guys to get back.

It's probably going to be a little below a $1 million, somewhere between $500,000, $900,000. And that will be in the third quarter. We've got a scrubber, that we've got to install, it'll be received in June and that should be relatively quick install and then we should wrap up the insurance, we would anticipate in the third quarter.

Excellent. My last question is just on the networks and capital management and what specifically we should assume or think about in terms of the inventory cadence as you work through the year?

We feel we can do a better job turning our inventories. One of our major initiatives as we move through this year will we get our turns up. So we're going to push like crazy to try and maintain existing inventory levels as sales grow. So we're not anticipating significant ongoing increases in our inventory levels.

(Operator Instructions) Our next question comes from Novid Rassouli with Cowen and Company.

First on the growth. So on the growth on the oil and gas side. As a percentage of sales, you were mentioning that. Can you just give us some more details on where that growth is coming from and if you could also talk about your mix or percentage of oil and gas products on the rig versus in the downhole?

Okay, if you look at our business in oil and gas, I guess, we'd have to -- first, we have to say is, inventories in the metal supply chain are extremely low. So a lot of, I called it, hand-to-mouth ordering, almost panic-type ordering. We need this. We need it now. So things feel a lot better than they probably are. No insane things are getting back to 2014 levels, but certainly compared to '15 and '16, we're seeing some fairly robust activity. Our material is generally on the exploration side. Most of it is on the rig. I'm going to say 3 quarters. We don't have direct lines of site, obviously, because we go through distribution almost 100% when we go through the oilfield. As far as the mix of products go, we have a mix of legacy products that we're selling into that market plus some unique -- necessarily unique by industry standards, but new to us, I guess, I should say, given the fact we now have our own forge out of North Jackson, which gives us some capabilities to make some long bar, which is greatly appreciated going into the oil and gas industry. So that's been a nice pickup for us in terms of having our North Jackson facility available during this cycle.

Very helpful.

Not much in the downhole side. Most of its above ground.

Got it. And then, just switching gears to aerospace. You mentioned kind of the positive backdrop and seeing Boeing's results this morning also very positive. Just wondering if you could provide any more insights on kind of what you're seeing there and what you would expect kind of the -- your aerospace shipping CAGR to be over the next 12 to 24 months given that there is generally some more visibility on that side of the market?

The market itself seems to be growing 5% to 7%, kind of upper mid-digit in terms of CAGR. What we're seeing is an aftermarket, that is very active. And we are assuming, although, we sell fair amount through distribution, so we're not selling directly to the OEMs, but it would appear as though a lot of planes that are up there flying around are getting used to a lot more. Maintenance requirements are high, and the parts supply is low, so there's been a great increase in activity. So we would expect to continue to -- as the cycle evolves to benefit from that underlying growth. And some of the prior question about inventory building, we're not really seeing much of that right now. Everybody is very eager to meet current contracts or current orders on their books. It's not general inventory buying at this point in the cycle.

Got it. And one last one from me, Denny, if I may. The increase in backlog. I'm just wondering if that's a similar mix to your sales by end market? Or if you're seeing anything that's kind of more overweight than your traditional mix?

There's nothing that's necessarily overweighted as you look at the first quarter. I mean, what we're seeing, there's some erosion in the traditional power gen market. But as you look at the incoming bookings and what's sitting in backlog there at the end of March, those rough numbers that we published for first quarter sales generally reflect what you see in the backlog. So less power gen, more oil, gas, aerospace in the 55%, 56% range. Those kind of numbers. Nothing material to call out in terms of change there.

And we have a follow-up question from Michael Gallo with CL King.

Denny, thanks for taking my follow-up. Just in terms of the new midsize bar capital sell project. I was wondering if you can dimensionalize what kind of paybacks and returns, how much of that will you expect to flow through gross margins next year? And also whether it might allow you to pick up some incremental business, especially as cycles start to get a little more elongated and you can really improve your group?

So the bar cell, there's a couple of things for us. It'll enable us to reduce inventory because we're basically taking 6 or 7 steps in our manufacturing process and cellularizing the whole process. So we can visualize a discrete process with inventory between each step. That inventory comes out. We also have fairly significant cost reductions in terms of labor that we would anticipate as the bar cell goes in. Quality should be up, and we should be able to make product a lot faster, which would reduce our cycle time and therefore, our lead time and give us a better competitive advantage out in the marketplace in terms of growing any additional business on our existing product line. It's roughly a $9.5 million, $10 million project. We've quantified that with roughly a 3-year payback. As far as new products, there are opportunities there. We typically try not to justify capital projects betting on the come, that we're going to get more sales. We typically take our existing book of sales and justify capital on cost reduction, which is what we did here. That said, we will look at some other opportunities as gravy that we can bring in and we're actively working on that as we speak. So I would expect to be talking about some higher sales generated by the fact we have the bar cell there. Did that answer your question?

Thank you.

(Operator Instructions) And speakers, I'm showing no further questions in the queue at this time. I'd like to turn the call back over to Mr. Oates for any closing remarks.

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

Ladies and gentlemen, this does conclude your program. Thank you for participating. You may all disconnect. Everyone, have a great day.