Universal Stainless & Alloy Products Inc (USAP) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Universal Stainless & Alloy Products, Inc. Second Quarter 2018 Conference Call and Webcast. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to June Filingeri. Please go ahead.

Thank you. Good morning. This is June Filingeri of Comm-Partners, and I'd also like to welcome you to the Universal Stainless conference call and webcast. We are here to discuss the company's second quarter 2018 results 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 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.

Thanks, June. Good morning, everyone. Thanks for joining us today. Our second quarter performance was driven by several positive factors: continued favorable market conditions, generally broad-based, but certainly led by aerospace; strong shipment volumes and improving mix, including record premium alloy sales; better price realization, you know we recently implemented our second base price increase on selected grades and products; improved cost absorption on higher activity levels across all facilities; and lower operating cost as we continue to make progress in lowering variable cost per pound through process improvement, controlled spending and targeted capital spending.

In combination, these factors translated into continued top line growth along with expanded margins and strong bottom line growth. Here are some details.

Sales of $66.1 million were up 26% from the second quarter last year and up 4% sequentially. Premium alloy sales reached the record $12 million or 18% of total sales, representing an increase of 78% from the second quarter of 2017 and up 2% from the record reached in 2018's first quarter.

Meanwhile, bookings were at record levels in the second quarter and have continued at a healthy pace through July. We ended the quarter with a backlog of $104.2 million, the highest in the past 6 years.

Looking at second quarter profitability. Gross margin dollars were up 63% from the 2017 second quarter and 26% sequentially. As a percent of sales, the gross margin reached 17.7%, which is the highest level since the first quarter of 2012.

Similarly, EBITDA rose 55% year-over-year and 28% sequentially, reaching $11.2 million in the second quarter, yielding an EBITDA margin of 17%.

Regarding raw material prices, nickel remained on an uptrend in the second quarter. At June 30, nickel was $6.85 per pound versus $6.08 per pound at the end of the first quarter. Earlier this morning, nickel was trading at $6.20 per pound. Moly and manganese were off their 2-year record highs, which we reached in the first quarter. And scrap and cobalt have generally remained flat. On balance, material costs and material surcharges remained generally in alignment.

Second quarter net income increased to $4 million or $0.50 per diluted share, including a onetime favorable adjustment recorded in other income of $0.06 per diluted share from a legal settlement. There were additional shares outstanding in the second quarter as well due to our successful equity offering completed in June. Chris will expand on these items during his financial remarks.

By comparison, net income was $1.2 million or $0.17 per diluted share in the second quarter last year and $2.1 million or $0.28 per diluted share in the 2018 first quarter. Chris will also detail balance sheet highlights, but let me just take a minute now and note that our equity offering marks a significant step forward in strengthening our financial structure. We now have additional flexibility to continue to pursue our growth strategy and to respond to robust market conditions.

Regarding the market outlook, we continue to hold a view that the demand cycle is still in the early innings as pointed out by our backlog and bookings and customer purchasing patterns.

Drilling down to operating highlights in the second quarter. Our vacuum induction melting facility and forging operations in North Jackson continued to achieve record production levels and productivity during the quarter. Shipments from our Bridgeville plant were the highest since the third quarter of 2012 despite the flooding, which occurred during June and delayed some shipments.

Quarterly production in our Dunkirk facility was the highest on record since the facility was acquired in 2002.

A brief update on the $10 million investment in the advanced bar finishing cell being installed at Dunkirk. The equipment is being assembled in the Cleveland area before transshipment to our plant. The project is on budget. It's on schedule for an early fourth quarter start-up. We're eager to capture the resulting cost reductions, quality improvements, faster cycle times and lower inventory requirements afforded by the state-of-the-art operation.

We received 2 approvals from an aerospace customer during the quarter, and we currently have 15 products under development.

Lastly, our precision rolled products group operating out of our Titusville plant generated record sales and record gross profit during the quarter.

Among our corporate highlights, we are pleased to welcome Judy Bacchus to our Board of Directors. Judy is Vice President and Chief Human Resources & Corporate Relations Officer for Kennametal. She has filled the vacancy created by the retirement of Doug Dunn, who had reached the company's mandatory retirement age for directors.

We are also pleased to qualify for inclusion in Russell 2000 Index in the latest annual reconstitution. Our team has worked very hard to advance our growth strategy, despite some sizable industry challenge in recent years, and it is gratifying to see our progress and promising future begin to be reflected in our market valuation.

Turning to our major end markets. Let's start with aerospace. Aerospace sales reached 61% of total sales in the second quarter of 2018. That compares to 55% of sales in the second quarter last year and 57% of sales in the 2018 first quarter.

Second quarter aerospace sales totaled $40.2 million, which is up 39% from the second quarter of 2017 and up 11% sequentially and included higher premium alloy sales. The aerospace market remains very active with continuing growth in global passenger and airfreight traffic, further supporting commercial airplane demand. The outcome of the Farnborough Air Show reinforces the strength of that demand.

Boeing announced orders and commitments approaching $100 billion from the show for a total of 673 commercial airplanes, which the company noted, and I'll quote, it reflects the continued resurgence and demand for freighters and strong order activity for the 737 MAX and 787 passenger airplanes. Boeing also updated its 20-year commercial market outlook at the show, which reflects an increase of 4% growth for aircraft deliveries over the 2017 forecast. In other words, Boeing forecast 42,730 airplanes, equivalent to roughly $6.4 trillion will be delivered over the next 20 years.

Airbus reported winning 43 orders or 501 aircraft at Farnborough, which is equivalent to roughly $65 billion. All this activity reinforces the announced build rate increases by both airframe makers. Production rates for the Boeing 737 MAX was scheduled to increase to 57 per month in 2019 from 52 per month today, while the 787 build rate is set to increase to 14 per month in 2019 from 12 per month this year.

Production in the Airbus 320neo is also said to increase to 60 per month in 2019 from 50 per month currently. Among the engine makers, GE reported the second quarter aerospace equipment orders increased 62% due to the GEnx wins and continued LEAP engine momentum. And that does not include about $23 billion of orders of Farnborough.

Honeywell reported 8% higher aerospace sales in the second quarter, including strong business aviation, original equipment orders, commercial aftermarket and defense, both U.S. and international.

Our teams' takeaway from the Farnborough Air Show was very positive. Our customers reported strong demand growth in the 5% to 10% range year-over-year, while inventories are up only 2% to 4% as evidenced in our bookings in growing backlog.

Also, the aerospace market remains very healthy for the supply channel and for Universal.

The heavy equipment market remained our second largest market in the second quarter, representing 14% of total sales versus 17% in the second quarter of 2017 and 16% of sales in the first quarter of 2018.

Second quarter of 2018 heavy equipment sales totaled $9 million, essentially flat with a strong second quarter of 2017, but 10% lower sequentially. The main component of our heavy equipment category is tool steel plate sales, which were up modestly from the second quarter last year and up 17% year-to-date, reflecting the strong start we reported in the first quarter and continued solid sales in the second quarter. Demand is being driven by a resurgent manufacturing sector in the U.S., particularly by healthy automotive production, increase in model changeovers, growth in off-road equipment and mining. Additionally, favorable rulings in the 2017 trade case has leveled the playing field and enabled us to gain market share. We anticipate these trends to continue.

The oil and gas end market remained our third largest market in the second quarter of 2018, representing 12% of total sales versus 9% of sales in the second quarter of 2017 and 13% of sales in the first quarter of this year.

Second quarter oil and gas sales totaled $7.8 million, which is 63% higher than the second quarter of 2017, but 7.5% lower sequentially.

Year-to-date sales were up 68% from the same period of 2017. A substantial growth in the first quarter was followed by a very solid second quarter. Industry activity levels are growing in oil and gas as reflected in the Baker Hughes rig count, which was up 10 for June 2018 compared to May and up 125 from the rig count of June a year ago. The gains were also impressive for the worldwide rig count, which was up 56 from May and up 111 from June of 2017. Baker Hughes reported receiving the largest orders since 2015 in their oilfield equipment segment with significant subsea production orders across 6 projects. Offshore drilling has been one segment that has been slow to recover prior to this quarter.

In addition to the positive news from Baker Hughes, Schlumberger gave another indication that things seem to be changing for the positive. They reported in their second quarter earnings on Friday that their offshore revenue in North America was up 22% sequentially, with new drilling projects in Canada, the U.S. Gulf and the Caribbean. They also reported additional deployment of hydraulic fracturing and directional drilling capacity in North America in the quarter. As we've discussed many times before, with the industry in recovery, we are seeing attractive oil and gas opportunities as well as new opportunities for Universal is only from the product capabilities of our North Jackson facility.

Power generation has been the weak spot among the end markets for Universal this year as well as for the industry, as evidenced by the challenges GE is facing in their power generation business. In the second quarter, our power generation market represented 4% of sales, the same level as in 2018's first quarter, but down from 9% of the sales in the second quarter of 2017.

Power generation sales totaled $2.3 million in the second quarter, which is down 51% from the second quarter last year, but up 2% sequentially.

Our power generation sales continue to be mainly to the maintenance market for installed gas turbines, as they have been for many -- for several years. I can also continue to report that we have not lost market share in the maintenance market, which we expect to continue to drive our power generation sales for next couple of years until the replacement cycle kicks in.

Our general industrial market sales were 7% of sales in the second quarter of 2018 versus 9% of sales in the second quarter of 2017 and 8% of sales in the 2018 first quarter. General industrial sales totaled $4.9 million, an increase of 6% from the second quarter of 2017, but 8% lower sequentially. The main drivers of our general industrial business are our new infrastructure-related products as well as our business development activities in such markets as semiconductor, medical and general manufacturing. Overall, we continue to expect growth in these markets in 2018.

Let me turn the call over to Christ Scanlon for his financial report. Chris?

Thank you, Denny, and good morning, everyone. This morning, I will cover our operating results as well as our balance sheet, and then conclude with some points summarizing our second quarter equity raise.

Starting with revenues and, as Denny previously noted, second quarter 2018 sales of $66.1 million were up 3.7% sequentially and up 25.6% compared with the 2017 second quarter. For the first 6 months of 2018, sales of $129.8 million were up 27.9% compared with the first half of 2017. The increase was broad-based with nearly all end markets contributing to the improvement versus the prior year, both for the second quarter and for the first half as a whole.

Gross margin in the second quarter was $11.7 million or 17.7% of sales, up 320 basis points from the first quarter of 2018 and up 410 basis points from the 2017 second quarter. The improvement in gross margin was driven primarily by the realization of manufacturing productivity initiatives, improved operating leverage, cost containment actions and a more favorable product mix. Additionally, our melt costs continue to be aligned with commodity surcharges.

Turning now to selling, general and administrative costs. For the second quarter, SG&A was $5.8 million or 8.8% of sales, an increase of approximately $640,000 compared with the 2018 first quarter and $1.4 million higher compared to the 2017 second quarter. The increase is primarily due to employee incentive compensation, which increased to approximately $1.1 million compared to the second quarter of 2017 and $470,000 compared to the 2018 first quarter.

Second quarter other income included a gain on legal settlement, which settled $650,000 or approximately $520,000 net of taxes. The legal settlement gain represented $0.06 per diluted share in the 2018 second quarter diluted EPS calculation. Our tax rate for the 6 months ended June 30, 2018, was 23.7% and included approximately $300,000 of discrete tax expense, primarily related to the expiration of fully vested stock options. Excluding the discrete tax items, our underlying annual effective tax rate is 19.6%.

Net income in the second quarter was $4 million or $0.50 per diluted share, an improvement of $0.22 per diluted share compared with net income of $2.1 million or $0.28 per diluted share in the first quarter of 2018. Our 2018 second quarter earnings per diluted share, excluding the previously mentioned gain on legal settlement, totaled $0.44 per diluted share.

Year-to-date, 2018 net income totaled $6.2 million or $0.79 per diluted share and was significantly improved from 2017 year-to-date net income, which was at a breakeven level.

Looking at EBITDA. Our second quarter EBITDA totaled $11.2 million, an increase of $2.4 million or 27.6% sequentially and an increase of $4 million or 54.6% compared with the second quarter of 2017. First half 2018 EBITDA totaled $20 million compared to EBITDA of $11.4 million in the 2017 first half.

Adjusting for noncash share compensation expense, 2018 Q2 EBITDA was $11.6 million. Please note, the EBITDA and adjusted EBITDA calculations are provided in the tables to the press release.

Now taking a look at the balance sheet. During the second quarter, managed working capital totaled $125.5 million and increased by $400,000 compared with the first quarter of 2018. The increase is consistent with strong markets and the continuation of improved business activity.

Accounts receivable increased by $2.2 million and inventory increased by $5.7 million, while accounts payable increased by $7.5 million. The increase in inventory is in direct support of higher backlog, which grew by $13.6 million during the quarter to over $100 million, while the increase in accounts receivable is directly attributable to the higher second quarter sales activity.

Capital expenditures for the second quarter were $4.2 million, with first half capital expenditures totaling $6.6 million. Prior year second quarter capital expenditures totaled $1.7 million, with prior year first half capital expenditures totaling $3.1 million.

For full year 2018, we continue to expect our capital expenditures to approximate $15 million. I'll provide a brief balance sheet update on our Dunkirk bar cell capital project next.

You will recall in the first quarter, we utilized the New Markets Tax Credit program to assist in the financing of our midsize bar cell capital project at our Dunkirk, New York facility. Utilizing this program resulted in the company recording restricted cash within other long-term assets and amounts within long-term liabilities. Our June 30 restricted cash balance totaled $6.1 million, down $2.2 million from the first quarter. Also, we continue to record $2.8 million within long-term liabilities related to qualified investment funds received. As Denny noted, our bar cell project continues to progress well and is expected to be in operation in the fourth quarter.

Moving on to debt. The company's total debt at June 30 stood at $57.1 million, a decrease of $42.8 million from the prior quarter, while our debt net of cash and restricted cash totaled $50.7 million at the current quarter-end.

Our decreased debt level was primarily driven by our equity raise activity within the quarter. Net cash proceeds from the equity raise approximated $32.3 million, all of which were applied to our credit facility. Additionally, the strength of our operations and related net income levels also served to decrease outstanding debt levels.

Next, I will summarize our second quarter equity raise activity. On May 25, we issued 1.2 million shares at $24.50 per share. The shares were offered at 12.6% discount to the previous sale date closing price of $28.02 per share. The May 25 equity issuance resulted in gross proceeds of $30 million. Additionally, on June 5, the underwriter exercised their option to purchase 184,000 shares, which resulted in an additional gross proceeds of $4.5 million. In total, net proceeds from our equity issuance after underwriters' fees and other issuance costs approximated $32.3 million.

Note, the equity raise impact to our earnings per share calculation for the second quarter totaled 550,000 shares. Our year-to-date basic and diluted shares outstanding increased by 277,000 shares as a result of the equity issuance. As I noted earlier, the funds raise have been applied to our credit facility.

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

Okay. Thanks, Chris. In summary, the continued favorable market conditions led by aerospace; strong volumes and mix, including record premium alloy sales and better price realization; high plant activity levels; and lower variable costs, all combined to drive our second quarter performance, resulting in continued top line growth, expanded margins and strong bottom line growth.

With quarter-end backlog of $104 million, the highest level in 6 years, and bookings at record levels in the quarter and continue with a healthy clip in July, we are in strong footing as we've entered the third quarter. We also have made significant progress in strengthening our financial structure with our successful equity offering completed in June. We now have additional flexibility to pursue our growth strategy and respond to robust market conditions. As I said at the beginning of today's call, we continue to hold the view that the demand cycle is still in the early innings as pointed out by our bookings and backlog. Section 232 is providing modest favorable tailwinds along with an element of uncertainty in the marketplace. We will continue to be relentless in pursuing these market opportunities.

That concludes our formal remarks. Operator, let's take a few questions.

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

Denny, I think the commentary, obviously, end market demand continues to be strong. We saw that obviously in the bookings and the backlog. But I just the -- probably, the biggest incremental surprise relative to your expectation was the gross margin, which seem to be much stronger in the second quarter and sort of got well above kind of that mid-teens level you were hoping to get to by the back half of the year. I was just wondering with a pricing seemingly continuing to move up, bookings and backlog continuing to be strong, would you expect to be able to sequentially improve upon these gross margin numbers in the back half? Or was the mix just very favorable where it'd be hard to improve upon that?

Well, clearly in the second quarter, the mix came together very nicely for us, along with all the operating issues that I cited. As we look at the third quarter, certainly, internally, let's look at the positives and the negatives. We will continue to have strong activity levels in the plant. We will continue to chip away at costs, all which will be positive to the margin. We have some further price increases that we announced late in the second quarter that will start to hit in the third quarter and the fourth quarter, again a positive. We're seeing some cost increases. In prior calls, I'd mentioned some inflationary trends, but things like refractories, and this, of course, the board say has some negative cost increases just in terms of supply items that will work the opposite way. So net-on-net, our goal internally is to continue to drive those margins up. The sequential improvement probably will not be as significant as you saw in the first quarter relative to the fourth and the second relative to the first, but there is no reason to think we can't continue to improve.

And our next question comes from the line of Phil Gibbs from KeyBanc.

Denny, kind of echoing what Michael just asked on the gross margin side. I know that there was a pretty strong positive inflection in nickel prices today. You only turn your inventory in this industry maybe a few times a year, 2, 3 times, maybe a little bit more, but not a lot. So just trying to understand how much that timing factor could have been a benefit to you all in the second quarter in terms of nickel having moved up and you're finally being on the right side of that nickel to cost relationship?

The raw material trends have generally been helpful to us. They were going in the right direction, kind of a modest improvement net on net. But it wasn't a big enough positive to call out in our results quite frankly. We look at the individual pieces of it. Nickel did rise during the quarter. Nickel retracted nearly in part of July and as far as the come back up the last week or so. So you're seeing nickel cycle around, but nowhere near the level of cyclicality you saw in '15 and '16. We were seeing 15%, 20% movements in the quarter. So from a nickel standpoint, I view that as relatively stable. If you look at the other commodities, they were actually down during the second quarter or flat. So all-in, there was not a meaningful impact on our margins from raw material surcharges versus melt costs in the second quarter.

Do you still have a headwind in the first quarter from this alignment done because your margins went up, your incrementals went up obviously much more than your sales did?

There was about $0.5 million negative in the first quarter relative to the fourth, as I recall, pretax.

$0.5 million negative in the first quarter versus the fourth you're saying?

Yes.

Okay. And then maybe just some color on how we should think about SG&A moving forward a lot. I mean the gross margins were strong, but SG&A was also very high. If this is a new baseline associated with the profitability you're generating right now? Or if this is something that will be more of a timing issue in terms of your prior 12-month run rate?

Hey, Phil, this is Chris. Hopefully, I can answer that question for you. I think SG&A levels that we've seen in Q1 and Q2 thus far, those percentages should progress through the year, the large driver, and increase in SG&A is the variable incentive compensation given the strength this year compared to last year. It's creating an increase in expense in 2018 compared to 2017.

So these -- we should think about SG&A as a percentage of sales, not necessarily an absolute level moving forward? So this is a good kind of ratio to use right now?

No. I would not use as a percentage of sales. I think, just to clarify, what we're talking about is the absolute dollar number. If you look at the puts and takes in SG&A this year relative to prior years, the biggest -- the largest change far and away is variable incentive comp. As we've talked many times, we don't have a need to add significant people to our SG&A area in order to continue to grow the business very substantially. The other categories that fall within our SG&A are relatively stable. The big variable there is going to be that dollar amount. So if I was modeling, that's how we take a look at the second quarter and first quarter, average it and use that for the third and fourth quarters.

And our next question comes from Lucy Guo.

Why don't you just touch on, I may have missed this, but the implied orders in the quarter was close to $80 million, right? And you had made a comment last Q that if you can get to a high $70 million order rate would have been a stretch goal. So it was kind of much stronger than you had anticipated. The ATI commentary yesterday where they talked about some pull forward in demand, their numbers were also very strong in the second quarter. So maybe if you can tie those comments together and just talk about how Q2 was in terms of orders versus your plan?

Let me clarify a couple things. The order entry in the second quarter was $71,600,000. It wasn't up at $80 million and that was 28,500,000 pounds. if you go back historically and, we just did this other the day because we get this question on a regular basis, you look at the end of each quarter and you look at our bookings and our backlog and try and extrapolate what the next quarter is going to be, generally speaking, if you look at our bookings number, that's plus or minus 5% of what our sales are going to be in the ensuing quarter. That's been true for the last couple of years. So I would offer that up to you. It's not $80 million. It's roughly $72 million that we actually booked in the second quarter. And that was a record booking level for us.

Okay. That's makes more sense. And so does that to some extent help your visibility? And you also referred to lead time extending, right? You talked about favorable setup for Q3. Can you maybe just give some context on where do you see visibility?

Well, we got a very healthy backlog. We've got bookings continue to improve. June was the highest booking month of the year so far, and July has continued at a very healthy clip. So we've got a good flow of business coming into the company. We were little light on sales frankly in the second quarter compared to what I thought we would do. That had to do basically with 2 biggest things that occurred then was the timing of some of our international sales. Our international sales were about $4.6 million in the second quarter, which is up 24% year-over-year, but it's down from the last couple quarters by about $1 million. So we don't recognize international sales from a revenue recognition standpoint until it's received by the foreign location. So there are some timing issues there. And for those of you that live around the Pittsburgh area, you remember the flooding in the second week of June and the last week of June that occurred, that did have an impact on our lab and limited some of our shipments at the end of the month. So that's the second quarter. As we look at the third quarter, given the backlog we have to work from, the bookings that we have and where we are at, I would expect that you're not going to see a seasonal decrease like we normally see in the business. There's no reason to think we can't continue to add incremental growth in our sales during the third quarter and have a 7 in front of the number.

Got it. And maybe just to clarify on the lead time extending. Is that days, weeks?

Lead times generally go out by weeks. So you're seeing a general increase in lead time stretch-out and lead times across the industry. Mills are busier, as we are busy, and the lead times are going to go out. The result of that you see in the marketplace as you do start to see some larger orders come in. Customers start to try and make sure they've got the capacity reserved at the mills. So you do see some stretch-out in your backlog in terms of how much business customers are willing to give you upfront, especially we compare it to 2 years ago when lead times were at historic lows. And if you were a buyer, you didn't really have to worry much because the mills were hungry and lead times were so short.

Right. And given the strong growth in aerospace, where you tend to have some of the annual or longer-term contracts versus transactional orders, have you seen in terms of your average length of orders also improving?

We are seeing the average length of our orders improving. We're seeing more desire to come to an agreement for annual or multiple year type contracts. Even when we announced our service center sales and talk about 60, roughly 2/3 of our sales quarter in and quarter out go through service centers. Keep in mind, a lot of times, there's probably 19 or 20 instances I can think of, where we are working with large major distributors and partner with them on specific pieces of business, where they have the contract, but we also have the supply arrangements. So not all of our service center business is transactional.

Got you. And last question on working capital. You've done a good job at maintaining that at the same level with -- despite the increase in backlog and revenues. Do you see that trend continue? And how much improvement do you think the bar cell in essence can attribute to, to that?

We feel we can do a much better job on working capital. We look at managed working capital as a percentage of sales. And as Phil Gibbs mentioned earlier, we take a look at how our inventory is turning. That's the key metrics that we're focused on. The bar cell itself is going to take basically 6 discrete operations and collapse them into one continuously operating system. So you can visualize all the Q inventory between those operations previously will basically go away over the next -- over a couple quarters. So we'll start that facility up early fourth quarter. By the end of the first quarter, we should have bled all that inventory down. That will be somewhere in the range of $3 million to $5 million of reduction in inventory. In addition to that, it's not the only thing that we have in our plans for inventory improvement. So as far as process improvements, we're working on to continue to drive the inventory turnover up and the percentage of working capital of the sales down.

(Operator Instructions) And our next question comes from Charlie Smith from Fort Pitt Capital.

A couple questions on capacity. My sense is you've still a lot of runway at North Jackson. I'm just curious what your excess level there of capacity is? Also, any bottlenecks anywhere in the system? And also, finally, what's your expected CapEx relative to depreciation in the next year to 18 months?

Okay. As far as capacity goes, we are seeing at North Jackson, which was a greenfield site, as you know, that we build about 5 or 6 years ago, you're starting to see the capacity utilization there pick up. So each quarter, we're hitting a new internal record for production, which is a good thing. As far as further runaway, we have plenty of runway. We're probably running in the range of 45% to 50% of capacity there. And with some relatively small capital investments, we can expand the capacity in melting at North Jackson. At our other facilities, we're probably running in the 65% to 70% range generally speaking. Bottlenecks, we have some, but they're largely on the finishing end, relatively say easy-to-fix type things, like saws, testing equipment, things along those lines, which we're doing on a real-time basis to make sure we basically breakthrough any anticipated bottlenecks. Probably, our overarching issue is hiring people and getting them into their shops, getting them trained up, so they can operate effectively and safely in our 4 operations. So that's kind of a rundown on what we're doing from a capacity standpoint. So we are growing, but we still have plenty of capacity take advantage of further growth. Capital spending this year is going to be net $15 million to $16 million range. We think, next year, we'd be in the same range based upon current planning. We are looking at a number of capital projects, which could lead to an increased net number next year. But nothing that we're prepared to call out at this juncture really. So for planning purposes, I would say $15 million, $16 million in '18 and the same number in '19. And as you know, (inaudible) is running about $19 million.

Okay. $15 million to $16 million for next year (inaudible) because there may be new projects?

Yes.

And we have a follow-up question from the line of Phil Gibbs from KeyBanc.

The question was just what you have outstanding on the revolver right now?

Sure. Thanks, Phil. At June 30, the revolver balance, just give me 1 second, I'll get you the good number. Revolver at June 30 was $19.6 million, and then term loan at June 30, $18.1 million. So senior debt in that $38 million range.

And then secondarily, Denny, you kind of triggered another question when you started talking about some of the international sales to the extent that some of this business would be going to Europe or other places that have put reciprocal tariffs on U.S. products that you've seen, are you seeing any impact to your business -- impact now in a good or bad way, I mean, you can kind of have set out, but how are you having to frame some of those orders? And who's bearing those tariffs?

Our tariffs are being borne by the importer of record, which is not us. We've not had any meaningful discussions with any customers about anything that would change based upon the current state of tariff system and the retaliation and so forth. So really, it's been a nonfactor so far.

(Operator Instructions) I show no further questions at this time. I would like to turn the call back over to the company's CEO, Mr. Denny Oates, for closing remarks.

Thanks, George. Once again, I want to thank everybody 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 October. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. Everyone, have a great day.