Universal Stainless & Alloy Products Inc (USAP) 2019 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Universal Stainless Third Quarter 2019 Conference Call and Webcast. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms. June Filingeri. Please go ahead, ma'am.

Thank you, Mary. Good morning. This is June Filingeri of Comm-Partners, and I also would like to welcome you to the Universal Stainless conference call and webcast. We are here to discuss the company's third quarter 2019 results reported this morning.

With us from management are Denny Oates, Chairman, President and Chief Executive Officer; Chris Zimmer, Executive Vice President and Chief Commercial Officer; Paul McGrath, Vice President of Administration and General Counsel; and Chris Scanlon, Vice President, Finance, Chief Financial Officer and Treasurer.

Before I turn the call over to management, let me quickly review procedures. After management has made formal remarks, we will take your questions. And as Mary said, she 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 regarding future events and financial performance. We caution you that such statements reflect management's best judgment based on factors currently known and that the actual events or results could differ materially. Please refer to the company's documents that are filed from time to time with the SEC, in particular, the Form 10-K, 10-Q and Form 8-K filed today with the company's press release. These documents contain and identify important risks and other factors that may cause actual results to differ from those contained in management's forward-looking statements.

Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. The company disclaims any obligation to update or revise any forward-looking statements. Management may provide guidance on today's call but will not provide any further guidance or updates on the performance during the quarter unless it is done in a public forum.

During this call, management will also discuss non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the GAAP to non-GAAP results is provided in today's press release.

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

Thank you, June. Good morning, everyone. Thanks for joining us today. The progress we achieved in the first half of 2019, especially in the second quarter, was slowed in the third quarter by unplanned downtime on critical equipment, including the hydraulic forge in North Jackson and the bar and rod mill in Dunkirk. As a result, we reported sales of $56.6 million, down 20% from last quarter and 18% from the third quarter of 2018. The 18% sales decline from 2018 includes an $8.8 million or 67% reduction in plate sales.

The equipment issues reduced shipments by 2 million pounds and sales by $6 million. Another $1.4 million of international sales was shipped physically but did not reach their destinations in time to be included in third quarter revenue.

Premium products were particularly hard hit by the forge issues, reflecting a $4.8 million sequential drop in sales to $8 million or 14.2% of sales. Year-to-date premium alloy sales totaled $30.2 million or 16.1% of sales.

Our aerospace sales remained strong in the third quarter and accounted for 72.3% of total sales. Year-to-date aerospace sales were up 16.8% from the same period of 2018, reaching a record $132.8 million. Third quarter order entry of $53 million before surcharges increased 5% compared to the second quarter, indicating very little seasonal impact and continued strong aerospace demand. Tool steel plate bookings were essentially equal to the second quarter but 34% below the near-record level of 2018.

Order backlog finished the quarter at $118.3 million compared to $116.9 million at June 30 and $111.4 million 1 year ago.

Net income for the third quarter was $800,000 or $0.09 per diluted share and included a $0.04 per share insurance recovery related to the fire in the pickling area of the Dunkirk facility back in September of 2017. That compares to net income in the second quarter of $2.1 million or $0.24 per diluted share, including charges of $0.03 per diluted share for the hydraulic forge at North Jackson in June. In the third quarter of 2018, net income totaled $3.9 million or $0.44 per diluted share.

EBITDA totaled $6 million compared with $8.2 million for the second quarter of 2019 and $10.1 million for the third quarter of 2018. Cash flow from operations remained positive at $6.6 million in the third quarter, and managed working capital fell $2.9 million. Total debt was reduced $2.1 million to $66.1 million or $3.1 million and $64.9 million net of cash. Chris will cover cash flow, managed working capital and other related financial items in his remarks.

Let me review the issues that impacted third quarter results, the good, the bad and the ugly. Reduced sales took a toll on margins in the third quarter with gross margin at 9.4% of sales compared with 12.8% of sales in the second quarter of 2019 and 15.1% of sales in the 2018 third quarter. In addition to reduced shipment volume, a less profitable product mix, lower production levels due to equipment issues and continued surcharge versus materials cost misalignment were the principal negative drivers of lower margins. The ramp-up with the new Dunkirk bar cell and the outstanding cost performance in vacuum induction melting were partially offsetting.

Let me highlight the commodity situation first. Nickel prices jumped during the quarter, rising from $5.43 per pound in June to $8.02 in September, a 48% increase. As a result, the surcharges on major nickel-bearing AOD produced grades like 15-5 bottomed at $0.56 per pound in August and will rise to $0.67 per pound in November. Similarly, surcharges on popular nickel-bearing premium grades like 13-8 bottomed at $0.94 per pound in August and will increase to $1.10 per pound by November. In September, this trend contributed towards an easing in the misalignment between surcharges and commodity prices, which has been pressuring margins most of this year. Even though nickel has retreated to the $7.35 per pound range, we expect to see continued easing in misalignment on nickel grades in the fourth quarter.

Other important commodities continued to weaken during the third quarter. Moly was down 3%, chrome down 12%, vanadium down 15% and 71% on a year-to-date basis, and scrap was down 8% during the quarter. So pricing of a tool steel grade like A2 reflects surcharges, which have fallen from $0.75 per pound in January to $0.41 per pound at September and will continue to fall to $0.38 per pound in November. Keep in mind that tool steel typically sells for $1.50 to $1.75 a pound, so short-term surcharge swings of this magnitude can have a significant impact on margins. We anticipate these commodities stabilizing as we move through the fourth quarter.

To summarize, misalignment eased during the third quarter but negatively impacted margins by $0.5 million or 0.9%. We expect continued easing in the fourth quarter due to the recent rise in nickel, slowing price reductions of other key commodities and monthly reductions in material cost as high-cost inventory sells through.

Let me turn to the facilities and operations. We had our challenges with equipment downtime during the quarter. There were 2 areas of note in terms of impact on shipments. First and most importantly, the radial forge in North Jackson. You'll recall that we had a fire on June 14 at this facility. Our team rallied working with third parties and the mill builder to get back into production quickly. On the last conference call, I reported that we planned a major 1-week outage in September and we would do expansive diagnostic work to ensure all elements of the system were working as before the fire. Unfortunately, we experienced deteriorating performance in July and early August and decided to accelerate the 1-week outage to replace the cylinder and other degraded parts. The net result of the planned outage acceleration and intermittent and unplanned downtime during the quarter were delayed shipments of 2 million pounds and $6 million or a margin impact of $1.5 million and an impact on gross profit margins of 2.4%. I am pleased to report that the forge has been processing material at record levels over the past month and already processed more material in the first 2.5 weeks of October than any month in the third quarter.

Secondly, we planned an outage at the bar and rod mill in Dunkirk to complete a $400,000 capital project on an in-line furnace. During the teardown of the furnace, we uncovered serious structural issues caused by collapsed water jackets and related floor and foundation damage. The outage was extended to 3 weeks and had a negative impact on costs and production flows in the Dunkirk facility. I'm pleased to report that Dunkirk reported record throughput across all operations, including the bar and rod mill in September as we recovered from this extended outage.

I would be remiss if I didn't address some of the offsetting positive trends during the quarter. Installation of the new bar cell in Dunkirk is complete as are most of the outstanding items on the punch list that I mentioned during our last call. The new phased array inspection system will be in place this quarter. As a reminder, the $10 million bar cell capital project involved modernization of our intermediate bar processing operations by consolidating 6 discrete processing steps into 1 fully functioning automated workstation.

Third quarter production on the cell was double Q1 and up 17% versus Q2 despite some of the operating challenges we faced. The cell added $0.5 million to margins or 0.8% impact -- positive impact on gross margin.

Year-to-date inventory reduction totaled $2.2 million as we liquidated inventory positioned according to obsolete production routes. Each quarter going forward, we expect to see positive effects on our margins as we continue up the learning curve and drive more product through the line. We maintain our expectation of a 2-year payback on the project, which was financed in a tax-advantaged manner utilizing new market tax credits.

Our vacuum induction melting operations established new records for throughput, campaign life and operating costs in Q3, supporting our corporate strategy to expand the premium melted products. After the extended outage of the bar and rod mill in Dunkirk was completed, that facility achieved a new record monthly production level in September to partially offset the unplanned downtime experienced in August.

Lastly, we received approval from 2 major aerospace OEMs for critical bearing and gearing steels, which will continue to grow our premium alloys consistent with our long-term strategy.

Let me turn to our end markets for a second and start with aerospace, our largest market. Our aerospace sales totaled $40.9 million or 72.3% of sales in the third quarter of 2019 compared with a record $49.3 million or 69.5% of sales in the second quarter of 2019 and $37.3 million or 54% of sales in the third quarter of '18. Year-to-date aerospace sales increased 16.8% from the same period of 2018, reaching a record $132.8 million for the first 9 months of the year.

Even with the continued issues plaguing Boeing 737 MAX, demand from our customers remained on track in the third quarter. While uncertainty continues regarding when the 737 MAX will be returned to service, we are not seeing a major impact on our order book. Rather, we see segments to the aero metal supply chain getting caught up after a strong 2018. I would note that there were a couple of order pushouts recently, but they seemed more related to year-end inventory adjustments specific to those customers.

The consensus among our customers and several Wall Street analysts is the Boeing will achieve recertification in the U.S. late in the fourth quarter this year with other countries following throughout 2020. As that plays out and with their current production of 42 airplanes per month, there is continued expectation of a ramp to 57 airplanes at some point next year. It is also expected that the first 777X will be delivered in 2020 despite recent issues that came up in testing.

More broadly, the IATA in the latest report on global air traffic reported that August passenger traffic grew 3.8% year-over-year, somewhat below the long run average of 5.5%. Load factors, however, reached a record 85.6%, which bodes well for the aftermarket. In fact, Honeywell in their third quarter report cited demand in the commercial aftermarket as contributing to their growth in aerospace for the period.

On the minus side, freight traffic continued to decline in August with the U.S.-China trade dispute being a major contributing factor. Overall, aerospace continued to be a bright spot in the third quarter both for Universal and for our customers, and it is expected to remain strong going forward. Although given the near-term cross currents and uncertainties, we're all monitoring the situation very closely.

The oil and gas end market remained our second largest end market in the third quarter of 2019 at 10% of total sales. Third quarter oil and gas sales totaled $5.7 million versus $7.7 million in the 2019 second quarter and $8.9 million in the third quarter last year. In general, we would characterize the oil and gas market as moving sideways to softening. However, it remains an active market for Universal because our introduction of new products and incoming orders remain level with the second quarter bookings.

Schlumberger reported somewhat mixed results in their third quarter report on Friday. They noted that international activity drove their overall growth, but North America sales were strong offshore while growth on land was minimal due to lower fracking activity and pricing weakness. In their outlook, they pointed to market uncertainty stemming from challenges to global economic growth due to trade concerns as weighing on oil demand. Our strategy for Universal continues to be expanding market penetration, utilizing unique capabilities of North Jackson.

The heavy equipment market was our third largest market in the third quarter 2019 representing 7.7% of sales versus 10.1% of sales in 2019 second quarter and 19.4% of sales in the third quarter of last year. Third quarter 2019 heavy equipment sales, which are primarily tool steel plate, have been anemic this year versus a record year in 2018. Heavy equipment sales totaled $4.4 million compared to $7.2 million in the second quarter and $13.4 million in the third quarter of '18.

After a pickup in the second quarter, we saw a reduced demand for tool steel in the third quarter. The effect of dropping commodity prices and surcharges compounded the issues I noted last quarter, including automotive production cuts, somewhat fewer model changeovers in the pipeline, short lead times of roughly 6 weeks and service center inventory adjustments. Going into the fourth quarter, we've seen a modest improvement in bookings and expect sales to be more in line with the second quarter of 2019.

Third quarter power generation market sales were $2.9 million compared with $3.2 million in 2019 second quarter and $2.7 million in the third quarter of '18 or 5.1% of sales. Our power generation sales continue to reflect maintenance spending for the most part, and bookings were up 29% sequentially in the third quarter, consistent with seasonal maintenance trends. We see little change in market dynamics over the near term and intend to supply maintenance needs until the replacement market for gas turbines kicks in.

In general industrial market sales were 3.6% of sales in the third quarter of '19 at $2 million versus $2.4 million in the second quarter and $5.1 million in the same quarter last year. Semiconductor, infrastructure and general manufacturing markets remained slow.

That concludes my summary of the end markets. Let me turn the call over to Chris for his financial report. Chris?

Thank you, Denny, and good morning, everyone. Let's get started with the income statement. As Denny discussed, third quarter 2019 sales of $56.6 million were down 20.3% or $14.4 million from the 2019 third quarter and down 18.1% compared with the 2018 third quarter. Third quarter sales were negatively impacted by unplanned downtime associated with repair activity at our North Jackson hydraulic forge relating to the fire that occurred in the second quarter. Fire-related delayed shipments reduced third quarter net sales by approximately $6 million.

2019 9-month sales of $187.8 million were down $11 million or 5.6% compared to 2018 9-month sales of $198.9 million. The year-to-date decrease was due to lower sales in most end markets with the exception of aerospace, which was up $19.1 million, and power generation, which was up $1.3 million.

Third quarter 2019 gross margin totaled $5.3 million or 9.4% of sales, down from 12.8% of sales in the 2019 second quarter and 15.1% of sales in the 2018 third quarter.

Our current quarter gross margin was negatively impacted by lower revenue and product mix. We also experienced misalignment of melt costs compared to commodity surcharges, as Denny noted earlier. This misalignment negatively impacted the third quarter gross margin. Additionally, we incurred $500,000 of increased operations costs due to the second quarter North Jackson hydraulic forge fire, a portion of which negatively impacted our third quarter gross margin.

Lastly, we also recorded a onetime noncash impairment charge of approximately $200,000 related to the rust furnace components at our Dunkirk facility. This charge was associated with the planned third quarter maintenance program at our Dunkirk bar and rod mill.

Selling, general and administrative costs for the third quarter totaled $4.5 million or 8% of sales, a decrease of $1.1 million compared with the 2018 second quarter and a $606,000 decrease compared to the 2018 third quarter. Employee-related costs drove the SG&A decline between periods, both sequentially and year-over-year.

Current quarter other income included insurance proceeds of $350,000 related to the Dunkirk pickle room fire, which occurred in September of 2017.

Specific to the third quarter, our income tax benefit was $577,000 driven by favorable discrete items, primarily increased research and development tax credits. For the 9 months ended September 30, 2019, our income tax expense totaled $55,000 with a related effective income tax rate of 1.3%.

Net income in the third quarter was $766,000 or $0.09 per diluted share. Second quarter 2019 net income totaled $2.1 million or $0.24 per diluted share, and 2018 third quarter net income totaled $3.9 million or $0.44 per diluted share.

Our third quarter EBITDA totaled $6 million with Q3 EBITDA as adjusted for noncash share compensation totaling $6.3 million. Third quarter EBITDA is $2.2 million lower than the second quarter 2019 and $4.1 million lower than third quarter 2018. The EBITDA and adjusted EBITDA calcs are provided in the tables to the press release.

Third quarter cash flow from operations was again positive at $6.6 million, up $4.4 million from our 2019 second quarter cash flow from operations, which totaled $2.2 million.

Related to the balance sheet, managed working capital totaled $144.9 million and decreased by $2.9 million compared with the second quarter of 2019. Accounts receivable decreased by $4.6 million and inventory increased slightly by $568,000 or 0.4%, while accounts payable decreased by $1.1 million.

Third quarter 2019 backlog totaled $118.3 million and is up $1.4 million from the 2019 second quarter. Year-over-year, third quarter 2019 backlog increased $6.9 million or 6.1% compared to the 2018 third quarter.

Capital expenditures for the third quarter were $3.9 million, with 9-month CapEx totaling $13.3 million. Third quarter 2018 capital expenditures totaled $6.6 million, with [2018] (corrected by company after the call) 9-month CapEx totaling $13.2 million. 2019 CapEx is expected to be above our 2018 levels and total approximately $17 million. This includes $500,000 of capital spend related to the hydraulic forge fire and the bar and rod mill repair.

New Markets Tax Credit Program restricted cash receipts totaled $359,000 in the third quarter. Our restricted cash was related to the financing of our midsized bar cell capital project. Additionally, within the third quarter, we received $750,000 of cash proceeds from a New York State development grant related to the Dunkirk bar cell capital project. These funds were used to pay down credit facility borrowings.

Lastly, looking at our debt. The company's total debt at September 30, 2019, was $66.1 million, a decrease of $2.1 million from the prior quarter. Debt, net of cash, totaled $64.9 million at the end of the third quarter, a decrease of $3.1 million from the 2019 second quarter.

This concludes the financial update. And Denny, I'll hand the call back to you.

Thanks, Chris. In summary then, we were challenged by several equipment issues in the third quarter, which lowered sales to a disappointing $56.6 million. Each equipment issue has been addressed, and production over the past 4 to 6 weeks has rebounded to record levels. The equipment issues overshadowed excellent progress in ramping up the new bar cell in Dunkirk, which is delivering on cost and inventory reductions as planned. We also are encouraged by the melt cost reduction performance at our vacuum induction melting shop at our North Jackson facility.

Commercially, we were pleased to earn new approvals for bearing and gearing steels from major aerospace OEMs, which underscores that our strategy to grow premium melted products continues to evolve. Year-to-date record aerospace sales of $132.8 million or 17% growth over 2018 also validates continued strength in the aero market and the long-term execution of our strategy.

We anticipate easing in the misalignment between surcharges and material costs in the fourth quarter. The easing is due to the firming in nickel prices, the sell-through of high-cost inventory. And on the non-nickel-bearing products like tool steel, we will continue to be challenged with misalignment due to declining commodity prices. However, we see those prices basically stabilizing as we move through the fourth quarter.

With major equipment maintenance behind us, we are focused on getting back on track in the fourth quarter. We have a strong backlog of $118.3 million. Aerospace bookings have remained reasonably strong in the seasonally slower third quarter.

On a separate note, we also have received an unsolicited proposal to merge from Synalloy Corporation on October 14 and filed a related 8-K indicating our Board of Directors as well as our legal and financial advisers are carefully considering their proposal and will respond in due course.

Before I close, I want to recognize the efforts of all of our employees to meet the substantial challenges we faced in the third quarter. My confidence in our ability to build on our accomplishments and successfully execute our strategy continues to be based on their dedication and hard work.

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

(Operator Instructions) Our first question is from the line of Tyler Kenyon from Cowen.

So a lot to think about with respect to bridging the third quarter to the fourth just given the impacts from the production downtime as well as the delayed shipment impact and then some dynamics with surcharges and input costs. Any help you could provide us with how to be thinking about fourth quarter sales and the trajectory of gross margins from here?

Yes. Let me take a crack at this. I realize we have a number of puts and takes. So here's the way we're looking at the situation. We had basically 6 unusual items that impacted the third quarter. 5 of them were negative and 1 of them was positive. So as we look at it, we reported $0.09 per share and a gross profit margin of 9.4%. The biggest impact was the problem we had at radial forge, which prevented us from shipping some $6 million of product. That equated to $0.14 per share in the third quarter and impacted gross profit margins by 2.4 percentage points.

We had another $1.4 million of sales that did ship, but they were international sales, they did not arrive in time to be counted. That impacted the third quarter by $0.02 per share and impacted margins by 0.5%.

We had continuing misalignment, which was lower than the first half of the year but still was there. That impacted the quarter by $0.04 per share and 0.9% on the gross profit side.

Chris mentioned the write-off of the rust furnace. This is a capital project of an in-line furnace. In doing the capital project, we had some un-depreciated asset value which we wrote off. That's $200,000 roughly or $0.02 a share and impacted gross profit margins by 0.4%. And we had the issue with the B&R mill, which did preclude us from doing some work there that impacted sales, getting small here but that was $0.01 a share and impacted margins by 2 -- 0.2%.

So if you take those negatives, that takes you $0.09 per share, up in the range of $0.32 per share. We had a $0.04 per share positive. So I take that out, we're looking at the third quarter adjusted at $0.28 a share and an equivalent gross profit margin of 13.8%.

I would -- in the interest of fairness, if you look at the positive, we do have the Daisho line, which is contributing about $0.04 a share in the quarter and improving margins by 0.8%. The Daisho, of course, will continue into the future. Hopefully, that doesn't cloud the issue and clarifies some of the impacts that we saw during the third quarter.

If you look at the fourth quarter, to answer the other part of your question, obviously, we've got product that went out the door and has now arrived in port and will be counted automatically in the fourth quarter. And we would expect to see our fourth quarter sales to be higher than the third quarter and our margins to be back in line with where we've been in the last couple of quarters. Or said another way, we're not anticipating 5 of these negative adjustments. Does that help?

Right. Okay. No, that's helpful. That's very helpful. And then also, I mean, even excluding the benefit that you had in SG&A, SG&A looked relatively low. I mean is there any way to be thinking about that moving into year-end? Are there any accruals we should be mindful of?

The trends that we have, Tyler, that you see should continue within the fourth quarter.

Okay. And then just lastly, generated some free cash in this quarter and just kind of wanted to get an updated view as to kind of debt reduction targets as we -- free cash flow and debt reduction target as we move into the close of the year.

I think on the last call, I said we wanted to get down into the 50s, mid-50s. I think that's going to be a stretch, frankly, because if you think about some of the billings that we anticipate in the third quarter, they may not be collected. So our goal is still to get down to 50s. So we do expect to generate cash in the fourth quarter and pay down debt. But I think it's going to be high 50s, 60-ish kind of a number by the end of the year, not the mid-50s we were talking about last quarter.

Our next question is from the line of Phil Gibbs from Capital Markets.

Thanks, Denny, for going through all that detail on the items there. I appreciate it. The $6 million hit from the forge, should we think about that essentially as you had $8 million in VIM sales and you would've had $14 million if the production had been on point with what you're seeing now?

No. The change in premium melted products was more like $4.8 million, I think, exactly. And the majority of that was related to the $6 million. So it's not the arithmetic you just did. If you look at the change in premium melted products, it was $4.8 million in the fourth quarter -- or excuse me, the third quarter. Compared to the second, that was a decline. And roughly 80% of that was tied to what happened at the forge.

Okay. So still probably close to a $45 million to $50 million annualized rate but not at that $14 million?

Yes. The challenge we have on premium melted products is to get the product that didn't go out the third quarter, ready and shipped to a customer in time in the quarter so it can be counted in the quarter. And we still have the risk of people doing some window dressing at the end of the year. But fundamentally, the majority of that product should go out in the fourth quarter.

You talked about some new wins in bearing and gearing steels. When did those start to enter into the fold? And how meaningful are those for the business at the margin?

This is Chris Zimmer. I'll touch on that. We did begin to have some shipments in the third quarter. I'd characterize them as very modest. That's a lot of the product that was put into inventory through the course of these trials and evaluations. But now we're moving full steam ahead to position our production and our inventory to break into the supply chain at a more meaningful way next year.

So a lot of these approvals that have taken years to get is a big milestone that we needed to hit in order to participate, and now we're at that level. But I would expect these new products to really start to take hold as we move through the second, third and fourth quarters of next year.

So just if I could add to that, Chris, Phil. We've talked in the past on these calls about some inventory that we had where we were holding the inventory, it's good inventory, but we couldn't really sell until we got the approvals. That's probably in the range of $3 million to $4 million. So that's the material that Chris was alluding to so we can start to sell off that material. And as I personally look at 2020, I'm very excited about these opportunities. I think it is very meaningful sales opportunities for the company. It will take us 1 quarter or 2 to really get established with the customers in the supply chain. But I think by the second half of next year, this will be very attractive business for us.

So when I -- I'm just trying to think about this from a high level. So let's just say right now, your rate on VIM sales or premium sales has been $40 million, maybe a little bit higher. Let's say you don't have the operational issues at the forge, you're able to get some product out the door and you start layering in some of these new contracts because I know these are probably 2 nice ones but there's more coming. What should we think about just in the here and now without any more incremental approvals, what your revenue potential at North Jackson is?

For premium melted products, just to make sure I'm answering your question correctly, there's no reason to expect we shouldn't see continued double-digit growth in 2020. So it will be up in the $60 million range.

And what is the biggest driver at the margin incrementally, this newer business you're talking about now in the bearing and gearing steels?

That's not the biggest driver of the margin. It's continued expansion of premium products in general. These products will clearly help. I think some of the capital projects like the bar cell, as that kicks in, that's going to help on the margin as well as we go into 2020.

What you're seeing coming out the P&L was not -- is not -- I mean we're not done as far as the -- we're just scratching the surface for the bar cell.

The $17 million CapEx you mentioned, the -- some of that sounds like it's spending that you had to do because of the fire.

Yes.

How much of that do you potentially view being reimbursed for, if any?

We do expect to receive insurance proceeds as a result of the North Jackson fire. We are in contact with the insurance company. They have accepted our claim, and we do continue to work with the insurer through the claims processing activities. These things do tend to take a while as we work through and as we saw this quarter with the receipt of the funds from the Dunkirk pickle room which occurred back in 2017.

We can't really give you a hard number on that

No, I can appreciate that, but I just want to be clear in terms of the -- you had CapEx related to both North Jackson and Dunkirk, it sounds like from some unexpected issues. I'm just trying to bench or bracket rather what that was. Sounds like something around $5 million. Is that relatively...

It was about $500 -- this year, it was about $500,000 Phil.

Okay. So I added an extra zero. Okay. Minor mistake.

Our next question is from the line of Greg Weiss from Boston Partners.

I just wanted to kind of get your reaction. Obviously, over the last couple of years, you guys have done a good job increasing your exposure to the attractive aerospace cycle and you've certainly highlighted the potential for future improvements and continued growth with orders at play at North Jackson and more consistent execution. But how do you kind of reconcile that just against the staggering low valuation you're getting in the market today? You're trading half book value, low multiple of certainly potential earnings and just the urgency to create value for shareholders.

Well, what you just quoted in terms of valuation of the company is accurate. We are below book value. Our view of that is there's a lot of concern about aerospace. We're heavily weighted toward aerospace, and there's a lot of tentativeness out there with companies in our space right now. As I look at everybody who's public in our space, you're all seeing -- we're seeing the same fundamental trends, perhaps more severely in the case of Universal as the smallest player in the space. But our view is we have to continue on our strategy, continue executing in the market. We'll realize that as we start to put numbers on the board.

That's why I said at the beginning of my comments here that we slowed down in the third quarter obviously doesn't help with that. But the underlying strategy is still very evident. It's still hanging together, and we're still very optimistic about our ability to continue to grow the vacuum induction melted products and then continue to improve in the other products as well. We're seeing more opportunities for AOD produced remelted steels. So we're spending some capital as we go into 2020 and 2021 to support those efforts. And they -- although they're not premium melted products, they're very high-margin specialty alloys. So we see a continuation of margin expansion, adding value for stockholders, and that will sooner or later be realized by the marketplace once we put a couple of quarters together that demonstrates that.

And just very quickly if I can follow up. Last year, you sold a little stock at $24.5, which, in hindsight, looks like a very wise move. Given your stock is trading over $10 below that now, is there any thought of using some amount of capital to go back the other way and repurchase stock?

Our Board is always considering different options as we meet. So that is one thing that we consider. I'm not prepared to announce anything at this point in time now.

Our next question is from the line of Phil Gibbs from Capital Markets.

Heavy equipment, did you say that the fourth quarter sales are going to be similar to the second quarter, Denny, kind of a bounce back from the weak Q2 levels?

Yes. Weak Q3, yes.

Yes. That's what I mean. Q4 looks like Q2.

Yes. I did say that and we -- that's the way we feel and that would be supported based upon some of the bookings we've seen so far in October, and remember that it's pretty short lead time business. We do that stuff in 5 or 6 weeks.

Okay. And this is the tool steel bucket essentially, right?

Yes. That's the vast majority of that. So we've seen 2018 was an all-time record. If you recall, things start to slow down in the fourth quarter. Hindsight is always 2020. So I think the market itself got a little ahead of itself. So we're in the middle of a destocking phase. I think it's further aggravated by the fact that we've seen very sharp decreases in full price due to surcharges. If you think about what I said there, surcharges fell from $0.71 a pound back in January to $0.38 a pound here as we get into the fourth quarter; on a product and sales were $1.50 or $1.75 a pound. So that's a tough pill to swallow and to navigate through over a very short period of time.

I've got a couple of other questions before I wrap up. But I know you had raised base prices on certain alloy materials maybe 3 to 6 months ago, and I know those weren't going to kick in anyways until 2020 and -- but the vibe in the industrial markets has clearly changed. Do you think that impacts the price increase announcement that you put out? Or you still expect to see that based on the products that you targeted?

Yes, Phil, this is Chris. The acceptance in the marketplace of the price increase has been what we call 100% capture rate. So we are getting it. With a lot of the new orders that are going in, it will be a 2020 event before we start to realize them. That was primarily on the low alloy product. So we'll start to see that benefit next year.

Okay. And I think I had one more but I don't remember.

(Operator Instructions) Our next question is from the line of Cole Fiser from Forest Hill Capital.

This is Cole. So earlier on the call when you said that you were carefully considering the Synalloy proposal, I just wanted to confirm that as part of that, that would be considering all strategic alternatives like shopping the company or taking it through a competitive bidding process and/or buybacks as well because today it sounds like...

I would refer you to our 8-K filing. That's about all I'm prepared to say on this -- in this format.

Our next question is from the line of Phil Gibbs from Capital Markets.

I remembered. As we kind of look out in the next year, I know you're a spot buyer of electrodes and pricing there has softened, but most of the supply chain has -- had built a low level of inventory into 2019 given the scarcity that existed a couple of quarters ago. Assuming these recent spot prices that we're seeing now on the graphite electrode market persist, when can you better realize those lower costs in the future?

I think, clearly, the third quarter was the high watermark. You'll start to average down what's in inventory with purchases in the fourth quarter. So you start to see that bleed into our P&L as we go into the first half of 2020. But I don't think you're going to get to the point where you basically liquidate the electrode inventory to the point where we're back down to, call it, $3 a pound, $2.50 a pound until midyear next year.

Okay. And then last one, I just want to make sure I'm clear here, Denny. It sounds like there's a bit of benefit on the nickel side in Q4, still some hangover in the vanadium kind of tool steel grades in terms of alignment, but we could see a little bit of a benefit. To the extent you had, let's say, ferrous scrap prices started to stabilize and move higher and nickel stays in around where it's at and the vanadium piece stops falling, should we expect as we look out into the first half of next year that these misalignment issues will turn into some level of positive for you?

I use the term easing in the fourth quarter for the reason you just alluded to because we know nickel-based products will see higher surcharges in October, November. Those surcharges go down a little bit in December based upon the retreat that we saw in nickel so far. I think we're around $7.35, I think, the last time I checked on nickel, okay?

So what we're looking at it in the fourth quarter is an easing compared to the third quarter because we'll have more positiveness on nickel-bearing but we see continued misalignment on the non-nickel-bearing steels, tool steel being the most glaring. I don't see that getting worse. I see that stabilizing. So we just said easing. We didn't say we're going to turn positive. As you get into the first quarter, you're asking me to forecast something that's wild to forecast, but if nickel holds up where it's at today or rises somewhat as we get into the first quarter of next year, which would require really some increased activity in China, in my mind...

Well, sorry to interrupt, Denny. Let's just say that things stay where they are now.

If things stay where they're at right now, then I would say we'd be neutral in the first quarter next year. I'd say we'd be neutral in the first quarter next year.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Dennis Oates. Please go ahead.

Thank you very much. Once again, I want to thank everyone for joining us this morning. We sincerely appreciate your ongoing support and interest in Universal, and we look forward to updating you on our progress during the fourth quarter on our next call in January. Have a great day, and early wishes for a happy holidays.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.