Universal Stainless & Alloy Products, Inc.

Good morning, ladies and gentlemen, and welcome to the Universal Sting List fourth quarter 2020 conference call-in webcast. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require any assistance during the conference, please press star then zero on your touch-tone phone. As a reminder, this conference is being recorded. Now, it's my pleasure to turn the conference over to your speaker, June Filangieri. Please go ahead.

Thank you. Good morning. This is June Filangieri of ComPartners, and I also would like to welcome you to the Universal's famous conference call and webcast. We are here to discuss the company's fourth quarter 2020 results reported this morning. With us for management are Danny Oates, Chairman, President, and Chief Executive Officer, Chris Zimmer, Executive Vice President and Chief Commercial Officer John Arminas, Vice President of Administration and General Counsel, and Chris Scanlon, Vice President of 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 our conference operator will instruct you on procedures at that time, as she promised. Also, please note that in this morning's call, management will make forward-looking statements. Under the Private Securities Litigation Reform Act of 1995, I would like to remind you of the risks related to these statements, which are more fully described in today's press release and in the company's filings with the Securities and Exchange Commission. With the formalities complete, I would now like to turn the call over to Denny Oates. Denny, we are ready to begin.

Thanks, Jen. Good morning, everyone. Thanks for joining us today. On our call last October, we said the fourth quarter would be challenging and characterized by three things, debt reduction, modest growth in bookings, and financial performance and operating levels closely paralleling the third quarter. Let's take a look at what actually happens. Debt was reduced $10.2 million during the quarter, which brings our second half 2020 debt reduction to $22 million, $2 million greater than our estimate at mid-year. We are in good shape from a liquidity standpoint to meet the gradual improvement in business we anticipate as we move through 2021. Gross bookings were $24 million, up 3.3 million or 16% from the third quarter. Order cancellations fell to $1 million compared to $10.5 million in the second quarter and $2.3 million in the third quarter. Our bookings reflect continuing destocking in aerospace and oil and gas markets, a plate market that has returned to pre-pandemic levels, healthy semiconductor activity, and the best quarterly bookings of premium melted products of the year. The outlook for recovery in aerospace in the second half of 2021 remains intact. and there is increasing optimism for oil and gas markets as well. Our backlog stood at $48 million at December 31st, a $7 million or 13% reduction sequentially, and $71 million and 60% below December of 2019. COVID-driven turmoil in the aerospace and oil and gas markets account for the decline. Let's move on to the fourth quarter results. Sales of $31.3 million were down $6 million, or 16.3% from the third quarter, and 43% below the fourth quarter of 2019. Our sales were adversely impacted by $2 million of sales to the Far East that did not reach the destination in time for Q4 revenue recognition, plus normal customer actions to delay shipments as part of year-end inventory management. Delays also pulled down our fourth quarter premium alloy sales by 35% sequentially. Fourth quarter sales also reflected a 19% sequential increase in plate sales and record semiconductor sales. We believe Q4 will be the low-wooder mark in sales for this down cycle. We have been working our operating plan designed to reduce costs and conserve cash. Our plan includes periodic shutdowns of entire facilities, coupled with rolling shutdowns of major work centers, stringent capital and operating spending controls, workforce reductions, and reduced work schedules. Our fourth quarter production levels were virtually identical to the third quarter. However, our cost per pound was reduced a further 6 percent. The continuation of low activity levels coupled with a less favorable product mix in the fourth quarter negatively impacted our gross margin. We recorded a fixed cost absorption charge of $3.8 million, essentially the same as the third quarter, and a $300,000 loss on excess scrap sales. These scrap sales generated $700,000 in cash. Excluding these charges, fourth quarter 2020 gross margin was a loss of $1 million, or a negative 3.1% of sales. One offset to these negative factors has been the continued rise in most commodity prices, which is enabling us to maintain metal spreads. Nickel, for example, closed the fourth quarter at $7.62 per pound, an increase of 13% from the end of the third quarter and up 22% from a year ago. Today, nickel was being quoted at $8.15 per pound. Moly, vanadium, and manganese also demonstrated strong quarter-over-quarter increases. While scrap closed the fourth quarter at $0.17 per pound, a 36% increase both sequentially and versus the end of 2019. We've made progress on our commitment to reduce managed working capital, posting a fourth quarter reduction of $19.2 million. To do so, we further reduced inventory by $9.6 million, which brought our total inventory reduction in 2020 to $36 million. In the first quarter of this year, we intend to pay off the $15 million in notes, which were issued in the acquisition of the North Jackson facility in 2011. As a result, lower interest expense of approximately $600,000 will benefit 2021. Chris will have more to say on this subject in his comments. Operating during a downturn generally isn't very much fun, but these times do provide us with the opportunity to step back and assess our shop practices with an eye towards driving productivity and sustainable cost per pound reductions, which will drive improved margins as volumes recover this year. During the fourth quarter, Plant activity levels were driven down 60% compared to the pre-pandemic first quarter, as measured by pounds processed through our facilities. Air melt operations were reduced 52% versus pre-pandemic levels. Yet productivity, as measured by pounds produced per operating hour, increased by double digits. Vacuum melting operations were reduced 57% compared to pre-pandemic levels. Yet cost per operating hour fell 12%. Variable non-material spending has been reduced over 50% since COVID hit. Controllable fixed spending has been reduced 46% since the March quarter. Selling general administrative expenses totaled $4.2 million in the fourth quarter, the same as the third quarter, and down $1.7 million or 30% from the first quarter. Lastly, and very importantly, working through all this COVID turmoil has been a challenge for all of our employees. So it's fantastic to see our OSHA recordable rate hit the lowest level in Universal's history. My sincere thanks to everyone for looking out for one another. We continue to bring capital spending down in the fourth quarter to a low of $700,000, which brought full-year CapEx to $9.2 million. We now expect capital spending in 2021 to increase to $11 million as we move forward with our strategic growth initiatives, including adding a vacuum arc remelt furnace, and an 18-ton crucible to our vacuum induction melting operation. These investments will expand our premium alloy production capabilities, plus reduce our costs. Our new vacuum arc remelding furnace will arrive at North Jackson this quarter and be installed in the second quarter, with commissioning occurring in the third quarter. A larger crucible will be installed in the third quarter and begin integration into operations immediately. Premium alloys will remain a major driver of our future growth. On the subject of premium alloys, one other benefit of the current slowdown is that OEMs have afforded more technology resources to upgrade long-term supply chains by approving new suppliers for critical alloys. As a result, we are increasingly optimistic we will be rolling out three new premium alloys in the fall of this year, alloys with excellent future growth opportunities. Turning to our end markets. Our airspace sales were $17.2 million, or 55% of sales in the fourth quarter, compared with 25.1 million, or 67% of sales in the third quarter of 2020, and 37.6 million, or 68% of sales in the fourth quarter of 2019. That represents declines of 32% and 54% from their respective prior periods. Full-year airspace sales of $121.9 million are off 28% from 2019. The turmoil in the aerospace market over the past several quarters has been well documented, starting with the delays in the return to service of the Boeing 737 MAX compounded by the COVID-19 pandemic, which severely impacted air travel. There's still some concerning news out there regarding aerospace. For example, the slow recovery in air travel stalled in November, with the International Air Transport Association reporting November 2020 travel down 70.3% year over year. versus 70.6% in October. New travel restrictions continue to be announced as recently as earlier this week. The IATA also reported $118 billion in airline industry losses in 2020, leading to difficult liquidity issues and canceled or postponed new aircraft deliveries. Boeing is dealing with some quality and production issues on the 787 and delays in the new 777X. Airbus recently slowed its production ramp on the A320 to 43 planes per month from 47 per month. Airbus also recently announced 500 employees are in quarantine in their Hamburg facility due to a nasty COVID outbreak. However, I want to remind everyone that all is not gloom and doom. The 737 MAX is returning to service. COVID-19 vaccines are rolling out, improving their prospects for air travel. United Airlines reports that leisure travel demand will recover quickly, likely a few months following COVID vaccinations due to pent-up demand. Delta Airlines is more optimistic and said last week that it expects corporate travel to, quote, come back aggressively, end quote, in the second half of 2021. Delta is calling back 400 pilots from layoff to begin flying mid-year. Boeing also began to book new orders. They booked a new 75-plane 737 MAX order from Ryanair. Ryanair called the plane a game-changer when they placed the order. Liquidation of the 450-plane inventory of 737 MAXs has begun, a process which will take an estimated 18 months. We'll see on today's Boeing call whether there's any other updates to the build rates. I should also add that defense spending continues to be a positive demand driver for us, especially in the rotor world. We recently canvassed our top 20 aerospace customers. The consensus is that destocking will ease this quarter and true demand buying will begin in the second quarter, a good thing for mill order books. This supports our outlook that we'll see sequential improvement in the business climate with increasing momentum moving through the second half of the year and into 2022. The heavy equipment market remained our second largest market in the fourth quarter of 2020 with sales of $6 million or 19% of sales, an increase of 30% from 4.7 million or 12% of sales in the third quarter, and 27% higher than the 4.8 million or 9% of sales in the fourth quarter of 2019. Metal fabrication markets, particularly automotive and new model introductions, drive plate sales. Our customers are restocking to meet growing demand, particularly from automotive Pounds booked in the fourth quarter were up 89%, and we are seeing booking strength continuing through this month. The general industrial market remained our third largest market in the fourth quarter, with sales reaching a near-record 4.4 million, or 14% of sales, an increase of 55% over 2020's third quarter sales of 2.9 million, and an increase of 83% over sales of 2.4 million, or 4% of sales in the fourth quarter a year ago. Total 2020 general industrial sales of $12.8 million were 42% higher than 2019. Our general industrial category includes sales to the semiconductor, medical, and general manufacturing markets. Substantial semiconductor market demand was a main driver of our near-record general industrial sales in the fourth quarter. In November, the World Semiconductor Trade Statistics Organization forecast that the industry's worldwide sales would increase 5.1% in 2020, and 8.4% in 2021, with 2020 growth primarily due to the 18.7% increase in sales in the Americas. Chip shortages are being reported in consumer electronics and among all major automotive OEMs. In addition to the strength in semiconductors, our general industrial sector is also benefiting from healthy medical demand. We will continue to focus on the semiconductor market in addition to pursuing opportunities in new markets within the general industrial segment to broaden our future sales potential. The oil and gas end market was our fourth largest market in the fourth quarter with sales of 2.3 million or 7% of sales compared with sales of 2.8 million or 7% of sales in the third quarter of 2020 and 6.3 million or 11% of sales in the third quarter of 2019. That represented declines of 17% and 63% from the respective prior periods. Full-year oil and gas sales were down 48% from 2019. Crude oil prices are back up above $50 per barrel. West Texas Intermediate was at 53 this morning. The rig count has increased for nine consecutive weeks. Major players such as Schlumberger, Halliburton, and Baker Hughes reported solid financial numbers for the fourth quarter and an upbeat view about recovery in the second half of 2021. with demand returning to 2019 levels in late 2022 and 2023. That said, current recounts are well below year-end 2019 levels at 378 versus 781, and the new administration's recently announced policy decisions are causing concerns in the marketplace. Our customers generally indicate cautious optimism that the global economy and oil demand will begin to recover in 2021. Slowly during the first half of the year, followed by increasing momentum in spending and activity levels as the macro environment improves, setting the stage for a stronger 2022. Current supply chain inventories are reported to be very lean. Power generation market sales declined to $1 million, or 3% of sales in the fourth quarter, compared with 1.6 million, or 4% of sales in the third quarter of 2020, and 2.9 million in the fourth quarter of 2019. Full-year power generation revenues of $6.9 million were 40% lower than 2019. Maintenance demand, which has accounted for most of our power gen sales in recent years, continued to be sharply limited in the fourth quarter, with a new wave of the pandemic spreading across the country and continuing today. We have not seen any tangible evidence of forging activity reshoring in North America as rumored late last year. On a positive note, GE did announce growth in new turbine orders, specifically 45 to 50 new turbines for 2021 delivery. That concludes my review, Chris. We're ready for your report.