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spk01: 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.
spk00: 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.
spk05: 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.
spk07: Great. Thanks, Denny, and good morning, everyone. Let's get started with the income statement. As Denny discussed, fourth quarter 2020 sales of $31.3 million were down 16.3% or $6.1 million from the 2020 third quarter and down 43.2% compared with the 2019 fourth quarter. Sequential growth was achieved in two end markets in the fourth quarter. Heavy equipment sales totaled 6 million and were up from third quarter levels by 1.4 million, or 29.5%. General industrial sales in the fourth quarter totaled 4.4 million, up by 1.6 million from the third quarter, an increase of 55%. Our aerospace sales were lower than third quarter 2020 by 7.9 million, or 31.5%. Our aerospace sales approximated 55% of our fourth quarter sales. Sales to the oil and gas and power generation markets also declined from the third quarter 2020. Fourth quarter gross margin was a loss of $5.1 million compared to a loss of $4.4 million in the third quarter 2020 and gross margin of $5.9 million in the 2019 fourth quarter. Several items affected gross margin. Our Q4 2020 gross margin was unfavorably impacted by $300,000 from the sale of excess scrap, which generated $700,000 of cash receipts. Our Q4 gross margin was also unfavorably impacted by a $3.8 million direct charge related to fixed cost absorption. This charge reflects the amount of fixed overhead costs charged directly to cost of goods sold versus capitalizing into inventory due to continued reduced operating levels in the fourth quarter. This charge was expected and is below the prior quarter's direct charge of $4.3 million. As adjusted for certain items, our fourth quarter gross profit improved over Q3 levels despite lower sales. As Denny discussed, we continue to diligently work to reduce our costs in order to better align our cost structure to the lower volumes we are currently experiencing. While we anticipate improved operating levels throughout 2021, we do estimate these fixed cost absorption charges will continue into the first quarter of 2021. Gross margin, as adjusted for the items noted, was a loss of $1 million. On the SG&A front, our cost containment activities continued in the fourth quarter, with selling general administrative costs at $4.2 million, or 13.4% of sales, flat compared with 2020 third quarter, and down $1 million compared to the 2019 fourth quarter. SG&A expense in the second half of 2020 totaled $8.4 million, down $3 million or 26% from our first half 2020 SG&A expense. Other income included $740,000 associated with the receipt of insurance proceeds. Within the fourth quarter, our income tax benefit was $1.9 million. Net loss in the fourth quarter was 7.3 million or 83 cents per diluted share. Fourth quarter net loss as adjusted for the gross margin related charges and the income on insurance proceeds totaled a loss of 4.6 million or 52 cents per share. Third quarter 2020 net loss totaled 7 million or 79 cents per diluted share and 2019 fourth quarter net income totaled $200,000 or 2 cents per diluted share. Our fourth quarter EBITDA totaled a loss of $3.9 million. Q4 EBITDA as adjusted for non-cash equity compensation expense, gross margin charges, and our insurance gain was a loss of $171,000. The EBITDA and adjusted EBITDA calculations are provided in the tables to the press release. Fourth quarter cash flow provided from operations was $11.2 million compared to our third quarter cash flow provided from operations of $13 million. and fourth quarter 2019 cash flow provided from operations of $4.7 million. Full year 2020 cash flow from operations totaled $23.8 million. Regarding the balance sheet, managed working capital totaled $114.1 million and decreased by $19.2 million or 14.4% compared with the third quarter of 2020. Inventory was the main driver of the decrease and declined by $9.6 million. Accounts receivable also decreased by $8.4 million in the fourth quarter. In total, managed working capital declined $27.1 million, or 19.2%, in 2020 compared to year-end 2019 levels. Looking at working capital change in the second half of 2020, we experienced a more pronounced decrease with a decline of $36.9 million, or 24.4%. Decreases in inventory levels drove our second-half decline, with inventory decreasing $23.7 million or 17.5%. Fourth quarter 2020 backlog totaled $48 million and is down $6.9 million or 12.5% from the 2020 third quarter. Year over year, fourth quarter 2020 backlog decreased $71.1 million or 59.7% compared to the 2019 fourth quarter. Capital expenditures for the fourth quarter totaled $700,000, While third quarter 2020 CapEx totaled $1.3 million, and fourth quarter 2019 capital expenditures totaled $4 million. Capital expenditures for the full year 2020 totaled $9.2 million versus $17.4 million in 2019. Capital expenditures are expected to approximate $11 million in 2021, which continues to be at a level well below our depreciation expenses. Lastly, as Denny noted, our strategic capital expenditures at our North Jackson facility related to the vacuum arc remelt furnace and AT-10 crucible for our vacuum arc melt operations continue. These investments are critical to support our growth in premium melted products and to reduce operating costs significantly. Our total debt at December 31, 2020, was $50.2 million, a decrease of $10.4 million from the prior quarter. This reduction is consistent with our focus on working capital and debt reduction. Our debt declined $22.3 million in the second half of 2020 and was down $14.2 million in 2020 from year-end 2019 level. The company's debt is primarily comprised of our revolving credit facility and term loan, which collectively totaled $25.3 million as of December 31, 2020, and our notes, which were issued in connection with the acquisition of our North Jackson facility in 2011. These notes total $15 million. We continue to include these $15 million in current debt as these notes are due and payable in the 2021 first quarter. We intend to pay these notes off in the first quarter of 2021. In addition, the $10 million term note related to the Paycheck Protection Program is included in our long-term debt. In the third quarter 2020, the company applied for full loan forgiveness under the Paycheck Protection Program and the PPP loan forgiveness process continues. As of December 31, 2020, we maintain revolver borrowing availability of $43.8 million. Our liquidity position will provide us the ability to meet the increase in business levels as we move through 2021. This concludes my update on the financials, and Denny, I'll hand the call back to you. Thanks, Chris.
spk05: Let me summarize. The fourth quarter was every bit as challenging as expected. Destocking continued in aerospace and oil and gas markets. Heavy equipment sales benefited from a strong recovery in automotive, and general industrial markets hit near record levels due mainly to semiconductor shortages. Our planned cash flow was strong, reducing total debt by another $10-plus million in the quarter on a 14% decrease in managed working capital, which included a near $10 million reduction in inventory. Incoming orders increased modestly by 3.3 million or 16%, and cancellations fell below $1 million as predicted. With three booking days remaining, January bookings are running 30% ahead of the fourth quarter's average month. Order back-off before surcharges of $48 million slipped 13% sequentially. Lower sales and activity levels negatively impacted our fourth quarter. and included a $3.8 million fixed-cost absorption charge and a $300,000 loss on scrap sales. While plant operating levels remained very low, we made solid progress improving productivity at key facilities and melting and hot working, which better positions Universal for the market recovery we see taking hold during 2021. We're excited about earning approval on three new products in the next six months and beginning commercial sales in the fall of this year. We are proceeding with our strategic investment in our premium alloy capabilities with the addition of a vacuum arc remelt furnace and an 18-ton crucible for vacuum induction melting operations. Overall, we see consecutive quarterly improvements in 2021 with momentum building in the second half of the year. In closing, I want to once again express my deep gratitude to our entire team. We would not have been able to navigate through this very difficult year without their commitment and relentless effort. Let me add my thanks to our customers, our board, our shareholders, and all of our stakeholders for their continued support. That concludes our formal remarks. Operator, we're ready to take questions.
spk01: Thank you. Ladies and gentlemen, if you have a question at this time, please press star then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first response is from Tyler Kenyon with Cohen. Please go ahead.
spk06: Hey, Jenny. Hey, Chris.
spk05: Good morning, Tyler. How are you doing?
spk06: Hi, Tyler. Good morning. Good, good. How about yourself?
spk05: Great.
spk06: Good. So it sounds like destocking in aerospace is expected to perhaps conclude, maybe more broadly speaking, in the first quarter here. Just based on your mention of conversations with your top 20 aerospace customers, I wanted to ask if there was any distinction to be made between what you may be hearing from maybe some of those customers who are more geared to the engine or structural side and maybe the same on the MRO versus OE side. I know sometimes it's very difficult for you to tell based on where you sit in the supply chain, but any additional color there would be appreciated.
spk05: Let me turn that question over to Chris Zimmer, who was the one who was actually contacting our customers along with me.
spk04: Hi, Chris. Hey, good morning. Well, let me take a crack at answering your question this way. The majority of our sales that flow through distribution tend to be oriented towards commercial structural components, and that's the area that we're starting to see the destocking begin to reach the end. Depending upon the program, we think that this will stretch through the first and second quarter. So our upside is more on the structural side of things, commercially oriented. I think engines have a little bit of a longer road to go. A lot of that product flows through forgers, and the demand signals are still not very fantastic there. They've got some inventories to work through as well, too. So we expect that the structural side is what's going to begin to give us an uptick in activity in the first part of the year, and then you add on the engine side to the back half of the year is our current view of things.
spk06: Great. Thanks for that. Just on some of the new premium alloy products that you intend on launching by the end of the year, any cannibalization or displacement of existing business, and how big of an opportunity could that be?
spk05: There's no cannibalization of any existing business, and most of these alloys we would expect within, you know, 18 to 24 months to be running in the range of $5 million a year in incremental sales.
spk06: Got it. And then just lastly, maybe, Denny, just your thoughts on the revenue trajectory moving into the first quarter. I would imagine, you know, if fourth quarter is the trough of a bit of an uptick, some of that could just be the $2 million of sales into the Far East that didn't make it before quarter end and maybe the absence of some typical year-end inventory reduction. But maybe if you could just talk about maybe some of the drivers of the sequential uplift into the first quarter and then how you're thinking about gross margins as well.
spk05: As we look at the year 2021, we see improvement in each quarter with growing momentum. So as you look at the first quarter, we're looking at, you know, high single-digit increases in sales on the top line. compared to the fourth quarter. I would point you towards, and what's driving that, I would point you towards the continued growth in our plate product line, which already picked up in the fourth quarter. But as you picked up on our increased bookings, that's going to carry through into the first quarter, and plate has actually continued to be strong, so has semiconductor. At the same time, we're starting to see things transition. To me, it's a transitional quarter, the first quarter. in terms of some of the structural commercial applications that Chris was alluding to. As we go through into the second, third, and fourth quarter, you see improvement as aerospace and some of the oil and gas products kick in in the second quarter. And then as the engine side starts to pick up in the second half and continued improvement in the commercial side, we see quarter-to-quarter improvements by a larger percentage later in the year. As far as gross margin goes, we are not planning any plant shutdowns in the first quarter. We still run at, by historical standards, we're going to run at what I would characterize as a low activity level, but at a much stronger activity level than the third and fourth quarters. So as Chris Scanlon mentioned, I would expect we'd still have some fixed expenses due to absorption. but they will be smaller in the first quarter and get progressively smaller and eliminated as we go through the year, and activity levels continue to climb.
spk06: Appreciate it. Thanks. I'll turn it over.
spk01: Thanks, Deb. Your next response is from Phil Gibbs with KeyBank Capital Markets. Please go ahead.
spk02: Hey, Denny. Good morning. Hi, Phil. You mentioned that the bookings so far, I mean, I know it's early in the year, but the bookings coming back of 30% versus average fourth quarter levels, where is that the most pronounced? Is it most pronounced in auto and semis, best you could tell, or is there a little bit of a pickup in structural, as Chris was talking about?
spk05: It's mostly plate and re-roll billet. So what you're seeing in the first right now in bookings would be a continuation of plate, continuation of semiconductor, gun barrel business. They would be the positives. As far as the structural commercial aerospace type product that Chris is talking about, there's some orders coming in on that, but I would say that we're still in the early parts of this quarter destocking. And as we said in the channel checks we've made, our customers, the majority of our customers, Tell us they'll be basically done that process by the end of the quarter.
spk02: Okay. And then on the side of inventory, you brought it down decently in the fourth quarter. Are you expecting to bring down your own inventories anymore as you look out into 2021? Is there more to go, or have you largely got to where you want to get there?
spk05: As I look at inventories for the first quarter versus the fourth quarter, I would expect to be flat in March. Okay. So I don't want anybody expecting a continuation of a $9, $10, $11 million free cash flow. If you look at our cash flow, we expect to see a somewhat better top line, some improvement from a gross profit standpoint, as we discussed. Inventory, our goal is to maintain that flat, but we will be spending a little more capital dollars in the first quarter. We will be taking delivery of that VAR furnace. that has reached the U.S. and will be delivered here at the end, actually next week, I guess. Our absorption number, we'll still have a negative absorption number. It will not be as big as the third quarter and fourth quarter.
spk02: Okay. So something along the lines of half of what you had or something could be a decent run rate and then trickling down as the year goes on.
spk05: That's a fair estimate.
spk02: Okay. Okay. I think that takes care of everything I got. Appreciate it. Go Browns.
spk01: Thank you. Again, ladies and gentlemen, if you wish to ask a question, please press star and the number one on your touchtone phone. Your next response is from Bob Sales of LMK Capital Management. Please go ahead.
spk05: Morning, Bob.
spk01: Morning.
spk03: A couple questions. With the arc remelt investment that you're making, is that required because you are expecting that you don't have capacity with your current premium remelt furnaces, or is it because there's a different formulation for the new products that you're planning to introduce in the second half of the year?
spk05: We have 11 vacuum arc remelt furnaces in the company. So at today's level, we've got plenty of capacity. VAR furnaces are different. Within our group of 11, we've got some what I would call modern VAR furnaces that have the capability to melt all of our alloys we currently produce, as well as the new ones we plan to produce. So the purpose for buying this vacuum arc remelt furnace is as you look at the growth we expect in our premium-melted products, we need another furnace that has the capability to melt all of our alloys, including the new ones.
spk03: Okay. And did you say in your response to an earlier question that you expect the new products that you're introducing to generate 5 million incremental sales per year, each product?
spk05: That's our target. That's how we pursue these alloys.
spk03: Gotcha. Okay. And then would you understand if you don't want to do it for competitive reasons, but you called out the semiconductor revenue. Can you highlight a little bit more on what specifically is allowing you to have success? And if you don't feel comfortable from a competitive standpoint, we can talk about it offline.
spk05: Success in terms of, what do you mean, selling into the semiconductor market?
spk03: What is the end goal? application for the semi-market?
spk05: This is material that's going into the equipment used basically to make chips. So as that industry is expanding, there is a shortage of chips. They need newer equipment that meets up with the new technology. With the new manufacturing techniques being used, they increasingly need more sophisticated materials going into that equipment, which is where we come into play in the marketplace. So over time... Yeah. Over time, it's very cyclical business. We're in the beginning of an uptick there. So people are investing in new equipment to expand the production in terms of volume and more modern chips, which are, you know, the old thing getting smaller and smaller. And to do that, manage the gases in the machine and so forth, they need more sophisticated metals.
spk03: Gotcha. Okay. And then on the oil and gas side... When you look out over 21, first of all, what is the breakdown between upstream oil production and turbines? That breakdown first, as much as you can, or generally. And then what is your expectation for oil and gas as you look over 21?
spk05: All of our turbine business would be in what we categorize as power generation. What we call oil and gas is virtually all exploration for oil and gas, so they're not combined there. As far as the outlook for oil and gas exploration, candidly, I've been surprised at the upbeat tone that I hear from the majors that I mentioned. If you listen to Baker Hughes and Schlumberger and Halliburton and what they're saying in their conference calls, They did put in a surprisingly good fourth quarter, financially speaking, and they were very upbeat about the things recovering in the second half of 2021. As we talk to our customers, they're equally optimistic about the second half of the year. One caveat I put in my comments, so I go with what our customers are telling us, quite frankly, and I know that the inventory levels of our products have been worked down fairly significantly over the last year in that supply chain. But at the same time, I hear the news like you do with the new administration and some of their new policies. So I think there's some question marks about that upbeat outlook for the second half of the year.
spk03: Okay. And then perhaps I was confused. When you talked about turbines for power gen, if that doesn't fall in oil and gas, is that under general industrial?
spk05: No, it's under power generation. We've got a separate category called power gen.
spk03: Oh, yeah, sorry. That's virtually all turbine business. Yep, got you. And can you talk about your perspective on that for 21?
spk05: Most of our metal is going into maintenance, refurb type applications in the existing population of gas turbines. And right now demand has been down due to the pandemic. So the maintenance business has been down. That's why you see the trend you see in our PowerGen market numbers. As the economy starts to come back and demand for energy continues to pick up through gas turbines, we would expect to see that improve. As oil and gas comes back in the second half of the year, the oil and gas industry on the exploration side is a big user of small turbines as well. We would expect that to continue to increase. What we've been waiting for as a company and I think as an industry is the recovery in the new turbine business. It's been a long time since we had an active market for new turbines. I just pointed out the GE did announce a decent quarter and that they've booked 45 to 50 new turbines for delivery in 2021. So I think as an industry, we've been waiting for the rebuilding cycle, if you will, in the turbine market, and maybe we're seeing the early signs of that here in 2021. Okay.
spk03: Thank you.
spk05: You're welcome.
spk01: I am showing no further questions at this time. I would like to turn the conference back over to Dennis Oates.
spk05: Thank you, Operator. Once again, I want to thank everyone for joining us this morning. We remain very grateful for your support over the past year in particular. We look forward to updating you on our efforts on our next call in April. We hope everyone continues to be well, stay safe, and have a great day. Thank you.
spk01: Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.
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