Universal Stainless & Alloy Products, Inc.

Good morning and welcome to the Universal Stainless First Quarter 2021 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. June Selingeri, ma'am, the floor is yours.

Thank you, Lara. Good morning. This is June Selingeri of Compartners, and I'd also like to welcome you to the Universal Stainless Conference call and webcast. We are here to discuss the company's first quarter 2020 results reported this morning. With us for management are Denny Oates, Chairman, President, and Chief Executive Officer of Chris Zimmer, Executive Vice President and Chief Commercial Officer, and John Arminas, Vice President of Administration and General Counsel. Before I turn the call over to management, let me quickly review procedures. After management has made formal remarks, we will take your questions. Lara will instruct you on procedures at that time. Also, please note that in this morning's call, management will make forward-looking statements. Under the Private Securities Litigation Reform Act of 1995, I would like to remind you of the risks related to these statements, which are more fully described in today's press release and in the company's filings with the Securities and Exchange Commission. With the formalities out of the way, I would now like to turn the call over to Denny Oates Denny, we are ready to begin.

Okay, thanks, Jen. Good morning, everyone. Thanks for joining us today. Consecutive quarterly improvement as we move through 2021. That's what we said on our January call, and we're off to a solid start in the first quarter. Sales were up 18% sequentially, including a 27% increase in higher margin premium alloy sales. Gross bookings jumped 82% over the fourth quarter with minimal cancellations. Order backlog increased 21%, the first increase in over a year. Except for general industrial markets, all end-use markets contributed double-digit positive sales growth. Plant activity levels were 39% above the fourth quarter. While Q1 results clearly point towards improvement, Sales and planned activity levels remained below pre-pandemic Q1 2020 levels by 37% and 38%, respectively. So let's unpack our first quarter results. First quarter sales totaled $37 million, an increase of $5.7 million, or 18% from the 2020 fourth quarter. Sales in first quarter 2020 were $58.5 million for comparisons. First quarter premium alloy sales were $7.6 million, or 20% of sales, versus $6 million, or 19% of sales, in the 2020 fourth quarter, and $7.7 million, or 13% of sales, in the year-ago quarter. The 27% sequential increase was due to stronger aerospace demand, especially for defense applications. Plate sales grew by 36%, indicating continued strength in industrial and automotive activity despite the chip shortages. Aerospace sales were up 29% as destocking eased, travel rates exceeded expectations, and confidence began to return. Additionally, defense applications continued to generate healthy demand for our products. Another sign of recovery was our gross bookings of $44 million, up 82% versus fourth quarter 2020. As a result, growth resumed in our backlog, which totaled $58 million before surcharges at March 31 versus $48 million at year-end 2020. Considering backlog was $111 million a year ago, we still have a distance to go on the road to recovery. First profit improved $4.8 million compared to the fourth quarter, coming in just under break-even at a $200,000 loss, which supports our view that the fourth quarter of 2020 marked a low-water mark for this COVID-induced downturn. The improvement in gross profit reflects higher shipments, stringent cost control, sustained productivity improvements, higher plant activity levels, and favorable alignment of sales surcharges and material costs. More specifically, shipments total 14.1 million pounds, an increase of 24% over Q4. Controllable fixed operating spending ran 35% below pre-COVID levels. Plant activity levels rose 39% in the first quarter versus the fourth quarter of 2020, as measured by pounds processed, with melt operations leading the way. Electric arc melting was up 59% sequentially and vacuum induction melting more than doubled. This reduced our fixed cost absorption charge to $2.6 million from $3.8 million last quarter. On prior calls, we pointed out that operating during the sharp 2020 downturn did provide us the opportunity to assess our shop practices with an eye towards driving productivity and sustainable cost per pound reductions, so we improved margins as volumes recover in 2021. These initiatives are paying dividends as activity picks up. Overall, variable non-material plant operating cost per pound fell 17% sequentially. Let me give you some specific examples. Electric arc furnace operations cost per pound fell 14% on near record productivity as measured by pounds produced per equipment hour. Vacuum induction melting operations reported record low operating costs per pound. Virtually every major work center in our Dunkirk facility posted productivity improvements and measurable cost reductions. The general rise in commodity prices over the past couple quarters has increased surcharges at a faster clip than our average melt cost. yielding an estimated short-term benefit of $800,000 to first quarter gross profit. Although nickel has retreated somewhat recently, the price of other major material inputs continue to increase sequentially and year over year, especially scrap, which is up 47% this year. Selling general and administrative expenses were $5.2 million, or 14.1% of sales. This compares to $5.9 million in Q1 2020, before COVID and 4.2 million in Q4 2020. Excluding accruals for certain employee expenses and stock options, Q1 expense was relatively stable at Q4 levels and 21% below last year's first quarter. Our effective tax rate was 25% in the first quarter, providing a $1.5 million benefit, bringing us to a first quarter net loss of $4.5 million or 51 cents per diluted share. Without the fixed cost absorption charges, the net loss would have been 2.6 million or 29 cents per share. As the anticipated recovery unfolds, we expect these charges will decrease next quarter and end during the second half. Let's talk about our financial position. In 2020, we reduced our working capital to match low activity levels, resulting from the impact of COVID-19 on our end markets. In March 31, 2021, Our managed working capital totaled $112.3 million, compared with $152.7 million at the end of the first quarter of 2020, a 40.4 million or 26% reduction. This included a $35.2 million reduction in inventory, which stood at $111.6 million at the end of March this year. A couple comments. Our focus on inventory management resulted in maintaining flat inventories at the $111 million level, despite double-digit increases in sales and production, with resulting improvement in turnover. Receivables increased 2.6 million, or 14%, on higher sales, partially offset by a three-day reduction in day sales outstanding. Accounts payable increased 6.5 million, driven primarily by higher March melt activity. Capital spending in the first quarter was $2.7 million, while depreciation and amortization totaled $4.8 million. The majority of the spend was on two strategic projects we discussed on recent calls. The addition of a state-of-the-art vacuum arc remelt furnace to support growth in premium products, and an 18-ton crucible for our vacuum induction melting facility to further reduce operating costs as we scale up. The vacuum arc furnace has been largely installed. We will finish some plumbing and electrical work and begin commissioning this quarter. The crucible will be received and integrated into operations in the third quarter. We still expect to spend about $11 million in capital this year. Adjusted EBITDA was a positive $2.1 million for the first quarter, a $2.2 million improvement over the fourth quarter of 2020. Our cash management strategy during the downturn has reduced debt about $25 million, or 32%, over the past year. At March 31, total debt was $51.6 million, including a term loan under the Payroll Protection Program. We have applied for full forgiveness of this PPP term loan. We also took steps during the quarter to enhance our financial flexibility and support our current growth and long-term strategic initiatives, by amending and restating our five-year $120 million asset-based credit agreement. The new agreement includes a revolving credit facility of $105 million and increases the term loan facility to $15 million. The new agreement will run through March of 2026. In conjunction with the amendment, the company repaid its $15 million seller note obligation associated with the acquisition of our North Jackson facility. The net short-term impact of the new credit agreement is approximately $120,000 lower interest expense on a quarterly basis. Amortization of financial fees remains unchanged. Our liquidity position at March 31 is $39 million, enabling us to comfortably fund our business as activity ramps. Let me add a word about product pricing. Effective March 1st, We implemented a base price increase on new orders of 3 to 10 percent on all products. The increase is holding and should benefit our third and fourth quarters. I mentioned last time that one benefit of the slowdown in 2020 was that OEMs have afforded more technical resources to upgrade long-term supply chains by approving new suppliers for critical alloys. We continue to be optimistic that we will be rolling out three new premium alloys in the fall of this year, offering excellent future growth opportunities. Let's take a couple of minutes on the end markets. Our aerospace sales were $22.2 million, or 60% of sales in the first quarter of 2021, an increase of 29% over the fourth quarter. However, aerospace sales remained 48% lower than the first quarter of 2020. As I mentioned, a 27% sequential increase in our premium alloy sales was driven by stronger aerospace demand, especially for defense. After a punishing 2020, Due to the delayed returns to service of the Boeing 737 MAX, along with the COVID-19 pandemic that essentially halted airline travel and interrupted production, there are growing signs that the commercial airspace market is starting to turn the corner. Leading indicators are many, but include deliveries resumed for the 737 MAX and the 787, Boeing booked 282 gross orders, including 224 for the MAX, The FAA approved the higher capacity 737-8200 design. Air traffic is exceeding forecast by all metrics. By way of examples, we're averaging over 1.4 million passengers a day, and American Airlines announced their plans to operate 90% of its domestic seat capacity this summer versus 2019. The plan to ramp to 31 737 MAXs by Q4 appears to be on track. while Airbus is sticking with its production plans announced in January. Defense contractors largely remain optimistic about spending patterns over the next few years, despite the change in administrations. For Universal, we're seeing order entry improvement with the easing of destocking by our service center customers, along with continuing strong defense demand. The overall demand outlook for the rest of 2021 still looks to be trending positively as travel opens, vaccines are distributed, confidence builds, and commercial build rates increase. Our customers expect to see a direct metal pull in the supply chain to build new planes and a more active aftermarket later this year. The heavy equipment market remained our second largest market in the first quarter of 2021, with sales of $8.1 million, or 22% of sales, representing roughly a one-third increase over both the fourth quarter of 2020 and Q1 2020. Metal fabrication markets, particularly automotive and new model introductions, drive plate sales, and the auto market remains strong. US vehicle sales in March were especially noteworthy, reaching 17.8 million annualized units, well above the consensus of 16.5 million. Despite the well-publicized semiconductor issues impacting negatively on automotive operations, Our plate customers report no major effect on their demand, and at Universal, we are seeing order entry for our plate products remain strong. The oil and gas end market moved up in rank to become our third largest end market in the first quarter, with sales at 3.1 million, or 8% of sales, an increase of 34% from sales in Q4, but down 30% from a year ago. We saw a sequential turnaround in our oil and gas market sales in the first quarter, as oil prices rebounded on rising economic activity and U.S. recounts showed signs of recovery reaching 430 at April 1st, the highest level in a year. The Energy Information Administration is forecasting Brent prices at $65 per barrel this quarter, which is more than enough to spur E&P activity. Even with the increased demand that we saw in the first quarter, our customers are still proceeding cautiously. The supply chain inventory picture is mixed. Nonetheless, confidence prevails among our customers that an improved second half 2021 and a much better 2022 are on the horizon as the macro environment further improves and COVID issues recede. Based on their earnings released this morning, Halliburton and Baker Hughes would agree with this outlook. The general industrial market was our fourth largest market in the first quarter with sales of $2.1 million, or 6% of sales. which is 53% lower than a near record 4.4 million or 14% of sales in the fourth quarter. Our general industrial category includes sales to the semiconductor as well as to the medical and general manufacturing markets. The sequential decline in our general industrial sales in the first quarter was due to inventory adjustment by our semiconductor customers after heavy buying in the third and fourth quarter of last year rather than to any disruption in production or market share loss. In fact, the Semiconductor Industry Association reports a 15% increase in global semiconductor industry sales in February compared with February of 2020. The Biden administration, along with the U.S. chip makers, have made addressing the acute chip shortage a priority. Capital spending by major chip and equipment makers is at record levels. Based on our discussions with customers, our backlog, and our current order entry trends, we expect general equipment sales to get back on track during the balance of the year. Our demand from this segment has always been a bit lumpy, and things certainly have not changed. Power generation market sales increased 25% in the first quarter to 1.2 million or 3% of sales compared with 1 million or 3% of sales in the fourth quarter, although they were 46% lower than the first quarter of 2020. As most of you know, maintenance demand has accounted for many of our power gen sales in recent years, but maintenance activities were interrupted by the spreading pandemic in 2020. We did see an uptick in the first quarter, although maintenance levels have not yet recovered to previous normal levels. It's worth noting that the underlying case for the critical role of gas and energy transition to address climate change remains unchanged. GE has pointed out that, on average, gas plant emissions are half that of coal, and for their high-efficient line of gas turbines, just a third of coal. GE further noted that in the U.S., the power sector has reduced its carbon emissions by 33%, since 2007, largely driven by switching from coal to gas. We, along with our customers, are awaiting the eventual pickup in the new turbine market in the U.S. In the meantime, we expect maintenance work to pick up in line with general economic activity. Let me wrap things up to get to your questions. While the road to recovery from the COVID-induced trauma to our major markets will take some time, our first quarter performance gets us off to a fast start. with broad-based double-digit sales growth, spiking order entry, backlog growth, and base price increases announced in March. As the market recovers, we are poised to seize opportunities as evidenced by our rapid first quarter production ramp, while posting notable productivity improvements, reducing operating costs per pound, tightly controlling spending, improving our working capital management, continuing to develop and market new products as customer approvals are earned, and lastly, ensuring the financial flexibility necessary to meet our operating and strategic goals. The higher sales and activity levels in the first quarter brought our gross margin nearly to break even, even with a $2.6 million fixed cost absorption charge. We anticipate these charges will be lowered in the second quarter and be eliminated during the second half as activity continues to ramp. Our plan now is to consolidate the gains from the operational improvements we achieved over the past year, as well as to move forward with our strategic growth initiatives. Our focus is expanding our premium alloy production capability by adding a vacuum-marked green mail furnace and an 18-ton crucible in our North Jackson facility. The projects are underway, and commissioning will be completed during the second half of the year. Let me underscore that our progress would not have been possible without the hard work and continued dedication of our entire team at all of our facilities, the support of our customers, shareholders, and lending institutions, and the guidance of our board. We are fully focused on making further progress during the rest of the year. That concludes our formal remarks. Operator, we're ready to take any questions.