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spk00: 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.
spk01: 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.
spk05: 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.
spk00: Thank you so much, sir. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchstone telephone. Again, that's the star, then the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question will come from the line of Phil Gibbs from KeyBank Capital Markets. Your line is now live. Go ahead, please.
spk02: Hey, good morning, Denny. How are you doing, Phil? Doing well. How are you? Enjoying the snow. Yeah, beautiful. Question is just on the benefit from higher surcharges, raw material costs. I think you said $800,000 in the first quarter. How much of that persists into the second quarter as you look ahead? Do those benefits accelerate or level out or go away as nickel has come back? I know things are moving in different directions.
spk05: Well, nickel has retreated. Most of the other materials continue to be up. So as you look at the second quarter, that number will be tempered a little bit, probably cut in half as we go through the next couple months. And, you know, forecasting material commodity costs is always very difficult. As you look at the second half, I expect that it will even out as it normally does.
spk02: You gave us a lot of color on that working capital and inventory issue. How do you expect networking capital to progress as the year unfolds, particularly as it relates to your inventory levels?
spk05: Well, we're looking at continued growth in sales each quarter. Production is ramping up, so I suspect you will see higher inventories as we go down each quarter. Having said that, you'll see improved inventory turns, though. So I don't expect inventory to stay flat for the rest of the year. but much improved over prior years in terms of turnover. As far as receivable goes, they'll follow the trend in sales, obviously. I think we're doing a good job on collections. I noted that our day sales outstanding is coming down. And as you look at, depending upon how you look at it, if you look at managed working capital, it's a percentage of sales as we do. That percentage will be going down each quarter the rest of the year.
spk02: Okay. That makes sense. And then, On the side of liquidity, I think you mentioned after all the moves you made on the refinancings, you're still around, I think where we targeted, you're around $39 million in liquidity right now. That's largely your availability on your ABL, is that correct? Yes, that's correct. Okay, and do you have any major debt maturities in the next couple of years that we have to think about?
spk05: Now we've got the bank agreement. It's pretty straightforward. It runs for the next five years. There's no other maturities. I would note that we did pay off the notes associated with the acquisition of North Jackson, which were at $15 million. We did that last, well, two months ago, I guess, at this point. Nothing else on the horizon, though, that requires a funding.
spk02: And the last question on aerospace, Denny. That improved, as you noted, sequentially as destocking ebbed. I think we're starting to see that from some others as well. Where do you think some of the holes are emerging? Is it kind of a broad-based blanket statement, or do you think things are leaner in some areas than others? I mean, is there any differentiation between engine or structurals? I don't know. What's just the general... tempo or pace right now. Let me ask Chris to handle that one. Chris?
spk04: Yeah, Phil, I think what we're expecting and what we're hearing from our customers is the structural side of the business will be the first to rebound, a little bit more of a gradual improvement. The engine side is probably going to be delayed, and when it hits, just like when it fell off, we expect it to pick up sharply. We're doing our best to look for signals of when that's going to happen. We still don't have any clear signals other than an indication that everybody expects the second half of the year to get better. So as Denny mentioned, a lot of our demand drivers these days are the supply chain coming in line, inventories coming back in order. And then you couple that with improving demand, first from structural and then with engines even more towards the tail end of the year. And that's how we're kind of seeing the balance of this year playing out.
spk02: And just remind me where your exposure is on the structural side. Is it largely landing gear type applications? Is that what we're thinking of?
spk04: It's really all throughout. Actuators, landing gear, a number of different structural components, hinges. We really show up throughout the entire plane.
spk02: And then on the engine side, Chris, are you guys more skewed to – to wide-body, meaning more of the roll supply chain or more of the GE supply chain? Because I know some of your newer awards have been on the roll side.
spk04: Yeah, I'd say it's a good balance. We talk a lot about rolls with the LTA we have with them that is wide-body driven. But with GE and Pratt, we've also got a lot of participation there. We probably don't make as much fanfare about it, but there's a pretty good split between the two.
spk02: Thanks, everybody. Appreciate it.
spk04: You're welcome.
spk00: Thank you, sir. And again, ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchstone telephone. Again, that's star one to ask a question. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your next question will come from the line of Bob Sayles. from LMK Capital Management. Your line is now live. Go ahead, please.
spk03: Morning.
spk05: How are you doing, Bob?
spk03: Denny, get yourself.
spk05: Go ahead.
spk03: Just a clarification about defense within Aero. What is the level of defense business within total aerospace in the current quarter or so?
spk05: 20% to 25% of our sales, we would estimate. And I always put a qualifier on that. As you know, we sell a lot through service centers, so it's not a precise number, but that's our best estimate.
spk03: Twenty to 25% of aerospace sales or total?
spk05: Yes, yes. Twenty to 25% of aerospace sales.
spk03: Of aerospace sales. And the next question was?
spk05: And I would say it's growing faster than commercial, not just because of the underlying demand features, but the number of the new products that we've introduced recently are defense-oriented.
spk03: Okay. And then when you break out service center versus OEM, is it safe to say that the OEM shipments are largely the defense business, or can you not really break down the OEM business, attribute it to one particular segment or subsegment?
spk05: I don't really have that in my head is how it breaks down. I mean, some of it is defense. Some of it is also power generation. Okay.
spk03: Okay.
spk05: The majority of that, quite frankly, I think is power gen.
spk03: Okay. All right. And then you touched on it a little bit, but the new products that you'll introduce this fall, can you expand a little bit about, I think you alluded to the fact that maybe they're oriented towards defense and But can you expand on that and also some expectations of the impact on that as we look into 2022?
spk05: We're working at the tail end there, so we're going through some final testing and so forth. These are all aerospace alloys. They have commercial and defense applications. And our longer-term estimate for each alloy is they'll generate an additional 5 million of sales. As to whether – I doubt that'll be – I'm not saying that's all going to hit in 2022 – I think as we get out over the next couple of years as our target, you know, by 2023, we'll be talking about $15 million of incremental business in a reasonably healthy aerospace environment based upon these new alloys we're working on now.
spk03: Okay. Once the process is running, let's say Q3, how long is the qualification process before you can actually ship to the end customer?
spk05: Are you talking about our capital projects now or approvals?
spk03: Well, I'm assuming that the three new products that you're going to introduce are going to be run through the furnace and induction crucible that you're installing today.
spk05: Not necessarily. The products we're talking about we can make with our existing footprint. But as we grow, I mean, there's not a direct correlation. Over time, let me talk about the VAR to make sure I'm being clear here. We've got 11 vacuum arc remelt furnaces. We're adding another one. This is a state-of-the-art vacuum arc remelt furnace, which will have the capability to handle any alloy that we're currently making or any one we would plan to make over the next five years. So it's important that we have a family of VAR furnaces that can handle our alloys. All VAR furnaces are not the same. So this one gives us the utility to be able to handle any alloy and support the growth we see in these premium melted products. That's a general statement. It's not directly correlated to the three alloys I'm talking about.
spk03: Gotcha. Okay, so back to the three alloys. When you say you're introducing these new products in the fall, does that mean at that point they will have been qualified with customers, or is that when the qualification process starts?
spk05: That's when we anticipate having approval, and those alloys will move into commercialization, which means we'll be able to sell them into the supply chains for the respective OEMs. So there will be a period of time there where we have to do good old-fashioned selling. A good part of that is all of these potential customers are already customers of ours. Most of them have already worked with us on business cases on why we should get approved. So I love to say this. When Chris Zimmer is in the room, it should be an easy sale.
spk03: Okay, thank you. That's all my questions. Congratulations on the nice progress.
spk05: Thanks, Bob.
spk00: Thank you, sir. Again, ladies and gentlemen, if you have a question at this time, please press star, then the number one on your telephone keypad. Press star, then the number one on your telephone keypad. I am showing no further questions at this time. I would like to turn the conference back to Mr. Dennis Oates for closing remarks.
spk05: Okay, thank you. Once again, I want to thank everyone for joining us this morning. After an enormously challenging 2020, it was great to see the improving momentum in end market demand during the first quarter. We look forward to updating you on our effort to capture market opportunities and move forward in our growth initiatives in our next call in July. I hope everyone continues to be well, stay safe, and have a great day. Thank you.
spk00: Thank you, sir. Thank you so much, presenters. And, again, thank you, everyone, for participating. This concludes today's conference. You may not disconnect. Stay safe and have a lovely day.
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