Universal Stainless & Alloy Products, Inc.

Good day, and thank you for standing by. Welcome to the Universal Stainless fourth quarter 2021 conference call and webcast. At this time, all participants are in a listen-only mode. After the presentation, there will be a question and answer session. To participate during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your host, June Fillinger. I'm sorry, please go ahead.

Thank you, Carmen. Good morning. This is June Fillinger of ComPartners, and I'd also like to welcome you to the Universal Stainless Call and webcast. We are here to discuss the company's fourth quarter 2021 results reported this morning. With us for management are Danny Oates, President and Chief Executive Officer of Chris Zimmer, Executive Vice President and Chief Commercial Officer. 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. The conference operator 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 these formalities complete, I would now like to turn the call over to Denny Oates. Denny, we are ready to begin.

Thank you, June. Good morning, everyone. Thanks for joining us today. Before we talk about fourth quarter results, I'd like to take a moment to simply state the obvious. Our progress in the fourth quarter and in all of 2021 would not have been possible without the tireless efforts of every one of our employees and the support of their families and friends. 2021 was a very challenging year with our business recovering from the pandemic, while also dealing with many unprecedented issues, including new COVID variants, critical shortages, uncertain schedules, just to name a few. Nonetheless, our employees were up for the challenge all year long. Because of their continued commitment, we expect to make further progress this year, and we are planning for sequential improvement in each quarter of 2022 as our markets continue to recover. Let's talk about our results. Business momentum continued to accelerate during the quarter based upon a couple different things. Sales of 43.2 million were up 16% sequentially. Premium alloy sales of 7 million up 19% sequentially. We achieved record-breaking vacuum melting production during the quarter. And perhaps most importantly, as we sit here looking at 2022, our order backlog before surcharges reached a new company record high of $134.5 million before surcharges. The main driver behind this performance was strengthening aerospace demand, which continues today and is consistent with expectations of recovery in aerospace in 2022, 2023, and beyond. Taking a deeper dive into the numbers, the net sales of $43.2 million for the fourth quarter compared to $37.2 million in the 2021 third quarter and included quarter-over-quarter growth in each of our end markets. Net sales increased 38% from the fourth quarter of 2020. Premium alloy sales of $7 million or 16% of sales compared favorably to $5.9 million in the third quarter. A record order backlog in the fourth quarter of $134.5 million. reflected solid order entry of $44 million. More than 20% of the total backlog at the end of the fourth quarter consisted of premium alloy products. Gross profit improved for the third consecutive quarter to $3.7 million, or 8.7% of sales. Third quarter gross profit was $2.3 million, or 6.2% of sales, while 2020's fourth quarter was a loss of $5.1 million. There were no special fixed-cost absorption charges recorded given our production levels. Q3 2021 and Q4 2020 gross profit included fixed-cost absorption charges of $1.5 million and $3.8 billion, respectively. Our progress in the most recent quarter reflects a number of benefits, a number of positive things that occurred. Generally higher production levels, positive product mix management, including more premium-melted products, targeted pricing actions to offset inflation, record-breaking production in our North Jackson premium welding facility, and process improvements initiated over the last two years. These positive factors were partially offset by three things. First, the ongoing labor shortage impacting oil manufacturers continued and was compounded by a spike in absences related to COVID. Specifically, since Thanksgiving, We've experienced 10% to 15% call-offs daily due to Omicron. Fortunately, it does appear the situation is slowly improving. Secondly, supply chain issues challenge the range of functions within the company. All transportation and freight, critical MRO parts delivery reliability, timely raw material receipts, capital project completion, and basic planning and scheduling of operations. And lastly, we experienced unplanned outages in our Bridgeville melt shop, hot mill, and a transformer, which services the entire plant. These three outages alone reduced gross profit in the fourth quarter by $750,000, or 1.7% of sales. As most of you know, commodity prices have been on a bull run all year. Compared to 2020's fourth quarter, nickel was up 19% at $9.10 per pound on December 31st. and has increased another 15% so far in 2022, reaching $10.42 as of this morning. Moly and Chrome more than doubled during 2021 at $18.96 and $2.20 per pound, respectively. Panadium increased in 2021 by 30% and reached $14.91 a pound. And lastly, scrap jumped almost 60% during the year. In addition to these material costs, inflationary pressures continue for other major consumable operating supplies, maintenance parts, and plant services. We will address these issues through a combination of productivity improvements, base price increases, and raw material surcharges. Towards this end, we announced four price increases in 2021 and implemented an additional base price increase of 3% to 10% on selected products effective January 10th. Fourth quarter 2021 selling general and administrative expenses remain level with the third quarter at $5 million, but declines as a percent of sales to 11.6% versus 13.5% of sales in the third quarter. We expect SG&A expenses to remain at current levels for the next few quarters. Our effective tax rate for 2021 was 81.3%, reflecting a benefit of 3.3 million on a pre-tax loss of $4 million. The benefit includes a 21% statutory rate, a $2.1 million add-back for the PPP loan forgiveness gain, and research and development credits, partly offset by expense from stock option forfeitures. The fourth quarter effective tax rate is negative 29.2%, driven by our pre-tax loss, stock option forfeitures, and the impact of changes in tax rates on deferred tax balances. That brings us down to a net loss for the fourth quarter of 2021 of $1.6 million or 18 cents per diluted share. In the 2021 third quarter, we recorded net income of 7.9 million or 87 cents per diluted share, which included a gain of $10 million due to the forgiveness of the Payback Protection Program loan. Before the PPP gain, the third quarter net loss was 2.1 million or 23 cents per diluted share. In the fourth quarter of 2020, the net loss was $7.3 million, or $0.83 per diluted share. There were pre-tax fixed cost absorption charges in the 2021 third quarter and 2020 fourth quarter, as previously mentioned. EBITDA for the fourth quarter of 2021 was $4.1 million, and adjusted EBITDA was $4 million after adding $300,000 in stock-based compensation and deducting $4 million for an insurance claim settlement. Moving on to our financial position, managed working capital increased $12.6 million during the quarter, reaching $136.9 million, reflecting sales and production growth, along with rising commodity prices. More specifically, inventory increased by $5.1 million, or 4%, to $140.7 million during the quarter. The increase reflects an $8.2 million increase in work and process inventory, offset by a $2.5 million reduction in raw materials and a $1.5 million reduction in operating supplies. The growth and work in process reflects our increasing backlog, particularly for premium products, and $3.5 million for test material involved in the commissioning of our new vacuum mark remelt furnace and an 18-ton crucible. Virtually all this test material has passed testing at this point and is now being applied to customer orders. While the reduction in raw material inventory was caused mainly by heavy premium product production, we are still carrying about $1.5 million to $2 million in advanced raw material purchases to protect operations from potential supply chain failures. Fourth quarter receivables increased by $1.5 million or 7.5% from the third quarter due to sales growth during the quarter. Day sales outstanding remained unchanged from prior quarters, and receivables are in great shape. Accounts payable decreased $5.9 million, or 20% from the third quarter, to $24 million. Fourth quarter capital spending totaled $4.6 million, bringing the year-to-date capital spend to $11.1 million, exactly on the target we've discussed previously. Depreciation and amortization totaled $19.3 million for all of 2021 and $4.8 million for the quarter. Most of the capital spent in 2021 was for two strategic projects, 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 continue to ramp up. I'm very pleased to report that the vacuum arc remelt furnace is now fully installed, commissioned, and being integrated into our operations. The 18-ton crucible is in the final stage of commissioning after a very smooth first campaign. We're also pleased to announce today that our board has authorized the acquisition of two additional vacuum arc remelt furnaces, which are slated to begin operations in the second quarter of 2023. This initiative is part of our strategic plan for 2022 and will support our growth in technically advanced premium alloys. Total debt at December 31st was $69.2 million, an increase of $17.7 million from September 30th. The $12.6 million increase in managed working capital and capital spending of $4.6 million accounted for most of the increase. Total gross availability under the revolver stood at $24 million at year-end, providing more than ample liquidity for the ongoing rampant activity. Let's take a look at end markets, beginning with aerospace, our largest market. Our aerospace sales increased 16% to $26 million, or 60% of sales in the fourth quarter. up from 22.3 million in 60% of sales in the third quarter of 2021. Aerospace sales jumped 50% from the fourth quarter of 2020. Full year 2021 aerospace sales were 91.5 million, or 59% of total sales, compared with 121.9 million in 2020 and 170.4 million in 2019. So while our market is improving, we are not back to 2019 and early 2020 levels. However, the recovery in aerospace is gaining traction based upon improving travel activity, increased deliveries, a return of bookings for commercial and the freight sectors, single-digit increases in already healthy defense spending, and growing activity in general aviation. A couple of data points for everyone to consider. TSA traffic increased 219% versus 2020, fueling aftermarket demand. Boeing delivered a better-than-expected 99 planes in the fourth quarter, ending in 2021, with 340 deliveries versus 157 in 2020. Airbus similarly reported increased deliveries of 611 planes. Gross new plane orders are increasing, with Boeing at 909 and Airbus at 771. China issued an airworthiness directive for the 737 MAX, a critical step in the return-to-service process and the increase in future build rates. Backlogs remain strong with Boeing at 5,136 planes and Airbus at 7,082. Air freight grew 20% in 2021, and the outlook for the freighter market is increasingly positive based on expanding e-commerce and express cargo markets. Defense spending is expected to increase 5.5%. Business jet takeoffs and landings were up 40% in 2021, and inventory of used planes is very low. Major airlines are highlighting strong spring and summer travel bookings and pent-up demand for consumer and business travel. And finally, the metal supply chain for aerospace is in good shape, perhaps even on the lean side in some areas. We feel these positive trends will more than offset potential headwinds from 787 rework, Omicron trends, high aircraft retirements, and the related parting out in any supply chain issues. We still see an accelerating metal pull as we move through 2022 into 2023. Certainly, our growing backlog and a near doubling of our sales to forgers in the fourth quarter supports our outlook. The heavy equipment market remained our second largest market in the fourth quarter with strong growth in sales versus prior periods. Specifically, heavy equipment sales were $9 million, or 21 percent of sales, which is 19 percent higher than the third quarter sales of 7.6 million and 50 percent higher than the fourth quarter of 2020. Full-year 2021 heavy equipment sales total 34 million, or 22% of sales, and we're 52% higher than 2020. Metal fabrication demand drives our sales to the heavy equipment market. The 52% increase in our 2021 sales reflects continued pickup in industrial manufacturing, increased off-road vehicle production, and a high level of automotive retooling and new model development. Based on our bookings and forecasts from customers, we expect our heavy equipment market sales to remain strong in 2022, even with some typical quarterly lumpiness. The oil and gas end market was our third largest market in the fourth quarter, with sales of 4.1 million, which is slightly ahead of the third quarter and represents 9.4% of total fourth quarter sales. Oil and gas sales were up 78% from the fourth quarter of 2020, as oil prices soared and recounts rose. Full year 2021 oil and gas sales were up 16% from 2020. Oil prices remained at seven-year highs and natural gas prices rose another 25% in the fourth quarter, bringing the full year increase to 82%. And both are setting the stage for continued recovery and drilling activity. Last week, Schlumberger reported strengthening activity in international markets, along with strong sequential growth in North America, driven in part by offshore and land-based drilling activity. Schlumberger expects a step up in industry capital spending in 2022 and described industry macro fundamentals as very favorable due to the combination of steady demand recovery, an increasingly tight supply market, and supportive oil prices. Baker Hughes agrees with that assessment, citing an increase of 228 rotary drilling rigs in the U.S. over the past year, while international rig counts were up by 169 over the same period. Taking a closer look at the U.S., oil rig counts were up by 205 or 71% year-over-year, while gas rig counts were up 24% or 28%. For the oil and gas supply chain, more production equals more parts equals more demand for our metal. While there continues to be some excess inventory in the channel, we expect a pickup in our oil and gas market sales as we move through 2022, and we actually booked some very nice orders earlier this week. General industrial market sales of $2.5 million, or 6% of sales, were up 18% from the third quarter of 2021, but 43% lower than the fourth quarter last year. Full-year sales totaled $9 million, which is 30% lower than in 2020. Our general industrial market includes sales to the semiconductor, medical, and general manufacturing markets. The semiconductor industry is coming off another strong year with ramped-up production by chipmakers, leading to record sales and unit shipments through November. Major investments are being made in chip manufacturing in the U.S., which should benefit our customers. Overall, we expect reasonable volume opportunities in the general industrial markets in 2022. Power generation market sales increased to 1.2 million, or 3% of sales, and increased to 39% from 800,000, or 2% of sales in the third quarter, and up 24% from the fourth quarter a year ago. Full-year sales were 4.6 million, which is 33% lower than 2020 sales. Maintenance demand has accounted for most of our power gen sales in recent years, and it was the main driver of our fourth quarter sales. We expect that to be the case in 2022 as well, although we continue to anticipate some benefit from increased gas turbine backlogs at major OEMs. Longer term, while there's abundant discussion on what effect net zero emissions in the latter part of the century will have on the industrial gas turbine market, recent reports tag industry growth through 2028, and at least amid single digits. So let me summarize. Business continued to come back in the fourth quarter, and we received sequential sales growth of 16%, including 19% higher premium alloy sales, as well as a record backlog of $134.5 million and a gross margin of 8.7%. We also continued to narrow our bottom-line loss. Recovering aerospace demand was the main driver of our top-line growth, with aerospace sales up 16% from the third quarter and nearly 50% from the fourth quarter of 2020. The latest reports on deliveries, orders, and build schedules at Boeing and Airbus, combined with growth trends in the freight world, business jets, and travel-fueled aftermarkets, point to further recovery in demand in 2022. Our sequential sales growth in the fourth quarter also included increases in the balance of our end markets, and the outlook for each is positive in the coming year. While there is no doubt that we will continue to be presented with challenges in our supply chain and from labor shortages and related issues, we plan to achieve sequential improvement in each quarter of 2022. In looking to the future, our strategic investments in 2021 and an additional VAR vacuum work remount furnace and 18-ton crucible will begin lowering costs and expanding capability immediately. Our Board has now approved the acquisition of two additional vacuum work remount furnaces, which will further expand our product portfolio based on recent customer approvals. Our balance sheet remains strong as we ramp up operations and invest in the future. Our liquidity position is adequate to fund working capital needs as activity levels rise, consistent with our record-breaking backlog, growing sales, and targeted investments in the future. I just want to repeat that none of our accomplishments will be possible without the dedication and resilience of our employees and add the support of our board, customers, and shareholders. I remain sincerely grateful to all of them. That concludes my formal remarks. Carmen, we're ready to take some questions.