Universal Stainless & Alloy Products, Inc.

Ladies and gentlemen, please stand by. Your conference call will begin momentarily. Once again, ladies and gentlemen, thank you for your patience and please stand by. Music Thank you. Thank you. Good day and thank you for standing by. Welcome to the Universal Stainless First Quarter 2022 Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll 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 then 0. I would now like to hand the conference over to your host today, June Filingeri. Please go ahead.

Thank you, Michelle. Good morning. This is June Filingeri of ComPartners, and I also would like to welcome you to the Universal Stamets Conference Call and Webcast. We are here to discuss the company's first quarter 2022 results reported this morning. With us for management are Denny Oates, Chairman, President, and Chief Executive Officer, Chris Zimmer, Executive Vice President and Chief Commercial Officer, and Steve DiTomaso, Vice President and Chief Financial Officer. 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 Michelle will instruct you on procedures again 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.

Thanks, June. Good morning, everyone. Thanks for joining us today. The recovery in aerospace demand continued to build positive momentum in the first quarter, driving exceptional growth in bookings, backlog, and increasing sales. Specifically, Consolidated backlog increased 50% from the record of 134.5 million at year-end 2021 to reach a new record of 201.8 million before surcharges. Our backlog ratcheted up each month of the quarter, including a strong increase in premium alloy products. On March 31, premium alloys represented 25% of total backlog. Given today's lead times, approximately one-third of the backlog is scheduled for shipment in 2023. The backlog growth reflects record monthly and quarterly bookings, which totaled $107.4 million before surcharges, providing an excellent base load for operations over the next several quarters. Finished bar and plate products were especially strong, with volume increasing sequentially by 136% and 40% respectively. Net sales increased to $47.6 million, up 10% or $4.4 million from the fourth quarter, and 28% or $10.4 million from the first quarter of last year. Shipments total 13.7 million pounds, essentially unchanged from last quarter. A couple of noteworthy points I want to make on sales. The 4.4 million increase in sales is comprised of three things. Price and surcharge increases of 2.3 million, product mix changes of 2.7 million, and a reduction in sales of $700,000 due to revenue recognition and other miscellaneous sales adjustments. We've announced eight base price increases over the past year. three before September 2021, and five since, including four increases in 2022 alone. Sixty percent of Q1 sales were booked prior to September and did not benefit from all the increases. We expect the positive impact of price increases to accelerate over the next few quarters as the benefits of subsequent price increases kick in. The product mix improvement of $2.7 million is directly attributable to increased sales of higher-priced finished bar and premium alloy products consistent with our long-term strategy. Premium alloy sales rose 27% to 8.9 million and represented 18.8% of total first quarter sales compared to 7 million and 16% of sales in the fourth quarter. A 17% reduction in shipments of lower-priced plate products also contributed to the favorable sales mix impact. However, I should point out that order entry for plate was excellent in the first quarter, Plate backlog is up 42%, and we continue to expect a solid year in the plate business. We also expect sales to trend upward each quarter of 2022, subject to modest seasonal factors. Current backlogs point towards stronger volume, higher prices, and improving mix. Let's turn to profitability. Gross margin was $4.1 million, or 8.5% of sales in the first quarter, versus 8.7% of sales in the fourth quarter of 2021, and a minus 7% of sales in the first quarter of last year. I said on our last call that I would expect double-digit gross margins as we move through the first half of 2022. Frankly, we expected to do better than 8.5%. Looking at the puts and takes, the gross profit margin in the last quarter benefited from three items that were more than offset by three challenges. So let's take them one at a time, starting with the positives. First quarter gross profit was increased by $1.1 million by a grant received under the Aviation Manufacturing Jobs Protection Program. We recorded a $1.1 million benefit in Q1 and estimate favorable impacts of $1.5 million in the second quarter and a half million in the third quarter. The grant is contingent upon maintaining certain minimum manning levels. Without the grant, first quarter gross profit margin was 6.3%. We estimate the positive misalignment between prices and surcharges compared to material costs added $400,000 to gross profit, or about 0.8% of sales. Lastly, the increasing mix of premium melted products had a favorable impact on gross profit. These positive factors were more than offset by three items. First, ongoing supply chain challenges, including delays in transport, delivery of critical parts, and timely receipt of raw materials. The resulting intermittent extended outages of key facilities limited production early in the quarter. Second, inflation in the price of virtually all operating supplies and consumables ran ahead of the benefits of price increases in the first quarter. Third, lower than planned production led to reduced absorption of fixed costs and lower margins. Actual fixed spending, however, remained unchanged. Sequentially, about $2 million of additional unabsorbed fixed costs hit the P&L in the first quarter compared to the fourth quarter. The resulting monthly trend in gross profit margins during the first quarter reflects the impact. In January, our gross profit margin was 9.5 percent. In February, we turned negative at 4.5 percent when the outages impact hit. And in March, we were at 11.7 percent before the impact of the aerospace grant. We've addressed these issues by completing major maintenance on key facilities such as our forge, grinding equipment, selected re-melt furnaces, and hot rolling operations. We've replenished parts and consumable inventories. We are de-risking our raw material and parts supply chains from exposure to Russia, Ukraine, China, and related areas of concern. Lastly, price and surcharge increases have been implemented, and their favorable contribution will grow each quarter. All these steps, coupled with a record backlog and increased production levels, give us confidence that profit margins will rise, and we will deliver the double-digit margins I described in our last call as we move through 2022. I'll provide an update on the spill in a moment, which could have an impact on our margins in the second quarter. First quarter, selling general and administrative expenses. Approximated about $5 million, essentially the same as the fourth quarter of 2021, but declined as a percentage of sales from 11.6% to 10.5%. We expect SG&A expenses to remain flat for the next few quarters. For the three months ended March 31, 2022 and 2021, our estimated annual effective tax rates applied to ordinary income were 10.6% and 25.8% respectively. The difference between the federal statutory rate of 21% and the federal annual estimated tax rate in both years is primarily due to research and development credits. The 2022 and 2021 estimated annual effective tax rates differ primarily due to an expectation of income tax expense in 2022 compared to an income tax benefit in 2021. The net loss for the first quarter was $1.6 million, or 18 cents per diluted share, virtually identical to the fourth quarter of 2021. A year ago, quarter loss was $4.5 million, or 51 cents per diluted share. EBITDA for the quarter was $3.8 million, and adjusted EBITDA was $4.2 million after adding back $400,000 for stock-based compensation. Let's move on to our financial position. Managed working capital increased in the first quarter to $142.5 million on March 31 from $136.9 million on December 31. The increase was mainly due to a $7.1 million increase in accounts receivable, resulting from the high volume of shipments in March. Approximately 40% of Q1 sales occurred in the month of March. Inventory increased by $6.7 million from the end of the fourth quarter to $147.4 million. The $6.7 million increase is comprised of a $2.1 million increase in raw materials with $400,000 due to volume and $1.7 million due to higher material costs. There's a $4 million increase in work in process with a $3.6 million decline due to lower pounds in work in process, offset by an increase of $7.6 million due to higher material costs. And lastly, there was a $600,000 increase in supplies and parts inventory. In short, the increase in inventory is due to the rising price of materials, not to increase volumes in inventory. Lastly, the $7.5 million increase in accounts payable more than offset the increase in inventory. Capital spending was $2.5 million in the first quarter, down from $4.6 million last quarter. While we still anticipate $20 million in capital spend this year, supply chain and delivery uncertainty may push some spending into 2023. We finished the quarter with total debt of $76 million, up 6.8 million from year end. Liquidity remains in good shape at 25.4 million, an increase of 1.4 million sequentially. Taking a minute on commodity prices, especially nickel, which ended March at $15.50 a pound, about 70% higher than at the end of December and more than double its price a year ago. The nickel market has tightened due to recent sanctions on Russia, ramping production of electric vehicles and healthy specialty metals demand. In addition to nickel, there were strong run-ups in other commodities by the end of March. Both vanadium and ferro-titanium more than doubled in price from the end of December, while chrome was up 45%, cobalt up 15%, and scrap up 13%. Due to these sharp inflationary cost increases affecting all areas of our business, we have announced four price increases since the beginning of the year. A base price increase for all products in January, price increases for bar products in February and March, as well as an increase for plate products in April. Moving on to operations. We announced on April 11th that a liquid metal spill had occurred during operations at our electric arc melting facility in Bridgeville. The spill was caused by a breakthrough at the bottom of a furnace shell. No one was injured, and there was no environmental impact. All other operations have continued to function normally. No near-term interruption to product delivery schedules is anticipated. Since the time of the spill, we have been in the process of cleanup and damage assessment. We said at the time that we expected melting operations to resume in six to eight weeks, subject to parts and contractor availability. Our team is doing an outstanding job recovering. and we expect to resume melting the week of May 23rd, which would be on the low end of that estimate. While there are still unknowns and these numbers are preliminary, we estimate the cost of cleanup and repairs to be in the $1.5 million range. An asset charge of about $300,000 to $400,000 will be required. We have a $1 million deductible in our insurance program. We are taking additional steps to partially mitigate the impact of the spill. Specifically, we are securing purchased melt for selected grades to meet customer commitments, maintain downstream asset utilization, and preserve our workforce. We're also redeploying affected employees to other productive roles within the plant. Although the metal spill is uppermost in our minds right now, there were several operational milestones reached during the first quarter. Among them was completing the commissioning of the new 18-ton vacuum induction melting crucible in North Jackson. As we have discussed, the vacuum induction melting crucible expands our vacuum induction melting capacity to support the growth in premium alloy products and significantly improves the efficiency of our melt operations. 100% of the $3 million in trial inventory in work in process at year end has passed testing and been applied to customer orders. We are also proceeding with the acquisition of two additional vacuum mark remelt furnaces to further support our growth and efficiency along with our expanding product portfolio. The furnaces have been ordered and will be installed at our North Jackson facility to be operational late in the second quarter of 2023. I'd also like to congratulate our entire Bridgeville team on achieving the coveted ISO 45001 certification for occupational health and safety. Bridgeville joins our other three plants, which earned the certification in recent years, demonstrating the commitment to safety by all universal employees and validating the effectiveness of our safety processes. Let's turn to our end markets, beginning with aerospace, our largest market. Our aerospace sales increased 17% to $30.1 million, or 63% of sales in the first quarter, from 25.7 million, or 60% of sales in the fourth quarter. Our first quarter sales to aerospace were the highest since the second quarter of 2020. Last quarter, I noted that recovery in aerospace was gaining traction due to improving travel activity, increased deliveries, a return of bookings for the commercial and freight sectors, increased defense spending, and growing activity in general aviation. Those same factors accelerated recovery momentum in the first quarter. Among these factors is the substantial comeback in air traffic. In its February report, IATA reported that air travel posted a strong rebound from January and a more than doubling of air travel from February of 2021. The year-over-year comparison included a 61% increase in domestic traffic and a 257% increase in international traffic. IATA said that the war in Ukraine did not have a major impact on February traffic numbers. However, March numbers are not yet available. Adding more evidence of the return of commercial air travel, Delta Airlines reported last week that it is seeing, and I'll quote, historic levels of sales activity and bookings as consumer demand accelerated through the quarter, highlighted by strong spring break performance in business travel. As Omicron faded, offices reopened and travel restrictions were lifted, end quote. At Boeing, the expected step-up in build rate of the 737 MAX has now materialized, increasing to 31 airplanes per month from 27 per month at the end of January. The increase seems supported by Boeing's order book, which remains strong, even with recent reductions required by accounting rules due to Russian sanctions. Boeing has received an estimated 1,000 orders for the 737 MAX since its return to service. Among its wide-body aircraft, Boeing continues to work through structural flaws in the 787 airplane before it can resume deliveries and ramp production in a meaningful way. Even so, it's worth noting that Boeing's backlog totaled 4,231 airplanes as of April 12th. Boeing has emphasized the freighter market as a major area of opportunity, and that is proving to be the case. They introduced a new 777-8 in January. accompanied by several major orders from Qatar Airlines, Western Global, DHL, and Ethiopian Airlines. At Airbus, management is targeting delivery of 720 commercial airplanes this year, up from 611 last year. On their conference call in February, Airbus said its main priorities are to strengthen its backlog and deliver on its commercial aircraft ramp. Their order backlog at year-end 2021 was 7,082 commercial aircraft. As part of their plan for production ramp-up of the A320 narrowbody family, Airbus has increased production build rate to approximately 50 airplanes per month, up from 40 per month during the pandemic. They remain committed to increasing that to 65 per month by July of 2023 and would like to move beyond that level to 70 to 75 per month, but recognize current supply chain capacity may be limiting. Demand in the defense market remains healthy. Since our last call, the administration submitted a fiscal year 2023 DOD budget requesting $773 billion, which is up 4% from the level enacted in fiscal year 2022. Based on discussion with our aerospace customers, their increased order levels are in response to current demand, combined with planning for higher demand in the second half of 2022, continuing to 2023. That's in line with airplane build rate forecasts and supported by multi-year backlogs at Boeing and Airbus. The heavy equipment market remained our second largest market in the first quarter of 2022. Heavy equipment sales were 8.1 billion or 17% of sales, which is 11% lower than 9 million or 21% of sales in the fourth quarter. Metal fabrication demand drives our sales to the heavy equipment market. Last quarter, I pointed to typical lumpiness in quarterly sales, and that was evident in the first quarter. Even so, based on our bookings and a 42% increase in order backlog in first quarter, We expect our heavy equipment market sales to remain strong in 2022, driven by continued industrial equipment demand and model changeovers by automakers. The oil and gas end market was our third largest in the first quarter of 2022, with sales up 7% to $4.5 million, or 9.2% of sales, compared with 4.1 million and 9.4% of sales in the fourth quarter. Volatility in oil and natural gas pricing of late has been dramatic. At the time of our last call in late January, Crude oil prices closed at $88 per barrel, close to a seven-year high, and natural gas prices had jumped a full 82% in 2021. Later on in the war in Ukraine, Russian sanctions, unusually cold weather, and the decision by the IEA to release approximately 240 million barrels of emergency oil reserves over the next six months, and the erratic moves in prices are not all that surprising. Oil was as high as $124 a barrel on March 8th and closed at $103 yesterday. while natural gas closed at $7.80 per million BTU, up 40% this month alone. While it may be hard to get a fix on where oil and gas prices will settle, drilling activity continues to increase as evidenced by the Baker Hughes Rotary Drilling Rig Count. As of April 8th, there were a total of 689 active drilling rigs in the U.S., an increase of 16 from the week before, and an increase of 257 rigs from April a year ago. International rigs totaled 815, up two during the week, but up 100 from the same period last year. The U.S. Energy Information Administration estimates that commercial oil inventories in the OECD ended the first quarter at 2.6 billion barrels, up slightly from February, but that was the lowest level since April of 2014. With a low level of inventories, one equity analyst recently not only forecast an increased drilling activity in the U.S. and internationally, but that major oil companies would maintain their capital discipline and spend at the upper end of expectations, while private operators would continue to add rigs. Higher drilling activity leads to more demand for parts, and therefore more demand for metal to produce them. We're seeing the initial signs of increased activity, and supply chain inventories appear to be getting in good shape. General industrial market sales in the first quarter totaled 3.7% of sales, an increase of 33% from the $2.5 million in the fourth quarter. Our general industrial market includes sales to the semiconductor, medical, and general manufacturing markets. Robust semiconductor industry demand remained the main driver of our first quarter growth in this market. Semiconductor industry reported global semiconductor sales increased 32% in February from the same month of 2021, while sales in the Americas increased 43%. At Universal, we continue to expect reasonable volume opportunities in the general industrial market in 2022. Power generation market sales increased 10% to 1.3 million or 3% of sales, compared to 1.2 million last quarter. Maintenance demand continues to account for most of our power generation sales, and we expect that to be the case for the foreseeable future. A pickup in seasonable maintenance aided our first quarter. While there may be some future benefit from increased gas turbine backlogs at major OEMs, it has not materialized in terms of demand from our customers. Looking at the industry more broadly, EIA has forecast that natural gas generation will represent a solid 35% of U.S. electricity generation in 2022 and 2023. At the same time, an industry analyst report in the industrial gas turbine market forecast a growth rate of about 3% over the next six or seven years. We expect sales to grow modestly in 2022 and track normal seasonal patterns. Before I wrap up, I'd like to take a moment to introduce Steve DiTomaso. Steve has served as our corporate controller since 2018, during which time he led our accounting and treasury operations and had expanding responsibilities in strategy development and operations. He's an ideal fit for the strategic role of vice president and chief financial officer because of his deep knowledge of financial reporting and cash management, and equally important because of his familiarity of Universals business and operations. Personally, I'm looking forward to working with Steve to execute our strategic plan, drive operating performance, and share in future conference goals and investor relations.