Universal Stainless & Alloy Products, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Universal Stainless and Alloy Products Incorporated second 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 will need to press star 1 1 on your telephone keypad. At this time, I would like to turn the conference over to Ms. June Fillingeri. Ma'am, please begin.

Thank you, Howard. Good morning. This is June Fillingeri of Compartners, and I also would like to welcome you to the Universal Stainless Conference call and webcast. We're here to discuss the company's second 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, John Arminas, Vice President and General Counsel, 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. 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.

Thanks, June. Good morning, everyone. Thanks for joining us today. Our company made solid progress in the second quarter despite facing several unprecedented challenges. Let me start off today with some highlights. Our order backlog reached a new record high of $222.7 million. Our top line growth continued with sales up 10% sequentially, up 36% from the second quarter last year, and up 32% year to date. The 9% to 12% base price increase announced on July 11th marks the sixth inflation-flighting price increase of this year. Gross margin expanded as expected to 12.6% of sales in the second quarter, excluding a positive AMJP grant of $1.8 million and charges for the liquid metal spill at our Bridgeville melt shop of $3.6 million. Our reported net loss for the second quarter narrowed to $1.4 million or $0.16 per diluted share. Excluding a similar $0.16 per share net charge for the unusual items, we essentially broke even during the quarter. The spill led to a seven-week unplanned outage while our team executed an aggressive recovery plan. We had estimated six to eight weeks of downtime in April. The melt shop is fully operational and focused on making up for lost time. Production, excluding the spill, continued to ramp, increasing about 15% sequentially as measured by pounds processed through our facilities. Plant overhead spending was totally controlled, remaining 15% below pre-pandemic levels. Progress was made de-risking our supply chain for geopolitical and availability issues. Ground was broken for the $15 million vacuum arc remelt facility in North Jackson. Our liquidity remained adequate at $26 million, a slight increase over March 31. Adjusted EBITDA of 6.4 million or 12.4% of sales almost doubled sequentially. Lastly, Universal was recognized by Rolls-Royce as a high-performing supplier, meaning we are one of their top material suppliers based on our quality, service, and responsiveness. Drilling into the details, The main driver of our positive results in the second quarter was the continued recovery in aerospace, which fueled our sales growth, our profitability improvement, and our record backlog. The continued growth in the backlog is noteworthy. We reached $222.7 million by the end of the quarter. That's an additional 10% from the record first quarter, which had jumped 50% from year-end 2021. To add additional perspective, our second quarter backlog increased 124 million or 125% from the second quarter last year. The backlog has increased now for five consecutive quarters. A full 26% of our current backlog consists of premium alloys, which are mainly for aerospace applications. Slightly over 50% of the backlog is scheduled for shipment next year. Although second quarter order entry of 64 million was below the record-setting level of Q1, It represents the third highest quarter in company history. Again, strong aerospace activity, including premium melt products, dominated with relatively stable order entry from industrial markets. Given our substantial backlog, we expect our production levels and our shipments to continue increasing each quarter for the balance of the year and into 2023. Taking a closer look at sales activity, our sales of $52.2 million increased $4.6 million, or 10% sequentially. $2.5 million of the increase was due to price, and $3.4 million was due to volume, with mix and other items offsetting by $1.3 million. We've announced six price increases since the beginning of the year to keep up with inflation and the cost of most operating supplies and consumables. The latest increase was a base price increase on bar products of 9% to 12%. A positive impact of these price increases will continue to build over the next few quarters and into 2023. Second quarter premium alloy sales remain level with the first quarter, but we're up 49% from the second quarter of 2021 and up 32% in the first half of 2022 versus the same period last year. We expect sequential premium sales growth to accelerate in the third and fourth quarter, given our current backlog position. Looking at profitability, our progress in the second quarter was achieved despite the challenges posed by liquid metal spill in our electric melt shop. While we captured the financial impact in the $3.6 million charge for the second quarter, it is important to recognize the enormous effort of our team that allowed us to meet our initial deadline to get the melt shop up and running with full operation restored in June. The scope of the recovery plan was significant, including basic cleanup, damage assessment, equipment procurement, installation, complex rewiring work, and an aggressive startup plan. Third-party melt was also acquired to partially mitigate risk to our customers. Meanwhile, most of our other operations continued to function normally, and there were no near-term interruptions to product delivery schedules. Like most other manufacturers, we also faced ongoing supply chain obstacles, affecting the transport and procurement of critical parts and materials, price inflation in supplies, consumables, energy, and services, and staffing our facilities to continue ramping up production. On the plus side, we estimate the positive misalignment between surcharges compared to our material cost added $500,000 to gross profit. We're just under 1%. Rejected higher activity levels in the second half will add absorption benefits and leverage margins higher. We expect both sales and gross margin to increase sequentially through the balance of the year. Steve will take you through additional items in our income statement as well as our balance sheet in his report. Before he does, just a few points on our financial position. Managed working capital increased at the end of the second quarter to $148 million compared to $142 million on March 31st. and $116 million at the end of the second quarter of 2021. The sequential increase in managed working capital is mainly due to increased sales and inventory values. For example, total inventory was $149 million at the end of the second quarter versus $146.9 million at the end of the first quarter. The $2.1 million increase was driven by an $18.1 million increase in material costs, offset by $16 million in lower volume in inventory. This was largely related to the spill's interruption of production. The increased mix of premium product inventory and finished bar products also represented a contributing factor to the increase in inventory. Capital spending was $3 million in the second quarter, bringing the year-to-date capital spend to $5.5 million. We expect to increase capital expenditures in the second half of 2022 as we complete projects that were delayed due to parts availability delays and other supply chain challenges in the first half. In total, we now expect 2022 capital expenditures to be in the range of $18 million, with ongoing supply chain issues being a wild card. We ended the second quarter with total debt of $84 million, an increase of $8 million from the first quarter due mainly to working capital needs. We continue to be in good shape from a liquidity standpoint, which stood at $26 million in June, up slightly from March. Just a few comments on commodities. Except for chrome, commodities remain elevated compared to year end 2021 and June of 2021, but began to retreat late in the second quarter. Nickel prices, which had jumped 70% per pound in the first quarter, ended the second quarter at $11.71 per pound, down just about $4 per pound, or 24% from March. However, nickel remains 29% higher than year-end 2021 and 44% higher than the end of the second quarter last year. The LME has now returned to more normal trading patterns after the distortions caused by a large short position in March, production interruptions, and the Ukraine-Russia situation. On balance, nickel is expected to trade in the $8 to $10 per pound range and was at $9.88 per pound this morning. Most of the other commodities we use for our products are also trading lower at the end of June versus the end of March. Given these trends, you should expect third quarter surcharges to be lower by roughly 10% compared to the June highs. Turning to operations, the resumption of operations at Bribeshell Melt Shop was clearly a major accomplishment in the second quarter. We also moved forward with our other capital projects, although many have been hampered by delays in getting parts and other supply chain challenges. We are acquiring two additional VAR furnaces, vacuum mark remount furnaces, that is, to further support our growth and efficiency, along with our expanding product portfolio. At the time of our last call, I reported that the furnaces had been ordered, and we plan to have them installed in our NARC Jackson facility and operational late in the second quarter of 2023. In the second quarter, we broke ground and have begun the building expansion. Our overall project timeline remains unchanged. Commissioning of the new 18-ton vacuum induction melting crucible in North Jackson was completed in the first quarter. This crucible expands our vacuum induction melting capacity and supports the production of our premium alloy products as it significantly improves the efficiency of our melt operations. Operationally, we are alternating 18-ton and 12-ton campaigns, and we validated the operating cost savings in the 30% range. Our new intermediate-sized bar cell in Dunkirk began operation just as the pandemic hit, and we have never really had the opportunity to test its capabilities. Second quarter production was the highest yet, and we are demonstrating a 12% reduction in operating costs and a 15-day reduction in cycle time compared to the traditional manufacturing routes. Looking at our end markets, beginning with aerospace, our largest market. Our aerospace sales increased 19% to $36 million, or 68% of sales in the second quarter. That's up 67% from the second quarter last year. Our aerospace sales increased 51% to $66 million in the first half of 2022 versus the same period a year ago, which shows the extent of the turnaround in the aerospace market. This accelerating momentum in aerospace demand reflects several positive trends. Commercial airliner deliveries are picking up. Boeing delivered 216 planes and Airbus delivered 297 planes in the first half. Build rates are rising generally consistent with expectations. For example, Boeing announced this morning they reached the planned 31 737s per month and are in the final stages of the 787 restart. Airbus is pushing 58 320s per month and shooting for 75 by 2025. New plane orders are slowly increasing again. Boeing has 205 firm orders, and Airbus has 259 through June 30. Plus, Airbus has commitments for almost 300 planes from three Chinese airlines, which could turn into firm orders by year-end. Demand is also supported by the quickening pace of air travel recovery and its positive impact on the aftermarket. Global air traffic in May was 83% higher than in May of 2021, according to IATA, as COVID-related travel restrictions eased further. In the U.S., the TSA reported that passenger traffic has nearly returned to pre-pandemic levels, noting the travel volume over the Fourth of July weekend was 93% as high as the same holiday in 2019. Air freight growth continues to outstrip expectations. Demand in the defense market remains healthy, as defense company order books and production demonstrate, even as that industry copes with the supply chain challenges being experienced by all manufacturers. For example, the current build rate for Lockheed Martin's Joint Strike Fighter is 156 planes per year through 2030. Lastly, rapid increases in aviation fuel prices increases the potential financial return from fuel-saving advanced engine technology available in today's aerospace products. We attended the Foreign Bureau Air Show last week, which traditionally is a great opportunity for us to meet with our top domestic and international service center and forger companies, along with many critically important OEMs. A couple takeaways worth mentioning. There's a strong consensus that aerospace and defense market demand is very robust now and will continue to build over the next several years. A major discussion point was the instability in the current supply chain, specifically a concern that the supply chain is struggling to ramp up production at a pace commensurate with demand, and this could have the potential of tempering the pace of recovery. It's noteworthy that current demand is largely focused on single aisle platforms with the expectation that double aisle activity won't begin in a meaningful way until 2024. Overall, the prospects for aerospace and defense demand remains compelling, notwithstanding supply chain issues, recessionary concerns, and air traffic hassles, which is all good news for our customers and also good news for us. The heavy equipment market remained our second largest market in the second quarter of 2022 at 14% of sales. Heavy equipment sales were 7.2 million or 11% lower than 8.1 million in the first quarter. In the second quarter of 2021, heavy equipment sales totaled 9.3 million or 24% of sales. Metal fabrication demand drives our sales to the heavy equipment market. Last quarter, I mentioned the typical lumpiness in our quarterly sales to this market, which was clearly in evidence during the second quarter. That pattern is understandable given the level of inventories that our customers, many of whom bought heavy at the end of last year, combined with cautiousness due to the economic sensitivity of this group and recent trends in key commodity prices. Even so, we expect heavy equipment market shipments to recover modestly over the next few quarters, driven especially by model changeovers at the automakers in their race to introduce electric vehicles combined with continued industrial equipment demand. The oil and gas end market was our third largest in the second quarter of 2022, with sales of 4.7 million or 9% of sales. That represents an increase of 7% from the first quarter sales of $4.4 million and an increase of 19% from $3.9 million in the second quarter of 2021. Our second quarter 2022 oil and gas sales were the highest since 2019, and first half sales increased 29% from the same period of 2021. Oil and natural gas markets are sending mixed signals. Clearly, prices have been high and volatile since our April call, and a global supply-demand imbalance exists. Oil prices have eased over the last four to six weeks, but the futures market would suggest increases are coming. In recent days, oil has been trading in the $100 per barrel range. IEA forecast that world oil demand would reach 101.6 million barrels per day in 2023, surpassing pre-pandemic levels and pointing out that higher prices and a weaker economic outlook are moderating consumption currently, but China is expected to drive gains in 2023. Natural gas has rallied to over $9 per million BTU on unusually hot weather, but again, the futures market suggests a downward trend as we move into the fall. Baker Hughes reports U.S. operating oil drigs are up by 272 over the prior year, and international rigs are up by 66. Halliburton is forecasting, and I'll quote, multiple years of growth and characterizing the North American market as strong, steady, and all but sold out, end quote. Add in the Ukraine-Russia situation, the administration's policies, and things get very complicated. At Universal, we expect generally higher exploration activity, leading to more demand for parts and the metal we produce to make them. Supply chain inventories appear to be in balance. Based upon our backlog and current lead times, we anticipate modest growth in this market in the second half of the year. The PowerGen market became our fourth largest market in the second quarter of 2022, with 72% sequential increase in sales, which totaled 2.2 million or 4% of sales. Power generation sales were up 58% from the second quarter last year and up 35% year to date. Maintenance demand continues to account for most of our power gen sales, and it was improved in the second quarter. We expect that to be the case for the remainder of the year. General industrial market sales in the second quarter totaled 1.8 million or 4% of sales, a decline of 45% from 3.4 million or 7% of sales in the first quarter, and 18% lower than the second quarter of 2021. Our general industrial market includes sales to semiconductor, medical, and general manufacturing markets. There does appear to be a pause in semiconductor activity due to uncertainty about our government's policies regarding the industry, coupled with reduced consumer demand for smartphones and personal computers. We do not expect a semiconductor upturn until later this year, but we do believe Q3 and Q4 sales will exceed the second quarter. Steve, let me turn the call over to you for a review of our financial situation.