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spk01: Good day, and thank you for standing by. Welcome to the Universal Stainless fourth quarter 2022 conference call and webcast. At this time, participants on 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker for today, June Filangieri. Please go ahead.
spk00: Thank you, Lisa. Good morning. This is June Filangieri of ComPartners, and I would also like to welcome you to the Universal Stainless Conference Call. We are here to discuss the company's fourth quarter, 2022, results reported this morning. With us from management are Denny Oates, Chairman, President, and Chief Executive Officer, Chris Simmer, Executive Vice President and Chief Commercial Officer, John Arminas, Vice President and General Counsel, and Steve DeTomaso, 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 Our conference operator, Lisa, 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.
spk07: Thanks, June. Good morning, everyone. Thanks for joining us today. The fourth quarter of 2022 was marked by important top-line growth, especially in premium alloy and aerospace products. At the same time, we were challenged by misalignment of surcharges and material costs, several unplanned outages, and very difficult weather conditions in December. To summarize the fourth quarter compared to the third quarter, net sales increased 22%, premium alloy sales jumped 69%, aerospace sales rose 27%, order backlog hit a new record high of $288 million. However, our gross margin declined to 4.3% from 6.4% in the third quarter. Let me drill into the fourth quarter positives and negatives, beginning with the positives. Net sales through the quarter rebounded to $56.2 million. The $10 million sequential increase was due to higher shipment volume of $4.4 million and increased all-in pricing of $5.6 million. In addition to the $10 million quarterly increase, sales were up 30% from the same quarter of 2021 and the highest since the first quarter of 2020. Full year 2022 sales increased 30% to $202.1 million versus 2021. Premium alloy sales reached a quarterly record of $13.5 million, or 24% of sales, a 92% increase from the fourth quarter of 2021. Full year 2022 sales of $39.2 million increased 48% compared to the full year of 2021. Robust demand in aerospace continues to be the main driver of our growing backlog, which reached a new record high in the fourth quarter. Order entry has remained strong. In other positive news, we are moving forward with our capital project in North Jackson, namely the addition of two additional vacuum arc remelt furnaces to expand our product portfolio with more technologically advanced, higher margin premium products. The equipment has now been delivered, and our goal is to install and commission these furnaces for integration into operations by Q1 of 2024. Additionally, we reached a new three-year collective bargaining agreement with our hourly employees in the Dunkirk facility, effective November 1st. At year end, we completed a $7 million leased financing agreement related to the remelt expansion at the North Jackson facility, which increases our financial flexibility going forward. Steve will have more comments on this in his report. Moving to the fourth quarter challenges. The most impactful negative in the fourth quarter was a $2.4 million negative misalignment between surcharges and material costs. Fourth quarter surcharges were at the lowest level of the year due to the broad-based drop in commodity prices, which began late in Q2 and continued through the third quarter. In the fourth quarter, we were shipping products earlier in the year when commodity prices were at their 2022 peak. Frigid weather hit our region in December. While our teams are experienced in contending with bitter colds and we took steps to prepare, some of our equipment was not able to withstand the extreme temperatures. As a result, dealing with localized freezing of pipes and related flooding negatively impacted production and increased maintenance spend. There were several additional unplanned equipment outages beyond those related to weather that occurred at key work centers in December. They would include the Bridgeville Hot Melt, where December operating hours declined by 30% sequentially. The AOD Melt Shop in Bridgeville, where operating hours were the lowest in six months, but output per equipment hour was the highest of the year. And the North Jackson Forge, where we lost the worm gear, leading to the lowest monthly operating hours of the year. These unplanned outages at our key facilities reduced gross profit by approximately $700,000 in the fourth quarter. Each of these situations has been resolved, and operations are off to a solid start in 2023. Like most manufacturing companies, we have been wrestling with a nationwide labor shortage. On our last call, I reported that applications were increasing, and that trend has continued. Our employee count is now 485, an increase of 50 since the last call, or 11%. Our outside contractors have been reduced to 29, which is a 54% reduction. Onboarding and trading of new employees is a major area of focus as the rebuilding of our workforce accelerates. Although improving, supply chain issues, particularly for repair parts, continue to extend turnaround times on maintenance work. And lastly, inflation continues, albeit at a reduced rate. The net result of all these issues was gross margin for the fourth quarter of 2022 declined to $2.4 million, or 4.3% of sales. compared with 3 million or 6.4% of sales in the third quarter of 2022. The net loss for the quarter was $3.7 million or 41 cents per diluted share versus a net loss of 14 cents in the 2022 third quarter. For full year 2022, the net loss was 8.1 million or 90 cents per diluted share versus a net loss of $800,000 or 9 cents per diluted share for the full year 2021. Recall that 2021 included a gain of $10 million due to forgiveness of a term note from the Paycheck Protection Program. EBITDA for the fourth quarter of 2022 was $1.7 million, while adjusted EBITDA was $2.1 million. A couple comments on our working capital and financial position. Managed working capital was $145.9 million at year-end 2022, compared with $147.4 at September 30th. Inventory was reduced to $154.2 million versus $158.9 million at the end of the third quarter, reflecting lower raw material on hand, as well as supply chains issues have basically lessened, and lower material costs flowing through work and process. Total debt on December 31st, 2022, is $98.4 million, and Steve will delve into that here in a few minutes. Capital expenditures, as reported, were $1.1 million in the fourth quarter and $12.1 million for the full year 2022. The strategic vacuum arc furnace investment in North Jackson was the largest contributor. Turning to commodities, as I mentioned, surcharges were at their lowest level in the fourth quarter due to a drop in commodity prices at a time we were shipping products with higher material costs produced earlier in 2022. As a reminder, there is generally a two-month lag time on surcharges, and the time between production and shipment production is typically between shipment and production typically averages about six months. For products produced in April, for example, the price of scrap was $0.34 a pound, while nickel was priced at $15.10 per pound. By October, scrap had fallen to $0.16 per pound, while nickel had fallen to $9.94 per pound, near the lowest level recorded in 2022. And that's basically when the surcharges for the month of December shipments were set. Since then, scrap has continued to trade in the 15 to 16 cent per pound range, but nickel has moved back up to $13 per pound and even higher as you look at current pricing. The key takeaway here is that commodities have been volatile. Some are up from early Q4 and a few are down. The current impact on Universal is that our published surcharges for January and February are up six to 20% depending upon grade. Material costs and inventory are lower as we sold through first half 2022 production, which will work towards mitigating the material misalignment reported in the fourth quarter as we move through the upcoming months. Let's turn to end markets for a minute, beginning with aerospace, which is our largest market. Aerospace sales represented 74% of fourth quarter sales and totaled $40.1 million. That's up 27% from the third quarter of 2022 and up 56% from the fourth quarter a year ago. Aerospace sales for full year 2022 also demonstrated substantial growth, increasing 50% to 137.5 million, or 68% of total 2022 sales. All indicators continue to suggest a multiple year aerospace expansion driven by three factors. First, Supply chain activity reflects improving delivery cadence, increased order activity, ramping build rates, lean inventories, all of which point towards positive momentum for 2023 and beyond. Consider Boeing for a minute. Q4 deliveries were 152 planes, best of the year. Full year 2022 deliveries were up 48 to 480, up from 340 or 41% from 2021. New orders reached 346 planes in the fourth quarter, bringing the 2022 total to 808 planes, up substantially from 2021. Year-end backlog is 4,578 planes, many years of production regardless of your production rate assumptions. Lastly, it was nice to see Boeing book a large 787 Dreamliner order, which supports the thesis of the double aisle recovery in 2025, which will drive increased metal production in 2024. Turning to Airbus, Airbus delivered 660 commercial aircraft and reported 820 new orders. Airbus deliveries were 8% above 2021. Build rates reflect improvement and continue to reflect the Airbus ramp-up trajectory, despite all the problems they've announced and termed as complexity in their operating environment. The second indicator is air travel, which continues to grow and drives a very active aftermarket. IATA reports that total traffic in November 2022 rose 41% compared to November 2021, or 75% of pre-COVID levels. International traffic rose 85% in November. North American carriers reported a 70% increase in air traffic in November versus the previous year. And TSA reports screening 2.4 million passengers on January 2nd of this year versus 1.9 million on that date in 2021. and $2.2 million in January 2019. And third, defense spending remains strong, and the outlook remains positive. The fiscal 2023 National Defense Authorization Act calls for $817 billion in defense spending, $45 billion more than the President's original budget request. So overall, aerospace demand remains robust. In speaking with our customers, whether structural or in engines, The conversations are about how they will manage through 2025 and beyond to respond to growing demand. The consensus is that there is a strong pull environment that will be sustained for many years to come, which is good news for all of us. In the heavy equipment market, our second largest market, fourth quarter of 2022 sales were 5.6 million, or 10% of our sales, which is 10% lower than the 2022 third quarter and off 38% from the fourth quarter of 2021. Full year 2022 heavy equipment sales totaled $27 million, or 13% of sales. Metal fabrication demand drives our sales to the heavy equipment market, especially in automotive. Our sales to the market trended downward over the past year as customers who bought heavy at the end of 2021 remained cautious amid economic concerns and recent trends in key commodity prices. That said, the U.S. auto industry has made a huge commitment to new investment in automotive factories, mainly for electric vehicle and battery manufacturing. According to the Nonprofit Center for Automotive Research, a total of $33 billion has been pledged in the U.S. for construction of new assembly plants and battery-making facilities through November of 2022. Meanwhile, model changeovers to electric vehicles continues to move quickly. For universal, our customers are proceeding cautiously in replenishing inventories as we begin 2023, and we expect demand to improve each quarter as we move through the year. Fuel and gas end market was our third largest market in the fourth quarter of 22, with sales of 5.3 million or 9% of sales, an increase of 42% from the third quarter, and 29% higher than the fourth quarter of 2021. Full year 2022 sales of 18 million were up 19% from 2021. There's a growing consensus supporting increased activity in the oil and gas exploration world based on supply shortages, underinvestment over the past five years, and the announced increase in exploration budgets by virtually all the majors. More specifically, the current U.S. Energy Information Administration outlook forecasts that the U.S. and other non-OPEC producers outside of Russia will increase oil production by 2.4 million barrels per day in 2023 and an additional 1.1 million barrels per day in 2024, with the largest growth occurring in the U.S. Chevron announced 2023 capital spending of $17 billion, largely focused at the Permian Basin. Schlumberger announced a distinctive new phase in the upcycle in oil and gas, including acceleration of activity in the Middle East, global offshore activity, and on land in the U.S. For Universal, given the increasingly bullish sentiment, current supply chain inventories, and operating difficulties confronting many European metal suppliers, oil and gas will definitely provide additional opportunities over the next several years. The general industrial market was our fourth largest market in the fourth quarter of 2022, with 3.6 million in sales, or 6% of total sales, an increase of 59% from 2022. Our general industrial market includes sales to the general manufacturing markets, especially semiconductor equipment and medical markets. On the last call, I said that we expected general industrial sales in the fourth quarter to be the same healthy level as in Q2 and Q3. We clearly exceeded our forecast despite the current low in semiconductor sales reported globally. U.S. companies have pledged $200 billion for chip manufacturing projects in recent years, incentivized by $76 billion in federal subsidies. While I'm sure there will be delays and changes over the next 10 years, we view these trends as positive for our customers and for Universal over the long term. Looking at our first half 2023, we expect general industrial sales to remain very healthy. PowerGen market was $1 million or 2% of sales in the fourth quarter, down 33% sequentially and 12% lower than the fourth quarter of 2021. On the other hand, full-year power generation sales of $6.1 million were up 32% from 2021. Demand for maintenance of industrial gas turbines used in electricity generation continues to account for most of our power gen sales, and there's not been much news of late about new builds in gas turbine manufacturing. GE has announced plans to spin off its gas, wind turbine, and energy businesses to a new company in 2024. GE has also noticed that it expects the gas market to remain stable over the next 10 years, and that gas will play a key role in any transition to renewable energy sources. While the formation of a new GE company focused on energy may translate to some new build opportunities in coming years, we expect maintenance demand to continue to drive our power generation business for the foreseeable future. Let me turn the call over to Steve for a deeper dive into our financials. Stephen?
spk06: Thank you, Denny. Our sales for the fourth quarter were $56.2 million, representing an increase of 22% sequentially and an increase of 30% versus the fourth quarter of 2021. This increase in sales was achieved despite the sequential decrease in raw material surcharges per pound within our selling price and was driven by higher total selling prices, partly from selling a greater mix of our premium product and partly from further base price increase capture during the quarter. Volume was also a contributor as we shipped about 1 million more pounds in Q4 compared to Q3. We will continue to capture more base price increase within sales as we progress through shipments in each quarter of 2023. Fourth quarter 2022 gross margin totaled $2.4 million, or 4.3% of sales, a decrease from 6.4% in the third quarter and 8.7% in the 2021 fourth quarter. The sequential decrease was caused by negative misalignment between our surcharge component of our selling price and materials cost of sales as we sold through material that was melted in 2022 at higher melt costs. But we also experienced several unplanned outages to key production units in December and the impact of our previous liquid metal spill continued to linger. The estimated negative impact on profitability in the fourth quarter due to the related cost impacts from those items was $1.1 million in total. The outages have all been resolved, as Denny mentioned, and the spill negative impact is down from $2 million reported in the third quarter. we do not expect any significant spill impact on future periods in 2023. Additionally, Q3 included a half million more of the AMJP grant benefit compared to the current quarter. Selling general and administrative costs in the third quarter totaled 5.6 million, or just under 10% of sales, in line with our expectations. The increase compared with $5.3 million in Q3 was due to the higher cost of business insurance as we renewed our policies in the fourth quarter. The increase versus $4.8 million in the fourth quarter of 2021 was due to the business insurance increase as well as higher employee costs. For the year ended December 31st, SG&A expenses were $21.2 million, up about 4.5% in 2022 versus last year. We expect SG&A expenses in the first quarter of 2023 to approximate the fourth quarter of 2022. Our reported operating loss for Q4 was $3.2 million, about $850,000 worse than Q3, which reflects the cost of sales items outlined previously and our higher SG&A expenses, partially offset by our increased sales volume and base selling prices. Total interest expense for the quarter was $1.6 million, compared with $1.2 million in Q2 and Q3, and about $600,000 in Q4 of last year. Interest expense has risen each quarter this year, along with higher market interest rates and higher borrowing levels on our revolver and credit facility. The interest paid on the majority of our revolver and term loan is variable and fluctuates with changes to the SOFR benchmark interest rate in our credit agreement. Due to the movement in market rates, our variable rate paid more than doubled from the beginning of the year to the end of the year, and accordingly, our interest expense followed. Our income tax benefit for the year was $2.6 million on a pre-tax loss of $10.7 million for an annual effective tax rate of 24.5%. The effective tax rate is greater than the federal statutory rate of 21% due to the impact of our research and development tax credits, which increase the income tax benefit for the period. Other elements of the rate calculation are not significant. we recorded an income tax benefit of $1 million on our pre-tax loss in the quarter, resulting in a Q4 effective tax rate of about 20.5%. Net loss in the fourth quarter was $3.7 million, or 41 cents per diluted share. Our fourth quarter EBITDA totaled $1.7 million, bringing our full year 2022 EBITDA to $12.8 million. Our adjusted EBITDA was $2.1 million for the quarter and just under $16 million for the year. Adjusted EBITDA includes add-backs for non-cash share compensation expense and other unique items impacting our results for the period, including impacts of our liquid metal spill that occurred in the second quarter and the aviation manufacturing jobs program grant we were awarded during the year. The EBITDA and adjusted EBITDA calculations are provided in the tables for the press release. Now I'll move on to cash flow and debt. We used $2.6 million of cash in our operations in Q4, despite managing our working capital down from Q3 as we reduced raw material inventory levels. Our CapEx decreased to $1.1 million for the fourth quarter And as a result, we increased the total net debt through those activities by $3.7 million. The net debt increase shown on our statement of cash flow primarily reflects incremental revolver borrowings of 4.7 million during the quarter and $1.8 million of cash received at closing of our new lease financing arrangement related to the capital project to expand our vacuum arc remelt facility at our North Jackson, Ohio plant, net of $2 million of cash on our balance sheet and about $750,000 in total payments made on our term loan facility and prior leasing arrangements during the fourth quarter. The new lease arrangement helps fund the remelt expansion project and is effectively a six-year financing lease transaction for $7 million in total, It is structured as a $5.2 million capital lease for the furnaces plus a $1.8 million sale leaseback transaction of ancillary equipment purchased for the project. At the conclusion of the arrangement, we own all of the underlying equipment. The $1.8 million is shown on the statement of cash flows as direct proceeds from the sale leaseback component, while the $5.2 million is a lease liability and has a corresponding asset recorded within the property, plant, and equipment line on our balance sheet. The total $7 million liability is included within the year-end total debt balance of $98.4 million. The deal helped expand our financial flexibility as we closed the year, and at December 31st, we had $2 million of cash on our balance sheet plus about $24 million of total revolver availability. This concludes the detailed financial update, and I'll hand the call back to Denny.
spk07: Okay, thanks, Steve. So let me summarize. In the fourth quarter of 2022, you saw top-line growth. Sequentially, sales increased 22%. Premium alloy sales were up 69%. Aerospace sales were up 27%. Solid bookings drove order backlog to a new record of $288 million. However, we had a gross margin problem. came in at $4.3 million versus $6.4 in the third quarter, mainly due to $2.4 million of surcharge and material cost misalignment, unplanned outages at several key facilities, and the weather we ran into in December. As we enter 2023, working on our record backlog, all facilities are off and running as Q4 outages have been resolved. Trends in surcharges, commodity prices, and material costs in inventory We'll reduce the misalignment reported in Q4. Momentum is building as we rebuild our workforce. Inflation and supply chain difficulties do continue, but they are improving. The capital project, which will add vacuum arc green mill furnaces at our North Jackson facility, is moving forward with plans to go operational in the first quarter of next year. All of these factors coupled with increased selling prices that are already in our backlog make us optimistic we will deliver improving sales and margin expansion as we move through 2024, excuse me, toward 2024. In closing, let me reiterate that our optimism for the future would not be possible without the commitment and relentless effort of all of our employees and the support of our board. It's because of them that we have been able to continue to overcome unexpected challenges and see the substantial opportunities we have before us. That concludes our formal remarks. Operator, let's take some calls.
spk01: Thank you. If you would like to ask a question, please press star 11 on your telephone. One moment while we wait for the Q&A roster. First question is going to come from Phil. Gibbs of Keyes, please go ahead. Your line is open.
spk09: Hey, good morning. Morning, Phil. Denny, obviously a lot of moving pieces on margins, compressed spreads in Q4. Nickel has gone up. You've had a little bit of improvement in Ferris prices as well. And I know that there's some timing lags within the business, as you talked about, but What should we expect in terms of margins in the first quarter? Can we get back to double digits or is that something reserved for progression?
spk07: I think it's reasonable to expect us to approach double digits in the first quarter and go significantly into the double digits as we move through the year. And the reason why I say that in the short term, as I tried to outline in my script, the misalignment will ease. Our current surcharges in January and February are up fairly significantly based upon the increase in commodity prices during the fourth quarter itself. At the same time, our material costs that will flow into the P&L in the first quarter have been averaged down through our production in third and fourth quarter, where we had lower raw material costs in our AOD shop. So I expect the misalignment, which is $2.4 million in the fourth quarter, to be significantly reduced in the first quarter. The other factor is base price increases. As you know, we've announced a series of price increases over the last year and a half. Those price increases are embedded in our backlog. We've already booked that. So it's a matter of getting those products produced and shipped out the door, and that will add to the margin accretion. And we have been struggling, as everyone knows, with labor, the whole labor issue, getting enough people into the plant, trained to ramp up the facility. And I see that improving. We've added 50 people to the workforce since our last call. I would expect to do that again during the first quarter. And we'll continue to do that. We probably need somewhere between 50 and 100 additional employees to really get to the point of performance for what we expect in 2024. All right, so the labor shortage is still an issue, but it's something that seems to be breaking. Applications have been up for the last three or four months, and we put a lot of people out in our facilities learning how to make our products and do that safely and efficiently.
spk09: That sounds like labor costs creeping up, given the fact that you're adding in internal headcount from some of the outsourcing, and then you also mentioned you have a new deal with – with one of the unions. Is there any other?
spk07: There are some hourly rate increases, no doubt. I mean, the puts and the takes on the labor front would be higher hourly labor costs per hour, but we'll also be running at higher activity levels, which will give us productivity to offset a portion of that. And the other factor to keep in mind is we've been using contractors. We've had as many as 75 to 85 contractors in our facilities to support production. And as I mentioned, we've been cutting those pretty consistently here for the last couple of months as we bring in employees. So we're down to less than 30 contractors currently, and we would expect that number to be zero here as we get into the second quarter. So that's a cost reduction for us.
spk09: So net of all the contractors coming off and then the labor increases, but you also have the headcount increases. You think that's going to be all, as it rolls up, going to be a neutral?
spk07: I think it's going to be a neutral to a low single-digit number because the cost increase per hour will be offset by higher activity levels, less contractors, and our workforce is coming up a learning curve, which is intangible. I can't quantify it, but it's there. So as we move through 2023 and people gain experience, The throughput will accelerate. Our cost will come down from a productivity standpoint, but the hourly rate that we're paying will go up. Okay.
spk09: And then on the networking capital side, I think that there was a little bit of a reduction in inventory, as you mentioned. That will be, I'm sure, the biggest driver's way to networking capital. What should we expect on the inventory side in 23?
spk07: So on the inventory front... Just some background on that, if I can use your question to further explain. If you recall in earlier calls, when things were very difficult in the first half of the year and supply chains were very tight, we did buy on the heavy side to make sure that we could run and operate. Those supply chain issues have somewhat eased at this point in time. So as you look at the fourth quarter, we reduced the absolute volume of raw materials, number one. Number two, the price tag on those raw materials in the third and fourth quarter relative to the second quarter and first quarter are down. And then when you look at work in process, as those raw materials that were lower flow into our work in process in the fourth quarter production, the cost per pound in inventory of work in process inventory is down on our AOD products. So that will come out in the first and second quarters of So as you look at inventory, you're right, there's some moving parts. Our goal is to keep working capital under control and manage very carefully. And we don't see the big ramp in raw material costs in the first half of the year. And we see opportunities to reduce our inventory per pound shipped, or in other words, increase our turnover in the first half.
spk09: Okay, that's helpful. And then I was going to ask after the labor piece, any step up in contractual consumables in 23 or anything other than outside of the spares that you mentioned, which are costly?
spk07: If you look at maintenance spares, we still have supply chain issues in terms of very long lead times by historical standards and very unreliable delivery times. which has made maintenance a challenge in terms of fixing things on a timely basis. So that's an operating issue. As far as cost goes, throughout 2022, we saw double-digit increases pretty much in MRO as well as most of our consumables. As we come into 2023, we continue to see inflation, but instead of being up pushing 18% to 20% increases we saw this time a year ago, we're probably half of that, high single digits. are some standout items like grinding wheels for example uh are up 30 percent effective with january that's you know that's just it's a large percent but a small buy in the total picture of things but i would say on average we're looking at high single digit inflation here as we come into 2023 and the last question just on um interest expense i think it was a million and a half you you did have some
spk09: increase in debt that fades through Q4, and I would assume you're trying to manage the debt in and around current levels, if not bring it down. But what's the interest expense moving forward? Thank you.
spk06: Interest levels remain pretty flat. The SOFR benchmark rate levels in early January. So if that holds true, we think interest expense in Q1 will be about $1.8 to $1.9 million in that range. Thank you. That includes the interest expense on the new lease financing arrangements we went through.
spk09: Appreciate that, guys. Best of luck. Thank you.
spk01: Thank you. One moment while we prepare for our next question. Our next question is coming from John Disher of Pinnacle. Your line is open. Hi.
spk03: Good morning, Denny and everyone. Good morning. Good morning. You painted a pretty optimistic picture. The backlog was up. I guess just two brief questions. One, what is the CapEx budget for fiscal 23?
spk07: We'll come in $16 to $18 million, and the reason I give you that range is with the supply chain issues we have. It's kind of challenging to really pin that number down, but right now we're planning on $16 to $18 million.
spk03: Okay, great. That's helpful. And on the debt situation, if everything goes according to plan, and I know that's a big if, where would you anticipate debt to be a year from now? I think it's, what, $90 million? 98.4, what should we think about for year-end debt levels?
spk07: 98.4 includes the new lease arrangement, just to make that point, since that's a change. And I would expect that number to be below 98.4. We'll probably have some use of cash in the first half of the year as sales ramp. and flatten out and pay down during the second half of the year. That's the way I would look at our numbers. So, if you're 98.4, somewhere in the 85 to $90 million range a year from now.
spk03: 85 to 90, you said? Yeah.
spk07: Okay.
spk03: All right. Good. That's helpful, and best of luck.
spk07: Thank you.
spk01: Thank you. If you have a question, please press star 11 on your telephone. One moment while we compare the Q&A roster. Next question is coming from Douglas Deasy of DC Cap. Your line is open.
spk08: Hi, DC Capital. Douglas Deasy, good morning.
spk07: Douglas, how are you?
spk08: Good, thank you. Could you comment on what your expectations are on volume increases in 23 versus 22 on some basis that you would look at it to get an idea on how much more is going to be flowing through the plant and equipment?
spk07: You're talking about shipment volume, I assume, right?
spk08: Yeah, exactly. Shipment is probably as good as any measure.
spk07: Two comments there. In terms of total pounds, you're probably looking at something in the range of 10%. Okay. With a significant shift in mix towards more premium melted products, which you've already started to see.
spk08: Yep.
spk07: And the wild card in that volume number is going to be some of our semi-finished products like plate that go into the heavy industrial market.
spk08: And that's based on where demand comes out then on that product?
spk07: Yeah, on that product, that is a shorter lead time product compared to, so in terms of our backlog, you're talking, you know, I don't know, six to ten weeks of lead time for that product at this point. And we'll be working to reduce that lead time, but that probably is the most economically sensitive part of our business.
spk04: Yep, okay.
spk07: As compared to the aerospace side, with all the things you and I hear about on the news and stuff, some of our customers in that supply chain have been a little cautious recently. They've managed their inventories down, and you see that reflected in our sales. Our personal view is we will see that improve as we go through 2023, and there is some upside potential there.
spk08: Okay, good. I think that's the main question I had. You've made some investments in Vim and Vard to upgrade the metallurgy of your products. How much capacity is added when you put it all together? It was not clear to me. You started probably a year or two years ago, and when you complete with this new initiative, I guess you mentioned the first quarter of 24. It's gone from A to B. What are A and B in terms of capabilities?
spk07: Well, if you look at premium melted products, we invested in North Jackson basically to add that technology to our company, so we didn't have it before. Okay. But if you look at what we can do, somewhere in the range of 18 to 20 million pounds of premium melted products would be a capacity number to use. That's production. And yields on those products are typically somewhere in the 55 to 60% range. And that's taking into account... I would, I mean, publicly just to add to that, so I don't want to confuse anybody. When we made that initial investment, we quoted incremental sales revenue from vacuum induction melded products, which is premium melded products, in the range of $105 to $110 million when we get to 80, 85% of capacity. So we have a ways to go there. We had sales of roughly just under $40 million of those products in 2022. And our goal really over the next couple of years is to double that sales volume. To do that, we need some additional remelt furnaces, which is the investment that we've alluded to a couple of times in our call.
spk08: But is that the one that's underway in finance now, or is that still under consideration?
spk07: Yes. Yes, we've built the building, and the equipment just arrived, and we'll be installing the equipment. And then we've got to go through a cold and hot commissioning phase because of the quality of these products. It's not something you just install and turn on. So our plan is to install that over the rest of the year, get the commissioning done, and be ready to hand it over to operations in January 2024.
spk08: Right. Just the last one, just on that point. What's the premium in pricing per pound versus your standard product, more stainless related?
spk05: Generally, you're talking about $7 to $9 range compared to $11 to $15 would be a good proxy between our specialty and our premium products. Okay, super.
spk08: Thank you very much.
spk02: You're welcome.
spk01: Thank you. If you would like to ask a question, please press star 11 on your telephone.
spk02: There appears to be no more questions in the queue.
spk01: I would like to turn the call Back over to Mr. Oates for concluding remarks. Go ahead, sir.
spk07: Okay. Thanks, operator. Once again, I want to thank everybody for joining us this morning. I also want to apologize for the frog in my voice, so hopefully everything came through loud and clear. We are starting the new year with a high level of optimism and are committed to seizing our market opportunities, especially in aerospace. We're looking forward to updating you on our progress on our next call, which will be in April. In the meantime, be well, stay safe, and have a great day. Thank you.
spk01: Thank you all for joining today's conference call. This concludes today's event. You may all disconnect and have a great rest of your day.
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