Universal Stainless & Alloy Products, Inc.

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.

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.

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?