Q4 2019 Earnings Call
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June filling Gerry please go ahead.
Thank you Sarah Good morning, This is Jim Phil and Jerry of comp partners and I also would like to welcome you to Universal stainless conference call and webcast. We're here to discuss the company's fourth quarter 2019 results reported this morning with us for management or Denny Oates, Chairman, President and Chief Executive Officer, Chris Sam.
Executive Vice President and Chief Commercial Officer pull Mcgrath, Vice President Administration, and General Counsel, and Chris Scanlon, Vice President Finance, Chief Financial Officer, and Treasurer before I turn the call over to management. Let me quickly review procedures. After management has made formal remarks, we will.
Take your questions I and the conference operator will remind you of 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 regarding future events and financial performance, we caution you.
Such statements reflect management's best judgment based on facts currently known and that's the actual events or results could differ materially. Please refer to the company's documents that are filed from time to time with the FCC in particular Form 10-K , 10-Q and form 8-K filed today with the companies.
The press release these documents contain and identify important risk and other factors that may cause actual results to differ from from so it was contained in management's forward looking statements.
Forward looking statements made during the call are being made as of today. If this call is replayed are reviewed after today the information.
Presented during the call me not contain current were accurate information the company disclaims any obligation to update or revise any forward looking statements management may provide guidance on today's call, but will not provide any further guidance or updates on the performance during the quarter unless it is gone.
Public Forum.
During this call management, but also discuss non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles.
Reconciliation of GAAP and non-GAAP result is provided in todays press release.
With these formalities complete I would now like to turn the call over to Danny.
Denny we are ready to begin.
Thanks, Jim.
Good morning, everyone. Thanks for joining us today.
During the fourth quarter, we improved gross profit margin sequentially generated positive cash flow reduce debt. It may tangible progress and operations, particularly in North America work action Forge operations.
Our net sales in the fourth quarter total $55.2 million.
Down, 2.5% sequentially and 3.3% below the fourth quarter 2018.
It's worth noting the 2019 fourth quarter sales included 37.6 million to the aerospace market, which brings total aerospace sales for 2019 to a record 170.4 million an increase of 14 <unk> percent from 2018.
There's also noteworthy that customer yearend inventory planning, probably compounded by the 737 Max issue led to a deterioration in shipment mix with a higher percentage, but lower margin semi finished product shipping as compared to earlier quarters in the year.
Aerospace will continue to be a major driver of our future results in aerospace backlog remains healthy going into 2020.
That said given the current uncertainty related to the 737 Mac situation, we're staying especially close to our customers.
That's for several customer push outs are manageable and cancellations have been minor less than a million dollars.
The supply chain is currently digesting the Boeing announcement yesterday afternoon, which pushes the returned to service target date to mid year.
We are prepared to react quickly as the Rts process evolve.
Our backlog in order entry remained solid in the fourth quarter and we ended December with a backlog before surcharges of $119.1 million.
Oh slightly from the end of September .
Our backlog includes a record backlog of premium melted products.
Order entry before surcharges of $50 million was on par with the last couple of quarters, reflecting a recovering tool steel plate market initial signs of life from the semiconductor market and moderate aerospace activity.
Fourth quarter premium alloy sales totaled $7.4 million or 13.4% of sales compared with $8 million were 14.2% of sales in the 2019 third quarter, an 8.1 million or 14.2% of sales in the fourth quarter of 2018.
As discussed on our last call. Our focus has been on shipping the premium alloy products that were delayed by residual fire related issues at the radial forge, although we made headway in the fourth quarter. Some of those shipments were pushed into the first quarter 2020.
We achieved record production volume at our hydraulic forward in North Jackson, the fourth quarter, leading to significant productivity gains at lower costs is that operation continued recovering from the June fire.
Additionally, the ramp up and where does show midsize Barcella unit at or Dunkirk facility continues resulting in further efficiency gains.
We also posted continued melt cost reductions in our vacuum induction melt shop at our North Jackson facility.
I'll return to some operational highlights later in my remarks.
The operating progress in the fourth quarter contributed to sequential improvement in our gross margin, which totaled 10.6% of sales.
Versus 9.4% of sales into 2019 third quarter.
Gross margin also benefited from material cost of sales that were more closely aligned with selling prices as surcharges stabilized and melt cost decline.
The fourth quarter 2019 gross margin was below the 11, 23% of sales recorded in the 2018 fourth quarter.
Due to less favorable product mix and the most recent period.
Typically a higher percentage of semi finished products.
The impact of sequentially lower sales of certain aerospace products on gross profit margins was 2%.
Net income for the fourth quarter of 2019 was $200000 or two cents per diluted share.
Versus eight cents or nine cents per dealer due to chair in the third quarter of 19.
Which included four cents of insurance recovery related to a fire and Dunkirk facility in September 2017.
Net income in the fourth quarter of 2018 was $600000 or seven cents per diluted share.
Full year 2019 income was 4.3 million or 48 cents per diluted share.
Fourth quarter, EBITDA was 5.5 million compared with 6 million in the third quarter, 2019, and 5.4 million into fourth quarter 2018.
Full year 2019, EBITDA was 26.7.
Cash flow from operations remain positive in the fourth quarter at 4.7 million and manage working capital was down by 2.9 million sequentially.
Total debt was reduced by 1.7 million from the third quarter and totaled 64.3 million at year end 2019.
Chris Scanner will provide further detail in its financial report.
Looking more closely commodity prices are last school I know it at the price of nickel had jumped 48% in the third quarter, reaching $8 in two cents per pound at the end of September nickel prices step down in subsequent months ending at $6.26 in December .
Nickel was quoted at $6.18. This morning.
The performance of other commodity prices was mixed in the fourth quarter with scrap ratcheting up each month, while malian chrome were lower than at the end of the third quarter.
The NANIUM continued its unprecedented decline ending the year at $10, a 59 cents a pound compared to $51.31 a pound at the beginning of the year.
Polychrome eliminating are key components in the production of tool steel and directly impacted by surcharges.
We're pleased with fourth quarter operating activities, which are driving down costs and bode well for Q1 in Q2 of 2020 as we sell through fourth quarter production.
Record throughput at the radial forge lowered cost per pound by 20% compared to pre fire quarter one 2009.
Vacuum induction melting operation set new records for each per campaign, reducing operating costs, 14% compared to 2018.
We've also ordered a new 18 ton furnace body for $1.5 million, which will deliver an acute in the fourth quarter 2020, and will reduce operating cost another 25%.
Our air melt operations are Bridgeville has consistently improved output per hour each quarter of 2019.
Our remote shops activity, particularly vacuum arc remelting with strong all year.
We placed an order for another state of the arc furnace for delivery in the fourth quarter of 2020 to support our growth in premium alloys in specialty Remelted steel.
We have now process, just under 9 million pounds, a new intermediate Barcelona, and expect further growth in volume in 2020, along with continued moving up the learning curve.
The completion of level to automation and the installation of phased array ultrasonic testing.
Although small at $8 million per year in sales are titusville precision rolled shapes business recorded a second consecutive record year in terms of sales and profitability and remains poised for a third record year based upon existing backlog.
Turning to our end markets, let me start with the largest aerospace.
Our aerospace sales totaled 37.6 million or 68% of sales in the fourth quarter 2019.
Thats down 8% from $41 million for 72.3% of sales in the third quarter 2019.
Full year 2019, aerospace sales increased 14.5% from 2018, reaching a record 170.4 million as mentioned earlier.
Although aerospace sales were lower in the fourth quarter, our backlog remains healthy amidst the uncertainty regarding the 737 Mac situation.
What we do know is the Boeing has ceased production the 737, Max and announced yesterday and I'll quote the Undergrounding. It was 737 Max will begin during mid 2020 in quotes.
GE as communicated a 750 unit cut in their engine production.
Spirit Arrow has executed layoff plants.
We know that our supply chain our customers.
Our closely assessing the situation, especially in view of yesterday's announcement.
We also know that the MRO business and the defense Arrow business remains strong, particularly helicopter.
We know Airbus continues to produce.
And we know the long term macros are somewhat below trend, but remain supportive of long term outlook for aerospace.
In any event, we're staying very close to our customers and maintaining our flexibility to does quickly to market conditions.
The oil and gas end market remained our second largest end market in the fourth quarter 2019, increasing to 11.3% of sales compared with 10% of sales in the 2019 third quarter.
11% of sales in the fourth quarter 2018.
Fourth quarter oil and gas sales totaled $6.3 million up 10.6% from the 2019 third quarter and aligned with the fourth quarter 2018.
Last quarter, we characterize the oil and gas market is moving sideways to softening although remained active for universal.
Recounts in North America have fallen.
But continue to achieve greater efficiencies oilfield service companies are guiding towards more international and offshore growth over the next few quarters.
Through on gas market continuously active for universal and our strategy remains focused on expanding market penetration utilizing our unique capabilities in north Jackson.
The heavy equipment market was our third largest market.
Fourth quarter heavy equipment sales, which are primarily tool steel plate totaled 4.8 billion, an increase of 9.2% from the third quarter 2019 were down 47.9% from the fourth quarter 2018.
Full year 2019, heavy equipment sales totaled $22.7 million compared with 41.6 million in 2018, an 18 million dollar or 45% reduction during the year.
Remember the 2018 was an all time record year for tool steel plate revenue.
I've already noticed the effective drop in commodity prices in surcharges on our tool steel results. The positive news is that our tools to order entry has been strong going into the first quarter with customer inventories and better balance versus the first half of 2019.
Current demand is being supported by a number of automotive and all through changeovers in 2020 and 2021.
Somewhat improved economic outlook and a strong market for industrial color.
Power generation market sales were $2.9 million in the fourth quarter, which is up 2% from the third quarter and 51% from the fourth quarter of 18.
Power generation represented 5.3% of 2019 fourth quarter sales.
For the full year 2019 power generation sales rose, 24.3% from 2018 totaling 11.5 million.
As I've noted over the past many quarters, our power generation sales, mainly reflect maintenance spending and we continue to see little changing market dynamics over the near term.
We intend to continue to supply seasonal maintenance needs until the replacement market for industrial gas turbines materializes.
Our fourth quarter General industrial market sales were $2.4 million, an increase of 20.8% from the 2019 third quarter, but 36.5% below the 2018 fourth quarter.
Full year sales were $9 million versus 19.1 million in 2018.
Our general industrial category includes sales to the semiconductor infrastructure in general manufacturing markets. The semi market semiconductor market was especially hard hit a 19.
Full year industrial sales estimate to be down by almost 13%, mainly due to a soft memory chip market, reflecting the deteriorating us relationship with China.
The semiconductor industry Association sees the signing of the phase one of us trying to treat that and more importantly, or the u_s_m_c Jay as major steps forward for the industry. We have also seen a strong pick up in semiconductor quotes and demand.
That concludes that concludes my review of end markets, Let me turn the call over to Chris for his financial review, Chris. Thank you Denny and good morning, everyone. Let's get started with the income statement.
As any discussed fourth quarter 2019 sales of $55.2 million were down 2.5% or 1.4 million from the 2019 third quarter and down 3.3% compared with the 2018 fourth quarter.
2019 full year sales of 243 million were down 12.9 million or 5.1% compared to 2018 full year sales of 255.9 million.
We did achieve record aerospace sales in 2019, which increased to 170.4 million or 14.5% for 2018. Additionally, our power generation annual sales improved to 11.5 million an increase of 2.3 million over 2018 sales to the balance of our end markets declined in 2019.
Next I wanted to summarize the impact of the forge fire on our consolidated 2019 operating results as the fire negatively impacted operating results by approximately $3 million.
This amount is comprised of missed sales decline production levels. Following the fire and increased operations activities, which were all negatively impacted by the fire.
Additionally, we incurred impairment and insurance deductible charges directly related to the fire.
We expect the positive impact on both cash flow and income as we work through the forge fire insurance claim settlement process.
Our fourth quarter 2019, gross margin totaled 5.9 million or 10.6% of sales up from 9.4% of sales in the 2019 third quarter, but down from 11.3% of sales in the 2018 fourth quarter.
Our Q4 gross margin was favorably impacted by the improved operating activities any previously discussed as well as lower material cost of sales compared to the third quarter of 2019.
Our material cost of sales was more closely aligned with selling prices on more stable surcharges and declining material cost of mill.
Selling general and administrative costs in the fourth quarter totaled 5.3 million or 9.5% of sales an increase of $730000 compared to the 2019 third quarter, but a decrease of $310000 compared to the 2018 fourth quarter.
Changes in accrued management incentive costs drove the changes compared to each quarter.
Fourth quarter 2019, SNA also included increased property and business insurance related costs totaling $300000 compared to 2019 third quarter.
Upon our property in business insurance renewal in October our annual insurance premiums expense increased by 1.2 million. This increase totals $300000 per quarter and began in Q4 2019 and will continue into the third quarter of 2020.
Specific to the fourth quarter, our income tax benefit was $560000 and was driven by favorable changes in state income tax items and increased research and development tax credits.
For the full year 2019, our income tax benefit totaled $500000.
We expect our effective annual tax rate in 2022 approximate 17% to 18%.
Net income in the fourth quarter was $200000 or two cents per diluted share.
Third quarter 2019, net income totaled $766000 or nine cents per diluted share in 2018 fourth quarter net income totaled $582000 or seven cents per diluted share.
Our 2019 third quarter net income included Dunkirk facility fire related insurance proceeds totaling four cents per diluted share.
Our fourth quarter EBITDA totaled 5.5 million Q4, EBITDA as adjusted for noncash share compensation totaled 5.8 million.
Fourth Corebody fourth quarter EBITDA declined $500000 from the third quarter 2019 total of $6 million.
An increased $100000 from the fourth quarter 2018 total of 5.4 million.
Full year 2019, EBITDA totaled 26.7 million compared to 35.6 million in 2018.
The EBITDA and adjusted EBITDA calculations are provided in the tables to the press release.
Fourth quarter cash flow from operations totaled $4.7 million compared to our third quarter cash flow from operations, which totaled 6.6 million.
Related to the balance sheet managed working capital totaled 142.1 million and decreased by 2.9 million compared with a third quarter of 29 team.
Accounts receivable decreased by 800000, an inventory increased by 6.7 million or 4.8% while accounts payable increased by 8.8 million.
Fourth quarter 2019 backlog totaled 119.1 million and is up 800000 from the 2019 third quarter.
Year over year fourth quarter, 2019 backlog decreased $7.1 million or 5.6% compared to the 2018 fourth quarter.
Capital expenditures for the fourth quarter were 4 million with full year 2019 capital expenditures totaling 17.4 million.
Fourth quarter 2018 capital expenditures totaled 2.2 million with 2018 full year capital expenditures totaling 15.4 million.
In 2019, Dunkirk in North Jackson fire related capital expenditures totaled $500000 with 2025 related capital expenditures expected to approximate $1 million.
2020 capital expenditures are expected to range between $13 million to $15 million.
The company's total debt at December 31, 2019 was 64.3 million a decrease of 1.7 million from the prior quarter.
Our debt is primarily comprised of our PNC bank revolving credit facility in term loan, which collectively totaled 47.7 million at year end 2019, and our notes which were issued in connection with the acquisition of our North Jackson facility in 2011.
These notes totaled 17 million at the close of 29 team. We have included 2 million and current debt related to the portion of the notes due in March 2020.
Following this 2 million payment the remaining 15 million of the notes will be classified as current debt. As these notes are due and payable in March 2021.
With that this concludes the financial update and Denny I'll hand, the call back to you.
Thanks, Chris.
So let me summarize while the fourth quarter 2019 was a quarter of improving margins positive cash flow and debt reduction along with tangible operating progress. We are far from satisfied we have much more work to do and expanding margins and generating cash this year.
The fourth quarter was also market by market uncertainty associated with the 737, Max partially offset by a recovering tool steel plate market and promising and a promising outlook for the semiconductor business.
Aerospace was a major driver of our performance in 19 in our sales to the aerospace market rose, 14.5%, reaching a record 170.4 million.
Were 70.1% of our total sales.
Aerospace will continue to be a major driver of our future results.
While our aerospace backlog remains strong we are staying very close to our customers as the 737, Max impacts continue to unfold throughout the supply chain.
We will continue to assess the Boeing production outlook and its potential impact on order entry as we move through the coming months.
We are prepared to respond to any significant changes up or down.
The balance of our end markets saw sequential sales growth in the fourth quarter and demand for total steel swift toward tool steel in the semiconductor market as much improved going into first quarter.
Let me also reiterate a few highlights for our operating progress during the fourth quarter.
First the record volume achieved at our hydraulic forging north Jackson as we recovered from the fire there in the early in the second quarter early in the third quarter excuse me.
Second the continuing ramp up of our bars show unit and Dunkirk and it's increasing efficiencies.
Third ongoing melt cost reduction activity in our north Jackson vacuum induction melting operations.
For us improving productivity, there Bridgeville air mill operations fifth or Titusville Cold Rolling operations continued at a record setting pace.
Lastly, our tool steel misalignment east as lower material cost in our mill began to sell through.
This progress contributed to the sequential improvement in the fourth quarter gross margin and positions us for continued improvement in 2020.
In closing, let me once again recognize a substantial effort of all of our employees throughout the year their dedication hard work or at the core of our ability to successfully execute our strategy over the long term.
That concludes our formal remarks, operator lets take some questions.
Thank you as a reminder to ask the question you need to press Star then one on your telephone to withdraw your question. Please press the pound Keith please standby, while we composite culinary roster.
Our first question comes from the line of Phil Gibbs with Keybanc capital markets. Your line is now open.
Good morning day.
They don't Phil.
Good.
You had said in the scripts.
The cutting 750 engines. So just a question on that as our use are you referring specifically.
To the leap or is that something that and is that something that they are communicating to.
To all their suppliers I don't think we had we had heard or seen a number on.
Thats a supplier communication initially it was 600 reduction in the leap.
And there was an additional 150 additive to the news yesterday afternoon.
Well, we're being told.
Okay.
That makes sense.
And in terms of.
How sentiment in the business is just shaping up early early in the year any any color you could provide on that.
Right now there.
In terms of the aerospace market I used the term uncertainty.
I mean, everybody is looking at 737 Max situation.
Two schools of thought on the announcement that came out yesterday, one is disappointment and obviously no. One wanted to see those dates moved further out into the future. So I need to supply chains trying to assess what that means currently.
I think there's also a strong school of thought that says that Boeing quite frankly has been wrong on every one of these dates and they want to over deliver.
So there's some optimism that remains out there that that date is probable is very conservative and we may still see earlier returned to service.
But right now I would describe the supply chain is trying to assess what's going on and the impact that we have seen is not all that material. Other then some push outs from the fourth quarter ended the first quarter and some minor push outs from the first quarter ended the second quarter. We did receive about $800000 of cancellations that was attributed to the seven.
And 37 Max.
And as you know, we can't tell exactly how many pounds of our product gets on to the 737, Max because we're so far back in the supply chain and we sell primarily to service centers and forward. Your so we're not dealing directly with the with the Oems in terms of customer only in terms of being approved.
I would also say that the defense business is still very active in aerospace MRO business still very active we're seeing particular activity in helicopter world.
So it's the 737 you just got to be careful we are trying to be careful we don't let that color over color, what we're doing here internally.
So our posture is to stay very close to the customers and be ready to pull the trigger in any specific actions to capitalize on any delays further push outs.
Sure as what it everybody happens in these cases at some point in time everything starts getting pulled in.
As far as the oil and gas business goes.
The market itself is kind of quiet.
We had some nice improvement towards you ended the year and Thats really is reflective of some of the products that north Jackson gives us the ability to sell into that market.
The general wrap is so lower activity in North America more offshore business more international business.
More offshore does not hurt us at all so thats fine by our standard, but overall the market itself.
Tends to be pretty quiet and at the moment.
The tool steel business is firing up again, if you recall, we had a record year and tool steel in 2018.
That's a very.
Short turnaround market very lumpy demand over the years. So after that record around the fourth quarter of 18, we saw very sharp drop in incoming business.
We had some reasonable inventory levels to support the higher level of activity in 18 and at the same time commodity prices collapsed for things like medium going from $50 down to 11.
So throughout 19, we suffered through.
Sharp declines in surcharges and we had to work through some high cost inventory. So we had a penalty from a margin standpoint, we also to penetrate penalty from a volume standpoint.
Late summer early fall, we started to see improvement in bookings and Thats continued through the end of the year and frankly right through the first couple of weeks of January So we've got some nice tool steel business returning.
Powergen as I said is is there is relatively stable largely maintenance nothing nothing big to report there and we are seeing increased activity in semiconductor in terms of early warnings of business become.
Actual inquiries. So we look at the semiconductor we see that building in the first if and some some nice increases in the second half of the years, we sit here now.
Is there any what are the what are the puts and takes in terms of gross margins.
In the first part of the year versus the second half last year.
So really if you look at.
Just focused on the fourth quarter.
We had a noticeable change in mix and by that I mean, some of the aerospace products that were pushed into the first quarter and second quarter 2020 and ended the fourth quarter.
We are higher margin products.
So if you look at the mix the percentage wise, we had more semi finished product, which is quick turn relatively quick turn lower priced lower margin type business.
If you quantify that that's about two percentage points of margin on the 10.6, we reported said another way if we ship the product that was pushed out we would have had margins higher by 2%.
As we look at the first quarter in the second quarter. We felt we as you know we were in an average costing system. So as you look at the prior quarter you can see trends in cost coming out in the ensuing quarter. So we said we had three record months of production.
Two of which were record once and productivity as measured by throughput per hour at or forge.
So that lower cost went into work in process inventory some of that came out during the quarter, but a lot of that it will come out the rest of will come out in the first half of 2020.
And I went through the other improvements rebate with working very diligently on our Marcel getting that up to speed, we've ramped up the activity in that each quarter.
We've run the size from the three quarter inch only up to the large ones and then virtually all of our alloys across machine. We've got some additional work.
To do with some of the ultrasonic testing.
Which is state of the our equipment, that's being put in as we speak and just putting lots of finishing touches on the level to automation, which will help us control that process in a much better fashion over time.
So those benefits can were evident in our improved margins on the ground Dora Dunkirk and we would expect those margins continue to improve as that becomes a bigger and bigger part of our production up at the Dunkirk facility.
Then the other operations I mentioned.
Is there were noteworthy was the improvement in our air Mill operations here Enbridge rules, you look at throughput at the melt shop here quarter to quarter, we've seen very consistent improvement in each quarter of 2019, and obviously the melt shop here in Bridgeville represents about 50, 60% of the total non metallic spend.
At this facility here, where I sit.
So as we look at margins going into 20.
20.
We see we've seen easing in the Misalignments that we suffered through in 2019.
And we see the benefits of some of these operating cost improvements.
On a negative side, we have some very specific the.
Property insurance industry is very tough we have some big hits there.
So you'll see in our onerous DNA, we have good about $300000 a quarter of increased spend that you will see in 2020 compared to 2019.
As probably the biggest single negative that I would point to.
Lastly, and I'll jump jump out here done a what.
How should we think about the impact of of nickel.
On into the.
That is certainty move through through last year.
As you mentioned, finishing down so.
Any impact positive or negative.
Thanks.
Well I think right right now obviously, it's going down so we'll see some lower surcharges and probably a modest squeeze on some margins for a few months.
As long as it cycles up and down them, it's fine where we have.
Significant issues is where you get double digit reductions continuously quarter to quarter as we head with an ATM in 2019.
We got a key commodity going into a product like tool steel and it falls from 51, $52 a pound down to $11 a pound over very short period of time.
So it's going to continue the cycle I don't see any drivers right now that's going to cause Nicole the skyrocket by the same token I think demand and when I look at inventories of nickel I don't see anything that from a supply and demand standpoint is going to cause it to go down so as we because we're planning we're looking at relatively flat nickel prices in the six and a half the 7 million dollar.
Per pound in our internal planning.
But as you know pull that takes is some environmental person in the Philippines. The close a couple of mines in the market gets.
That's very psychological environment, these days and sometimes that override supply and demand.
Thank you.
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Thanks, Okay operator.
This concludes today's question and answer session I would now like to turn the call back to Dennis Oates for closing remarks.
Once again I want to thank everyone for joining us. This morning, we deeply appreciate your ongoing support and interest in universal stainless and we look forward to updating you on our progress in our next call in April .
Have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.