Q2 2020 Universal Stainless & Alloy Products Inc Earnings Call
[music].
Ladies and gentlemen, good fits the operator your conference is scheduled to begin momentarily.
The time your line is what it can be placed on music hold thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Universal.
Painless steel.
Alloy products.
Second quarter 2020 conference call and webcast.
At this time, all participants will be in listen only mode.
After the speakers presentation, there will be a question and answer session.
To ask a question doing this during that time. Please press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your Speaker today June Phil and Jerry. Thank you. Please go ahead man.
Thank you Chris.
Good morning.
Voluntary adcom partner 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 2020 results reported this morning with us for management or Danny.
Chairman, President and Chief Executive Officer, Chris Simmer, Executive Vice President and Chief Commercial Officer, John Armina, Vice President of administration, and General Counsel, and Chris Scanlon, Vice President Finance, Chief Financial Officer, and Treasurer before I turn the call.
All over to managing it let me quickly review procedures.
After management has made formal remarks, we will take your questions.
Hi, Chris scale will instruct you on procedures at that time.
Please note that in this morning's call management will make forward looking statements I can private.
Securities Litigation Reform Act of 1995, I would like to remind you up at the risks related to these statements which are more fully described in today's press release and and the company's filings with the Securities and Exchange Commission.
I will see formalities complete I would now like to turn the call over to Denny Oates, Danny we are ready to begin.
Thanks, Joe.
Good morning, everyone. Thanks for joining us here today.
As reported in the mornings release this mornings release the quarter virus pandemic continues to cause serious dislocation in the metal supply chain thinking, it's going end market demand, especially in aerospace and oil and gas.
Rapidly deteriorating conditions in both these end markets have caused the supply chain to adjust quickly with substantial reductions in new mill orders in a drive to reduce inventory.
For Universal that has met low order entry the push out of delivery dates and some cancellations, albeit mainly on long lead time products not yet in production.
Average monthly order entry declining from $15.3 million before surcharges in the first quarter to $7.1 million in the second quarter.
Cancellations during the quarter totaled $10.5 million.
All of our plants operated throughout the quarter working through our backlog.
We ended the quarter with total backlog before surcharges of $71.8 million down from $110.7 million scan to the first quarter.
Which points to the challenges we will confront in the second half of 2020.
We do however expect to see sequential quarterly improvement in business activity beginning in 2021.
These negative trends were becoming evident at the time of our last call, but the magnitude and duration of the downturn we're uncertain.
We outlined a plan to reduce costs, an increase liquidity during the second quarter specifically.
We said, we would reduce plant activity levels in line with market conditions.
Would flex spending down on all fronts, and we would cut capital spending to roughly $2 million per quarter on average for the remainder of the year.
Let's take a look what we actually did in the second quarter versus the first quarter.
Plant activity levels will reduce 25% as measured by pounds processed.
Building activity was reduced 34% contributing to a 12 million dollar reduction in inventory and suggesting further reductions to come in the second half.
Despite lower activity I'm pleased to report our variable operating costs prepare almost flat validating the outstanding job. Our manufacturing team is doing relentlessly controlling costs in a rapidly changing environment.
As DNA expenses declined $1.1 million or 20% before including 600000 dollar 600000 dollar severance charge.
Operating cash flow was a positive $7.4 million, despite a $13 million drawdown in accounts payable.
Capital spending was $2.7 million and we're tracking towards our $9 million total for 2020.
We generated $800000 in cash through strategic scrap sales.
And very importantly plant life safety as measured by Osha recordable rate was within one decimal point of matching our company's record low.
Our goal remains to flex spending and plant activity in line with market changes, while still maintaining productivity, a safe work environment servicing customers and positioning ourselves for growth in the ultimate recovery.
The acute pressures on the commercial aerospace natural gas markets two of our largest end markets continued during the second quarter. Therefore, we have taken further difficult actions to respond to current market realities.
These actions include.
We eliminated 25% of the salary payroll and deferred annual merit increases, which yields about $5 million an annualized savings.
We implemented salary reductions were selected executives.
We implemented a mandatory leave of absence program for all salaried employees during the second half saving $500000.
Rescheduled three to four weeks of complete plant shutdowns during the second half as well as rolling weekly shutdown so specific work centers.
We plan to continue cutting costs and controlling spending very tightly across all of our locations.
And we will also continue to evaluate and prioritize capital investments to focus on current and potential developing markets.
Let me just add to making reductions to our workforce is always difficult and we're very mindful to pay any cause those affected and their families.
With these latest actions, we expect to say about $6 million in annual staff costs.
Keep our variable cost per pound in line with lower activity levels and generates significant cash flows over the balance of the year.
It is important to recognize that the successful improved implementation of our initiatives. During this challenging time would not be possible without the dedication understanding of our employees and their commitment to staying the course as well as building Universal's long term growth.
Everyone of them has my gratitude and respect for the many contributions during these unprecedented times.
Let me cover some details on the second quarter itself.
Second quarter sales were $52.5 million.
Down about 10% from the first quarter 2020.
Aerospace market sales were down 12% versus the first quarter and oil and gas market sales fell 18%.
General industrial markets improved 28%, mainly on the strength of the semiconductor business.
Tool steel in power generation sales each slipped about 5% sequentially.
So more to say about each of these markets and a few minutes.
Major bright spot in the second quarter sales was 62% sequential increase in premium alloy sales.
Which a $12.4 million near the record level achieved in the second quarter of 2019.
And represented 24% of total 2022nd quarter sales.
Let me underscore that we said in today's release.
Jamie Malice remain our highest priority for targeted growth and we continue to gain traction with new products and approvals with recent underlying demand coming primarily from defense applications and specialty applications.
Gross margin in the second quarter 2020 was 3.7% of sales down from 8.4% of sales in the first quarter and 12.8% of sales in the second quarter a year ago.
Excluding charges related to reduce production levels that negatively impacted absorption of fixed costs and a loss on the sale of excess scrap gross margin totaled 2.5 million or 4.8% of sales.
The scrap sales generated cash receipts of about $800000.
We made good headway in reducing SGN a expenses in the second quarter, which were 20% lower than the first quarter and 14% lower than the second quarter 2019, excluding 600000 $600000 employee severance expense.
Bottom line the net loss for the second quarter, 2020 was $3.3 million or 38 cents per diluted share.
It was 2.4 million or 27 cents per diluted share adjusted for Cobot, 19, pandemic related charges, including gross margin and as DNA items.
EBITDA adjusted for your share based compensation and cobot 19 pandemic related charges totaled $2.9 million.
Chris scale will discuss the reductions we achieved in managed working capital and long term debt in his review suffice to say that we are focusing on debt reduction and improved cash flow as we manage through the balance of the year and we expect accelerating positive cash flows over the near term.
Looking at commodity prices at the end of June nickel was quoted at $5 in 76 cents per pound an increase of 7% from the end of March when it hit the lowest level since January 2019.
In contrast, Molly was down 10.3% from into March while vanadium was down 20% to $9 in 75 cents per pound.
Iron scrap rose modestly.
As result of these changes we expect surcharges overall to increased slightly during the third quarter.
Taking a closer look at our operations, we are working to running as efficiently as possible, while dealing with a step down in volumes companywide.
Which prevents us from realizing the full benefits of our past initiatives, including the new Barcella at our Dunkirk facility.
At the same time, we're balancing the reality is an even more difficult second half of the year against our longer term opportunities in growth plans.
Therefore, while we are reducing capital spending in 2020, we are proceeding with our strategic investments in additional vacuum arc remelt furnaces as well as an 18 turn crucible to support premium products growth.
Although we are moving these projects later into 2021.
Let me turn to our end markets beginning with aerospace.
Our aerospace sales totaled $37.2 million were 71% of sales in the second quarter 2020.
Compared with $42.4 million or 73% of sales in the first quarter 2020, which represents a 12% decrease.
In the second quarter of 2019 Aerospace sales were 40 to 49.3 million or 70% of sales.
It's worth a reminder, that aerospace demand in a year ago quarter remained robust even as the market was just beginning to contend with the delays in the 737 Max.
Unfortunately, the commercial aerospace market has worsened since our last call with additional delays in recertification. The Boeing 737, Max Boeing announced this morning at December 37, Max production forecasts are being reduced to about 31 planes per month by early 2022. Additionally, a triple seven programs will go from three planes per.
Among the two planes per month in 2021, and the 77 will go to six planes per month in 2021.
The current buyers pandemic is continuing to compound the problem with the sharp drop in air travel having cause financially ruling airlines to cut capacity retire airplanes and postpone or cancel new aircraft.
International Air Transport Association announced June year over year revenue passenger miles fell 86.5% in total with international travel almost at a standstill at 96.8% decline.
Domestic travel is down 67.6% and freight was down 17.6%.
The impact on aerospace metal supply chain as I said earlier has been to reduce buying and aggressively move inventory lower.
Looking at some more specifics Boeing delivered 10 airplanes in June versus 37 in June a year ago.
Additionally April just one order our 767 during the quarter.
That for a total deliveries were first half of 2020 to 70.
Boeing's backlog currently stands at 4552 airplanes.
It was approximately 5000 as of our last call.
The earnings call will follow as ours. This morning, So we should learn more about their backlog in production.
Meanwhile, Airbus delivered 36 aircraft in June.
But registered no new orders for the month reported 196 deliveries in 298 net orders in the first half Airbus backlog totaled 7584 aircraft as of June 30.
The aftermarket is also under pressure.
Honeywell saw lower commercial demand with their aftermarket sales declining and estimated 54% year over year.
They cited the steep decline in flight hours as pressuring the aftermarket.
Good morning, GE Aviation announced a similar 55% reduction in bookings.
In contrast to the challenges and commercial aerospace defense Aerospace is most strong performer, including for us and it contribute to the strong sequential growth in our premium alloy sales in the second quarter and the 19% increase in sales through our forger market channel.
In their report last week, Lockheed Martin reported a 12% year over year increase in second quarter sales, including 70% growth and Aeronautics segment, driven by increased 35 sales.
Lockheed also reported $22 billion of new orders in the second quarter, bringing their backlog to a record hundred $50 billion with over $7 billion of orders booked for the F 35.
We expect solid demand for the defense sector over the next few quarters.
The heavy equipment market remained our second largest market in the second quarter.
2020, reflecting a continuation of the tool steel plate sales recovery, we saw in the first quarter in total second quarter heavy equipment sales were $5.6 million were 11% of sales compared with 6.1 million or 11% of sales in the first quarter and $7.2 million or 5% of sales in the second quarter of 19.
Our heavy equipment market sales, mainly consist of tool steel plate sales, which were 6% lower than the first quarter.
We ended the second quarter was strong backlog and met our expectations for the quarter.
We will still plays mainly used by automotive industry, especially for tooling a model changeovers for context, our tool steel sales were solid even though automakers idled operations beginning in March due to covert 19, and now projected to 20% to 25% year over year production decline.
Automakers are also continue to focus introducing new models for the reintroduction of the Ford Bronco as the recent example.
Plus we see Tesla building, a major new auto plant in less than to manufacture the cyber truck pickup and other vehicles.
We expect our tool steel sales to be level in the second half of 2020.
The oil and gas end market was our third largest end market in the second quarter with sales of 3.6 million or 7% of sales compared with 4.4 million or 8.8% of sales in the first quarter 2020.
The challenging conditions in the oil and gas, marking the second quarter cost Halliburton in their recent conference call to describe global activity the global activity collapse as swift severe and much worse than expected.
With us recast dropping 50% from the first quarter.
Well the rig count has generally expect the bottom out in the third quarter. The consensus calls for a 50% to 60% reduction spend throughout the oilfield from our vantage point, we're seeing customers hunker down for a tough rest of the year.
In contrast, general industrial market sales grew 3.1 million or 6% of sales in the second quarter 2020, representing increases of 28% from the 2021st quarter and 30% from the second quarter of 2019.
Our general industrial category includes sales to semiconductor infrastructure and general manufacturing markets.
The semiconductor market has been a major market for us with in the general industrial segment and the overall market has been relatively strong in 2020 after a challenging 29 team.
We're continuing to focus on semiconductor market as well as pursuing opportunities in the additional markets within this segment to broaden our future sales potential.
Power generation market sales were $2.1 million or 4% of sales in the second quarter 2020 down 5% from the first quarter at 34% lower than the second quarter 2019.
While our sales to the power generation marker generally driven by normal seasonal maintenance activity the shutdowns due to the corn virus pandemic or sharply limited maintenance demand.
Power announced a 41% reduction in bookings in the second quarter. This morning.
We have not lost market share and we expect maintenance to return to more normal levels as our states open.
That concludes my review of the business during the second quarter, Let me turn the call over to Chris scaling for his financial report, Chris. Thank you, Dan and good morning, everyone.
Let's get started with the income statement.
As Denny discussed second quarter 2020 sales at $52.8 billion were down, 10.3% or 6 million from the 2021st quarter and down 26% compared with the 2019 second quarter.
Our general industrial sales improved 27.7% or $700000 from the 2021st quarter.
And we're also $700000 or 30% higher than second quarter 2019.
Sales to the balance of our end markets declined sequentially and year over year.
Second quarter 2020, gross margin totaled 1.9 million or 3.7% of sales down from 8.4% of sales in the first quarter 2020, and 12.8% of sales and the 2019 second quarter.
In the second quarter, we generated $800000 of cash receipts from the sale of excess scrap our Q2 gross margin was unfavorably impacted by $350000 related to this sale.
Additionally, our gross margin was negatively impacted by fixed cost absorption direct charges of 200000 related to reduce plant operating levels.
Gross margin as adjusted for these two items totaled 4.8%.
The 200000 fixed cost absorption direct charge was the result of reduced second quarter operating levels.
Due to the reduced production levels. There was an amount of our fixed costs that was not absorbed in the inventory and taken as a charge in the second quarter.
We anticipate these absorption charges to continue in the second half of 2020 on lower activity levels.
Selling general and administrative costs in the second quarter totaled 5.4 million or 10.3% of sales.
Decrease of $511000 compared with the 2021st quarter.
And $207000 lower compared to the 2019 second quarter.
As Denny noted second quarter 2020, selling general administrative expenses include severance expense of $620000.
Our ESG.
Yes unit costs, excluding severance expense totaled 4.8 million, which represented a nearly 20% decline from our first quarter SDMA expense of 5.9 million.
SDMA in each of the third and fourth quarters is expected to be below our adjusted 4.8 million second quarter amount.
SGN. A also includes increased property and business insurance related costs totaling 300000 as compared to the 2019 second quarter.
Specific to the second quarter, our income tax benefit was $939000 and we expect our full year 2020 effective tax rate to approximate 25%.
Net loss in the second quarter was 3.3 million or 38 cents per diluted share.
Second quarter net loss as adjusted for the loss on the sale of excess scrap the fixed cost absorption direct charge and severance costs totaled 2.4 million or 27 cents per share.
First quarter 2020, net loss totaled 1.4 million or 16 cents per diluted share and 2019 second quarter net income totaled $2.1 million or 24 cents per diluted share.
Q2, EBITDA as adjusted for noncash share compensation the loss on sales of excess scrap fixed cost absorption direct charge and severance totaled $2.9 million.
The EBITDA and adjusted EBITDA calculations are provided in the tables to the press release.
Second quarter cash flow provided from operations was 7.4 million compared to our first quarter cash flow used in operations 7.8 million.
And second quarter 2019 cash flow provided by operations of 2.2 million.
Ladies and the balance sheet manage working capital totaled 151.8 million and decreased by $1.7 million compared with the first quarter of 2020.
Managed working capital was a source of cash as activity declines manage working capital has been a source of cash and we expect to see greater cash benefit from working capital for the rest of the year.
Within the components of manage working capital accounts receivable decreased by $3.4 million and inventory decreased by $11.7 million, while accounts payable decreased by 13.4 million.
The decline in inventory is primarily due to Q2 sales levels and reduced production activity as we maintained in inventory level commensurate with our order backlog.
The decline in accounts payable was driven by decreased 80, and vim melt activity and a corresponding decline in production related spending.
Also contributing to decline in accounts payable was a reduction in capital expenditure activity.
Second quarter, 2020 backlog totaled 71.8 million and is down $38.9 million or 35.1% from 2021st quarter.
Year over year second quarter, 2020 backlog decreased 45 million or 38.5 per cent compared to the 2019 second quarter.
Capital expenditures for the second quarter were 3.2 million $860000 lower than first quarter, 2020, and $660000 lower than second quarter 2019.
Capital expenditures for the first half of 2020 totaled 7.2 million 2.2 million lower than first half 2019.
Capital expenditures are expected approximate 9 million for full year 2020.
The company's total debt at June 32020 was 72.5 million a decrease of 3.8 million from prior quarter.
Companies debt is primarily comprised of our revolving credit facility in term loan, which collectively totaled 47.6 million as of June Thirtyth, and our notes, which were issued in connection with the acquisition of our North Jackson facility in 2011.
These notes totaled $15 million at June 30.
We continue to include this 15 million in current debt as these notes are due and payable on March 2021.
Our long term debt also includes a 10 million term note pursuant to funds received under the Paycheck protection program.
As of June 32020, we maintain revolver borrowing availability of 46.6 million.
We believe that our current liquidity position, coupled with the solid credit worthiness of our customer base provides us the ability to continue into our future uncertainties.
As I noted earlier anticipated declines in managed working capital levels are expected to be source of cash and we expect to see continued reduction and our debt levels throughout the second half of 2020.
I will summarize our paycheck protection program loan next.
On April 17th we received 10 million of PPP funds. These funds were used for eligible employee payroll and utility costs. During the week measurement period, which began on April 17th and then on June 11.
Paycheck protection program loans can be forgiven based on usage of the funds for eligible payroll and utility expenses.
That PPP forgiveness calculation also includes adjustments related to reductions in full time employee equivalents and salary and hourly wage reductions.
We have complied with the PPP loan requirements and had eligible payroll and utility costs during the week forgiveness period in excess of our 10 million of PPP proceeds.
During the third quarter, we will submit our loan forgiveness application for full forgiveness of the totaled 10 million loan amount.
This concludes the financial update and Denny I'll hand, the call back to you.
Thanks, Chris.
In closing on our last call I offered a snapshot of where we saw things at that time in the summarize we set our industry was highly stressed and uncertainty was running high.
Our customers, we're being conservative in ordering and buying only on need basis and not on speculation.
And we were anticipating headwinds from lower activity levels, and higher cost and inefficiencies from one going disruptions due to the virus.
Each of those conditions played out and continues to be the case today, what does become clear is that the difficult situation will last through the end of the year and impact our financial performance with a step down in quarterly sales and operating activity expected for the next two quarters as Chris explain the disposition of our PPP loan should occur before the end of.
The year.
I also said last time that to mitigate the challenging conditions and remain in a strong position for the eventual recovery, we will focus on liquidity and on aggressively reducing costs.
We may tangible progress on both counts in the second quarter, Let me reiterate that we are executing a proactive operating strategy similar in principle to past cyclical downturns and look forward to the beginning of recovery in early 2021.
Let me also say that we have some heavy lifting the due over the next few quarters, even so I remain extremely confident that we have the rate plan a great team of employees the support of our stakeholders and we will power through the current situation and position our company for further growth and success in the next upturn.
Sincerely grateful to everyone for their support.
That concludes our formal remarks.
Operator, we'll we'll take questions at this point.
Anthony mine or if you would like to asking questions. Please press star one on your telephone to withdraw your question Chris Allen.
Please standby why we compile the culinary roster.
Your first question comes from the line of Telerik Handy.
Colin.
Kelly.
Good morning, Tyler Frank.
Good morning warning.
Getting wonder if you could just walk us through.
Just seasonal sequential gross margin impacts in the quarter you did call out a few items interest just exceeding those pieces sharing.
Surcharges channel lower production and perhaps in mix impacts.
And is or is there a good way to think about kind of progression.
I was going here as we move into the second half.
Okay. So by the second quarter.
You saw we reported gross margin of about 3.7%.
And if you look at the detail. Some adds there were some adders an expense over the course of the quarter, we had some heavy scrap.
Activity.
Which was about 1.6% margin this to that so in other words food at about $900000 negative.
Let's see equivalent to 1.6% margin.
We did write off some inventory some older inventory.
And again, we're seeing a situation, where we have inventory which is for sale.
It's slow moving.
In decent times customers will take that on a regular basis and the current environment. They will not and as we look at the just a time phasing of cash flows.
We're in a situation where it makes sense for us the basically right some of this off.
And scrap it out in the for buying new scrap because they're all goes back into our melt shop.
We had a loss on the sale of some 316 l. scrap that we discussed during our prepared comments.
That was 0.7% to slow moving by the way was 1.2 was <unk> 0.8%.
We had an acceleration of fixed cost of 200000.
Which is 0.4%.
And although I don't I don't have a specific number for you here, there's several percentage points decides to the base level of absorption. We knew when you cut your operations and the capital intensive business by the magnitude we did during the second quarter.
Youre going to have unabsorbed costs is going to kick as a volume variance so you're seeing that embedded in our margins as well.
So roughly if you adjust for that you'd up the 7.5% you add the unabsorbed fixed cost in the base, you're starting to push nine and have 10% margins.
As you look at the third in the fourth quarter.
We're going to see a foreign sales.
If you look at the margin percent itself, we will have larger ripe acceleration of fixed cost.
So 200000 dollar number is going to grow.
Our our focus is to maintain a positive gross profit margin as we go through the second half a year in this environment.
And what you will see as a generation of cash as we as working capital will unwind at a much higher rate than it did during the second quarter.
And capital spending in the third and fourth quarter will be lower than what you saw in the first two quarters.
That give you a sense were where we're at that it's all gets a backdrop of the very uncertain environment.
As I look at those look at the numbers. This morning, we had about two and a half million pounds sitting on the dock ready to go on June Thirtyth the customers didn't take.
So a lot of that depends upon timing and when customers take things and we're still in a mode. Although it is quite a down somewhat of customers cancellations are down.
Bookings continue to be relatively weak.
But customers are managing very carefully when they take delivery of product.
So you see some small pull aheads, but most what we're seeing is push outs.
Good morning, Okay. Appreciate all that.
[music].
Just on on SGN, a im curious if thats at a white level relative decline you would you anticipate for second half to play out sounds like you are taking additional action here.
In response to two more challenging environment, so curious as to as to where we'll see some of that costs come out and how to specifically thinking about the Austrian airlines.
In the low fours low 4 million range.
So we are basically run into a four eight run rate in the second quarter.
And we did they announced some changes to our share repair role as you saw thats not oil SGN a.
There's a fair amount of salary folks that are in the gross profit number.
The other thing I would comment on this DNA for US is about 40% abreast DNA is what I would call people costs.
It's also where we book our business insurance, that's our next largest item there.
Got it okay.
And then just lastly from me and then I'll turn it over but.
With respect to that the free cash flow in the second half I mean, how should we be thinking about that in threeq versus Fourq you win.
Yes, maybe maybe how exactly to think about the progression of the working capital piece.
Sure we will have improved working capital levels I.E. reductions in Q3 in Q4.
As Denny noted those will favorably impact our debt levels.
We anticipate.
Much improved reduction in inventory compared to second quarter levels and similar situation on debt reduction.
Current forecast, we do anticipate.
We'll probably call it from Denny you can chime in here.
We're looking at approximate debt reductions north of $20 million in the second half of the year on the managed working capital we're looking at reductions north of $30 million for the second half of the year.
Thanks very much.
Your next question comes from the line, Phil Gibbs with Keybanc capital markets.
Hey, good morning.
Jamie you long good you had the.
The backlog down.
About 35% versus the first quarter is that roughly.
The.
The change we should see in revenues in the in the upcoming quarter relative to Twoq you in terms of terms of the magnitude the drop off your expected.
No.
No.
It's not going to be that significant in the third quarter.
We still have opportunity to book business into the fourth quarter.
So you look at about another 20% reduction somewhere in that range as we look at the fourth third quarter from where we stand today.
So I would have still expect to see afford for that number and a third quarter you'd have to the third quarter gets a little dicier.
Our expectation is we ended the fourth quarter will start to see some bookings coming in for the first quarter of 2021.
And by that point in time, you should see the destocking the liquidation of inventory that's occurring as we speak should be over.
So the whiplash affected mills that have to have to suffer through should be behind us and you start to see bookings pickup in activity levels pickup a little bit as we go through the end of the year.
Okay.
Got it and then you gave some color on the gross profit side are those.
Absorption impacts Danny going to be basically acute in the back half and then the assumption is that that that gets starts to start to improve next year.
Yes ill be much.
We will be accelerating fixed cost write offs in the third in the fourth quarter will be much larger than what you saw in the second quarter and Thats reflective of the fact that we as you look at our facilities, we ran the entire second quarter.
For all intents and purposes, we took three of our larger plants down during the first week in July.
And we have depending upon the plan three or four weeks scheduled down during the second half of the year. In addition, we've got rolling outages at different work centers. So as those activity levels come down you will start to spin out the requirement to accelerate fixed cost write offs. So those numbers will get bet bigger in the third and fourth quarter.
Okay.
And then.
Thats, all non cash, but just the right.
Okay and then.
Yes on the.
The revolver availability, what what's that number today and then you reiterate what you said in terms of second half networking capital reduction DC 30 million plus is your goal.
Yes on the managed working capital you're correct.
From a liquidity standpoint, and then availability standpoint in the second quarter, we had $86 million of borrowing base. We had outstanding drawings on our revolver of 40 million not left us with the remaining revolver availability of $46 million.
That remaining availability, we anticipate should be fairly consistent as we approach and go through the third and fourth quarters.
And that is commensurate with the reduction in borrowings along with a reduction in our borrowing bases, we wind down managed working capital levels specific to the revolving credit facility to manage working capital impacts are the accounts receivable in inventory lines.
Okay.
So essentially I got that liquidity numbers, so essentially in the back half as you.
Flush out cash that also goes this is an increase block against your base. So your liquidity basically is going to stay similar to where it was in the second quarter is that the thought.
Yeah.
Okay.
Thanks, everyone.
Thank you Phil.
Once again, if I wanted to ask your question. Please press star one on your Touchtone phone.
Your next question comes from the line of Johnson.
Year with Pinnacle.
Okay.
Good morning, everyone.
Hey, John I know.
Thanks.
Couple of questions. One you mentioned the fixed costs write offs.
Make sure I understand that is that fixed asset write offs or what exactly are you referring to there and how big might those be in the back half in the second.
Over here.
Sure John I'll touch on the accounting exercise that is the fixed cost write off. So this is required whenever we have production levels that are decrease.
When production levels fall below normal operating levels required to do a review of fixed cost absorption to see if any of the fixed our fixed overheads should be taken to the PML.
Versus capitalized into inventory.
This has done to make sure that we avoid any over absorption of fixed costs on the balance sheet.
We did this review in the second quarter, because our production levels fell outside of our normal operating levels.
And this is what resulted in that 200000 dollar expense hit to the P. announced.
We do anticipate decreased production levels in the third and fourth quarter's commensurate with the reduction in backlog.
Because of these reduced operating levels the fixed charge for the absorption is anticipated to be much higher than the 200000 in the third quarter or in the second quarter correction.
How much larger do you think it might be.
Yes approach and making sure the amounts in the third and fourth quarters could approach a million dollars based on what we currently have forecasted within the production levels for Q3 in Q4.
Okay.
And that runs through the piano correct.
Yes that will run through our gross margin and is a noncash charge, we will make sure we highlighted.
As these charges only come about whenever we have significantly reduced production levels.
Got it.
And on the Capex side.
Hi, my name for the year.
7.2 may and year to date that implies 900000 or so per quarter is that.
Is that the right way to think about this for the back half.
Yes, we have finished virtually all of our capital work that we plan to do this year as of June 30.
The risk there is that we have a major breakdown of a piece of equipment, where we need to spend some capital to keep it go on.
This would be non maintenance type stuff, but.
We're not aware of anything like that so.
That's where we're at.
Okay.
And this one's for your Danny.
Obviously times are tough year struggling.
And I would guess some of your competitors are struggling also.
So I'm just wondering.
Focuses on debt and expense reduction but.
Is M&A at all on the radar screen at this point, because historically you've been opportunistic in downturns like this.
And we always like companies that come out the back end of a downturn stronger than when they went hand.
And Im just curious are you seeing opportunities with amongst any of your competitors kind of what's the what's that landscape look like at this point.
I think M&A in our space. So is relatively muted right now normally during a downturn you get well into it and you start to see some opportunity start to pop before the next upturn.
We're still.
I won't say were to beginning of this thing but we're.
We're nowhere near the end of it.
So theres theres nothing Thats really hot there's a couple opportunities we were always.
Talking to people and looking at different things.
But I think to be honest with you over the last 345 months.
Whether its universe or any of our competitors.
The focus is all about adjusting to this.
The current demand levels in the sharp drop we're seeing and how do you restructure your business. So you can get after the other end.
So no one's waving the white flag at this point no.
Okay.
Great and but I think that's I think that will probably happened money. It's too early in the game right now.
Later this year later this year early next year kind of timeframe you might okay.
All right well keep your eyes open.
We will.
Thanks.
And there are no further questions I.
I would like to turn the call back to Mr. Dennis for closing remarks.
Thank you.
Once again I want to thank everybody for joining us this morning.
We continue to deeply appreciate your ongoing support interest in universal stainless and we look forward to updating you on our next call, which will be out in October be well stay safe and have a great day.
This concludes today's conference call you may now disconnect.
[music].
[music].
Ladies and gentlemen, thank you for standing by and welcome to the universe. So.
Stainless steel.
Alloy try it out.
Second quarter 2020 conference call and webcast.
At this time, all participants will be in it with an only mode.
After the speakers presentation, there will be a question and answer session.
I ask a question during the.
During that time, please press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your Speaker today June Phil and Jerry. Thank you. Please go ahead man.
Thank you Chris Gayle <unk>. Good morning. This is Jim filling a jury Adcom partners 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 2020 results reported this morning with us for management or Denny Oates Chairman.
President and Chief Executive Officer, Chris Simmer, Executive Vice President and Chief Commercial Officer, John Armina, Vice President of administration, and General Counsel, and Chris Scanlon, Vice President Finance, Chief Financial Officer, and Treasurer before I turn the call over today.
<unk>, let me quickly review procedure.
After management has made formal remarks, we will take your questions.
Hi, Chris Dell will instruct you on procedures at that time.
Also please note that in this morning's call management will make forward looking statements I guess private.
Securities Litigation Reform Act of 1995, I would like to remind you up the risks related to these statements which are more fully described in today's press release and and the company's filings with the Securities and Exchange Commission.
I would see formalities complete I would now like turn the call over to Danny.
Denny we are ready to begin.
Thanks, Joe.
Morning, everyone. Thanks for joining us here today.
As reported in the mornings release in this mornings release for the quarter virus pandemic continues to cause serious dislocation in the metal supply chain, taking its goal in end market demand, especially in aerospace and oil and gas.
The rapidly deteriorating conditions in both these end markets have caused the supply chain to adjust quickly with substantial reductions in new mill orders in a drive to reduce inventory.
For Universal that is met low order entry the push out of delivery dates and some cancellations, albeit mainly on long lead time products not yet in production.
Average monthly order entry declined from $15 million to $23 million before surcharges in the first quarter to $7.1 million in the second quarter.
Cancellations during the quarter totaled $10.5 million.
All of our plants operating throughout the quarter working through our backlog.
We ended the quarter with total backlog before surcharges are $71.8 million down from $110.7 million scan to the first quarter.
Which points to the challenges we will complete in the second half of 2021.
We do however expect to see sequential quarterly improvement in business activity beginning in 2021.
These negative trends were becoming evident the time of our last call, but the magnitude and duration of the downturn we're uncertain.
We outlined a plan to reduce costs, an increase liquidity during the second quarter specifically.
We said, we would reduce plant activity levels in line with market conditions.
Would flex spending down on all fronts, and we would cut capital spending to roughly $2 million per quarter on average for the remainder of the year.
Let's take a look what we actually did in the second quarter versus the first quarter.
Plant activity levels will reduce 25% as measured by pounds processed.
Melting activity was reduced 34% contributing to a 12 million dollar reduction in inventory and suggesting further reductions to come in the second half.
Despite lower activity I'm pleased to report our variable operating cost per pound was flat validating the outstanding job. Our manufacturing team is doing relentlessly controlling costs in a rapidly changing environment.
As DNA expenses declined $1.1 million or 20% before including 600000 dollar 600000 dollar severance charge.
Operating cash flow was a positive $7.4 million, despite a $13 million drawdown in accounts payable.
Capital spending was $2.7 million than we are tracking towards our 9 million dollar total for 20 Twond.
We generated $800000 in cash through strategic scrap sales.
And very importantly plant life safety as measured by our Osha recordable rate was within one decimal point of matching our company's record low.
Our goal remains to flex spending and plant activity in line with market changes, while still maintaining productivity, a safe work environment servicing customers and positioning ourselves for growth in the ultimate recovery.
The acute pressures on the commercial aerospace in oil and gas markets to our largest end markets continued during the second quarter. Therefore, we are taking further difficult actions to respond to current market realities.
These actions include.
We eliminated 25% of the salary payroll and deferred annual merit increases, which yields about $5 million an annualized savings.
We implemented salary reductions were selected executives.
We implemented a mandatory leave of absence program for all salaried employees during the second half shaving $500000.
We scheduled three to four weeks of complete plant shutdowns during the second half as well as Rolling weekly shut down so specific works.
We plan to continue cutting costs and controlling spending very tightly across all of our locations.
And we will also continue to evaluate and prioritize capital investments to focus on current and potential developing markets.
Let me just as it making reductions to our workforce is always difficult and we're very mindful of the pain. It causes those affected and their families.
With these latest actions, we expect to say about $6 million in annual staff cost.
Keep our variable cost per pound aligned with lower activity levels and generates significant cash flows over the balance of the year.
It is important to recognize that the successful implementation of our initiatives. During this challenging time would not be possible without the dedication understanding of our employees and their commitment to staying the course as well as building Universal's long term growth.
Everyone of them as my gratitude and respect for their many contributions during these unprecedented times.
Let me cover some details on the second quarter itself.
Second quarter sales were $52.5 million.
Down about 10% from the first quarter 2020.
Aerospace market sales were down 12% versus the first quarter and oil and gas market sales fell 18%.
General industrial markets improved 28%, mainly on the strength of the semiconductor business.
Tool steel in power generation sales speech slipped about 5% sequentially.
More to say about each of these markets and a few minutes.
Major bright spot in the second quarter sales was 62% sequential increase in premium alloy sales.
Which at $12.4 million near the record level achieved in the second quarter of 2019.
Represented 24% of total 2022nd quarter sales.
Let me underscore that we said in today's release.
Premium alloys, we made our highest priority for targeted growth and we continue to gain traction with new products and approvals with recent underlying demand coming primarily from defense applications and specialty applications.
Gross margin in the second quarter 2020 was 3.7% of sales down from 8.4% of sales in the first quarter and 12.8% of sales in the second quarter a year ago.
Excluding charges related to reduce production levels that negatively impacted absorption of fixed cost and a loss on the sale of excess scrap gross margin totaled 2.5 million or 4.8% of sales.
Scrap sales generated cash receipts of about $800000.
We made good headway in reducing SGN a expenses in the second quarter, which were 20% lower than the first quarter and 14% lower than the second quarter 2019, excluding 600 $600000 on employee severance expense.
Bottom line the net loss for the second quarter 2020 was $3.3 million were 38 cents per diluted share.
It was 2.4 million or 27 cents per diluted share adjusted for Cobot, 19 pandemic related charges, including gross margin as DNA items.
EBITDA adjusted for share based compensation and Covance 19 pandemic related charges totaled 2.9 million.
Chris scale will discuss the reductions we achieved and manage working capital and long term debt in his review suffice to say that we are focusing on debt reduction and improved cash flow as we manage through the balance of the year and we expect accelerating positive cash flows over the near term.
Looking at commodity prices at the end of June nickel was quoted at $5 in 76 cents per pound an increase of 7% from the end of March.
Is the lowest level since January 2019.
In contrast, Molly was down 10.3% from into March well vanadium was down 20% to $9.75 per pound.
And scrap rose modestly.
As result of these changes we expect surcharges overall to increased slightly during the third quarter.
Taking a closer look at our operations, we are working to run as efficiently as possible, while dealing with the step down in volumes companywide.
Which prevents us from realizing the full benefits of our past initiatives, including a new barcella at our Dunkirk facility.
At the same time, we're balancing the reality is even more difficult second half of the year against our longer term opportunities in growth plans.
Therefore, while we are reducing capital spending 2020, we are proceeding with our strategic investments in additional vacuum arc remelt furnaces as well as an 18 turn crucible to support premium products growth.
Although we are moving these projects later into 2021.
Let me turn to or end markets beginning with aerospace.
Aerospace sales totaled $37.2 million were 71% of sales in the second quarter 2012.
Compared with 42.4 million or 73% of sales in the first quarter 2020, which represents a 12% decrease.
In the second quarter of 2019 Aerospace sales were 40 to 49.3 million or 70% of sales.
It's worth reminder, that aerospace demand in the year ago quarter remain robust even as the market was just beginning to contend with the delays in the 737 Max.
Unfortunately, the commercial aerospace Mark has worsened since our last call with additional delays and the recertification. The Boeing 737, Max Boeing announced this morning at December 37 matched production forecasts are being reduced to about 31 planes per month by early 2022. Additionally, a triple seven programs will go from three planes per.
The two pennies per month in 2021, and Usseventy seven will go to six planes per month in 2021.
The current of ours pandemic is continuing to compound the problem with a sharp drop in air travel having cause financially ruling airlines to cut capacity retire airplanes and postpone or cancel new aircraft.
International Air Transport Association announced June year over year revenue passenger miles fell 86.5% in total.
International travel almost at a standstill at 96.8% decline.
Domestic travel was down 67.6% and freight was down 17.6%.
The impact on aerospace metal supply chain as I said earlier has been to reduce buying and aggressively move inventory lower.
Looking at some more specifics Boeing delivered 10 airplanes in June versus 37 in June a year ago.
Additionally, the book just one order 767 during the quarter.
That for a total deliveries for the first half of 2020 to 70.
Boeing's backlog currently stands at 4552 airplanes.
It was approximately 5000 as of our last call.
The earnings call follows ours. This morning, so we should learn more about their backlog in production.
Meanwhile, Airbus delivered 36 aircraft in June but.
But registered no new orders for the month.
According to the other 96 deliveries and 298 net orders in the first half.
Yes backlog totaled 7584 aircraft as of June 30.
The aftermarket is also under pressure.
Well saw lower commercial demand with their aftermarket sales declining and estimated 54% year over year.
They cited the steep decline in flight hours as pressuring the aftermarket.
Good morning, GE Aviation announced a similar 55% reduction in bookings.
In contrast to the challenges of commercial Aerospace defense Aerospace is most strong performer, including for us and it contributed to the strong sequential growth in our premium alloy sales in the second quarter and the 19% increase in sales through it through our forger market channel.
In their report last week, Lockheed Martin reported a 12% year over year increase in second quarter sales, including 17% growth and Aeronautics segment, driven by increased 35 sales.
Lockheed also reported $22 billion of new orders in the second quarter, bringing their backlog to a record $150 billion with over $7 billion orders booked for the F 35.
We expect solid demand for the defense sector over the next few quarters.
Heavy equipment market remained our second largest market in the second quarter.
2020, reflecting a continuation of the tool steel plate sales recovery, we saw in the first quarter in total second quarter heavy equipment sales were 5.6 million, 11% of sales compared with 6.1 million or 11% of sales in the first quarter.
And $7.2 million or 5% of sales in the second quarter of 19.
Our heavy equipment market sales, mainly consist of tool steel plate sales, which were 6% lower than the first quarter.
We ended the second quarter with strong backlog and met our expectations for the quarter tool steel plate is mainly used by automotive industry, especially for truly a model changeovers for context, our tool steel sales were solid even though automakers idled operations beginning in March due to cope with 19, and now projected 20% to 25% year over year production decline.
Automakers are also continue to focus introducing new models for the reintroduction of the Ford Bronco as the recent example.
Plus we see Tesla building, a major new auto plant in Austin to manufacture the cyber truck pick up and other vehicles, we expect our tool steel sales to be level in the second half of 20 Twond.
The oil and gas end market was our third largest end market in the second quarter with sales of 3.6 million or 7% of sales compared with 4.4 million or 8.8% of sales in the first quarter 20 Twond.
The challenging additions in the oil and gas, marking the second quarter cost Albert and their recent conference call to describe global activity the global activity collapse as swift severe and much worse than expected.
With us recast dropping 50% from the first quarter.
Well the recount is generally expect the bottom out in the third quarter, we consensus calls for a 50% to 60% reduction spend throughout the oilfield from our vantage point, we're seeing customers hunker down for a tough rest of the year.
In contrast, general industrial market sales grew 3.1 million or 6% of sales in the second quarter 2020, representing increases of 28% from the 2021st quarter and 30% from the second quarter 2019.
Our general industrial category includes sales to semiconductor infrastructure in general manufacturing markets.
The semiconductor market has been a major market for us with in the general industrial segment and the overall market has been relatively strong in 2020 after a challenging 29 team.
We are continuing to focus on semiconductor market as well as pursuing opportunities in the additional markets within this segment to broaden our future sales potential.
Power generation market sales were $2.1 million or 4% of sales in the second quarter 2020 down 5% from the first quarter at 34% lower than the second quarter 2019.
While our sales to power generation marker generally driven by normal seasonal maintenance activity. The shutdowns due to the corn virus pandemic or sharply limited maintenance demand fee power announced a 41% reduction in bookings in the second quarter. This morning.
We have not lost market share and we expect maintenance to return to more normal levels as our states open.
That concludes my review of the business during the second quarter, Let me turn the call over to Chris scaling for his financial report, Chris. Thank you, Dan and good morning, everyone.
Let's get started with the income statement.
As Denny discussed second quarter 2020 sales of $52.8 billion were down, 10.3% or 6 million from the 2021st quarter and down 26% compared with the 2019 second quarter.
Our general industrial sales improved 27.7% or $700000 from the 2021st quarter.
And we're also $700000 or 30% higher than second quarter 2019.
Sales to the balance of our end markets declined sequentially and year over year.
Second quarter 2020, gross margin totaled 1.9 million or 3.7% of sales down from 8.4% of sales in the first quarter 2020, and 12.8% of sales and the 2019 second quarter.
And the second quarter, we generated $800000 of cash receipts from the sale of excess scrap our Q2 gross margin was unfavorably impacted by $350000 related to this sale.
Additionally, our gross margin was negatively impacted by fixed cost absorption direct charges of 200000 related to reduce plant operating levels.
Gross margin as adjusted for these two items totaled 4.8%.
The 200000 fixed cost absorption direct charge was the result of reduced second quarter operating levels.
Due to the reduce production levels. There was an amount of our fixed costs that was not absorbed in the inventory and taken as a charge and the second quarter.
We anticipate these absorption charges to continue in the second half of 2020 on lower activity levels.
Selling general and administrative costs in the second quarter totaled 5.4 million or 10.3% of sales.
Decrease of $511000 compared with the 2021st quarter.
And $207000 lower compared to the 2019 second quarter.
As Denny noted second quarter 2020, selling general administrative expenses include severance expense of $620000.
Our associate.
Yes unit costs, excluding severance expense totaled 4.8 million, which represented a nearly 20% decline from our first quarter SDMA expense of 5.9 million.
SDMA in each of the third and fourth quarters is expected to be below our adjusted at 4.8 million second quarter mile.
SGN. A also includes increased property and business insurance related costs totaling 300000 as compared to the 2019 second quarter.
Specific to the second quarter, our income tax benefit was $939000 and we expect our full year 2020 effective tax rate to approximately 25%.
Net loss in the second quarter was 3.3 million or 38 cents per diluted share.
Second quarter net loss as adjusted for the loss on the sale of excess scrap the fixed cost absorption direct charge and severance costs totaled 2.4 million or 27 cents per share.
First quarter 2020, net loss totaled 1.4 million or 16 cents per diluted share and 2019 second quarter net income totaled $2.1 million or 24 cents per diluted share.
Q2, EBITDA as adjusted for noncash share compensation the loss on sales of excess scrap fixed cost absorption direct charge and severance totaled $2.9 million.
The EBITDA and adjusted EBITDA calculations are provided in the tables to the press release.
Second quarter cash flow provided from operations was 7.4 million compared to our first quarter cash flow used in operations 7.8 million.
And second quarter 2019 cash flow provided by operations of 2.2 million.
Late into the balance sheet managed working capital totaled 151.8 million and decreased by 1.7 million compared with the first quarter of 2020.
Managed working capital was a source of cash as activity declines manage working capital has been a source of cash and we expect to see greater cash benefit from working capital for the rest of the year.
Within the components of managed working capital accounts receivable decreased by 3.4 million and inventory decreased by 11.7 million, while accounts payable decreased by 13.4 million.
The decline in inventory is primarily due to Q2 sales levels and reduce production activity as we maintain and inventory level commensurate with our order backlog.
The decline in accounts payable was driven by decreased 80, and then melt activity and a corresponding decline in production related spending.
Also contributing to decline in accounts payable was a reduction in capital expenditure activity.
Second quarter, 2020 backlog totaled 71.8 million and is down 38.9 million or 35.1% from 2021st quarter.
Year over year second quarter, 2020 backlog decreased 45 million or 38.5% compared to the 2019 second quarter.
Capital expenditures for the second quarter were 3.2 million $860000 lower than first quarter, 2020, and $660000 lower than second quarter 2019.
Capital expenditures for the first half 2020 totaled 7.2 million 2.2 million lower than first half 2019th.
Capital expenditures are expected approximate 9 million for full year 2020.
The company's total debt at June 32020 was 72.5 million a decrease of 3.8 million from prior quarter.
Companies debt is primarily comprised of our revolving credit facility in term loan, which collectively totaled 47.6 million as of June Thirtyth, and our notes, which were issued in connection with the acquisition of our North Jackson facility in 2011.
These notes totaled $15 million at June 30.
We continue to include this 15 million in current debt as these notes are due and payable on March 2021.
Our long term debt also includes a 10 million turnover pursuant to funds received under the Paycheck protection program.
As of June 32020, we maintain revolver borrowing availability of 46.6 million.
We believe that our current liquidity position, coupled with solid credit worthiness of our customer base provides us the ability to continue to into our future uncertainties.
As I noted earlier anticipated declines in managed working capital levels are expected to be source of cash and we expect to see continued reduction in our debt levels throughout the second half of 2020.
I will summarize our paycheck protection program loan next.
On April 17th we received 10 million of PPP funds. These funds were used for eligible employee payroll and utility costs. During the week measurement period, which began on April 17, and then on June 11.
Paycheck protection program loans can be forgiven based on usage of the funds for eligible payroll and utility expenses.
That PPP forgiveness calculation also includes adjustments related to reductions in full time employee equivalents and salaried and hourly wage reductions.
We have complied with the PPP loan requirements and had eligible payroll and utility costs during the week forgiveness period in excess of our 10 million of PPP proceeds.
During the third quarter, we will submit our loan forgiveness application for full forgiveness of the totaled 10 million loan them out.
This concludes the financial update and Denny I'll hand, the call back to you.
Thanks, Chris.
In closing on our last call I offered a snapshot of where we saw things at that time.
To summarize we set our industry was highly stressed and uncertainty was running high.
Our customers, we're being conservative in ordering and buying only on it need basis and not on speculation.
We were anticipating headwinds from lower activity levels, and higher cost and inefficiencies from one going disruptions due to the virus.
Each of those conditions played out and continues to be the case today, what has become clear is that the difficult situation will last through the end of the year and impact our financial performance with a step down in quarterly sales and operating activity expected for the next two quarters as Chris explain the disposition of our PPP loan should occur before the end of.
The year.
I also said last time that to mitigate the challenging conditions and remain in a strong position for the eventual recovery, we will focus on liquidity and on aggressively reducing costs.
We made tangible progress on both counts in the second quarter, Let me reiterate that we are actually executing a proactive operating strategy similar in principle to past cyclical downturns and look forward to the beginning of recovery in early 2021.
Let me also say that we have some heavy lifting the due over the next few quarters, even so I remain extremely confident that we have the rate plan a great team of employees the support of our stakeholders and we will power through the current situation and position our company for further growth and success of the next upturn.
Sincerely grateful to everyone for their support.
That concludes our formal remarks.
Operator, we'll we'll take questions at this point.
Anthony mine or if you would like to ask your question. Please press star one on your telephone to withdraw your question pressed the palace.
Please standby why we compile the culinary roster.
Your first question comes from the line of Tyler Kenyon.
With Cowen.
Alan.
Good morning, highlighting.
Morning.
Getting wonder if you could just walk us through.
Just similar sequential gross margin impacts in the quarter you did call out a few items just just exceeding those pieces sharing.
Surcharges lower production and perhaps in mix impacts.
And is or is there a good way to think about kind of the progression.
James can here as we move into the second half.
Okay. So by the second quarter.
You saw we reported gross margin of about 3.7%.
And if you look at the detail some add there were some adders an expense over the course of the quarter, we had some heavy scrap.
Activity.
Which was about 1.6% margin. This thats. So in other words, we would that $900000 negative.
Let's see equivalent to 1.6% margin.
We did write off some inventory some older inventory.
And again, we're seeing a situation, where we have inventory which is for sale.
It's slow moving in decent times customers will take that on a regular basis in the current environment. They will not and as we look at the just the time phasing of cash flows.
We're in a situation where it makes sense for us the basically right some of this off.
And scrap it out and be for buying new scrap because it all goes back into our melt shop.
We had a loss on the sale of some 316 l. scrap that we discussed during our prepared comments.
That was 0.7% to slow moving by the way was 1.2, 0.8%.
We had an acceleration of fixed cost of 200000.
Which is 0.4%.
And although I don't I don't have a specific number for you here, there's several percentage points to just as the base level of absorption. When you when you cut your operations and the capital intensive business by the magnitude we did during the second quarter.
You are going to have unabsorbed cost is going to kick as a volume variance so you're seeing that embedded in our margins as well.
So roughly if you adjust for that you'd have to the 7.5% you add the unabsorbed fixed costs in the base, you're starting to push nine and have 10% margins.
As you look at the third in the fourth quarter.
We're going to see a foreign sales.
If you look at the margin percent itself, we will have larger right acceleration of fixed cost.
So 200000 dollar number is going to grow.
Our our focus is to maintain a positive gross profit margin as we go through the second half of the year in this environment.
And what you will see is a generation of cash as we as working capital will unwind at a much higher rate than it did during the second quarter.
And capital spending in the third in the fourth quarter will be lower than what you saw in the first two quarters.
That give you a sensor where we're at that it's all gets a backdrop of the very uncertain environment.
As I look at those look at the numbers. This morning, we had about two and a half million pounds sitting on the dock ready to go on June Thirtyth the customers intake.
So a lot of that depends upon timing and when customers take things and we're still in a mode. Although it's quite a down somewhat of customers cancellations are down.
Bookings continue to be relatively weak.
But customers are managing very carefully when they take delivery of product.
So you see some small pull aheads, but most what we're seeing is push outs.
Got it okay appreciate all that.
Just on on SJ curious if thats at a rate level relative decline you are you anticipating second half to play out sounds like you are taking additional action here.
In response to two more challenging environment, So curious as to where we'll see some of that cost come out and how to specifically thinking about BSG megawatts.
In the low fours low 4 million range.
So we're basically they run into four eight run rate in the second quarter.
And we did announce some changes to our salary payroll as you saw that's not always DNA.
There's a fair amount of salary folks that are in the gross profit number.
The other thing I would comment on this DNA for US is about 40% of fresh DNA is what I would call people costs.
So so where we book our business insurance, that's our next largest late in there.
Got it okay.
And then just lastly from me and then I'll I'll turn it over but.
With respect to that the free cash flow in the second half I mean, how should we be thinking about that in threeq versus Fourq you and.
Chris maybe maybe how exactly to think about the progression of the working capital piece.
Sure we will have improved working capital levels I.E. reductions in Q3 in Q4.
As Denny noted those will favorably impact our debt levels.
We anticipate.
Much improved reduction in inventory compared to second quarter levels and similar situation on debt reduction.
Current forecast, we do anticipate.
Probably call it from Denny you can chime in here.
We're looking at approximate debt reductions north of $20 million in the second half the year on the managed working capital we're looking at reductions north of $30 million for the second half of the year.
Thanks very much.
Your next question comes from the line of Phil Gibbs with Keybanc capital markets.
Hey, good morning.
Thank you.
Got you had the the backlog down.
About 35% versus the first quarter is that roughly.
The.
The change we should see in revenues in the in the upcoming quarter relative to Twoq you in terms of in terms of the magnitude the drop off your expected.
No.
No.
It's not going to be that significant in the third quarter.
We still have opportunity to book business into the fourth quarter.
So you're looking about another 20% reduction somewhere in that range as we look at the fourth third quarter from where we stand today.
So I would it still expect to see afford for that number in the third quarter you'd out in the third quarter gets a little dicier.
Our expectation as we get into the fourth quarter will start to see some bookings coming in for the first quarter of 2021.
And by that point in time, you should see the destocking of liquidation of inventory that's occurring as we speak should be over.
So the whiplash effect that mills that have to have to suffer through should be behind us and you start to see bookings pickup in activity levels pick up a little bit as we go through the end of the year.
Okay.
Got it and then you gave some color on the gross profit side are those.
Absorption impacts Danny going to be basically acute.
In the back half and then the assumption is that that get starts to start to improve next year.
Yes, I'll be much.
We will be accelerating fixed cost write offs in the third in the fourth quarter will be much larger than what you saw in the second quarter and Thats reflective of the fact that we as you look at our facilities, we ran the entire second quarter.
For all intents and purposes, we took three of our larger plants down during the first week in July.
And we have depending upon the plan three or four weeks scheduled down during the second half of the year. In addition, we've got rolling outages at different work centers. So as those activity levels come down you will start to spin out the requirement to accelerate fixed cost write offs. So those numbers will get better bigger in the third and fourth quarter.
Okay.
Okay.
And then.
That's all non cash but.
The right.
Okay and then.
Chris on the.
The revolver availability, what what's that number today and then you reiterate what you said in terms of second had net working capital reduction do you say 30 million plus is your goal.
Yes on the managed working capital you're correct.
From a liquidity standpoint, and then availability standpoint in the second quarter, we had $86 million of borrowing base. We had outstanding drawings on our revolver of 40 million not left us with the remaining revolver availability of $46 million.
That remaining availability, we anticipate should be fairly consistent as we approach and go through the third and fourth quarters.
And that is commensurate with the reduction in borrowings along with a reduction in our borrowing bases, we wind down managed working capital levels.
Specific to the revolving credit facility to manage working capital impacts are the accounts receivable and inventory lines.
Okay.
So essentially I got the liquidity numbers, so essentially in the back half as you.
Flush out cash that also goes is as an increase block against your base. So your liquidity basically is going to stay similar to where it was in the second quarter is that the thought.
Correct.
Okay.
Thanks, everyone.
Thank you Phil.
Once again in order to ask your question. Please press star one on your Touchtone phone.
Your next question comes from the line of John.
Here with Pinnacle.
Okay.
Good morning, everyone.
Hey, John.
Thanks.
Couple of questions. One you mentioned the fixed costs to write offs.
Make sure I understand that is that fixed asset write offs or what exactly are you referring to there and how big might those be in the back half in the second.
Over here.
Sure John I'll touch on the accounting exercise that is the fixed cost write off.
So this is required whenever we have production levels that are decrease.
When production levels fall below normal operating levels required to do a review of fixed cost absorption to see if any of the fixed our fixed overhead should be taken of the personnel.
This is capitalized into inventory.
This is done to make sure that we avoid any over absorption of fixed costs on the balance sheet.
We did this review in the second quarter, because our production levels fell outside of our normal operating levels.
And this is what resulted in that 200000 dollar expense hit to the PML.
We do anticipate decreased production levels in the third and fourth quarter's commensurate with the reduction in backlog.
Because of these reduced operating levels the fixed charge for the absorption is anticipated to be much higher than the 200000 in the third quarter during the second quarter correction.
How much larger do you think it might be.
Yes approach and make sure the amounts in the third and fourth quarters could approach a million dollars based on what we currently have forecasted within the production levels for Q3 in Q4.
Okay.
And that runs through the piano correct.
Yes that will run through our gross margin that is a noncash charge, we will make sure we highlighted.
As these charges only come about whenever we have significantly reduced production levels.
Got it.
And on the Capex side.
9 million for the year.
7.2 may and year to date.
It implies 900000 or so per quarter is that.
Is that the right way to think about this for the back half.
Yes, we have finished virtually all of our capital work that we plan to do this year as of June 30.
The risk there is that we have a major breakdown of a piece of equipment, where we need to spend some capital to keep it going.
This will that be non maintenance type stuff, but.
We're not aware of anything like that so.
That's where we're at.
Okay.
This one's for your Danny.
Obviously times are tough you're struggling.
And I would guess some of your competitors are struggling also.
So I'm just wondering.
Our focus is on debt and expense reduction but.
Is M&A at all on the radar screen at this point because historically you've been opportunistic in downturns like this and we always like companies that come out the back end of a downturn stronger than when they went in.
And I'm just curious are you seeing opportunities with amongst any of your competitors kind of what's the what's that landscape look like at this point.
I think M&A in our space is relatively muted right now normally during a downturn you get well into it and you start to see some opportunity start to pop before the next upturn.
We're still.
I want to say, we're at the beginning of this thing but we're.
We're nowhere near the end of it.
So there is theres nothing Thats really hot there's a couple opportunities we were always.
Talking to people are looking at different things.
But I think to be honest with you over the last 345 months.
Whether its universe or any of our competitors.
The focus is all about adjusting to this.
The current demand levels in the sharp drop we're seeing and how do you restructure your business. So you can get after the other end.
So no one's waving the white flag at this point no.
Okay.
Right, but I think I think that will probably happen, but I think it's too early in the game right now.
Later this year later this year early next year kind of timeframe they might okay.
All right well keep your eyes open.
We will.
Thanks.
And there are no further questions I.
I would like to turn the call back to Mr. Dennis for closing remarks.
Thank you.
Once again I want to thank everybody for joining us this morning.
We continue to deeply appreciate your ongoing support interest in universal stainless and we look forward to updating you on our next call which will be out in October.
Well stay safe and have a great day.
This concludes today's conference call you may now disconnect.