Q3 2020 Universal Stainless & Alloy Products Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Universal stainless third quarter 2020 conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to participate on that portion of the call you wouldn't be surprised star one on your.
Sean if you require any further assistance. Please press star in cereal now it's my pleasure to turn the call. This conference over to your Speaker June filling Gerry. Please go ahead.
Carmen. Good morning. This is June filling jury of calm partners and I also would like to welcome you to the Universal stainless conference call and webcast. We are here to discuss the company's third quarter 2020 results reported this morning with us from management or Denny Oates, Chairman, President and Chief Executive Officer, John or me.
Vice President General Counsel, and Secretary increased gambling, 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.
Carmen will instruct you on procedures at that time also please note that in this morning's call management will make forward looking statements under the private Securities Litigation Reform Act of 1995, I would like to remind you of the risks related to these statements which are more fully described in todays.
Press release and in the Companys filings with the Securities and Exchange Commission.
These formalities complete I would now like to turn the call over to Danny Danny.
Any we are ready to begin.
Okay. John Thank you good morning, everyone.
Good morning, everyone. Thanks for calling in today.
As we described during our last conference call in July we expected a very challenging third quarter.
Second quarter order entry and backlog trends pointed towards a steep sequential step down in sales and operating activity, reflecting lower supply chain demand customer de stocking ensure industry lead times and.
In fact third quarter sales of $37.4 million were down 29% sequentially well ship pounds declined 32%.
Currently we are seeing sales level stabilizing and modest month to month improvements in order entry.
We reacted quickly to the cobot induced market disruptions in the second and third quarters executing on plans designed to rapidly reduce costs conserve cash and pay down debt without jeopardizing, our long term strategic plans.
Despite these actions a decrease in sales and operating activity took a heavy toll on our bottom line, we reported a net loss of $7 million or 79 cents per diluted share on a generally accepted accounting principle basis.
Excluding the pre tax fixed cost absorption charge of $4.3 million due to abnormally low activity levels in there.
In the $300000 pre tax gain on insurance proceeds the third quarter net loss was 3.9 million or 44 cents per diluted share.
Let's look more closely at third quarter results, starting with the top line.
Consistent with last quarter, aerospace and oil and gas sales were hard hit declining, 32% and 24% respectively on a quarter over quarter basis.
Other end market sales were sequentially lower as well with power generation down, 25% heavy equipment down, 16% and general industrial down 7%.
However, I should point out that general industrial sales increased a noteworthy 43% from the third quarter 2019, due mostly to semiconductor business.
Premium alloy products, which reached nearly 25% of our total third quarter sales are holding up better than air melted products, reflecting ongoing demand coming from defense and specialty applications.
It is worth underscoring that premium alloys, our highest priority for targeted growth and remain a focus of our very active product development and customer approval efforts.
Order backlog before surcharges fell to $54.8 million at September 30, compared to 71.7 million at June 30, and 119.1 million at year end 2019.
Gross order entry stabilized at $21 million before surcharges compared to $45 million in the first quarter.
Interestingly July was the low month for gross order entry this year with steady increases in August and September so.
September order entry was the highest monthly total since the covert pandemic kit.
Tobar is tracking about 10% ahead of September.
Also on a positive note cancellations have slowed significantly fall into $2.3 million in the third quarter versus $10.5 million in the second quarter.
We continue to expect more modest improvements in order entry during the fourth quarter and sequential improvement as we move through the first half of 2021.
From a profitability standpoint, the reduced sales and operating activity in the third quarter resulted in our our reporting a negative gross margin of $4.4 million, which is.
Which included a $4.3 million write off of fixed costs due to the of normally low production levels as required under GAAP.
Additionally, $2.1 million, a negative efficiency variances associated with sharply lower activity levels were expensed during the quarter.
We've been working on our operating plan designed to reduce costs and conserve cash our planning.
Our plan includes periodic shutdowns of entire facilities, coupled with rolling shutdowns of major work centers.
Stringent capital and operating spending controls.
Workforce reductions and reduced work schedules here.
Here are the results in terms of plant activity levels and our cost structure.
Plant activity levels were driven down 45% sequentially and 60% compared to the first quarter as measured by pounds processed through our facilities.
Paramount operations were reduced 50% sequentially and 67% compared to the first quarter.
Vacuum melting operations were static sequentially due to somewhat healthier backlogs, but declined 35% compared to Q1.
Variable non material spending has been cut in half since cope with it.
Controllable fixed spending has been reduced 30% since March.
SGN expenses totaled $4.2 million in the third quarter down $1.8 million or 30%.
Managed working capital was reduced $16.8 million during the third quarter, reflecting a reduction of $40 million in inventory and $6.7 million in receivables the risk.
We received these these reductions were partially offset by lower payables of $4.1 million.
We are tracking to the $30 million second half reduction in managed working capital we committed to on our last call.
Similarly capital spending was $1.2 million in Q3 and is tracking to the $9 million to $10 million annual estimate cited in our last call.
Taken together these actions generated $11.9 million in cash, which we used to pay down total debt to $60.6 million at September 30.
The $20 million second half debt reduction called out on our last call remains our goal.
I would be remiss if I did I'd also highlight that our safety performance as measured by an Osha recordable rate of 1.3 marked a new universal record low during the third quarter. Despite the many disruptions on the shop floor my comp.
My complements saw great job guys.
With regard to co bid we have been very fortunate to only have two positive cases, given that we have worked throughout the pandemic as an essential business cost recovered related mitigation have run 150000 to $200000 per quarter for pp and enhance sensitive sanitizing activities.
Our priorities for the balance of the year to continue executing our operating plan to reduce cost and generate cash we.
We are expecting fourth quarter activity levels and sales to closely parallel third quarter performance.
For the longer term, we are moving forward with our strategic initiative to add a vacuum arc remelt furnaces, which will be installed in the second quarter 2021, and an 18 ton crucible for vacuum arc melting operations, which is scheduled to be installed and commissioned by 2020 one's third quarter.
These investments are critical to support our growth in premium melted products and to reduce operating costs significantly.
Turning to commodity prices nickel strengthen each month in the third quarter, reaching $6.74 per pound in September a 17% increase from the end of the second quarter and the highest level since November of last year. This may.
This morning, Nicole was a $7.23 a pound.
Malian vanadium exhibited a small sequential increases and scrap started to show an upward trend in September as well.
As a result, our surcharges on shipments have been moving up in a positive direction maintaining metal spreads. We expect these trends to continue this quarter.
Now, let me turn to our end markets beginning with aerospace.
Aerospace sales were 25.1 million or 67% of sales in the third quarter 2020, compared with $37.2 million or 71% of sales in the second quarter of 2020.
The third quarter of 2019, aerospace sales were $40.9 million or 72% of sales.
The challenges facing the aerospace industry are many severance.
737, Max has returned to service reduced air travel, we financial health of Airlines growing order cancellations uncertain build rates an unstable supply change just to name a few.
Let's start with a 737 Max.
Here's a 737 Max will be returned to service by year end based on recent developments Europe's top regulated regulator said to 737, Max is safe enough to return to flight in Europe by the end of the year.
Europe is one of the largest markets for the Max I'm on.
Second Airlines also announced plans to reduce a 737 Max on domestic flights beginning with New York to Miami runs pending a late November FAA approval.
Well this is as well and welcome boost for the industry and the supply channel, we do not see an immediate effect on an airplane build rates given Boeing has an estimated 450 Max airplanes on the ground ready for delivery.
Another issue weighing heavily on the commercial aerospace market has been the krona virus pandemic and its impact on air travel.
Ita now expects full year 2020 traffic to be down 66% from 2019 versus their previous estimate of 63% decline.
Travel for August 2020 was down 75% from August of 2019 include.
Including an 88% drop in international passenger demand and a 69% drop in us domestic travel.
While these numbers do reflect improvement compared to the April may timeframe, when domestic travel was down over 90% the pace.
The pace of improvement has slowed due to secondary cobot outbreaks.
Aftermarket aerospace demand will be stressed central travel demonstrates more meaningful improvement probably not until vaccines are readily available next year.
The latest reports from US carriers further tested depressed industry conditions with difficult liquidity issues at the forefront not surprisingly. This has resulted in order cancellations and postponements of new aircraft.
Although a possible upside in this this situation is that airlines are also retiring older aircraft, which may eventually bolster new plane sales.
We look for government assistance to support the industry's financial health and employment levels over the near term.
Our aerospace customers and the entire supply chain for that matter our de stocking at an unprecedented pace.
We expect this process to continue through the end of the year and perhaps into Q1 of 2021.
With Destocking easing by then orders to the mill sector will increase we.
We expect this increase to be supported as we move through 2021 by further travel growth, especially funding introduction of vaccines.
Against this challenging backdrop, there are some positives to differ.
The defense market has been a strong and a positive countervailing force in the aerospace market for universal and our expanding premium alloy alloy offerings.
Although small is also worth noting that the business jet market is active as well.
In summary, our aerospace customers continue to expect solid demand from the defense in general aviation sectors over the next few quarters slow.
Slow improvement in mill bookings as Destocking eases and travel picks up are also in the books.
Significant improvement in the commercial aerospace build rates are not expected until beyond 2021.
Heavy equipment market remained our second largest market in the third quarter of 2020 with sales of $4.7 million or 12% of sales compared with $5.6 million or 11% of sales in the second quarter and $4.4 million or 7% of sales in the third quarter of 2019.
After two quarters of recovery in plate sales the market pause somewhat for normal seasonal reasons.
Our plate sales are driven by a variety of metal fabrication markets, particularly automotive and new model introductions nuisance.
News from the armor automakers has been mainly favorable lately.
In part by low interest rates, but also by with General Motors describes his pandemic induced auto demand as consumers consumers up for more private vehicle transportation over public transportation family stay more vacations by car and city residents move to the suburbs New Ma.
New model launches are projected to recover through 2019 level in 2021 and accelerate in 2023 and 2024.
This is all good news for plate demand we have.
We expect our fourth quarter played sales to be up 10% based on existing backlogs and recent bookings trends.
The general industrial market became our third largest market in the third quarter with sales of 2.9 million or 8% of sales.
Well, 7% lower than the second quarter of 2020 sales of $3.1 million or 6% of sales they increased 43% from $2 million or 4% of sales in the third quarter of 2019.
As a reminder, our general industrial category includes such markets as semiconductor medical and general manufacturing.
The semiconductor industry Association reported a 4.9% increase in worldwide sales of semiconductors in August 2020 versus August 2019, using a three month moving average of 3.6% increase from July 2020, total $35 billion.
Growth was especially strong in the Americas were sales increased nearly 24% year over year.
We are continuing to focus on the semiconductor market as well as pursuing opportunities in the additional markets within the general industrial segment to broaden our future sales potential.
We already have the grades of steel and the service center relationships. So there is no need to invest capital or develop new products to support this effort.
The oil and gas end market became our fourth largest end market in the third quarter with sales of $2.8 million were 7% of sales.
This compares with sales of $3.6 million or 7% of sales in the second quarter of 2020, and $5.7 million or 10% of sales in the third quarter of 2019.
That represents declines of 24% and 51% from respective prior periods.
The severe challenges in oil and gas demand are reflected in the latest recount data from Baker Hughes.
The average us rig count for August 2020 was 250 down five from July and down 679 from August 2019.
While the rig count seems to be stabilizing we are a long way from what many analysts would consider a normalized us rig count of 400 to 600 rigs.
Likewise worldwide rig count for 2020 August 2020 stood at 1050.
20 foot dry, but down 1100, 56 or 52% from.
From August of 2019.
BNP companies are continuing to restrict spending to protect cash flows.
On Friday, Schlumberger reported a 2% sequential decline in third quarter, North American revenues with improved land, well completions offset by reduced land drilling a lower offshore activity impacted by lower rig counts and hurricane disruptions.
On the other handheld burden called out now quote second half 2020, as the bottom with a.
With a better 2021, reflecting progressive improvement in activity throughout the year and.
From our vantage point after a long period of hunkering down by our customers are now looking for a gradual improvement in 2021.
While there is not yet a lot of firmness in demand customer inventories are low.
Power generation market sales were $1.6 million or 4% of sales in the third quarter of 2020, now 25% from the 2.1 million or 4% of sales in the second quarter of 2020.
And $2.9 million or 5% of sales in the third quarter of 2019.
The continued shutdowns due to the current environment pandemic, a sharply limited maintenance demand, which has been the major driver of our power generation sales, we expect maintenance to eventually return to more normal seasonal levels as states open and stay Open addition.
Additionally, rumors of forging work for power generation coming back to the states continue but weve seen nothing tangible at this time.
Before I turn the call over to Chris Scanlon for his financial review, let me mention our new five year collective bargaining agreement with the hourly employees that are pays full facility effective as of April one.
The new contract maintains the flexible work rules.
And profit sharing incentives contained in the prior agreement and also allows us to be competitive in the marketplace and attracts skilled employees.
That concludes my review, Chris Let's have your financial report great. Thank you Dan and good morning, everyone. Let's get started with the income statement as Denny discussed third quarter 2020 sales of $37.4 million were down, 29% or 15 million from 2022nd quarter and down 34% compared with the 2019 third quarter.
Our aerospace sales were lower than second quarter, 2020 by $12 million, or 32% and $15.7 million or 38.5% lower than third quarter 2019, our.
Our aerospace sales approximate 67% of our third quarter sales.
Sales to the balance of our end markets declined from the second quarter of 2020.
Third quarter gross margin was a loss of $4.4 million compared to $1.9 million in the second quarter 2020, and $5.3 million in the 2019 third quarter.
Our Q3 gross margin was unfavorably impacted by $4.3 million direct charge related to fixed cost absorption. This charge was the result of reduced third quarter operating levels.
We have aggressively reduce costs due to our reduced production levels. There is an amount of our fixed costs and was not absorb that inventory and taken as a charge in the third quarter, we anticipate.
We anticipate these fixed cost absorption charges to continue in the 2024th quarter on continued lower activity levels grow.
Gross margin as adjusted for the 4.3 million fixed cost absorption direct charge was at a breakeven level.
Gross margin also included $2.1 million of negative operating efficiency variances during the quarter, which were also expense.
These variances were associated with low activity levels.
Selling general and administrative costs in the third quarter totaled $4.2 million or 11% of sales a decrease of $1.2 million compared to 2022nd quarter and $372000 compared to 2019 third quarter.
Other income included $307000 associated with the receipt of insurance proceeds.
Specific to the third quarter, our income tax benefit was $1.9 million.
Net loss in the third quarter was $7 million or 79 cents per diluted share.
Third quarter earnings per share adjusted for the 4.3 million fixed cost absorption direct charge into the 307000 gain on insurance proceeds is a loss of 44 cents per share.
Second quarter 2020, net loss totaled $3.3 million or 38 cents per diluted share.
2019 third quarter net income totaled $800000 or nine cents per diluted share.
Our third quarter EBITDA totaled a loss of $3.6 million Q3, EBITDA as adjusted for non cash share compensation fixed cost absorption direct charges in our insurance gain totaled $636000. The EBITDA and adjusted EBITDA calculations are provided in the tables to the press release.
Third quarter cash flow provided from operations was $13 million compared to our second quarter cash flow provided from operations of $7.4 million in third quarter 2019 cash flow provided by operations of 6.6 million.
Regarding the balance sheet managed working capital totaled $135 million in decreased by $16.8 million compared with the second quarter of 2020.
Accounts receivable decreased by $6.7 million and inventory decreased by $14 million, while accounts payable.
Decreased by 4.1 million.
The decline in inventory is primarily due to reduced production activity to maintain an inventory level commensurate with our order backlog.
Third quarter, 2020 backlog totaled $54.8 million is down $17 million or 24% from the 2022nd quarter year.
Year over year third quarter, 2020 backlog decreased 63, and a half million dollars or 54% compared to the 2019 third quarter.
Capital expenditures for the third quarter were $1.2 million, while second quarter, 2020, Capex totaled $3.2 million and third quarter 2019 capital expenditures totaled $3.9 million.
Capital expenditures for the nine months of 2020 totaled $8.5 million versus $13.3 million for the nine months 2019.
Capital expenditures are expected to approximate $9 million to $10 million for the year 2020.
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Lastly, the Companys total debt at September 32020, $60.6 million, a decrease of $11.9 million from the prior quarter.
This reduction is consistent with our focus on working capital and debt reduction.
The company's debt is primarily comprised of our revolving credit facility and term loan, which collectively totaled 35.7 million as of September 32012, and our notes which were issued in connection with the acquisition of our North Jackson facility in 2011. These.
These notes totaled $15 million.
We continue to include this $15 million in current debt as these notes are due and payable in March 2021.
We intend to pay these notes off in the first quarter quarter via utilization of our revolver due to the variance in interest rates between the 6% fixed rate of the north Jackson, those and the approximate 2% current interest rate on our revolver, we anticipate annual savings of approximately 600000 interest expense following the payoff.
Of the North Jackson seller notes.
Additionally, the 10 million term note related to the Paycheck protection program is included in our long term debt in that.
In the third quarter 2020, the company applied for full loan forgiveness under the Paycheck protection program.
And the PPP loan forgiveness process is currently underway.
As of September 32020, we maintain revolver borrowing availability of $44.2 million, our strong liquidity position.
Coupled with the solid credit worthiness of our customer base provides the ability to continue to indoor indoor future uncertainties risks.
This concludes the financial update and Denny with that I'll hand, the call back over to you.
Thanks, Chris.
In summary, then on our last call we provided our outlook for the second half of 2023.
The third quarter played out as expected with a step down in sales and activity levels, but also and importantly, with tangible progress in flexing spending down.
Accuse me and improving our liquidity.
Total debt was reduced to $12 million on an 11% decrease in managed working capital, including a $14 million reduction in inventory we.
We ended the quarter with $44 million in liquidity, which positions us to successfully navigate through the current downturn and seizing opportunities as business conditions recover.
We ended the third quarter with incoming business slowly improving in each month since the low point in July.
Over bookings are currently running ahead of September.
We will continue to diligently work our operating plan during the normally seasonally slower fourth quarter and expect results to closely parallel third quarter performance in terms of sales activity levels and cash generation.
Longer term, we are actively focused on future growth opportunities, including our strategic investment in an additional vacuum arc remelt furnaces, and an 18000 crucible for vacuum induction melting operations.
These will reduce costs and expand our premium alloy capabilities.
We are also pursuing new product and market opportunities to further diversify our revenue stream in future years.
Lastly, these times of lower production provide opportunities to really get after initiatives to de bottleneck operations increased first time through quality and continuously improve our safety processes.
In closing I'd like to express my personal deep gratitude to our entire team, whose commitment and relentless effort are enabling us to navigate through these challenging times and to our customers board and shareholders for their continued support.
That concludes our formal remarks.
Carmen we're ready for any questions.
Thank you and as a reminder, ladies and gentlemen to ask a question seems May press star one on your telephone keypad.
To withdraw your question just Greg they're hatched.
Our first question is from Tyler Kenyon with Cowen. Please go ahead.
Hey, Thanks, very much good morning, everyone.
Hey, Tyler how are you doing.
Good good how are you.
Limited during.
Okay home, Danny you noted a steady improvement in.
Order entry is the quarter grew to a close and it sounds like that is continued here into October.
Can you talk maybe a little bit about where you're seeing that improvement across end markets or product specific applications I mean it sounds.
You're mostly seeing Watson tool steel plate.
Play is a component of that and also defense in aerospace side and.
And the last six weeks or so we're starting to see some orders, which I would characterize as.
Service centers looking at their inventory and finding some holes as they destock.
Which I look as a good sign because it says that inventory levels are starting to get to the point where.
People are getting surprised.
So three areas basically to the plate business.
Largely the automotive and the.
The new models coming back now.
Next year, which is going to require new jigs and fixtures and metal sales on our part this year and into the early part of next year. The defense end of the aerospace market and.
And soon some holes in inventory on regular commercial aerospace products.
Got it okay, thanks for that and.
Our year cost reduction efforts that you have been pursuing here called over the course of the past quarter are they fully reflected in the third quarter or should we expect more benefits as we move into the fourth.
I would say 80% of its reflected in the third quarter, we would expect to get some further benefits in the fourth quarter.
From from a full quarter of spending reductions in certain categories and also I mean, obviously when you're running when you dip down to the low levels of activity. It is very challenging to run efficiently out in the middle.
Now in the Middle we think think of each treat furnace that thats going to run a load for five hours typically.
Typically if you have adequate volume you can fill that furnace up lets hypothetically with 20 large bars today's environment might only have five that's the efficiency issues. So as we go through the fourth quarter.
We will get better and better at running at these lower activity level. So I would expect some of those efficiency variances that we had in the third quarter, which.
Which were negative to be much smaller as in the fourth quarter.
Got it okay and Denny in your in your closing comments you talked about how it is challenging times is kind a.
Brought a fresh perspective in terms of pursuing de bottlenecking efforts and enhancing.
Sales through various channels just curious if maybe you could talk a little bit about about some of those efforts you're undertaking considering at this point well.
Well, we have a situation where.
When you are busy there never seems to be Youre always working on these kinds of things basic blocking and tackling.
On the shop, which were also busy getting production getting product to customers in the climate like we are in today. It does free up some time for us to focus on some some other areas of process improvement I'm not talking necessarily about capital projects here.
So were looking and maintenance practices in our rebuild facility.
Each of the past has been a bottleneck for us.
We also are bringing a new furnace on as well, but I'm talking about process improvements, particularly on the maintenance side.
Were going paperless in our on our shop floor.
Which will help significantly in terms of cycle times.
We're looking at different chemistry modifications and heat treat modifications on some of the newer alloys.
Where we have approval the plan, obviously would be the now that we have the approval to see where we don't have fixed practices. What can we do to further reduce costs.
There's a whole range of items that I would categorize as de bottlenecking, which basically taking existing facilities and increasing that capacity. So that we can sell more and cycle things through our facilities faster when things recover over the next couple of years and the other one would be continuous improvement on product quality.
So as we have things going through our shop. They go through basically once we reduce rework and so forth when things recover.
Thanks for that and Chris just one for you it sounds like the working capital reduction targets in the second half as well as the debt reduction targets.
Remain intact.
The $20 million reduction.
In debt does that include some assumption around the forgiveness of the PPP loan and I'm not sure. If you made some specific comments in your remarks, but maybe if you could kind of talk about where you are in that process and kind of when you would expect that to be resolved.
Sure thing so the $20 million debt reduction excluded any application of PPP forgiveness. So is organic debt reduction associated with our revolving credit facility coupled with our term note.
With regard to timing of the PPP application that was submitted in the third quarter. The bank has 60 days to review our application once they're complete that will get handed over to the SBA, who then has 90 days to conduct their review and make a conclusion on our application.
So what we had originally went into this process is thinking that we would get forgiveness, maybe in that Q3 Q4 timeframe. Obviously were in Q4 now depend.
Depending on the timing of the review by both the bank and DSP and SSP eight it appears that that application for full forgiveness will most likely occur in let's call. The first quarter of 2021.
Thanks, very much I'll turn it over.
Thanks.
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Our next question is from Phil Gibbs with Keybanc capital. Please go ahead.
Hey, good morning.
Hi, Phil.
Denny so if we if we surmise that revenues are between.
35, and $40 million for next quarter, and let's just let's just postulate they stay there in Q1.
Should we expect that your gross margins will begin to improve.
All else equal as as.
As as your own Destocking efforts subside, because I think it's an important point.
Right now that.
I am perceiving that you guys are getting hit with a double whammy.
Obviously, lower sales, but but you're taking your own inventories down so I think.
So I think that that could be.
Helpful to educate people on.
Yes as.
As you look at the first of all with regard to the fourth quarter the quarter. We're in I would look at the third quarter and I expect performance to be very similar in the.
In the fourth quarter in terms of activity topline probably.
Profitability as well as cash generation.
As we get into the first quarter I'm looking at bookings improving in the fourth quarter compared to the third quarter. We've seen now four consecutive while three consecutive months. It looks like we'll have a fourth consecutive month of improving bookings.
So what that means as we get into the first quarter our activity levels should rise.
We'll be able to absorb more of those fixed costs that were writing off currently.
And we will be able to run more efficiently. So.
So right now it's it's dicey because I don't know how much things are going to improve during the fourth quarter first quarter production, but I do expect higher production levels.
So I would expect to see margins, improving with lower fixed cost write offs and lower negative variances.
As we get later in the second in the second.
The second quarter latter part of the first half of next year.
If things continue tracking the way, we see them tracking we should be working our way out of this requirement to.
The book Unabsorbed fixed costs and so forth.
So to answer your question fourth quarter pretty much seems a third quarter improvement in the first quarter in some of these unusual things should disappear as we get into the second quarter next year, if things play out the way we are projecting them.
It doesn't require a return to 2019 aerospace markets, that's not what I'm, saying.
So right now right now we got to do that from a commercial standpoint kind of a triple whammy right, we get lower demand in the supply chain driven by cold.
We've got our customers also.
Very quickly trying to get their inventories down so you get the bullwhip effect on the mill.
And then I would throw into that the fact that lead times are so short.
Let people know they can get product in fairly short order from the mills right. Now. So there is no need to really lay in orders.
For the first quarter I mean, we're still selling into our fourth quarter when many products.
So you put those three things together and Thats whats.
Which makes things are exporting currently in the market.
I get all that I'm, just trying to understand this if.
Yes lets just say this quarter you did 37 million next quarter $37 million.
I'm, just saying if you do 37 million in Q1 next year, you may anticipate a pickup or decline probably a pickup but.
Just just saying, let's just assume revenues are flat shoes.
Should your margins improve.
Alone just on the fact that by Q1, you won't be taking out as much inventory.
Yes, they will.
They will be running slightly higher we would expect production to be coming up so it wasn't that the link the topline from what we see in production based upon that.
With the army of incoming business now.
Because I think you said in the third quarter.
Your your own internal production was down something like 50% correct me if I'm wrong, there, but your revenues were not down that much sequentially.
Yes.
We are producing on a much lower level than were selling so the selling as the press, but we're producing at an even lower level and you're seeing that in our reduced inventory levels and that will continue so fourth quarter, we expect that to start to turn around here as we exit this year and go into next year.
Which will result in lower fixed cost being written off.
And better performance out of the shop with higher volumes.
To better plan and schedule our operations.
Do you expect to take out more inventory in the fourth quarter than you did in the third just absolute dollar basis or.
Or similar.
Hello.
About the same maybe a little bit less currently.
But overall if you look at managed working capital and cash generation should be very close to what you saw in the third quarter.
So if I look at the 4.3 million six cost charge that you took this quarter how much of that is due to the fact that your production.
Let's just say how much is due to the fact that you took out inventory.
100% of it is due to the reduction in inventory, which is being accomplished by lower production. If you look.
If you look at the elements of fixed costs non depreciation fixed costs.
They have been reduced 30% to 35%.
Over the last three or four months.
So we've taken a fair amount of what we can control and the fixed category like longer term maintenance items and things like that they have been reduced.
We have something like depreciation that is truly fixed.
That's going to be there.
So if you guys didnt take out any inventory of the third quarter. Your gross margins would have been around zero.
A little bit higher than that if you add back just the 4.3 that would get you to zero yes.
But I also you also can minimize the impact on operations from an efficiency standpoint.
Because what I described in my heat treat example, I could give you an example virtual area.
Peeler for example, we've had decent volume throwing could flowing through the shop.
You can schedule things by size. So you can run fairly efficiently in today's climate, you got a lot of Onesies and Twosies, which required to take the machine apart basically set it up again, so you're set ups increase.
And your throughput per hour goes down even though the year spending per hour goes down that makes sense there.
So as as volume picks up we'll be we'll get more productive. So some of those efficiency variances will also turn around and I would expect that the head further improvement to gross profit margins.
Thank you very much.
Yes.
Thank you and I'm, Sorry reminder, ladies and gentlemen to ask the question Jesper Guard Denmark.
All right I will turn the call back to their home.
For his final remarks.
Thank you Darren.
That concludes our formal remarks well.
Once again, thank you for joining us. This morning, we truly appreciate your ongoing support and interest in Universal and we'll look.
And we'll look forward to updating you on our next call in January continued to be well stay safe and through the holidays and have a great day.
And with that ladies and gentlemen, we thank you for participating in todays program. You may now disconnect have a wonderful day.
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