Q1 2021 Universal Stainless & Alloy Products Inc Earnings Call
Missed you in filling Jerry ma'am. The floor is yours. Thank you Laura a good morning. This is Jerry of Comm partners. And I'd also like to welcome you to the universal stainless, call and webcast. We are here to discuss the company's first-quarter twenty-twenty results recorded this morning with us for management or Danny Oates chairman president and chief executive officer Chris Zimmer Executive Vice President and chief commercial officer and John are Nina's vice president of administration in general counsel before I turn the call over to management. Let me quickly review procedures after management has made formal remarks. We will take your questions the conference off will instruct you on procedures at that time. Also, please note that in this morning's call management will make forward-looking statements under the private Securities litigation.
Reform Act of 1995 I would like to remind you of the risks related to these statements which are more fully described in today's press release and then the company's filings with the Securities and Exchange Commission with the formalities out of the way. I would now like to turn the call over to Denio's Denny. We are ready to begin.
Okay. Thanks, Jan. Good morning, everyone. Thanks for joining us today.
Check YouTube quarterly Improvement as we move through 2021. That's what we said on our January call and we're off to a solid start in the first quarter sales are up 18% sequentially including a 7% increase in higher-margin premium. Alloy sales gross bookings jumped 82% over the fourth quarter with minimal cancellations.
Order backlog increased 21% the first increase in over a year.
Except for General industrial markets all in use markets contributed contributed double-digit positive sales growth.
Plant activity levels were 39% above the fourth quarter.
Well q1 results clearly Point towards Improvement sales and plain activity levels remain below free pandemic q120 Levels by 37% and 38% respectively.
What's unpack our first quarter results?
First quarter sales totaled $37 an increase of five point seven million or 18% from the 2020 fourth quarter sales in first quarter $20 58.5 million 4 compact.
First quarter premium alloy sales were seven point six million dollars or 20% of sales versus six million or 19% of sales in the 2024 quarter and 7.6 million or 13% of sales in the year-ago quarter. The 27% sequential increase was due to Stronger Aerospace demand, especially for defense applications.
Play sales grew by 36% indicating continued strength and Industrial and Automotive activity. Despite the chip shortages.
Aerospace sales were up 29% as destocking eased travel rates, exceeded expectations and confidence began to return additionally defense applications continue to generate healthy demand for our products.
Another sign of recovery was are gross bookings of 44 million dollars up 82% versus fourth quarter 2020 as a result growth resumed in our backlog which totaled $58,000 before surcharges at March 31 vs. 48 million year end 2020.
Considering backlog was $111 a year ago. We still have a distance to go on the road to recovery.
Gross profit improved 4.8 million dollars compared to the fourth quarter coming in just under break even at a $200,000 loss which supports our view that the fourth quarter 2020 marked the low-wage market for this COVID-19 induce downturn.
The Improvement in gross profit reflects higher shipments stringent cost control sustained productivity improvements higher plan activity levels and favorable alignment of sales sales surcharges and material cost.
More specifically shipments total 14.1 million pounds an increase of 24% over Q4 controllable fixed operating spending around 35% with low levels month plan activity levels Rose 39% in the first quarter versus the fourth quarter of 2020 as measured by pound of processed with melt operations leading the way electric Arc name was up 59% sequentially and vacuum induction melting more than doubled this reduced our fixed cost absorption charge to two point six million dollars from 3.8 million dollars last quarter.
One prior cause we pointed out that operating during the sharp 20/20 downturns did provide us the opportunity to assess our shop practices with an eye towards driving productivity and sustainable cost per pound reductions.
So we improve margins as volumes recover and twenty Twenty-One. These initiatives are paying dividends as activity picks up.
Overall variable non-material plant operating cost per pound fell 70% sequentially. Let me give you some specific examples electric Arc furnace operations cost per pound fell 50% or near-record productivity as measured by pounds produced per equipment. Our vacuum induction melting operations reported record low operating cost per pound.
Virtually every major work center our Dunkirk facility posted productivity improvements and measurable cost reductions.
The general rise in commodity prices over the past couple of quarters has increased surcharges at a faster clip than our average belt cost yielding an estimated short-term benefit of $800,000 to first quarter gross profit.
Although nickel has retreated somewhat recently the price of other major material inputs continue to increase sequentially and year-over-year especially scrap, which is up 47% this year.
Selling General and administrative expenses were five point two million dollars or 14.1% of sales. This compares to 5.9 million in q1 $20 before COVID-19 and 4.5 and two for $20 excluding across for certain employee expenses and stock options. If you want expense was relatively stable at Q4 levels and 21% below last year's first quarter.
Our effective tax rate was 25% in the first quarter providing a 1.5 million dollar benefit bringing us to a first-quarter net loss of 4.5 million dollars or $0.51 per diluted share with without the fixed cost absorption charges. The net loss would have been two point six million or 29 cents per share.
The anticipated recovery unfolds we expect these charges will decrease next quarter and end during the second half.
Let's talk about our financial position.
In twenty-twenty we reduced our working capital to Max low activity levels resulting for the impact of COVID-19 on our end markets and March 3121 are manage working capital one thousand twelve point three million dollars compared with 150 2.7 million at the end of the first quarter 2020.
A 40.4 million or 26% reduction?
This included a 35.2 million reduction inventory which stood at 111 point six million at the end of March this year a couple of comments are focused on Inventory management result of maintaining flat inventories at the $111 level despite double-digit increases in sales and production with resulting Improvement in turnover receivables, increased two point six million or 14% on higher sales partially offset by a three-day reduction and Day sales outstanding.
accounts payable
6.5 million driven primarily by higher March melt activity
Capital spending. The first quarter was two point seven million dollars while depreciation amortization totaled 4.8 million. The majority of the span was on to strategic projects we discussed on recent calls.
The addition of a state-of-the-art vacuum Arc furnace to support growth and premium products in 1/18 on Crucible for our vacuum induction building facility to further reduce operating costs as we scale up.
Vacuum Arc furnace has been largely installed will finish some plumbing and electrical work and begin commissioning. This quarter The Crucible will be received in integrated into operations in the third quarter. We still expect to spend about eleven million dollars in capital this year.
Adjusted ebitda was a positive 2.1 million dollars for the first quarter of two point two million dollar improvement over the fourth quarter of 2020.
Cash management strategy during the downturn has reduced debt about $25 or 32% over the past year at March Thirty One told that was 51.6 million dollars including a Term Loan under the payroll Protection Program.
We have applied for for forgiveness of the PPP terminal.
We also took steps during the quarter to enhance our financial flexibility and support our current growth and long-term strategic initiatives by amending and restating our five year $120 asset-based wage agreement. The new agreement includes a revolving credit facility of $100 million and increases the term loan facility to 15 million. The new agreement will run through March of 2026.
In conjunction with the amendment the company repaid. It's $15 seller note obligation associated with the acquisition of our North Jackson facility.
The next short-term impact of the new credit agreement is approximately $120,000 lower interest expense on a quarterly basis.
Amortization of financial fees remains unchanged our liquidity position at March Thirty One is $39 enabling us to comfortably fund our businesses activity ramps.
Let me add a word about product pricing effective March 1st. We implemented a base price increase on new orders of 3 to 10% on all products increases holding and should benefit our third and fourth quarter.
I mentioned last time that one benefit of the slowdown in 2020. Was that GMC before more Technical Resources to upgrade long-term Supply change by approving new suppliers for critical Alloys wage in you to be optimistic that will be rolling out three new premium Alloys in the fall of this year offering excellent future growth opportunities.
Let's take a couple of minutes on the end markets are Aerospace sales were twenty two point two million or 60% of sales in the first quarter of 2021 and increase of 29% over the fourth quarter. However, Aerospace sales remained 48% lower than the first quarter of 2020 as I mentioned the 27% sequential increase in our premium Alloys sales is driven by anger Aerospace demand, especially for defense.
after a punishing
Twenty-twenty due to the delayed returning to service of the Boeing 737 Max along with a COVID-19 pandemic that essentially hold an airline travel and interrupt the production. There are grown no signs that the commercial airspace Mark is starting to turn the corner leading indicators are many but include deliveries resume for the 737 Max and the 787 Boeing bought a $282 gross orders including $224 for the max the faa-approved the higher-capacity 737-800 design
Your traffic is exceeding forecast by all metrics by way of examples were averaging over 1.4 million passengers a day and American Airlines announced their plans to operate 90% of its domestic seat capacity this summer versus 2019.
The plan to ramp to 3137 Maxs by a Q4 appears to be on track while Airbus is sticking with its production plants announced in January defense contractors lawyer remain optimistic about spending patterns over the next few years. Despite the change in Administrations.
Universal we're seeing order entry improvement with the easing of destocking by our service center customers along with continuing strong defense demand.
Your world demand outlook for the rest of the 2021 still looks to be trending positively as travel opens vaccines are distributed confidence builds and Commercial build rates increase our customers expect to see a direct metal pole in the supply chain to build new planes and a more active after market player this year.
The heavy equipment Market remained our second largest market in the first quarter of 2021 with sales of 8.1 million or 22% of sales representing roughly a 1/3 in, so we're both the fourth quarter of 2020 in q1 2020.
Metal fabrication markets particularly automotive and new model introductions Drive plate sales in the auto market remains strong us vehicle sales in March were especially noteworthy reaching 7.8 million annualized units. Well above the consensus of 16.5 million.
Despite the well-publicized semiconductor issues impacting negatively on Automotive operations are playing customers report no major effect on their demand and Universal. We are seeing order entry took a plate products remain strong.
You only gas in Market moved up in rank to become our third largest in Market in the first quarter with sales of 3.1 million or 8% of sales an increase of 34% from sales in Q4 back down 30% from a year ago.
We saw a sequential turn around in our oil and gas market sales in the first quarter. As oil prices rebounded on Rising economic activity and US recount showed signs of recovery reaching 430 April 1st the highest level in a year.
energy
Administration is forecasting Brent prices at $65 per barrel this quarter, which is more than enough to Spur e&p activity.
Even with the increased demand that we saw in the first quarter. Our customers are still proceeding cautiously the supply chain inventory picture is mixed nonetheless confidence prevails among our customers been an improved second-half 21 and a much better 2022 are on the horizon as the macro-environment further improves and COVID-19 issues receive based on their earnings release this morning Halliburton and Baker you would agree with this Outlook.
The general industrial Market was our fourth largest market in the first quarter with sales of 2.1 million dollars or 6% of sales, which is 53% lower than a near-record four point, four million or 14% of sales in the fourth quarter. Our general industrial category includes sales to the semiconductor as well as the medical and general manufacturing markets.
You sequential decline in our general Industrial Sales in the first quarter was due to inventory adjustment by our semiconductor customers after heavy buying in the third and fourth quarter of last year rather than to any disruption in production or market share loss.
In fact, the semiconductor industry Association reports a 15% increase in global semiconductor industry sales in February compared with February of 2020 the Biden administration of law makers that made addressing the acute ship shortage a priority Capital spending by Major chip and Equipment makers is at record levels.
Based on our discussions with customers our backlog and our current order entry Trends. We expect General equipment sales to get back on track during the balance of the year are demand from the segment has always been a bit lumpy and things certainly have not changed.
Power generation market sales increased 25% in the first quarter to one point two million or 3% of sales compared with 1 million or 3% of sales in the fourth quarter. Although they were 46% lower than the first quarter of 2020 as most of you know, maintenance demand is accounted for many of our power 10 sales in recent years, but maintenance activities were interrupted by the spreading pandemic in 2012.
We did see an uptick in the first quarter. Although maintenance levels had not yet recovered two previous normal levels.
It's worth noting that the underlying case for the critical role of gas and energy transition to address climate change remains unchanged.
P as pointed out that on average gas plant emissions are half that of coal and for their High efficient line of disturbance just a third of coal GE further noted that the US in US the power is reduced its carbon emissions by 33% since 2007 largely driven by switching from coal to gas.
We along with our customers are awaiting the eventual pick up in the new turbine Market in the US. In the meantime, we expect maintenance work to pick up in line with General economic activity.
Let me wrap things up to get to your questions.
While the road to recovery from the COVID-19 induced trauma to our major markets will take some time. Our first quarter performance gets us off to a fast start with broad-based double-digit sales growth spiking off entry backlog growth and base price increases announced in March.
As the market recovers we are poised to seize opportunities as evidenced by a rapid first quarter production ramped while posting notable productivity improvements reducing operating costs per pound them tightly controlling spending improving our working Capital Management continue to develop and Market new products as customer approvals are earned and lastly ensuring the financial flexibility necessary to meet our operating in strategic goals.
The higher sales and activity levels in the first quarter product gross margin nearly to break even even with a two point six million dollar fixed cost absorption charge. We anticipate these charges will be lower in the second quarter and be alone during the second half as activity continues to rent.
Our plan now is to consolidate the gains from the operational improvements. We achieved over the past year as well as the move forward with our strategic growth initiatives. Our focus is expanding our premium alloy production capability buying a vacuum Arc furnace an 18-ton Crucible in our North Jackson facility. The projects are underway and commissioning will be completed during the second half of the Year. Let me underscore that. Our progress would not have been possible without the hard work and continued dedication of our entire team at all of our facilities the support of our customers shareholders and lending institutions and the guidance of our board. We are fully focused on making further progress during the rest of the year.
That concludes our formal remarks operator. We're ready to take any questions.
Thank you so much, sir. Ladies and gentlemen. If you have a question at this time, please press the star. Then the number one key on your touch-tone telephone again. That's the store then the number 1 on your touchtone telephone if your question has been answered or you wish to remove yourself from the cable, please press the pound key. Your first question will come from the line of Steel gifts from keybanc Capital markets. Your line is alive still ahead clean. Hey, good morning, Danny. How you doing Phil doing? Well, how are you enjoying the snow in a beautiful question is just on the benefit from higher surcharges raw material cost. I think you said eight hundred thousand in the first quarter.
How much of that persists into the the second the second quarter as you look ahead to those do those benefits would accelerate or level out or go away is nickel has come back. I know things are moving in different directions. Well Nicholas retreated most of the other materials continue to be up. So as you look at the second quarter that that number will be temporary a little bit probably cut in half as we go through the next couple of months.
And you know for casting material commodity cost is always very difficult. If you look at the second half by expecting all even out.
Does it has it normally does?
You gave us a lot of color on that working capital and and inventory. How do you expect net working capital to progress as the year unfolds particularly as it relates to your life story levels. We're looking at continued growth in sales. Each quarter production is ramping up. So I suspect you will see higher inventories as we go down. Each, having said that you will see improved inventory turns though. So I don't expect inventory to stay flat.
For the rest of the year, but much improved over prior years in terms of turnover. As far as receivable goes they'll they'll follow the trend in sales. Obviously. I think we're doing a good job in collections. I noted that our Day sales outstanding is coming down and she look at depending on how you look at if you look at manage working capital as a percentage of sales as we do that percentage going down each quart of the rest of the year.
Okay, that makes sense. And and then on the side of liquidity, I think you mentioned after all the moves you made on the the refinancings. You're still around wage. I think where we targeted you're around 39 million and and liquidity right now that that's largely your availability on your your abl that correct. That's correct. Okay. Okay. And do you have any major debt maturities in the next couple of years that we have to think about?
No, we've got the bank agreement is pretty straightforward runs for the next five years. There's no other maturities. I would note that we did pay off the the notes associated with the acquisition the North Jackson dead which were at $15. We did that last about two months ago. I got at this point.
Nothing else on the Orizon note requires a full funding.
On the last question on Aerospace Denny that that improved as you noted sequentially is D stocking up. I think we're we're starting to see that from from some others as well. Where do you think some of the the holes are emerging? Is it is it kind of a broad-based blanket statement or do you think things are leaning some areas and others. I mean, is there any differentiation between engine or structural know what's just the general Tempo or Pace right now?
Let me ask Chris to handle that one Chris. Yeah, so I think what we're expecting and what we're hearing from. Our customers is the structural side of the business will be the first to rebound off a little bit more of a gradual Improvement. The engine side is probably going to be delayed and when it hits just like when it fell off we expect it to pick up sharply. We're doing our best to look for Signal when that's going to happen. We still don't have any clear signals other than an indication that everybody expects the second half of the year to get better. So is there any mention a lot of our demand drivers these days off by change coming in line inventory is coming back in order and then you couple that with improving demand first from structural and then with engines even more towards the tail end of the year and that's how long I've seen the balance of this year playing out.
Inda just remind
Give me where where your exposure is on the structural side. Is it largely? Is it largely landing gear type type applications? Is that what we're we're thinking of it's really all throughout actuators landing gear a number of different structural components hinges. Um, we really show up throughout the entire plane. And then on the engine side, Chris wage. Are you guys more skewed to to wide wide body meaning meaning more of the role supply chain or more of the the GE supply chain? Cuz I know some of your newer Awards have been on a roll side. Yeah, I'd say it's a good balance. We talked a lot about roles with the LTA we have within that is wide body driven, but with g e and Pratt we've also got a lot of participation. We probably don't make as much fanfare about it, but there's a pretty good split between the two.
Next everybody. Appreciate it. You're welcome. Thank you, sir. Hold on ladies and gentlemen. If you have a question at this time, please press the star. Then the number 5 key on your touch-tone telephone again. That's star one to ask a question if your question has been answered or you wish to remove yourself from the queue, please press the pound key.
Your next question will come from the line of Bob sales from Allan K. Capital Management. Your line is alive. Go ahead please.
Morning, how you doing? Bob? Denny. You got yourself just a clarification about this sense within Arrow. What is the level of Defense business within?
Total errors Aerospace and you know the current quarter or so twenty to twenty-five percent of our sales, we would estimate and I always put a qualifier on that as you know, we sell a lot through service center. It's not a precise number but that's our best estimate twenty to twenty-five percent of Aerospace sales or yes. Yes twenty 25% of sales.
Okay, and my next question was and I would say I would say it's growing faster than commercial not just because of the underlying demand features, but the number of the new products that we've been wage recently or defense oriented.
Okay, and then when I when you when you break out service center versus
is that is it is it safe safe to say that the OEM shipments are largely. The defense business or is is still that prime or it can you not really break down the OEM business attributed to one particular segment or sub segment?
I don't really have that in my head. Is it breaks down? I mean some of it is defense. Some is also power generation.
Okay. Okay. Good majority. I quite frankly. I think it's powergen. Okay. All right, and then you touched on it a little bit but the the new products that you'll introduce fall. Can you expand a little bit about I think you alluded to the fact that maybe they're oriented towards defense, but can you expand on that and also some expectations of the impact on that as we look into 2022 we're working at the tail-end are so we're going through some final testing and so forth. These are all Aerospace Alloys they have commercial and defense applications.
And our longer-term estimate for each alloy is they'll generate an additional five million in sales as to whether I doubt that will be I'm not saying that's all going to hit in 2022. I think if we get out of the next couple of years at Target, you know by 2023 will be talking about $15 of incremental business in a reasonably healthy Aerospace environment based upon these new Alloys and working on now. Okay, once you're up once the process is learning, let's say Q3. How long is the qualification process for before you can actually ship to the End customer?
You talking about our our capital projects now or approvals? Well, I'm assuming that the three new products that you're going to introduce are going to be going to be Thursday the furnace and induction crucible that you're that you're installing today.
Not necessarily. We we can make the current products we're talking about we can make with our existing footprint. But as we grow, I mean, there's not a direct correlation overtime. Let me talk about the VAR to make sure I'm being clear. We've got 11 vacuum Arc furnace has we're adding another one. This is a state-of-the-art vacuum Arc furnace, which I have that ability to handle any alloy that we're currently making or anyone we would plan to make over the next five years.
So it's important that we we have a family of VAR furnace, it can handle or Alloys all VAR furnaces are not the same. So this one gives us the utility to be able to handle any alloy support the growth. We see in these these Premium Outlet products. That's the general that's a general statement. It's not directly correlated to the three Alloys I'm talking about
Gotcha. Okay. So back to the three allies when you say you're introducing these new products in the fall. Does that mean at that point they will have been qualified with customers or is that when the qualification process starts off? That's when we'll get that's when we anticipate having approval and those Alloys will move into commercialization which means we'll be able to sell them into the supply chains for the respective oems. So it'll be a period there where we have to do good old-fashioned selling good part of that is all these customers or potential customers are already customers of ours most of the voice already worked with us on business cases Thursday, excuse me was why we should get approved.
So I love to say this one.
Consumers in the room. It should be an easy sale.
Okay, thank you. That's all my questions. Congratulations on the nice burgers.
Thanks, Bob. Thank you, sir. I can ladies and gentlemen. If you have a question at this time, please press star then the number one on your telephone keypad off the phone keypad.
I am showing no further questions at this time. I would like to turn the conference back to mister Dennis Oates for closing remarks. Okay. Thank you. Once again, I want to thank everyone for joining us this morning afternoon. Normally challenging twenty-twenty. It was great to see the improving momentum in in market demand during the first quarter. We look forward to updating you on our effort to capture Market opportunities and move forward in our growth initiatives in our next call in July. Hope everyone continues to be well stay safe and have a great day. Thank you God. Thank you, sir. Thank you so much for that. Then again. Thank you. Everyone for participating. This concludes today's conference. You may not disconnect and have a lovely day off.
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