Q1 2022 Universal Stainless & Alloy Products Inc Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily once again, ladies and gentlemen, thank you for your patience and please standby.
[music].
Good day, and thank you for standing by welcome to the Universal.
Stainless first quarter 2022 conference call and webcast at this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone. Please be advised today's conference is being recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today June as Phil and Jerry. Please go ahead.
Thank you Michelle Good morning. This is June <unk>, Jerry <unk> of Comm 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 first quarter 2022 results reported this morning with US from management are Denny Oates, Chairman, President and Chief Executive Bob.
Sure, Chris Zimmer Executive Vice President and Chief Commercial Officer, and Steve did Tommaso Vice President and Chief Financial Officer before I turn the call over to management. Let me quickly review procedures. After management has made formal remarks, we will take your questions and Michele <unk>.
<unk> procedures again at that time also please note that in this morning's call management will make forward looking statements.
The private Securities Litigation Reform Act of $19 95, I would like to remind you of the risks related to these statements which are more fully described in today's press release and in the end.
The company's filings with the Securities and Exchange Commission.
With these formalities complete I would now like to turn the call over to Danny Oates Denny we are ready to begin.
Thanks, Jim.
Good morning, everyone. Thanks for joining us today.
The recovery in aerospace demand continued to build positive momentum in the first quarter driving exceptional growth in bookings backlog and increasing sales specifically.
Specifically.
Consolidated backlog increased 50% from the record of $134 5 million at year end 2021 to.
To reach a new record of $201 $8 million before surcharges are.
Our backlog ratcheted up each month of the quarter, including a strong increase in premium alloy products.
At March 31 premium alloys represented 25% of total backlog given today's lead times approximately one third of the backlog is scheduled for shipment in 2023.
The backlog growth reflects record monthly and quarterly bookings, which totaled 107 4 million before surcharges, providing an excellent base load for operations over the next several quarters.
Each bar and plate products were especially strong with volume increasing sequentially by 136% and 40% respectively.
Net sales increased to $47 6 million up 10% or $4 4 million from the fourth quarter, and 28% or $10 4 million for the first quarter of last year shipment.
Shipments totaled $13 7 million pounds, essentially unchanged from last quarter.
A couple of noteworthy points I want to make on sales.
The $4 4 million increase in sales is comprised of three things pricing surcharge increases of $2 3 million product mix changes of $2 7 million and a reduction in sales of $700000 due to revenue recognition and other miscellaneous sales adjustments.
We've announced eight base price increases over the past year three before September 2021, and five <unk>.
Including for increases in 2022 alone.
60% of Q1 sales were booked prior to September it did not benefit from all the increases.
We expect the positive impact of price increases to accelerate over the next few quarters as the benefits of subsequent price increases kick in.
The product mix improvement of $2 7 million is directly attributable to increased sales of higher priced finish bar and premium alloy products consistent with our long term strategy.
Premium alloy sales rose, 27% to $8 9 million and represented 18, 8% of total first quarter sales compared to $7 million and 16% of sales in the fourth quarter.
A 17% reduction in shipments of lower priced <unk> products also contributed to the favorable sales mix impact.
However, I should point out that order entry for fleet was excellent in the first quarter play backlog is up 42% and we continue to expect a solid year in the plate business.
We also expect sales to trend upward each quarter of 2022 subject to modest seasonal factors.
Current backlogs point towards stronger volumes higher prices and improving mix.
Let's turn to profitability.
Gross margin was $4 1 million or eight 5% of sales in the first quarter versus eight 7% of sales in the fourth quarter 2021, and a minus 7% of sales in the first quarter of last year.
I said on our last call that I would expect double digit gross margins as we move through the first half of 2022, frankly, we expected to do better than eight 5%.
Looking at the puts and takes the gross profit margin in the last quarter benefited from three items that were more than offset by three challenges.
So let's take them one at a time starting with the positives.
First quarter gross profit was increased by $1 $1 million by a grant received under the aviation manufacturing jobs protection program.
We recorded a $1 $1 million benefit in Q1 and estimate favorable impacts of $1 5 million in the second quarter.
$5 million in the third quarter. The grant is contingent upon maintaining certain minimum manning levels.
Without the grant first quarter gross profit margin was six 3%.
We estimate the positive misalignment between prices and surcharges compared to material costs added $400000 to gross profit or about 8% of sales.
Lastly, the increasing mix of premium melted products had a favorable impact on gross profit.
These positive factors were more than offset by three items.
First ongoing supply chain challenges, including delays in transport delivery of critical parts and timely receipt of raw materials, the resulting intermittent extended outages of key facilities limited production early in the quarter.
Second inflation that price of virtually all operating supplies and consumables ran ahead of the benefits of price increases in the first quarter.
Third lower than planned production led to reduced absorption of fixed cost and lower margins actual fixed spending however remain unchanged.
Sequentially about $2 million of additional unabsorbed fixed cost hit the P&L in the first quarter compared to the fourth quarter.
The resulting monthly trend in gross profit margins during the first quarter reflects the impact in January our gross profit margin was nine 5% in.
In February we turned negative at four 5% when the outages impacted.
And in March we were at 11, 7% before the impact of the aerospace Grant.
We've addressed these issues by completing major maintenance on key facilities, such as our forge grinding equipment selected rebuild furnaces and hot rolling operations.
We've replenished parts and consumable inventories.
Where do it de risking our raw material and parts supply chains from exposure to Russia, Ukraine, China and related areas of concern.
Lastly, pricing surcharge increases have been implemented and they are favorable contribution will grow each quarter.
All of these steps coupled with our record backlog and increased production levels give us confidence that profit margins will rise and we will deliver the double digit margins are described in our last call.
As we move through 2022.
I will provide an update on the spill in a moment, which could have an impact on our margins in the second quarter.
First quarter.
Selling general and administrative expenses approximated about $5 million essentially the same as the fourth quarter of 2021, but declined as a percentage of sales from 11, 6% to 10, 5% we.
We expect SG&A expenses to remain flat for the next few quarters.
For the three months ended March 31, 2022, and 2021, our estimated annual effective tax rates applied to ordinary income were 10, 6% and 25, 8% respectively.
The difference between the federal statutory rate of 21% in the federal annual estimated tax rate in both years is primarily due to research and development credits the.
The 2022, and 2021 estimated annual effective tax rates differ primarily due to an expected expectation of income tax expense in 2022.
Pair to an income tax benefit in 2021.
The net loss for the first quarter was $1 6 million or <unk> 18 per diluted share virtually identical to the fourth quarter of 'twenty one.
The year ago quarter loss was $4 5 million or <unk> 51 per diluted share.
EBITDA for the quarter was $3 8 million and adjusted EBITDA was $4 2 million after adding back $400000 for stock based compensation.
Okay.
Let's move onto our financial position.
Managed working capital increased in the first quarter to $142 5 million on March 31.
$136 9 million on December 31.
The increase was mainly due to $7 $1 million to a $7 $1 million increase in accounts receivable, resulting from the high volume of shipments in March.
<unk>, 40% of Q1 sales occurred in the month of March.
Inventory increased by $6 $7 million from the end of the fourth quarter to $147 4 million.
The $6 7 million increase was comprised of $2 1 million increase in raw materials.
With $400000 due to volume and $1 7 million due to higher material costs.
It was a $4 million increase in work in process.
With a $3 $6 million declined due to lower pounds and work in process offset by an increase of $7 6 million due to higher material costs.
And lastly, there was a $600000 increase in supplies and parts inventory.
In short the increase in inventory is due to the rising price of materials not to increase volumes and inventory.
Lastly, the $75 million increase in accounts payables more than offset the increase in inventory.
Capital spending was $2 5 million in the first quarter down from $4 6 million last quarter.
While we still anticipate $20 million in capital spend this year supply chain and delivery uncertainty may push some spending into 2023.
We finished the quarter with total debt of $76 million up $6 8 million from year end.
Liquidity remains in good shape at $25 4 million, an increase of $1 4 million sequentially.
Taking a minute on commodity prices, especially nickel, which ended March at $15 50, a pound.
Now, 70% higher than at the end of December and more than double its price a year ago.
The nickel market has tightened due to recent sanctions on Russia ramping production of electric vehicles and healthy specialty metals demand.
In addition to nickel there were strong run ups in other commodities by the end of March both vanadium and Ferrotitanium more than doubled in price from the end of December while chrome was up 45% cobalt up 15% and scrap up 13%.
Due to the sharp inflationary cost increases affecting nearly all areas of our business, we have announced four price increases since the beginning of the year.
Base price increase for all products in January price increases for bar products in February and March as well as an increase for plate products in April .
Yeah.
Moving on to operations.
We announced in April only.
<unk> eleventh's liquid metal spill it occurred during operations at our electric art melting facility in Bridgeville.
<unk> is caused by breakthrough at the bottom of the furnished show.
No one was injured and there was no environmental impact while.
All other operations have continued to function normally.
No near term interruption to product delivery schedule. This was anticipated.
Since the time of the spill, we had been in the process of cleanup and damage assessment.
We said at the time that we expected melting operations to resume in six to eight weeks subject to parts and contractor availability.
Our team is doing an outstanding job recovering and we expect to resume melting the week of may 23rd, which which would be on the low end of that estimate.
While there are still unknowns and these numbers are preliminary we estimate the cost of cleanup and repair to be in the $1 $5 million range.
And in asset charge of about 300 to $400000 will be required.
We have a $1 million deductible in our insurance program.
We are taking additional steps to partially mitigate the impact of the spill.
Specifically, we are securing purchase melt for selected grades to meet customer commitments maintained downstream asset utilization and preserve our workforce.
We're also redeploying affected employees to other productive roles within the plant.
Although the metals spill is uppermost in our minds right now there were several operational milestones reached during the first quarter among.
Among them was completing the commissioning of the new 18 ton vacuum induction melting crucible of North Jackson.
As we have discussed the vacuum induction melting crucible expands our vacuum induction melting capacity to support the growth in premium alloy products and significantly improves the efficiency of our mill operations.
100% of the $3 million in trial inventory and work in process at year end has passed testing and been applied to customer orders.
We're also proceeding with the acquisition of two additional vacuum mark rebuilt furnaces to further support our growth and efficiency along with our expanding product portfolio.
The furnaces have been ordered and will be installed at our north Jackson facility to be operational late in the second quarter of 2023.
I'd also like to congratulate our entire bridgeville team on achieving the covenant ISO 45001 certification for occupational health and safety.
Richard joins our other three plants, which are in the certification in recent years, demonstrating our commitment to safety by all universal employees and validating the effectiveness of our safety processes.
Let's turn to our end markets, beginning with aerospace our largest market our aerospace sales increased 17% to $30 1 million or 63% of sales in the first quarter.
From $25 7 million or 60% of sales in the fourth quarter.
Our first quarter sales to aerospace were the highest since the second quarter of 2020.
Last quarter I noted that recovery in aerospace was gaining traction due to improving travel activity increased deliveries a return of bookings for the commercial and freight sectors increased defense spending and growing activity in general aviation.
Those same factors accelerated recovery those same factors accelerated recovery ma'am in the first quarter.
Among these factors is the substantial comeback in air traffic and as February report.
Reported that air travel posted a strong rebound from January and.
More than doubling of air travel from February of 2021.
The year over year comparison included a 61% increase in domestic traffic and a 257% increase in international traffic.
<unk> said that the award in Ukraine did not have a major impact on February traffic numbers. However March numbers are not yet available.
Adding more evidence of the return of commercial Air travel Delta Airlines reported last week that is seeing historic levels of sales activity and bookings as consumer demand accelerated through the quarter higher.
Highlighted by strong spring break performance in business travel as omicron faded offices reopened and travel restrictions were lifted and quote.
At Boeing do you expect it to step up and build rate of the 737 Max has now materialized increasing to 31 airplanes per month from 'twenty seven per month at the end of January <unk>.
Increasing supported by Boeing's order book, which remained strong even with recent reductions required by accounting rules to do Russian sanctions.
Boeing has received an estimated 1000 orders for the 737 Max since it's returned to service.
Although its wide body aircraft Boeing continues to work through structural flaws in the 77 airplane before it can resume deliveries and ramp production in a meaningful way, even so it's worth noting that boeing's backlog totaled 4200 31 airplanes as of April 12.
Boeing has emphasized the freighter market is a major area of opportunity that is proving to be the case.
We introduced a new triple seven dash eight in January accompanied by several major orders from Qatar Airlines, Western Global DHL and Ethiopian Airlines.
And Airbus management is targeting delivery of 720 commercial airplanes. This year up from 611 last year.
On their conference call in February Airbus There. Its main priorities are to strengthen its backlog and deliver on its commercial aircrafts ramp.
The order backlog at year end 2021 was 7082 commercial aircrafts.
As part of their plan for production ramp up of the <unk> hundred 20, narrow body family Airbus has increased production build rate approximately 52, approximately 50 airplanes per month up from 40 per month during the pandemic.
They remain committed to increasing that to 65 per month by July of 2023, and we'd like to move beyond that level to $70 75 per month.
But recognize current supply chain capacity may be limited.
Demand in the defense market remains healthy since our last call. The administration submitted a fiscal year 2023, Dod's budget requesting 773 billion, which is up 4% from the level of enacted in fiscal year 2022.
Based on discussion with our aerospace customers. They are increased order levels are in response to current demand combined with planning for higher demand in the second half of 2022 continuing into 2023.
That's in line with airplane build rate forecast is supported by multiyear backlogs at Boeing and Airbus.
The heavy equipment market remained our second largest market in the first quarter of 2022 heavy.
Heavy equipment sales were $8 1 billion or 17% of sales, which is 11% lower than $9 million or 21% of sales in the fourth quarter.
Metal fabrication demand drives our sales to the heavy equipment market last quarter I pointed to typical lumpiness in quarterly sales and that was evident in the first quarter, even so based on our bookings and a 42% increase in order backlog and first quarter.
We expect our heavy equipment market sales remained strong in 2022, driven by continued industrial equipment demand and model changeovers by automakers.
The oil and gas end market was our third largest in the first quarter of 2022 with sales up 7% to $4 5 million or nine 2% of sales.
Compared with $4 1 million and nine 4% of sales in the fourth quarter.
Volatility in oil and natural gas pricing of late has been dramatic.
At the time of our last call in late January crude oil prices closed at $88 per barrel.
Close to a seven year high and natural gas prices that jumped up 482% in 2021.
Later on the war in Ukraine, Russian sanctions unusually cold weather and the decision by the IEA to release, approximately 240 million barrels of emergency oil reserves.
Over the next six months and the erratic moves in prices are not all that surprising.
Oil was as high as $124 a barrel in March 8th and close to $103 yesterday.
While natural gas closed at $7 80 per million Btu up 40% this month alone.
While it may be hard to get a fix on where oil and gas prices will settle drilling activity continues to increase as evidenced by the Baker Hughes rotary drilling rig count.
As repo rates. They were totaled 689 active drilling rigs in the U S. An increase of 16 from weak before and an increase of 257 rigs from April a year ago.
International rigs totally 15 up to during the week, but up 100 from the same period last year.
U S energy information administration estimates that commercial oil inventories in the OECD ended the first quarter at $2 6 billion barrels up slightly from February but that was the lowest level since April 2014.
With a low level of inventories one equity analyst recently, not only forecasted increased drilling activity in the U S and internationally.
But the major oil companies would maintain their capital discipline.
And spend at the upper end of expectations, while private operators will continue to add rigs.
Higher drilling activity leads to more demand for parts and therefore more demand for metal to produce them. We're seeing the initial signs of increased activity and supply chain inventories appear to be getting in good shape.
General industrial market sales in the first quarter totaled $3 4 million or 7% of sales an increase of 33% from the $2 5 million in the fourth quarter.
Our general industrial market includes sales to the semiconductor medical and general manufacturing markets robust semiconductor industry demand remained the main driver of our first quarter growth in this market.
Semiconductor industry reported a global semiconductor sales increased 32% in February from the same month of 2021.
While sales in the Americas increased 43% at.
At Universal we continue to expect reasonable volume opportunities in the general industrial market in 2022.
Okay.
Power generation.
Asian market sales increased 10% to $1 3 million or 3% of sales compared to $1 2 million last quarter.
Maintenance demand continues to account for most of our power generation sales and we expect that to be the case for the foreseeable future.
A pickup in seasonal maintenance aided our first quarter, while there may be some future benefits from increased gas turbine backlogs at major Oems has not materialized in terms of demand from our customers.
Looking at the industry more broadly EIA as forecasted natural gas generation will represent a solid 35% of U S electricity generation in 2022 and 2023.
At the same time and industry analysts report and the industrial gas turbine market forecasted growth rate of about 3% over the next six or seven years.
We expect sales to grow modestly in 2022 and tracked normal seasonal patterns.
Before I wrap up I'd like to take a moment to introduce Steve <unk>.
Steve has served as our corporate controller since 2018.
During which time he led our accounting and Treasury operations, the net expanding responsibilities in strategy development and operations and.
He is an ideal fit for the strategic role of Vice President and Chief Financial Officer, because this deep knowledge of financial reporting cash management and equally important because those familiarity of universities Universal's business and operations.
Personally I'm looking forward to working with Steve to execute our strategic plan drive operating performance and share in future conference calls and Investor Relations.
Sure.
Thank you Danny.
I'm very excited to take on this new responsibility for universal stainless.
For the past four years I've been fortunate to be a part of the finance group here and Im supported by a strong and talented team.
We are fully focused on furthering universal's growth strategy and initiatives.
I'm also fortunate to have worked closely with Denny and our leadership team.
We have met several recent challenges, but we also see many immediate opportunities and universal stainless is well positioned for success going forward in 2022 and beyond.
Thanks, Steve.
So many of you will be working with Steve Here's will go down the road.
Let me wrap up a couple of points I'd like to close with.
Accelerating recovery in aerospace demand drove exceptional growth in bookings and order backlog as well as increased sales.
Aerospace sales were up 17% sequentially and included a 27% increase in higher value premium alloy sales.
Backlog is at an all time high of $202 million up 50%.
A full 25% of the backlog consisted of premium alloys.
First quarter bookings also reached a new record of $105 million.
The balance of our end markets achieved sequential sales growth except for heavy equipment.
However, I noted several times that the heavy equipment backlog grew 42% during the first quarter and we expect a solid year overall.
Our gross margin of eight 5% in the first quarter was aided by strong premium alloy sales.
A modest positive misalignment between prices and material costs, and a $1 $1 million grant.
These positives were more than offset by supply chain challenges operational difficulties early in the quarter ongoing labor shortages and rapidly rising costs that were not yet fully offset by price increases.
Our immediate focus is on ramping up our melt shop in Bridgeville following liquid metal spill at our electric shock.
We're taking all actions possible to mitigate the effect of that event and continue to expect building operations to resume the week of May 23.
The very preliminary cleanup cost estimate of the event is $1 5 million plus a 3% to $400000 noncash asset charge.
Our deductible from insurance standpoint, it's $1 million.
We're also moving forward on our strategic investment in two new advanced vacuum arc re mail furnaces and a variety of other labor saving investments.
We have adequate liquidity to fund our record backlog.
Creasing sales targeted.
Targeted investments and working capital needs.
Excluding the charge for the melt shop spill in Q2 with the strength of our backlog and bookings amid recovering markets. We expect to deliver stronger sales volume continued pricing improvements a richer mix ramping production and improve margins as we move through 2022.
Let me end by recognizing the efforts talents and resilience of our employees, who continue to enable us to overcome our challenges and seize these new opportunities are.
Our ongoing confidence in the future is due to their commitment as well as the support of our board customers and stockholders.
That concludes my formal remarks, Michelle we're ready to take some questions.
Thank you if you have a question at this time. Please press Star then one on your Touchtone telephone question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And our first question comes from the line of Michael <unk> with Keybanc capital markets. Your line is open. Please go ahead.
Hey, good morning.
Hey, Julie.
Good good firstly I just wanted to ask on supply chain inventory specifically within aerospace.
Where do you see those relative to where they normally at this time of year and do you see any potential shifts for meaningful restocking towards the back half of the year.
In other words is the 50% increase that we're seeing in backlog evidenced that the supply chain doesn't have enough inventory needed for some of the production ramps that we're seeing within aerospace right now.
Let me have Chris Zimmer, our executive VP answer that Chris.
The feedback that we're getting from the supply chain is that.
Their demand from a pull standpoint continues to increase.
Their inventory levels are low.
So in addition to ramping their buys with us to support demand Theyre looking forward to where they anticipate they want to have their inventories level ought to get back to the service levels that they like to have.
We're finding that a lot of our customers that are used to quoting out of inventory with quick lead times because of their lower inventory levels right now it's extending their service levels.
So as we look at what's coming ahead in our backlog and.
And more importantly that demand it's coming in from our customers, we see a lot of the buys coming in to keep up with demand.
And quite frankly, it's a bit of a struggle for them to reload their inventories to levels that they'd like to get back to.
And do you have any visibility into what specific platforms that your materials being shipped in our.
Or what's driving that backlog increase in terms of platform I would assume it's some of the narrow body ramps, but I just didn't know what visibility you had.
On year end.
The visibility is not what I would call crystal clear, but we do have a very good idea of where a lot of it is flowing towards because that first channel for most of our sales. Our service centers. We know that Boeing is a major driver both structural landing gear engine side of the business.
There is a good portion of our business that goes to the engine producers.
The big three whether it would be a formal contract or transactional business through forgers.
And even as you look through some of the smaller to mid size programs like Bombardier and Embraer as we know that our product is getting there through contractual deals that we have primarily with service centers.
And then there is also a portion of the business, it's going to defense applications.
Helicopters fixed wing.
And again, a lot of that flows through distribution and forgers. So we have a general idea of where those are going towards from the specs that flow down.
But only a small portion of our sales is actually on a direct basis.
Got it.
I would just add a couple of things that I couldnt.
I would echo everything Chris said.
The fact that if you look at our backlog I commented that about a third of our backlog is out into 2023, I think that underscores the confidence in the supply chain on the ultimate demand coming out of the aerospace business. The fact that we're seeing that kind of <unk>.
Interest in loading up in the first half of next year.
And.
We.
Everything Chris said is correct with regard to how our metal gets to market, but it's just impossible in that kind of the way. We go to market to really tell you. How many pounds. For example was one of 737 of our product.
But we know that the base fare product that's on every commercial airplane in some way shape or form through our forging and.
Service Center customers.
Yes, no thats helpful.
And then on margins I wanted to ask if you expected to do better than the eight 5% this quarter given some of the elevated supply chain issue then inflation.
Versus three months ago do you see some of these issues are abating or do you expect margin improvement in the second quarter and sequentially throughout the remainder of the year.
<unk> some of the headwinds that you called out.
We expect margin improvement as we move through the year.
I'd point back to the monthly trends, we saw you can clearly see in our monthly trend in gross profit.
Which was nine 5% gross profit in January than we went into the Red in February when we add some of these supply chain issues happen.
And essentially what's happening is and.
Any steel mill Youre going to have maintenance issues, you do preventive maintenance predictive maintenance.
But there are going to be breakdowns.
We have a core competency and jumping on those things and fixing them quickly.
Album were running into as I think all mills are is getting get our hands on the parts. So you've got equipment, that's sitting idle, while we're waiting for parts to arrive.
That's what hurt us here this quarter.
If you look at March as things cleared up and we are able to purchase get some of those supplies in largest pick back up to 11, 7%.
So as I look at the second quarter I expect to see double digit margins.
The one caveat on that and I am excluding when I say that the impact of the spill. We will have a charge in the second quarter I don't have a hard number that I gave you. The best estimates we have on that so I'm, excluding that from when I say that we're going to have double digit margins.
As far as whether the situation is getting improved.
I would say very very slowly.
Essentially we are addressing that by buying heavy.
And the last couple of calls Ive talked about buying extra raw materials.
Buying heavier on parts I pointed out we had an increase in our supply and operation parts and inventory so.
So we are buying a little on the heavy side to try and compensate for supply chain issues and I would expect that to slowly improve but when we go of course of the year.
But I think we'll still be talking about some disruptions here in the fourth quarter of this year, but just not as bad as today.
And the labor shortage situation continues there is a challenge these days so.
We're in a mode, where we're hiring people.
Which.
Implies we've got a lot of training going on out there we've got probably a third of our employees is less than a year's experience.
So we need to train those employees to work safely first and foremost and efficiently as well.
So we're going through all his usual struggles we've seen a ramp up.
Which compounded by a labor shortage that I think everybody is facing these days.
And then on that labor shortage, how much do you need how much workforce do you need to bring back.
To get to the to be able to produce that normalized pre pandemic volumes.
We probably need another 50 to 75 employees.
Hourly employees Im talking about.
Got it.
Alright Thats it from me thanks for all the color.
Youre welcome.
Thank you and our next question comes from the line of Greg Weiss with Boston Partners. Your line is open. Please go ahead.
Hey, Danny How're you doing.
Good morning, Greg.
Look obviously in kind of a bipolar quarter. The margins were not what you wanted the bookings were <unk>.
Tremendous which is normally probably the more important of the two.
And I think the reason your stock is trading at such a distinct discount. The book value is because there is lack of confidence of achieving the profitability of that backlog. So I guess, if you could just.
A little more granularity on what you've already said of whether it's pricing of the backlog or.
Asset utilization are offsetting some of these headwinds.
Of how we're going to be.
Be profitable in this backlog and just take it one step forward.
If you can comment on how order entry has been post the quarter, but getting paired by the spill at all or.
Any color there would be great.
Okay, Let me take those in reverse orders go through reporting so yes.
Yes, So we had a we had a great first quarter and order entry customers buying ahead as they see their demand ramping.
Denny mentioned the four price increases that we put out this year. In addition to I believe the five that we had last year.
As lead times extend.
What you don't see is under lie behind that a little caveat that it's effectively.
Pricing in effect for those orders that are placed out so far into the future that gives us an opportunity to be able to stay ahead of inflation in.
And even for the orders that are on the books out to the future still make adjustments.
To reflect what we need to do there staying ahead of inflation and.
So on an order entry standpoint, we feel very good about the quality of whats going into the backlog.
<unk> are moving up significantly.
Even with the longer lead time items, we have additional flexibility to push them up higher in response to any additional inflationary impact we see.
So let's talk about why you think margins will go up.
The.
Key writeoff, where Chris left off we've got price increases that we've announced and with each of the next couple of quarters.
More of those price increases will start to be reflected in our P&L.
Alright about three of the price increases impacted first quarter five of them and as we move through time Youll start to see the impact as we sell through the orders that we booked.
Since those those price increases and so we're looking at higher prices going forward.
If you look at the mix, we're seeing a mix of our higher margin business. The premium alloy products are up finished.
<unk> finished bar products are up.
And plate, which was down in the first quarter, we've had a significant increase in backlog. So we expect that volume to return.
So we're looking at a very decent mix on top of increased prices.
We are a capital intensive business as you know is all steel mills are so production activity has a big impact on our quarter to quarter swings in profitability in the first quarter. We were hammered by some of these outages, we add and I didn't go through all the outages, but for example, we launched our forged for about a month all told during the month waiting.
Waiting for parts.
Which is a bit landing, but we feel that we've covered ourselves where we have known maintenance issues, we've taken outages.
So we feel we're in pretty good shape as we enter the second quarter third quarter here to ramp up production get higher pounds, which will improve absorption and increase our margins as well.
And obviously, we got a nice book of business.
Time record in terms of absolute volume to work on so you've got increasing selling prices improving mix.
We expect higher production levels.
And we got the backlog already on our books, we're not planning to do.
You don't need to book a lot in the next quarter or two we already have the stuff on our books.
As far as the bookings so far this quarter I just wanted to say.
Don't want anybody to expect we're going to have record bookings in the second and third quarter I think will have strong bookings as we move through this year, but.
But I don't expect to see 100 million plus each quarter in terms of bookings this year.
Does that answer to help you at all Craig.
Yeah, that's great I mean.
Good luck.
I can make some money.
Thank you.
Thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then one.
And our next question comes from the line of Bob sales with <unk> Capital Management. Your line is open. Please go ahead.
Hi, Bob.
Hi, how are you.
Good.
Okay.
So I guess the first question is on gross margins.
Got it.
Already.
The margins that you recognized in March are.
Ex the hit you might take on.
The rebuilding of the electric arc furnace is probably what we should expect as we go forward for Q2.
The 11, 7% number in March just to clarify excludes the positive $1 1 million for the grant.
Alright.
With this we recorded anything for the spill. So as you look at the second quarter I would expect our largest go up from that level.
Alright, excluding the spill so.
This is all kind of this is all in motion right now, but we will have a number that we will identify in the second quarter.
That will be related to the spill.
Right.
And the margins outside that.
I would expect to be higher than what we saw in March.
Got you and then.
Gross margin hit from this bill is that.
The cost of.
Yes.
Ramping back into production as well as some materials that you might have.
Procure from outside sources.
The components of the gross margin.
For the.
That's not the problem.
The growth the gross margin hit from you talking about the spill now or just the activity level in the first quarter. This bill this is Phil.
So the spill basically we'll have our melt shop.
Closed for six weeks.
Right.
Okay. That's got some implications for absorption, obviously, because we're not producing.
But we're also not incurring a lot of the cost of the production as well.
Alright, we're estimating a $1 million or $5 is the cost to basically.
Clean up.
And replace any equipment that needs to be replaced relying.
<unk>, the furnace and get back into operation is going to be about $1 million or $5.
There are some pieces of equipment that were destroyed.
The books, so we will have to write those off and we're estimating that at $3 to $400000.
The other thing that could impact that number as we look at buying some outside milk to supplement our operations.
What kind of difference, we would see between our internal melt costs and external purchase cost.
Well, which would fall under an insurance umbrella, that's got a $1 million deductible.
Alright understood.
When you described it as a crack in the shell.
Just to understand specific issue. So there is a refractory bottom to an electric arc furnace.
That you are having to replace that refractory bottom somehow correct.
Or is it something different.
No im over simplifying, but simply put an electric arc furnaces, nothing more than a commodity carbon shell and the inside of the shell is line with refractory brick along the sides and a refractory take ram product that goes into the bottom.
So with the liquid you put the raw materials in scrap and so forth into the furnace and melted down the liquid metal never really touches the shell.
Contained within the refractory brick.
There are chemical reactions that go on over time. So the lining is going to have to replace be replaced every so many heat which is normal operations.
So what happened in this case is liquid metal broke through the refractory made contact with the shell itself.
Basically melded through.
And it happened it happened to occur at a time when we were about the taps. So we had a full 50 tons of material in the furnace.
And we essentially had a hole in the bottom of the furnace and the liquid metal came through the hole.
Understood got it Okay and then.
What is the what is the.
Path towards.
Maybe I'm getting greedy here, but.
What is the path towards margin.
11%.
The path towards margin as further price increases higher activity levels.
We've got to manage our mix to make sure we get the right products into our portfolio as we're working within our existing.
<unk> portfolio and new products.
I don't want to leave you with the impression if I am that we're top of the 11, 7% margin.
I think you can look at the history of the company and see some of our margins back then there's no reason to expect we can't be at or better than those high watermarks.
That's certainly where we're shooting inside the company.
Got you, Okay and the last question for you is when would.
When you take orders for a given quarter.
Are you.
Forward buying.
<unk> materials, such as nickel has been.
The first one that comes to mind to that.
Then matches up.
The cost and pricing.
We don't we don't do a lot of hedging if we had a sizeable order with a reasonable certainty of the volume we would hedge that particular order, but frankly in our business.
That's not the nature of our business. So we're not doing much hedging at this point, we're not speculating on raw materials from time to time, we will buy if I use the term by heavy which means we may buy more than we than we need that's not so much as a risk mitigation against price changes its more risk mitigation against.
Ability in today's world.
And so in general if it's a rising market for four.
Materials, such as nickel are you there.
Basically chasing those material prices until you get silly flatten flatten off and then you are able to overcome it completely through pricing.
Is the pricing is the cost of raw materials goes up driven by nickel for example.
We are going to surcharge that with a two month lag in most of our our orders.
Alright, so surcharges at time of shipment.
All in a market, where you've got rising raw material prices.
You should see a slight positive that's the $400000 that I called out in my comments.
A positive misalignment between surcharges and our raw materials.
Over time as those increases start to flatten out they will come back into balance and there can come a time, where those raw materials go down and our margins would take a hit for.
The inverse of it over time, the idea is that as a risk mitigation against fluctuations in raw material costs.
All mills pass along into the supply chain over time, it evens out, but you can look a lot better than you really are.
In a sharply rising market.
Slightly worse than you are in a decreasing market when a quarter to quarter basis.
Yeah understood. So the surcharges as what I forgot about what allows you to.
For purchasing the nickel free when you take orders.
Yes.
Okay. Thanks, that's all my questions.
That will go into us.
Thank you and again if you have a question at this time. Please press Star then one.
And im showing no further questions and I'd like to turn the conference back over to Mr. <unk> for any further remarks.
Thanks Michelle.
Once again I want to thank everybody for joining us. This morning, we're beginning of second quarter with some operational challenges, but with record high backlog amid recovery markets, especially aerospace.
We'll continue to seize on those market opportunities as well as move forward with our growth opportunities.
We will get the spill thing behind us and get our melt shop back up and running here in May and I will look forward to updating you on our progress on our next call in July be well stay safe and have a good day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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