Q3 2022 Universal Stainless & Alloy Products Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good day, ladies and gentlemen, and thank you for standing by welcome to the Universal stainless and alloy products incorporated third quarter 2022 conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question.
During the session you will need to press star one one on your telephone keypad.
At this time I would like to turn the conference over to MS June filling Gerry Ma'am. Please begin. Thank you. Good morning. This is Jim Phil and Jerry of Comm partners and I also would like to welcome you to the universal stainless.
This call and webcast. We are here to discuss the company's third quarter 2022 results reported this morning with US from management are Denny Oates, Chairman, President and Chief Executive Officer, Chris Zimmer Executive Vice President and Chief Commercial Officer, John Armina, Vice President General Counsel and Steve.
Teach maths I was 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.
Magenta private Securities Litigation Reform Act of 1995, and we'd like to remind you of the risks related to these statements which are more fully described in today's press release and in the company's filings with the Securities and Exchange Commission.
With a formality is complete I would now like to turn the call over to Danny <unk>, Danny we are ready to begin.
That's true.
Good morning, everyone.
Thanks for joining us today.
The third quarter proved to be particularly challenging and frankly, the negative impacts of these challenges more than all set the favorable underlying trends in our business.
Let me start with a major items with a plus side.
Bookings to $66 million remains solid on.
On par with a strong second quarter and marked the third highest quarterly order intake on record.
Robust aerospace demand was the main driver.
Our premium alloy sales are $8 million or 17% of sales.
Remaining on a near record setting pace.
Our backlog increased 11% to reach a new record of $246 $3 million, including $73 million in premium alloys or 30% of the total backlog.
From 26% last quarter.
All clean up and repairs related to the second quarter liquid metal spill has been completed and our electric arc chop is operational.
Per capital program is proceeding as planned we're.
We're adding two additional vacuum mark retail furnaces in North Jackson, which are scheduled to be operational late in the second quarter of 2023.
The investment supports our strategy to expand our product portfolio with more technologically advanced higher margin premium products.
We amended our credit agreement to increase our financial flexibility in funding the production needs being driven by our growing backlog.
Unfortunately, the third quarter challenges outweigh the progress we made in.
In line with our announcement from last week and is reported this morning shipment volume in the third quarter was 19% lower sequentially due to three factors.
The residual effects of the liquid metal spell it our bridgeville milk shop in the second quarter.
The ongoing labor shortage in supply chain challenges, resulting in intermittent production outages at key facilities.
And an unfortunate spike in Covid cases that are Dunkirk test lab late in September , which curtailed final testing and product certifications necessary for shipping.
In short these factors combined to disrupt product flow interfere with plant productivity gains and reduced shipments in the third quarter below expectations.
Additionally, a sharp decline in commodity prices during the quarter resulted in a negative misalignment between product surcharges material cost and revert values totally approximately a million dollars $5 pretax.
Let's take a closer look at how those challenges flowed through our income statement in the third quarter.
Net sales for the quarter were $46 million, which is 11% lower sequentially.
We estimate that four and a half million dollars did not ship due to operational disruptions.
On the other hand, net sales were up 24.3% versus the third quarter last year and year to date sales of 146 million are up 30% from the same period of 2021.
Third quarter premium alloy sales of 8 million were down 9% from the 2022 second quarter, but represent 17% of total sales.
Premium alloy sales were up 35% from a year ago, and rose, 33% year to date to reach $26 million or 18% of sales.
Despite the lower third quarter sales, we see accelerating growth in the market as evidenced by our growing premium alloy order book and increasing OEM approval activity.
Gross margin in the third quarter slipped to $3 million or $6, 4% of sales.
And included 600000 dollar benefit from the jobs Grant received under the AAM J P program.
$2 million in expenses related to the spill after effects and operating challenges.
And $1.5 million negative misalignment between surcharges and total material costs.
Second quarter of 2022, gross margin was $4.7 million or 9% of sales.
Including a $1.8 million benefit <unk> P program, while set by $3.6 million in costs related to liquid metal spill.
The net loss for the third quarter was one $3 million or 14 cents per diluted share versus a loss of $1.4 million 16 per share in the 2022 second quarter.
Third quarter EBITDA totaled three 1 million and adjusted EBITDA was for $2 million.
Let me add a few points about our financial position before we go to Steve's report.
Man, it's working capital totaled $147 million on September 30 in line with a $148 million on June 32022.
Total inventory was $159 million at the end of the third quarter of 2022 versus $149 million at the end of the 2022 second quarter.
Within inventory raw material inventories were reduced $3 million or 13%, while working process inventory increased $11 million or 10% is electric art melting production doubled over the spill impacted second quarter.
Third quarter capital expenditures were five and a half million dollars and we expect capex to approximate $5 million to $7 million in the fourth quarter, mainly for expansion of the premium product capability at our North Jackson facility.
Total date on September 30th 2022 was $86.6 million of $3 million sequentially.
Subsequent to the end of the quarter, we announced that amendment to our credit agreement, which provides a total of $10 million and add liquidity and flexibility to fund our growth.
Let me turn to commodities for a moment.
Prices are virtually all commodities using our operations fell significantly during the quarter with scrapping the most pronounced declining almost 39% as a result, mainly have reduced carbon mill production schedules.
Nicole was down 12% from the end of the second quarter and appears to have moved into surplus.
Other commodities third quarter price drop were largely double digit ranging from 15% to 30% down.
Falling commodity prices drove reductions and surcharges on the order of 20% between June and September .
Looking at October trends, we see relatively stable surcharges in October November with further decreases in December .
Turning to operations liquid metal spill in the second quarter caused a seven week shutdown of melting operations as we cleaned up and may repairs to our electric arc shop in Bridgeville.
Our team did an excellent job recovering and securing outside and get supply.
Nonetheless, rather than increasing production to meet our rapid backlog growth Melchor production fell by over 40% during the second quarter, creating a sizeable hole in the front of our manufacturing system.
Third quarter milk production doubled increasing every month of the quarter, but were unable to flex up downstream operations sufficiently to keep product flowing smoothly at a higher rate.
These two obstacles being the two obstacles being the labor shortage in supply chain issues.
With key parts and consumables.
For some perspective.
We currently have about 460 hourly workers that are four locations. This compares to 400, a year ago and we currently have a need for about 560 employees.
We are addressing a portion of the shortfall with increased outsourcing and contractors.
Since Labour day, I am pleased to report that applications have increased and we are focused on recruiting onboarding training and developing the workforce.
I should also mentioned that we are currently negotiating labor contract in Dunkirk, which expires in October 31 discussions are ongoing and progressing in due course.
Supply chain issues, specifically long lead times and unreliable deliveries continue resulting in rolling unplanned outages as we wait for parts.
That said, we can report improvement for example, all of our re mailed furnaces are now available for production for the first time in over a year.
Our mobile equipment fleet is in much better shape.
We have purchased repair parts and spares heavily where the opportunity exists to minimize future disruptions from supply chain issues.
Construction of our vacuum mark rebuilding facilities progressing as scheduled and within budget.
Equivalent deliveries are still expected in the first quarter of 2023 with initial testing scheduled to begin in the second quarter.
These re mailed furnaces will support the growth we are seeing in premium products today, along with future growth from new approvals.
It's starting to end markets, beginning with aerospace our largest market.
Aerospace sales represented 69% of sales totalling $32 million down 11% from the second quarter due solely to the production obstacles that impeded our shipments.
Third quarter Aerospace sales were 42% higher than the third quarter last year and increased 48% to $97 million in the first nine months of 2022 versus the same period a year ago.
Demonstrating the ongoing turnaround we're seeing in the aerospace market.
The fundamentals driving the arrow strength.
And for basic areas first increasing air travel.
<unk> reports domestic air travel up 20, 27% year over year, reaching 85% of pre COVID-19 levels.
International growth jumped 166%, 116% excuse me, but remains about 35% below pre COVID-19 levels.
Second airline profitability is growing for example, Delta recently reported record revenues for the third quarter as well as a double digit operating margin.
The only caution from airlines it seems to be short term shortages of material and skilled labor specialty pilots and a growing shortage of jets.
Again for example through August Boeing is only delivered seven 737, Max's to United versus a promise 53.
Third did.
Deliveries and build rates are increasing.
Boeing is struggling to stabilize production due to supply constraints.
Getting new hires up the experienced curve and engine availability.
They had been planning to increased 737, Max production to 38 per month in the first half of 23 and 47 by the end of the year, but they have struggled to meet these goals.
They are struggling to meet these goals.
Another challenge facing bona Boeing is achieving FAA certification for the dash eight dash seven dash 10, with a statutory deadline of December 31 of this year.
Boeing has delivered 112 planes up from 85 in the third quarter of 2021 and reported 328 deliveries year to date.
September order activity was also strong with 90 net orders.
Year to date net orders were 428 plants.
Boeing closed the third quarter with a gross backlog that would be unfilled orders of 5236 airplanes, including 4200, 737, and almost 500 787.
Somewhere between eight to 11 years of production depending upon your assumption.
Current production rates.
At Airbus September deliveries total 55 aircraft, bringing year to date net deliveries to 435.
Airbus Book 13 orders in September with 647, net new orders year to date.
Business jet demand is projected to total 8500, new jets from 2023 to 2032, which is up 15% from last year's forecast.
While usage is expected to increase another 9% in 2022.
And last but not least higher defense spending.
Ukraine situation increased defense spending by alloys allies plan replenishment of U S equipment and increased training for U S readiness, all pointing towards higher defense spending.
So just to summarize the prospect for aerospace and defense demand.
Remained compelling notwithstanding some of the supply chain issues in recessionary concerns we hear about that's good news for our customers and it's also good news for us.
The heavy equipment market remained our second largest market in the third quarter of 2022 with sales of $6 $2 million or 13% of sales.
Which is 14% lower than the second quarter and off 18% from the third quarter of 2021.
Year to date heavy equipment sales totaled $22 million or 15% of sales.
Metal fabrication demand drives our sales to the heavy equipment market, especially automotive.
The Lumpiness, we saw on second quarter sales continued in the third quarter is customers who bought heavy at the end of last year remain cautious economic concerns and recent trends in key commodity prices.
That said Fitch ratings for example is forecasting that U S oil production will be sustained at current levels or possibly increase in 2023, even assuming a mild U S recession next year.
That's based on the fact that industry production volumes are already at low levels due to COVID-19 mitigation measures and component shortages.
Dealer inventories are still below OEM target levels with only 30, <unk> 32 days of supply.
At the end of the third quarter versus.
Versus 66 days at the end of the third quarter of 2019 before the pandemic.
Meanwhile, model changeovers are continuing including for hybrids and especially electric vehicles.
As a result, we continue expect heavy equipment market shipments to recover modestly over the next few quarters helped further by industrial equipment demand.
The oil and gas and Marco is our third largest market in the third quarter of 2022 with sales of three $7 million or 8% of sales.
That compares with $4.7 million or 9% of sales in the second quarter of 2021 [noise].
When oil and gas sales for the highest since 2019.
Your day sales of $12 7 million were up 15% from the same period of 2021.
The oil and gas market continues to send mixed signals.
I recently noted that disruptive market forces are multiplying as the growth trajectory of oil supply through the remainder of this year and next year has been derailed by the OPEC plus plan to sharply curtail oil supplies.
Meanwhile, their outlook for oil demand has been reduced due to downgrades and global GDP growth with recession expectations in several European countries.
On the other hand Baker used in Schlumberger see the same factors from a different perspective.
Baker feels that despite current economic challenges they remain constructive on the outlook for oil and gas and believe that underlying fundamentals remained supportive of a double digit multiyear upturning global upstream spending Gomez.
Domestic recounts her up 229 from October of 2021 B.
The international recount is up 92.
Meanwhile, Schlumberger recently pulled out an urgent need for increased investment to rebalance markets create supply redundancies and rebuild spare capacity.
On balance the sentiment in the oil service industry is increasingly bullish and the prices and demand for natural gas continue to rise.
Based on our customers inventories in our backlog, we expect modest improvement in activity as we move through the fourth quarter and into 2023.
The general industrial market became our fourth largest market in the third quarter of 2022 with sales of $2 $2 million or 5% of sales an increase of 21% from the 2022 second quarter and a 4% from the third quarter of 2021.
<unk> sales increased 15% seven $4 million.
For general industrial market include sales to the general manufacturing markets, especially semiconductor equipment and medical markets.
And the last call. We said, we expect the third quarter sales to exceed 2022 second quarter, and we hit that target as evidenced by 21% increase in our general industrial sales.
This was achieved despite reduced consumer demand for smartphones and personal computers.
In fact, the semiconductor industry Association report the global semiconductor industry sales in August .
Increasingly slightly year to year and decreased 3% from July of 2022.
Looking at our fourth quarter, we expect your annual industrial sales to be in the same range as Q3s healthy level.
Power generation market sales totaled 1.6 million or 3% of sales in the third quarter, which is down 30% sequentially put up 83% in the third quarter of 2021.
Powergen sales were up 47% year to date.
Demand for maintenance of industrial gas turbine using electricity generation continues to account for most of our power Jen sales.
While electricity in the U S is forecast to increasingly come from solar and wind.
U S energy information administration on their October report estimates the 2022 natural gas will fuel 38% of U S electricity and.
And approximately 36% next year as.
As a result, we expect sustain maintenance demand over the coming years, although bearing with seasonal fluctuations.
That concludes my remarks for now let me turn it over to Steve for a deeper dive into our financial performance Steve.
Any.
Good morning, everyone.
Our sales for the third quarter was $46 $2 million, which represents an 11% decrease sequentially.
And an increase of 24% versus the third quarter of 2021.
The decrease versus Q2 was first a result of various operational challenges encountered that restricted our ability to get orders to the finish line in alpha door in Q3.
Many of which were caused by lingering impacts of the liquid metal spill that occurred in April and.
And second due to a drop in the surcharge component of our selling price.
Setting aside the surcharge decline.
Pricing for all of our major product categories increased in Q3 versus Q2, reflecting.
Reflecting further capture of our six base price increases previously announced this year.
Third quarter of 2022 gross margin totaled three point O million dollars or $6, 4% of sales Ah decreased from nine 1% of sales in the second quarter and an increase from 6.2% of sales and the 2021 third quarter.
The decrease versus cute do is due to the negative surcharge misalignment and spill impacts that dennie described.
As well as a smaller benefit from the J P grant within the numbers.
The increase versus Q3 of the prior year reflects higher pricing and higher plant activity levels, which better cover fixed plant overhead costs in the current period.
R Q3 gross margin included $600000 of a favourable impact from J P. Grant that we were awarded in the first quarter earlier this year.
We have recorded a total benefit of about $3 $4 million in 2022, thus far and there was no further P&L benefit expected in the future.
[noise] profitability in the current period was again unfavourably impacted by the previous liquid metal spill, which cause negative impacts the gross margin of $2 million in the third quarter.
And net negative impacts to adjusted EBITDA of $1.5 million after considering the incremental insurance recovery recorded this quarter.
After adjusting for the impact of the grant and the spill gross margin for the quarter, what approximate 10% of sales fell.
Further the misalignment of our surcharge pricing and our total material costs held back margin by an additional 320 basis points in Q3, when compared with Q too.
The spill costs of $2 million include higher material costs realized on late milk.
Increased internal labor contractor and vendor spending related to catch up activity.
Margin lost on shipments that were either late or missed entirely within the quarter due to the production impacts of the spill.
As well as the impact of disruptions in productivity and gross production levels.
Caused by lingering spill issues.
In the second quarter, the immediate expense impacts of the spill were partly offset by the receipt of $1.5 million of insurance proceeds.
In Q3, we recorded an additional 500000 dollar recovery within other income.
Future cash received under the claim will be recognized within other income when received.
Selling general and administrative costs in the third quarter totaled $5.3 million.
411, 4% of sales flat to Q2, and an increase of $270000 compared to the prior year third quarter.
For the nine month period September 3rd ended September 30th.
<unk> expenses are up 1% in 2022 versus last year.
We expect SG&A expenses to approximate five and a half million dollars in the fourth quarter.
Ah reported operating loss for Q3 was $2.3 million lower compared to our expectations and a reflection of the lower volumes and gross margin achieved this quarter.
Total interest expense for the quarter was $1.2 million compared to about $870000 in Q2 and $540000 in Q3 of last year.
Interest expenses continued to increase along with higher market interest rates and higher borrowing levels on a revolving credit facility.
The interest paid on the majority of a revolver and our term loan is variable and.
And it fluctuates with changes to benchmark interest rates.
The primary benchmark rate in our credit agreement was updated in October as part of a recent amendment.
During the second quarter, we recorded an income tax benefit of $1.6 million on our pre tax loss in the quarter.
And net loss was $1.3 million or 14 cents per diluted share.
The third quarter per share loss after adjusting for impacts of the a M. J P grant and the liquid metal spill was approximately seven.
Our third quarter EBITDA totaled.
$3 $1 million and our adjusted EBITDA includes ads, but add backs for non-cash share compensation the spill impact net of the insurance recovery.
And the grant benefit and it totaled $4.2 million.
The EBITDA and adjusted EBITDA calculations are provided in the tables of oppression press release.
I'll move to cash flow and liquidity.
We generated $2.7 million in cash from operations in Q3, despite using 10 million to grow inventory in support of a record record backlog as our Bridgeville melt shop return to full operation for the quarter.
Additionally, cash used for our capital expenditures increased in the quarter totaling five and a half million dollars.
Therefore free cash flow was a burn of $2.8 million.
And our bank debt increased about two and a half million dollars in the third quarter to help fund those inventory in capex needs.
Total debt at the end of the quarter was $86 6 million.
And revolver availability was $22 million.
Given the near term increased cash requirements of our business as we rent production levels and an inflationary environment and approach completion of our strategic vacuum or remote expansion project in North Jackson.
We executed a targeted amendment of our credit facility with our existing lenders to provide additional liquidity as we navigate the next couple of quarters.
The amendment has two main effects.
First it provides an additional $10 million in liquidity and financial flexibility.
And second it eliminates LIBOR is the main benchmark rate in our agreement, replacing it with Sopher.
The secures our liquidity position as we focus on a successful Q4 and look forward into 2023.
That concludes the prepared financial update and Danielle turn the call back to you.
Okay. Thanks, Steve.
In summary, then or post pandemic recovery characterized by sequential quarterly sales growth and margin expansion was interrupted in the third quarter or residual effects of the liquid metal spill in the second quarter double digit declines in key commodity prices and ongoing labor and supply chain disruptions.
Demand is excellent overall, largely driven by rebounding aerospace markets.
Bookings are strong.
Order backlog reached a new record high of $246 million.
Growth in premium alloys product premium alloy products is accelerating.
The positive impact of the six base price increases announced over the past year will increase as we move through the fourth quarter and into 2023.
Electric arc melting activity increased each month since June validate any outstanding job done by our team to cleanup make repairs and restart operations.
Applications for hourly employment are measurably ups since Labour day, suggesting some relief in the labor shortage front and.
In the meantime, we will continue to utilize third party partners and contractors.
International logistical issues have significantly improving international supply chains.
Where possible we have advanced purchase critical parts to partially mitigate ongoing supply chain instability domestically.
Our strategic capital investment and two state of the art vacuum Mark remote furnishes at North Jackson is progressing on time and within budget.
With the new amendment to our credit facility, we have additional flexibility and liquidity to support our plan to ramp up in production an initial inflationary environment.
We are fully focused on getting back on track with our growth plan this quarter, but.
The fourth quarter is always super sensitive to seasonal factors and customers proactive measures to manage their ear and inventories.
Nonetheless, we plan to increase sales sequentially and expand margins.
In conclusion, I want to again underscore our confidence in our ability to move forward with our growth plan.
And all of that wrestling, the ongoing determination and resiliency of our employees supportive of our customers financial institutions stockholders and board and I'm personally very grateful to all of them.
That concludes our formal remarks.
Howard if you're ready we will take some questions. Please.
Yes, Sir ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.
Again, if you have a question or comment at this time. Please press star one one on your telephone keypad. Please.
Please stand by while we compiled the Q&A roster.
Our first question or comment comes from the line of field gifts from Keybanc. Your line is open.
And thanks good morning.
Hey, how you doing.
Good.
Question first son, just this this amendment.
Heard you say you had $22 million of liquidity does that include.
The additional 10 million that that you are freed up or does that not include that.
The amendment is effective.
Timber 30th so that doesn't include the additional.
The additional liquidity provided.
Okay.
And then on the interest expense you mentioned.
Obviously.
Rates have gone higher.
In that line item I think it was a little over a million dollars is that is that what we should anticipate moving forward.
Yes.
<unk> there was a lot of odd noises you you mention.
With the.
The bridgeville piece still still moving into the third quarter and misalignment on raw materials. You you had a good guy in there too.
Certainly not where you wanted to be in terms of [noise] excuse me gross margins how.
How much is just from a gap gap gross margin perspective relative of that six and change in the third quarter should we expect and.
And the fourth quarter in terms of pick up.
We'd be shooting for something in the low single low double digits.
Okay.
And what are the <unk>.
What are the drivers sequentially or are you completely out of the spill impacts are.
Or the the misalignment.
Easing some.
Let's talk about this this spill was.
Big impact on the company in the second quarter.
It's a big impact in the third quarter, and we will have some impact in the fourth quarter, but it won't be as large though.
As we start to ramp up operations and things stabilized we basically have.
A big slogan material moving through operations that were candidly unstable because we either didn't have parts of the run them or we didn't have the people demand them in all cases.
So is that is mitigated and we're already seeing some of that mitigate as we as we sit here today, we would expect that bubble to go down and things get back to some semblance of normal.
Would expect there will be some minor changes.
Minor impaction of fourth quarter from the spill.
As far as the <unk>.
Somewhere in a half million dollars to $750000 perhaps.
Because we will have pricing misalignments now we will have some production issues as well.
When the when the misalignment from a commodity price standpoint commodities peeked in June came down sharply in the third quarter stabilized a little bit and right now as we look at where where surcharges are we know what our surcharges are in October and November and they're relatively flat to where we were in September .
<unk>.
And looking at October it's not over yet, but fundamentally commodity prices dipped a little bit more in October so you'll see some small decreases.
And surcharges in the month of December Alright.
Alright material costs, you basically go sideways so.
So I think you will see some negative misalignment in the fourth quarter, but it'll be nowhere near as big as it was in the third quarter.
Thank you.
You're welcome.
Thank you.
Our next question or comment comes from the line of Bob sales from Al M. P capital markets. Mr. Snails. Your line is open.
Hi can you hear me.
Yeah, Good morning Butler.
Let's see.
So I understand a couple of things here.
So.
With the economy prices down and now leveling off.
Can you.
Well. So so first question of your cost of good <unk> I I guess I think we're really assets or don't have it written down raw materials as a percentage of the of your cost cost of goods runs about what.
If you costs of goods includes fixed costs and inventory and Cogs, you're talking about something in a 55% range.
Overall per cent okay.
Got it I got it and then a small.
Mine's a range the range of that to keep in mind now the range and that number can go as high as 75 and it can be below 50, depending upon what product you're talking about but.
I'm trying to make good average views.
Okay, and then if commodity prices were down sort of on average.
Pencil and a number of 20%.
And Thats, let's assume flat going forward.
Help us understand what is that I would expect that you're working capital would start to recede.
Is it benefits from bringing in.
Those lower costs.
Starting in.
It wasn't Q3, so do you have any guidance for.
Or or mechanics for us to appreciate what will happen to that level of working capital as you are all forward with lower commodity prices.
Well, let's let's talk through what's happened the last two or three quarters, I mean going up through June we had significant increases in commodity prices.
We also have some availability issues due to supply chain issue. So if you remember on prior calls I talked about the fact that.
Raw material inventories.
We're up largely because of price increases.
We also increase the volume of raw materials in some cases to make sure we had adequate supplies of material that we're concerned about getting due to the supply chain.
So at the end of the third at the end of the second quarter we.
We had pretty rich raw materials and as you see when we had to spill. So he had it back up there.
And the raw material inventories are starting to come down physically and in dollar terms and I would expect that to continue to get back to a more normal level, which is probably about 25% lower than we currently have.
Alright, because we churn through the raw materials fairly quickly.
And gas is the same issue you're going to you're going to see lower lower coming in prices the raw materials which'll over over months as we produce we transition to working working process and lower the average cost there.
But that will be offset by the fact, we're going to need to improve increase inventories as we ramp up and start to address the production needs to a record backlog.
She won't even slightly together you got got a lot of moving parts and I would expect modest increases in working capital.
Here's me in inventories, we go down the road.
I would expect him and that'll be partially funded by trade payables.
And from a receivable standpoint receivables came down in the third quarter because of the lower sales, we expected and they start going back up.
So that you use a cash on the surface.
But it also since we are an asset based borrower that also increased our borrowing flexibility.
Gotcha, So if you're getting two $3 million actually where they're definitely making more confusing.
[laughter] no no no I understand.
I'm just I'm estimating you get two or 3 million Bucks a quarter, just with your inventory turns and raw material costs.
With lower lower raw material costs, and what you are saying is offset because you expect.
Revenue to be up from the 46 million dollar point in Q3.
All that if I'm if I'm understanding.
Understanding correctly do agree with that.
Yes, yes.
Okay got it got it and then you talked about the backlog for your premium products I think you said you.
Your backlog your premium products are now, 30%, 33% of of backlog versus 26% last quarter and 17% of revenue.
Are you.
Is all this backlog pre.
Predicated on your current.
Zac vacuum or remote capacity today or is some of that predicated on the <unk>.
<unk> <unk> <unk>.
<unk> furnace is going and I would expect to you have to requalify.
Those the new <unk>.
Capital equipment, before you're able to take orders and it makes it.
Now we have the rebuilt capacity when fully man to be able to handle the backlog. We have today, we need the additional rebuild furnaces, because we anticipate further growth in premium melded products.
We've we've said publicly that our long term goal is to get above $100 million of incremental sales into our company from vacuum melted or premium melted products and.
Right now, we're running into $40 million to $50 million range.
And we're working very diligently with a range of Oems for additional approvals for basic products.
<unk> these additional two furnishes.
Right now we expect them in in the first quarter frankly, they could come in before the end of the year.
Building is basically ready to go the holzer dug we're ready to pop them in.
We would plan to begin called commissioning of them in early second quarter and producing trial heats mid to late second quarter.
And all of that is targeted towards bringing them into operation by the fourth quarter of 2024.
And at that point in time timing wise, we would expect to have continued growth in real volume in backlog.
For our premium other products plus additional approvals that we will be bidding on.
Understood.
The only thing I wanted to ask you a <unk> broader question is.
With the F 45.
Issue with some Chinese.
Exotic material and the 45 and then there's also.
Amazingly aggressive.
Moves on the part of the by the administration semiconductor capital equipment.
Do you sense, Danny that you're getting any <unk> any sort of tailwind where you want manufacturers pulling away from Chinese suppliers or is that not really <unk>.
What you're seeing in your your your order today.
We well internal to our company, we did do a.
Allowed to work earlier this year to Derisk, our exposure to China into the whole Ukraine, Russia area.
Terms of what we were purchasing in terms of our business.
We hear a lot of anecdotal stories about onshoring coming back to the states.
Emphasizing China is a market, but candidly I don't think we're seeing anything tangibly.
Yes, I wondered I, just wondered on the automobile side, whether or not that.
Okay, then again Bob.
I was just thinking on the automobile part of it is a lot of that stainless that you guys get for tooling used to come from China and I didn't know.
Whether or not you know.
The industry had sort of wanted to make a clean break from China on on some of that or or not.
Are selling into that industry is strictly tool steel plate.
So there's only a couple of producers cole steel plate domestically and quite frankly, we don't see any Chinese competition and neck product line.
Gotcha, and then I'm going to continue on Fitzgerald, there's only three or four question your son.
So did I hear that you said that the surcharge.
The misalignment of search higher charging commodity costs in the quarter sequentially was a negative 320 basis points on gross margins.
Yes, yes, Steve said that I didn't say it but yes, that's correct, yeah and still.
Looking at it and it made a half dollar impact pre tax.
Yeah, and so when you go forward.
You, Don and and commodity prices level off you still have.
A sequential this alignment relative to Q too.
But the misalignment starts to become less as.
Lower cost materials flow through your.
Suffice your your accounting is that correct.
Yes.
In effect the cost of melting the product.
Catches up to where the surcharges.
And that'll be happening as we move through the fourth quarter.
The one thing that we should allow that because it looks like unless something changes dramatically December surcharges will be down modestly. So that's why there'll still be some mis alignment.
And the fourth quarter, but it won't be as large as what you saw in the third quarter.
And over by the time, we get into the first half of things stabilize things go back to normal the other thing to keep in mind, there because we have announced six base price increases over the last year.
So as we go through each quarter, we'd get a benefit from higher prices as well.
Got it got it but just focusing on the the misalignment, if we were a year.
And you flush out all of your raw materials inventory.
Turn it over four times a year.
It looks like a year from now we would be the alignment would be back to you zero.
Relative to win assuming raw material costs are fixed and assuming.
There was no changes and surcharges I'm doing the math right is it the right thinking.
That's the right thinking, but it wouldn't take a year.
Okay [laughter], okay. Thanks for taking my questions and you know look forward to seeing seeing.
<unk> is it a progression as we go from here, there's a couple of quarters you guys head.
Okay. Thanks, though.
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I'm showing no additional questions in the queue at this time I'd like to turn the conference back over to Mr. Oates for any closing comments.
Okay Howard Thank you.
Once again, thanks. Thank you everyone for joining us this morning.
Committed to getting back on track with our growth plan and seizing market opportunities, especially in aerospace.
I'll be looking forward updating you on our progress on our next call, which will be in January in the meantime, be well stay safe and enjoy the upcoming holidays.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day speaker standby.
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