Q2 2023 Universal Stainless & Alloy Products Inc Earnings Call
Okay.
Good day, and thank you for standing by welcome to the Universal stainless and alloy products' second quarter 2023 conference call and webcast. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
Ask a question during this session you'll need to press star one on your telephone you will then hear an automated message advising your hand this race to remove yourself from the queue. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to James filling Geri. Please go ahead.
Thank you. Good morning. This is June Phil and Jerry or Tom Partners and I'd also like to welcome you to the Universal stainless call and webcast. We are here to discuss the company's second quarter 2023 results reported this morning with US from management are Denny Oates Chairman.
President and Chief Executive Officer, Chris Zimmer Executive Vice President and Chief Operating Officer, Jon <unk>, Vice President and General Counsel and Steve to NAV, So 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.
The conference operator in the warmer.
Sorry about that.
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Well I will take your questions.
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 moly.
More fully described in today's press release and in the company's filings with the Securities and Exchange Commission.
With its formality keeps complete I would now like to turn the call over to Denny Oates.
Jenny we are ready to begin.
Okay, Jamie Thank you.
Everyone. Thanks for joining us today.
The main highlight of our second quarter performance is improving profitability.
A product of the positive momentum we described on our last call.
More specifically gross profit margin reached 14, 43% of sales despite an across the board dropping commodity metal prices that resulted in a negative surcharge misalignment of about a half a million dollars.
First quarter gross margin was 11, 7%.
The margin improvement in the most recent quarter led to a more than doubling of operating income to $3 1 million.
We turned the corner on bottom line profitability with net income, reaching $900000 or 10 cents per diluted share.
The main drivers of second quarter profitability were higher shipment volume both sequentially and year over year increase production improved productivity at key operations and higher base selling prices.
We announced two additional price increases in the second quarter, when bar and plate products.
Adjusted EBITDA of almost $8 million during second quarter was the highest achieved since the second quarter of 2019 and increased 17% from last quarter.
Looking at our topline net sales remained strong at $69 million, an increase of 5% sequentially and up 32% year over year.
Highest level since the second quarter of 2019.
Year to date sales reached $135 million, an increase of 35% over last year.
Second quarter sales included premium alloy sales of $12 9 million, which is 27% lower than the record first quarter, but 46% higher in the second quarter of 2022.
Year to date premium alloy sales were up 72% to $35 million or 23% of sales.
We expect premium product sales to be above Q1's record levels during the second half of the year.
Our premium alloy sales are for aerospace applications aerospace sales increased 5% to a record $51 million in the second quarter at 44% year over year and up 52% year to date.
Okay.
The last call, we pointed to an expected modest improvement in sales in the second quarter with growth accelerating during the second half of the year.
Second quarter sales, including premium alloys were in line with our plans are.
Our positive outlook for the final two quarters of the year remains unchanged.
It's based on the continued strength and demand for our products, especially our premium alloys tempered somewhat by seasonality and declining surcharges.
Okay.
June 30, total order backlog before surcharges remained robust at $355 million, but fell $11 million from Q1's record high as we work with customers to control our order entry.
The backlog of orders scheduled to ship over the next 12 months actually increased 6% compared to March 31.
We continue to diligently work to reduce extended lead times.
Premium alloys continued to represent about 35% of our backlog.
Turning to our financial position total debt.
Was reduced by $6 2 million to $93 3 million during the quarter.
Revolver availability remained unchanged at an adequate $24 million.
Managed working capital was $148 million down.
Darren I mean, $5 sequentially, representing about 54% of sales.
Receivables are in good shape with DSO falling to <unk> 41 from 50 at year end 2022.
Inventory at the end of the second quarter increased a modest one 4% to $152 million, reflecting improved terms, partially offset by higher volumes of premium grades and work in process.
Second quarter capital expenditures were $2 $4 million, bringing the year to date total to $6 $9 million.
We expect full year capital expenditures of about $16 million.
Half of that amount for our investment in rebuild capacity at our North Jackson facility.
Where we're adding two vacuum arc re mail furnaces.
Equipment installation is underway and we are working towards full integration of operations beginning in the first quarter of 2024.
Our objective is to expand our product portfolio with more technologically advanced higher margin premium products.
To enhance our capabilities our cost structure and also our growth prospects.
We continue to deepen our management team in the second quarter with the naming of Ricks Cola as vice president of supply chain and purchasing.
<unk> is a 13 year veteran of Universal and most recently served as universal supply chain director.
He reports directly to Chris Zimmer, our recently named Chief operating Officer.
Two additional updates and announced we announced separately today.
We have engaged Baker Tilly as our new auditor.
Following the filing of our second quarter 10-Q.
<unk> replaces Schneider Downs, who has been our auditor of record for over 20 years we.
We've been pleased with the quality of professional services that Schneider Downs has provided and we look forward to working with in order to firm as the caliber of Baker Tilly.
Additionally, we are currently in negotiations on a new labor agreement with the Union, representing the hourly employees at our Bridgeville facility.
Our current five year agreement expires on August 31.
Okay.
Chris I'll turn the call over to you for your review of operations.
Yes.
Thank you Danny and good morning, everyone.
I'll start with premium alloys, and our vacuum induction melting operations, which are the critical platform for our growth strategy.
While premium alloy sales were sequentially lower in the second quarter due to shipment timing our results year to date or 72% higher than the first half of 2022 and.
And we remain on track for a record year of sales in 2023.
Operationally, we achieved record vacuum induction melting productivity during the second quarter, which supports our rapidly growing premium alloy sales planned for the second half of this year.
Despite continued challenge challenges stabilizing our workforce, we were able to increase our total production sequentially and expect additional production increases in the third quarter.
Production levels at our re melt shops hot working mills and major finishing units all improved sequentially as we continue our March back to pre Covid production levels.
As most of you know rolls Royce has been a longstanding customer of ours and I'm pleased to report that Universal was again named to the Rolls Royce High performance supplier group for 2023.
This is a very short list of suppliers and we are proud of the great job that our team has done to receive this recognition.
Turning to commodities nickel.
Nick will continued to slide in the second quarter declining 9% sequentially into the low $9 per pound range.
Other metals, followed suit with nearly every metal, we track down quarter over quarter and year over year.
The reasons for the decline are mainly weak manufacturing and trade data from China weaker European demand and concerns about further monetary policy tightening in the U S and the effect on the U S dollar.
Overall, we expect negative surcharge misalignment for the third quarter.
Let's turn to end markets, beginning with aerospace our largest market we.
We saw additional growth in our aerospace sales in the second quarter of 2023, which increased 5% to a record $51 $3 million or 74% of sales compared to $49 million and 74% of sales in the first quarter of 2023.
Aerospace sales increased 44% from $35 7 million in the second quarter of 2022.
And year to date sales totaled $1 million.
An increase of 52% from the same period.
2022.
The drivers of commercial aerospace demand continue to gain momentum in the second quarter.
Consumer demand is up.
The pace of deliveries at Boeing and Airbus has increased.
Carriers are turning over their fleets for more fuel efficient planes.
And build rates are ramping up.
We attended the Paris Air show last month, and it was one of the most positive shows in memory.
Looking at the airplane manufacturers.
Boeing delivered 136 planes.
In the second quarter with a bed with a better than expected 60 deliveries in June .
Boeing's orders were strong in the second quarter at 460 claims, including a 220 plane order from Air India.
At the end of June Boeing's net backlog stood at over 4800 claims.
With the continued increase in backlog and strong Q2 deliveries Boeing is increasing the 737 Max monthly build rate to 38 from the current rate of 31.
And plans to reach 50, and the 2025% to 2026 timeframe.
We should learn more about boeing's plans on their call. This morning.
At Airbus June deliveries totaled 72, bringing year to date deliveries to 316.
Airbus had gross orders in June of 902 planes, including a firm order for 580 320 family aircraft from Indigo.
India's largest airline.
That orders set the record for the biggest single purchase agreement and the history of commercial aviation.
Earlier this month Airbus opened a new assembly line for the a 321 neo in southwest France.
Part of its efforts to reach a build rate of 75 on the <unk> hundred 20 family by 2026 amid record demand.
The current build rate is at 45 planes per month.
<unk> added more good news in there May report.
Total air traffic in May increased 39% from May of 2022.
Global traffic is now at 96% of the pre pandemic levels.
Domestic traffic for Mei rose, 36%, making it the second month in a row that it has exceeded pre pandemic levels.
Meanwhile, International traffic jumped 41% versus May of 2022, with all markets reporting strong growth.
In the U S. TSA recorded impressive passenger volume of $2 9 million on may 30th.
Versus $2 $5 million on that date in 2022.
And $2 2 million in 2019.
Volume had fallen to 800002 thousand 20.
That healthy activity translated into record revenue and profits at Delta Airlines, which reported robust domestic demand and record international performance in the second quarter.
The company expects the same high level of demand to continue through the quarter.
United Airlines and American Airlines also reported record results in the quarter.
Defense market demand continues to be driven by the global conflicts that we read about daily.
Lockheed Martin for example reported record backlog in the second quarter, including a $7 $8 billion contract from the Pentagon for 'twenty six F 35 fighters.
And rotorcraft, our customer Bell Textron received the go ahead to move forward with manufacturing its tilt rotor aircrafts.
<unk> 280 valor.
The U S Army's future attack helicopter, which will eventually replace a core skus Blackhawk.
And other deals, Germany will purchased 60 Chinook helicopters from Boeing.
The purchases are part of a shift in policy following Russia's invasion of Ukraine.
The challenge for both commercial aerospace and defense manufacturers is to overcome continued supply chain shortages to increase build rates.
The parallel challenge for Universal's customers is to meet the enormous demand for our products, which is expected to continue through 2024 and beyond.
Customers are fully in a pull mode.
Describe their inventories as hand to mouth and have a record backlog of orders waiting for material from the mills.
The heavy equipment market remained our second largest market in the second quarter of 2003 with sales of $8 $9 million or 13% of sales up.
Up 29% from sales in the first quarter of 2003 and up 24% from the second quarter of 2022.
Metal fabrication demand drives our heavy equipment market sales, mainly for automotive applications, especially model changeovers.
The strong sales pick up we saw in the first quarter continued in the second as customers continue to replenish inventories of plate product.
While demand in the heavy equipment market can be lumpy, we expect our sales to that market to remain solid in the third quarter.
The general industrial market became our third largest market in the second quarter of 2003 with sales of $2 3 million or 5% of sales, which is down 7% from the first quarter of 'twenty, three but up 76% from the second quarter of 2022.
Our general industrial sales are mainly for semiconductor manufacturing.
Based on market outlook, we are bullish about 2024 with the ramp up beginning in the second half of this year.
The oil and gas market move down to fourth place in the second quarter of 2023 with sales of $3 1 million or 4% of sales versus $4 8 million in the first quarter of 2023.
Demand in the oil and gas market in the second quarter was negatively impacted by market softness in North America, including muted drilling activity in the U S as indicated on and lower rig counts.
Baker Hughes Halliburton, and Schlumberger are all expecting softness in the U S land market to continue in the second half of 2023.
While the long term prospects for our oil and gas segment are positive we are temporarily shifting more of our capacity to higher margin aerospace products to better respond to the enormous demand in that market.
Power generation market sales totaled $1 $3 million or 2% of sales in the second quarter of 'twenty three.
23% increase from $1 1 million in the first quarter.
Our power generation sales is program specific heavily reliant upon maintenance of industrial gas turbines for electricity generation.
We remain positioned to benefit from any additional maintenance opportunities. Following this unusually hot summer and any ongoing investment in new domestic gas turbines.
Now, let me turn the call over to Steve for his report on our financials.
Thank you, Chris and good morning, everyone.
This quarter, we grew the topline by more than $3 million sequentially or about 5%.
Driven by higher base pricing and more shipment volume, despite the lower mix of premium products and falling surcharges.
Compared with the second quarter of the prior year, our total net sales increased nearly $17 million or <unk>, 32%, while our premium product sales are up by more than $4 million.
Our second quarter gross margin totaled $9 8 million or 14, 3% of sales the highest quarterly gross margin percentage since 2018.
Consistent with our plan as we advance through this year the margin expansion as a result of higher base prices strong production volume and improved cost absorption.
And more shipment volume.
And in the current quarter. These benefits overcame negative misalignment between our materials cost and the surcharge component of our total sales price from the impact of falling commodity metal prices.
Selling general and administrative costs totaled $6 8 million in Q2 compared to $6 3 million in the first quarter.
$5 3 million in the second quarter of last year.
Although lower as a percent of sales when compared to last year.
$1 $5 million increase is driven by higher property insurance costs and higher employee related costs.
As a result of the higher gross margin, we earned operating income of $3 $1 million, which more than doubled the first quarter and was $3 $6 million better than the loss posted in the second quarter of last year.
However, interest rates interest expense remained high compared to prior years and a $2 million was approximately flat to Q1.
Despite paying down our revolver by $6 million.
Part of reducing our overall net debt position by $5 million.
The variable interest rates, we pay continued to rise during the quarter.
Right on the majority of our debt fluctuates with terms ofer under the terms of our credit agreement.
Terms so for US currently hovering just above 5% and was around four 5% throughout the first quarter and one 5% at this time last year.
Accordingly, our average borrowing rate for Q2 was about eight 5%, which compares to eight 2% in Q1 and four 4% in Q2 of last year.
We posted pretax income of just over $1 million and recorded a provision for income taxes.
148000.
Resulting in an effective tax rate of 14, 2% for the quarter.
Consistent with our discussion on prior calls our estimated annual effective tax rate is less than the federal statutory rate of 21% due to the beneficial impact of research and development credits.
Other items in discrete items during the quarter are not significant.
Our net income for the quarter was about $900000.
Our diluted shares outstanding reported in Q2 increased to $9 3 million.
And our earnings per diluted share or 10.
The Q2 performance brought us into a year to date net income position as well.
Totaling about $400000 or <unk> <unk> per diluted share.
EBITDA was $7 6 million, which is $1 2 million better than last quarter and the highest level since the second quarter of 2019.
While adjusted EBITDA totaled $7 9 million.
Including an add back for noncash share compensation expense.
The reconciliation of adjusted EBITDA for each period presented is provided in the tables within the press release.
Okay.
During the second quarter, we generated $7 $7 million of cash from our operations, despite investing $2 6 million in inventory.
Primarily resulted from two record vacuum induction melting production campaigns executed during the 2023 second quarter.
In total we generated cash for our managed working capital as we drove accounts receivable down to $31 $3 million delivering a DSO of 41.
And we grew accounts payable modestly in line with inventory.
We used $2 4 million of cash on capital expenditures during Q2.
And our free cash flow of $5 2 million was used to pay down debt.
Additionally, our available borrowings under our revolving credit facility remained flat compared to March 31.
About $24 million.
The exploration of our temporary credit agreement amendment that.
That provided access to additional inventory collateral value throughout the third quarter.
And fourth quarter of 2022.
Through March 31 of.
Of this year.
This liquidity position, coupled with our ongoing expectation of positive quarterly operating cash flow provide sufficient liquidity for our operations and market opportunity for the foreseeable future.
This concludes my report and I'll hand, the call back to Denny.
Okay. Thanks, Steve Let me summarize.
We move forward in strengthening our profitability and cash flow in the second quarter.
Gross margins reached 14, 3% of sales despite negative surcharge misalignment and lower premium product sales higher shipment volume increased production productivity and yield improvements and higher selling prices all contributed to the margin expansion.
We turned the corner and Bottomline profitability with net income approaching $1 million or <unk> 10 per share.
Adjusted EBITDA increased 24% to $8 million.
Total debt was reduced by 6% working capital metrics improved across the board.
Second quarter sales remained strong at $69 million growing 5% sequentially consistent with our plan and expectations.
Those were 34% higher year over year, and up 35% year to date, reaching $135 million.
Premium alloy sales were up 46% year over year, but down 27% sequentially due to shipment timing demand for our premium products remains at record levels.
So it is our backlog, which contains over 35% premium alloy product as demand in commercial aerospace in the commercial aerospace market continues to surge.
Our major capital projected which actually remains on track and we are working to have it operational in the first quarter of 2024.
We continue to develop our organization during the quarter with the recent appointment of rich Nikola a 13 year veteran with Universal as Vice President supply chain and purchasing.
Our second half outlook is for sequential quarterly sales growth.
Fueled by a solid backlog, increasing base prices and improving mix of premium products shipments tempered somewhat by declining surcharges and normal seasonality.
We further expect these top line trends coupled with increased production to yield improved gross profit margins positive cash flow and further debt reduction.
Let me conclude by recognizing our exceptionally talented team of hourly and salary employees for their dedication and hard work during the quarter and over the last several years.
Yeah, My sincere gratitude to our board our customers and our stockholders.
That concludes our formal remarks.
Normal, let's take some questions from our callers.
Thank you as a reminder to ask a question. During this session you will need to press star one on your telephone.
To withdraw your question. Please press Star one again, please wait for your name to be announced please standby, while we compile the Q&A roster.
One moment for your first question. Please.
And our first question comes from the line of Phil Gibbs with Keybanc capital markets. Your line is now open.
Hey, good morning.
Hey, Bill Hey, Doug.
You all mentioned surcharge misalignment in the second quarter.
Despite having pretty solid.
Gross margins anyways.
Any way to couch, what that may have been either on a dollar or a percentage basis and then.
Maybe the same thing as it relates to how you're thinking about the third quarter.
While we have seen declining commodities during the second quarter. So we know surcharges are going to be lower in the third quarter versus the second.
So at the same time, our material costs should be drifting down as well.
So as that comes together in the third quarter, our best estimate would be misalignment would be negative it would be about the same amount as we saw in the second quarter on a sequential basis.
So not not really any worse than what you already experienced in Q2 and was that 100 basis points.
Roughly or more or less.
About $500000.
Okay.
So 500 over 69 would be that what youre asking.
Yes, yes.
Okay. So similar amounts in the third quarter.
As of right now is what Youre, saying right.
And then and then I was just the housekeeping.
You had given some color on.
General items.
What's the update and just in terms of the amount of liquidity that you have right now and then also what should we be modeling that.
FERC for the book tax rate for the back half.
Yeah right now as we as we begin to step through Q3, we're basically flat to the end of Q2, so still at that $24 million level and we are forecasting.
Pay down in the third and fourth quarters, so probably not at the same level of second quarter.
With our incremental improving margins and growing sales.
Even though capex, we expect to increase in the second half of the year.
We will pay down some debt in the third and fourth quarters and expand liquidity as well.
So $24 million as of now and then.
Tax rate was was somewhat unique maybe perhaps too low in the first half should we expect the back half to be more normal 2020.
Yes, that's right more normalized back half on the tax rate.
Okay.
And then.
As it relates to your mix and.
Your your pricing that seems like it's more than going to overcome.
This misalignment piece just from a timing perspective.
How many how many quarters or visibility do you have.
In terms of that mix and pricing dynamic continuing to improve because I know you are turning over that.
That backlog.
With with sort of a richer outcome.
Well for the two components of our selling price to base prices are known a lot of our bar products and aerospace products are booked largely the next four quarters and we will see sequential base price improvement in each one of those quarters.
It gets a little cloudier on the surcharge front, we do know that the surcharges in the third quarter, we will drift down.
But it remains to be seen what the fourth quarter 2024 will look like.
We continued to manage our inventories tightly to turn our inventories to keep up with those changes.
So our expectation is is that unless there is a wild spike in either direction. It should not have a significant impact on oi.
Margins and again the sales.
Surcharge component will track with commodities.
Thank you and then lastly, as it relates to the them and kind of var complex.
Finally, really strongly finding its footing.
At this point in time.
Are you gaining.
Are you gaining the wins and share that you would hope.
I hope to is to have seen a couple of years ago with the forgers and maybe some of the OEM direct customers is that the idea behind it because I know obviously a lot of your business historically its been transactional. So just maybe anything you could say at a high level relative to that.
Yes, that's right we're now enjoying.
The benefits of the product development and the approvals that we've gained throughout the years.
We're picking up share.
There are a lot of the growth in the backlog is coming from.
The market is stronger but for sure we are into some new customers new applications that we were not in before.
With some of these new <unk> products, we continue to have more and more conversations some really good things coming out of the air show.
So I expect us to continue to build upon the successes, we're having this year as we move into 'twenty four.
And I don't see any reason why this this momentum won't continue beyond 24. So that is one of the big parts of the success story here is the additional vim sales that are coming largely through share gains.
<unk> in the back of a strong market.
And just kind of a sub question to that is the north Jackson complex is that from a mix standpoint richer than the broader portfolio or is about the same.
It's generally richer.
The North Jackson plant in our plant up in Dunkirk.
Our largely aerospace driven.
Bridgeville plant is where we have our semi finished products to the general industrial market things like tool steel plate, that's a bigger part of what the Bridgeville plant does the original plant is also the primary feeder of input stock to North Jackson in Dunkirk.
But as I look at those three plants.
North Jackson, Dunkirk, and our Titusville plant as well are all very much aerospace focused in the products that they put into the market.
Thank you.
Thank you for your question.
Again, ladies and gentlemen that is star one wanted to ask your question.
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Yes.
And I'm currently showing no further questions at this time I would like to hand the conference.
Woods for closing remarks.
Thank you Robert once again, thanks, everyone for joining us this morning.
We move forward with our strategy in the second quarter, we remain optimistic about our growth prospects for the remainder of this year and well into 2024 and 2025.
Look forward to updating you on our progress in our next call, which will be in October in the meantime, enjoy the rest of the summer be well and stay safe.
Yes.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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