Q2 2024 Universal Stainless & Alloy Products Inc Earnings Call
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Operator: Good day, and thank you for standing by. Welcome to the Universal Stainless second quarter conference call.
Operator: At this time, all participants are in 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 1-1 on your telephone. You will then hear an automated message as your hand is raised. To withdraw your question, please press star 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, June Filingeri. Please go ahead. Thank you.
Good day, and thank you for standing by.
Speaker Change: To the Universal stainless second quarter conference call at this time.
Speaker Change: Alright listen only mode.
Speaker Change: No.
Speaker Change: After the speaker's presentation, there will be a key.
Speaker Change: Question and answer session to ask a question during the session you will need a restaurant.
Speaker Change: You will then hear an automated message back to your history.
Speaker Change: Just try your question. Please press star one again, please be advised that today's conference is being recorded.
Speaker Change: I would now like to hand over to your first speaker today, Jim Phil and Jerry. Please go ahead.
June Filingeri: Thank you, Jacinda. Good morning. This is June Filingeri of ComPartners, and I also would like to welcome you to the Universal Stainless conference call and webcast. We are here to discuss the company's second quarter 2024 results, reported this morning. With us for management are Chris Zimmer, President and Chief Executive Officer; John Arminas, Vice President and General Counsel. Before I turn the call over to management, let me quickly review procedures again. After management has made formal remarks, we will take your questions.
Speaker Change: Thank you just Amanda good morning. This is John Phil and Jerry 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 second quarter 'twenty 'twenty four results reported this morning.
Speaker Change: With us from management are Chris Zimmer, President and Chief Executive Officer, John Armenia, Vice President General Counsel, and Steve D, Tommaso, Vice President and Chief Financial Officer.
Speaker Change: Before I turn the call over to management, let me quickly review procedures again after management has made formal remarks, we will take your questions.
June Filingeri: Our conference operator will instruct you on procedures at that time. Also, please note that on this morning's call, management will make forward-looking statements. Under the Private Securities Litigation Reform Act of 1995, I would like to remind you of the risks related to these statements, which are more fully described in today's press release and in the company's filings with the Securities and Exchange Commission. So, with these formalities complete, I would now like to turn the call over to Chris Zimmer. Chris, we are ready to begin.
Speaker Change: Our conference operator will instruct you on procedures at that time also please note that in this morning's call management will make forward looking statements under the private Securities Litigation Reform Act of 1995, I would like to remind you of the risks related to these statements.
Speaker Change: You are more fully described in today's press release and in the company's filings with the Securities and Exchange Commission.
Christopher M. Zimmer: So with these formalities complete I would now like to turn the call over to Chris timber, Chris we are ready to begin.
Christopher M. Zimmer: Thank you, June. Good morning, everyone.
Speaker Change: Yeah.
Chris: Thank you Jim Good morning, everyone. Thank you for joining us.
Christopher M. Zimmer: Thank you for joining us. The second quarter was a period of significant achievement for Universal. Sales reached a record $82.8 million. Gross margin hit an all-time high of 25.4% of sales. Record net income of $8.9 million, or $0.90 per diluted share.
Speaker Change: The second quarter was a period of significant achievement for Universal.
Speaker Change: Sales reached a record $82 $8 million.
Speaker Change: Gross margin hit an all time high of 25, 4% of sales.
Speaker Change: Record net income of $8 9 million or 90 cents per diluted share.
Christopher M. Zimmer: And adjusted EBITDA was a record $18.5 million, or 22% of sales. Our ability to achieve this level of sales and profitability is the direct result of our strategic focus and capital investment in our aerospace market capacity and capabilities, namely in premium alloys and other critical products for commercial aircraft and defense applications. That focus has delivered a richer product mix and a broader base of customer approvals in a market with substantial growth potential for the foreseeable future.
Speaker Change: And adjusted EBITDA was a record $18 $5 million or 22% of sales.
Speaker Change: Our ability to achieve this level of sales and profitability is the direct result of our strategic focus and capital investment in our aerospace market capacity and capabilities.
Speaker Change: Namely in premium alloys, and other critical products for commercial aircrafts and defense applications.
Speaker Change: That focus has delivered a richer product mix and a broader base of customer approvals and a market with substantial growth potential for the foreseeable future.
Christopher M. Zimmer: As evidence of our progress, we achieved record aerospace market sales of $68.6 million in the second quarter, representing 83% of total sales, with premium alloys at 25% of total sales, mainly driven by aerospace. An important profitability driver is the targeted and sustainable margin improvement projects we continue to put in place. These projects, combined with the change in our mix towards aerospace and premium products, represent a structural change in the level of margin we are achieving.
Speaker Change: As evidence of our progress we achieved record aerospace market sales of $68 $6 million in the second quarter representing.
Speaker Change: Representing 83% of total sales with premium alloys at 25% of total sales mainly driven by aerospace.
Speaker Change: An important profitability driver is the targeted and sustainable margin improvement projects, we continue to put in place.
Speaker Change: These projects combined with the change in our mix towards aerospace and premium products represent.
Speaker Change: A structural change in the level of margin we are achieving.
Christopher M. Zimmer: The acceleration of our margins in the second quarter and the growth of our adjusted EBITDA, which increased 47% quarter over quarter and 135% year over year, are indicators of this new level of profitability. Additionally, our second quarter benefited from higher base selling prices along with stabilizing commodity prices. We continue to invest in our premium alloy capacity, and we are adding a second 18-ton furnace shell for the VIM at our North Jackson facility in the middle of 2025 and a new box furnace this quarter to support growth at the forge.
Speaker Change: The acceleration of our margins in the second quarter and the growth of our adjusted EBITDA, which increased 47% quarter over quarter and 135% year over year are indicators of this new level of profitability.
Speaker Change: Additionally, our second quarter benefited from higher base selling prices along with stabilizing commodity prices.
Speaker Change: We continue.
Speaker Change: To invest in our premium alloy capacity and we are adding a second 18 ton furnace shell for the vim at our North Jackson facility in the middle of 2025.
Speaker Change: And a new box furnished this quarter to support growth at the forge.
Christopher M. Zimmer: We also remain fully focused on managing working capital and generating positive cash flow to fund our strategic capital expenditures, as well as paying down debt. In the second quarter, net cash generated by operating activities totaled $7.3 million, and total debt reduction was another $3 million, bringing the total debt reduction over the past four quarters to $15 million, a decrease of 16%.
Speaker Change: We also remain fully focused on managing working capital and generating positive cash flow to fund, our strategic capital expenditures as well as paying down debt.
Speaker Change: In the second quarter net cash generated by operating activities totaled $7 3 million and total debt reduction was another $3 million, bringing the total debt reduction over the past four quarters to $15 million a decrease of 16%.
Christopher M. Zimmer: Backlog remains solid at $297 million at the end of the second quarter versus $325 million at the end of the first quarter. We are continuing to work with customers to manage order entries in order to pull in lead times, which better serves them while strengthening our competitiveness. From an operations standpoint, total production in the second quarter was up 4% sequentially. That follows a 12% sequential increase in the first quarter, as we further benefit from our capital modernization projects throughout the plan.
Speaker Change: Backlog remained solid at $297 million at the end of the second quarter versus $325 million at the end of the first quarter.
Speaker Change: We are continuing to work with customers to manage order entries in order to pull in lead times, which better serves them while strengthening our competitiveness.
Speaker Change: From an operation standpoint total production in the second quarter was up 4% sequentially.
Speaker Change: That follows a 12% sequential increase in the first quarter as.
Speaker Change: As we further benefit from our capital modernization projects throughout the plants.
Christopher M. Zimmer: Through those projects, we are realizing process improvements and an increased ability in our manufacturing process, enabling our production levels to ramp up. There was positive news on the workforce front earlier this month with the signing of a new five-year collective bargaining agreement with the hourly production and maintenance employees at our North Jackson facility. It's a good contract serving the best interests of our employees, our customers, and our shareholders. The capabilities of our North Jackson facility and our capital investments there have an essential role in our growth strategy. A further positive development in the second quarter was the return of Universal Stainless to the Russell 2000 and 3000 indices.
Speaker Change: Through those projects, we are realizing process improvements and an increased stability in our manufacturing process, enabling our production levels to ramp.
Speaker Change: There was positive news on the workforce front earlier this month with the signing of a new five year collective bargaining agreement with the hourly production and maintenance employees at our North Jackson facility.
Speaker Change: It's a good contract serving the best interest of our employees, our customers and our shareholders.
Speaker Change: The capabilities of our North Jackson facility, and our capital investments there, having a central role in our growth strategy.
Speaker Change: A further positive development in the second quarter was the return of Universal stainless to the Russell 2003 thousand indexes.
Christopher M. Zimmer: We believe it reflects our substantial progress over the past year in achieving our growth objectives and in building value for our shareholders. Turning to our end markets, let me begin with aerospace. Second quarter sales were a record $68.6 million, up 14% from the first quarter and up 34% from the second quarter of 2023. Year-to-date sales increased 29% to $128.8 million.
Speaker Change: We believe it reflects our substantial progress over the past year, and achieving our growth objectives and in building value for our shareholders.
Speaker Change: Turning to our end markets.
Speaker Change: Let me begin with aerospace second quarter sales were a record $68 $6 million up 14% from the first quarter and.
Speaker Change: And up 34% from the second quarter of 2023.
Speaker Change: Year to date sales increased to 29% to $128 $8 million.
Christopher M. Zimmer: I've just returned from the Farnborough Air Show, where the enthusiasm and optimism about the future of the aerospace market demand remain as strong as ever. The importance of the show for Universal was the opportunity to make further inroads into expanding our base of major customer approvals, as well as in deepening current customer relationships on both commercial and aerospace. We were successful on both fronts.
Speaker Change: I've just returned from the Farnborough Air show, where the enthusiasm and optimism about the future of the aerospace market demand remained as strong as ever.
Speaker Change: The importance of the show for Universal was the opportunity to make further inroads in expanding our base of major customer approvals.
Speaker Change: As well as in deepening current customer relationships on both commercial aerospace and defense we were successful on both fronts.
Christopher M. Zimmer: As expected, Boeing and Airbus announced major deals at the show. They were encouraging wins for Boeing, including an order for 20 787 Dreamliners for Japan Airlines and an order for 20 777-9s from Qatar Airlines. Airbus also won orders, including one from Japan Airlines, for both wide-body aircraft and the single-aisle 321neos. Boeing's focus at the airshow was on safety, quality, and their plan to meet customer commitments, while Boeing recently pushed back by a few months their production plans for the 737 MAX.
Speaker Change: As expected Boeing and Airbus announced major deals at the show.
Speaker Change: They were encouraging wins for Boeing including an order for 20 787, Dreamliners for Japan Airlines and order for 'twenty Triple seven Dash Nines from Qatar Airlines.
Speaker Change: Airbus also won orders, including one from Japan Airlines for both wide body aircraft and the single aisle 321 Neo <unk>.
Speaker Change: Boeing's focus at the Air show was on safety quality and their plan to meet customer commitments.
Speaker Change: While Boeing recently pushed back by a few months their production plans for the 737 Max.
Christopher M. Zimmer: COO Stephanie Pope told reporters at the air show that they are seeing significant improvement in the flow of their 737 factory, and she confirmed their production target of a steady rate of 38 737 MAX airplanes per month by the end of this year.
Speaker Change: 70, Pope told reporters at the Air show that they are seeing significant improvement in the flow of their 737 factory.
Speaker Change: And she confirmed their production target of a steady rate of 38 737, Max airplanes per month by the end of this year.
Christopher M. Zimmer: They also plan to return to producing five 787s per month later this year as the supply of parts continues to improve. To date, Boeing has continued to work with the supply chain to ensure reliability and sufficient inventory for the ramp-up in production rates. While our customers are closely monitoring the recent pushback in production target dates, we have only seen minimal order adjustments, and there have been no cancellations.
Speaker Change: They also plan to return to producing five 780 sevens per month later this year as the supply of parts continues to improve.
Speaker Change: To date Boeing has continued to work with the supply chain to ensure reliability and sufficient inventory for the ramp up in production rates.
Speaker Change: While our customers are closely monitoring the recent pushback and production target dates we have only seen minimal order adjustments and there had been no cancellations.
Christopher M. Zimmer: Confidence in aerospace demand is based on the fundamentals underpinning the commercial, airplane, and defense aerospace market, which point to an extraordinary and sustainable growth opportunity. Not only has air travel recovered to pre-COVID levels, but TSA screened a record 3 million passengers on July 7. The surge in air travel and forecasts of continued growth are driving up demand from airlines for new, more fuel-efficient planes to replace aging aircraft and support their fleet expansion plans.
Speaker Change: Confidence in aerospace demand is based on the fundamentals underpinning the commercial airplane and defense aerospace market, which point to an extra ordinary and sustainable growth opportunity.
Speaker Change: Not only has air travel recovered to pre COVID-19 levels.
Speaker Change: <unk> screened a record 3 million passengers on July seven.
Speaker Change: The surge in air travel and forecast of continued growth are driving up demand from airlines for new more fuel efficient planes to replace aging aircraft and support their fleet expansion plans.
Christopher M. Zimmer: The need is increasingly urgent as airlines have had to postpone route expansions as they await overdue deliveries. Somewhat ironically, the delay in new planes is driving another aerospace segment, the parts aftermarket and MRO, which we estimate to be about 5 to 10% of our aerospace business. The potential size of the commercial aerospace market can be seen in the combined net bookings of Boeing and Airbus, which total more than 14,000 aircraft. All of this translates into a substantial need for premium alloys today and in the years to come.
Speaker Change: The need is increasingly urgent as airlines have had to postpone route expansions as they await overdue deliveries.
Speaker Change: Somewhat ironically.
Speaker Change: The delay in new planes is driving another aerospace segment, the parts aftermarket and MRO, which we estimate to be about 5% to 10% of our aerospace business.
Speaker Change: The potential size of the commercial aerospace market can be seen in the common and the combined net bookings of Boeing and Airbus, which totals more than 14000 aircrafts.
Speaker Change: All of this translates into substantial need for premium alloys today and in the years to come.
Christopher M. Zimmer: Strong fundamentals are also driving demand and defense. Ongoing geopolitical conflicts have resulted in record global military spending, which reached $2.4 trillion in 2023, including increased military budgets at NATO countries, and the U.S. $884 billion defense budget for 2024 is aimed at modernizing weapons systems and technology and expanding capacities and capabilities for Advanced Jet Fighters, Military Helicopters, Drones, and Combat Vehicles, all require specialty and premium
Speaker Change: Strong fundamentals are also driving demand in defense.
Speaker Change: Ongoing geopolitical conflicts have resulted in record global military spending which reached $2 four trillion in.
Speaker Change: In 2023.
Speaker Change: Including increased military budgets at NATO countries.
Speaker Change: In the U S 884 billion defense budget.
Speaker Change: For 2024 is aimed at modernizing weapons systems, and technology, and expanding capacities and capabilities for.
Speaker Change: Advanced jet fighters.
Speaker Change: Terry helicopters drones and combat vehicles.
Speaker Change: All require specialty and premium alloys.
Christopher M. Zimmer: The defense industry is a growing and increasingly important part of our aerospace sales, representing 15 to 20 percent of our total sales. That demand, combined with strength in commercial airspace and the extensive number of new OEM approvals that we have received in recent years, are the primary drivers of our overall growth. Our company is in the strongest position it has been in to respond to the aerospace market opportunities. Turning to the Balance of Our Markets
Speaker Change: The defense industry as a growing and increasingly important part of our aerospace sales representing 15% to 20%.
Speaker Change: That demand combined with strength in commercial aerospace and the extensive number of new OEM approvals that we have received in recent years are the primary drivers of our overall growth.
Speaker Change: Our company is in the strongest position, we have been in to respond to the aerospace market opportunities.
Speaker Change: Turning to the balance of our markets.
Christopher M. Zimmer: Heavy equipment market sales were $5.2 million, or 6.3% of the second quarter sales, which is 11% lower than the first quarter. However, customers remained hesitant to build inventory in the face of changing market demand for EVs versus hybrids and gas engine vehicles. GM, for example, saw second-quarter sales strengthen in gas-powered vehicles while the pace of growth of their EV models slowed. Given the slowing pace of EV demand growth, GM is pushing back plans for a new Buick electric vehicle, although they do plan to introduce other new EV models in the coming months.
Speaker Change: Heavy equipment market sales were $5 2 million or six 3% of the second quarter sales, which is 11% lower than the first quarter.
Speaker Change: Customers remained hesitant to build inventory in the face of changing market demand for evs versus hybrids and gas engine vehicles.
Speaker Change: GM for example saw second quarter sales strength strengthening gas powered vehicles, while the pace of growth of their EV models slowed.
Speaker Change: Given the slowing pace of EV demand growth. They are pushing back plans for a new Buick electric vehicle, although they do plan to introduce other new EV models in the coming months.
Christopher M. Zimmer: Model changeovers are a positive driver of tool steel demand, whether for gas-powered, hybrid, or electric vehicles. We expect our heavy equipment market sales to pick up later in the year, and in 2025, demand to return to historic robust sales levels post-election once the automotive industry has better clarity and direction and the confidence to make substantial investments in new production lines. Energy market sales totaled $5.1 million in the second quarter, or 6.2% of sales, which is 15% lower than the first quarter but up 17% from the second quarter last year.
Speaker Change: Model changeover changeovers are a positive driver of tool steel demand weatherford gas powered hybrid or electric vehicles.
Speaker Change: We expect our heavy equipment market sales to pick up later in the year.
Speaker Change: And in 2025 demand to return to historic robust sales levels post election, once the automotive industry has better clarity and direction and the confidence to make substantial investments into new production lines.
Speaker Change: Energy market sales totaled $5 1 million in the second quarter or six 2% of sales, which is 15% lower than the first quarter, but up 17% from the second quarter last year.
Christopher M. Zimmer: The energy category combines our oil and gas and power generation sales, which we reported separately prior to 2024, and better reflects our strategy in the energy market as we have shifted production capacity to aerospace products in recent quarters. We plan to increase our energy market sales in future quarters as our production capacity continues to expand. General Industrial Markets totaled $3.3 million, or 4% of sales in the second quarter, which is 22% lower than the first quarter but up 3% from the second quarter last year.
Speaker Change: The energy category combines our oil and gas and power generation sales, which we reported separately prior to 2024.
Speaker Change: And better reflects our strategy in the energy market as we have shifted production capacity to aerospace products in recent quarters.
Speaker Change: We plan to increase our energy market sales in future quarters as our production capacity continues to expand.
Speaker Change: General industrial markets.
Speaker Change: <unk> totaled $3 3 million or 4% of sales in the second quarter, which is 22% lower than the first quarter, but up 3% from the second quarter last year.
Christopher M. Zimmer: We had expected our sales in this market to grow, mainly from semiconductor manufacturing, but general industry demand continues to remain modest. The long-term prospects in this market remain positive as U.S. semiconductor sales are continuing to gain traction amid the rampant development of AI and as semiconductor manufacturing returns to the U.S. with the help of the CHIPS Act. We expect our general industrial sales to improve post-election and remain poised to benefit from strengthening market dynamics in 2025.
Speaker Change: We had expected our sales in this market to grow which are mainly from semiconductor manufacturing.
Speaker Change: But general industry demand continues to remain modest.
Speaker Change: The long term prospects in this market remain positive as U S. Semiconductor sales are continuing to gain traction amid the rapid development of AI and as semiconductor manufacturing returns to the U S with the help of the chips Act.
Speaker Change: We expect our general industrial sales to improve post election, and remain poised to benefit from strengthening market dynamics in 2025.
Christopher M. Zimmer: Looking at the balance of the year, our strong backlog puts us in a great position to increase sales next quarter and further expand our margins, generating more free cash flow from operations. Now, let me turn the call over to Steve for his report on our financial...
Speaker Change: Looking at the balance of the year, our strong backlog puts us in a great position to increase sales next quarter and.
Speaker Change: And further expand our margins generating more free cash flow from operations.
Speaker Change: Now, let me turn the call over to Steve for his report on our financials.
Speaker Change: Yes.
Steve: Thanks, Chris.
Steve: Good morning, everyone.
Steve: As you can see in the numbers, our sales growth continued in the second quarter, consistent with our expectations. This is fueled by the effort from our team to execute on a robust market for our aerospace products, delivering record top-line quarterly sales of $82.8 million. Our overall shipment volume increased compared with the first quarter by 2%. This included a strong increase in aerospace and market shipments. Partly offset by lower shipments in the Heavy Equipment End Market Driven by Soft Demand and Lower Shipments of Conversion Services. Our expectation is for strong recovery for heavy equipment in 2025 after completion of the U.S. election cycle later this year.
Steve: As you can see it in the numbers our sales growth has continued in the second quarter consistent with our expectations.
Speaker Change: This is fueled by the effort from our team to execute on a robust market for our aerospace products.
Steve: Delivering record topline quarterly sales of $82 $8 million.
Steve: Our overall shipment volume increased compared with the first quarter by 2%.
Steve: This included a strong increase.
Speaker Change: In the aerospace end market shipments.
Speaker Change: Partly offset by lower shipments.
Speaker Change: In the heavy equipment end market, driven by soft demand and lower shipments of conversion services.
Speaker Change: Our expectation is strong recovery for heavy equipment in 2025 after completion of the U S election cycle later this year.
Steve: Additionally, continuous improvement projects layered throughout the organization have delivered lower costs and better yields. This has delivered record profitability as measured by gross margin, operating income, net income, EBITDA, or adjusted EBITDA. Our diluted earnings per share of $0.90 trails only the fourth quarter of 2017, which benefited from tax adjustments driven by new tax laws, and two quarters from much earlier in the company's history when the diluted share total was much lower.
Speaker Change: Additionally, continuous improvement projects layers throughout the organization.
Speaker Change: Delivered lower costs and better yields.
Speaker Change: <unk> has delivered record profitability as measured by gross margin operating income net income EBITDA or adjusted EBITDA.
Speaker Change: Our diluted earnings per share of <unk> 90.
Speaker Change: Trails, only the fourth quarter of 2017, which benefited from tax adjustments driven by new tax laws.
Speaker Change: In two quarters from much earlier in the company's history when the diluted share total was much lower.
Steve: Gross margin totaled $21 million in the first quarter, or 25.4% of sales, compared with 18.9% of sales last quarter and 14.3% in the first quarter of last year. The significant sequential improvement is primarily driven by three sustainable factors. First, the impact of cost and yield initiatives executed to specifically improve product profitability. Also, a richer mix of aerospace products.
Speaker Change: Okay.
Speaker Change: Gross margin totaled $21 million in the first quarter or 25, 4% of sales.
Speaker Change: Compared with 18, 9% of sales last quarter and 14, 3% in the first quarter of last year.
Speaker Change: The significant sequential improvement is primarily driven by three sustainable factors.
Speaker Change: First the impact of cost and yield initiatives executed to specifically improve product profitability.
Speaker Change: Also a richer mix of aerospace products.
Steve: And finally, the ongoing recognition of our higher base price. Our expectation is to continue to drive profitable growth for the foreseeable future through execution of the Margin Project initiatives while maximizing our supply to aerospace and defense. Selling General and Administrative costs totaled $8.2 million in the second quarter, compared with $7.4 million in the first quarter and $6.8 million in the second quarter of last year. Quarterly SG&A has increased compared to 2023 due to higher employee-related costs. Business Insurance Expenses and Audit and Accounting Support Expenses.
Speaker Change: And finally, the ongoing recognition of our higher base prices.
Speaker Change: Our expectation is continue is to continue to drive profitable growth for the foreseeable future your expectation of the margin project initiatives, while maximizing our supplier to aerospace and defense.
Speaker Change: Selling general and administrative costs totaled $8 $2 million in the second quarter.
Speaker Change: Compared with $7 4 million in the first quarter and $6 8 million in the second quarter of last year.
Speaker Change: Quarterly SG&A has increased compared to 2023.
Speaker Change: Due to higher employee related costs.
Speaker Change: <unk> insurance expenses, and audit and accounting support expenses.
Steve: We expect SG&A to approximate $8.5 million per quarter through the second half of this year. Our operating income for the quarter is $12.8 million, which is a company record. We committed on our last two calls that we would see meaningful operating income growth each quarter. As the impact of the margin initiatives falls through to the income statement, and we realize the benefit of the 16 price increases that were announced over the last three years, there is more good to come from both of those factors in the balance of the year.
Speaker Change: We expect SG&A to approximate $8 $5 million per quarter through the second half of this year.
Speaker Change: Our operating income for the quarter.
Speaker Change: This $12 8 million, which is a company record.
Speaker Change: We committed on our last two calls that we will see meaningful operating income growth each quarter.
Speaker Change: As the impact of the margin initiatives fall through to the income statement.
Speaker Change: And we realize the benefit of the 16 price increases that were announced over the last three years.
Speaker Change: There is more good to come from both of those factors and the balance of the year.
Steve: We also reduced interest expense by $150,000, to a total of $1.9 million for the quarter. $100,000 of the decrease relates to our lower total debt levels, and $50,000 relates to lower average interest. Term SOFR, which drives our rate for the majority of our debt, was flat. But we achieved a 25 basis point reduction in our spread above SOFR for our bank debt near the end of the first quarter. This reduction benefited Q2 and will benefit our rates going forward.
Speaker Change: We also reduced interest expense by $150000.
Speaker Change: To a total of $1 9 million for the quarter.
Speaker Change: $100000 of the decrease relates to our lower total debt levels and $50000 relates to lower average interest rates.
Speaker Change: Terms sofa, which drives.
Speaker Change: Our rate for the majority of our debt was flat.
Speaker Change: But we achieved a 25 basis point reduction in our spread above sofa for our bank debt near the end of the first quarter.
Speaker Change: This reduction benefited Q2 and will benefit our rate going forward.
Steve: And we have the opportunity to reduce the rate by another 25 basis points in Q3, and we expect to see that benefit in the Q4 income statement. We recorded income tax expense of $2.1 million for the first quarter, resulting in an effective tax rate of about 19% for the year to date. The effective tax rate is 19.3% and includes a projected annual ETR of 20% and $100,000 of a discrete benefit related to share-based compensation.
Speaker Change: And we have the opportunity to reduce the rate by another 25 basis points in Q3 and expect to see that benefit in the Q4 income statement.
Speaker Change: We recorded income tax expense of $2 1 million for the first quarter.
Speaker Change: <unk> and an effective tax rate of about 19%.
Speaker Change: For the year to date.
Speaker Change: Effective tax rate is 19, 3%.
Speaker Change: And it includes a projected annual ETR of 20%.
Speaker Change: And a 100 and $100000 of a discrete benefit related to share based compensation items.
Steve: Net income for the quarter was $8.9 million, or $0.90 per diluted share. This more than doubles Q1 diluted EPS and brings the year-to-date figure to $1.33. The current quarter's diluted EPS is the highest since Q1 2007, excluding the fourth quarter of 2017, which benefited from the tax adjustment.
Speaker Change: Net income for the quarter was $8 9 million or <unk> 90 per diluted share.
Speaker Change: This more than doubles Q1 diluted EPS and brings the year to date figure to $1 33.
Speaker Change: The current quarter diluted EPS is the highest since Q1 2007, excluding the fourth quarter of 2017.
Speaker Change: Which benefited from the tax adjustment.
Steve: EBITDA was $17.9 million. Adjusted EBITDA includes an ADVAC for non-cash share compensation and was $18.5 million. A 46% growth over Q1 and the highest level in company history. Our Income Adjusted for Non-Cash Items generated $16.2 million during the course. We grew net working capital by $5 million, as AR grew from the timing of our Q2 sales, and InventoryGroo, along with increasing VIM milk production, to support ramping VIM sales. We spent $5.5 million on capital expenditures, bringing year-to-date capex to about $11 million.
Speaker Change: EBITDA was $17 9 million.
Speaker Change: Adjusted EBITDA.
Speaker Change: Includes an add back for noncash share compensation and was $18 5 million.
Speaker Change: A 46%.
Speaker Change: Both over Q1, and the highest level in company history.
Speaker Change: Our income adjusted for noncash items generated $16 $2 million during the quarter.
Speaker Change: We grew net working capital of about $5 million.
Speaker Change: <unk> grew from the timing of our Q2 sales and inventory grew along with increasing then milk production to support ramping <unk> sales.
Speaker Change: We spent $5 5 million on capital expenditures, bringing.
Speaker Change: Bringing year to date capex to about $11 million.
Steve: We expect full year 2024 capital expenditures to total approximately $18 million. Our debt paydown was about $3 million in Q2. We expect to pay down our revolver and decrease our net debt each quarter for the rest of the year. That concludes the financial update, and I'll hand the call back to Chris.
Speaker Change: We expect full year 2020 for capital expenditures to total approximately $18 million.
Speaker Change: Our debt Paydown was about $3 million in Q2.
Speaker Change: We expect to pay down our revolver and decrease our net debt each quarter for the rest of the year.
Speaker Change: That concludes the financial update and I'll hand, the call back to Chris.
Christopher M. Zimmer: Thanks, Steve.
Christopher M. Zimmer: In summary, our sales and profitability reached new levels in the second quarter, with record sales of $82.8 million, record gross margin of 25.4%, record net income of $8.9 million, or $0.90 per diluted share, and record adjusted EBITDA of $18.5 million.
Christopher M. Zimmer: In summary, our sales and profitability reached new levels in the second quarter with record sales of $82 8 million.
Speaker Change: Record gross margin of 25, 4%.
Christopher M. Zimmer: Record net income of $8 $9 million or <unk> 90 per diluted share.
Speaker Change: And record adjusted EBITDA of $18 $5 million.
Christopher M. Zimmer: The combination of our focus on aerospace and premium alloys with targeted margin improvement projects has been transformational as we've created a structural change in the margins we can achieve. That change is sustainable going forward, and we plan to build upon it. We continue to invest in our premium alloy capacity and efficiencies while also reducing debt. We remain fully focused on managing working capital, generating positive cash flow to further fund capital investments and debt reduction.
Speaker Change: The combination of our focus on aerospace and premium alloys with targeted margin improvement projects.
Speaker Change: Has been transformational as we've created a structural change in the margins we can achieve that.
Speaker Change: That change is sustainable going forward and we plan to build upon it.
Speaker Change: We continue to invest in our premium alloy capacity and efficiencies while also reducing debt.
Speaker Change: We remain fully focused on managing working capital generating positive cash flow.
Speaker Change: To further fund capital investments and debt reduction.
Christopher M. Zimmer: For the balance of this year, we continue to see opportunities to grow our top line and expand our gross margin. As I said in today's release, we remain highly optimistic about our growth momentum and strategy for 2025 and beyond.
Speaker Change: For the balance of this year, we continue to see opportunities to grow our topline and expand our gross margin.
Speaker Change: As I said in today's release, we remain highly optimistic about our growth momentum and strategy for 2025 and beyond.
Operator: This concludes our formal remarks. Operator, we're ready for questions. Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, please press star 1-1 on your telephone.
Speaker Change: This concludes our formal remarks, operator, we're ready for questions.
Operator: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A list. Our first question comes from Phil Gibbs at KeyBank.
Speaker Change: Thank you at this time and will create a question and answer session. As a reminder to ask a question. Please press star one on your telephone.
Deanna: Thank you Deanna.
Speaker Change: She has a strong a question. Please press star one again, please standby lumber composite Q&A roster.
Speaker Change: Okay.
Speaker Change: Our first question comes from Phil Gibbs at Keybanc.
Philip Ross Gibbs: Hey, good morning.
Phil: Hey, good morning, Phil.
Philip Ross Gibbs: Question was just on some of the Capital Spending Initiatives that you have and what you mentioned incrementally this morning. So currently, you have VAR being commissioned at the current time, and then you mentioned more de-bottlenecking initiatives or growth in size of the potential, and then that sounds like it's more relegated to next year. But kind of take us through where you are on some of the bigger items this year and then what you announced today and what the goals are.
Speaker Change: Question was just on some of the.
Speaker Change: Capital spending initiatives that you have.
Philip Ross Gibbs: <unk>.
Speaker Change: What you mentioned incrementally this warning.
Speaker Change: So currently you have.
Speaker Change: The.
Speaker Change: Var is being commissioned.
Speaker Change: At the current time, and then you mentioned.
Speaker Change: More debottlenecking initiatives our growth.
Speaker Change: Growth in size of the potential added them that sounds like it's more relegated to next year, but.
Speaker Change: Kind of take us through where you are on some of the bigger items. This year and then what you announced today in and what the goals are.
Christopher M. Zimmer: Yeah, our capital spending this year is going to be in the $18 million neighborhood. You can expect half of that, a little more than half of that, to go towards what we call sustainability.
Speaker Change: Yes, our capital this year capital spending is going to be in the $18 million neighborhood.
Speaker Change: You can expect half of that little more than half of that to go towards what we call sustainability. So this is the maintenance and the upkeep of legacy equipment.
Christopher M. Zimmer: So this is the maintenance and the upkeep of legacy equipment. We've got about $4 million going towards modernization projects. So this is the ability for us to be able to implement technology throughout the plants, helping a new generation of workers in the plants work more efficiently and safely and get back to some of the production levels that we had enjoyed when we had what I call the pre-COVID workforce and all the tribal knowledge that they contained.
Speaker Change: We've got about $4 million going towards modernization projects.
Speaker Change: So this is the ability for us to be able to implement technology throughout the plants.
Speaker Change: Helping a new generation of workers in the plants work more efficiently and safely and get back to some of the production levels that we had enjoyed when we had.
Speaker Change: What I call the pre Covid workforce and all the tribal knowledge they contained.
Christopher M. Zimmer: And these modernization efforts are really starting to take hold as we've been expanding our production levels each quarter. Finally, the growth in the ROI side of the CapEx spending is going to be in the neighborhood of five to six million. These are going to be things like furnace capacity. A number of the alloys that we're producing that are more advanced require a little bit more time in the furnaces. So we're adding furnace capacity at the forge and downstream.
Speaker Change: These modernization efforts are really starting to take hold as we've been expanding our.
Speaker Change: Our.
Speaker Change: Production levels each quarter.
Speaker Change: Finally, the growth in ROI side of the the Capex spending is going to be in the neighborhood of $5 million to $6 million.
Speaker Change: These are going to be things like furnished capacity number.
Speaker Change: A number of the alloys that we're producing that are more advanced require a little bit more time in our furnaces. So we're adding furnace capacity at the forge and downstream.
Christopher M. Zimmer: Putting investments into a number of areas that are either down money for investments next year like the VIM or areas to be able to enhance our pull-through on the finishing side. I'll give you a little bit of color. Hopefully, that answers it, Phil.
Speaker Change: Putting investments into a number of areas that are either down money for investments next year like the vim.
Speaker Change: Or areas to be able to enhance our pull through on the finishing side.
Speaker Change: That gives you a little bit of color hopefully that <unk>.
Speaker Change: The answer is it Phil.
Christopher M. Zimmer: What would you describe as your... Your primary bottleneck right now in terms of on the labor front. Are there any thoughts that you need to add into more targeted areas there, or do you feel like you've got the right people? It is just a set of folks coming up the curve at the moment.
Philip Ross Gibbs: What would you describe as your.
Philip Ross Gibbs: Your primary bottleneck right now in terms of in terms of.
Philip Ross Gibbs: Capacity or capability.
Speaker Change: And then secondly.
Speaker Change: On the on the Labor front are there any thoughts that you need to add added into more targeted areas there.
Speaker Change: Or do you feel like you've got the right.
Speaker Change: Set of folks coming up the curve at the moment.
Christopher M. Zimmer: Yeah, so let me talk a little bit about what's been pacing lead time. For our premium products, VIM primary melt has been the area that has really been pacing lead times. We did have a very strong quarter, ramping up melt production there. We're on track to have another record production quarter at VIM here in the third quarter, all in line with what we've got baked into the backlog. Aside from VIM melt production pacing lead times, finishing, particularly on small diameters, has been another area that has also been pacing lead times, simply because of the nature of the labor intensity of the smaller diameter product.
Speaker Change: Yeah. So let me talk a little bit about what's what's been pacing lead times.
Speaker Change: For our premium products Vim primary milk has been the area that has really been pacing lead times.
Speaker Change: We did have a very strong quarter ramping melt production. There. We're on track to have another record production quarter at <unk> here in the third quarter. All are in line with what we've got baked into the backlog.
Speaker Change: Aside from them milk production pacing lead times, finishing particularly on small diameters has been another area that has also been pacing lead times simply because of the nature of the labor intensity of the smaller diameter.
Speaker Change: Product.
Christopher M. Zimmer: From a labor standpoint, we have seen better stability, but I'm not where we want to be. We still have opportunities to continue to pull through and retain. Workers at a Higher Level. As we get them working safely and efficiently, following instructions, and working to the levels that we need them to work at, I think we're really close to getting back to those pre-COVID production levels, which we're just shy of right now.
Speaker Change: From a labor standpoint, we have seen better stability, but im not where we wanted to be we still have opportunities to continue to pull through and retain.
Speaker Change: Workers at a higher level.
Speaker Change: As we get them working safely and efficiently following instructions and working to the levels that we need in the work at <unk>.
Speaker Change: We're really close to getting back to those pre COVID-19 production levels.
Speaker Change: We are just shy of right now, but I expect as we move through the second half of this year into 2025, we will return to those production levels.
Christopher M. Zimmer: But I expect as we move through the second half of this year and into 2025, we'll return to those production levels. So labor has improved, it's stabilized, but I think we can still continue to get better at fully staffing up and securing those reliable good workers that we need.
Speaker Change: Labor has improved its stabilized but.
Speaker Change: But I think we can still continue to get better fully staffing up.
Speaker Change: In securing those reliable good workers that we need.
Philip Ross Gibbs: And how should we be thinking about networking capital over the balance of the year? And then, you know, within that, have you, and I know the margins have been obviously outstanding, but was there any misalignment still going on, or is that still over? So I guess two questions: one on networking capital and one on whether or not there's any raw material misalignment. Yeah, so you'll see.
Speaker Change: And how should we be thinking about.
Speaker Change: Net working capital over the balance of the year.
Speaker Change: Within that have you and I know the margins have been obviously outstanding but was there any.
Speaker Change: Misalignment is still going on or is that does that still over so I guess two questions. One on the networking capital and one on whether or not there's any raw material misalignment.
Christopher M. Zimmer: Yeah, so you'll see that inventories went up a little bit in the second quarter. The primary driver there is that we got a little bit ahead of ourselves in melt by design late in the second quarter, knowing that we had some planned annual maintenance outages at our melt shop. So, we will bring our inventories and our working capital levels back down to ending first quarter levels by the time we exit the third quarter here. So, getting those inventories back under control, getting back aligned on that commitment to grow our top line while keeping our inventory levels flat to down. And remind me of your second question there, Phil.
Speaker Change: Yes, so youll see that inventories.
Speaker Change: Went up a little bit in the second quarter. The primary driver. There is that we did get a little bit ahead of ourselves and melt by design late in the second quarter, knowing that we had some planned annual maintenance outages at our melt shops. So we will bring our inventories in our working capital levels back down to ending first quarter.
Speaker Change: Levels by the time, we exit the third quarter here, so getting those inventories back under control.
Speaker Change: Getting back realign on that commitment to grow our top line, while keeping our inventory levels flat to down.
Speaker Change: And remind me your second question therefore.
Philip Ross Gibbs: Was there any raw material misalignment in the second quarter, and what do you expect in the back half? Yeah, it was very minor. It was only an adverse effect of about $500,000 to $600,000.
Speaker Change: Was there any raw material misalignment in the second quarter and what have you it's right in.
Christopher M. Zimmer: Yeah, it was very minor. It was only an adverse, about $500,000 to $600,000 that we saw the misalignment impacting the second quarter. It got to the point where we didn't specifically call it out. So, just modestly negative, but we're now seeing enough stability in surcharges and in the raw material flows that I don't expect it to have any type of misalignment here in the third quarter. Thank you.
Speaker Change: In the back half thanks.
Speaker Change: Yes. It was very minor it was only an adverse about five to $600000 that we see.
Speaker Change: The misalignment impacting the second quarter it got to the point, where we didn't specifically call. It out so just modestly negative, but we're now seeing enough stability in surcharges in the raw material flows that I don't expect it to have any type of a misalignment here in the third quarter.
Speaker Change: Thank you.
Speaker Change: Youre welcome. Thank you Phil.
Operator: Thank you. The next question comes from Bob Sales at LMK Capital Management.
Speaker Change: Thank you. Our next question comes from Bob <unk>.
Speaker Change: Okay capital management.
Speaker Change: Hi can you hear me.
Speaker Change: Yes, hi, good morning, Bob.
Robert A. Sales: Good morning. Nice quarter. A couple questions. First of all, on the premium alloy mix, how much if you were to guess how much of that premium alloy goes into the defense versus commercial era?
Bob: Good morning, nice quarter, a couple of questions.
Speaker Change: First of all on the premium alloy mix.
Speaker Change: How much if you were to guess how much of that.
Speaker Change: Premium alloy goes into defense versus commercial Aero.
Christopher M. Zimmer: The majority. Therefore, premium alloys lend themselves to structural components within defense applications, both on fixed-wing fighter craft and on helicopters. The premium products also lend themselves to the engine. Part of this business, so obviously you've got engines and fighter jets, but these premium products are also going into engines that are in the. Commercial Aerospace side of the business. So, rough cut, I'd say about two-thirds of those premium products are aligned with defense applications and about a third of them are ultimately going into engines for commercial applications.
Speaker Change: The majority so the premium alloys lend themselves to structural components within defense applications, both on fixed wing fighter craft and on helicopters.
Speaker Change: The premium products also lend themselves to the engine.
Speaker Change: Part of the business. So obviously <unk> got engines in fighter Jets, but these premium products are also going into engines that are that are in the.
Speaker Change: Commercial aerospace side of the business. So rough cut I would say about two thirds of those premium products are aligned with defense applications.
Speaker Change: And about a third of it ultimately into engines for commercial applications.
Robert A. Sales: Okay, thank you. And then, could you touch on the backlog a little bit? I think you mentioned, can you expand on what you mentioned about the fact that order entry, you're working with customers on order entry, I assume that meant that earlier in the year, you were putting more orders into the system that you were constrained by, and that's given some relief with throughput now, but I'm not sure I'm right. So can you expand on that a little bit?
Speaker Change: Okay. Thank you and then.
Speaker Change: Can you touch on.
Speaker Change: The backlog a little bit I think you mentioned can you expand on.
Speaker Change: What you mentioned about the fact that order entry you are working with customers in order entry I assume that that earlier in the year.
Speaker Change: You were you were putting more orders into the system that you were constrained by and Thats given some when you probably have some relief with throughput now, but I'm not sure I'm right. So can you expand on that a little bit.
Christopher M. Zimmer: Yeah, the primary driver there, as you look back, particularly in 2023, when we hit a high water mark for backlog, at that time, we had premium alloy lead times that were out in the 70- to 80-week range, depending upon the size range of products. It makes it very difficult for our customers to plan on demand being that far out with the visibility that they have.
Speaker Change: Yes, the primary driver there.
Speaker Change: As you look back, particularly in 2023, when we hit a high watermark for backlog at that time, we had premium alloy lead times now are out in the.
Speaker Change: 70% to 80 week range, depending upon the size range of products.
Speaker Change: Makes it very difficult for our customers to plan on demand being that far out with the visibility that they have.
Christopher M. Zimmer: So we've been working with customers, assuring them an allocation so that they feel comfortable that they are gonna have a spot in line with us. But we've been walking back our lead times. And these days, we've gone from, call it, the mid-70s, to right around 45 to 50 week lead times on those premium alloys. And we've done that just by controlling order entry on a controlled basis, periodically opening up the order book for customers to layer in new orders.
Speaker Change: So we've been working with customers.
Speaker Change: Assuring them an allocation so that they feel comfortable that they are going to have a spot in line with us, but we've been walking back our lead times and these days, we have gone from call. It mid seventies to right around 45 to 50 week lead times on those premium alloys.
Speaker Change: And we've done that just by controlling order entry on a controlled basis periodically opening up the order book for customers to layer in new orders.
Christopher M. Zimmer: So, that total level of demand, on the aggregate of what we expect in the quarters to come, continues to increase, but we've just been walking in the lead times. This has been very helpful to our customers. It's given them the ability to layer in higher assurance that the sizes and the grades that they're ordering align with what they need. This has been a very good thing for customers, and it's also helped to enhance us from a competitive standpoint. So, as we continue to walk those lead times back in and ramp up our production levels, it's going to put us in a better position to sustain our growth trajectory.
Speaker Change: That total level of demand on aggregate of what we expect in the quarters to come continues to increase but we've just been walking in the lead times. So this has been very helpful to our customers.
Speaker Change: Given them the ability to layer in a higher.
Speaker Change: Assurance that the sizes and the grades that they're ordering align with what they need.
Speaker Change: This has been a very good thing for customers and it's also helped to enhance us from a competitive standpoint. So as we continue to work those lead times back in and ramp our production levels. It is going to put us in a better position to sustain our growth trajectory.
Robert A. Sales: What level do you feel will be, for your premium? What level do you feel will be normalized lead times?
Speaker Change: What level do you feel will be for your premium.
Speaker Change: <unk> do you feel like will be normalized.
Speaker Change: Lead times.
Christopher M. Zimmer: Well, that's a good question because I think we're still in an environment for the foreseeable future, and by that, I mean years, where we've got an environment where demand is going to outpace supply. And I'm speaking for the industry, not just Universal Stainless.
Speaker Change: Boy that's a good question because I think we're still in an environment for the foreseeable future and by that I mean years, where we've got an environment, where demand is going to outpace supply and I'm speaking.
Speaker Change: For the industry not just universal stainless so.
Christopher M. Zimmer: The capacity is going to come as we ramp up our efficiencies, and we've got some modest increases that are going into the equipment at our VIM facility to be able to give us more capacity and throughput there. But I suspect that living in the call it 10 to 14 month range industry-wide is probably going to be the new norm. A lot of that is going to depend upon the sustained growth and demand for these premium alloys and the ability for Universal and the industry, for that matter, to continue to ramp up our throughput and production levels.
Speaker Change: The capacity is going to come as we ramp our efficiencies and we've got some modest increases that are going into the equipment at our <unk> facility to be able to give us more capacity and throughput there.
Speaker Change: But I suspect that living in.
Speaker Change: Call it 10% to 14 month range industry wide is probably going to be the new norm.
Speaker Change: A lot of that is going to depend upon the sustained growth and demand in these premium alloys and the ability for universal in the industry for that matter to continue to ramp our throughput and production levels.
Robert A. Sales: Okay, and then lastly, in backlog, so we don't draw any erroneous conclusions, do you expect backlog to continue to trend down over the next several quarters as you make improvements, or do you expect that it will maintain the level that we've seen this quarter?
Speaker Change: Okay, and then lastly in backlog so John.
Speaker Change: Any.
John: <unk> conclusions do you expect backlog.
John: Continues to trend down over the next several quarters as U S.
Speaker Change: As you make improvements or.
Speaker Change: Or do you expect that it will maintain the level that we've seen this quarter.
Christopher M. Zimmer: Well, I think my bias would be that it would move sideways to slightly down. I think the one wildcard there is that while it's clear that the aerospace and defense business continues to remain extremely strong, we continue to win new pockets of share as we gain approvals. But those markets outside of aerospace continue to be a bit muted. We think that some of it is tied to the election, with markets looking for some certainty moving forward.
Speaker Change: Well I think my bias would be that it would move sideways to slightly down I think the one wildcard there is while it's clear that the aerospace and defense business continues to remain extremely strong we continue to win new new new pockets of share as we again approvals.
Speaker Change: But those markets outside of aerospace continued to be a bit muted.
Speaker Change: We think that some of it is tied to the election markets looking for some certainty moving forward. So we're turning in record results right now and we're not quite firing on all cylinders.
Christopher M. Zimmer: So, we're turning in record results right now, and we're not quite firing on all cylinders. Once that tool steel plate market, our heavy industry market, starts to pick back up, the energy market, semiconductor, that will help to bolster our backlog, and it's going to help to fuel the top line as well too. I've got a bit of a conservative approach. I'm not sure that we'll see that economic benefit in those other markets for us until the latter half of 2024 and into 2025. But, you know, if the markets wake up and decide that they want to start surging on order entry, we're poised and ready to be able to meet that demand.
Speaker Change: That tool steel plate market, our heavy industry market starts to pick back up energy market semiconductor that will help to bolster up our backlog and it is going to help to fuel the top line as well too.
Speaker Change: I've got a bit of a conservative approach I'm not sure that we'll see that economic benefit in those other markets for us until the latter half of 2024 going into 'twenty five.
Speaker Change: But if the market's wake up and they decided that they want to start surging on order entry, we're poised and ready to be able to meet that demand.
Robert A. Sales: Thank you, and congratulations on the performance.
Speaker Change: Thank you and congratulations under performance.
Christopher M. Zimmer: Thanks, Bob. I appreciate it. Thank you.
Speaker Change: Thanks, Bob I appreciate it.
Operator: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. Our next question comes from... Phil Gibbs, at KeyBank.
Speaker Change: Thank you Adam My head to ask questions. Please Chris start online.
Speaker Change: Okay.
Speaker Change: Our next question comes from.
Philip Ross Gibbs: Phil Gibbs at Keybanc.
Philip Ross Gibbs: Well thank you.
Philip Ross Gibbs: Yeah.
Philip Ross Gibbs: My question was around the comments in the release on the sustainable cost improvement or efficiencies that you garnered as part of your gross profit margin outcome, something certainly that appeared new to the discussion. So maybe talk a little bit about what that means and why you highlighted it this quarter. Thanks.
Philip Ross Gibbs: My question was around the comments in the release on the.
Speaker Change: Sustainable.
Speaker Change: Cost improvement or efficiencies that you that you've garnered as part of your.
Speaker Change: Gross profit margin outcome.
Speaker Change: Something certainly that appeared new.
Speaker Change: Two.
Speaker Change: The discussion.
Speaker Change: So.
Speaker Change: Maybe talk a little bit about about what does.
Speaker Change: What that means.
Speaker Change: And why you highlighted this quarter. Thanks.
Christopher M. Zimmer: Okay, sure. Yeah, these, I'm going to have Steve talk a little bit about them. He's worked closely with our industrial engineers, technology, and operations group, quantifying these initiatives to reduce material costs, operations costs, and improve yields. So, Steve, do you want to touch base a little bit on these initiatives and why we're just now calling them out?
Steve: Okay sure, yes. These I'm going to have Steve talk a little bit about it. He has worked closely with our industrial engineers technology and operations group quantifying these initiatives to reduce material costs ops cost improved yield so Steve do you want to touch base, a little bit on these initiatives and why we're just now calling it out.
Steve: Sure, so... We implemented some specific projects in 2023 as part of our 2024 plan to drive margin improvement. So some examples of those are actively being reviewed.
Steve: Sure so we.
Steve: We implemented some specific projects.
Steve: In our in 2023 as part of our 2024 plan to drive margin improvement.
Speaker Change: Ample of those are.
Steve: Actively reviewing heat.
Steve: We made heat charge make-ups for our melt shops, and we trialed and successfully implemented lower-cost methods of melting products without sacrificing quality. Another example would be yield improvement. So we've carved out subsets of our product categories. We attacked our flat rolled plate business and some different components of our round bar business to drive yield improvement. So, as I described those, right, melt and yield improvement, they took some time and effort to implement.
Speaker Change: The heat charge make ups for our melt shops, and we trialed and successfully implemented lower cost methods of melting product without sacrificing quality.
Speaker Change: Another example would be yield improvement so we carved out subsets of our product categories.
Speaker Change: We attacked our flat rolled plate business.
Speaker Change: And some different components of our round bar business to drive yield improvement.
Speaker Change: So as I described those right milk and yield improvement it took some time and effort to implement that.
Steve: They worked through our inventory and reached the P&L upon shipment. So we're really starting to see the benefits of those projects pop in Q2, which is why we're calling them out now. They're a significant part of that margin improvement, and we wanted to highlight them to drive home the message that they're sustainable. These are things that, you know, we've implemented and won't go away.
Speaker Change: Worked through our inventory and reach the P&L upon shipment. So we're really starting to see the benefits of those projects pop in Q2.
Speaker Change: Which is why we're calling the mountain now there are a significant part of that margin improvement.
Speaker Change: We wanted to highlight them to drive home the message that they are sustainable these are things that.
Speaker Change: We've implemented and won't go away.
Philip Ross Gibbs: Now, lastly for me, kind of on a different track, you've been You've been adding capability to the operations recently and then, and then also over time when you made the big acquisition a decade plus ago to sort of get you where you are with North Jackson. So there's certainly interest in building certain capabilities for the industry, and there's a sort of a limited asset set of places that can do these things.
Speaker Change: And then lastly for me kind of on a different track you've been.
Speaker Change: <unk> been adding capability to the operations.
Speaker Change: Recently, and then and then also over time win.
Speaker Change: He made the big acquisition.
Speaker Change: A decade plus ago to sort of get you where you are with north Jackson.
Speaker Change: So there is there is there is certainly interest in building certain capabilities for the industry.
Speaker Change: And there is a sort of a limited limited assets.
Speaker Change: Places that can do these things.
Christopher M. Zimmer: Is that drawing more interest in the M&A environment? Do you think the M&A environment could attract more? You know, active, I think, one by one by one, we've seen, obviously, with the titanium operations that used to be out there in the marketplace, Latrobe or Ladish, things like that over time, PCC, things have kind of gotten gobbled up. So there's sort of a lack of, kind of a lack of assets out there, seemingly, in your wheelhouse. But are there any thoughts that there should be more consolidation in the market? Is that something that's being talked about more broadly by the industry?
Speaker Change: Is that drawn drawn more interest in the in the M&A environment is there is there do you think the M&A environment could get more.
Speaker Change: Active I think one by one by one and we've seen obviously with the titanium operations that used to be out there in the marketplace Latrobe over flattish things like that over the over time PCC things have kind of gotten gobbled up.
Speaker Change: So there's sort of a lack of.
Christopher M. Zimmer: Kind of a lack of lack of assets out there seemingly in your in your wheelhouse.
Speaker Change: But.
Speaker Change: Are there any thoughts that.
Speaker Change: There should be more consolidation in the market is that something that's being talked about more broadly by.
Speaker Change: By the industry.
Christopher M. Zimmer: Yeah, I think you're spot on on the idea that what we do is a unique spot in the specialty metals industry. There aren't a lot of players out there doing what we do.
Speaker Change: Yeah.
Speaker Change: Yes, I think youre spot on on the idea that what we do is a unique spot in the specialty metals industry.
Christopher M. Zimmer: We know about Asuranox acquiring Hanes, and it looks like that deal is getting ready to go through final approvals and happen. As a public company, we're always susceptible to having those types of discussions. But I can tell you that our focus right now has been around executing on our strategy. We've got a big backlog that we need to be able to bite into that I think is going to continue to drive better results.
Speaker Change: Theres not a lot of players out there doing what we do.
Speaker Change: We know about <unk> acquiring haynes and it looks like that deals getting ready to go through final approvals and to happen.
Speaker Change: As a public company, we're always susceptible to having those types of discussions, but I can tell you that our focus right now has been around executing on our strategy.
Speaker Change: Got a big backlog that we need to be able to eat into that.
Speaker Change: I think it's going to continue to drive better results.
Christopher M. Zimmer: As we look around the industry at opportunities for us to be able to supplement our growth, where we can find capacities, we're utilizing them. Assets out there in the marketplace that have historically supported automotive demand, for example, being able to partner up with some people to help us on the finishing side. And we do that in kind too; wherever we've got some available capacities, we'll offer those conversion services to other customers.
Christopher M. Zimmer: As we look around the industry and opportunities for us to be able to supplement our growth.
Speaker Change: Where we can find capacities were utilizing them.
Speaker Change: Assets out there in the marketplace that had historically.
Christopher M. Zimmer: <unk> automotive demand for example, being able to partner up with some people to help us on the finishing side.
Christopher M. Zimmer: And we do that and kind to wherever we've got some available capacities will offer out those conversion services to other customers.
Christopher M. Zimmer: But you're right, the market is tight. BIM supply is tight. Demand is fantastic, and it's only going to get stronger. But this is an industry that, you know, needs to find a way to grow. It needs to find a way to support all these planes that we need to build. But, in short, our focus right now is just being able to execute, realize the full potential of the assets that we have, a very organic structure there, but keeping our eyes open on ways that we can find partners to help us accelerate that growth. Thanks, Chris and team.
Christopher M. Zimmer: But youre right the market is tight <unk> supply.
Christopher M. Zimmer: Supply is tight demand is fantastic and it's only going to get stronger.
Christopher M. Zimmer: But this is an industry that.
Speaker Change: Needs to find a way to grow it needs to find a way to support all these planes that we need to build.
Christopher M. Zimmer: But in short our focus right now is just being able to execute realize the full potential of the assets that we have.
Christopher M. Zimmer: A very organic structure, there, but keeping our eyes open on ways that we can find partners to help us accelerate that growth.
Philip Ross Gibbs: Thanks Chris and team; I appreciate it.
Speaker Change: Okay.
Operator: Thanks, Chris and team appreciate it.
Christopher M. Zimmer: Thank you.
Operator: Our next question is from Bob Sills at LMK Capital Management.
Speaker Change: Our next question for Bob.
Catherine Mansion: Okay Catherine mansion.
Robert A. Sales: Yeah, Chris, I did have one more question for you. Yeah, you don't consistently tell Denny Oates that this business is really easy to run, do you?
Speaker Change: Chris I did have one more question for you.
Speaker Change: You don't.
Speaker Change: <unk> consistently.
Robert A. Sales: Denny Oates that this business is really easy to run to you.
Christopher M. Zimmer: No, no, no. I've been having fun in the new role. We've got a really good team here, so it's made the successful transition a lot easier on me because we've got a really good team here. I'm sure Denny is listening, so I couldn't resist the question.
Speaker Change: Now now now.
Speaker Change: I've been having fun in the new role we've got a really good team here. So it's made the successful.
Christopher M. Zimmer: Transition.
Christopher M. Zimmer: To use the army because we've got a really good team here.
Christopher M. Zimmer: I am sure Denny's listing so I couldnt resist to question.
Christopher M. Zimmer: Yes.
Denny: Thank you.
Operator: I'm showing no further questions at this time. I will now like to turn the call over back to Chris Zimmer for closing remarks.
Speaker Change: I'm showing no further questions at this time I would now like to turn the call over back to Craig for closing remarks.
Christopher M. Zimmer: Thank you everyone for joining us this morning. The first half of 2024 was one of substantial progress and momentum, and we're focused on continuing to achieve both of those during the rest of this year. I look forward to updating you all on the progress during our third quarter call. Thanks, and have a great day.
Christopher M. Zimmer: Thank you.
Craig: Thank you everyone for joining us. This morning, the first half of 2024 was one of substantial progress and momentum and we're focused on continuing to achieve both of those during the rest of this year.
Christopher M. Zimmer: I look forward to updating you all on the progress during our third quarter call.
Christopher M. Zimmer: Thanks, and have a great day.
Denny: Okay.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Operator: Okay.
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