Q2 2019 Earnings Call

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July 2nd which was effective immediately that covers about 10% to 15% of our business and should start benefiting sales and margins later this year.

Net income in the second quarter totaled $2.1 million or 24 cents per diluted share and included unusual charges of three cents related to a fire at the North Jackson hydraulic forge, which has returned to operation.

Adjusted EBITDA increased 17.9% sequentially date, and a half million dollars or 8.9 million, excluding the north Jackson fire related expenses.

Which approximates 12% to 13% of sales.

Chris will cover cash flow manage working capital and other related items in his remarks.

So I'll turn back to operations.

We reported a fire to north Jackson facility back in June .

By way of background, we acquired the North Jackson Forge and the adjacent vacuum induction melting facility in 2011.

As a way for us to add key capabilities in aerospace and oil and gas applications.

The completion of all equipment installations took another 18 months the acquisition led to our successful market entry into the aerospace engine market.

Additional critical aerospace structural parts, including landing gear helicopter rotor manifesting gears and drill ships for oil and gas applications.

The North Jackson facility acquisition was a key part of our strategy of moving toward technologically advanced and higher margin alloys.

The fire to North Jackson plant was caused by a ruptured hydraulic line, which resulted in hydraulic fluid coming in contact with hot metal and igniting there were no injuries.

Electrical and hydraulic repairs commenced immediately product delivery schedules were minimally impacted as our team did an outstanding job in responding.

In fact, we recorded record shipments in North Jackson in the second quarter, despite the disruption from the fire.

During the third quarter, we have a normal annual planning outage of the forwards during which time, we will expand our work to ensure all fire related issues have been addressed.

Our insurance coverage has a $350000 deductible, which has already been incurred.

We are rapidly moving up the learning curve operating the new barstow in Dunkirk after completing virtually all items on the punch list, except a few level two items and our new inspection system, which will require customer approval.

We essentially doubled the output of the line during the second quarter processing, a mix heavily weighted toward smaller bar diameter.

As a reminder, this capital project involves the modernization of our intermediate bar processing operation.

By consolidating six discrete processing steps into one fully functioning automated workstation.

The project will increase efficiency and speed, reducing cost lead times and work in process inventories, while enhancing the safety environment.

We expect that two year payback on the project.

Additionally, the project was financed in a tax advantaged manner utilizing new market tax credits.

Overall underlying plant activity levels continued to be strong in the second quarter, and we expect them to remain strong in the current quarter, even with some anticipated third quarter seasonality.

We believe that seasonality, we've moderated by the strength in the aerospace market.

In addition to the more extensive forge planned outage will be taking selective facilities down for a normal one week outages during the quarter.

More broadly we continue to execute successfully on our plan of moving to higher value premium alloy sales optimizing our integrated manufacturing system.

Expanding customer approvals for new products and targeting our capital investment the high return opportunities.

We have a strong focus on employee safety and employee engagement and retention today. Our business is focused on attractive end markets most of which are experienced growth rates in excess of the economy generally which provides a strong tailwind for our business over the long term.

Turning to those end markets, let me start with aerospace our largest end market.

Our aerospace sales reached $49.3 million or 70% of sales in the second quarter of 2019, compared with $43 million or 71% of sales in the first quarter of 2019 and $40.2 million or 61% of sales in the second quarter of 2018.

Demand from our customers remains strong in the second quarter and continues apace today. The sentiment is basically that customers want their orders and they want them now.

Demand remains strong even with the uncertainty surrounding the 737 maxs that has hung over the market for months.

Boeing issued a press release last Thursday that added clarity to their expectations for the return to service of the 737, Max now forecasted for early in the fourth quarter and their production schedule plan.

Essentially a gradual increase in production rate from the current reduced 42 airplanes per month to 57 planes per month in 2020, the original plan.

Apart from some minor inventory adjustments.

Most Boeing suppliers and maintain a steady production rate to avoid falling short or late when the 57 planes per month target is back in play.

Following the earnings call May add more perspective, I believe their call starts at 10 30 to this morning.

As an added comment I must say that we were literally unable to find any customers at the recent Paris Air show there were anything but positive about aerospace over the next several quarters and bullish on the long term outlook.

So overall the aerospace market from our standpoint remains healthy as do our aerospace bookings and backlog.

The oil and gas end market moved to second position among our end markets in the second quarter of 2019 at 11% of total sales.

Yes, there is some softness in the first quarter of 2019.

Oil and gas sales were 12% of sales in the second quarter of 2018.

Second quarter oil and gas sales totaled $7.7 million, an increase of 44% sequentially.

And slightly below the 2018 second quarter.

Demand in the oil and gas market is solid in its earnings report last week Slumber J reported a 5% sequential increase in worldwide revenues, including 8% increase in its international business, citing a bruin upturn in MP investment in activity, while the North America land revenues increased 1% in offshore revenues were up 10%, which they attribute the stronger exploration led activity.

At the same time, the total revenues were flat year over year.

While Schlumberger is oil demand forecast for 2019 has been reduced slightly on trade war fears and global geopolitical tensions it was clear on its earnings call that it does not anticipate a change in the structural demand outlook for the third quarter.

For 2019 in total they expect internationally NP investment to grow eight 9%.

Excuse me.

While North America is expected to decline, 10% in line with our previous forecast due to NP, operator cash flow constraints and declining rig counts.

Our strategy for Universal continues to be expanding the penetration of this market utilizing our new capabilities at North Jackson.

The heavy equipment market became our third largest market in the second quarter of 2019, representing 10% of sales.

Compared with 11% of sales in the first quarter of 2019.

And 14% of sales in the second quarter of 2018.

Second quarter 2019, heavy equipment sales, which are primarily tool steel plate sales totaled $7.2 million, which is 11% higher sequentially with 21% lower than the second quarter of 2018.

In the first quarter, we reported a dip in tool steel plate sales as our tool steel customers adjusted their inventories there for strong buying in 2018.

Demand start to pick up in may leading to the sequential growth in our heavy equipment market sales in the second quarter.

We expect a respectable level of tool steel sales in the second half of the year, but we do not see the record volumes reported in the second half of 2018.

Automotive production cuts somewhat fewer model changeovers in the pipeline.

Lower surcharges in coming months.

Short lead times of roughly six weeks and service center inventory adjustments are the primary reasons for the modest reduction in outlook relative to 2018.

Power generation market sales represented four and a half a percent of total sales in the second quarter of 2019, compared with 14.2% in the 2019 first quarter and three and a half a percent of sales in the second quarter of 18.

Second quarter power generation sales increased sequentially and year over year and totaled $3.2 million, which is up 28% from the first quarter of 2019 and up 37% in the second quarter last year.

This growth mainly reflects seasonal maintenance spending in the quarter as the new build market, we do not anticipate any meaningful near term recovery, even with Oems initiatives to turnaround there power businesses, we expect maintenance to continue to drive our sales for the foreseeable future.

Our general industrial market sales were 3.4% of second quarter 2019 sales versus 3.7% of sales in the first quarter of 2019 and 7.4% of sales in the 2018 second quarter General industrial sales totaled $2.4 million, an increase of 8% sequentially, although 51% lower than the second quarter of 2018.

Our general industrial market sales go to the semiconductor medical infrastructure and general manufacturing markets.

Depressed conditions in the chip sector have negatively impacted demand for the past three quarters as manufacturers turn cautious with ongoing us China trade frictions compounded by excess inventories in certain memory chip markets.

That said channel checks with a number of customers at the recent Semicon show introduced a note of optimism that they expect a bottoming out in demand in the second half of 2019, and a modest recovery going into 2020.

Additionally, the growth outlook for the balance of the markets in our general industrial business is generally positive.

Let me turn the call over to Chris for his financial report press.

Thank you Denny and good morning, everyone, let's start with the income statement.

As Denny noted second quarter 2019 sales of $71 million were up 17.8% or $10.7 million from the 2019 first quarter and up 7.5% compared with the 2018 second quarter.

2019, first half sales of $131.3 million were up slightly compared to 2018 first half sales of 129.8 million.

Increased 2019 first half revenues were driven by our aerospace end market, which had 91.9 million in revenue for the first half of 2019.

Second quarter 2019, gross margin totaled $9.1 million or 12.8% of sales up 60 basis points from the 2019 first quarter, but down 490 basis points from the 2018 second quarter.

And the 2019 second quarter, our gross margin was negatively impacted by fire related expenses at the North Jackson facility amounting to $357000.

Additionally, within certain products, we experienced melt cost misalignment compared to our commodity surcharges, which negatively impacted second quarter gross margin compared to 2019 first quarter.

Looking at selling general and administrative costs second quarter, SDMA was $5.6 million or 7.9% of sales an increase of 638000 compared with the 2019 first quarter and a 245000 decrease compared to the 2018 second quarter.

Employee related costs drove the change between periods, both sequentially and year over year.

Our effective tax rate for the six months ended June 32019 was 16%.

Specific to the second quarter, the income tax provision was 384000 or 15.5%.

Net income in the second quarter was $2.1 million or 24 cents per diluted share.

Second quarter diluted EPS adjusted for the North Jackson fire charges totaled 27 cents per diluted share.

First quarter 2019, net income totaled $1.2 million or 14 cents per diluted share.

From 2018 second quarter net income totaled $4 million or 50 cents per diluted share.

Second quarter, EBITDA totaled 8.2 million EBITDA as adjusted for both non cash share compensation and the North Jackson fire expenses totaled $8.9 million.

Our second quarter adjusted EBITDA of $8.9 million was 1.5 million higher than the first quarter of 2019, and 2.7 million lower than the second quarter of 2018.

The EBITDA and adjusted EBITDA calculations are provided in the tables to the press release.

Taking a look now at our balance sheet at the end of the second quarter manage working capital totaled $147.8 million and increased by $7.9 million compared with the first quarter of 2019.

Accounts receivable increased by $6.4 million in inventory decreased by 7 million, while accounts payable decreased by $8.5 million.

Our decline in payables compared to the first quarter of 2019 coincided with decreased inventory levels in the quarter.

In the first quarter inventory levels and Miltec Tivity were higher as we positioned inventory at our Dunkirk facilities midsize Barksdale unit for second quarter process.

Second quarter 2019 backlog totaled $116.9 million. This is down $13.2 million from record backlog of $130.1 million in the first quarter of 2019.

Year over year second quarter, 2019 backlog increased $12.7 million or 12.1% compared to the 2018 second quarter.

Capital expenditures for the second quarter were $3.8 million with year to date capital expenditures totaling 9.4 million.

Prior year second quarter capital expenditures totaled $4.2 million with 2018 first half capex totaling 6.6 million.

Increased 2019 capital expenditures relate to strategic spend primarily our new mid size bar cell units and our Dunkirk facility with Marcel commissioning activities nearly complete at the close of the 2019 second quarter.

Our restricted cash balance totaled 430000 at June 32019, which was in line with first quarter, 2019, and 5.7 million lower than the prior year second quarter.

Our restricted cash is related to the new markets tax credit program. These funds are limited to use in the financing of our midsize bar cell capital project.

Lastly, looking at our debt the Companys total debt at June 30 stood at $68.2 million, an increase of 2.7 million from the prior quarter net of cash and restricted cash our debt totaled $67.5 million at the end of the second quarter.

This concludes the financial update and Denny ill turn the call back to you.

Okay, Chris Thank you.

In summary, then business was strong in the second quarter of 2019, especially aerospace and we made tangible progress.

Total net sales were the highest in seven years.

Aerospace and premium alloy sales were at record levels.

Gross margin improved sequentially and totaled 13.3% of total sales, excluding north Jackson fire related charges.

Our new Barstow is ramping up and performing above expectations.

Underlying plant activity levels continued to be strong in the second quarter, and we expect them to remain strong in the current quarter, even with some anticipated third quarter seasonality, which should be moderated by the strength, we're seeing in the aerospace market.

Overall, we continue to believe 2009, two will be another positive year for universal and we anticipate sales growth the sequential margin improvement and positive cash flow for the remainder of the year.

Before I close I want to thank all of our employees for their continued hard work and dedication and especially for the outstanding job. Our team did in responding to the fire at North Jackson, where we recorded record shipments despite the disruption.

That concludes our formal remarks, operator, we're ready to take any calls.

Thank you ladies and gentlemen.

Thank you ladies and gentlemen, if you have a question at this time.

Please press the Star then one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound.

To prevent any background noise, we ask that you. Please place your line on mute once your question has been Steven.

Our first question comes from Tyler Kenyon with Cowen.

Hey, good morning.

They don't Tyler.

Good good.

Getting there.

The backlog go up a healthy 12%.

Year over year, but is there any color you can provide us just on what drove.

On a sequential weakness.

Just with respect to the various end markets you serve and.

Any update on kind of where the backlog stand quarter to date.

Let me, let me for that question that Chris Zimmer.

Yeah, I'd say the primary drivers are despite the continued strength.

Initiatives at the North Jackson plan to ramp up production and as we continue to bring onboard the new Midscale Marcel range in Dunkirk its opened up our production bandwidth.

It's actually offered us opportunities to pull our cycle times and.

So that has slowed order entry in the near term simply because our customers are adjusting to.

The new shorter cycle times that we have for new order placement.

And I think there is also a degree of.

Potential pause in the marketplace as our customers look at commodity prices coming down which is normal buying behavior.

So I expect that as our lead times stabilize and commodity prices stabilize and trend back upwards again that they will return back to that normal buying pattern, then we'll see that reflected in our backlog.

So I guess I would just summarize I don't look at the decrease as a negative I actually look at it as a positive if you look at it by product.

We've seen a decrease in tool steel is the main product line, it's down in the backlog just numerically.

And keep in mind that that is one of our shortest lead time products as well so if you're a buyer of tool steel today Youre looking at relatively short lead times of six weeks or so.

You know that your prices are going to be down in a couple of months because surcharges driven by what I described in chrome and vanadium in scrap in particular will be going down.

So there is a little change in purchasing pattern out there, we're seeing smaller orders and customers waiting till the last minute to place an order, particularly in the tool steel environment.

Okay, Great. That's helpful. And then another one of your specialty metal producer peers cited can de stocking.

From a jet engine OEM in the second half of this year are you seeing that and are you seeing any any evidence of destocking just within the structurals market as well.

We're not seeing any meaningful destocking.

Familiar with the one situation there.

There is some movement of product you know pull pull something in a month push something out but generally speaking.

On the aerospace side, we're not seeing any evidence of any significant or measurable destocking.

We'll next tool steel side, which is non aerospace we have seen destocking over the first half of the year.

Which I think reflects more the heavy buying that that our customers did in the second half of last year.

And then on just last one for me on.

You pointed toward expectations for gross margin to recover.

Into the third quarter here in any sense you can provide us just on the magnitude of the sequential improvement you're looking for I mean, it sounds like there are some crosscurrents here.

With the maintenance outages in the third quarter.

As well as some alleviation and just the the nickel line surcharges and material costs.

Generally speaking, we expect strong activity levels in the plants, we do have outages at our forged melt shop.

During the summer that's nothing that is unusual.

From a bigger picture standpoint that we have some tailwinds in the sense that we've got the new bar cell coming online.

And as we continue to increase production and sell through that inventory remember were on an average cost inventory accounting.

System.

We'll start to see the benefit of the bar cell come out in the third quarter in the fourth quarter and increasing modestly positive tailwind.

From a from a mix headwind standpoint is this whole subject to commodities right. Now if you look at nickel bearing products over the course of the last six months you've seen nickel.

Moving up and then decreasing and having a negative impacted the testing during the second half of the second quarter.

Nickel has now shot up.

So that will have some positive effects late in the third quarter, we do expect nickel to tail off though.

If you look at the other products the other commodities rather like chrome.

Vanadium.

In Mali that I mentioned, they have fallen significantly we expect them to basically be bottoming out as we as we go forward. So you put that all together from a net basis, we expect that the tailwinds to be stronger than those headwinds we see on the commodity front.

Hopefully that didnt confuse the issue, but commodities has been the one wildcard here over the last six months in particular has been a little bit of a surprise from our standpoint.

Terms of the trends we've seen.

Thanks very much.

Thank you again, ladies and gentlemen, if you have a question at this time. Please press. The Star then one key on your Touchtone telephone. Our next question comes from Phil Gibbs with Keybanc capital markets.

Hey, Denny Chris how are you.

Phil how are you doing.

Good I just had to laugh and he said confuse the issue I mean, there hasn't been any confusion in the tree landscape to date.

At all so.

Quite expected under sarcasm there.

Maybe never.

I had a question more so on.

Just the Capex outlook for the rest of the year and Chris still good 14 million ish or so so kind of later in the in the back half.

We expect capex levels within 2019 to approximate 2018 levels potential a little bit lighter, we're continuing to work through strategic projects as the timing of those projects settles out within the year, we will finalize but at this point, we're still projecting pretty close to 2018 levels.

And then as you you look ensure your inventory.

Over the rest of the year and you say you think about potential for for taking the.

The debt levels down.

Clearly it looks like your profits are going to be.

Pretty resilient for the rest of the year. So what what are you thinking about in terms of magnitude of.

Just core core debt reduction and taken more out of.

Inventory.

I think as you look at inventory, we're targeting to get close to the 2018 end of year inventories.

All right.

And if you take a look at that where we see things playing out from an earning standpoint and the capital standpoint, we would expect to make.

And other seven $8 million reduction in debt.

So I think on the last call I indicated we'd be somewhere between a five minute I think and high fives and it will be in the low fives.

Maybe high fours.

Hi, fives low fours in terms of what I'm sorry.

During the total debt.

So 50, 58 50 low fiftys.

Okay.

Okay.

It seems pretty.

Conservative I think.

And Norris.

North Jackson.

Strong quarter in terms of sales.

Any insight in terms of what your outlook there is for for the year and any any update on progress of contracts.

We would expect to continue to see strong activity coming out of North Jackson and continue to have new records in terms of production and shipping as we go through the second half of the year.

As you and I have talked in the past we continue to have opportunities to get additional approvals. We typically have stop bragging about those in a sense only because this led to some competitive compromise out in the marketplace.

But I will tell you in the aerospace World, we do have some additional approvals.

The we got earlier this year, which were benefiting from right now in agreements part of the reason why the premium alloy sales continue to ramp.

So we continue to do that we're focused on the aerospace side and those approvals.

Not so much in oil and gas at this point in time.

But that that could that continues.

Thanks very much.

Youre welcome.

Ladies and gentlemen, thank you for participating in today's question and answer session I would now like to turn the call back to Mr., Alex for any closing remarks.

Well once again, thanks, everyone for joining us. This morning, we sincerely appreciate your ongoing support and your interest in Universal stainless.

And we'll look forward to updating you in October on how we make out in the third quarter.

Have a great day thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect and have a wonderful day.