Universal Stainless & Alloy Products Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 1, 2024

There are 5 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Universal Stainless and Alloy Products Incorporated First Quarter 2024 Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, June Filangieri.

Operator

Please go ahead.

Speaker 1

Thank you, Brittany. Good morning. This is June Filangeri 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 Q1 2024 results reported this morning.

Speaker 1

With us from management are Chris Zimmer, President and Chief Executive Officer John Arminas, Vice President and General Counsel and Steve De Tannaso, Vice President and Chief Financial Officer. Before I turn the call over to management, let me quickly review procedures. After management has made formal remarks, we will take your questions. Brittany will instruct you again on procedures at that time. Also, please note that in this morning's call, management will make forward looking statements.

Speaker 1

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. With the formalities complete, I would now like to turn the call over to Chris Zimmer. Chris, we are ready to begin.

Speaker 2

Thank you, June. Good morning, everyone, and thank you for joining us. I'm pleased to report our earnings momentum continued in the Q1, most evident in our gross margin, which reached 18.9%, the highest in 12 years, even with a 1 point $3,000,000 raw material misalignment. Without it, our gross margin would have topped 20%. This is the 5th consecutive quarter of gross margin improvement and we expect the momentum to continue in the coming quarters as sales ramp up, our base prices continue to increase and raw material headwinds dissipate as commodity prices further stabilize.

Speaker 2

Operating income rose 51 percent to $7,300,000 in the Q1 and net income increased nearly 60%, reaching $4,100,000 or $0.43 per diluted share compared with $0.27 in the 4th quarter. Our Q1 sales of $77,600,000 were the 2nd highest in our history, only exceeded by our record 4th quarter sales of $79,800,000 We expect to achieve record sales quarterly for the balance of the year based upon the strength of the aerospace market demand, which continues unabated. It's also supported by our backlog, which increased to 325,000,000 dollars from 318,000,000 at year end on continued strong order entry. 1st quarter premium sales totaled $20,100,000 just shy of the record level in the 4th quarter. Our premium alloys, which are mainly for aerospace application, represented 26% of our total 1st quarter sales and aerospace represented nearly 78% of sales in the quarter.

Speaker 2

Both continue to be the main drivers of our performance and growth. It's important to underscore that our strategy to focus on premium alloys has been transformational for our company and has yielded a broader base of customer approvals, a richer product mix and increased earnings power. Total debt for the Q1 was reduced by another $4,300,000 while we also continue to invest in our premium alloy capabilities in North Jackson. That includes ordering a second 18 ton furnace for the VIM, which adds to efficiencies and capacity as well as a new box furnace to support the forge. Additionally, we are further investing in upgrades of our process controls with more digital capability on equipment to utilize optimizing operating performance.

Speaker 2

We plan to continue to invest capital in our facilities while further reducing debt in 2024. Our total production in the Q1 was 12% higher than the Q4 of 2023 and are strongest since the Q1 of 2020. We are seeing the benefits of targeted capital modernization projects throughout our plants that have delivered process improvements and reliability to our manufacturing process, enabling our production levels to ramp. We have additional modernization projects underway to support our growth as the stability of our workforce continues to improve. Turning to our end markets, starting with aerospace, our largest.

Speaker 2

1st quarter sales totaled $60,200,000 compared to $61,900,000 in the 4th quarter $49,000,000 in the Q1 of 2023. As I said, aerospace demand remains robust despite the current low build rates at Boeing resulting from the 7 37 MAX production issues and slower production of the 787. While that has curved the supply of Boeing airplanes to its customer, it has not curved Boeing's demand to its suppliers. Boeing's message to the supply chain, keep your foot on the gas and keep to the master schedule production plan. Boeing is intent on ensuring supplier stability and allowing all suppliers to catch up in preparation for the increase in build rates planned for 20252026.

Speaker 2

On their call last week, Boeing said that production of MAX planes will remain below 38 per month in the first half of twenty twenty four, but they plan to ramp up to the 38 level in the second half of the year. Rate increases beyond that are predicated on their work with the FAA. The rate of 787 production is expected to increase to 10 per month in 2026 and Boeing expects to make first delivery of the 777X in 2025. Boeing also reported that demand across its portfolio remains incredibly strong. Their net new orders in the Q1 totaled 125, including 85 73710s, 28 777X planes.

Speaker 2

At quarter's end, Boeing's net backlog stood at more than 5,600 planes, including approximately 4,800 MAX planes, nearly 800787s and around 480 777Xs. Meanwhile, Airbus reported a total of 170 new orders in the Q1. While their single aisle production is running below plan at about 50 planes per month due to supply chain issues, Airbus has reaffirmed their production goal of 75 A320s per month in 2025, as well as their target of raising A350 output to 10 per month in 2026. The surge in air travel is driving demand for new airplanes with Delta, United, Alaska and American Airlines, all reporting strong first quarter growth and bullish second quarter outlooks. Delta's Ed Bastian described market travel conditions as the most constructive in his career.

Speaker 2

With consumers in a healthy position, travel remaining a top priority and corporate travel accelerating. Other airlines echoed the same. One limiting factor for the airlines is the slowed production and delivery of new generation airplanes, causing them to reduce schedules during the peak flying season and rely on older aircraft. On the plus side, that has generated demand in the MRO business, which benefits supply chain demand. In the defense sector, the President just signed into law a $95,000,000,000 aid package for Ukraine, Israel and Taiwan amid the increasing intense conflicts in those regions.

Speaker 2

That follows passage of the long delayed $825,000,000,000 defense spending bill for fiscal 2024 in March. Increased defense spending can translate into added market demand for the type of premium and specialty alloys we produce. The defense market is an increasingly important market for us and it currently represents 15% to 20% of our total aerospace sales. Overall, I would echo the sentiment that this is the most constructive aerospace market environment I've ever seen. The feedback from customers indicates that they are fully in a pull mode, replenishing their inventories on strong demand.

Speaker 2

Our company is also in the strongest position we've ever been to respond to that demand as a result of our multi year capital investment in premium alloy capabilities and capacity. Turning to our remaining markets. Beginning this quarter, we are reporting a new market category energy, which combines our oil and gas and power generation sales and better reflects our strategy in the energy market. We have been deemphasizing PowerGen in recent quarters as we focus capacity on the aerospace industry. In fact, PowerGen sales contributed just $1,100,000 to total energy market sales of $6,000,000 in the Q1.

Speaker 2

Oil and gas sales of $4,900,000 made up the rest. Energy market sales were up 29% sequentially and up 3% from the Q1 last year, representing 7.7% of total sales. Although we have temporarily shifted much of our premium alloy production and finishing capacity to aerospace, we plan to increase our energy market sales in future quarters as our production capacity continues to expand. Heavy equipment market sales totaled $5,800,000 or 5.7 percent of 1st quarter sales. Sales were down 9% sequentially as our customers continue to balance inventories and digest the changing market demand for EVs versus hybrids versus gas engine vehicles.

Speaker 2

Both Ford and GM did report increased EV sales in the Q1 with GM reporting a sharp rise in EV production and deliveries and Ford emphasizing its record hybrid sales. However, automakers are modifying the mix of their planned model offerings and the timing of new model introductions as they adjust to current customer preferences. Even so, model changeovers are a positive driver of tool steel demand and we expect our sales to pick up in the second half of the year. General industrial market sales totaled $4,300,000 in the first quarter compared to $5,600,000 in the 4th quarter $3,500,000 in the Q1 last year. First quarter results were in line with our expectations as discussed on our last call.

Speaker 2

We expect our sales in this market, which are mainly for semiconductor manufacturing to resume growth in the Q2. The U. S. Semiconductor market is benefiting from the CHIPS Act, which aimed at onshoring semiconductor manufacturing. The Commerce Department recently announced the deal with Samsung providing up to $6,400,000,000 in incentives to support their manufacturing operation in Texas.

Speaker 2

The Commerce Department previously announced incentives for TSMC, Intel, Global Foundries, Microchip Technology and BAE Systems. Additionally, AI related demand is also driving the market. We remain very optimistic about this market in 2024, especially during the second half of the year. Now let me turn the call over to Steve for his report on our financials.

Speaker 3

Thanks, Chris. Good morning, everyone. Sales of $77,600,000 in Q1 were nearly $12,000,000 higher than the Q1 a year ago and second only to our record Q4 2023. Gross margin totaled $14,700,000 in the 1st quarter or 18.9 percent of sales compared to 16.4% last quarter and 11.7% in the Q1 of last year. When compared with Q4 2023, the margin improvement was driven first by higher base prices on shipments and also cost reductions delivered by specific margin improvement projects executed during 2023.

Speaker 3

The margin increase was partially offset by a raw materials misalignment headwind in the quarter that totaled approximately $1,300,000 When compared to the Q1 of last year, about $7,000,000 of the increased sales fell through to margin, representing about a 60% pull through and demonstrating the impact of our higher base prices, our volume recovery and our cost improvement efforts. Selling, general and administrative costs totaled $7,400,000 compared with $8,300,000 last quarter $6,300,000 in the Q1 of last year. The 2023 Q4 SG and A was higher due to the timing of employee related costs, which then decreased in Q1. Higher business insurance expenses and higher audit and accounting support expenses continue in 2024. We expect SG and A expense to range between $7,500,000 $8,000,000 per quarter as we move through the year.

Speaker 3

Our operating income of $7,300,000 was at its highest level since Q2 2012 and was $2,500,000 better than last quarter. A month ago on our call, I said that we plan to drive meaningful growth in operating income in 2024. This is step 1 on that path and demonstrates our profitability potential in the coming quarters as we continue to execute our plan. Total interest expense for the quarter was $2,000,000 compared to $2,200,000 in the Q4 of 2023. Average debt was about $5,000,000 lower in the Q1 compared to the Q4 of last year.

Speaker 3

Term SOFR, which drives our interest rate for the majority of our debt, was flat for both quarters and our effective interest rate for both periods was about 9.5% on all debt. Due to our financial performance the last few quarters, we achieved a 25 basis point reduction in our spread above SOFR on our bank debt near the end of the Q1. This will benefit interest expense in Q2 and going forward. And we have the opportunity to reduce the rate by another 25 basis points in Q3 if we achieve our financial plan. We recorded income tax expense of $1,100,000 during the Q1, resulting in an effective tax rate of 20.4%.

Speaker 3

The effective tax rate includes the impact of the federal statutory rate of 21% and state income taxes, offset by the impact of our research and development tax credits, which decreased income tax expense for the period. Other elements of the rate calculation and discrete items in the quarter are not significant. Discrete items resulted in less than $100,000 of tax expense in the quarter and the estimated annual effective tax rate for 2024 is 19.7%. Net income for the quarter was $4,100,000 or $0.43 per diluted share. This represents an increase in EPS of $0.16 or nearly 60% versus last quarter despite the calculation of diluted shares increasing by 137,000 shares in the same period due to our higher stock price.

Speaker 3

Our first quarter EBITDA was $12,200,000 compared to $9,600,000 last quarter. Our adjusted EBITDA includes an add back for non cash share compensation and was $12,600,000 or 16.2 percent of sales, highest since Q1 2012. Our income adjusted for non cash items generated $10,600,000 in cash during the quarter. We invested $300,000 of that in net working capital and other assets and used our remaining cash flow to fund capital expenditures of $5,500,000 and decrease our net debt by 4,800,000 dollars We expect full year 2024 capital expenditures to total approximately $18,000,000 and we plan to generate free cash flow each quarter and pay down debt each quarter in 2024. This concludes the financial update.

Speaker 3

I'll hand the call back to Chris.

Speaker 2

Thanks, Steve. In summary, we achieved the highest profitability in 12 years in the Q1 as our gross margin continued its upward trajectory reaching 18.9% even after a $1,300,000 material misalignment and our net income reached $0.43 per share on near record sales. Unabated aerospace demand continues to drive our premium alloy sales as well as our increased backlog and strong order entry. Our strategic focus on premium alloys has been transformational, expanding our base of customer approvals, giving us a richer product mix increasing our earnings power. We continue to invest in our premium alloy capabilities and capacities in the Q1, ordering a second 18 ton furnace for the VIM in North Jackson and a new box furnace to support the forge there.

Speaker 2

At the same time, we reduced net debt by another $4,800,000 in the quarter. We plan to continue to invest capital on our facilities in 2024, while also further reducing our debt through a focus on managed working capital and generating positive cash flow. With a strong start to 2024, we are focused on achieving record quarterly sales and increasing profitability for the rest of the year. As I said in today's release, we remain highly optimistic about our growth momentum and strategy for the foreseeable future. That concludes our formal remarks.

Speaker 2

Operator, we're ready for questions.

Operator

Thank you. At this time, we will conduct a question and answer session. First question will come from the line of Michael Leischalk with KeyBanc Capital Markets. Michael, your line is now open.

Speaker 4

Hey, good morning. I wanted to start with the Boeing impact of their lower production. Wondering how long you could mitigate some of those issues before it starts to have a larger impact assuming nothing changed at Boeing. Just thinking about supply chain inventory levels and elevated backlogs and trying to get a sense for how much buffer there is, if 737 production remain subdued longer than Boeing's expectations?

Speaker 2

Yes. Good morning, Mike. So the best information that we have and a lot of this is coming from a conference that we attended about 4 to 5 months ago, a supplier conference out that way and recent correspondences that we've had. The supply chain issues that have persisted, this is an opportunity for the supply chain to continue to catch up to support that 38 per month level that they were trying to achieve. There's an idea out there that it would have been difficult for them to achieve that level at the current rate that the supply chain was able to support it.

Speaker 2

So this is an opportunity for the supply chain to continue to get caught up and get Boeing in the position to be able to realize that 38 rate count. So what we're seeing and what we're seeing in the industry right now has not been a push out or a cancellation of any of the schedules. They remain committed to their word and what they said they would do, which is to continue to keep all of the schedules in place and to continue to pull in through the supply chain. From a timing standpoint, I believe that if we go out beyond the late June, July time period and they don't have resolution with the FAA to get back on track going beyond the 38 per month rate, I think at that point then we need to reassess what the environment looks like. But I believe that their current plan right now that they've got in place that the FAA is going to be reviewing and ultimately signing off on at the end of a 3 month period that began a month or so ago.

Speaker 2

I believe that if this persists beyond July, then we need to talk about potential impacts. But until that point, we feel comfortable with the demand and the pull in the supply chain continuing to be strong even with them tapping the brakes on the build rate here in the first half of the year.

Speaker 4

Got it. That's very helpful. And then in the quarter, you had very strong margins despite the raw material misalignment. And I think 3 months ago, you had said this would begin to maybe moderate in 2Q and then behind us by the end of the Q2. So is this still your view or has anything changed given some of the moving pieces?

Speaker 2

Yes, we still stand by that. I think that we will still have a little bit of misalignment here in the second quarter, but roughly only about 40% to 50% of what we experienced in the Q1. We've had stability now for a few months and actually nickel is starting to show a little life. It is up slightly over the past 4 to 5 weeks. I don't know where that's going to go or if that's just a near term move, but what we're currently seeing in the commodities market is stability to a slight upward bias.

Speaker 2

So again, less misalignment in the Q2. And at the rate we're going right now, I don't think we'll have misalignment in the second half of the year. But we'll wait and see what the commodities do and talk about it more then.

Speaker 4

And what impacts are you seeing within aerospace aftermarket? It sounds to us like MRO demand is going to be strong for several years. And just wondering if there's any new opportunities or any way to think about the impact of maybe a more prolonged aftermarket strength?

Speaker 2

It's hard for us to quantify simply because of the majority of our product that flows through service centers and forgers. It's hard to know where that metal is going to for new builds or MRO. But that is definitely a positive balance when we look at a slower build rate happening at Boeing and again that's not impacting us yet. But the carriers had a plan to retire their legacy planes and get these new fuel efficient planes into service. They're having to continue the life of these legacy planes, which I know is increasing their maintenance side of operation and is helping us from an MRO standpoint.

Speaker 2

I know that that's happening, but it's hard for us to quantify just how much that shows up and is impacted in our numbers.

Speaker 4

Then lastly for me, just a clarification, you had mentioned you expect record quarterly sales and increased profitability for the rest of the year. Just want to make sure I understand that's implying sequential increases each quarter?

Speaker 2

That's right. And a lot of that's predicated upon the continued march that we have to ramp production. We're taking a number of targeted initiatives to modernize our plant, really giving assistance to the labor force that we have and the leadership throughout the plants to enable us to continue that March ramping volume. And then from that, we continue to expect sequential improvement as we move through the year.

Speaker 4

Great. Thank you. Appreciate all the color.

Speaker 2

No problem. Thanks, Mike. Have a good day.

Operator

Thank you so much for One moment. Okay. I'm showing no further questions at this time. I would now like to turn it back to Chris Zimmer for closing remarks.

Speaker 2

Thank you again for joining us this morning. 2024 got off to a strong start and we expect increasing traction in our growth plan during the rest of the year. We look forward to updating you on our progress on our Q2 call. Have a good day.

Operator

All right. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Universal Stainless & Alloy Products Q1 2024
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