Universal Stainless & Alloy Products Inc (USAP) 2006 Q1 法說會逐字稿

Good morning. My name is Felicia and I will be your conference facilitator. At this time, I would like to welcome everyone to the Universal Stainless & Alloy Products first-quarter 2006 conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. As a reminder, today's conference is being recorded.

Thank you. Ms. Filingeri, you may begin your conference.

Thank you. Good morning. This is June Filingeri of Comm-Partners, and I'd also like to welcome you to the Universal Stainless & Alloy Products conference call. We're here to discuss the Company's first-quarter 2006 results and second-quarter outlook, which were reported this morning. With us from management are Mac McAninch, President and Chief Executive Officer; Paul McGrath, Vice President of Operations; and Rick Ubinger, Vice President of Finance and Chief Financial Officer.

Before I turn the call over the management, let me quickly review procedures. After management has made formal remarks, we will take your questions. The conference facilitator 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, which are more fully described in today's press release and in the Company's filings with the Securities and Exchange Commission.

With these formalities out of the way, I would like to turn the call over to Mac McAninch. Mac, you may begin.

Thank you, June. Good morning. Thank you for joining us today. As we reported this morning, we achieved record results for the first quarter of 2006. Net income increased 33% to 3.9 million or $0.59 per diluted share, which was ahead of the $0.50 to $0.55 that we had anticipated. That growth was achieved on a 4% increase in sales, which totaled 44.9 million, and were are at the high end of our forecast.

Our backlog also continued to grow, reaching 118 million as of March 31. The same factors that drove our growth in 2005 also benefited us in the first quarter of 2006. These included continued strong demand in the markets in which we focus, especially aerospace, and we expect all of our markets to remain strong.

A second factor is our pricing strategy, which has enabled us to effectively address the volatile raw material costs that we have been experiencing. This month alone, scrap is up approximately $15 per ton and nickel is back trading at over $8 a pound, which underscores the importance of our base price and the surcharge initiatives to protect our gross margin while being fair to our customers.

Our pricing discipline is also reflected in our decision to substantially reduce our rod and wire product shipments at our Dunkirk facility in the first quarter due to unacceptable pricing in the marketplace. We shipped 42% less rod and wire product in the first quarter than we did in the 2005 fourth quarter and 51% less than in the first quarter of last year.

A third factor is our continued focus on process improvements to further increase our efficiency and throughput and to better handle the additional processing required for the manufacturing of higher value-added grades of steel to our customers' specifications. In the 2006 first quarter, significant manufacturing process enhancements aided us in more than doubling Bridgeville's bar shipments compared to the same period last year.

The most important factor driving our growth is the continued strategic shift of our product mix to higher value-added products. Our progress is reflected both in the growth of our sales to service centers, forgers and OEMs, which represented 78% of total sales versus 63% in the first quarter of last year, as well as in our Company-wide operating margin of 14.2%.

We are accomplishing this shift through our selling discipline, through our process improvements and through our capital investments to further increase our ability to produce those products. Recent investments have included our new vacuum-arc remelt furnace in Bridgeville, which is now fully operational and will make a full-quarter contribution to our second-quarter results.

We will add a seventh VAR furnace, also in Bridgeville, as we announced in February, which will be operational in September. We added two new milling machines in Bridgeville during the first quarter, which helped us increase our flat bar production. And we'll add a plate flattener later in the current quarter to expand our capability to produce both full steel and stainless steel plate products.

As I did last quarter, and I will comment briefly on our operating segments before turning to our end markets. Let me begin with the Universal Stainless & Alloy Products segments, where we reported a 38% increase in the operating income on a 2% increase in sales, despite shipping 23% fewer tons. This is a result of improved pricing, as well as product mix, with increased shipments of bar products and special shapes offsetting lower shipments to our reroller customers.

Sales at Dunkirk increased 2% in the first quarter of 2006 on 12% fewer tons. That also reflects improved pricing and increased bar shipments, which represented 80% of the total sales at Dunkirk versus 67% in the first quarter of last year, offset by the reduction of rod and wire shipments that I had discussed earlier.

Dunkirk's operating income was down 21%, mainly due to the timing of feedstock procurement from the Bridgeville facility, as was the case in the 2005 fourth quarter. Although operating income increased 16% sequentially because of the improved pricing and mix, we have made progress in curing the production delays that we experienced in the fourth quarter, and we are currently adding new employees in Dunkirk to join with our current employees to correct the manufacturing bottlenecks and increase shipments. Dunkirk will also begin to benefit from the added remelt capacity coming onstream in Bridgeville, although the fuller effect will be seen in the third quarter of this year.

Turning to our end markets, our sales to the aerospace market rose 46% from the first quarter of 2005 and were up 21% from our very strong fourth quarter. We are continuing to hear good news from Boeing, which had a record of 1002 commercial plane orders placed in 2005, as well as a $205 billion backlog as of December 31. Our increased remelt capacity will help us to continue to capitalize on that very robust commercial aircraft market.

The outlook for the power generation market remains very positive, although we saw some industry-wide inventory corrections in the past two quarters. As a result, our sales to the power generation markets were down 3% from the first quarter of 2005 and 13% from the 2005 fourth quarter. I expect that market to remain fairly strong for the balance of the year.

Our sales to the petrochemical market increased 7% over the first quarter of 2005 and 20% over the fourth quarter of 2005. With petrochemical demand showing no signs of abating, given what is happening to oil prices, our salesforce is pursuing this opportunity very aggressively.

Tool steel sales continued to strengthen in the 2006 first quarter, increasing 5% over the previous quarter, but were down 3% from last year's first quarter. Customers say that the market remains very strong and the outlook for heavy industry supports that view. At this point, we believe it is just the timing of orders entered and shipments that affected our tool steel sales in the first quarter.

As you will note from our forecast in today's press release, we are expecting the second quarter of 2006 to be another strong quarter. Looking at the balance of year and beyond, our biggest challenges remain the same -- to better respond to the needs of our customers and to further convert our record backlog and substantial market opportunity into higher levels of sales and profitability.

We plan to make additional progress in this regard by continuing to focus on developing and serving OEM and service center customers, by strengthening our manufacturing processes and operations, and moving further in our shift to higher value-added products.

We are also looking beyond these current initiatives to further expand our capital investment program to take advantage of the opportunities that this very strong market is providing us. I can assure you that any course of action that we pursue will be consistent with the disciplined approach we have always taken. Our decisions will be based on the needs of our customers, the long-term opportunities in our marketplace, the cooperation of our workforce and the potential return to our shareholders.

This concludes my formal remarks. We are now ready to take your questions.

(OPERATOR INSTRUCTIONS). Michael Gallo, C.L. King.

Good morning and congratulations on another excellent quarter. First question I have just is I know you addressed Dunkirk a little bit in terms of some of the manufacturing delays over the last couple of quarters. I was wondering if you can give us a little bit more color on where you are in resolving those, whether you still expect some of that to persist in the second quarter, and when you expect that they will be fully resolved. Is it the third quarter?

Well, number one, let me talk a little bit about Dunkirk. We have been working on -- it really wasn't manufacturing problem delays that we have experienced at Dunkirk. I'm talking no major manufacturing issues that we had to do with.

Part of the problem was created by Bridgeville and the lack of billet shipments to Dunkirk, which really occurred back in the fourth quarter. And I can assure you that we have made significant progress from the end of the last year into the first quarter. And I can tell you that within the last seven days, there were 25 truckloads of billets that were shipped to the Dunkirk facility. So that issue, I think, is pretty much behind us.

I believe -- I know -- it was more a people issue at Dunkirk. We really had not reacted as quickly at Dunkirk to bring on additional people to handle the volume of product. And I think part of it was a confidence level by our plant manager up there as to whether Bridgeville had really resolved the issues as far as getting billet product shipments to Dunkirk.

I believe those issues are behind us. I had mentioned earlier in my presentation about the lack of business -- by our choice, I might add -- in the rod and wire side of the business. We are going to capitalize on that and utilize those people over in the bar side of the business to enhance the opportunities to get additional shipments through the bar finishing side, as well as hiring additional people. I don't see this as being a manufacturing issue. I think it is a -- it has been a people issue, but I believe that that's behind us.

And then second question -- with the two VAR furnaces, obviously the second one coming on in September, the new milling machines, etc., and some of the other CapEx, assuming you have a similar sales mix, how much will this allow you to increase your sales? I guess it would really be the -- probably the fourth quarter where you have a full quarter of the second new VAR, etc.

Mike, I have a difficult time predicting or trying to predict what is going to happen in the second quarter. And I would prefer not really -- my crystal ball is not clear enough for me to talk about the fourth quarter this year yet. I expect that our business is going to be very strong. And the one thing that I will guarantee you -- we are going to do everything in our power to try to capitalize on those markets that will enhance the bottom-line profitability of this Company and to continue to increase our sales revenue.

In terms of just the VAR furnaces, to come back to that, I mean, each one of those should be roughly in a 15%-ish type increase in melting capacity?

I will give you the numbers this way, and we have indicated this before. When we installed the first additional VAR furnace here at Bridgeville, we had said that it will generate about 18,000 pounds, ingot pounds, of product per day. The second VAR furnace that we are in the process of installing here at Bridgeville will do exactly the same thing.

So I haven't done the math on a percentage basis, but you can plug that in. Now I'm saying ingot pounds, and that has to be yielded [faster] to come to the final shipped pounds that will go to the marketplace. And if you use just a thumbnail sketch, if you would use a 70% yield, 30% yield loss by the time we ship a bar out the door, that's not a bad number to use.

Michael, let me add to that. While this seventh furnace will be coming online in the month of September, I don't think it's realistic to expect a lot of shipments even in the fourth quarter of 2006, just because you have to go through the -- taking the ingot down to a billet and then a billet down to a bar. Those steps will still have to be done. So I think similar to the path that you have seen with the sixth furnace, we won't see a full quarter's benefit from the seventh furnace until the first quarter of 2007.

Rich Murphy, Cross River Partners.

The high temperatures alloy steel in Dunkirk, you saw a big pop from 352,000 in revenue to 1.3 mil. Is that at full capacity now? Or I guess -- I might be asking the same question that Chris asked, but how quickly -- how much more can that grow? And I noticed the high temperature alloy steel at USAP didn't -- was pretty much flat. So what is the dynamic going on there, I guess?

Well, again, it depends on the timing of the customers placing the orders and the ultimate market that they are selling into. And I don't think that is a real big surprise to us internally, because you have to remember, we really are not a large supplier of the nickel-based alloys going into the marketplace. There are a select few that we try to capitalize on.

And if you take a look at the history of our Company over the last two or three years, even though our participation in that marketplace is growing and our intent is to continue to grow that type of business and capitalize where we can, I don't really think that you could say, well, Bridgeville lost business there. It was more a timing of the requirements of the customer base rather than us losing or gaining the business.

In response to a capacity, from a capacity perspective, we have plenty of capacity to handle anything that comes across the transom as far as us selling that product out in the marketplace.

So that number can continue to grow without more CapEx?

Sure can.

Thanks. Great quarter.

(OPERATOR INSTRUCTIONS). At this time, there are no further questions. Mr. McAninch, are there any further -- I'm sorry, we do have a question from Jeff [Brashell with Pohler].

I am kind of new to the story, but one thing I was trying to understand is -- can you actually explain to me what is going on in the rod and wire market versus the bar market, whether it is imports or the end markets aren't as strong or just what's going on?

If you take a look at history, and I'm talking over the last 15, 20 years, the rod and wire business has been severely impacted by foreign imports coming into this country, and especially wire.

And if you go back and look at late last year and early this year, the wire coming into this country has picked up somewhat from an imports perspective. And the primary driver as far as we are concerned -- forget where the wire is coming from -- it's a pricing issue. And the history of our Company, we typically do not participate and try to chase prices down in the marketplace. If we are not getting the kind of return on the investment that we are making, to hell with it, let someone else have it. We will sell other product where we can, make an acceptable gross margin.

You said that you were already reallocating people over to the bar business. Can you -- can the equipment actually be applied over there as well?

Not equipment. No, no. A wire-drawing machine is a wire-drawing machine and it always will be. But I can assure you that I have plenty, more than enough, additional bar processing equipment to handle the increased sales that we are going to pick up.

That is helpful. And then on the reroller issue that has sort of been in the last couple of press releases, is there a revenue level that -- did you actually disclose what it is this quarter in terms of revenues and how long will it take you to get rid of the rest of that?

Well, the way -- I appreciate your comments. I just got a little chuckle out of that. Number one, I have no intention of getting rid of the reroller business. If you were around 12 years ago when we started this Company, the reroller billet sales were extremely important to the success of this Company. We have developed some very good relationships with our reroller customers. And I want to take care of those customers as far out into the future as I can see. That business is important to us.

And do I have an objective to work it down so that we have no reroller business? Absolutely not. It will become, as our sales revenue increase and our value-added products continue to increase, it will become a smaller percentage of our overall business. Now, that is being done intentionally.

That is helpful. And then so trying to understand the business in the context of some of your peers, and I am looking at the margin profile. And have you laid out exactly where you think margins could go? I see, I think it's -- if I crunched it correct here, you're around 14% at the [EBIT] line this quarter? So I wonder if you put out there whether you think you can get to X, Y or Z or how much higher you can get from here or --

I would love to get to X, Y and Z, whatever that number is. But we focus every day on trying to improve yields, which bottom line will improve the gross margin that we're generating. We try to get the highest possible selling price that we can for the product that we take to the marketplace. We try to pass through as much of the uncontrollable costs that we experience, i.e., in alloy surcharges and natural gas surcharge.

Our objective is to drive that gross margin to the highest possible level because that gives us the opportunity, provides us the opportunity to go out and buy additional capital or make additional capital investments that ultimately will either expand our capability to take a niche product into the marketplace or drive our costs further down. But from a target gross margin? No, I want to see it go up every month.

So would I. All right, you are doing great work on that front. But thanks a lot for the rundown.

Jeff, let me also add, since you are new to the story, that with raw materials being approximately 50% of our total cost structure, we see raw materials really as a pass-through. So that if you're looking at operating income or gross margin, whatever statistic you want to look at as a percent of our sales price, that percentage can be considerably different based on where pricing of raw materials is at that point in time.

Right now, our raw materials are very high in comparison to two, three, four years ago. If raw materials went back down to those levels that we had two, three, four years ago, those percentages would be significantly higher than they are today.

Well, that is helpful, so I guess it's really about driving volumes and trying to get a little bit more price.

(OPERATOR INSTRUCTIONS). At this time, there are no further questions. Mr. McAninch, are there any further remarks?

Yes, thank you. Let me end this call by thanking you for your continued interest and support. We are working very hard to deliver value to our customers and our shareholders. I look forward to updating you on our progress next quarter. Thank you very much.

Thank you. This concludes today's Universal Stainless & Alloy Products first-quarter 2006 conference call and webcast. You may now disconnect.