Universal Stainless & Alloy Products Inc (USAP) 2007 Q1 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Universal Stainless & Alloy Products conference call. 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 would also like to welcome you to the Universal Stainless & Alloy Products conference call.

We are here to discuss the Company's first quarter 2007 results and second quarter 2007 outlook which were reported this morning. With us from management are Mac McAninch, Chairman and Chief Executive Officer; Ken Matz, President; and Rick Ubinger, Vice President of Finance and Chief Financial Officer.

Before I turn the call over to management let me quickly review procedures. After management has made formal remarks, we will take your questions. The conference operator 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. Good morning and thank you for joining us today. Before I begin my formal presentation this morning I would like to mention that Ken Matz, our relatively new President, will participate in the presentation this morning.

As reported in today's press release, we achieved record results for the first quarter of 2007. Sales rose 25% to a record $56.2 million which was in line with our forecast. Both of our Operating segments set new sales records in the first quarter. Our net income rose 70% to a record $6.8 million or $1 per diluted share, exceeding the high end of our forecast by $0.13. We estimate that approximately $0.10 to $0.12 of that amount is due to the effect of higher-than-expected nickel prices.

Ken Matz will discuss the Universal Stainless and Dunkirk segments more fully in a few minutes, as well as provide additional details on nickel pricing and trends.

Our first quarter performance was driven by two factors that benefited us throughout 2006. The first is the continued strength of all of our end markets led by Aerospace. The second factor is our improved ability to take advantage of the market opportunity and continue to shift our sales mix to our higher value-added products resulting from the capital investments we have made over the past two years.

They included the addition of our sixth and seventh Vacuum-arc Remelt Furnaces, a new plate flattener and state-of-the-art laboratory equipment. Personnel additions in Dunkirk and in our Bridgeville Laboratory also contributed to our growth.

A third factor played an important role in our first quarter performance. The improvement we achieved in our on-time delivery performance, which enabled us to translate more of our backlog into sales. Improving our on-time delivery has been one of our main priorities and our capital investments have been focused on helping us to do so.

In the first quarter, we not only improved delivery of VAR products as reflected in Dunkirk's reduced backlog, we also increased tool steel shipments from our Bridgeville facility, thanks to our new plate flattener. On-time delivery and the ability to quote shorter lead times are competitive advantages in our marketplace especially with service centers. We have more work to do in this regard, but we're making progress.

Looking at our first quarter performance by end market. Aerospace remains our largest end market and represented an estimated 45% of our total sales in the 2007 first quarter. Our sales to Aerospace rose 47% from the first quarter last year and were level with the fourth quarter. The year-over-year growth is due directly to our capital investments. As we noted in today's release our added Vacuum-arc Remelt capacity enabled us to further our shift to higher value-added products with sales of high-strength flow alloy and high-temperature alloy steels, which are primarily for aerospace applications equal to 16% of total first quarter sales versus 11% last year.

Included in our first quarter sales was the Boeing order won by Dunkirk that I had discussed on our last call. What we have since learned is that Boeing plans to use the titanium shape rolled by Dunkirk on a 737 prototype, rather than on the 787 as originally indicated. We will continue to pursue opportunities to work directly with Boeing.

The outlook for the aerospace industry continues to become even more promising. The peak in Commercial Aircraft deliveries from Boeing and Airbus is now expected in 2010 rather than 2009; and a forecast of aircraft to be delivered at the peak has increased to 1117 aircraft from 985. Let me note, that does not include any potential new orders from the Domestic Fleet replacement that may be needed.

Our sales to the petrochemical market rose 3% from the first quarter of 2006 but were 9% lower than the fourth quarter. As I have mentioned before, our Petrochemical sales typically fluctuate throughout the year from quarter to quarter. But they remain a strong component of our overall sales mix. Our sales to the power generation market rose 8% from the 2006 first quarter but were down 20% from the fourth quarter. We expected higher par generation sales in the first quarter because of the 1 million pound order we had received from GE that I discussed last quarter.

However GE is in discussions with us on that order, because of the cancellation by TXU of eight of 11 coal-fired power plants that they had planned to build. KKR and TPG changed that plan.

Despite this, we remain very positive about the outlook for our Power Generation sales for the balance of the year. Based on our very strong order entry in the first quarter, including continued strong orders from our forging customers mainly for the production of forged power turban blades for China and other international markets. The domestic market demand may pickup the second half of the year.

Our Tool Steel sales increased 22% from the first quarter of 2006 and were up 50% from the fourth quarter. We did a much better job of shipping Tool Steel product to our customers in the first quarter. With our competitive strength and a strong market position in tool steel combined with the positive worldwide outlook for mining, oil and gas, and heavy equipment and for U.S. agriculture -- especially the corn crop -- we see substantial opportunity for us for the balance of the year and beyond.

I will now turn the call over to Ken Matz for his discussion of our first quarter performance by operating segment, after which I will discuss our outlook for the second quarter. Ken?

Thank you, Mac.

Before I begin my discussion of our Universal Stainless and Dunkirk segments let me provide an overview of nickel pricing in the first quarter which affected us Companywide.

As most of you know, nickel prices began increasing rapidly in the second half of 2006. They reached an average of $15.68 in December versus $6.71 in the first quarter of 2006. It was generally believed that the peak had been reached.

However, that turned out not to be the case and nickel continues to hit new highs every month in the first quarter of 2007, reaching an average of $21.01 in March. Because of our surcharge mechanism, increases in nickel prices are passed along to our customers and, thereby, accelerate our sales growth. However the high nickel prices also led to conservative inventory replenishment by service centers and stifled speculative buying of any high nickel content alloys throughout the marketplace.

The consensus is that nickel really has peaked this time; and we have built that assumption into our forecast for the second quarter. I recently attended an American Metal Market Conference and heard their forecast of the longer-term outlook for nickel. In their view, nickel prices are expected to moderately decline for the remainder of 2007. They see further correction in 2008, but believe that we may never see $5 nickel again because of strong worldwide demand.

At the same time, they are predicting an increase in moly and chrome prices in 2007. Our surcharge mechanism will protect us from those increases if they do, in fact, materialize.

In past calls we have discussed the effect of rising nickel prices on our operating margin line, which normally benefits Dunkirk because of the spread between the cost of nickel at the time of feedstock procurement and the higher price when product is shipped because of its three- to six-month production cycle. Our Universal segment typically has a shorter production cycle and can be hurt by the lag effect of the surcharge mechanism.

All of these factors did come into play in the first quarter of 2007 but there were additional and important contributors to the record sales and strong profitability achieved by both operating segments. Mac has already addressed the major drivers of our growth - strong markets, capital investments and improved on-time delivery performance.

Looking more closely at the Universal segment, the main story is a very favorable product mix that produced both record sales of $48 million and record operating income of $7.2 million, yielding an operating margin of 50% for the first quarter of 2007. Our new VAR furnaces supported the shift to higher value-added product and our focus on improving on-time delivery led to higher shipments of Tool Steel as Mac already has mentioned.

We are working closely with our sales organization to build our OEM customer base and develop additional prospects in the Petrochemical market. Our Dunkirk segment also achieved record sales in the 2007 first quarter which totaled $20.4 million, which is up 46% in the first quarter of 2006.

Operating income increased 162% from the year-ago period reaching $3.8 million or 19% of sales. That margin is a bit lower than the previous quarter, reflecting the narrowing of the spread in nickel pricing versus feedstock cost.

Operationally, Dunkirk continues to achieve very strong operating performance and with the improved flow of VAR Remelt feedstock from Bridgeville, we expect profits will continue to improve. Dick [Vankoski], our Dunkirk General Manager, continues to add excellent personnel to our workforce.

I will now turn the call back to Mac.

Thanks, Ken.

As we noted in our earnings release, we expect the second quarter of 2007 to be another strong quarter for Universal Stainless and Alloy products. Our optimism is based on our strong backlog and order entry trends in the first quarter on the continued favorable outlook for our markets, and on our enhanced production capabilities that are enabling us to continue to shift to higher value-added products and to continue to improve on our on-time delivery performance.

We believe that the best way to build shareholder value is to increasingly meet the needs of our customers. That will remain our focus for 2007 and beyond.

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

Tracy, can you instruct our listeners on how to ask a question?

(OPERATOR INSTRUCTIONS)

Michael Gallo with C.L. King.

Couple of questions. I wanted to just touch on the Boeing business a little bit. I think you mentioned in your formal remarks that they possibly might be using it on the 737 prototype.

That's correct.

Does this pretty much mean that it is not going to be used on the Dreamliner at all? And if so I assume this is the new 737 prototype that will be following the Dreamliner. So is it fair to assume then that you don't expect to have any meaningful impact from that this year?

That's probably true, Michael, and as far as us pursuing other shapes because when we were first contacted by Boeing and looking at various shape type titanium products, if I recall correctly, I think there were four or five specific shapes that they were looking at.

We have successfully produced the one and shipped the actual product to them which they informed us that it was going to go to the 737 prototype. But it has not been clarified as to whether any of the other shapes which we may participate in could ultimately end up on the 787 or not.

It's still unclear at this time -- I mean, any sense for when you might get a better feel for that? I mean, obviously, it's scheduled I guess to have its first flight sometime in the middle of next year.

Not really, Boeing is keeping most of this information pretty close to their vest, but I would expect that as we progress through the year we will continue to get additional feedback from them.

Great. Second question I have, just wanted to touch on the PowerGen business a little bit. I know it had been -- it looked like it was turning up a little bit and perhaps you could step back a little bit by the TXU cancellations. But it seems as though, we look out from 2007 to 2010, that there is still going to be a substantial amount of new coal-fired capacity coming online that's currently under construction. Certainly versus what came online over the last 10 years or so.

So I was wondering if you could just touch on a little bit what you see happening on the PowerGen stuff?

No. 1, I totally agree with you in the expectations that the Power Generation side of our business, where the Power Generation market is going to continue to get stronger, especially domestically. We need some additional capacity in the U.S. and I would expect that there is going to be coal-fired and as I've mentioned before I'd certainly expect to see some nuclear power plants being installed in the U.S.

One of the things that we are doing internally to react to this cancellation that took place by TXU through GE is that we are putting a full core press on with our salespeople in going out and trying to develop more OEM business for those smaller shops that manufacture repair parts and replacement parts for the existing turbines that are in use in the U.S. It is my belief that there is going to be a substantial demand and that you will see, for the balance of this year and going into early next year, additional power generation stations being taken off-line for repairs.

I think and I've read articles on this that a lot of companies have extended their maintenance outages, No. 1, because of the demand; and it is going to reach a point where they are going to have to take an outage to do the repair jobs on those turbines and I want to make damn sure that we capitalize on that and pick up any additional repair type business that we can.

Then just final question, just wanted to touch on the capacity side as you head into next -- late this year and 2008. Do you have any plans to add additional capacity either VAR or Electro-slag [Remelting] capacity or any other capital additions you think might be necessary?

As of this minute we have no plans to add additional VAR or ESR capacity. That's as of this minute. You know we are pretty much a dynamic organization and depending on what the market -- the market will drive us into the decision that we have to make as it relates to those two operating units.

Our intentions are to add additional [annealing] capacity to handle future business. You know we have capacity in our open air [melt] shop and based on the way I see the marketplace right now we are in a position to handle the Vacuum-arc Remelt and the Electro-slag Remelt business that we see coming at us. But that does not mean that if the market says "hey Universal, you should add another VAR ESR furnace," that we would not consider that in a heartbeat.

Chris Olin with Cleveland Research.

You were talking a little bit on the nickel surcharge being $0.13 better than expectations. I'm wondering if you could provide us what the total FIFO benefit would have been during the quarter?

$1.2 million.

$1.2 million on the quarter?

Yes.

Second questions is, with the nickel surcharge rising to the extent it has over the past three months, have you seen any kind of slowdown and, call it near-term purchases, because maybe the customers are waiting for a reversal in cost or some uncertainty on the surcharge?

I think Ken addressed that question. But there's absolutely no question is the service center industry especially. They are not going to place orders on speculation that they are going to be able to sell, especially those alloys that have very high nickel content. You know they are going to wait and play it closer to the vest to make sure that they have a sale or that they expect to sell it over a relatively short period of time.

I mean hey, they could get hurt very badly if and we do not expect it to happen nor do the so-called experts expect it to happen in 2007, but you never know what could happen. So they are playing very close to the vest. Not only the service center. Anyone that's out there in the mode of buying high nickel content alloys.

Thanks. Another question I had just once again on the Boeing 787 contract. Did somebody else win that business or was there some kind of change in the thought process of what kind of material they were going to use on that jet by Boeing?

If it -- no, I don't think there was any change at all. It may have been a communication gap between the representatives we were talking to originally. But, hey, sitting here I will give you my perspective on it. Am I upset that it's not going onto the 737 prototype rather than the 787? Not in the least. I will tell you why.

I would expect that they are going to sell a hell of a lot more 737 prototypes than they are 787s. So I would expect in the long term, it is going to be a win-win for us.

I guess the last question I would have for you then is when are they going to tell -- when are they telling you the 737 prototype or the new jet is going to come out into production?

As I mentioned earlier, Boeing plays this very close to their vest as to when they are going to come out and actually start producing the 737 prototype. The only thing that I have heard is that it is a 737 prototype (technical difficulty) start unknown at this point. By me, anyway.

[Larry Falthum] with [My Broker LLC].

All I can say about the numbers is "wow". I do recognize the impact there.

I kind of like them too.

Yes. Did we -- there was some -- no comment, really, on CapEx earlier this year. I know you considered the program. You indicated you are looking to make further moves to improve ability to meet to give orders out the door. Can you comment any further? Are there any particular plans involved? I gather they are not spectacular, but what sort of things are being done in that program?

Well we -- you know we placed purchase orders for a number of pieces of equipment for our laboratories, both in Bridgeville and Dunkirk. All of that equipment has not been delivered yet, but I would expect as we go into the second quarter, a couple of those items in particular -- particularly will be delivered, i.e., on the immersion Sonic testing side and we have a new tensile machine going in at Dunkirk.

All of those are going to make contributions to Ken's objective of substantially improving our on-time delivery performance to our customers. And as I'd mentioned in my remarks at some point there that we are planning on adding additional annealing capacity with the strength of the Tool Steel market and the Aerospace market, many of which, those grades of steel require multiple annealing cycles. So we are reacting to that and we will continue to react to the market demands as they're placed on the Company.

And the additional annealing capacity of both facilities?

Yes.

Didn't hear anything about Titusville. Any thing happening up there?

Titusville just keeps on plodding. We are upgrading one of our annealing furnaces up there where we do the atmospherically controlled anneals cycles to improve that process. We are going to upgrade a couple of pieces of equipment and bring them up more to the state-of-the-art computer-driven operation rather than just the manual type operations.

But Titusville just keeps plodding along. I can tell you one thing from a sales and marketing perspective, our salespeople are getting -- because both of which are relatively new to Universal as well as [Rick Hack], our VP of Sales. They are getting more comfortable in talking with potential customers and trying to increase the capability of that facility and get us some additional business going through there.

But Titusville just continues to do an outstanding job.

(OPERATOR INSTRUCTIONS) At this time, there are no further questions. I will now turn the call back to Mr. McAninch.

Thank you. If there are no more questions then I would like to thank you for your interest and attention this morning. With our strong start we believe that 2007 will be another year of important progress for Universal Stainless & Alloy Products. I look forward to updating you on that progress in our next call. Thank you.

Thank you for your participation in today's Universal Stainless & Alloy Products conference call. You may now disconnect.