Universal Stainless & Alloy Products Inc (USAP) 2009 Q1 法說會逐字稿

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Stainless and Alloy Products first quarter 2009 conference call and webcast. Today's call is being recorded, April 29, 2009. (Operator Instructions). Thank you. Ms. June Filingeri, you may begin your conference.

Thank you, this is June Filingeri of Comm-Partners, and I would also like to welcome you to the Universal Stainless call this morning. We are here to discuss the Company's first-quarter 2009 results which we reported this morning. With us from management are Denny Oates, President and Chief Executive Officer, Bill Beible, Senior Vice President of Operations, Paul McGrath, Vice President of Administration, Rick Ubinger, Vice President of Finance and Chief Financial Officer and Chris Zimmer, Vice President of Sales and Marketing.

Before I turn the call over to management, let me quickly review procedure. 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 his 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 Denny Oates. Denny, we are ready to begin.

Thank you, June. Good morning, everyone. Thanks for joining us today. This morning, we recorded first-quarter sales of $42 million, which is at the high end of our forecast, and trailed first-quarter 2008 by 26% on 18% fewer tons shipped. We also reported a net loss of $200,000 before including $6 million of pre-tax unusual charges which we pre-announced in March. These unusual charges were directly attributable to depressed market conditions, fluctuations in raw material costs and surcharges, severance costs and the lack of credit availability.

With regard to credit availability, it is interesting to note that we had self-imposed credit holds at March 31 on approximately $4 million of sales originally scheduled to ship during the first quarter. We estimate gross profit on these lost sales would have been approximately $1 million. Rick will provide some more details here in a moment. We have been executing plans to aggressively reduce costs, generate cash and adjust operating levels to market realities. Cash flow from operations was positive in the first quarter, and we completed the first phase of our melt shop upgrade on time, within budget, and without interfering with our customer's needs. The quarter ended with a very strong balance sheet including cash of $26 million, working capital of $100 million and long-term debt of $13 million.

From our vantage point, the depressed market conditions were very broad-based. In comparison to the first quarter of 2008, sales declined by double-digit rates in each customer category with the exception of sales to forgers. The 44% increase in sales to forgers reflects our focused marketing programs, which target power generation, aerospace and oil and gas markets.

Sales were also lower in each customer category sequentially, with the exception of OEMs, where sales increased 11% from the 2008 fourth quarter, fueled by defense applications. Our backlog at March 31 was $58 million, a drop of about 20% during the quarter. What we experienced and continue to see today is lower end-use demand, leading to significant de-stocking throughout the metal supply chain.

This destocking is amplifying the effect of the recession on our sales and order entry. Enquiry activity has been generally good, the customers have been reluctant to pull the trigger and place orders. Let's look at our results by end-market. Aerospace, our largest end market, represented 45% of first-quarter 2009 sales. Aerospace sales were down 12% year-over-year and 3% sequentially. Conditions in the aerospace market are somewhat mixed. Build rates and activity levels at Boeing and Airbus are strong by historical standards. Each manufacturer expects to deliver approximately 480 commercial airplanes for the year, and backlogs have filled up reasonably well. Nevertheless, sharp declines in passenger and cargo traffic, the lack of credit availability around the glove, deferrals on delivery dates and the growing number of parked jets are all leading to uncertainty and drive to adjust inventories downward in the metal supply chain. Our aerospace customers are largely service centers, and they have been particularly sensitive to the need to reduce their inventories.

Our sales to the power generation market represented 13% of our first-quarter sales and were down 24% from the first quarter of 2008 and 32% sequentially. After a strong 2008, our customers are saying that new projects are simply not being funded at the moment. There is some optimism about nuclear, but that is farther down the road.

Our sales to the petrochemical markets represented 16% of our sales in the first quarter of 2009. They were down 19% year-over-year and 30% sequentially. The decline is mainly due to the drop in the oil and gas market, especially in exploration, which is our main market. The biggest decline in the first quarter was in tool steel sales. Our tool steel sales fell 38% from the first quarter of 2008 and 40% from the 2008 fourth quarter. Tool steel represented only 8% of our total sales in the first quarter of 2009. A large overhang in inventory exists at service centers as a result in the sharp drop in automotive activity, coupled with a general decline in global industrial activity.

Let me turn it over to Rick for more information on our financial performance.

Thanks, Denny. Sales for the first quarter of 2009 were $42.2 million, compared with our forecasted range of $32 million to $42 million. We recorded a net loss of $3.8 million, or $0.57 per diluted share, which included unusual charges of $3.6 million, or $0.53 per diluted share. The unusual charges, which totaled $6 million pre-tax included the following items. We increased our bad debt reserve specifically for one privately-held service center that has not paid invoices we issued in the 2008 fourth quarter approximating $1.9 million. In addition, we added $500,000 to our inventory reserves for products with unique chemistries that cannot be sold to other customers.

Another factor impacting our overall financial performance is the continued decline in the monthly average of raw material values. While nickel remained level, we saw double-digit declines in the monthly average value for moly, chrome and iron between 2008 and March 2009. We estimate these declines, compounded by the use of high-cost material melted in prior periods, negatively impacted our operating results by $1.5 million in the quarter.

Finally, lower than expected order-entry levels in the month of February and March caused us to expand our planned melt shop outage from two weeks to four weeks. In addition, we experienced an additional unplanned two week maintenance outage at our universal rolling mill. While these outages did not interfere with customer service, their ripple effect within our facilities increased our absorption rate of fixed cost over direct manufacturing cost. This rate increase resulted in an additional $900,000 charge to cost of sales.

The reduced level of order entry also triggered our contingency plan to reduce cost through a 20% reduction in salaried personnel across the Company, and we identified and scrapped approximately 3% of our work-in-process materials we do not believe can be sold under current market conditions. These decisions impacted first-quarter results by $1.2 million. Universal Stainless segment sales were down 24% from the first quarter of 2008, primarily due to a 19% decrease in tons shipped, while Dunkirk's sales declined 43% because of a 28% decrease in tons shipped. Both segments' sales were negatively impacted by lower surcharges in comparison to the first quarter of 2008.

Our gross margin, before the impact of the unusual charges previously discussed was $2.2 million for the 2009 first quarter, or 5.3% of sales versus 17.7% in the first quarter last year and 7.2% of sales in the 2008 fourth quarter. Our selling and administrative expenses before the impact of the unusual charges were $2.6 million, a decline of approximately $422,000 from the year-ago period. During the quarter, we generated cash flow from operations of $2.6 million. Our managed working capital, consisting of accounts receivable and inventory minus accounts payable fell by $8 million. This was achieved through a 16% reduction in work-in-process inventory, lower material values and the impact of curtailing operations.

Capital expenditures during the quarter were $3.7 million, of which $2.5 million related to the Bridgeville melt shop upgrade. In February, we executed a new unsecured loan agreement with P&C Bank to support this initiative that provided a $12 million, five-year term loan and a $15 million, three-year revolving credit facility. That completes my review of the financials. I will now turn the call back to Denny.

Thanks, Rick. Today, our operations are focused on cost reduction and generating a healthy cash flow while we continue to drive our strategic initiatives to provide unparalleled customer service, invest in our facilities and develop our organization for future profitable growth. Currently, we are being very proactive with our customers. We increase prices by $0.05 per pound on air-melded steels, and the increase appears to be holding. We are running significantly reduced operating schedules, but still maintaining our ability to flex our operations as dictated by customer demands.

We continue to expand our access to new markets with the awarding of AS9100 certification at our Bridgeville facility, and we are headed for certification at Dunkirk soon. We are committed to our strategic investment program which squarely targets broader product offerings, reduced production cycle times, increased customer service levels, improved material yields, reduced operating costs and enhanced working capital management. These are all essential for current conditions and for positioning Universal to win business as the market recovers.

We have also strengthened our company with the addition of two accomplished industry veterans. Bill Beible has joined us as Senior Vice President of Operations and Chris Ayers has recently joined our Board of Directors.

Turning to our outlook for the second quarter, as we said in today's release, we are not providing specific earnings guidance because of the unprecedented market uncertainty. However, based on current low-order entry and the decline in our backlog since year-end 2008, we anticipate that second quarter sales will be below those of the first quarter 2009. Our performance will be aided by our cost-saving initiatives and better alignment of material costs to surcharges. We expect to generate positive cash flow and preserve our very strong balance sheet.

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

(Operator Instructions). Your first question comes from Edward with Sidoti.

Good morning, gentlemen.

Good morning.

My first question is, how soon do you think you can match your material costs of the current cost of-- the current cost of the market at this time?

If you take a look at the trend in raw material cost over the last four or five months, I think we're coming out of that squeeze that we have been experiencing. I would say that by the end of the second quarter, we should be in good balance, barring any unknown movement in raw material cost, our expectation is, they will essentially move sideways as we go through this second quarter.

Okay. And then, with the inventory, what's your expectations for the inventory for the year? Do you assume that will come down, or stay flat?

Are you talking about our inventory or our customers' inventory?

Your inventory, sorry.

We would expect our inventory to come down during the second quarter and the third quarter, based upon our current expectation of market demand, but this has become a-- this has always been a very exciting industry, and things are changing week to week to week, but our current plan would be to have further inventory reductions here as we move through the second quarter.

So, kind of looking at, then, your working capital for the year-- do you expect to see that as an inflow or use of cash?

When you say through the year, you mean through December of 2009?

Right. So, with respect that it's-- a lot of things can change until then.

Well, going after the year-end 2009 nine months out is a little hazy for us, and that's why we've been reluctant and pulled some of our earnings guidance, but I would tell you over the short term or the next three to four months, we would expect to see further decreases in inventory, and that would be a generation of cash as you look at our working capital position.

Okay, and then as far as the destocking is concerned, do you have a timeframe as to when this can be completed in the industry and, again, with respect that it's very difficult to make those projections?

Like everybody else in the industry, I think we're all getting gun-shy trying to forecast that. The last two or three weeks-- I think I visited with virtually every one of our major service center accounts and a number of our forging accounts. The general vibe you get from the field would be, given the low level of demand today and their purchasing practices, we would expected to see something improve as we get to the latter parts of the third quarter of this calendar year, but I would quickly add to that that we felt that way based about three months ago based on customer feedback, and I think what's happening is that the demand levels that they're seeing continues to surprise on the downside.

Now, your service centers for the tool steel are predominantly privately held and if so-- the increase in the reserve, and you mentioned that was for one, in particular, service center. How many do you foresee kind of following in that same pathway, knowing that the tool steel is related to the automotive industry?

We are not anticipating any further issues of this magnitude. The $4 million that I mentioned that was on credit hold relates to about four or five customers. Those customers are paying us, which is different from the one company we put the reserve on, but paying us a much slower rate than normal, so at this point in time, there is nothing on the horizon in terms of what we saw in the first quarter.

Thank you, guys.

You're welcome.

Your next question comes from Nate Kellogg, with Next Generation Equity.

Morning, guys, how are you doing?

Fine, how are you?

Good. Just, obviously, for the-- at the current activity levels, you guys would still be nicely profitable as long as the material costs were more in line with the pricing in the environment, I mean, that's the primary headwind. I realize less profitable than a year ago, but that's the primary headwind. Am I correct in looking at it that way?

We've been squeezed for the last four or five months with a rapid decline, yes.

Okay, and the way that that might be resolved quicker than the end of the second quarter would be either an uptick in the commodity prices or, if volumes picked up, it would let you work through things a little bit faster.

That's true.

Okay, and then, I'm just wondering, on the power gen side of it, I know that you guys are thinking in Q4 you said that the GE was still booking orders for the turbines, I'm just curious about sort of what you're seeing there-- sounds like you're being a little bit more cautious today than maybe you were three months ago.

Well, if you take a look at our sales to forgers in the fourth quarter-- excuse me, in the first quarter, we did see a nice increase year-over-year, and-- but if you're looking at it sequentially, they're somewhat down. As you go around and talk to our various forging customers that feed in to the GEs of the world, you hear two things. One is lower demand and the need to reduce inventory. They were kind of the last market that we serve that really saw the impact of decreased demand, and essentially, it appears to me that they have finished off a number of projects. There is a perception that there is too much inventory in the pipeline, and they're readjusting their inventories as we speak. They are all generally optimistic about the tail-end of 2009 and 2010, however.

Okay. Okay, that's helpful. And then I just-- I know you guys have given us this before, but, maybe now that we're a little bit farther along the process and you're actually putting some money toward the project, I was wondering if you could just sort of give us an update on what you now expect the timeline looks like for this capital investment, when you expect to be completed, when do you expect to see benefits. I mean, I know we're looking at the 2010, but when do you expect all the cash to sort of go out? That would be sort of helpful, if you don't mind.

Take a look at the project itself. We're about a third complete. If you look at the spending, we've got the lion's share of some of the big equipment in place already. What we said at the last meeting-- the last conference call, still holds true, which is that we would expect, by the end of September this year, to have the vast majority of the equipment in place, and to be operating-- and we should start to generate the savings there, tail-end of the third quarter, early fourth quarter. A large piece of the investment is the systems related to the equipment. That is not scheduled to be completed until April of 2010, so the full-bore savings that we talked about in prior press releases I would not look for until mid second-quarter 2010.

Okay. And the savings are really due because you're able to process orders more quickly and meet delivery schedules that you've promised them. I know, Denny, when you got there that one of the things you talked about was trying to make sure that Universal was better at sort of meeting the delivery schedules that you guys had promised customers and whatnot. Maybe if you could talk about any other additional savings that--

Reliability is a key part of what we're doing, alright? But the hard, tangible savings come in yields, quality improvement and lower consumption of operating supplies in our melt shop.

Okay, that's great. Alright, guys, that's all I've got, I appreciate the color and I'll hop back in the queue.

our next question comes from Tim, with Davenport.

Howdy, good morning. I just have two questions. First, on the $1.5 million of unusual charges for the raw material values, the decline in the raw material values-- do you have a breakout of how that affects the two segments?

Yes, Tim, the personal state segment was $1.2 million, the (inaudible) segment was $300,000.

And then for your guidance-- sales guidance for Q2, I'm assuming that the sequential decline is going to come both from falling volumes and falling realizations-- can you give a little more color on is it going to be more so volumes and less so realizations, or vice versa, or just some more detail on that, if you could.

I think it's going to-- the majority of it is going to be volume. Take a look at materials, you know, our expectation is going to move sideways. We have seen a little bit of movement up, which means that surcharges in June improved somewhat. We have also put a $0.05 per pound price increase through, which appears to be holding, as I said during my prepared comments. Looking at the second quarter, clearly, when you look at our backlog and current levels of order entry, we would expect our volume to be the majority of our anticipated shortfall on the top line.

Okay, thank you.

Your next question comes from Michael with CL King.

Hi. Good morning.

Michael, how are you?

The question I have is-- good, how are you? The question I have is just on the credit side of things. Can you speak to whether you see larger issues than just the one or two or just the handful of customers, how are you re-evaluating credit and how you feel about the rest of the customer base being able to weather the current downcycle? Thank you.

If you look at the last three to six months, credit has become an increasing issue with us. We look at that every day. We do have a general trend where customers are paying slower. This one instance was a major issue that we've watched very carefully. We have been in almost daily contact with the customer involved, and we thought it was prudent to address that situation today, based upon everything that we know and everything that we see. We do not anticipate anything else at this point in time of this magnitude.

The other customers that we have on credit hold are generally paying us, but fall into that category of paying us slower. We have had numerous requests from customers to extend terms, things of that nature, and I think this is all reflective of what you hear and read about in the newspapers, you know, the credit crunch, and people are looking to stay as liquid as possible, and if they can do that off their suppliers, some customers are going to try to do that.

Okay, great, that's helpful. Can you-- do you have a breakdown in terms of just this one customer-- how big a customer they were in 2008 at all, Rick?

This customer was-- I believe they were about 3% of our sales.

Okay, that's very helpful. And then, finally, I guess as you go through the order patterns over the last six to eight weeks, is there any signs that you have seen a bottoming in the patterns, or is it spotty, is it lumpy, does it vary week by week, or is it kind of continued along the deterioration that you saw over the last couple of quarters? Thank you.

I think if you look at the last several months, if I can take it back there, our January showed little improvement over December in terms of incoming business, February, we blipped up, March we went back down, and right now, as you look at where we are today, it's kind of moving sideways, so when I reflect back on the last three or four months, we kind of hit a low level and we stayed there, except for the one blip there in February.

Okay, great, and then any update on the European business or what your expectations are for that this year?

We continue to have a lot of discussions, interesting development over the last quarter, and this is nothing that's going to swing the needle or anything, but we did make our first shipment to a new customer in Germany whom we have been exchanging some technical discussions with. We are also shifting some additional plate products over to Sweden, so they are new developments, but, again, if you take a look at that in the broader scheme of things, international sales, direct international sales are only about 5% or 6% of our total mix.

It sounds like it's progressing. That's all I have, thank you.

You're welcome.

Your next question comes from Mark with KeyBanc.

Hi, this is Phil Gibbs for Mark Parr, how are you guys?

Fine, Phil, how are you doing?

Okay. I think there was question just a couple of questions ago about volume and pricing impacts in the second quarter-- I just wanted a little bit more color on the pricing side. On a sequential basis, do we really have another leg to go, or are the surcharge impacts kind of being minimized at this point, meaning, are we close to sequential stability as each quarter passes on, here?

From where I sit, I would say we're closer to some level of stability. That's not to say there aren't some crazy things you see happening in the marketplace every now and then, but if you look at surcharges and you look at the general trend in raw materials, they have their ups and downs, but they would appear to have stabilized somewhat, and maybe even some of the commodities have an upward bias here over the last two or three weeks. From a base price standpoint, there has been general support for some base price increases, $0.05 per pound, which is roughly-- about 5% as well, so I would say it's trending towards more stability.

Okay, great, and on the bad debt reserve, the $1.9 million increase, that was primarily baked in the SG&A that looks like--

That's correct.

How should we view that, as coming out in some quarter, or how do we view that, just for modeling purposes?

Well, the only way that will change, Phil, is if this customer does obtain some financing that they will be able to pay off these invoices, so that's the only way it will come out.

Okay. And what do you guys view the likelihood of that as?

Well, I think the fact that we took the big adjustment tells you that we view the probability of that as slim.

Okay. Thanks, guys.

Okay.

(Operator Instructions). There are no further questions at this time. Mr. Oates, do you have any closing remarks?

Yes, I just want to thank everybody once again for joining us today. These are certainly some very challenging times, but we have taken some important steps to strengthen our ability to manage through the times, and we hope to maintain-- we do plan to maintain our strong cash position and our strong balance sheet, and we all look forward to updating you in our next conference call on how we're doing. Thank you very much.

This concludes today's conference call. You may now disconnect.