Universal Stainless & Alloy Products Inc (USAP) 2010 Q1 法說會逐字稿

Good morning. My name is Crystal, and I will be your conference operator today. At this time I would like to welcome everyone to the Universal Stainless first-quarter 2010 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 session. (Operator instructions). As a reminder, today's call is being recorded. And now I would like to turn the call over to Ms. Filingeri. Please go ahead, ma'am.

Thank you, Crystal. Good morning, this is June Filingeri of Comm-Partners, and I would also like to welcome you to the Universal Stainless conference call. We are here to discuss the Company's first-quarter results which were 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 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 the formalities out of the way, I'd now like to turn the call over to Denny Oates. Denny, we are ready to begin.

Thanks June. Good morning, everyone. Thanks for joining us today. The financial results we reported this morning reflected further recovery and robust sequential growth. Although first-quarter shipment volume was 12% below 2009's first quarter, volume jumped 37% over the fourth quarter of 2009.

Shipments to service centers, forgers and rerollers increased 59%, 29% and 62% respectively over the fourth quarter. It's good to see the volume improvement so broad based by product and also by end-use market. The main drivers of this sequential growth were renewed stocking throughout the supply chain, modest improvement in end-use demand and successful execution of our customer service and marketing initiatives.

Our total first-quarter sales increased 30% over the 2009 fourth quarter, while our operating income tripled. The improvement in profitability was due to the higher shipment volume, as well as the progress being made company-wide to reduce costs, improve yields and shorten cycle time. Our capital projects and process improvement programs over the past two years are producing tangible results. Melt shop productivity has increased and first-time proof quality has remained excellent. Recent investments in low-cost heat-treating and the introduction of cellular manufacturing of bar products are also contributing to lower costs.

Turning to our end markets, aerospace remained our largest market at 34% of first-quarter sales, up from 32% in the 2009 fourth quarter, but lower than the 45% of sales they represented in the first quarter of 2009. While our aerospace sales were down 38% year-over-year, they were up 38% sequentially. The increase is mainly attributable to supply chain inventory replenishment, given that aircraft build rates have remained fairly consistent.

Boeing had some optimistic comments on their earnings call last week that point to an improving outlook. The noted that global economic recovery is leading to increased passenger air traffic, especially in emerging markets and, therefore, an improved financial outlook for the world's airlines. Boeing also reported that the 787 is on schedule for first delivery in the fourth quarter and may increase the 737 production rate beyond the current 31 planes per month. They've already announced plans to increase production rates for both the 777 and the 747-8.

Our next largest market in the first quarter was the petrochemical market, primarily oil and gas, which represented 22% of sales, about the same level as in both the first and fourth quarters of 2009. Our petrochemical sales were down 13% from the first quarter of 2009 but they rose 37% sequentially. As discussed before, we've been focusing on increasing our presence in the oil and gas market. Oil exploration is picking up due to higher oil prices, and our steel is typically used in exploration equipment.

Power generation represented 17% of our first-quarter sales up from 16% of sales in the year-ago period, but down from 23% of sales in the fourth quarter. Our power generation sales were down 14% from the first quarter of 2009 and 4% lower than the 2009 fourth quarter. This continued a trend we first saw last quarter. The market for new turbines is not expected to recover until 2011. However, we did see higher than expected turbine maintenance spending in the first quarter. GE's first quarter report shed some light on the expected build schedule for new turbines. They reported orders for 10 gas turbines in the first quarter versus 18 last year.

Our service center plate sales moved up to 18% of sales in the first quarter of 2010 from 13% in the 2009 fourth quarter and 11% in the 2009 first quarter. Service center plate sales were up 30% from the first quarter of 2009 and 75% from the 2009 fourth quarter with a 94% sequential increase in shipment. You may remember that our service center plate sales from the fourth quarter were up nearly three-fold from the third quarter.

This ramp-up is being driven by the strong recovery in the domestic automotive industry. For example, earlier this month, GM reported that combined sales for Chevrolet, Buick, GMC and Cadillac were up 43% in March from March of 2009. Service centers have had to build inventory to meet this snap back in demand following several quarters of aggressive destocking. As we have said for the past two quarters, we expect 2010 to be a much better year overall for service center plate than 2009. The first quarter gave us a good start.

Before I turn the call over to Rick Ubinger, I want to joint with all Universal employees and the board of directors here to wish you the best as you leave to pursue a new opportunity. We appreciate your many contributions to the success of Universal Stainless over the 16 years you served as our CFO. Rick, best of luck to you, from all of us. Now let me turn the call over to you for your report.

Thanks Denny. I simply want to add that my career at Universal Stainless has been personally rewarding. However, after 16 years, it is time for me to pursue a new challenge. I would like to thank Mac McAninch, Denny, the board of directors and all Universal Stainless employees for their support. I would also like to thank everyone on this call for making the past 16 years a memorable experience. Now for my report on the first quarter.

Sales for the first quarter of 2010 were $34.7 million, which was below the $42.2 million reported in the 2009 first quarter but above $26.7 million in the 2009 fourth quarter. The decline in sales from the year-ago period is attributable to an overall 12% decrease in shipments and product mix. The decrease in shipments of aerospace products and petrochemical products of 43% and 15% respectively were partially offset by increases in service center plate products and power generation products of 42% and 10% respectively.

The sequential increase in sales is attributable to a 37% increase in shipments, most of which relates to increased shipments of semi-finished products and bar products, as Denny has discussed. Operating income for the first quarter of 2010 was $2.3 million in comparison to a $6.4 million operating loss in the 2009 first quarter and operating income of $736,000 in the 2009 fourth quarter. The 2009 first-quarter results included $6 million of unusual charges related to the effects of the recession and the imminent bankruptcy of a service center customer.

Sequentially, the improved results were due to increased shipments and operating cost reductions resulting from completed capital expenditure projects, process improvements and higher production volumes. Production in our melt shop increased by 57% over the 2009 first quarter and by 101% sequentially. The Universal Stainless segment sales were down 15% from the first quarter of 2009, primarily due to a 10% decline in shipments and product mix. The ship-- the segment experienced lower shipments in each market category except for plate shipments to service centers, which increased by 41%. Sales increased 35% sequentially on a 39% increase in shipments resulting from improved demand from most markets.

The gross margin for Universal Stainless segment in the 2010 first quarter was $3.7 million or 11.9% of sales versus 7.9% in the 2009 first quarter after excluding the impact of the unusual charges and 9.5% in the fourth quarter of 2009. The year-over-year improvement was due to the decline in material costs as a percentage of sales to 45.3% from 49.1% in the year-ago period. Material costs increased sequentially from 42.8%, primarily due to the higher mix of semi-finished products shipped in the first quarter.

Our operation cost of sales per ton shipped declined in comparison to the prior-year period and sequentially due to the higher production volumes and process improvements. Dunkirk segment sales were down 8% from the first quarter of 2009 and were up 22% sequentially. The year-over-year decline was also due to a 13% reduction in shipments, partially offset by higher selling prices. The sequential increase is due to a 12% increase in tons shipped, as well as higher selling prices.

Dunkirk's gross margin for the 2010 first quarter was $1.2 million or 11.6% of sales versus a loss of $756,000 in the year-ago period after excluding the impact of the unusual charges. Dunkirk's gross margin was $1.1 million or 12.9% of sales in the 2009 fourth quarter. Material cost of sales of 57.1% were in line with the 2009 fourth quarter and significantly below the 70.8% reflected in the 2009 first quarter. Our operation cost of sales per ton shipped declined in comparison to the 2009 first quarter, primarily due to the benefit of relocating the round bar finishing facility in 2009, while our operating cost of sales per ton shipped increased sequentially due to the mix of products shipped.

During the quarter, we increased our managing-- managed working capital by $8.3 million to support increased sales activity and growing backlogs. $6.6 million of the increase is reflected within accounts receivable, resulting from increased shipment activity, especially in the month of March. We increased our work-in-process inventory volume by 45% during the quarter in response to the rise in backlog. Managed working capital as a percentage of sales fell to 42.5% compared to 46.7% at December 31, 2009. Capital expenditures for the quarter were $1.1 million, of which $629,000 related to the Bridgeville melt shop upgrade.

At March 31st, the Company had cash of $37.8 million and total debt of $12.9 million. The debt includes the $12 million term loan with PNC and principle payments of $600,000 per quarter will commence in May. That completes my review of the financials. Now I would like to turn the call back to Denny.

Thanks Rick. Just to summarize, the market recovery that began in the fourth quarter gained strength in the first quarter. Operating income tripled on a broad based 30% sequential increase in sales. Our backlog increased sequentially by 47% to $53 million. Our customer service metrics now place us in the best-of-class category. Yields have been improved 1% to 1.5% with more to come. Operating costs per pound were reduced by 4% versus the fourth quarter of 2009 and by 6% versus the first quarter of 2009. The capital spending program is on time, within budget, and generating returns.

Our financial condition remains strong with a net cash position of $25 million at March 31. Based on these improvements and the increase in our backlog, we expect further sequential growth in the second quarter of 2010. Longer-term recovery will require more than supply chain restocking, however. It will require stronger growth in end-market demand as well. The news from our end markets is improving, but it is too early to expect market recovery to be more than gradual. We will continue the focus on operational excellence so that we may fully capture the opportunities that further recovery offers. With regard to Rick's departure, we have initiated a search and we are optimistic about filling the position by the summer months. That concludes our formal remarks. We are now ready to take your questions.

(Operator Instructions). We'll pause for just a moment to compile the q-and-a roster. Your first question comes from the line of Michael Gallo with CL King.

Hi, good morning.

Michael, how are you?

Good. Just a couple questions. First question, want to touch on the power gen market. I think from your prepared remarks, Denny, it appeared clear that you were a little surprised by the strength of power gen on a sequential basis, but based on some of the turbine orders and build rates we're seeing out of people like GE. Would you expect that rate to just kind of flatten out and not show the same kind of sequential improvement you would see-- expect to see in the rest of the end markets or do you think at some point later in the year we'll see the destocking finished in that (inaudible)?

The feedback we get from our customers, that they're looking at midyear 2011 as-- in kind of the second half of 2011 and then 2012 as being back on pace with where they were a couple years back. That's the feedback we're getting. That slipped a little bit since the last quarter that we talked. Before it was the first half of 2011. So there seems to be some slippage in what the big players like the GE's of the world are seeing in a new turbine market. But you're correct; we have seen a surprising-- I was expecting that market to be down more than it was, quite frankly. And a lot of that we attribute to maintenance of existing turbines, purchase of parts for which we supply metal, so--

Based on what you're see-- oh, I was going to say based on though what you're seeing in order rates and backlog trends though, would you expect that level of improvement going forward or do you think the first quarter was more of an anomaly on that front?

I think you're going to see gradual improvement the rest of this year with a steeper improvement as we exit 2010.

All right. Okay, great. Second question I have is just for Rick. Any nickel-- what was the nickel impact in the quarter on the gross margins?

Michael, the nickel impact was pretty small, actually, because of the timing of our purchases and also the cycle time improvements that we're achieving. They're certainly not the way they were a couple years ago.

Right. Okay. And then just final question, it sounds like the melt shop upgrade is on schedule and on budget. I was wondering if you started to see-- did you start to see any of the benefits from that in the first quarter or-- and if so, how much are you realizing in benefits, and do you still expect save $6.5 million annually once it's fully implemented?

As far as the-- yeah, we did start to see some improvements in our cost performance from the facility actually going back to last year when we started it up. We still have some more work to do in terms of the controls that will be going in over the course of the next three to six months, and so the full benefits won't be seen until we exit this year. And remember that benefit figure was based upon 2008 volumes.

Right.

As far as what we're seeing right now today, a lion's share, that yield improvement that I mentioned, that 1% to 1.5%, you can track back to the melt shop.

Right.

And a fairly sizable portion of the operating cost improvement goes back there as well.

All right. So is it fair to say kind of you're already getting maybe half of the improvement you would have expected once it's on track or is it not quite that much yet?

I would say it's not quite that much, more like 35%, 40% of it.

Okay. Okay, great. Thanks a lot, and also I would like to send my regards to Rick, doing a great job with the Company over the years. Good luck, Rick.

Thank you, Mike.

Your next question comes from the line of Nat Kellogg with Hudson Securities.

Morning, guys. Congrats on a nice quarter. Just a couple of quick things.

Thanks Nat.

You guys say what D&A was in the quarter, depreciation and amortization?

Depreciation, $1.3 million.

Okay, great. And obviously a step up here in the working capital, which is no surprise given how lean you guys were at the end of last year, obviously depends upon the slope and the shape of the recovery but sort of as you see things today and considering a modest recovery but maybe not gang busters, do you guys foresee a lot more increase in working capital or do you feel like you've done the lion's share right now? Just any sort of color on that would be great.

I feel we've done the lion's share of that. We have very specific targets for inventory turnover as we move through this year to make continuous improvement there. We've mentioned cycle time improvements quite a bit in the last several quarters and as you improve quite cycle time you obviously need to carry less inventory. Fighting against that is our plan. We have been (inaudible) some strategic inventory in to make sure that our lead times are as fast as possible. That kind of goes counter to what I just said.

I guess the overall metric we're looking at is as sales goes up, what's happening to our working capital, so I think we mentioned in Rick's comments-- Rick mentioned in his comments, actually, our working capital-- managed working capital which is receivables, inventories less payables, that's actually gone down as a percentage of sales. So we're managing that whole category very carefully. You will see some modest improvements if sales continue to grow the way they are now, but at a lesser rate than you've seen in the past.

Okay, that's helpful. And then on the tool steel business, I mean I know that that's come back particularly strongly but, like, obviously part of that is just because you guys had some quarters last year where people just weren't ordering anything. Just as a-- how much-- do you guys have a sense of how much the increase in demand is from restocking and how much is just because-- I mean, obviously auto production is moving higher here. I'm just curious to how much is due to actual real end demand or if you have any sense of that?

Let me have Chris Zimmer, our VP of Sales, answer that one.

Well, I think there's a combination of destocking that happened in the supply chain that resulted in significant drop-off in our bookings last year. So now that that supply chain is a little bit more in sync with demand, we have seen that pick up in bookings. The feedback we get from our customers is that they expect the demand on their side to continue and they're booking at that demand rate with us. So we expect this booking activity to continue moving forward. We don't see a major increase in their inventories being built right now, but instead they're buying in line with their demand.

Okay. Okay, that's helpful. And then, last one. I know you guys have had a series of price-- base price increases at the end of last year and so far in the first quarter and just curious on how those are being received in the marketplace and whether they're sticking to your liking?

Well, the price increases that we have implemented are sticking.

Okay, that's great. And then I have one other. Tax rate came in just a hair lower than expected. I mean, is 34% a good proxy for the full year or do you think it might pick up a little bit over the next couple quarters?

At this point, Nat, we're expecting 34%.

Okay. Okay, that's great. All right, well thanks again. Congrats on a nice quarter, guys, and best of luck to you Rick.

Thank you.

Your next question comes from the line of Jason Brocious with KeyBanc.

Hey, this is Phil Gibbs from KeyBanc. How is everyone?

Good Phil, how are you?

Doing okay. My question is just on the mix in the metal spreads. I think they were a little bit lighter than what we were looking for and that's probably due to the semi-finished products as being a high percentage of volumes in the quarter. How should we look at that going forward, should we anticipate mix improving or should we anticipate kind of the mix going right now being constant going forward?

I think you should expect mix to be improving as we move through 2010. You're correct; we have seen a relative increase in reroll, ingot and billet business.

Um-hmm.

But that will balance out as we go through the year, you'll see more finished products.

What's the-- what's kind of the temperature right now of the aerospace forging customer base, do you believe that they're ordering right now based on any of the sentiment or pull-forward in some of these aircraft commercial programs?

I believe they've clearly stopped destocking and they're now ordering closer to what they see as their demand. I still sense that they are very conservative and cautious about how they're ordering, not willing to commit a great deal from-- on a longer-term basis, still very concerned about where raw material costs are headed for the rest of the year. I think that's all feeding a healthy amount of conservatism in their buying.

Okay, great. And how do you guys feel about the raw material cost position just-- of just your company, I mean given the increases that we've seen in ferrous scrap and nickel and cobalt and are you guys comfortable with the way that you're managing that and your ability to pass that on going forward?

We are very disciplined about passing that on via our surcharge mechanism. Our push on cycle times is really two-fold. One is to allow us to provide short lead times to the marketplace, but also the faster you can spin product through here the less your exposure to raw material fluctuations. We don't do a lot of this, but where we do go longer term with customers we do hedge to protect ourselves.

Okay.

So I think we're doing all the things that you would expect in order to protect ourselves and mitigate the risk of fluctuations in raw materials. Now, are-- do you believe that-- just a follow-up here, I'm sorry, but on the raw material position, do you feel that you have less raw material just exposure on the ground, that your inventories are leaner, given the cycle time improvement?

Absolutely. By definition, if you're increasing your cycle time per pound going out the door, you need less inventory.

Great. Thanks, guys, and Rick, we're certainly going to miss you; you've done a great job.

Thank you, Phil.

(Operator Instructions). And your next question comes from the line of Mark Parr with KeyBanc Capital Markets.

Hey, greetings.

How you doing, Mark?

Good. Good Denny. Hey, Rick.

Hi, Mark.

Hey, so there's a rumor out there you're going to become CFO of Exxon Mobile.

Not quite.

But I just wanted to wish you well and congratulations on-- I just keep thinking about the first time we met when the operation had barely gotten started, and it was-- you guys have really come an incredible long way and you've done it the old fashioned way. You kind of did it by your bootstraps and you earned your way along and that's just really nice to see, resuscitation of industrial enterprise in Western Pennsylvania. So congratulations on that. It's a tremendous accomplishment and I'm sure it's something that you'll treasure for the rest of your life.

Absolutely, Mark. And this would not happen if it wasn't for the vision of Mac and the dedication of every employee who ever walked through the doors or Universal Stainless over the years.

Yes, it's really been cool. Now we get Denny Oates to carry on the tradition, right?

That's what they say, Mark.

I'm a little taller than Mac.

That's right, but you're not nearly as good looking, though.

That-- he would agree with that. But I still have some hair.

Hey, along those lines, I wanted to get your updated thoughts on how you're going to take advantage of this new upgraded melt shop. You're going to have a tremendous capacity boost at your disposal and what's the latest strategic thinking about how you might enhance the value of that electrode capacity?

Well, what we're doing, obviously we spent the money and justified the money on pure cost reduction. The capacity kind of comes along, I won't say for free, but it-- kind of an added bonus. What does it do for us? If you look at our plans to grow the business, we had some work to do from a customer service standpoint to improve deliveries and so forth. A lot of our problems, as we look at how we would do that, went back to the melt shop, so this capital has really enabled us to significantly improve our on-time performance. As I said in my prepared comments, I feel we're best of class at this point in time and have been for the last six months, in low volume as well as some pretty high volumes here in the first quarter. That will bring this company additional business.

We've also expanded the grades that we're producing and the size of material we're producing at the melt shop as a part of the capital program in some of our process improvements, so they are segments of the market that we have not played in before and will offer some additional growth opportunities.

If you look at the international markets, we were 3%, 4%. Last year we increased our participation in international markets up to just about 11%. That percentage has slipped back to 8% in the first quarter, but that's largely because of the growth in the non-export business, not that we're losing position export-wise. But I don't see any reason why this company can't be exporting upwards of 25% of its sales, so I see a growth opportunity internationally.

Right.

The other thing, it gives us the opportunity to flex up and flex down. The whole story in this market today is lead times and customer service, being able to turn things around quickly, and to the degree we have a shop that we can flex up and flex down reliably, we're going to be a much stronger player in the marketplace.

Any thoughts about additional downstream capability, new rolling mills or any sort of additional finishing or remelt capabilities?

We-- from a rolling standpoint, I think we're pretty well situated. We are looking very hard at our remelting facilities. There have been changes in technology in some of the remelting technologies and I would expect that we'll be looking at that very hard and doing some things over the 12 months, we're just not prepared to announce those at this point in time. As far as finishing, the cellularization we did of bars is in a certain size range. There will be opportunities to apply some cellular manufacturing in other size ranges as well, which we're looking at very aggressively.

All right. Well, we'll look forward to an update on the capacity ramps and congratulations on the progress, it was a great first quarter, and look forward to the Company's results as it unfolds over the course of this year.

Thanks, Mark.

(Operator Instructions). And at this time, there are no questions in queue.

Okay. Well, thanks again for joining us today. First quarter gave us a good start for 2010. We plan to make additional progress as the year continues, and we look forward to reporting back to you on our progress on our next call. Have a good day.

This concludes today's Universal Stainless first-quarter 2010 conference call and webcast. You may now disconnect.