Universal Stainless & Alloy Products Inc (USAP) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Universal Stainless Steel & Alloy Products first quarter 2011 conference call and webcast. At this time, all participants are in a listen-only mode. Later we'll have a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference may be recorded.

I would now like to turn the conference over to your host for today, Ms. June Filingeri. Ma'am, you may begin.

Thank you, Mary. Good morning. This is June Filingeri of Comm-Partners, and I also would like to welcome you to the Universal Stainless conference call. We are here to discuss the Company's first quarter 2011 results, which were reported this morning.

With us from management are Denny Oates, Chairman, President, and Chief Executive Officer; Bill Beible, Senior Vice President of Operations; Paul McGrath, Vice President of Administration and General Counsel; Doug McSorley, 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 again 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 now like to turn the call over to Denny Oates. Denny, we are ready to begin.

Okay. Thanks, June. Good morning, everyone. Thanks for joining us today. First quarter sales of $59.8 million increased 72% from the first quarter a year ago, and rose 16% sequentially. Our Dunkirk Specialty Steel segment posted a record $22 million in sales in the first quarter, reflecting our strategy to increase higher-margin finished product volume.

We noted on the last call that customer optimism about business levels was increasing, and confidence in our ability to deliver on time, with very competitive lead times, was growing. In fact, business activity was robust and broad-based across virtually all end markets in the first quarter. Consolidated bookings reached a new record. Order backlog climbed 33% to $92 million on March 31 after increasing 18% in 2010's fourth quarter. Our operating margin improved to 11.7% of sales in the first quarter, or 12.4% before business development expenses. Operating margins were 6.5% of sales in the first quarter of 2010 and 10.6% in the 2010 fourth quarter.

Our recently upgraded melt shop in Bridgeville successfully integrated additional automation packages into operations during the quarter. Productivity, reliability, and first time through quality continued to demonstrate improvement. Melt to ship yields increased 0.5% during the quarter. The buildings and equipment damaged by a fire in December at our Dunkirk facility are back in service. We also supplemented in-house remelting and conditioning operations to temporarily support the ramp-up to record finished product sales at Dunkirk.

As a result of increased shipment volume, pricing, and mix management, and continued operational improvements, net income was triple the level of the first quarter of 2010, and rose 25% from the fourth quarter, reaching $0.64 per diluted share, or $0.68 per fully diluted share excluding business development expenses.

To support the continued strong sales activity and backlog, we invested $8.1 million in managed working capital during the quarter, which resulted in negative cashflow from operations of $1.7 million. Capital spending totaled $2.2 million during the quarter.

Looking at first quarter shipment volumes, total tons shipped increased 54% year over year and 15% from the 2010 fourth quarter. Shipments to service centers reached the highest level in 10 quarters, increasing 34% from the first quarter of 2010, and 42% sequentially. More than half of those shipments were made through Dunkirk, where we have improved throughput by installing a finished bar [sale] and state-of-the-art heat-treating equipment, along with numerous manufacturing process improvements.

Looking at end market shipment volume compared to the first quarter of 2010, aerospace shipments more than doubled, power generation shipments rose 59%, petrochemical volume was up 52%, while service center plate shipments were 13% lower than at 2010 first quarter, which is a period of heavy restocking in the supply chain.

Sequentially volume shipped to the aerospace market increased 26%, shipments of plate products to service centers rose 71%, and petrochemical volume was up 7%, while shipments to the power generation market were 6% lower than the record fourth quarter. We are continuing to capture a high level of maintenance and repair business through our quick turnaround programs in the power gen market.

Turning to the details of our end markets, aerospace sales increased to 41% of our total sales in the first quarter compared with 36% of sales in the fourth quarter and 33% in the first quarter of 2010. Aerospace sales increased 30% sequentially, and we're up 112% from the first quarter of 2010. The positive momentum in commercial aircraft demand continues. Airbus reported 69 new orders as of April 7th, while last week Boeing reported 106 net commercial orders thus far in 2011.

As noted in our last call, build rates are increasing. Our customers are also more optimistic about the new delivery date for the 787, and airline passenger traffic has been positive. High jet fuel prices have the potential to cut both ways. They hurt airline profitability, which may reduce new orders, while they also can encourage investment in more fuel-efficient aircraft.

On balance, the combination of current airplane build schedules, extending industry lead times, and increased confidence from our customers, is leading to a greater willingness to make longer-term commitments, a big change from 9 months ago.

Our petrochemical sales represented 23% of sales in the first quarter, about even with both the fourth quarter of 2010 and the first quarter of 2010. Petrochemical sales rose 17% sequentially, and were up 72% from the first quarter of 2010. Oil and gas exploration continues to be high.

In our earnings report last week, Halliburton was very bullish, especially about North America and its prospects in coming quarters. They cited a 2% increase in rig count, and what they've described an unabated shift to unconventional oil and liquids-rich basins, that have more than offset effects of the suspension of deep water activity in the Gulf.

Schlumberger also reported results last week. While noting the negative impact of disruptions from the geopolitical events in North Africa and the Middle East, they also reported a very strong quarter in North America, driven by well services activity and pricing. From our standpoint, demand is strong and channel inventories remain in balance.

Our sales to the power generation market represented 18% of first quarter sales, compared with 22% in the 2010 fourth quarter, and 17% in the first quarter of 2010. Our power gen sales were down 5% from the fourth quarter, but up 82% from the first quarter of 2010.

Our forecast that material buys for new power turbines will begin in the second half of this year, has not changed. Additionally, with natural gas prices low and expected to remain low for years to come, the outlook for new gas turbines is even more promising. GE reported receiving orders for 27 gas turbines in the first quarter, up from 10 in the same quarter last year. They received 29 gas turbine orders in the fourth quarter.

We are also booking orders to support Japanese recovery following the earthquakes and the tsunami. While the ultimate impact of the Japanese nuclear crisis on the global nuclear industry is unclear, repair and maintenance of existing nuclear facilities is expected to increase.

Service center plate sales represented 9% of first quarter sales, compared with 7% in the fourth quarter and 18% in the first quarter of 2010. Our service center plate sales were 47% higher sequentially, although 11% below the first quarter a year ago.

I noted last quarter that our fourth quarter order entry in tool steel had improved as demand in the supply chain had stabilized. That was reflected in our first quarter sales. Despite fluctuations in supply chain demand and shipment mix, end user news has remained positive for some time.

We expect North American oil production to reach 13 million units versus 11.7 million in 2010, where recently General Motors reported a 38% increase in their retail sales in the first quarter, with combined sales for vehicles launched since June 2009, including their fuel-efficient Chevrolet Cruze and Equinox, of 74% for the first quarter of last year and 54% in March.

Although Toyota production is down 50% currently, we do not anticipate a major negative impact on tool steel activity in North America, stemming from production interruptions caused by the crisis in Japan. Caterpillar will report results on Friday, but they have gone on record forecasting that their revenue growth in 2011 will exceed 17%, a very good indicator of the optimism in the off-road industry.

Let me turn the call to Doug at this point, for his report on the first quarter financial performance.

Thank you, Denny. Sales in the first quarter was $59.8 million. This was 72% stronger than the $34.7 million in sales recorded in the first quarter of 2010, and primarily driven by a 54% increase in volume. Sequentially, sales for the first quarter were 16% higher than the 51.6 million recorded in the prior quarter, on 15% higher volume.

The gross margin in the first quarter improved to 18.1% of sales, as compared with 14.2% in the first quarter of 2010, and sequentially the first quarter compares to 17.1% in the prior quarter.

As Denny mentioned, we reported record sales level in the Dunkirk segment. The increase in the consolidated gross margin reflects this shift towards our finished products activity.

SG&A expense for the first quarter was 6.4% of sales, as compared to 7.7% in the prior year first quarter, and 6.6% in the fourth quarter of 2010. Despite the improvement, SG&A was higher in the quarter due primarily to business development costs of $419,000.

As reported on a prior call, our effective tax rate in 2011 is 35%, a 1% increase from 2010.

The Company's cash position at the end of the first quarter was $30.5 million, as compared to $34.9 million at year-end 2010. Our managed working capital for the first quarter, which includes receivables and inventory less accounts payable, was 36% of annualized sales, compared to 42% in the first quarter of last year. This percentage was 38% at the end of 2010.

The use of cash in the quarter reflects an overall use of $4.4 million, primarily due to the increase in our inventory levels. As Denny mentioned, we are continuing to book increased order activity and our operating plans are being scheduled to support that.

Capital expenditures for the quarter were $2.2 million. Our total debt is $10.1 million. This debts includes our term loan with PNC, against which we are making quarterly principal payments of $600,000. The debt to total capitalization at the end of the quarter was 5.8%.

This concludes my report. Denny, I'll turn the call back to you for concluding remarks.

Okay. Thanks, Doug. In summary, then, first quarter sales demonstrated strong growth both year over year and sequentially. Our consolidated order entry was at a record level, and our backlog reached $92 million, as business activity was robust across all end markets.

The result of operating improvements achieved to date in the completed capital projects can be seen in our Dunkirk record sales, our ability to capture fast turnaround orders, expanding margins, and growth in our bottom line. Our remelt capital project remains on schedule. We announced further price increases for stainless and tool steel products, and we continue to hear positive news from our end markets.

Against this backdrop, we will remain focused on relentlessly pursuing additional operational improvements and on seizing market opportunities to achieve further profitable growth.

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

(Operator Instructions). And our first question comes from the line of Mike Gallo from CL King. Your line is open.

Hi. Good morning. Congratulations on the very strong results.

Thanks, Mike.

Thanks, Mike.

My question is just on the booking. You know, if -- I guess if I look back, I think, [second] quarter of 2008 you had $72 million, $73 million worth of bookings, so -- but this quarter the bookings far exceeded that. Anything unusual in the bookings this quarter? Based on what you're seeing, can you sustain the run rate? It seems like power gen, if anything, should be -- should start to get better. Or is that just an off-the-charts kind of number?

And, two, at what point, if you maintain that kind of level of bookings, would you start to need to make some additional capital investment? Obviously you've picked up your melt shop capacity quite a bit here, but other just de-bottlenecking stuff that you have to do? Thank you.

Mike, I would say there's nothing unusual in our order entry during the first quarter. The recovery basically is on track. It's building in momentum positively. It's very broad-based. It's spread around existing customers. So, there's nothing that really jumps out at us, in terms of something unusual in the first quarter. I believe we're picking up some share that complements what's going on in the business overall.

As far as capacity goes, from a melting standpoint, if I annualize what we did in the first quarter, we're still running in that low 60% of capacity range, so there's not an issue there. As you start to look at remelting, from time to time, we will -- as we mentioned, we did put some remelting out to outsources, where we have partnerships with people. That'll happen from time to time. But right now I would say from a general remelting standpoint we're probably in the low 80s, from a capacity utilization standpoint.

So I don't foresee a need to make significant capital investments to generate new capacity this year, but certainly as we look down the road and we plan our business to how we're going to position the company, we're looking very actively at that issue.

Thanks very much.

Thank you. Our next question comes from the line of Mark Parr from KeyBanc Capital. Your line is open.

Okay, thanks. Hey, good morning, guys.

Hey, Mark. How are you doing?

Good morning, Mark.

Oh, man, I'm just -- it's been a great earnings season.

You're having fun, right?

We're having -- we're just having a ball. Actually, it's been really encouraging to see the aero recovery and the oil and gas recovery unfolding. You guys are -- you know, showing good ability to take advantage of that, and you've got your operational excellence initiatives on top of that, which makes things even better. So congratulations on the result.

Thank you.

Hey, one question I had. Can you talk a little bit about where we are in terms of recovery of base pricing compared to, say, the -- I think base pricing peaked probably, when, in 2007? Maybe early 2008? I'm just wondering where we are in the various end markets, or if you could just kind of give us some color on that particular side of your operations.

Well, we have been increasing prices, if you go back into the third and fourth quarters, and we've just announced some recent price increases. Let me ask Chris Zimmer to just kind of run through what we're doing from a pricing standpoint. Chris?

The market environment has supported the opportunity for us to put some announcements out for increases, four of which back in 2010, and two recently in the past couple of months. So the situation from a pricing standpoint -- I think you hit it on the nose, that the beginning of 2008 was the last peak. This is a good environment and we are taking this opportunity to put some announcements out to get that base pricing back up.

How close are you to that previous peak?

I think we still have another 15% to go generally, and I'm saying generally because that's an average number, Mark. When you look at our different products, you know, we'll sell tool steel plate to be $1.60 or $1.75 a pound. Then we've got other products that'll sell for $4.00 or $4.50 a pound. So, depending upon how they move, the overall average can look kind of funky, but --

Okay. Just if I could do a follow-on there. And again, I realize that there's a -- you know, there's a raw material pass through here. So I'd like to try to take the conversation, you know, excluding that raw material side. If you look at your conversion costs on a per-pound basis today, compared to where you were back in that 2007, 2008 timeframe, how would you characterize your cost of conversion on a per-pound basis? I mean, relative to -- again, back at that peak pricing [marketing] environment.

This is for definition purposes, to make sure we're clear. By conversion, you mean our operating -- our non-material costs in total? Right?

Yes.

All right. Sometimes conversion costs means outsourcing within the industry. So if I look at those total costs and look at just some of the investments we made around the company and process improvements -- I mean, I'm not sitting here looking at a number, Mark, from 2007 and comparing it to what we did in the first quarter. We can pull that together. But I know our operating costs are down somewhere in a range, on a per-unit basis, 10% to 15%.

If you remember, just in our melt shop alone, when we announced a $13 million investment a couple of years back, we said publicly that when we get back to 2008 volumes, we would submit that we should be able to save $7 million pretax in a year. We're getting close to those 2008 volumes and we are hitting one of those targets.

All right. So, the -- so, yes, let's just say -- and again, I'm not trying to ask you to make any forecasts here, but as I interpret your comments, assuming the recovery continues, the opportunity for base price increases continues to present itself, you can move the pricing up another 10%, 15%, say, over the next however long it takes -- couple of years.

And at the meantime, though, your conversion costs are a lot lower than they were -- your production costs are a lot lower on a per-unit basis than they were in that 2007, 2008 timeframe. So there's some nice opportunities for financial momentum to continue on a very nice track, I guess, is what -- the kind of conclusion I'm coming to. Is there something wrong with that thought process?

Directionally, you're correct. I'm not committing to the 10% or 15% number that you're talking about, but directionally I think you're correct. And there's also some -- you know, from a proactive standpoint there's mix management things you can do to also improve upon that.

Okay. Anything you want to talk about from a mix perspective? I know some of the other companies that serve the similar sectors, maybe with a little bit different products, but mix management has been a big deal, I know, Denny, for your former employer in particular. And yes -- what can Universal do to enhance mix over the next 18 months?

It's a little different here at Universal. We're not looking at products that we're necessarily getting out of or walking away from. We did a lot of that a couple of years ago, basically, where we just -- where we weren't making money, we adjusted price or we adjusted cost. And we couldn't; we got out of those products.

So right now, going forward, really the major item we're looking at is growing more finished products as a percentage of our total. It's not that we're walking away from business, but with our capacity situation we can manage how we layer on additional products and additional volume, and go after higher-margin products.

So if you take a look at the Dunkirk phenomenon right now, with record sales in the first quarter, and a very solid backlog going into the second quarter, they've been basically shipping at record levels for the last three or four months, and would expect to continue to do so.

So more finished products, which have higher margins, higher prices as a percentage of the total; but we still have the ability to sell and get -- and bill it, semi-finished products, on which we make a handsome profit, but it's not as profitable.

Yes. Okay. Well, congratulations, and look forward to chatting with you again next quarter.

Okay, Mark. Thank you.

Thank you. Our next question comes from the line of Tim Hayes from Davenport & Company. Your line is open.

Hey, good morning.

Hey, Tim. How are you doing?

Morning, Tim.

Yes, in terms of the -- your capacity now that the outlook for several end markets are quite robust, how much, you know, tonnage can you support in your existing configuration? Could you be able to support tonnage of, say, 70,000 tons at maybe several years -- a few years from now, if we got demand strong enough to get to that point?

Yes. If you look just -- from a historical perspective on that, the most Universal ever melted in the melt shop here at Bridgeville was 70,000 tons. I think it was in 2006. Right now with the investments we've made, we're confident we can go up to 120,000 tons.

Okay. Thank you.

Thank you. (Operator Instructions). And we have a followup from the line of Mike Gallo from CL King. Your line is open.

I've got a question on -- nice growth in the OEM side of the business. I know that's been an area that the Company would like to continue to grow in. Is that something you see being a bigger percentage of sales going forward, or was there anything that -- you know, unusual -- obviously it's a pretty small line item as a percentage sale. Thank you.

Yes, I think as we go down the road and bring on some new products you'll see that grow at a faster rate than the average. But we are committed to our distribution business as well, which is, you know, 45%, 50% of the products we sell. So I don't see that -- I don't see a dramatic shift in that relative relationship, Mike.

Okay. And then I just follow up -- what was international as a percentage of sales? Did you see similar growth in that area to what you saw in your other business?

Let me turn that one over to Chris Zimmer.

The international side of the business has remained on par with where we've been in 2010, essentially growing at the same rate. It is the focus area for us. We're going to continue to grow internationally, but there's also a lot of opportunities domestically too, and we're looking after opportunities in both arenas.

Right. And the business development expenses -- were those related to potential international opportunities? Just to help us frame what you were looking at there.

Well, strategically, Mike, if you think back over the last couple of years, we've been very focused on what we need to do to grow this company profitably. We've talked at length about on-time performance, quick cycle times, very -- having the best lead times out there in the marketplace, and I think you're seeing the benefits of that here, during this recovery that started during 2010. We did that by eliminating gaps in our manufacturing capabilities and by taking advantages from opportunities we saw in the marketplace.

We still have gaps. We still have opportunities out there. So, we continue to look at opportunities, both organically as well as outside the Company. And you also noted, we tend to be a pretty conservative bunch, so we want to make sure we study things and understand things completely. So that's what the $400,000 and some odd was in expenses during two -- the first quarter of 2011. It's us looking at where we want to be a couple of years down the road.

All right. Well, is that something we should expect, just kind of going forward, that there's going to be a few [cents] of that every quarter as you kind of plan for the future, or are we just --?

I would look at it as a nonrecurring spend.

Okay. Thanks very much. Congratulations on the good results again.

Okay, Mike.

Thanks, Mike.

Thank you. (Operator instructions). And I show no further questions in the queue. I would like to turn the conference back to Mr. Dennis Oates for closing remarks.

Well, thanks again for joining us today. We've had a strong start this year and our market environment remains very favorable. We plan to seize the many opportunities it offers, and we'll look forward to updating you on our progress on our next call. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.