Universal Stainless & Alloy Products Inc (USAP) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Universal Stainless fourth-quarter 2011 conference call and webcast.

At this time all lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host today, June Filingeri. Please begin.

Thank you, Sean. 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 fourth-quarter 2011 results reported this morning.

With us from management are Denny Oates, Chairman, President, and Chief Executive Officer; 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 the formalities out of the way I would 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.

This morning we announced that fourth-quarter sales were $62 million, an increase of 21% over the fourth quarter of 2010. In comparison to the third quarter 2011, which was our all-time record sales quarter, sales were down 8%, reflecting earlier than normal customer delivery cutoffs and declining raw material surcharges.

Nickel alone fell almost 20% from late summer to November, moving roughly from $10 a pound to $8 a pound. Interestingly, nickel is now rebounding and appears headed back towards $10 a pound in the current quarter.

For the full year 2011 sales were up 33% reaching $253 million, a new company record, on a 16% increase in volume. The sales-to-volume trend evident in our 2011 sales demonstrates the general benefits of our strategy to expand our product portfolio with more higher value and more technologically advanced products. A more specific example of these benefits is the record performance of our Dunkirk operation which grew sales 72% to almost $100 million or 39% of company sales.

Our progress in adding higher value products combined with cost reductions and pricing actions is also evident in the higher operating margins we are achieving on our legacy Universal business. Operating income before expenses associated with the North Jackson investment was $7.9 million, or 12.8% of sales, in the fourth quarter versus 10.9% in the fourth quarter last year. The operating margins achieved during the past three quarters are among the highest on record and have been accomplished despite falling nickel prices and the resulting decline in surcharges.

Fourth-quarter net income was $0.72 per share before including the $0.13 per share impact of our North Jackson acquisition, compared to $0.52 per share in 2010's fourth quarter, a 38% improvement. Adjusting for North Jackson's after-tax costs of $0.51 per share, 2011 earnings per share increased 60% reaching $3.07 compared to 2010's $1.93.

Cash flow from operations totaled $9.6 million in the fourth quarter. We invested $16.6 million in capital projects during the quarter, including $14.4 million for North Jackson. Total debt at the end of the quarter was $95 million, or 34.4% of total capitalization, a slight reduction versus September 30 despite heavy capital spending.

We ended the year with a record backlog of $103 million, including $14 million for our North Jackson facility. At the beginning of the third quarter the backlog associated with North Jackson was $9.5 million. I am going to correct that; at the beginning of the fourth quarter the backlog associated with North Jackson was $9.5 million.

The increased backlog reflects strong underlying market demand, record fourth-quarter bookings, and shipments pushed into 2012 by customers' receiving practices at year-end. Before my update on operating progress at North Jackson let's take a closer look at end markets.

Aerospace sales were up 62% for the full year. For the fourth quarter aerospace remained our largest market at 46% of total sales, which is up from 42% of sales in the 2011 third quarter and 36% in the fourth quarter of 2010. Our sales to aerospace rose 53% from the fourth quarter last year and 1% from the 2011 third quarter.

News from the aircraft makers continues to be very positive. Airbus recently reported booking 1,419 net orders in 2011 and ended the year with an order backlog over 4,000 aircraft. Boeing booked 805 net orders last year, including 13 for the 787 despite its production delays, as well as 200 orders for the popular 777, 551 orders for the 737, with strong demand for the new 737 MAX.

Boeing ended 2011 with a backlog of 3,771 airplanes which analysts estimate represents six to seven years of annual output at current production levels. Airbus' backlog is estimated at eight years at current production rates. The challenge for aerospace suppliers is to keep pace with demand and expect that production rate increases, which is a good challenge to have.

Our full year petrochemical sales were up 42%. The petrochem market remained our second-largest market in the fourth quarter, representing 21% of total sales compared with 23% of sales in the third quarter and 22% in the fourth quarter of 2010. Petrochemical sales were up 13% from the fourth quarter of 2010, but were 16% lower than the record third quarter, mainly due to seasonal buying patterns rather than a change in market demand or in the balance of inventory in the channel.

The market opportunity remains very positive. Schlumberger is forecasting growth in exploration and production in 2012, especially in North America, on land and in deepwater. On Monday, Halliburton reported a record fourth quarter overall as well as in North America where they say their horizontal drilling activity continued to increase and US rig count increased 3%. We expect the positive trend to continue into 2012 coupled with additional growth in the Gulf where activity is reaching pre-moratorium levels.

Power generation sales increased 23% compared to 2010, even though the new turbine business never developed as expected. After strong growth and record sales in the third quarter, our fourth-quarter sales for the power generation market were down 5% sequentially and level with the fourth quarter last year. Power generation represented 18% of both fourth-quarter and third-quarter sales and 22% of sales in the fourth quarter last year.

There are positives on the horizon. GE shipped more turbines in 2011 than they did in 2010 and they expect that number to increase again in 2012. (inaudible) in their fiscal third-quarter announcement last week reported seeing continued demand for new equipment in emerging markets coupled with demand for maintenance service activity in mature markets, including the US. We continue to believe energy needs will grow as the global economy recovers driving higher maintenance spending and new equipment demand in the developing and developed world.

Our service center plate sales, while remaining at 8% of total sales, were down 12% year over year and tool steel sales were down 16% indicating the magnitude of the restocking which took place in 2010. The 35% increase in tool steel imports through the end of October was also a contributing factor.

Fourth-quarter service center plate sales increased 27% from the 2010 fourth quarter, but were 12% below the third quarter of 2011. Meanwhile, our tool steel plate sales were down 4% from the fourth quarter last year and 34% sequentially.

We are seeing continued volatility in tool steel plate demand and customer inventory levels. Despite the rise in imports, we have seen an increase in our backlog in tool steel which points to improvement in 2012. The backlog increase is in line with the news from the automotive and off-road leaders.

Ford reported an 11% increase in vehicle sales worldwide and 17% increase in 2011 Ford brand sales in the US. Similarly, GM saw a 14% increase in vehicle sales in 2011 and they are forecasting further growth in 2012.

In the off-road market, Caterpillar delivered record sales and earnings in 2011 and projects 2012 to be another record as developed economies continue to recover on top of robust business in the developing world. All of which is positive for tool steel demand.

With our new radial forge in North Jackson Universal has begun producing tool steel rounds, making us the first domestic producer in that market in nearly 15 years. We shipped our first round bar earlier this month.

Let me turn to our North Jackson operation, where we remain on track with our accelerated schedule for start up, including construction projects and equipment commissioning.

Production on a new radial forge is ramping up as planned with 6.4 million pounds moving across the dies in the fourth quarter. Production was increased each month of the quarter with December production about 150% above September's. Forged backlog now stands at $14 million with $11 million being new business captured due to North Jackson capabilities.

Although third-party conversion work has been somewhat slower to build than we originally planned, we expect this business to build each quarter of 2012, especially after North Jackson earns AS 9100 aerospace approval which is targeted for the second quarter of this year.

Construction of the vacuum induction melting furnace has been completed and the first heat was made in December as scheduled. We are now working through a punch list of minor issues and plan to start a 16-heat melting campaign next Monday, January 30.

We also completed first heats on each of our two new vacuum art remelt furnaces in December. Our goal is to be running these furnaces around the clock by the end of March. Two additional vacuum arc remelt furnaces for North Jackson have been ordered. Delivery is scheduled for the 2012 third quarter and production slated for the fourth quarter.

Our finishing operations at North Jackson, including heat treating, straightening, sawing, and peeling, are ramping up as the major equipment comes on stream with interim support from our Bridgeville team as required. We are on our way to making North Jackson an integral part of our manufacturing process, serving customers directly and supporting our Dunkirk, Bridgeville, and Titusville facilities with high-quality products and services. We continue to expect the North Jackson operation to be accretive from operations this quarter as we originally reported last summer.

Let me turn the call over to Doug for his report on the finances of the Company.

Thank you, Denny. As Denny said, sales for the fourth quarter of 2011 were $62.2 million, an increase of $10.6 million, or 20.5%, compared to be fourth quarter a year ago on 4% increase in shipments. A more favorable mix of higher value products and increased pricing also contributed to the sales increase.

Sequentially sales decreased by $5.1 million, or 7.6%, on a similar decrease in shipments due to year-end seasonality. Full-year 2011 sales increased by $63.2 million, or 33.4%, compared to 2010 reaching a record $252.6 million on a 15.7% increase in tons shipped.

Our gross margin in the fourth quarter was $11.9 million, an increase of $3.1 million, or 34.6%, from the same quarter last year. It was $670,000, or 5.3%, lower than the 2011 third quarter due to lower sales. For full-year 2011 the gross margin increased $13.7 million to a record level of $47.5 million. As a percentage of sales the gross margin was 18.8% for 2011 compared with 17.8% for 2010.

Selling, general, and administrative expense for the fourth quarter was $4.9 million, or 7.9% of sales. After excluding $800,000 of North Jackson-related costs, the adjusted fourth-quarter SG&A was $4.1 million, or 6.6% of sales, compared with $3.3 million and 6.6% of sales in the fourth quarter a year ago. SG&A costs were $452,000 lower than the 2011 third quarter which included $1.3 million in acquisition-related expenses and North Jackson start-up costs.

For full year 2011, SG&A expenses were $17.8 million or 7% of sales. Excluding the impact of $3 million of acquisition-related expenses and North Jackson start-up costs, recurring SG&A cause were $14.8 million or 5.9% of sales. For full-year 2010 SG&A expenses were $13.3 million or 7% of sales.

Operating income for the 2011 fourth quarter was $7 million, or 11.3% of sales. After adjusting for $850,000 of operating expenses related to the start-up of North Jackson, fourth-quarter income was $7.9 million or 12.8% of sales. That is an increase of $2.4 million from operating income of $5.5 million, or 10.6% of sales, in the fourth quarter of 2010.

Operating income in the 2011 third quarter was $7.2 million and included $1.7 million of expenses related to the acquisition and start-up of North Jackson. The adjusted operating income was $8.9 million or 13.2% of sales. For full-year 2011 our adjusted operating income was $33 million, or 13.1% of sales, compared to $20.6 million, or 10.9% of sales, for 2010.

Interest expense in the 2011 fourth quarter was $570,000, which is in line with the third quarter. Both periods reflect our increased debt for the North Jackson acquisition. Interest expense was $118,000 in the fourth quarter last year.

Turning to taxes. As discussed last quarter, our acquisition of North Jackson results in a taxable loss for federal tax purposes in 2011. Based on our year-end assessment of our tax position and the increased commissioning of assets into service, which is subject to accelerated depreciation under the 2010 Tax Relief Act, our tax rate for this quarter is 34.2%. This reflects an adjustment to our full-year tax rate of 36.4%.

Early in 2012 we filed for the recovery of $4.5 million of estimated tax payments made in 2011 prior to the acquisition, which we expect to receive before the end of the current quarter. Also, we have the option to elect to carryback for cash recovery -- to carry back our operating tax loss for cash recovery of federal taxes paid in 2010 as well, which would have an estimated cash recovery of $5.4 million. But if we do so would result in an increased tax rate.

At this time we expect our national tax rate in 2012 to be 36.5%.

The number of shares used in computing the diluted earnings per share for the fourth quarter was $7.4 million. It was $7.1 million for the year. As a reminder, there was an increase in shares as a result of the convertible note provided as consideration for the North Jackson acquisition. The number of shares that will be included in subsequent quarters is 427,000 shares.

The EPS reported for the fourth quarter of 2011 was $0.59 per share, including dilution adjustments totaling $0.13 per share related to the impact of the North Jackson acquisition. In total, these adjustments include $0.07 per share of after-tax operating loss resulting from the start-up of North Jackson and $0.08 per diluted share for the continued dilutive effect of interest expense and the increase in outstanding shares resulting from the acquisition financing, offset by $0.02 per share for the effective or reduced tax rate.

Excluding these adjustments, fourth-quarter EPS was $0.72 per share compared to $0.52 in the fourth quarter of 2010. Similarly adjusted EPS for full-year 2011 was up $3.07 compared to $1.93 for 2010.

Turning to the balance sheet, our managed working capital at the end of the fourth quarter, which included receivables and inventory less accounts payable, was 35% of the annualized sales, representing an improvement from 36% at the end of last quarter and 38% at the end of 2010. Capital expenditures for the fourth quarter were $16.6 million, including $14.4 million for North Jackson, for a total capital investment in 2011 of $24.5 million.

At the end of the quarter our total debt was $94.7 million, a reduction of $950,000 from last quarter. Our debt-to-total capitalization is 34.4% and we have $37.1 million available under the revolver facility at the end of the quarter. Denny, I will turn the call back to you for concluding remarks.

Okay, Doug. Thanks. 2011 was a year of important progress for Universal. Sales grew 33%, exceeding $250 million for the first time. We increased our earnings power by expanding our product portfolio with higher margin products, squeezing returns from recently completed capital projects, improving manufacturing processes to reduce costs and cut cycle times, and continuing to build our organization for the future.

Acquisition of the North Jackson operation was successfully completed in August and our start-up has been fast tracked. We are more convinced than ever that this is a game-changer for Universal as it broadens our production capabilities, expands our product range in higher value, higher margin products, and positions us to enter new market niches on a global basis.

We have entered 2012 with a record backlog and with momentum in our end markets. Our full focus is on achieving further profitable growth in the coming quarters.

That concludes our formal remarks. We are now looking forward to taking your questions.

(Operator Instructions) Michael Gallo, CL King.

Good morning. Couple questions. Denny, when I look at the fourth quarter it seemed like the sequential fall off at traditional was more than what we have seen historically seasonally. Obviously you always get the service center inventory management on year-end, but I guess when I look at your book-to-bill in the fourth quarter, stripping out Patriot which obviously had a lot of bookings and not a lot of shipments in the fourth quarter, it looks like it was below 1.

So help us just to kind of understand your confidence that you are still seeing demand pickup and that you have seen just a shift in shipments from Q4 to Q1. And then also on that note, the $14 million that you booked at Patriot, how much of that would you expect to ship in the first quarter?

Okay, there is three or four questions there. Let me go back through them, Mike, and tell me if I miss anything. As far as the fourth quarter versus the third quarter, these sequential trends that we are seeing in the base business, as I look at the normal service center stuff that happens every year -- and it's not just service centers -- it was a little more severe this year.

Several of our largest customers cut off a week earlier than they did the last couple years and also did not take any product at the tail end of the year for delivery early in the new year. So it was a more severe year from our standpoint dealing with service centers in particular than it has been in prior years. That was a big player in our numbers.

I am struggling a little bit with your book-to-bill comment because our bookings, our total bookings in the fourth quarter were a record for the Company.

Let me just clarify it. I think it was $72 million-ish of bookings for the fourth quarter. I think you noted you book $14 million or so at -- I think you booked $14 million (multiple speakers)

-- $14 million in the backlog for North Jackson, that wasn't bookings. The prior number for North Jackson was $9.5 million I think at the beginning of the fourth quarter, end of the third quarter.

Okay. So (multiple speakers) the $14 million was the total backlog, okay. That was the classification.

As I am looking at our bookings, the fourth quarter for Universal was a record quarter for bookings. As I look at the first -- I looked at bookings this morning, for example. We are 27 days into the month of January; we are running at a pace that is just under 10% greater than what we averaged each month of the fourth quarter.

So we are seeing sustained level of business coming in. In fact, a stronger level of business coming in.

When you say where is it coming in from, the three major markets that we talk about all the time all are playing a role in there. But the major, major improvements are coming from petrochem, aerospace, and we have seen increases in tool steel bookings so far this year.

Right. And in terms of just the backlog at Patriot, how much of that do you expect to ship first quarter, second quarter?

I am going to say half of it's the first quarter, tail end of the quarter and the rest of it would be early second quarter. And understand on Patriot -- this is not a stand-alone operation. So we are talking about a fair amount of business that is -- Bridgeville -- normally would have been booked at Bridgeville and perhaps forged outside by a third party before. Okay, they are not doing the business directly.

Right, right. Okay, I think that that clarifies it. Thank you.

Okay.

(Operator Instructions) Dan Whalen.

Thank you. Similar question, just trying to better understand the sequential movement on the top line. The scheduling shifts, does that revenue evaporate or is it shifted just in the first quarter or --?Especially with nickel prices escalating again, are we seeing a step up here, or how should we be thinking about that as that flows through into the first quarter?

We have seen no cancellations of orders that I am aware of; I am looking at Chris Zimmer. So we have had no cancellations. Therefore, anything that doesn't get shipped in the fourth quarter is going to roll over into the first quarter.

As far as the nickel dynamic, if you think back to the last conference call we had there were a number of questions and a lot of discussion about how the fourth quarter would play out based upon different trends in nickel. We said back then, if nickel could stabilize or even start to increase, it would be bullish for the fourth quarter.

As you know, looking back now nickel continued to decrease. In fact, November was the low-water mark.

Absolutely.

All right, so that has a depressing effect in terms of buying. People tend to push things out even further, assuming there is going to be even lower prices -- lower total acquisition prices in the future.

Okay. So this is really more of a timing function versus a fundamental issue?

Yes, yes. That nickel thing, just let me finish my thought. That is also turning around, as I said in my prepared comments, where nickel has had a rally here so far this year. It's up pushing towards $10, so you have the inverse of what you saw during the fourth quarter.

Great, great. I know we are not done with January yet, but is there any color you can give in terms of how the backlog is progressing here in January?

Our backlog is going sideways because we are shipping fairly heavy at this point in January. However, I would point to the bookings number just to give you a sense of the activity level out there.

We had a record -- as I was saying, a record quarter in the fourth quarter for bookings. The previous record was the third quarter last year, and currently in the fourth quarter through 27 days we are on a pace to beat those numbers by about 10%. So we have seen a pickup in bookings here the first three-and-a-half weeks of the month.

Excellent. Then you have already made some comments on the petrochem and I know a lot of that is seasonal related, but are we seeing a descent or a fair uptick in that market as well?

On the petrochem market?

Yes.

Petrochem market is very hot.

Okay.

So it's very strong. Everybody does business with different customers in that market space so you get some quarters that get a little lumpy, a little up and down that have to do with individual customers and where they are in their business.

But the fundamental drivers of that business are very strong. The capital is flowing in exploration. It's going into areas that are going to require more and more of the products that we make, so we are very bullish on that business.

Great. One last maintenance or one maintenance, if I may. You mentioned, I think, 36.5% for targeted 2012 tax rate. There are a lot of moving parts and timing. Any -- for first quarter how should we be looking at that?

That would be the rate I would use, Dan.

Evenly throughout the year?

That is right. Unless -- that is the best rate to use.

That is great. Thank you.

(Operator Instructions) Tim Hayes, Davenport & Co.

Good morning. I think you have some targets for gross profit as a percent of value-added sales, what, 30% at USAP, 40% at Dunkirk. Now with North Jackson coming into the fold should we be thinking of those percent targets moving higher? And if so, is there any amount that you envision?

I think you should look for progressive improvements in those margins just due to the capital that we are spending in those direct operations, as well as process improvements we plan to make and a higher value mix going through those plants. I won't attribute that all to North Jackson because we basically transfer product between our plants at a market level, so each plant is earning a profit. But each plant is a profit center, I guess, for lack of a better term.

So you won't see the benefits of North Jackson showing up in the Dunkirk segment. You will see the benefits of what we do to Dunkirk itself showing up in the Dunkirk segment. And you should see steady improvement in those margins as we do our thing with regard to adding higher value products with higher margins. And we make strategic investments in the Dunkirk facility to improve our operations and do our process thing each year.

Okay, very good. Thank you.

Phil Gibbs, KeyBanc Capital Markets.

As we look into 2012, can you give us a sense of the capital expenditures?

At this point, though, our capital projects that we are currently working on that are in flight you should expect about a $30 million capital spend, which is largely the North Jackson operation. We have some other strategic investments that we are looking at, but right now our committed spend rate is about $30 million.

Okay. Doug, I think you mentioned earlier in the call about an income tax receipt. You expect to get about $4 million to $5 million in a cash --

In this current quarter.

-- in the receipt in the first quarter, is that right?

That is right, and those are payments that were made early in 2011 as estimated payments for 2011 prior to North Jackson being acquired.

Okay. Denny, how has the start-up of the VIM gone relative to your expectations?

Any start-up is a wild ride so we have learned a lot, but it was pretty standard start-up in the sense that we put things together. We had cooperation with the vendor. We have a good team of people working on that. We made our first heat and we learned a lot about the equipment.

We tested just about everything and you try and push those things to failures when you are doing these early start-ups. So that is where the punch list of issues came from; we have been working on those for the last few weeks. I think the fact that we are going to start a 16-melt campaign on Monday speaks to our confidence in that facility and the people we have operating it.

I know you guys are generally pretty conservative and the start-up costs were a little bit ahead of what you expected. I think it was a $0.10 drag is what you were looking for. Was that due to the fact that you just were pushing the VIM hard in December?

Well, if you remember way back when we didn't anticipate doing any melting on the VARs or the VIM in the fourth quarter. We expected to do that in 2012, so we did adopt an accelerated strategy. That had some effect.

But the real issue there was we expected some more conversion business, to be candid with you, which would absorb some of those start-up costs and that was slower in coming. Why was it slow in coming? The major reason -- two major reasons.

One is we do not have AS 9100 certification so there is some folks who just flat out, because of their quality systems, can't give us conversion work until we have that approval at North Jackson, which will be early in the second quarter. At least that is our target. Obviously, we have to pass all the audit work along those lines.

The other issue, quite frankly, was the transition between the prior owners and Universal. If you remember, we said in our June announcement we would close in July and we ended up closing in the third week of August. Obviously, people have to run their business and then they had a new cast of characters. Things were delayed so they went in a different direction for their second half of their year.

So all of those customers have now talked to us directly, all of them have been through North Jackson again, all of them want to retest material under Universal ownership which is in process. So that is why we expect that conversion business to increase each quarter as we go through 2012.

Now does that increased conversion business in the first quarter is that what is going to push the North Jackson facility into the black in the first quarter of the year?

It's some of that. The majority of that though is additional business, I would call it -- without confusing you, it's the business that Universal is now able to go after because we have the facility. So it's essentially business that Universal has always been in through the Bridgeville operation, where we can now take third-party forging and shift it over to North Jackson.

The second part would be business that we weren't competitive in because we didn't have a cost position or the cycle times that went up to those sizes. And the third area is products that are going to go from Bridgeville to North Jackson and those smaller sizes go up to Dunkirk.

So I would say that the majority of the reason why we expect to operationally be accretive is those kinds of products. Conversion will help, but that is not the sole reason.

Thanks for all the insight. I really appreciate it.

You are welcome.

I am not showing any other questions in the queue at this time. I would like to turn it back over to Mr. Dennis Oates for closing comments.

Thanks, again, for joining us today. We have ended the new year better than equipped than ever to capitalize on the opportunities in our markets. We are all looking forward to updating you on our progress at the end of the first quarter.

Have a good day. Thanks again.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.