Universal Stainless & Alloy Products, Inc. (NASDAQ:USAP) Q4 2023 Earnings Call Transcript

Universal Stainless & Alloy Products, Inc. (NASDAQ:USAP) Q4 2023 Earnings Call Transcript January 24, 2024

Universal Stainless & Alloy Products, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by and welcome to the Universal Stainless & Alloy Products Fourth Quarter 2023 Business Update Conference Call and Webcast. Participants will remain in a listen-only mode for the duration of this call. There will not be a question-and-session this morning. As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, June Filingeri. Please go ahead.

June Filingeri: Thank you. Good morning. This is June Filingeri of Comm-Partners. And I also would like to welcome you to the Universal Stainless conference call and webcast. As reported this morning, the company will provide a business update on the fourth quarter of 2023 on today’s call with the report of final results expected in March. As a result, the company will defer its question-and-answer session until then. Our presenter today will be Christopher Zimmer, Universal’s President and Chief Executive Officer. Please note that the financial results reported today are preliminary estimates based on information available to the company as of today and are subject to further changes upon completion of the company’s standard year end closing procedures and financial audit.

Please also note that the company does not intend to update the financial information provided today before its final report expected in March, even if it identifies items that require the company to make adjustments to the preliminary information provided today. Additionally, 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. I would now like to turn the call over to Chris Zimmer. Chris, we are ready to begin.

Christopher Zimmer: Thanks, June. Good morning, everyone. Thanks for joining us today. Normally, we would report fourth quarter and full year results today, however, due to the late start of our consolidated financial audit as our new auditors were engaged on December 18, we now plan to give a full report of our financial results in March. That’s consistent with our practice of announcing quarterly and full year results that have been reviewed by our auditors. In the meantime, we thought it would be useful to provide a business update and commentary on our end markets, as well as some limited preliminary financial metrics. We look forward to providing our final fourth quarter and full year 2023 results in March. Let me highlight a few financial metrics.

Fourth quarter sales are expected to range from $78 million to $80 million, which would represent a new record high. That compares with $71 million in the 2023 third quarter, and $56 million in the fourth quarter of 2022. As a result, we expect to report full year 2023 sales of $284 million to $286 million compared to $202 million in 2022. Premium alloy sales in the fourth quarter are expected to range from a record $20 million to $21 million versus $16.5 million in the third quarter and $13.5 million in the fourth quarter a year ago. That would bring total premium alloy sales for 2023 to a record $67 million to $68 million, substantially ahead of $39 million in 2022. Backlog at the end of 2023 remains very healthy at $318 million. Premium alloys represent 36% of our current backlog.

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Q&A Session

I’m pleased to report that we reduced total debt by another $4 million in the fourth quarter to $85.6 million, which brought our full year 2023 debt reduction to nearly $13 million. Capital spending totaled $3.3 million in the fourth quarter and $13 million for the full year. The main focus of our capital spend in 2023 was for the two new VAR furnaces at our North Jackson facility. This project increases our VAR capacity by 20% to support additional record premium alloy sales. Plus, the new VARs have better technology and better controls that will be mainly used for premium alloy production. The new VARs will be qualified and released into production next month. Before turning to our end markets, let me provide an update on commodities. Most commodity prices continued to decline in the fourth quarter.

For example, the price of nickel slid further, falling to $7.43 a pound, which is 17% lower than the prior quarter, and down 43% from the end of 2022. Moly was also down 19% sequentially and 25% year-over-year. In fact, in comparison to the fourth quarter of 2022, almost all of the commodities we tracked were down more than 20%. We continue to see benefits each quarter as already announced, base price increases are realized, but these are being partially offset by negative surcharge misalignment in the fourth quarter, which we expect to moderate as we go through the first quarter of 2024. Let’s turn to end markets, beginning with aerospace, our largest market. Aerospace sales are expected to range from $61 million to $62 million for the fourth quarter of 2023.

That would exceed the record $54 million in the third quarter of 2023 and $40 million in the prior year fourth quarter. As a result, full year 2023 aerospace sales are expected to range from $215 million to $216 million, compared to $138 million in 2022. Aerospace demand was robust in the fourth quarter and that continues today. The drivers of that demand remain the same. Recovery in air traffic worldwide, new orders from the airlines for new more fuel efficient planes, order books at Airbus and Boeing currently approximating nine years worth of production. Here are some recent developments. Airbus reported that it beat its delivery forecast in 2023, which totaled 735 aircraft and reported a record 2,319 gross orders for 2023, more than double 2022.

The company reiterated that it expects to increase its build rate to 75 airplanes per month by 2016. Boeing reported that its fourth quarter deliveries came in at the high side of their forecast and new orders were the highest since 2014. Boeing had good news in its wide-body airplanes, with deliveries increasing to 47 in the fourth quarter and new orders for the 787 totaling 78. Boeing continues to lead the wide-body market with 58% market share. At the end of the year, Boeing reported that its gross total backlog stood at 6,216 airplanes. IATA reported that November 2023 air travel reached 2019 levels, including 26% higher international travel versus November of 2022. They reported that total air travel was up 30% from 2022. They also reported that U.S. domestic travel reached a new high, expanding 9% over November of 2019 on strong Thanksgiving holiday demand.

In a separate report, IATA said that global cargo markets had their strongest year-on-year growth in roughly two years in November, and the fourth consecutive month of growth in demand. In the defense market, global military spending is expected to increase in 2024 due to the growing conflict in the Middle East, the continuing war in Ukraine and ongoing tensions over Taiwan, even with the current congressional budgetary challenges in the U.S. As I said last time, the opportunities for Universal Stainless in commercial aerospace and defense are substantial and increasing. We continue to expand our portfolio, especially with grades used in the engine side of the airplane, and win more business from the primes. I also said that overall, the supply chain remains in a pull mode and strong demand is expected to continue well into 2024 and beyond.

That has not changed. Our trajectory remains firmly positive. In the heavy equipment market, we expect fourth quarter sales in the range of $6 million to $6.5 million compared with $8.9 million in the fourth quarter of 2023 and $5.6 million in the fourth quarter of 2022. Full year sales are expected to range from $30 million to $31 million compared with 2022 sales of $27 million. During our last call, we said that customers were showing signs of caution and we expected some softening in our heavy equipment sales in the fourth quarter, which was the case. That cautious approach to inventory management has continued into the first quarter. However, we are seeing signs of new order entry rates that support an increase in shipments in the second quarter and expect to see sequential improvements in sales as the year progresses.

General industrial market sales are expected to range from $5 million to $5.5 million in the fourth quarter, compared with $3.3 million in the third quarter of 2023 and $3.6 million in the fourth quarter of 2022. Full year 2023 sales are expected to approximate $15 million to $15.5 million versus $11 million in the prior year. Our general industrial sales are mainly for semiconductor manufacturing. In their latest report, the Semiconductor Industry Association reported that global semiconductor sales increased year-to-year in November for the first time since August of 2022. SIA sees this as an indication that the global chip market is continuing to gain strength and they project double-digit growth in 2024. We remain optimistic about 2024, especially in the second half of the year.

Turning to our energy markets. In the oil and gas market, we expect fourth quarter sales to range from $3 million to $3.5 million versus $2.6 million in the third quarter of 2023 and $5.3 million in the fourth quarter of 2022. Full year sales are expected to range from $13 million to $14 million, compared with sales of $18 million in 2022. Our sales to the oil and gas market became a smaller portion of our total sales over the past year, reflecting our decision to temporarily shift more of our production to higher-margin aerospace products. We plan to continue that strategy going into 2024. Power generation market sales are expected to approximate $1 million in the fourth quarter, compared with $700,000 in the third quarter, and $1 million in the fourth quarter of 2022.

Full year 2023 sales are expected to approximate $4 million versus $6 million in 2022. As with oil and gas, we have temporarily shifted finishing capacity away from the power gen market to aerospace applications. As we continue to ramp our production levels, we remain well positioned to expand our sales to the energy markets in the future. In summary, we expect to report that we achieved record top line performance for the fourth quarter and full year of 2023 driven by the robust aerospace market, which also drove our record premium alloy sales. We continue to generate positive cash flow to pay down debt. Our capital project in North Jackson expands our VAR capacity with new furnaces that have better technology and better controls for premium production.

Continued strong aerospace demand, combined with our expanding product capabilities and portfolio will drive our progress in 2024 and beyond. This concludes my report. Thank you for joining us this morning and we look forward to returning in March to discuss our final fourth quarter and full year 2023 results. Have a good day.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.

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