Universal Stainless & Alloy Products, Inc.
Q3 2013 Earnings Call Transcript
Published:
- Operator:
- Good morning ladies and gentlemen and welcome to the Universal Stainless Third Quarter conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. If anyone should require assistance during the call, please press star then zero on your touchtone telephone. I would now like to introduce your host for today’s conference, June Filingeri. You may begin.
- June Filingeri:
- Thank you, Mercy. 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 third quarter 2013 results reported this morning. With us from management are Denny Oates, Chairman, President and Chief Executive Officer; Mike Bornak, Vice President of Finance and Chief Financial Officer; Paul McGrath, Vice President of Administration and General Counsel, 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 these formalities out of the way, I would now like to turn the call over to Denny Oates. Denny, we are ready to begin.
- Dennis Oates:
- Thank you, June. Good morning everyone. Thanks for joining us here today. As we reported this morning, net sales for the third quarter of 2013 were $48.5 million, an increase of 13% from the 2013 second quarter on 15% higher volume. Compared to the third quarter 2012, sales and shipments fell 21% and 15% respectively. The sequential improvement in our third quarter sales and volume came from three of our four key markets
- Michael Bornak:
- Thanks Denny. As Denny indicated, our third quarter 2013 net sales were $48.5 million, which is a decrease of approximately $12.9 million or 21% when compared to the third quarter 2012 net sales of $61.4 million. This decrease in net sales primarily corresponds to a decrease in our overall shipments as we shipped 9.8 million tons in the third quarter of 2013 compared to 11.6 million tons in the third quarter of 2012, a decrease of approximately 15%. Sequentially, our net sales increased by $5.6 million or 13% from the second quarter of 2013 primarily as a result of a 15% increase in tons shipped. On a year-to-date basis, our net sales were $140.5 million, down approximately 31% from the same prior period primarily due to the business climate we are currently operating in. Our gross margin in the third quarter of 2013 was $2.4 million or 5% of sales compared to gross margin of $9.3 million or 15.2% of sales in the third quarter of 2012. The decrease from the prior period is primarily due to the higher shipment volumes in the third quarter of 2012 and lower operating activity in the most recent period. Sequentially, our gross margin as a percentage of sales decreased from 12.4% in the second quarter of 2013 to 5% in the third quarter of 2013. Our third quarter 2013 margins were primarily impacted by three factors
- Dennis Oates:
- Okay, thanks Mike. In summary then, we saw sequential improvement in our sales and shipments to three of four key end markets in the third quarter despite continued challenging industry conditions. Bookings in July and August indicated little improvement in market conditions and supported our plans to take additional steps to reduce spending, lower work in process inventories, and generate cash. A short-term shift towards lower margin semi-finished product sales, the mismatch between surcharges and raw material costs, and reduced manufacturing levels took a substantial toll on our gross margin in the third quarter. The third quarter was also a period of tangible progress in the execution of our long-term plan and our strategy to move to technologically advanced alloys. That progress included the lengthy and costly process of achieving industry accreditations. We also earned important customer approvals in the quarter and we were pleased to announce our new long-term agreement with Haynes which will leverage our vacuum induction melting capacity and forge capability in North Jackson. We kept our North Jackson workforce intact in the third quarter to continue to pursue customer approvals, even as we flexed down production where we could match industry conditions. So where does that leave us at this point? In September, our bookings increased 5% over the trailing three months. In October, our bookings were 36% higher than the trailing three months and 23% higher than October of 2012. Many of these new orders have 2014 shipping dates; therefore, we see continuing challenges in the fourth quarter with expanded customer closures for the holidays and aggressive year-end inventory management. However, our current bookings clearly reflect early signals of improvement as we move into 2014. A potential headwind for the positive customer and market trends in 2014 is the recent announcement by a customer to begin in-sourcing requirements currently provided by Universal. The exact impact and timing are not yet known. At this point, we will keep you posted and we are working cooperatively with our customer on a smooth transition for both companies. In the meantime, we remain focused on operational improvements, customer approvals, and preparing for a stronger 2014. We’re now ready to take your questions.
- Operator:
- Thank you. [Operator instructions] Our first question is from Michael Gallo from CL King. Your line is open.
- Michael Gallo:
- Hi, good morning. Denny, a couple questions. You mentioned some business you’re doing that’s going to be in-sourced, it looks like, by a customer. Can you give us some framing around how much revenue there is right now, what the timing of a transition might be? Would this be something that would start to come out of the revenue in the first quarter of next year?
- Dennis Oates:
- I don’t have a great deal of clarity on that. We saw the announcement – this is basically Carpenter’s Talley operations that was announced last Tuesday, so it’s targeted for 2014.
- Michael Gallo:
- And about how much revenue are you still doing with Talley at this point?
- Dennis Oates:
- If you go back historically, it’s in the range of $20 million a year.
- Michael Gallo:
- Okay. And you expect that all that will be in-sourced, or there will be a period where it will transition?
- Dennis Oates:
- I think both companies need to work together to figure out how that’s going to work at this point in time.
- Michael Gallo:
- Okay, so still kind of to be determined.
- Dennis Oates:
- Yes. These are semi-finished billet sales that typically are in a lower quartile of our profit profile.
- Michael Gallo:
- All right, okay. Second question I have, just on the fourth quarter. Would you expect sales to be down sequentially, given the holiday shut-downs and things, or would you expect with a little bit better order entry that you’d see some improvement? What should we look for in the fourth quarter sales?
- Dennis Oates:
- I think sales will be somewhat below where we were in the third quarter. The wild card in that, you already identified, and that is how severe will the shut-downs in December be on the part of our customers as they manage inventory. On the one hand from a positive standpoint, there are several instances given our short lead times where we’re getting orders that we can still deliver in the fourth quarter. We’re not out of the 2013 fourth quarter shipping window. On the other hand, there’s increasing signals that you’ll see an expanded effort to basically shut down receipts early in December on the part of several of our customers. So as we look at the fourth quarter, we’re not planning on sales going up. We see sales coming down relative to the third quarter, but there is still an opportunity to make that delta a lot smaller.
- Michael Gallo:
- Right. And in terms of just the gross margins, obviously a lot of reasons – Mike highlighted some difficulties in the quarter. But some of those reasons, I guess look like they’re obviously going to recur in the fourth quarter, particularly lower volumes and obviously maintaining the work force at Patriot. So what kind of gross margin expectations should we have, that it will be somewhat better than the third quarter but maybe not as good as the second quarter?
- Dennis Oates:
- Well, let’s take it one piece at a time. As far as the mix issue goes with heavier semi-finished, that should be less significant in the fourth quarter than in the third quarter. As far as the mismatch of surcharges, if you look at nickel prices, nickel prices have come down but tended to stabilize over the last several months, so you’ll see less of a delta there. From an operating standpoint, we’ll be operating at or better than what we did in the third quarter, so our expectation is you should see—we should be at or slightly better than the gross margins you saw in the third quarter, but not back to historical levels.
- Michael Gallo:
- So kind of a high single-digit number? Would that be a reasonable expectation, Mike?
- Dennis Oates:
- Yes.
- Michael Bornak:
- Yes.
- Michael Gallo:
- Okay, and then final question for Mike – I mean, obviously the trailing 12-month EBITDA number’s come down quite a bit. You mentioned amending the credit facility. Are there any add-backs that you could call out? I guess looking at the numbers on the surface, it would look like you would have been above the 3.75 coming out of the third quarter, so any framing around what the credit facility EBITDA calculation is and whether you think you can liquidate more inventory in the fourth quarter in order to bring the consolidated leverage down? Thank you.
- Michael Bornak:
- Yes, the trailing 12-month EBITDA was right around $19 million. We fell a little short on the leverage ratio at the end of Q4, and then we approached our banker given the weaker conditions that we see in Q4. What this basically is going to do is provide us a little bit more flexibility on the timing of certain covenants while allowing us better borrowing capacity to meet working capital requirements as business conditions improve. So that’s the two things you should see in the amendment to the new agreement.
- Michael Gallo:
- Okay, so it sounds like it’s basically done at this point; it’s just a matter of hammering out the final details?
- Michael Bornak:
- Yes, we’re hoping to finalize it before we file our 10-Q, either later this week or early next week.
- Michael Gallo:
- Okay. And in terms of inventory, can you bring that down further? Should we expect that to come down further in the fourth quarter?
- Dennis Oates:
- I don’t think you’re going to see a material decrease in inventory in the fourth quarter, given the pick-up in our bookings that we’ve seen over the last month and a half, two months, and we’re beginning to get vacuum induction melting orders for 2014 as reported on the last call, Mike.
- Michael Gallo:
- Okay, so we should expect that to kind of flatten out.
- Dennis Oates:
- Yes.
- Michael Gallo:
- All right, okay. Thanks very much.
- Dennis Oates:
- You’re welcome.
- Operator:
- As a reminder, if you have a question at this time, please press the star then the number one key on your touchtone telephone. Thank you. I’m not showing any further questions in the queue. I will now like to turn the call back to Dennis Oates for closing remarks.
- Dennis Oates:
- Okay, well thank you very much for joining us this morning. Obviously it was a very challenging third quarter. As we look at the business, we do see some improving trends from a booking standpoint. As we work through the fourth quarter, we’ll be working on further customer approvals, getting ourselves ready for a better 2014. Have a good day.
- Operator:
- Ladies and gentlemen, this does conclude today’s conference. You may now disconnect. Thank you.
Other Universal Stainless & Alloy Products, Inc. earnings call transcripts:
- Q1 (2024) USAP earnings call transcript
- Q4 (2023) USAP earnings call transcript
- Q3 (2023) USAP earnings call transcript
- Q2 (2023) USAP earnings call transcript
- Q1 (2023) USAP earnings call transcript
- Q4 (2022) USAP earnings call transcript
- Q3 (2022) USAP earnings call transcript
- Q2 (2022) USAP earnings call transcript
- Q1 (2022) USAP earnings call transcript
- Q4 (2021) USAP earnings call transcript