Good morning, ladies and gentlemen, and welcome to the Universal Stainless Fourth Quarter 2020 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instruction will follow at that time. As a reminder this conference is being recorded.

Now, it's my pleasure to turn the conference over to your speaker, June Filingeri. Please go ahead. .

Thank you. Good morning. This is June Filingeri of Comm-Partners. I also would like to welcome you to the Universal Stainless conference call and webcast. We are here to discuss the company's fourth quarter 2020 results reported this morning..

Thanks June. Good morning, everyone. Thanks for joining us today. On our call last October, we said the fourth quarter will be challenging and characterized by three things; debt reduction, modest growth in bookings; and financial performance and operating levels closely parallelling the third quarter. Let's take a look at what actually happened.

Debt was reduced $10.2 million during the quarter, which brings our second half 2020 debt reduction to $22 million, $2 million greater than our estimated midyear. We are in good shape from a liquidity standpoint to meet the gradual improvement in business we anticipate as we move through 2021.

Gross bookings were $24 million, up $3.3 million or 16% from the third quarter. Order cancellations fell to $1 million, compared to $10.5 million in the second quarter and $2.3 million in the third quarter. Our bookings reflect continuing destocking in aerospace and oil and gas markets.

Our plate market has returned to pre-pandemic levels, healthy semiconductor activity and the best quarterly bookings of premium melted products of the year. The outlook for recovery in aerospace in the second half of 2021 remains intact and there is increasing optimism for oil and gas markets as well.

Our backlog stood at $48 million at December 31st, a $7 million or 13% reduction sequentially and $71 million and 60% below December of 2019. COVID driven turmoil in the aerospace and oil and gas markets account for the decline. Let's move on to the fourth quarter results.

Sales of $31.3 million were down $6 million or 16.3% from the third quarter, and 43% below the fourth quarter of 2019.

Our sales were adversely impacted by $2 million of sales to the Far East that did not reach the destination in time for Q4 revenue recognition, plus normal customer actions to delay shipments as part of the year-end inventory management. Delays also pulled down our fourth quarter premium alloy sales by 35% sequentially..

Great. Thanks Denny and good morning everyone. Let's get started with the income statement. As Denny discussed fourth quarter 2020 sales of $31.3 million were down 16.3% or $6.1 million from the 2020 third quarter and down 43.2% compared with the 2019 fourth quarter. Sequential growth was achieved in two end markets in the fourth quarter.

Heavy equipment sales totaled $6 million and were up from third quarter levels by $1.4 million or 29.5%. General industrial sales in the fourth quarter totaled $4.4 million, up by $1.6 million from the third quarter an increase of 55%. Our aerospace sales were lower than third quarter 2020 by $7.9 million or 31.5%.

Our aerospace sales approximated 55% of our fourth quarter sales. Sales to the oil and gas and power generation markets also declined from the third quarter 2020. Fourth quarter gross margin was a loss of $5.1 million compared to a loss of $4.4 million in the third quarter 2020 and gross margin of $5.9 million in the 2019 fourth quarter.

Several items affected gross margin. Our Q4 2020 gross margin was unfavorably impacted by $300,000 from the sale of excess scrap, which generated $700,000 of cash receipts. Our Q4 gross margin was also unfavorably impacted by a $3.8 million direct charge related to fixed cost absorption.

This charge reflects the amount of fixed overhead costs charged directly to cost of goods sold versus capitalizing into inventory due to continued reduced operating levels in the fourth quarter. This charge was expected and is below the prior quarter's direct charge of $4.3 million.

As adjusted for certain items our fourth quarter gross profit improved over Q3 levels despite lower sales. As Denny discussed, we continue to diligently work to reduce our costs in order to better align our cost structure to the lower volumes we are currently experiencing.

While we anticipate improved operating levels throughout 2021, we do estimate these fixed cost absorption charges will continue into the first quarter of 2021. Gross margin as adjusted for the items noted was a loss of $1 million.

On the SG&A front, our cost containment activities continued in the fourth quarter with selling, general and administrative costs of $4.2 million or 13.4% of sales flat compared with 2020 third quarter and down $1 million compared to the 2019 fourth quarter.

SG&A expense in the second half of 2020 totaled $8.4 million down $3 million or 26% from our first half 2020 SG&A expense. Other income included $740,000 associated with the receipt of insurance proceeds. Within the fourth quarter our income tax benefit was $1.9 million. Net loss in the fourth quarter was $7.3 million or $0.83 per diluted share.

Fourth quarter net loss as adjusted for the gross margin related charges and the income on insurance proceeds totaled a loss of $4.6 million or $0.52 per share. Third quarter 2020 net loss totaled $7 million or $0.79 per diluted share and 2019 fourth quarter net income totaled $200,000 or $0.02 per diluted share.

Our fourth quarter EBITDA totaled a loss of $3.9 million. Q4 EBITDA as adjusted for non-cash equity compensation expense gross margin charges and our insurance gain was a loss of $171,000. The EBITDA and adjusted EBITDA calculations are provided in the tables to the press release.

Fourth quarter cash flow provided from operations was $11.2 million compared to our third quarter cash flow provided from operations of $13 million and fourth quarter 2019 cash flow provided from operations of $4.7 million. Full year 2020 cash flow from operations totaled $23.8 million.

Regarding the balance sheet managed working capital totaled $114.1 million and decreased by $19.2 million or 14.4% compared with the third quarter of 2020. The inventory was the main driver to the decrease and declined by $9.6 million. Accounts receivable also decreased by $8.4 million in the fourth quarter.

In total, managed working capital declined $27.1 million or 19.2% in 2020 compared to year end 2019 levels. Looking at working capital change in the second half of 2020, we experienced a more pronounced decrease with a decline of $36.9 million or 24.4%.

Decreases in inventory levels drove our second half decline with inventory decreasing $23.7 million or 17.5%. Fourth quarter 2020 backlog totaled $48 million and is down $6.9 million or 12.5% from the 2020 third quarter. Year-over-year fourth quarter 2020 backlog decreased $71.1 million or 59.7% compared to the 2019 fourth quarter.

Capital expenditures for the fourth quarter totaled $700,000 while third quarter 2020 CapEx totaled $1.3 million and fourth quarter 2019 capital expenditures totaled $4 million. Capital expenditures for the full year 2020 totaled $9.2 million versus $17.4 million in 2019.

Capital expenditures are expected to approximate $11 million in 2021, which continues to be at a level well below our depreciation expense. Lastly as Denny noted, our strategic capital expenditures at our North Jackson facility related to the vacuum arc remelt furnace and 18-ton crucible for our vacuum arc melt operations continue.

These investments are critical to support our growth in premium melted products and to reduce operating costs significantly. Our total debt at December 31, 2020 was $50.2 million a decrease of $10.4 million from the prior quarter. This reduction is consistent with our focus on working capital and debt reduction.

Our debt declined $22.3 million in the second half of 2020 and was down $14.2 million in 2020 from year end 2019 level.

The company's debt is primarily comprised of our revolving credit facility and term loan which collectively totaled $25.3 million as of December 31, 2020 and our notes which were issued in connection with the acquisition of our North Jackson facility in 2011. These notes totaled $15 million.

We continue to include these $15 million in current debt as these notes are due and payable in the 2021 first quarter. We intend to pay these notes off in the first quarter of 2021. In addition the $10 million term note related to the Paycheck Protection Program is included in our long-term debt.

In the third quarter 2020, the company applied for full loan forgiveness under the Paycheck Protection Program and the PPP loan forgiveness process continues. As of December 31, 2020, we maintained revolver borrowing availability of $43.8 million.

Our liquidity position will provide us the ability to meet the increase in business levels as we move through 2021. This concludes my update on the financials and Denny I'll hand the call back to you..

Thanks Chris. Let me summarize. The fourth quarter was every bit as challenging as expected. Destocking continued in aerospace and oil and gas markets. Heavy equipment sales benefited from a strong recovery in automotive and general industrial markets hit near record levels due mainly to semiconductor shortages.

Our planned cash flow was strong reducing total debt by another $10-plus million in the quarter on a 14% decrease in managed working capital which included a near $10 million reduction in inventory. Incoming orders increased modestly by $3.3 million or 16% and cancellations fell below $1 million as predicted.

With three booking days remaining, January bookings are running 30% ahead of the fourth quarter's average month. Order backlog before surcharges of $48 million slipped 13% sequentially. Lower sales and activity levels negatively impacted our fourth quarter and included a $3.8 million fixed cost absorption charge and a $300,000 loss on scrap sales.

While plant operating levels remained very low we made solid progress improving productivity at key facilities in melting and hot working which better positions Universal for the market recovery we see taking hold during 2021.

We're excited about earning approval on three new products in the next six months and beginning commercial sales in the fall of this year. We are proceeding with our strategic investment in our premium alloy capabilities with the addition of a vacuum arc re-melt furnace and an 18-ton crucible for vacuum induction melting operations.

Overall, we see consecutive quarterly improvements in 2021 with momentum building in the second half of the year. In closing, I want to once again express my deep gratitude to our entire team. We would not have been able to navigate through this very difficult year without their commitment and relentless effort.

Let me add my thanks to our customers, our Board, our shareholders, and all of our stakeholders for their continued support. That concludes our formal remarks. Operator, we're ready to take questions..

Thank you. Your first response is from Tyler Kenyon with Cowen. Please go ahead..

Hey Denny, hey Chris..

Good morning Tyler.

How are you doing?.

Hey Tyler..

Good morning. Good, good.

How about yourself?.

Great..

Good. So, it sounds like destocking in aerospace is expected to perhaps conclude maybe more broadly speaking in the first quarter here just based on your mention of conversations with your top 20 aerospace customers.

I wanted to ask if there was any distinction to be made between what you may be hearing from maybe some of those customers who are more geared to the engine or structural side and maybe the same on the MRO versus OE side.

I know sometimes it's very difficult for you to tell based on where you sit in the supply chain, but any additional color there would be appreciated. .

Let me turn that question over to Chris Zimmer who was the one who was actually contacting our customers along with me..

Hi Chris..

Hey good morning. Well, let me take a crack at answering your question this way. The majority of our sales that flow through distribution tend to be oriented towards commercial structural components. And that's the area that we're starting to see the destocking begin to reach the end.

Depending upon the program we think that this will stretch through the first and second quarter. So, our upside is more on the structural side of things commercially oriented. I think engines have a little bit of a longer road to go. A lot of that product flows through forgers and the demand signals are still not very fantastic there.

They've got some inventories to work through as well too. So, we expect that the structural side is what's going to begin to give us an uptick in activity in the first part of the year and then you add on the engine side to the back half of the year is our current view of things..

Great. Thanks for that. Just on some of the new premium alloy products that you intend on launching by the end of the year.

Any cannibalization or displacement of existing business and how big of an opportunity could that be?.

There's no cannibalization of any existing business. And most of these alloys we would expect within 18 to 24 months to be running in the range of $5 million a year in incremental sales..

Got it. And then just lastly maybe Denny just your thoughts on the revenue trajectory moving into the first quarter. I would imagine if fourth quarter is the trough a bit of an uptick.

some of that could just be the $2 million of sales into the Far East that didn't make it before quarter end and maybe the absence of some typical year-end inventory reduction.

But maybe if you could just talk about, maybe, some of the drivers of the sequential uplift into the first quarter and then how you're thinking about gross margins as well?.

As we look at the year 2021, we see improvement in each quarter, with growing momentum. So as you look at the first quarter, we're looking at high single-digit increases in sales on the top line, compared to the fourth quarter. I would point you towards and what's driving that.

I would point you towards the continued growth in our plate product line, which already picked up in the fourth quarter. But as you picked up on our increased bookings that's going to carry through into the first quarter and plate has actually been continue to be strong, so is semiconductor.

At the same time, we're starting to see things -- to me it's a transitional quarter, the first quarter, in terms of some of the structural commercial applications that Chris was alluding to. As we go through into the second, third and fourth quarter, you see improvement as aerospace and some of the oil and gas products kick in, in the second quarter.

And then as the engine side starts to pick up in the second half and continued improvement in the commercial side, we see quarter-to-quarter improvements by a larger percentage later in the year. As far as gross margin goes, we are not planning any plant shutdowns in the first quarter.

We still run a -- by historical standards, we're going to run at, what I would characterize as, a low activity level, but at a much stronger activity level than the third and fourth quarters.

So as Chris Scanlon mentioned, I would expect we'd still have some fixed cost -- fixed expenses due to absorption, but they will be smaller in the first quarter and get progressively smaller and eliminated as we go through the year and activity levels continue to climb..

Appreciate it. Thanks. I’ll turn it over..

Thanks, Tyler..

Your next response is from Phil Gibbs with KeyBanc Capital Markets. Please go ahead..

Hi, Denny. Good morning..

Hi, Phil..

You mentioned that the bookings so far -- I mean, I know, it's early in the year, but the bookings coming back, up 30% versus average fourth quarter levels.

Where is that the most pronounced? Is it most pronounced in auto and in semi, as best you could tell? Or is there a little bit of a pickup in structural, as Chris was talking about?.

It's mostly plate and reroll billet. So what you're seeing in the first right now in bookings would be a continuation of plate, continuation of the semiconductor, gun barrel business, they will be the positives.

As far as the structural commercial aerospace-type product that Chris was talking about, there's some orders coming in on that but I would say that we're still in the early parts of this quarter destocking.

And as we said in the channel checks we've made, our customers, the majority of our customers tell us they'll be basically done that process by the end of the quarter..

Okay.

And then, on the side of inventory, you brought it down decently in the fourth quarter, are you expecting to bring down your own inventories anymore, as you look out into 2021? Is there more to go? Or have you largely got to where you wanted to get there?.

As I look at inventory for the first quarter versus the fourth quarter, I would expect to be flat in March. So --.

Okay..

I don't want anybody expecting a continuation of a $9 million, $10 million, $11 million free cash flow. If you look at our cash flow, we expect to see somewhat better top line. Some improvement from a gross profit standpoint, as we discussed.

Inventory, our goal is to maintain that flat, but we will be spending a little more capital dollars in the first quarter. We will be taking delivery of that VAR furnace that has reached the U.S. and will be delivered here at the end, actually, in next week, I guess.

Our absorption number, we'll still have a negative absorption number, will not be as big as the third quarter and fourth quarter..

Okay.

So something along the lines of half of what you had or something could be a decent run rate and then trickling down as the year goes on?.

That's a fair estimate..

Okay. I think that takes care of everything I got. Appreciate it. Go Browns..

Thank you. Your next response is from Bob Sales of LMK Capital Management. Please go ahead..

Good morning, Bob..

Good morning, good morning. A couple of questions.

With the arc remelt investment that you're making, is that required because you are expecting that you don't have capacity with your current premium remelt furnaces? Or is it because there's a different formulation for the new products that you're planning to introduce in the second half of the year?.

We have 11 vacuum-arc remelt furnaces in the company. So, at today's level, we've got plenty of capacity. VAR furnaces are different. Within our group of 11 we've got some, what I would call, modern VAR furnaces that have the capability to melt all of our alloys we currently produce, as well as the new ones we plan to produce.

So the purpose for buying this vacuum-arc remelt furnace is, as you look at the growth we expect in our premium melted products, we need another furnace that has the capability to melt all of our alloys including the new ones..

Okay.

And did you say, in your response to an earlier question that you expect the new products that you're introducing to generate $5 million incremental sales per year each product?.

That's our target. That's how we pursue these alloys..

Got you. Okay. And then, would you -- I understand, if you don't want to for competitive reasons. But in your -- you called out the semiconductor revenue. Can you highlight a little bit more on what specifically is allowing you to have success? And if you don't feel comfortable from a competitive standpoint, we can talk about it off-line..

Success in terms of what do you mean selling into the semiconductor market?.

What is the end application for the semi market?.

This is material that's going into the equipment used basically to make chips. So, as that industry is expanding, there is a shortage of chips. They need newer equipment that meets up with the new technology.

With the new manufacturing techniques being used, they increasingly need more sophisticated materials going into that equipment, which is where we come into play in the marketplace. So over time....

So it is cyclical?.

Yes. Over time, it's a very cyclical business. We're in the beginning of an uptick there. So people are investing in new equipment to expand the production in terms of volume and more modern chips, which you know they are getting smaller and smaller. And to do that manage the gases in the machine and so forth they need more sophisticated metals..

Got you. Okay. And then, on the oil and gas side, when you look out over 2021 on -- maybe first of all, what is the breakdown between oil -- upstream oil production and then in turbines? That break down first as much as you can or generally.

And then, what is your expectation for oil and gas as you look over 2021?.

All our turbine business would be in what we categorize as power generation. Oil and -- what we call oil and gas is virtually all exploration for oil and gas. So, they're not combined there. As far as the outlook for oil and gas exploration, candidly, I've been surprised at the upbeat tone that I hear from the majors that I mentioned.

If you listen to Baker Hughes and Schlumberger and Halliburton and what they're saying in their conference calls, they did put in a surprisingly good fourth quarter, financially speaking. And they were very upbeat about the things recovering in the second half of 2021.

As we talk to our customers, they're equally optimistic about the second half of the year. The one caveat I put in my comments, so I go with what our customers are telling us quite frankly. And I know that the inventory levels of our products have been worked down fairly significantly over the last year in that supply chain.

At the same time, I hear the news like you do with the new administration and some of their new policies. So, I think there's some question marks about that upbeat outlook for the second half of the year..

Okay.

And then perhaps, I was confused, when you talked about turbines for power gen, is this -- is that doesn't fall in oil and gas? Is that under general industrial?.

No, it's under power generation. We've got a separate category called power gen. That's virtually all turbines business..

Got you.

And can you talk about that -- your perspective on that for 2021?.

Most of our metal is going into maintenance refurb-type applications in the existing population of gas turbine. And right now, demand has been down due to the pandemic. So the maintenance business has been down. And that's why you see the trend you see in our power gen market numbers.

As the economies start to come back and demand for energy continues to pick up through gas turbines, we would expect to see that improve. As oil and gas comes back in the second half of the year, the oil and gas industry on the exploration side is a big user of small turbines as well. We would expect that to continue to increase.

What we've been waiting for as a company and I think as an industry is the recovery in the new turbine business. It's been a long time since we had an active market for new turbines. And I just pointed out the GE did announce a decent quarter and that they've booked 45 to 50 new turbines for delivery in 2021.

So, I think as an industry, we've been waiting for the rebuilding cycle if you will in the turbine market and maybe, we're seeing the early signs of that here in 2021..

Okay. Thank you..

You are welcome..

I am showing no further questions at this time. I would like to turn the conference back over to Dennis Oates..

Thank you, operator. Once again, I want to thank everyone for joining us this morning. We remain very grateful for your support over the past year in particular. We look forward to updating you on our efforts on our next call in April. We hope everyone continues to be well, stay safe and have a great day. Thank you..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect..