Good morning, and welcome to the Universal Stainless First Quarter 2021 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 instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms. June Filingeri. Ma’am, the floor is yours..

Thank you, Lara. Good morning. This is June Filingeri of Comm-Partners. And I would also like to welcome you to the Universal Stainless conference call and webcast. We are here to discuss the company's first quarter 2021 results reported this morning..

Okay, thanks June. Good morning, everyone. Thanks for joining us today. Consecutive quarterly improvement as we move through 2021. That's what we said on our January call and we're off to a solid start in the first quarter. Sales were up 18% sequentially, including a 27% increase in higher margin premium alloy sales.

Gross bookings jumped 82% over the fourth quarter with minimal cancellations. Order backlog increased 21%, the first increase in over a year. Except for general industrial markets, all end-use markets contributed double-digit positive sales growth. Plan activity levels were 39% above the fourth quarter.

While Q1 results clearly point towards improvement, sales and plan activity levels remain below pre-pandemic Q1 2020 levels by 37% and 38% respectively. Let's unpack our first quarter results. First quarter sales totaled $37 million, an increase of $5.7 million or 18% from the 2020 fourth quarter.

Sales in the first quarter of 2020 were $58.5 million for comparison. First quarter premium alloy sales were $7.6 million or 20% of sales versus $6 million or 19% of sales in the 2020 fourth quarter and $7.7 million or 13% of sales in the year ago quarter.

The 27% sequential increase was due to stronger aerospace demand, especially for defense applications. Plate sales grew by 36% indicating continued strength in industrial and automotive activity despite the chip shortages. Aerospace sales were up 29% as destocking eased, travel rates exceeded expectations and confidence began to return.

Additionally, defense applications continue to generate healthy demand for our products. Another side of recovery was our gross bookings of $44 million, up 82% versus fourth quarter 2020..

Thank you so much, sir. Your first question will come from the line of Phil Gibbs from KeyBanc Capital Markets. Your line is now live. Go ahead..

Hey, good morning, Denny..

How are you doing, Phil?.

Doing well.

How are you?.

Enjoying the snow..

Yes. Beautiful. Question is just on the benefit from higher surcharges, raw material cost, I think you said $800,000 in the first quarter. How much did that persists into the second quarter as you look ahead to those benefits accelerate or level out or go away as nickel has come back. I know things are moving in different directions..

Well, nickel has retreated. Most of the other materials continue to be up. So as you look at the second quarter, that number will be tempered a little bit, probably cut in half as we go through the next couple of months.

Forecasting material commodity cost is always very difficult as you look at the second half I expect that all even out as it normally does..

And you gave us a lot of color on networking capital and inventory.

How do you expect networking capital progresses the year unfolds, particularly as it relates to your inventory levels?.

Well, we’re looking at continued growth in sales each quarter. Production is ramping up. So I suspect you will see higher inventories as we go down each quarter. Having said that, you’ll see improved inventory turns though. So I don't expect inventory to stay flat for the rest of the year, but much improved over prior years in terms of turnover.

As far as receivable goes, they'll follow the trend in sales obviously. I think we're doing a good job on collections. I noticed that our day sales outstanding is coming down.

And if you look at – depending upon how you look at it, if you look at manage working capital as a percentage of sales as we do that percentage will be going down each quarter for the rest of the year..

Okay. That makes sense.

And then on the side of liquidity, I think you mentioned after all the moves you made on the refinancing you're still around, I think where we targeted you around $39 million in liquidity right now, that's largely your availability on your ABL; is that correct?.

Yes, that's correct..

Okay. Okay.

And do you have any major debt maturities in the next couple of years that we have to think about?.

No. We've got the bank agreement; it's pretty straight forward once for the next five years there's no other maturities. I would note that we did pay off the notes associated with the acquisition of North Jackson, which were at $15 million.

We did that last – well two months ago, I guess, at this point; nothing else on the horizon note, it requires a funding..

Our last question on aerospace, Denny that improved as you noted sequentially is destocking, I think we're starting to see that from some others as well.

Where do you think some of the are emerging? Is it kind of a broad based blanket statement or do you think things are leaner in some areas than others? I mean, is there any differentiation between engine or structural's? I don't know, what hits the general tempo or pace right now?.

Let me ask Chris to handle that one.

Chris?.

Yes. So I think what we're expecting and what we're hearing from our customers is the structural side of the business will be the first to rebound, a little bit more of a gradual improvement. The engine side is probably going to be delayed and when it hits just like when it fell off; we expect it to pick-up sharply.

We're doing our best to look for signals of when that's going to happen. We still don't have any clear signals other than an indication that everybody expects the second half of the year to get better. So as Denny mentioned a lot of our demand drivers these days or the supply chain coming in line, inventories coming back in order.

And then you couple that with improving demand first from structural, and then with engines even more towards the tail end of the year, and that's how we're kind of seeing a balance of this year playing out..

And just remind me where your exposures on the structural side.

Is it largely landing gear type – type of applications? Is that what we're thinking off?.

It's really all throughout actuators, landing gear, a number of different structural components, hinges we really show-up throughout the entire plane..

And then on the engine side, Chris, are you guys more skewed to wide body meaning, meaning more of the role of supply chain or more of the GE supply chain because I know some of your newer awards had been on the roll side?.

Yes. I'd say it's a good balance. We talk a lot about roles with the IATA we have within that is wide body driven. But Whitney and Pratt we've also got a lot of participation there. We probably don't make as much fanfare about it, but there's a pretty good split between the two..

Thanks everybody. Appreciate it..

You're welcome..

Thank you, sir. Your next question will come from the line of Bob Sales from LMK Capital Management. Your line is now live. Go ahead, please..

Good morning..

How are you doing Bob?.

Denny, good, yourself..

Go ahead..

Just a clarification on sort of defense within arrow.

What is the level of defense business within total aerospace in the current quarter or so?.

20% to 25% of our sales we would estimate. And I always put a qualifier on that as you know, we sell a lot through service center, so it's not a precise number, but that's our best estimate..

20% to 25% of aerospace sales or total sales?.

Yes, 20%, 25% of aerospace sales..

Of aerospace sales. And my next question was….

And I would say, it's growing faster than commercial, not just because of the underlying demand features, but the number of the new products that we've introduced recently are defense oriented..

Okay.

And then when you break out service center versus OEM, is that – is it safe to say that the OEM shipments are largely the defense business or is still that primary – or can you not really break down the OEM business attributed to one particular segment or sub segment?.

I don't really have that in my head, that's how it breaks down. I mean, some of it is defense, some of it is also power generation. The majority of that, quite frankly, I think is power gen..

Okay. All right. And then you touched on it a little bit, but the new products that you'll introduce this fall. Can you expand a little bit about – I think you alluded to the fact that maybe they're oriented towards defense, but can you expand on that? And also some expectations of the impact on that as we look into 2022..

We're working at the tail end there, so we're going through some final testing and so forth, these are all aerospace alloys, they have commercial and defense applications and our longer-term estimate for each alloy is they'll generate an additional $5 million of sales, as to whether I doubt that'll be – I'm not saying that's all going to hit in 2022, but I think as we get out over the next couple of years is our target, by 2023, we'll be talking about $15 million of incremental business in a reasonably healthy aerospace environment, based upon these new alloys we're working on now..

Okay.

Once you're up – once the process is running, let's say Q3, how long is the qualification process for before you can actually ship to the end customer?.

Are you talking about our capital projects now or approvals?.

Well, I'm assuming that the three new products that you're going to introduce are going to be run through the furnace and induction and crucible that you're installing today..

Not necessarily. We can make the current – the products we're talking about, we can make with our existing footprint. But as we grow, I mean, there is not a direct correlation over time, let me talk about the VAR and make sure I'm being clear here. We've got 11 vacuum arc vacuum arc remelt furnaces, we're adding another one.

This is a state-of-the-art vacuum arc remelt furnace, which have a capability to handle any alloy that we're currently making or anyone we were planning to make over the next five years. So it's important that we have a family of VAR furnace and/or alloys, all VAR furnaces were not the same.

So this one gives us the utility to be able to handle any alloy and support the growth we see in these premium melded products. That's a general statement, it's not directly correlated to the three alloys I'm talking about..

Got you. Okay.

So back to the three alloys, when you say you're introducing these new products in the fall, does that mean at that point, they will have been qualified with customers or is that when the qualification process starts?.

That's when we'll get – that's when we anticipate having approval and those alloys will move into commercialization which means we'll be able to sell them into the supply chains for the respective OEMs. So there'll be a period of time there where we have to do good old fashioned selling.

A good part of that is all of these customers – potential customers are already customers of ours, most of them have already worked with us on business cases, excuse me, and why we should get approved. So I love to say this when Chris Zimmer is in the room, it should be an easy sale..

Okay, thank you. That's all my questions. Congratulations on the nice progress..

Thanks, Bob..

Thank you, sir. I am showing no further questions at this time. I would like to turn the conference back to Mr. Dennis Oates for closing remarks..

Okay. Thank you. Once again, I want to thank everyone for joining us this morning. The enormously challenging 2020, it was great to see the improving momentum in end-market demand during the first quarter. We look forward to updating you on our effort to capture market opportunities and move forward and our growth initiatives in our next call in July.

Hope everyone continues to be well, stay safe and have a great day. Thank you..

Thank you, sir. Thank you so much, presenters. And again, thank you everyone for participating. This concludes today's conference. You may now disconnect. Stay safe and have a lovely day..