Yahoo Finance Universal Stainless & Alloy Products, Inc. (NASDAQ:USAP) Q1 2024 Earnings Call Transcript
Universal Stainless & Alloy Products, Inc. (NASDAQ:USAP) Q1 2024 Earnings Call Transcript May 1, 2024
Universal Stainless & Alloy Products, Inc. beats earnings expectations. Reported EPS is $0.43, expectations were $0.32. USAP isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Universal Stainless & Alloy Products Inc. First Quarter 2024 Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, June Filingeri. Please go ahead.
June Filingeri: Thank you, Brittany. 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. We are here to discuss the company's first quarter 2024 results reported this morning. With us from management are Chris Zimmer, President and Chief Executive Officer; John Arminas, Vice President and General Counsel; and Steven DiTommaso, Vice President and Chief Financial Officer. Before I turn the call over to management, let me quickly review procedures. After management has made formal remarks, we will take your questions. Brittany 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 complete, I would now like to turn the call over to Chris Zimmer. Chris, we are ready to begin.
Chris Zimmer: Thank you, June. Good morning, everyone, and thank you for joining us. I'm pleased to report our earnings momentum continued in the first quarter, most evident in our gross margin, which reached 18.9%, the highest in 12 years, even with a $1.3 million raw material misalignment. Without it, our gross margin would have topped 20%. This is the fifth consecutive quarter of gross margin improvement and we expect the momentum to continue in the coming quarters as sales ramp up. Our base prices continue to increase and raw material headwinds dissipate as commodity prices further stabilize. Operating income rose 51% to $7.3 million in the first quarter, and net income increased nearly 60%, reaching $4.1 million or $0.43 per diluted share compared with $0.27 in the fourth quarter.
Our first quarter sales of $77.6 million were the second highest in our history, only exceeded by our record fourth quarter sales of $79.8 million. We expect to achieve record sales quarterly for the balance of the year based upon the strength of the aerospace market demand, which continues unabated. It's also supported by our backlog, which increased to $325 million from $318 million at year-end on continued strong order entry. First quarter premium sales totaled $20.1 million, just shy of the record level in the fourth quarter. Our premium alloys, which are mainly for aerospace application, represented 26% of our total first quarter sales and aerospace represented nearly 78% of sales in the quarter. Both continue to be the main drivers of our performance and growth.
It's important to underscore that our strategy to focus on premium alloys has been transformational for our company and has yielded a broader base of customer approvals, a richer product mix and increased earnings power. Total debt for the first quarter was reduced by another $4.3 million, while we also continue to invest in our premium alloy capabilities in North Jackson. That includes ordering a second 18-ton furnace for the VIM, which adds to efficiencies and capacity as well as a new box furnace to support the forge. Additionally, we are further investing in upgrades of our process controls with more digital capability on equipment to utilize optimizing operating performance. We plan to continue to invest capital in our facilities while further reducing debt in 2024.
Our total production in the first quarter was 12% higher than the fourth quarter of 2023 and our strongest since the first quarter of 2020. We are seeing the benefits of targeted capital modernization projects throughout our plants that have delivered process improvements and reliability to our manufacturing process, enabling our production levels to ramp. We have additional modernization projects underway to support our growth as the stability of our workforce continues to improve. Turning to our end markets, starting with Aerospace, our largest. First quarter sales totaled $60.2 million compared to $61.9 million in the fourth quarter and $49 million in the first quarter of 2023. As I said, Aerospace demand remains robust despite the current low build rates at Boeing resulting from the 737 MAX production issues and slower production of the 787.
While that has curbed the supply of Boeing airplanes to its customer, it has not curbed Boeing's demand to its suppliers. Boeing's message to the supply chain, keep your foot on the gas and keep to the master schedule production plan. Boeing is intent on ensuring supplier stability and allowing all suppliers to catch up in preparation for the increase in build rates planned for 2025 and 2026. On their call last week, Boeing said that production of MAX planes will remain below 38 per month in the first half of 2024, but they plan to ramp up to the 38 level in the second half of the year. Rate increases beyond that are predicated on their work with the FAA. The rate of 787 production is expected to increase to 10 per month in 2026 and Boeing expects to make first delivery of the 777X in 2025.
Boeing also reported that demand across its portfolio remains incredibly strong. Their net new orders in the first quarter totaled 125, including 85 737-10s, 28 777X planes. At quarter's end, Boeing's net backlog stood at more than 5,600 planes, including approximately 4,800 MAX planes, nearly 800 787s and around 480 777Xs. Meanwhile, Airbus reported a total of 170 new orders in the first quarter. While their single-aisle production is running below plan at about 50 planes per month due to supply chain issues, Airbus has reaffirmed their production goal of 75 A320s per month in 2025 as well as their target of raising A350 output to 10 per month in 2026. The surge in air travel is driving demand for new airplanes with Delta, United, Alaska and American Airlines, all reporting strong first quarter growth and bullish second quarter outlook.
Delta's Ed Bastian described market travel conditions as the most constructive in his career with consumers in a healthy position, travel remaining a top priority and corporate travel accelerating. Other airlines echoed the same. One limiting factor for the airlines is the slowed production and delivery of new generation airplanes, causing them to reduce schedules during the peak flying season and rely on older aircraft. On the plus side, that has generated demand in the MRO business, which benefits supply chain demand. In the defense sector, the President just signed into law a $95 billion aid package for Ukraine, Israel and Taiwan amid the increasing intense conflicts in those regions. That follows passage of the long-delayed $825 billion defense spending bill for fiscal 2024 in March.
Increased defense spending can translate into added market demand for the type of premium and specialty alloys we produce. The defense market is an increasingly important market for us, and it currently represents 15% to 20% of our total aerospace sales. Overall, I would echo the sentiment that this is the most constructive aerospace market environment I've ever seen. The feedback from customers indicates that they are fully in a pull mode, replenishing their inventories on strong demand. Our company is also in the strongest position we've ever been to respond to that demand as a result of our multiyear capital investment in premium alloy capabilities and capacity. Turning to our remaining markets. Beginning this quarter, we are reporting a new market category energy, which combines our oil and gas and power generation sales and better reflects our strategy in the energy market.
We have been deemphasizing power gen in recent quarters as we focus capacity on the aerospace industry. In fact, power gen sales contributed just $1.1 million to total energy market sales of $6 million in the first quarter. Oil and gas sales of $4.9 million made up the rest. Energy market sales were up 29% sequentially and up 3% from the first quarter last year, representing 7.7% of total sales. Although we have temporarily shifted much of our premium alloy production and finishing capacity to aerospace, we plan to increase our energy market sales in future quarters as our production capacity continues to expand. Heavy equipment market sales totaled $5.8 million or 5.7% of first quarter sales. Sales were down 9% sequentially as our customers continue to balance inventories and digest the changing market demand for EVs versus hybrids versus gas engine vehicles.
Both Ford and GM did report increased EV sales in the first quarter with GM reporting a sharp rise in EV production and deliveries and Ford emphasizing its record hybrid sales. However, automakers are modifying the mix of their planned model offerings and the timing of new model introductions as they adjust to current customer preferences. Even so, model changeovers are a positive driver of tool steel demand, and we expect our sales to pick up in the second half of the year. General industrial market sales totaled $4.3 million in the first quarter compared to $5.6 million in the fourth quarter and $3.5 million in the first quarter last year. First quarter results were in line with our expectations as discussed on our last call. We expect our sales in this market, which are mainly for semiconductor manufacturing to resume growth in the second quarter.
The U.S. semiconductor market is benefiting from the CHIPS Act, which aimed at onshoring semiconductor manufacturing. The Commerce Department recently announced the deal with Samsung providing up to $6.4 billion in incentives to support their manufacturing operation in Texas. The Commerce Department previously announced incentives for TSMC, Intel, GlobalFoundries, Microchip Technology and BAE Systems. Additionally, AI-related demand is also driving the market. We remain very optimistic about this market in 2024, especially during the second half of the year. Now let me turn the call over to Steve for his report on our financials.
Steve DiTommaso: Thanks, Chris. Good morning, everyone. Sales of $77.6 million in Q1 were nearly $12 million higher than the first quarter a year ago and second only to our record Q4 2023. Gross margin totaled $14.7 million in the first quarter or 18.9% of sales compared to 16.4% last quarter and 11.7% in the first quarter of last year. When compared with Q4 2023, the margin improvement was driven first by higher base prices on shipments and also cost reductions delivered by specific margin improvement projects executed during 2023. The margin increase was partially offset by our raw materials misalignment headwind in the quarter that totaled approximately $1.3 million. When compared to the first quarter of last year, about $7 million of the increased sales fell through to margin, representing about a 60% pull-through and demonstrating the impact of our higher base prices, our volume recovery and our cost improvement efforts.
Selling, general and administrative costs totaled $7.4 million compared with $8.3 million last quarter and $6.3 million in the first quarter of last year. The 2023 fourth quarter SG&A was higher due to the timing of employee-related costs, which then decreased in Q1. Higher business insurance expenses, and higher audit and accounting support expenses continue in 2024. We expect SG&A expense to range between $7.5 million and $8 million per quarter as we move through the year. Our operating income of $7.3 million was at its highest level since Q2 2012 and was $2.5 million better than last quarter. A month ago on our call, I said that we plan to drive meaningful growth in operating income in 2024. This is step one on that path and demonstrates our profitability potential in the coming quarters as we continue to execute our plan.
Total interest expense for the quarter was $2 million compared to $2.2 million in the fourth quarter of 2023. Average debt was about $5 million lower in the first quarter compared to the fourth quarter of last year. Term SOFR which drives our interest rate for the majority of our debt was flat for both quarters, and our effective interest rate for both periods was about 9.5% on all debt. Due to our financial performance the last few quarters, we achieved a 25 basis point reduction in our spread above SOFR on our bank debt near the end of the first quarter. This will benefit interest expense in Q2 and going forward. And we have the opportunity to reduce the rate by another 25 basis points in Q3 if we achieve our financial plan. We recorded income tax expense of $1.1 million during the first quarter, resulting in an effective tax rate of 20.4%.
The effective tax rate includes the impact for the federal statutory rate of 21% and state income taxes, offset by the impact of our research and development tax credits which decreased income tax expense for the period. Other elements of the rate calculation and discrete items in the quarter are not significant. Discrete items resulted in less than $100,000 of tax expense in the quarter and the estimated annual effective tax rate for 2024 is 19.7%. Net income for the quarter was $4.1 million or $0.43 per diluted share. This represents an increase in EPS of $0.16 or nearly 60% versus last quarter despite the calculation of diluted shares increasing by 137,000 in the same period due to our higher stock price. Our first quarter EBITDA was $12.2 million compared to $9.6 million last quarter.
Our adjusted EBITDA includes an add-back for noncash share compensation and was $12.6 million or 16.2% of sales, highest since Q1 2012. Our income adjusted for noncash items generated $10.6 million in cash during the quarter. We invested $300,000 of that in net working capital and other assets. And used our remaining cash flow to fund capital expenditures of $5.5 million and decreased our net debt by $4.8 million. We expect full year 2024 capital expenditures to total approximately $18 million, and we plan to generate free cash flow each quarter and pay down debt each quarter in 2024. This concludes the financial update. I'll hand the call back to Chris.
Chris Zimmer: Thanks, Steve. In summary, we achieved the highest profitability in 12 years in the first quarter as our gross margin continued its upward trajectory, reaching 18.9% even after a $1.3 million material misalignment. And our net income reached $0.43 per share on near-record sales. Unabated aerospace demand continues to drive our premium alloy sales as well as our increased backlog and strong order entry. Our strategic focus on premium alloys has been transformational, expanding our base of customer approvals, giving us a richer product mix and increasing our earnings power. We continue to invest in our premium alloy capabilities and capacities in the first quarter, ordering a second 18-ton furnace for the VIM in North Jackson and a new box furnace to support the forge there.
At the same time, we reduced net debt by another $4.8 million in the quarter. We plan to continue to invest capital in our facilities in 2024 while also further reducing our debt through a focus on managed working capital and generating positive cash flow. With a strong start to 2024, we are focused on achieving record quarterly sales and increasing profitability for the rest of the year. As I said in today's release, we remain highly optimistic about our growth momentum and strategy for the foreseeable future. That concludes our formal remarks. Operator, we're ready for questions.
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