Universal Stainless & Alloy Products Inc. ( USAP)

Q3 2010 Earnings Call

October 27, 2010 10:00 am ET

Executives

June Filingeri - Comm-Partners

Denny Oates - President and CEO

Doug McSorley - VP Finance, CFO and Treasurer

Analysts

Tim Hayes - Davenport & Company

Phil Gibbs - KeyBanc Capital Mark

Gregory Macosko - Lord Abbett

Presentation

Operator

Good day ladies and gentlemen, and welcome to the USAP third quarter 2010 earnings call and webcast. At this time all participants are in a listen-only mode. Later we'll have a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder today's conference maybe recorded.

I would now like to turn the conference over to your host for today Ms. June Filingeri of Comm-Partners. Ma'am you may begin.

June Filingeri

Thank you, Mary. Good morning, this is June Filingeri. And I’d also would like to welcome you to the Universal Stainless & Alloy Products conference call. We are here to discuss the company's third quarter results, which were reported this morning. With us from management are Denny Oates, Chairman, President and Chief Executive Officer; Bill Beible, Senior Vice President of Operations; Paul McGrath, Vice President of Administration and General Counsel; and Doug McSorley, Vice President of Finance and Chief Financial Officer.

Before I turn the call over to management let me quickly review procedures. As Mary said after management will makes their formal remarks they will take your questions. The conference operate will instruct you on the 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 risk 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 out of the way, I would now like to turn the call over to Denny Oates. Denny, we are ready to begin.

Denny Oates

Okay, June. Thank you very much. Good morning everyone. Thanks for joining us today. Our third quarter performance reflects modest sales growth, solid profit margins, positive cash flows and a 28% increase in our backlog.

Third quarter sales of $51.9 million doubled those of the same quarter last year and about 1% ahead of the second quarter.

With supply chain re-stocking mostly completed in the first half of the year. Third quarter sales mainly reflected end used demand, as well as our progress in market and product expansion initiatives. From an end market standpoint positive momentum in aerospace was the major positive driver of our sales in the third quarter. Our operating margin remained above 12% of sales in the third quarter, despite the recent price fluctuations in nickel and other raw materials.

We continue to drive improvements in operating performance. The increase in inventory returns achieved thus far is less than the impact of nickel volatility. The melt shop upgrade and other recently completed capital projects along with process improvements are reducing costs and increasing yields. By way of update on our Melt shop projects daily melt productivity has increased 33%, materials are up more than 2% and work in process inventory returns are 50% higher.

In total our Melt shop production in the first nine months of 2010, was 50% greater than its production for all of 2009.

As I said on our last call, the operational improvements achieved to date are sustainable and there is still more we can do.

Cash flow from operations was a positive $8.8 million in the third quarter and managed working capital per dollar a sales is consistently improved over year.

Let me turn to our end markets, aerospace remained our largest market growing up to 37% of sales in the third quarter compared to 32% of sales in the second quarter of this year and 31% in the third quarter of 2009.

Aerospace sales rose 20% sequentially and were 150% greater than the 2009 third quarter. Boeing’s earnings report last week shows the positive momentum in the market.

For the third quarter Boeing reported booking at net 221 commercial airplane orders compared with 68 net orders in the 2010 second quarter and 79 in the third quarter of last year.

They also have raised the production level for the 737 for the third time, starting the resurgence in air travel and strong demand from their customers. The current backlog includes over 2000, 737s and they are optimistic that number is going to increase, based on existing customer options and their sales efforts.

Boeing also [have set] the demand for a 777, 787 and the stretch (inaudible) rather supports their current production schedule and they anticipate prolonged market recovery overall.

The Petrochemical market was our second largest market in the third quarter, representing 21% of sales essential even over the second quarter of 2010 and the same period last year.

Our potential chemical sales which are primarily for the oil and gas exploration market, were up 2% sequentially or being nearly double the level the third quarter of 2009. As noted on the last call, some excess inventory remains in the distribution supply chain, which we expect to come into balance by year end.

For the third quarter Halliburton and Schlumberger both reported sequentially flat international sales with strong growth in North America with a shift to more land based fields from offshore drilling. Both companies are forecasting further recovery in 2011. The good news from our standpoint is that our customers have started adding to payroll and our coding activity has picked up in recent weeks.

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