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Common Stainless & Alloy Merchandise, Inc. (NASDAQ:USAP) This fall 2023 Earnings Convention Name March 28, 2024 10:00 AM ET
Firm Individuals
June Filingeri – President-Comm-Companions LLCChris Zimmer – President & Chief Govt OfficerSteve DiTommaso – Vice President & Chief Monetary Officer
Convention Name Individuals
Phil Gibbs – KeyBanc Capital Markets
Operator
Good day and thanks for standing by. Welcome to the Common Stainless Fourth Quarter 2023 Convention Name and Webcast. At the moment, all individuals are in a listen-only mode. After the speaker’s presentation, there shall be a question-and-session. [Operator Instructions] Please be suggested that at the moment’s convention is being recorded.
I might now like at hand the convention over to your speaker at the moment, June Filingeri. Please go forward.
June Filingeri
Good morning. Thanks for becoming a member of us. That is June Filingeri of Comm-Companions, and I would additionally wish to welcome you to the Common Stainless convention name and webcast. We’re right here to debate the corporate’s fourth quarter outcomes reported this morning.
With us from administration are Chris Zimmer, President and Chief Govt Officer; John Arminas, Vice President and Normal Counsel; and Steve DiTommaso, Vice President and Chief Monetary Officer. Earlier than I flip the decision over to administration, let me shortly evaluation procedures. After administration has made formal remarks, we are going to take your questions. The convention operator will instruct you on procedures at the moment.
Additionally please be aware that this morning’s name, administration will make forward-looking statements underneath the Non-public Securities Litigation Reform Act of 1995. I wish to remind you of the dangers associated to those statements, that are extra totally described in at the moment’s press launch and within the Firm’s filings with the Securities and Trade Fee.
So with the formalities full, I might now like to show the decision over to Chris Zimmer. Chris, we’re prepared to start.
Chris Zimmer
Thanks, June. Good morning and thanks for becoming a member of us. Our 2023 monetary audit is now full. The ten-Ok shall be filed tomorrow, and I am happy to report that our monetary outcomes present our technique to speed up worthwhile development is gaining traction. Right here some highlights.
Fourth quarter gross sales had been up 12% sequentially to a report $80 million. That is the fifth consecutive quarter of gross sales development. Full yr gross sales had been up 42% to a report $286 million. Premium alloy gross sales additionally reached report ranges, climbing to $21 million within the fourth quarter and leaping 74% for the complete yr to $68 million or 24% of gross sales.
Gross margin has improved every quarter in 2023, reaching 16.4% within the fourth quarter the best degree since 2018, regardless of a $1.6 million uncooked materials misalignment headwind. 16 base worth will increase over the past three years, together with the newest on February 12, proceed to learn gross sales and gross margin whereas offsetting adverse surcharge misalignment on commodity costs which were falling. We anticipate to appreciate extra of those worth enhance advantages as we transfer by means of 2024.
Commodities have stabilized over the previous few months, which ought to ease the uncooked materials misalignment by the top of the second quarter. Working earnings rose 9% sequentially to $4.8 million within the fourth quarter, regardless of greater SG&A expense on worker associated and insurance coverage prices.
Internet earnings reached $0.27 per diluted share within the fourth quarter and $0.53 per share for the yr, representing a marked turnaround from losses in 2022. Backlog remained robust at $318 million at yr finish and order entry continues to be wholesome. Premium Alloys represent 36% of our backlog.
Our debt was decreased by $13 million in 2023, even with our strategic spend, which is added to new Vacuum Arc Remelt furnaces in North Jackson. We plan to proceed to cut back debt in 2024. The brand new VAR furnaces had been launched into manufacturing final month. This new capability, together with capability enlargement of our beam furnace, will speed up our premium alloys ramp, which is vital to our technique of accelerating worthwhile development.
Turning to our finish markets, beginning with aerospace. Fourth quarter gross sales rose 15% sequentially to a report $62 million. Full yr aerospace gross sales elevated 57% to a report $216 million or 76% of gross sales.
As I stated in January, Aerospace demand was sturdy within the fourth quarter and that continues at the moment. The dynamics of that demand stay the identical, International restoration in air site visitors, the demand from airways for brand spanking new, extra fuel-efficient planes amid capability constraints as a result of resilient demand and to changing getting old plane, large order backlogs at Airbus and Boeing extending into the subsequent decade, even with Boeing’s present challenges.
Since our name in January, Boeing’s challenges, which had been precipitated by the plug door blowout on an Alaska Air MAX 9 have continued, together with investigations by the FAA, NTSB and Justice Division into the accident and likewise into Boeing’s manufacturing procedures. The FAA has saved manufacturing of the MAX airplanes at 38 monthly, they usually’ve set a 90-day interval for the corporate to develop a plan to deal with high quality management points.
At a convention final week, Boeing’s CFO underscored their goal to extend high quality and to drive provider stability. The airways have been urgent for adjustments given how important Boeing is to their fleet enlargement plans. In the end, although, the airways are holding their slots for Boeing plane as a result of their development plans require it.
The truth is, Boeing not too long ago described demand is powerful, noting new 737 orders from American Airways, a Thai Airways order for 787s and an Ethiopian order for the 777X. On the finish of February, Boeing’s gross backlog of the 737 MAX airplanes totaled 4,752. Widebody demand has elevated with restoration in worldwide journey.
Boeing has reached a construct fee of 5 Dreamliners monthly and is working in the direction of 10 monthly by 2016. Their 787 backlog stood at virtually 800 on the finish of February, whereas whole backlog was 5,900 planes or practically 9 years of manufacturing.
For Airbus, the primary problem to reaching their construct fee objectives has been the availability chain. Regardless of that, Airbus expects the A320 construct fee to succeed in 56 monthly in 2024 and not too long ago reported progress nicely in the direction of their aim of 75 plane monthly in 2026. Airbus’ backlog of A320s at year-end totaled practically 7,200 plane.
As to widebodies, Airbus is working in the direction of a month-to-month fee of 4 plane for the A330 in 2024 and a fee of 10 in 2026 for the A350. Complete year-end backlog at Airbus was 8,600 aircrafts. The sustained restoration in air site visitors is a significant component driving plane demand.
IATA estimates world air site visitors will develop greater than 3% per yr over the subsequent 20 years, even with the constraints of infrastructure, delays in plane supply, and provide chain points.
Heavy air site visitors and the supply delays of recent plane are additionally fueling demand within the MRO market. Within the protection sector, worsening world conflicts, rising threats from Russia, China, and North Korea and the step-up in army spend by NATO international locations are driving elevated market demand on a worldwide foundation.
Within the US, the DoD finances for 2024 prioritizes modernization of the fighter power and air protection, benefiting home demand for supplies. The administration has now proposed a rise to the 2025 protection finances to $895 billion.
As a significant provider of the premium and specialty alloys required for protection purposes, our participation in that market is rising. We estimate 15% to twenty% of our aerospace gross sales are going to protection.
Total, the aerospace market stays sturdy and the availability chain stays in a full pull mode primarily based upon our channel checks. Provide chain challenges since COVID have compelled the primes to strengthen and diversify their provider sources, and we now have benefited. This has been evident by the tempo of our approvals that we’re receiving and the brand new enterprise that we’re successful. We anticipate robust development in our aerospace gross sales together with premium alloys to proceed as we transfer by means of 2024 and into 2025 and 2026.
Fourth quarter heavy gear market gross sales had been $6.4 million, a lower of 28% from the third quarter, however up 14% year-over-year. Full yr gross sales elevated 15% to $31.2 million or 8% of gross sales. As we mentioned final time, clients grew cautious within the fourth quarter because the outlook for EV gross sales weakened, and we’re seeing that near-term warning within the first quarter as nicely. Even so, the carmakers are persevering with to introduce new fashions requiring retooling and power metal. We do anticipate demand to enhance within the second half of the yr.
Normal industrial gross sales elevated 68% sequentially to $5.6 million within the fourth quarter. Full yr gross sales of 2023 rose 43% to $15.7 million or 7% of gross sales. Our common industrial gross sales are primarily for semiconductor manufacturing. Our newest outcomes present the rising energy of that market. The Semiconductor Trade Affiliation has projected double-digit development for 2024. Given the necessity for elevated chip manufacturing and the transfer to onshore, we stay very optimistic about 2024, particularly within the second half of the yr and past.
Taking a look at our power markets. Oil and fuel market gross sales totaled $3.6 million within the fourth quarter, which is 38% greater than the third quarter, though 32% decrease than the fourth quarter of 2022, reflecting our shift of manufacturing to higher-margin aerospace merchandise in 2023. That shift can also be mirrored in full yr oil and fuel gross sales that totaled $14 million, a decline of twenty-two% from 2022. Oil and fuel gross sales had been 4% of whole 2023 gross sales.
We plan to briefly proceed to strategically shift our manufacturing belongings to aerospace in 2024. That very same shift, particularly for ending capability is obvious in our energy technology market gross sales, which had been $1.1 million within the fourth quarter. Whereas that is up 51% from the third quarter, full yr 2023 gross sales had been down 31% from a yr in the past to $4.2 million or simply 1% of gross sales. I famous final time that as we proceed to ramp our manufacturing ranges, we stay very nicely positioned to develop our gross sales into the power markets sooner or later.
Now let me flip the decision over to Steve for his report on our financials.
Steve DiTommaso
Thanks, Chris. Good morning, everybody. I’ve to begin by telling you that it feels good to be right here earlier than the top of March, reporting our outcomes as we dedicated to you again in January. 2023 was a novel yr for us, and we capped it off with our greatest monetary efficiency since mid-2018 by a number of measures, together with a record-setting prime line.
However earlier than I dive deeper into the numbers, I would wish to replace you on the anticipated submitting of our annual report on Kind 10-Ok tomorrow and in Part 9A of that doc. You’ll discover administration’s report on inside management over monetary reporting, the place we described materials weaknesses in inside management as of December 31, 2023. Some element of these weaknesses shall be disclosed within the doc, however I wish to present context and perspective at the moment.
The principle merchandise to emphasise is that there is no such thing as a restatement of numbers within the present interval or any prior interval and the monetary statements current pretty in all materials respects, the outcomes, and consolidated monetary place of the corporate. The core of the weaknesses pertains to course of and documentation. We now have already began enchancment actions and our present processes shall be enhanced to satisfy the usual required to remediate the weaknesses.
The inner management weaknesses are being addressed and shall be topic to remediation testing in future intervals. We are going to proceed to replace you as we make progress in that effort. We can not decide to a particular timeline for formal mediation. Nevertheless, this can be a prime precedence, and we’re centered on implementing management enhancements instantly as we flip round and shut the books on Q1 2024.
Now again to the numbers. Chris already highlighted our report prime line gross sales achievement, regardless of a sequential decline in uncooked materials surcharges per pound inside our promoting costs. This was the results of many positives, extra cargo quantity, greater base costs and a better mixture of then melted product. That prime line drove a rise in gross margin, which reached $13.1 million within the fourth quarter, or 16.4% of gross sales, a rise from 15.3% within the third quarter and 4.3% within the 2022 fourth quarter.
Observe that the prior yr fourth quarter was impacted by outages at key manufacturing models and people didn’t recur this yr. The sequential enhance is pushed by a mixture of worth and cargo quantity as described already and decrease value as we’re starting to see advantages from elevated productiveness and higher manufacturing effectivity. As well as, the margin would have been practically 2 proportion factors greater if it weren’t for the $1.6 million of uncooked materials headwind that Chris talked about.
Promoting, common, and administrative prices within the fourth quarter totaled $8.3 million in contrast with $6.4 million in Q3. About $1.5 million of the $1.9 million enhance is attributable to worker prices. The remaining enhance was because of the greater value of enterprise insurance coverage, as we renew our insurance policies yearly on October 1 and incurred a premium enhance through the present yr renewal.
For the complete yr, SG&A bills elevated $6.4 million to $27.8 million from $21.2 million in 2022. And the drivers had been the identical as these for the quarter. Worker prices made up practically $5 million of that change. Enterprise insurance coverage contributed $1.2 million and better accounting and auditing charges rounded out the rise. The insurance coverage element and parts of the worker prices will persist, however we anticipate different parts to come back down from their This fall 2023 highs, and we anticipate our first quarter 2024 SG&A expense to approximate $7.5 million.
Our working earnings of $4.8 million was $400,000 higher than Q3 and nicely forward of the working loss posted within the fourth quarter of 2022. The final time we noticed working earnings of this degree was mid-2018 on significantly greater cargo quantity. As we proceed to execute our development technique, ship on the highest line, and convey SG&A again to $7.5 million, we are going to drive extra enlargement in working earnings within the coming quarters.
Complete curiosity expense for the quarter was $2.2 million, roughly flat to Q3 and up about $600,000 from the prior yr fourth quarter. Common debt through the fourth quarter was about $6 million decrease in 2023 in comparison with final yr, however time period SOFR charges climbed from about 3.5% on common through the prior yr quarter to five.3% all through This fall 2023.
Curiosity expense rose sequentially every quarter in 2022 and this yr earlier than flattening in This fall. We anticipate that development to reverse now every quarter, as we step by means of 2024.
We reported an earnings tax advantage of about $20,000 on our pre-tax earnings through the quarter, leading to an efficient tax fee of near zero. This fee could be just like our annual ETR, if not for the influence of discrete objects within the quarter.
Our earnings tax expense for the yr was about $400,000 on pre-tax earnings of $4.9 million for an efficient ETR of seven.5% for the yr. The efficient tax fee is lower than the federal statutory fee of 21%, primarily because of the influence of our analysis and growth tax credit, which decreased earnings tax expense for the interval. This profit is partly offset by about $300,000 of tax expense from forfeited inventory choices. Different parts of the speed calculation should not important.
Internet earnings within the fourth quarter was $2.6 million or $0.27 per diluted share. Our fourth quarter EBITDA was $9.6 million, bringing our full yr 2023 EBITDA to just about $33 million in contrast with $12.8 million final yr. Our adjusted EBITDA was $10 million for the quarter and $34.2 million for the yr.
Adjusted EBITDA consists of an add-back for non-cash share compensation and there’s a reconciliation of EBITDA and adjusted EBITDA within the tables to the press launch. We generated greater than $7 million of money from operations within the fourth quarter bringing our 2023 working money technology to over $25 million. After spending $13 million on capital expenditures for the yr, we used the remaining working money to pay down debt and develop our liquidity.
Our debt discount in This fall totaled $4 million and we anticipate to pay down debt every quarter in 2024 starting with about $3 million in Q1. Debt reductions anticipated to speed up within the second half on greater gross sales, greater margins and managing restricted development in working capital. We additionally anticipate to spend about $16 million to $18 million on capital expenditures in full yr 2024.
This concludes the monetary replace and I am going to hand the decision again to Chris.
Chris Zimmer
Thanks, Steve. In abstract, our fourth quarter and full yr 2023 outcomes point out our development technique is kicking into excessive gear. Business aerospace demand stays sturdy and our participation in protection is rising, approvals and new orders are rolling in, because the primes need us of their provide chain. We’re seeing that in backlog, which remained robust at $318 million, whereas order entry additionally stays wholesome. We have expanded our premium alloy capability and capabilities with the capital funding in North Jackson.
The stability of our end-markets presents continued alternative together with mannequin changeovers for device metal demand, onshoring and enlargement within the chip producer for our common industrial gross sales and in power, the necessity for our grades of metal for drilling in hostile environments and building and upkeep of fuel generators.
Profitability is strengthening with the gross margin of 16.4% at a five-year excessive, three years of worth will increase and rising premium alloy gross sales are increasing our prime line and margins. We have decreased debt as we proceed to generate optimistic money circulate and plan to cut back debt additional in 2024.
First quarter outcomes are to date indicating that our development is continuous. We’re genuinely enthusiastic about our future and the expansion momentum we’re seeing for 2024 and past. We plan to maintain our heads down and execute. That concludes our formal remarks. Operator, we’re prepared for questions.
Query-and-Reply Session
Operator
[Operator Instructions] Our first query comes from Phil Gibbs with KeyBanc Capital Markets. Your line is now open.
Phil Gibbs
Hey, thanks. Good day. This is generally…
Chris Zimmer
Hello, Phil. Good morning.
Phil Gibbs
Good morning. Sense of simply revenues and gross margins within the first quarter as you’ve got bought fairly good visibility now on the tail finish of the quarter, you had been on the tail finish of the quarter relatively?
Chris Zimmer
I believe that the important thing parts that we have been speaking about we’ll see that proceed into the fourth quarter. We’re not fairly wrapped up with the numbers but however I might proceed to see that sequential prime line development margin enlargement and debt discount.
Phil Gibbs
And also you talked about in your script that you’d anticipate the misalignment to be behind you by the top of the second quarter, assuming that uncooked materials costs form of keep the place they’re now. Ought to we assume, the primary quarter has a reasonably comparable influence because the fourth after which – after which that can properly average in Q2.
Chris Zimmer
Yeah, that is proper. I believe you are spot on, the primary quarter misalignment must be in the identical neighborhood as fourth quarter, surcharges have been shifting sideways proper now. We simply want to show by means of that stock, which is about us a couple of six-month course of, so moderating misalignment within the second quarter.
Q – Phil Gibbs
After which perhaps replace us on North Jackson, when it comes to what you’d anticipate from that enterprise within the quick time period and midterm, with a few of these new de-bottlenecking initiatives getting kicked off.
Chris Zimmer
Sure, we talked concerning the two new VARs, which had been an space of alternative for us to develop supporting the premium gross sales. These two new VARs had been moved into the operational facet of the enterprise. They’re operating nice and that is serving to to assist the brand new demand that is flowing by means of on the premium facet. The staff on the soften store there may be doing a terrific job executing and rising upon the massive backlog that we now have. So, they’re making strides each month to have the ability to notice that potential there.
We do have investments downstream as nicely too, thermal therapies on the Forge [ph] and persevering with to deal with coaching our workers. The typical tenure we have talked about it earlier than lately is decrease than pre-COVID, however a number of that’s behind us. The workforce has actually completed a very good job stabilizing and persevering with to have the ability to develop pull by means of and hit the productiveness ranges that we have to assist this backlog.
Q – Phil Gibbs
After which on the web working capital facet, I believe you talked about that, you’d anticipate minimal change in web working capital for the yr? Good to see your stock was down properly attending to a greater vary, relative to gross sales and so I am simply curious within the shifting items on, what the ideas are on all the most important sort of factors of working capital and 2024.
Chris Zimmer
Yeah, we proceed to seek out alternatives to have the ability to pull that down whereas nonetheless increasing our prime line. The orientation of that stock the aerospace merchandise are likely to take about anyplace from 4 to seven months, relying upon the quantity of labor that we have to do to tug them by means of the methods. Semi-finished merchandise like our device metal grades, we are able to turnaround in a few months. So the character of a better portfolio of aerospace gross sales does put a little bit bit extra stress on working capital and our potential to have the ability to flip it faster. So, my expectation is that that is going to maneuver sideways this yr. We’ll proceed to develop the highest line. Then as that device metal facet of the enterprise heats up within the second half of the yr, that ought to gasoline some further enhancements to our stock turns.
Q – Phil Gibbs
Thanks.
Chris Zimmer
Thanks, Phil.
Operator
Thanks. [Operator Instructions] This concludes the question-and-answer session for at the moment’s convention name. I might now like to show it again to Chris Zimmer closing remarks.
Chris Zimmer
Thanks once more for becoming a member of us this morning. Our development technique gained momentum in 2023 and our optimism is excessive for 2024 and past. We stay up for updating you on our progress on our first quarter name. Have a terrific day.
Operator
This concludes at the moment’s convention name. Thanks for collaborating. It’s possible you’ll now disconnect.
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