Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Record sales of $82.8 million in Q2 2024.
- Gross margin reached an all-time high of 25.4% of sales.
- Record net income of $8.9 million or $0.90 per diluted share.
- Adjusted EBITDA was a record $18.5 million, representing 22% of sales.
- Significant growth in aerospace market sales, which reached $68.6 million, representing 83% of total sales.
Negative Points
- Heavy equipment market sales decreased by 11% compared to the first quarter.
- Energy market sales were down 15% from the first quarter.
- General industrial market sales decreased by 22% from the first quarter.
- Higher SG&A costs due to increased employee-related expenses, business insurance, and audit and accounting support.
- Backlog decreased to $297 million from $325 million at the end of the first quarter.
Q & A Highlights
Q: The question was just on some of the capital spending initiatives that you have and what you mentioned incrementally this morning. So currently, you have the VARs being commissioned at the current time and then you mentioned more debottlenecking initiatives or growth and size of the potential end of them. That sounds like it's more relegated to next year. But kind of take us through where you are on some of the bigger items this year and then what you announced today and what the goals are.
A: Our capital this year, capital spending is going to be in the $18 million neighborhood. You can expect half of that, a little more than half of that to go towards what we call sustainability. So this is the maintenance and the upkeep of legacy equipment. We've got about $4 million going towards modernization projects. So this is the ability for us to be able to implement technology throughout the plants, helping the new generation of workers in the plants work more efficiently and safely and get back to some of the production levels that we had enjoyed when we had, what I call, the pre-COVID workforce and all the tribal knowledge that they contained and these modernization efforts are really starting to take hold as we've been expanding our production levels each quarter. And finally, the growth in ROI side of the CapEx spending is going to be in the neighborhood of $5 million to $6 million. These are going to be things like furnace capacity, a number of the alloys that we're producing that are more advanced require a little bit more time in the furnaces. So we're adding furnace capacity at the forge and downstream, putting investments into a number of areas that are either down money for investments next year like the VIM or areas to be able to enhance our pull-through on the finishing side. I gave you a little bit of color. Hopefully, that answers it, Phil.
Q: What would you describe as your primary bottleneck right now in terms of capacity or capability? And then secondly, on the labor front, are there any thoughts that you need to add more targeted areas there? Or do you feel like you've got the right set of folks coming up the curve at the moment?
A: For our premium products, VIM primary melt has been the area that has really been pacing lead times. We did have a very strong quarter, ramping melt production there. We're on track to have another record production quarter at the VIM here in the third quarter, all in line with what we've got baked into the backlog. Aside from VIM melt production pacing lead times, finishing, particularly on small diameters, has been another area that has also been pacing lead times simply because of the nature of the labor intensity of the smaller diameter product. From a labor standpoint, we have seen better stability but I'm not where we want it to be. We still have opportunities to continue to pull through and retain workers at a higher level. As we get them working safely and efficiently following instructions and working to the levels that we need them to work at, I think we're really close to getting back to those pre-COVID production levels, which we're just shy of right now. But I expect as we move through the second half of this year into 2025, we'll return to those production levels. So labor has improved. It's stabilized. But I think we can still continue to get better fully staffing up and securing those reliable good workers that we need.
Q: And how should we be thinking about net working capital over the balance of the year? And then within that, have you -- and I know the margins have been obviously outstanding, but was there any misalignment still going on or is that still over? So I guess two questions, one on the net working capital and one on whether or not that there's any raw material misalignment.
A: You'll see that inventories went up a little bit in the second quarter. The primary driver there is that we did get a little bit ahead of ourselves in melt by design late in the second quarter, knowing that we had some planned annual maintenance outages at our melt shops. So we will bring our inventories and our working capital levels back down to ending first quarter levels by the time we exit the third quarter here. So getting those inventories back under control, getting back realigned on that commitment to grow our top line while keeping our inventory levels flat to down. Regarding raw material misalignment, it was very minor. It was only an adverse about $500,000 to $600,000 that we see the misalignment impacting the second quarter. It got to the point where we didn't specifically call it out. So just modestly negative, but we're now seeing enough stability in surcharges and in the raw material flows that I don't expect it to have any type of a misalignment here in the third quarter.
Q: On the premium alloy mix, how much -- if you were to guess, how much of that premium alloy goes into defense versus commercial aero?
A: The majority. So the premium alloys lend themselves to structural components within defense applications, both on fixed-wing fighter craft and on helicopters. The premium products also lend themselves to the engine part of the business. So obviously, you've got engines and fighter jets, but these premium products are also going into engines that are in the commercial aerospace side of the business. So rough cut, I'd say about two-thirds of those premium products are aligned with defense applications and about one-third of it ultimately into engines for commercial applications.
Q: Can you touch on the backlog a little bit? I think you mentioned -- can you expand on what you mentioned about the fact that order entry, you're working with customers on order entry? I assume that meant that earlier in the year, you were putting more orders into the system that you were constrained by and that's given some -- and you probably have some relief with throughput now, but I'm not sure I'm right. So can you expand on that a little bit?
A: The primary driver there, as you look back, particularly in 2023, when we hit a high watermark for backlog, at that time, we had premium alloy lead times that were out in the 70- to 80-week range depending upon the size range of products. It makes it very difficult for our customers to plan on demand being that far out with the visibility that they have. So we've been working with customers, assuring them an allocation so that they feel comfortable that they are going to have a spot in line with us, but we've been walking back our lead times. And these days, we've gone from, call it, mid-70s to right around 45- to 50-week lead times on those premium alloys. And we've done that just by controlling order entry on a controlled basis, periodically opening up the order book for customers to layer in new orders. So that total level of demand on aggregate of what we expect in the quarters to come, continues to increase. But we've just been walking in the lead times. So this has been very helpful to our customers. It's given them the ability to layer in a higher
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
