Q2 2020 TimkenSteel Corp Earnings Call
Second quarter, two dozen 20 earnings conference call.
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No. It came the call over to Jennifer Beeman. Thank you. Please go ahead ma'am.
Thanks, Good morning, everyone and welcome to Timkensteel second quarter 2020 conference call I'm, Jennifer Beeman Senior manager of Communications and Investor Relations for Timkensteel, joining me today as Terry Dunlap interim Chief Executive Officer, and President, Chris Westbrooks Executive Vice President and Chief Finance.
Oh officer, as well as Tom O'malley Executive Vice President of commercial you all should've received a copy of our press release, which was issued last night.
During today's conference call, we may make forward looking statements as defined by the FCC. Our actual results may differ materially from those projected or implied due to a variety of factors, which we described in greater detail in yesterdays release.
Please refer to <unk> SEC filings, including our most recent form 10-K and form 10-Q, and a list of factors included in our earnings release, all of which are available on the Timkensteel website.
Our non-GAAP financial information as referenced additional detailed reconciliations to its gas equivalent or also included in the earnings release with that I'd like to turn the call over to Terry Harry.
Thank you Jennifer and thanks to everyone on the call for joining us this morning.
Second quarter presented extraordinary challenges to our country to our customers into our company.
Our employees were exceptional facing a challenges confronting timkensteel in this environment.
A few highlights for the core first we operated safely.
Our Osha recordable rate was an all time low for the first half a year.
In addition to our steadfast attention to operating safely our employees have been diligent and following the cobot 19 precautions, we put in place to maintain a healthy work environment.
Diligencing, great teamwork across the company a lot of to maintain uninterrupted service to our customers.
My sincere thanks to the Timkensteel team for their ongoing focus on staying safe and watching out for their co workers every day.
Second we were able to deliver positive EBITDA and cash flow despite extremely weak demand.
Last quarter, we shared some of the immediate cost reduction actions, we introduced when the impact of Cobot 19 was becoming clear, including reduced operating schedules rolling for loads for salaried employees reduced compensation for a board of directors and leadership team and the suspension number for a one k. matching contribution.
Since to name just a few.
These incremental cost reductions combined with other pre coli cost reduction actions and systemic working capital management initiatives.
Attributed to generating second quarter, EBITDA of $5.7 million and second quarter operating cash flow of $16.1 million.
As expected demand in the second quarter fell significantly as a result of customer plant shutdowns order cancellations and delays.
Second quarter shipments of 108700 tons represented the company's lowest shipment quarter in more than 30 years.
Initially our automotive sales were severely impacted by our customers immediate and widespread plant outages, followed by their slow and sometimes choppy restart process. He's.
As you progress we began to see it somewhat steady your recovery in fact June sales in the light vehicle sector exceeded industry forecast due in part to stronger than anticipated online sales and the reopening of dealerships.
In the truck and as you'd be markets relatively low vehicle inventory levels drove more immediate ramp up efforts during the quarter and for the products, we sell for those high volume models.
[noise] customers in the industrial end markets, including defense generally remain operational during the quarter with fairly stable demand and inventory levels.
Our distributors continue to align inventory with changing demand from their customers and continue to be cautious and buying patterns and inventory management.
It's widely reported the energy market remains under great pressure as result of low pricing and demand and as a result, we expect very low levels of activity to continue for the foreseeable future.
Most importantly, we're staying close to our customers as they navigate these many challenges and continue to align our operating schedules accordingly.
Overall, we estimate our ship times were 100000 lower in the second quarter due to the impact of Cobot 19, with a corresponding decrease of $120 million in net sales.
From an operations and cost management perspective, we aggressively reduced production schedules at all plants in response to decline in demand.
In addition, we instituted rolling furloughs that impacted 90% or salaried workforce by an average of five weeks further reducing administrative costs.
Beyond the immediate challenge of covert 19, we remain focused on long term performance and profitability improvement actions.
We continue to implement a number of long term cost reduction initiatives launched in late 2019, an early 2020.
As we discussed in the past two calls numerous cross functional teams focused on a wide range of cost reduction and working capital efficiency work streams.
Our active across virtually all functions and activities of the business.
A few examples include.
Ongoing actions to restructure our organization in order to reduce costs improve the efficiency of decision, making and ultimately further improve service to our customers.
These actions have resulted in a 15% head count reduction in the first half of 2020.
And a 28% reduction since the beginning of 2019.
Another example is the ongoing evaluation of our overall product portfolio to focus on areas of strength and adjusting in areas no longer critical to our customers or where market dynamics have changed significantly.
One recent area. This focus has been on our seamless mechanical tubing product line.
Where we will be eliminating certain historically unprofitable sizes from our product catalog.
We're working closely with customers to complete a smooth transition by year end.
We anticipate the impact of this action will result in a 3 million dollar per year EBITDA improvement.
There are dozens of other projects similar to the examples I just mentioned being worked on in all areas of the company with the goal sustainable profitability and cash flow generation.
We will continue to update you on our progress.
In addition, as we've discussed on recent calls our value added components product line continues to be an area of focus.
As a reminder, these are highly engineered parts made from timkensteel bars in tubes for the automotive industrial and energy markets.
We provide solutions to our customers to simplify their supply chain and supplier base by helping to manage the supply chain from raw material to finish component.
Providing customers with just in time parts inventory to meet their manufacturing needs.
The expansion of our value added components facility in your Dayton, Ohio remains on time and under budget.
In July production of semi finished and finished powertrain components for our automotive customers began in the expanded machining operations at that facility.
We're now working closely with three major customers on final qualifications and ramp up production schedules.
We estimate sales from these new product launches to be modest in 2020 at approximately $25 million increasing to approximately $80 million in 2021.
In addition, we continue to review application and performance requirements to identify new opportunities.
With that I'd like to turn the call over to Chris.
Chris.
Thanks, Terry Good morning, everyone and thank you for joining us today.
I also wanted to take the opportunity to acknowledge the hard work and dedication of our entire organization during a very challenging second quarter.
Although the sequential and prior year periods, our unfavorable comparisons we safely operated throughout the second quarter to support our customers' needs significantly reduce costs expanded our cash position and continue to maintain a high level of available liquidity.
So thank you to all our employees for your hard work and dedication.
Moving now to financial matters on a GAAP basis, our second quarter of 2020 net loss was $15.3 million.
Excluding certain items, the adjusted net loss was $14.3 million in the quarter.
Adjusted EBITDA of $5.7 million in the second quarter was significantly aided by the ongoing cost reduction program that we previously discussed as well as additional cobot 19 related cost reduction actions.
Our cash balance was at a record high level with $75.5 million at the end to the second quarter, an improvement of nearly $10 million from the end of March.
Available liquidity from our credit facility plus cash on hand was approximately $252 million as of June Thirtyth 2020.
Cash generated from operating activities in the second quarter was $16.1 million in first half of 2020 operating cash flow generation was approximately $80 million.
Moving now to the drivers of the second quarter results.
Net sales of $154 million in the quarter declined 41% in the first quarter of 2020 and 54% from the prior year second quarter, both reflective of a significantly lower demand primarily as result of automotive industry disruption related to cope with 19 and continued weakness in the energy sector.
As Terry mentioned, we estimate the total negative impact of Cobot 19 on our second quarter net sales was $120 million and when combined with the late first quarter impact. The total year to date impact is estimated to be $130 million.
In addition to lower volume net sales were compressed by lower surcharge revenue in the second quarter.
The decline in sequential quarter surcharge revenue of $21.6 million was the result of lower ship tons.
In comparison to the prior year second quarter the decline in surcharge revenue of $53.6 million was the result of both lower volume and a 29% decline in average raw material surcharge per tonne on lower scrap and alloy prices.
As Terry mentioned shipments were 108700 tons in the second quarter of 2020.
The month of May represented the low point in the second quarter with shipments of approximately 30000 tons.
From May to June shipments improved by approximately 55%.
The overall decline in second quarter shipments drove a $16.8 million sequential reduction and adjusted EBIDTA and a 26.9 million dollar reduction versus the second quarter of 2019.
From an end market perspective shipments the automotive customers were 32700 tons in the quarter, 63% decrease from the first quarter and 70% decrease from the second quarter of 2019.
These decreases are almost entirely the result of temporary automotive plants stoppages related to cope with 19.
Although demand in shipments began to improve in June automotive shipments have not yet returned to pre cobot stable levels.
Shipments were 63200 tons to industrial and 9100 tons to energy in the second quarter, both of which were lower sequentially and as compared to the prior year quarter.
So with 19 related demand reduction impacted the industrial and energy markets, but not significantly as automotive.
Additionally, energy shipments continued to be negatively impacted by a weak oil and gas market.
Oh, CTG billet shipments of 3700 tons were minimal in the quarter and are expected to remain modest for the foreseeable future.
Price and mix improved in the second quarter with a favorable EBIT the impact of $7.4 million compared to the first quarter and $4.4 million compared to the second quarter of 2019.
Reduced shipments of lower margin products, including those CTG billets positively impacted average price and mix.
Manufacturing improved $3 million sequentially and $7 million in comparison to prior year second quarter.
These improvements were primarily a result of additional cost reductions aided by flexible production schedules and unpaid salary furloughs, partially offset by unfavorable fixed cost leverage on significantly lower production levels in the second quarter of 2020.
Melt utilization declined to approximately 20% in the second quarter as a result of the cobot 19 related low demand environment.
Close collaboration between our manufacturing supply chain and commercial organizations has enabled the company to manage weekly production schedules with flexibility to ensure alignment with demand while maintaining high on time delivery for our customers.
We're not operating hourly employees around layoffs in costs are significantly reduced.
We will continue to closely managing production schedule on a weekly basis going forward, while ensuring that we are positioned to meet the needs of our customers that demand recovers.
SGN a expense for the quarter was $16.8 million, an improvement of $6.6 million sequentially and $3.4 million from the prior year second quarter.
Lower Sq Nay expense was primarily due to savings from prior restructuring actions and cobot 19 related actions, partially offset by increased variable compensation.
Moving on to cash and liquidity, our total available liquidity was approximately $252 million at the end of the second quarter 2020 and improvement of $21.6 million since the end of 2019.
Compared to the ended the first quarter total available liquidity declined $38.1 million as a result of the lower asset borrowing base given the current economic environments and ongoing working capital management activities.
During the quarter the company generated free cash flow of $9.4 million and closed the quarter with $75.5 million of cash.
The positive free cash flow generation and high level of cash was the result of inventory reductions in all categories effective management of receivables and payables and the continued benefit of aggressive cost reduction actions.
In addition to positive free cash flow, we've continued to make progress with the ongoing sale of noncore assets and receive cash proceeds of approximately $1 million during the second quarter. Upon the sale of certain assets located at our former facility in Houston, Texas.
Year to date proceeds from the sale of noncore assets exceeded $8 million.
Our convertible debt with a principal amount of $86.3 million was reclassified from a long term liability to a current liability in the second quarter reflective of its June 1st 2021 maturity.
We continue to monitor the capital markets and believe that options exist to address the convertible debt opportunistically in advance of we're at its maturity.
Overall, our liquidity position at the end of June remains sufficient to meet the current needs of the business.
From pension plan perspective, the company recorded a noncash remeasurement gain of $1.9 million in the second quarter of 2020, which has been excluded from our adjusted EBITDA results.
The ongoing quarterly Remeasurement of the U.S. salary pension plan obligation and assets in 2020 was triggered in the first quarter. This year.
Following the second quarter U.S. salary pension plan Remeasurements. The total funded status of all company pension plans was approximately 85% as of June Thirtyth 2020 flat to the end of the first quarter and down slightly from the end of 2019.
There are no additional required pension contributions in 2020.
Switching gears to our cost reduction actions last quarter I walked you through a variety of cobot 19 related actions that we implemented at the onset of the pandemic on top of the ongoing cost cutting actions commenced in 2019.
The cobot 19 related actions reduced administrative expenses and preserved approximately $5 million of cash during the second quarter.
Additionally, the company deferred cash payment of $2 million of social security payroll taxes during the second quarter, an opportunity that was afforded by the cares Act.
Future cash deferral in the second half of 2020 is estimated to be $5 million, bringing the total 2020 estimated payroll tax deferral to $7 million there will be paid into equal installments at the end of 2021 in 2022.
We're currently analyzing the carriers act employee retention credit given that our gross sales were down in excess of 50% in the second quarter of 2020 in comparison to the prior year.
We'll provide an update on this topic in the future as the analysis is complete.
As it relates to manufacturing staffing demand related layoffs in the second quarter generated approximately $11 million of savings as I mentioned, we will continue to align plant staffing to our manufacturing schedules and demand in the coming months.
These actions in addition to the previously discussed ongoing 70 million run rate savings program contributed significantly to both our second quarter adjusted EBITDA results and our substantial available liquidity.
Looking forward from a commercial perspective order bookings have improved in recent weeks with the second half of the third quarter looking stronger than the first after the quarter.
But demand has not yet returned to pre cobot levels.
Visibility continues to be limited as customer order bookings are aligned with our relatively short lead times.
Operationally, we've recently performed the majority of our annual shutdown maintenance activities with an estimated cost of approximately $6 million in the third quarter.
Although this represents an increase of approximately $2 million from the third quarter last year.
Our full year 2020 shutdown maintenance costs are estimated to be a reduction of $3 million from 2019.
Lastly.
We further reduced our planned capex now expect to spend between 15 million and $20 million in 2020.
We believe this level of spending is sufficient to complete the value added components expansion in our Eaton, Ohio facility as well as continue to maintain our assets at a high level and a lower than normal production here.
To wrap up we remain focused on supporting our customers needs operating our facilities safely and in alignment with the current demand environment and continuing the aggressive focus on cost reduction in working capital management.
Given the continued uncertainty around the extending duration of cobot 19, and the resulting volatility in our end markets, we're not providing quarterly earnings guidance at this time.
This wraps up my prepared remarks, we would like to open the call for questions.
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Joe Your question press the pound.
Your first question comes the line of Seth Rosenfeld of Exane.
Good morning, Thank you for taking my questions today.
Good morning satisfy may.
Morning.
I have a question with regards to product mix impact going to ask Pete I'm. Obviously, we saw it somewhat surprising improvement in sales per ton during the quarter you touched on earlier the decrease in CPG substrate sales would think a contributing factor to that can you give us any more color on kind of what drove that scale.
I have an improvement in realized pricing despite the market headwinds and then when we look forward to Q3 and beyond.
Q2 print kind of the right run rate or should be resetting that lower for any one off factors as we look forward. Thank you well assess well first of all due to our much lower automotive shipments it certainly had an impact.
On the average selling price and I don't think you should plan on it being the same for the third quarter.
At the highest level. That's that's was really the biggest driver.
Tom you want to add just any other color you want to put on that please.
Yeah, Terry that's that's exactly correct that the comprehensive level.
Our average values were much more influenced by mix than they were price.
Large level.
And the biggest inflow words influencers of that average value from mix perspective was the lower shipments.
Mobile on highway products, which are lower alwy containing type materials.
And the much lower shipments of oil country tubular goods billets.
If you look deeper into the markets themselves.
In our industrial markets. The average values were reasonably high in second quarter.
Again that was a mix related issue and.
The mix shift and industrial was based on how we content average values were impacted by lower shipments, so low oil or low alloy containing bar products to the general industrial markets offset by high alway containing products for defense type applications.
And in energy a few excuse the CTG billets from the rest of the mix.
A mix shift that happened there was more product driven.
A product type two.
A large percentage of higher average value to products in Q2.
Energy shipments included 51% to products.
Relative to only 19% in Q1.
I don't expect we don't have much visibility on on the forward as we're still booking in Q3.
So.
Are those average value is going to hold not not at the comprehensive level, because we're going to be reintroducing.
Much larger volume of automotive products.
And within the sub markets that mix is going to shift as well as we go into Q3, but still hard to forecast because we're still booking in that window.
Okay. That's very clear so we should expect something of the stuff lower just as auto volumes recover.
A more normalized run rate thereafter based on the more specific product mixes within each end market it sounds like.
That's very clear and then second question. Please with regard to that look for Q3 shipments and you just touched on the fact that you're still booking you don't have full clarity could last quarter, we are able to give us a little bit of color with regards to kind of current utilization rate at the time of results.
As of today I'm more already.
Working our way through the third quarter can you tell us a little bit where you've been through July in early August with regards to volumes or utilization rates. Please.
Chris you want to take that one.
Yes, we can't get into a lot of details on that we have seen our production facilities continue to.
Be operated as demand continues and that this is a gradual improvement in demand in its choppy. So it could change significantly a week to week and that's how we're managing it.
But it's not back to say Q1 or prior levels.
Okay. Thank you very much.
Welcome.
Your next question comes line of Tyler Kenyon of Cowen.
Hi, good morning.
Good morning, Tyler.
Chris curious as to maybe how we should be thinking about working capital moving into the third quarter a another strong release in the in the second quarter here and I'm curious as to how we should be thinking about that into the third quarter and then as we close close the year realized that visibility is somewhat.
At this point, but anything.
Add would be helpful.
Absolutely, it's still a significant focus for us all of the tactics that we implemented late 19 in the early 20, if continued to benefit US we do expect to see some inventory really seared, but it's modest.
We've taken the inventories down to it to a level that supports our needs today, the receivables and payables are just going to be a function of what's happening happening with our demand.
If we're shipping more you'll see those receivables via use of cash and will be buying more so it's just that the timing of how that comes through so.
It's still a clear focus for us sustaining all those improvements we implemented a floor before we do believe there's opportunity there.
But I can't guide just in terms of the size are exactly the direction.
Got it okay.
And with respect to restructuring is there is there any more cash outflow expected.
Do you expect to realize any further proceeds just from asset sales from some of the restructuring efforts that you've taken thus far.
Yes, that's where we're continuing to work on asset sales and you'll hear more about that next quarter. We have a lot of things in motion there and secondly on restructuring charges. There there will be ongoing charges as we as we go forward. That's just so part of the rhythm what we're on what we're doing.
Chris you want to add anything to that.
Yes at the end of June we had 3.4 million on our balance sheet as a reserve for future payments on restructuring so that cash will go up primarily in the third quarter.
And then obviously any new activities, we have will be incremental to that.
Thank you.
There are no further questions at this time I'll now turn the floor back a region for reman for any additional for closing comments.
I'm sorry, everything on a question.
I apologize, Phil Gibbs of Keybanc capital markets.
Thanks very much.
Good morning.
Good morning, Phil.
So the 6 million of maintenance in the third quarter is that all incremental to what you experienced in the second quarter.
Yes exactly.
Okay.
And then.
It sounds like we've already talked about mix a into the third quarter.
Volumes.
And and you did take obviously, some pretty aggressive cost actions in the second quarter due to the pandemic.
Is there any cost that begins to return.
In the third quarter that that you had taken down.
In Q2 on now that you've got so you've got incrementally better volume visibility on in the automotive supply chain.
Well fell the cares act provided us a lot of opportunities, which we took full advantage out.
Right about at worried about it in our numbers and so with the cares Act.
In particular, the $600 Carlo.
Supplement being gone or at least gone for the moment that that will add some costs back into the business for sure on the hourly side that will change anything we'll continue to run our our playbook with with the operations and staffing accordingly, so there'll be no change there.
So I think the single biggest thing will will be just the impact of the furloughs that we were able to take advantage of on the salary employee side.
And what we do to mitigate that going forward.
Certainly the.
Thomas hasn't decided but they're going to do are not going to do but at the moment theres nothing so.
We would fully expect that to to look different in the third fourth quarters given the current current state.
Chris you want add anything else to that.
It just some specificity on the furlough piece I mentioned $5 million of administrative expense reductions in Q2.
Related to coded about two thirds of that was furloughs that ran April may and June we did continue to run the furlough plant in July for about a million dollars. The savings, but you will we'll see a couple of million dollars difference with higher cost in Q3 as a result in no furloughs.
No further furloughs.
Okay. So that's relative to Q2 with something like that that 5 million salaried.
Hit about half of that comes back and then you get a little bit more that coming back in the fourth quarter.
That's correct.
Okay, Yes.
And then you did talk about some of your your longer term.
Revenue opportunities in the into value added business.
Maybe talk a little bit more about exactly what you're doing there and then and then some of the cadence in the timing and then whether or not your.
Your staff Stan.
Call it the Expensed in terms of your asset capability to meet those.
Goals as of today.
So we do have the businesses the p. paps or have happened then we're now and ramp up mode and.
For the fourth third fourth quarter.
Three major customers, which were not at Liberty to say, who those are but.
Those are ongoing just on totally on plan the the added equipments pretty much in place.
The the employee base is already there.
Between training and the activity of making the products and getting it to the rhythm of shipping to our customers. So that will continue to ramp up through the rest of the third and fourth quarters and be at close to full run rates in the first quarter of.
2021, so wouldn't expect any additional significant cost.
Staffing or or other expenses that are already there already in the business prepared to.
Support or three customer programs, we have with the expansion. So that's where we mentioned the run rate getting up to two a full year $80 million type number.
As we head into 20 2021, so we're we're staffed up ready to go.
And.
So it's all systems go at this point.
The company.
Thank you.
Last one from.
Yes.
No go ahead Michael.
I was going to jump to something else. So if you wanted to finish that no no no. Please go ahead.
Okay. So the.
The second quarter I would imagine had did have some.
Benefit from the widening of of a prime scrap to to obsolete scrap this quarter, certainly that looks to be narrowing pretty aggressively should we consider raw material spread impact in the third quarter best best you could see it.
Well.
It's hard to predict right you've heard from everybody else in their views on what's happening in the scrap market and it's still appears to be highly unpredictable. So the spreads we've had over the last couple of months have been very positive.
I I think they'll continue to be positive from a historical perspective, whether they stay at the same levels that.
We enjoyed for a couple of months in in the second quarters to be determined so but it doesn't appear there going back to sort of historical spread levels at least in the short term so.
We can sustain what what we were able to achieve in the second quarter is to be determined.
The one thing about the scrap market right now so it's.
Appears to be like many other things fairly unpredictable at the moment so.
My guess would be somewhere in the metal Phil between.
Where we were and where the historical numbers are.
But of course shifts and as I say that by Tomorrow that'll change again so.
Yup.
Forecast, often thanks, guys for but [laughter] okay. Thanks.
And your question Transdigm. Thank you Glenn turning over to Jennifer for any closing or additional comments.
Okay, great. Thank you everyone. Thanks for joining us today, we look forward to updating you next quarter and stay healthy. Thank you.
Thank you that does conclude today's conference call you may now disconnect.