Q4 2020 TimkenSteel Corp Earnings Call
Today's conference is being recorded if you require any further assistance. Please press star zero I would now like to turn the call over to Jennifer Beeman. Thank you. Please go ahead.
Thank you and good morning, everyone and welcome to Timken, Steel's fourth quarter and full year 2020 conference call I'm, Jennifer Beeman Senior manager of Communications and Investor Relations for Timken Steel joining me today is Mike Williams, President and Chief Executive Officer, Kris Westbrooks executive.
<unk>, President and Chief Financial Officer, Tom Moline, Executive Vice President of commercial and Bill Bryant Executive Vice President of manufacturing and supply chain.
You all should have received a copy of our press release, which was issued last night during.
During today's conference call, we may make forward looking statements as defined by the SEC. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in yesterday's release.
Please refer to our SEC filings, including the most recent form 10-K and form 10-Q, and the list of factors included in our earnings release, all of which are available on the Timken steel website, where non-GAAP financial information is referenced additional details and reconciliations to its GAAP equivalent are also included.
In the earnings release with that I'd like to turn the call over to Mike Mike.
Thank you Jennifer and thanks to everyone on the call for joining us this morning.
Since joining timken steel in January I've spent my time getting to know the people and the business.
It's still early but I'm incredibly excited about the opportunities that lie ahead for timken steel.
I think Terry Dunlap for his leadership.
In an incredibly difficult year and for helping the company strengthened its financial position during his time as interim CEO.
The company's cash generation and profitability improvement initiatives, certainly enabled the company to weather some difficult quarters.
And I. Thank the employees of Timken steel, who clearly demonstrated they have what it takes to transform this company to a consistent high performer in the industry, we're not there yet, but I am happy to be working alongside smart dedicated employees, who are driven to succeed.
Turning to safety the wellbeing of our employees took a whole new meaning in 2020.
I believe safety is our number one priority and therefore I am pleased timken steel had the lowest rate of recordable injuries since the company's inception in 2014. Additionally.
Additionally, our employees have been diligent in following COVID-19 protocols and because of this we have not experienced any operational shutdowns due to illness.
We continue to collaborate with our employees suppliers and the U S. W to ensure our workplaces remain exceptionally safe.
During 2020, the company focused on generating cash through disciplined working capital management and was able to successfully launch numerous efficiency initiatives improved the company's capital structure and dry systemic cost savings all of this hard work helped to improve the cost structure.
And better position the company to fully leverage rebounding markets.
Speaking of our markets in the fourth quarter, we saw steady automotive demand recovery, particularly in the light truck and SUV categories.
Though modest in recent months, we continue to monitor the lingering effects of COVID-19 on automotive production.
Helped by increasing demand in auto our fourth quarter volumes are almost back to pre COVID-19 levels.
Now our attention has turned to the recent disruptions due to the global semiconductor shortage.
At this time, we have not experienced a meaningful impact to our order book as a result of this supply chain disruption and we continue to stay close to our customers to understand any long term implications.
In our industrial markets, we continue to see positive indicators, but volumes are not yet back to pre COVID-19 levels. The industrial markets, we serve such as industrial machinery rail agriculture power generation in some areas of defense are experiencing modest growth.
The distribution channel remained very cautious through 'twenty 'twenty year end, however, distributors are coming back into the market at a more accelerated pace than the industrial Oems, which we see as a common in a market recovery.
Lastly, the energy market continues to remain challenged recently, we began to experience an increase in inquiries, but this has not translated into meaningful orders.
U S rig counts improved in the fourth quarter, but are expected to remain at depressed levels for the foreseeable future.
Moving to pricing the environment going into contract negotiations in the fourth quarter was somewhat challenging.
We expected pricing headwinds for select markets and applications, but successfully maintained our market share.
The spot price and environment presented opportunities for price increases and SB Q and seamless mechanical tubing over the last three months and as recently as this week you probably saw those publicly announced and we were encouraged that thus far they have been accepted by the market.
With that I'd like to turn to the recent action, we took to optimize our milk and casting assets.
We continually review our operations to ensure we are properly positioned to meet our customers' needs as efficiently as possible.
As a result of our thorough evaluation of our melting casting assets, we plan to indefinitely idle the Harrison melt and casting assets late in the first quarter of 2021.
This was not an easy decision to make but given the prolonged weakness in the energy market it is necessary.
By operating one melt shop at our fair crafts location, we will be using our manufacturing assets more efficiently, while producing the best possible mix of products to meet our customers' needs.
Impacted hourly employees may have continued employment opportunities as defined in their basic labor agreement.
It is also important to note that this action does not impact.
The Harrison rolling and finishing operations.
This action aligns with our goal to improve profitability through the optimization of our assets.
Before I turn it over to Kris I look forward to discussing our opportunities and focus areas in the future.
Thank you for your continued support of Timken steel and stay safe and stay healthy with that I'd like to turn the call over to Kris Kris.
Thanks, Mike Good morning, everyone and thanks for joining us today.
Despite a challenging environment I'm proud that our team delivered improved profitability in the quarter as well as significant operating cash flow, which led to an increase in total liquidity.
Both our operating cash flow of $173 $5 million for the full year of 2020, and our total liquidity of $314 $1 million at the end of the year represent record highs since the inception of the company.
Turning to our quarterly results on a GAAP basis fourth quarter of 2020 net loss was $12 8 million compared to a net loss of $84 $6 million in the fourth quarter of 2019, and a net loss of $13 $9 million in the third quarter of 2020.
On an adjusted basis fourth quarter of 2020 net income was $600000. This adjusted net income represented a significant improvement from an adjusted net loss of $27 $3 million in the fourth quarter of 2019, and an adjusted net loss of $17 $3 million in the third quarter of 2020.
On 7% lower net sales adjusted EBITDA improved to $27 million in the fourth quarter of 2020 from an adjusted EBITDA loss of $8 $7 million in the same quarter of 2019.
This represents a $29 $4 million improvement in adjusted EBITDA, and a lower demand environment reflective of our successful cost reduction actions discussed in prior quarters and a continued focus on cost control.
Additionally, adjusted EBITDA improved $18 $1 million sequentially.
Moving now to the drivers of the financial results.
Ship tons in the quarter increased 6% to 164000 tons compared with the third quarter of 2020, but declined 9% from the fourth quarter of 2019.
From an end market perspective, improving demand in the automotive and industrial end markets drove higher sequential shipments.
Shipments to automotive customers increased 6000 tons sequentially to 96300 tons, while industrial shipments increased 4000 tons sequentially to 63300 tons.
We continued to be impacted by a weak energy market with shipments of 4100 comes in the fourth quarter down slightly from the third quarter.
Net sales of $211 $2 million in the quarter increased 3% compared with the third quarter of 2020, but were down 7% compared with the fourth quarter of 2019.
The sequential increase in net sales is largely due to the increased demand in the automotive and industrial end markets, which continued to rebound following the spring of 2020 collapse in demand stemming from the COVID-19, pandemic and the related temporary plant shutdowns.
From a manufacturing cost perspective utilization rates in the quarter improved both sequentially and compared with the fourth quarter of 2019, and melt and other manufacturing processes, including rolling to piercing and finishing however, melt utilization still remained low at 43% in the fourth quarter of 2020.
Additionally, our continued focus on cost control the completion of the annual shutdown maintenance in the third quarter of 2020 and savings from prior head count reduction actions all contributed to a $15 million sequential manufacturing cost improvements and a $19 million improvement from the prior year quarter.
Recent actions to improve manufacturing efficiency and reduce cost we will continue to benefit us going forward.
We offset by inflation.
Turning to SG&A expense in the fourth quarter of 2020 SG&A of $18 6 million was a slight sequential increase as a result of higher variable compensation expense.
Excluding certain items SG&A improved 11% in both the fourth quarter and full year 2020 in comparison with the 2019 periods.
In dollar terms on an adjusted basis, we reduced SG&A by $9 $8 million in 2020.
Total SG&A head count declined by 23% throughout 2020. This full year reduction was primarily a result of prior restructuring actions supported by a continued focus on process simplification and efficiency.
Looking now at cash flow.
The company generated operating cash flow of $52 $5 million from the fourth quarter of 2020, which resulted in record operating cash flow for the full year of $173 $5 million.
Combination of working capital management improvements and higher profitability drove the cash flow in 2020.
As we start 2021 cash from operating activities is expected to be a use of cash in the first quarter, given improving demand and a rise in raw material prices, which is expected to impact all working capital elements.
Capital expenditures in 2020 totaled $16 $9 million and are projected to be approximately $20 million in 2021.
Capex plans in 2021 includes manufacturing equipment improvement upgrades and maintenance as well as modest investments to drive further process improvements and efficiencies.
Additionally, cash from investing activities included nearly $11 million from the liquidation of noncore assets in 2020.
Moving onto capital structure in December we successfully exchanged $46 million of convertible debt that was set to mature on June one 2021 and extended the maturity date to December one 2025, while maintaining a consistent 6% interest rate on the instrument.
At this time, we plan to repay the remaining outstanding balance of $40 2 million on our original 2016 convertible debt upon maturity in June 2021, with available cash and our credit facility borrowings.
The company has no additional near term debt maturities and the outstanding balance on our credit facility was zero at the end of 2020.
Total liquidity, which includes available borrowing capacity on our credit facility plus cash was a record $314 1 million at the end of 2020.
This represents a significant increase of $83 $8 million since the end of 2019, driven by the company's strong operating cash flow generation.
At the end of 2020, our cash position was $102 8 million, an increase of $75 $7 million since the end of 2019.
Overall, our total liquidity position at the end of 2020 remains sufficient to meet the current needs of our business.
From a pension and postretirement benefit plan perspective, we recorded a $14 $7 million non cash loss from the Remeasurement of all plans in 2020.
The Remeasurement loss, which is excluded from our adjusted EBITDA results was driven by a reduction in the discount rate more than offsetting another year of strong asset returns.
The average discount rate dropped by approximately 75 basis points in 2020 on $1 5 billion of liabilities and the average return on assets was approximately 15% on $1 $3 billion of assets.
In total the accounting funded status of all company plans was 86% as of December 31, 2020 unchanged from the end of 2019.
Required pension contributions are expected to be modest at 1 million to $2 million in 2021.
Before I wrap up the cash flow and balance sheet discussion I'd like to highlight two matters afforded by the cares act that will impact our cash flow in the future for.
First we deferred $6 $4 million of company's social security payroll taxes in 2020.
Remittance of these deferred payroll taxes will be in two equal installments at the end of 2021 and 2022.
Additionally, beginning at the start of 2021, the payroll tax deferral option ended and we again began rebidding current payroll taxes.
Second during the fourth quarter of 2020, we accrued $2 $3 million for the employee retention credit on qualifying wages and benefits timing.
Timing of receipt is expected sometime in 2021.
Switching gears to the indefinite idle of the Harrison melting casting assets I would like to elaborate on Mike's comments with some additional financial details.
As we noted in our recent filings, we expect to record an $8 million to $10 million noncash charge in the first quarter of 2021 associated with the write down of the Harrison melting casting assets.
Regarding the $15 million to $20 million estimated annual savings.
It's important to note that all impacted hourly employees have continued employment opportunities as defined by their basic labor agreements as opportunities arise in the future.
As such the ultimate number of impacted employees is unknown at this time however.
However for the previously noted annual savings estimate we've assumed about one third of the approximately 100 employees will be retained elsewhere in our camp manufacturing footprint as demand requires and the remaining two thirds of employees remain on layoff for the foreseeable future.
From a timing perspective, approximately half of the estimated annual savings were realized in 2020, given the low utilization rate of the Harrison melting casting assets and corresponding significant periods of time that employees were on demand driven layoffs during 2020.
Following the employee benefits continuation period, we expect full run rate savings to be achieved beginning in 2022.
We also expect that over time, we will realize additional manufacturing efficiency savings with a single melting casting shop at fair crest as well as avoiding further capex and maintenance expenses associated with the Harrison melting casting assets.
Following the indefinite idle or the Harrison melting casting assets, we are projecting the aircraft's melton casting assets to run above 70% utilization for the remainder of 2021.
Aircraft has successfully operated at this and higher levels of utilization for many years in its history.
As a reminder for aircrafts total annual mill capacity is approximately one 2 million tons of raw steel.
To wrap up my prepared remarks, we're encouraged by the improving demand in the automotive and industrial end markets, but remain cautious given the uncertainty in customer supply chains and the ongoing COVID-19 pandemic.
Our strong 2020 cash generation and resulted in total liquidity provides us with significant financial flexibility to execute on our strategic initiatives aimed at further improving the profitability of timken steel.
We look forward to sharing our progress going forward.
Now like to open up the call for questions.
Ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from Justin Bergner with G Research Your line is open.
Welcome aboard Michael and good morning, Chris.
Good morning, Justin.
So I wanted to delve a bit more into the Harrison.
Idling.
I guess for starters, the 8-K talked about $15 million to $20 million of cash savings.
That all flowing through the income statement.
Or is some of that.
In reduced Capex and then just to clarify your comment from a few minutes ago. So half of those $15 million to $20 million of cash savings would have sort of indirectly been realized in 2020, just given the weak level of demand and and furloughs and other sort of activity taken in 2020 as that.
<unk>.
Yes, correct Justin good morning on the first part of the question those are cash savings, there's no capex element of those and it's primarily savings from from lower salaries and benefits over time.
And then from a timing perspective, you again have that right as well 2020, we realized approximately half of those savings because they're demand driven as melt utilization was very low and employs around layoff in that period and.
In 2021, we're expecting incremental savings of a very minimal amount and then in 2022 is when the run rate savings would it be achieved at the beginning of the year from a cash perspective.
Got it that's helpful. Maybe just two more clarifier there.
For the lack of incremental benefit in 2021 is that because some of the demand related savings are.
Dean on wound or is it just because 2021 was a transition year and then I guess secondly, how should we think about sort of normalized maintenance capex going forward for the business with Harrison.
Indefinitely idled.
So on the first part we're retaining the savings from 2020, it's just they're not incremental to 2021.
So the one.
Associates are on lay off those will continue to be savings in the company in 2021, but it's not going to add additional dollars. There in terms of the maintenance, we do expect to spend more it fair for us to make sure that it's properly maintained may.
It may not be one for one but a similar level of maintenance.
We will be required in total for the company, but there will be some incremental savings, but we do need to make sure. We have fair crushed running at the highest level possible for the future.
Okay understood, but it is 20 million sort of a.
Representative maintenance Capex or is it below what you think.
Would be normalized maintenance capex and sort of the new plant paradigm.
That's a normal level, what we're incurring this year last year lower than prior years, but that's because we do also spend normal expense dollars on maintenance, making sure things are maintained at the highest level, but that's a level that you can expect for the foreseeable future absent any growth investment.
Okay, and then my other big question related to sort of the drivers of the strong fourth quarter EBIT adjusted EBITDA.
Can you talk to think about a $15 million sequential benefit from cost savings and related efforts.
I don't know if that was sort of a gross or a net number and then the second part.
Part of the question would be.
Now that you are on a FIFO system did fourth quarter results benefit from the price of scrap cost timing in the fourth quarter.
So the first part of the question the $15 million I referenced was specifically in the cost of goods sold area for manufacturing.
About a third of that was related to not doing our annual shutdown in the fourth quarter. We did that in the third quarter. So that's a sequential improvement and savings in cost and then there was another component a big component around fixed cost leverage although the utilizations were lower we did capitalize more cost in the inventory in the quarter because we produce more.
So it's really unrelated to our historical cost savings program at least for the two thirds. The remaining third I'd say is specifically around just the continued benefit of the actions that we took previously.
I'm sorry can you repeat the second part you got another part to that I mean, now that you are on a FIFO system did the fourth quarter EBITDA benefit from share price.
Scrap surcharge timing dynamics.
Maybe the price is sort of moving up the for the.
Scrap that you were flowing through your cost of goods sold inventory moved up.
Not significantly in the fourth quarter.
Okay.
I'll hop back in the queue I do have one more question, but thank you.
Sure.
Again to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from Phil Gibbs with Keybanc capital markets. Your line is open.
Hey, good morning, and welcome Mike.
Thanks, Phil.
Question on the fourth quarter.
Obviously very nice cost performance I think as adjusted was alluding to.
Is is everything in the quarter.
Effectively sustainable and persistent in terms of your underlying cost performance in other words can you take this this cost momentum and operating leverage into next year versus versus that level of performance.
Yes, I absolutely believe so Phil.
Overly unique in the fourth quarter, we expect that to continue.
Optimistic that it can improve as well.
Okay.
Perfect and then you had mentioned.
For the automotive supply chain, there could be potential for disruption, but youre not seeing it I think you said your order book is pretty pretty visibly solid and then I think you also mentioned.
Service centers are starting to come back into the market. So it didn't appear to be a lot of that in the fourth quarter on the service center side either so.
Thinking about this right.
Think auto holds up relative to the fourth quarter and and then you get a nice boost in the industrial side from the service centers just coming back is that the way to look at it.
Yes.
We see it the automotive.
Recoveries almost back to pre COVID-19 levels.
And even though the the disruption to the semiconductor issue.
Not seeing any major effect to the platform for vehicle platforms that we're on.
Okay.
So we're feeling pretty good about things right now.
So were speaking of auto where where do you all stand on the New business Awards I know Terry last year was talking a lot about some of these new programs that you are getting.
Downstream business in.
And any visibility you all can provide on that in terms of what where you're at in the process or how much volume.
A much more could be added here.
Yes.
Good morning, Phil This is Tom <unk>.
We started launch.
And ramp up of those new programs last year.
And we realized about a little greater than $20 million in revenue in 2020, as a result of those new programs.
They are still in ramp mode, but they are going quite well, we want to experience a full fully annualized rate even yet this year that won't happen until 2022, but we expect the 2021.
Revenue numbers to be in the $70 million to $75 million range relative to 'twenty.
So youre thinking on that on that downstream auto business you pick up another 50 and change this year is that what youre, saying Tom.
That's correct.
Okay and can you can you just remind us guys.
What some of this some of this goes into or what you've been working on because I.
I think it's not the the vanilla.
S PQ business, it's a little bit more downstream. So maybe just some help in terms of understanding where this goes I realize it might be a little sensitive, but whatever you could share there would be helpful.
Okay. These are value added components that go into the automotive industry.
We create or manufacturer a seamless mechanical tube that we then send into our network of machining sources.
And we have for a very long time been very well position supporting eight to nine speed transmission programs at several Oems for truck SUV and <unk> platforms.
This recent addition is for 10 speed transmissions.
It's a new introduction of a product offering for new transmission planetary gear blanks.
And as I said, we are well into the launch phase of these programs.
These programs are without question considered upgrades to other high performance transmissions.
And it's now a core.
Transmission offering that will be there for many years to come.
Thanks for the color Tom Good luck guys.
Thank you. Thank you.
Your next question comes from Justin.
Alright, Burger with G Research your line is open.
Thanks for the follow up.
I just wanted to refresh her in terms of.
How much of your industrial tonnage typically is not contracted and effectively.
<unk> on the spot like these.
If you look at our overall.
Contract versus spot.
It's approximately 20% for the total company.
And then that's shifted a little bit here in recent months.
If you look at pricing agreements. It is as Kris said about 80% of our portfolio right now the other 20% being more on a spot type arena and that has shifted more towards the pricing agreement.
Volumes, primarily as automotive volumes became a larger portion of our portfolio with the significant decline in energy volumes.
And then relative to relative to automotive, Tom industrials less than that right from a yes from a percentage basis yeah.
Our automotive portfolio is in the in the mid fifties right now.
Industrial OEM, including distribution wood.
It would be in the mid thirties.
I'm sorry, the mid fifties number was what in the mid thirties number of automotive.
Mid fifties for automotive mid thirties for industrial OEM and distribution.
Okay.
I guess you made a comment at the start of the call Michael about the.
Sort of contract pricing season.
And.
I guess, what I was trying to gauge as to the seasoned sort of play out in line with your expectations.
Slightly better or slightly worse in terms of contract pricing.
I would say slightly better than what we were expecting going in.
It was very competitive situations that we were facing and I would say that we came out better than what we thought we.
We were going to.
Okay. That's good.
And then lastly, Michael I know, it's early days for you, but you're a veteran of the steel industry.
It goes without saying that getting.
Tonnage up at Timken steel and getting melt utilization up as a key driver for us.
Future performance of the company are there any sort of commercial opportunities that are jumping out at you that maybe haven't been discussed.
During <unk> tenure.
Looking out over the next couple of years.
Given what you've seen to date.
Of course.
I see quite a few opportunities in the camera.
Actual area.
Most of its focused in.
Effectiveness.
And I guess market participation segmentation are the probably the primary areas.
However, I also see quite a bit of opportunities and enhancing the manufacturing efficiencies as well.
Okay. Thanks again.
And welcome.
Thank you.
And there are no further questions queued up at this time I'll turn the call back over to Jennifer Beeman.
Thank you all for joining us today and that concludes our call.
This concludes today's conference call you may now disconnect.
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