Q1 2021 TimkenSteel Corp Earnings Call
Hello, Brian.
Please be aware of.
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Good day, and thank you for standing by welcome to the Timken Steel first quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session. The <unk>.
Ask a question during the session you will need the press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to Jennifer Beeman Ma'am. Please go ahead.
Thanks, Good morning, and welcome to the Timken Steel's first quarter 2021 conference call I'm, Jennifer Beeman senior manager of communications in the Investor Relations for Timken Steel joining me today is Mike Williams, President and Chief Executive Officer, and Kris Westbrooks Executive Vice.
And Chief Financial Officer.
You all should have 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 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 our 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 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.
We have enjoyed a strong start tour of year, thanks to the recovery of the automotive and industrial markets.
Our improving cost structure.
As a result in the first quarter, our adjusted EBITDA nearly doubled from the prior quarter and we continued to generate positive operating cash flow the.
Of the systemic changes we've put in place over the past 18 months have allowed us to leverage recovery markets and improve profitability.
Before I continue with my remarks regarding the quarter I'd like to cover a few changes at Timken steel.
As announced in our earnings release, our board of Directors has named Ron Rice as our new Chairman following the retirement of Jack Riley <unk>.
<unk> has been an independent member of the Timken Steels board of directors since 2015.
And brings a wealth of knowledge to the role.
For the team when I say, we look forward to working with Ron more closely in the future.
Furthermore, we sincerely thank Jack for his dedication and leadership as chairman over the years.
He was a founding member of our board of directors and under Jack's guidance Timken Steel has built a strong foundation for future growth.
We are grateful for his contributions and we wish Jack well in his retirement.
We also announced that Tom Moline Executive Vice President of commercial operation and Bill Bryant Executive Vice President of manufacturing and supply chain will both be leaving the company.
Kevin Rakitic currently serving as executive Vice President of strategy and development of Timken steel will assume a new role as executive Vice President of sales marketing and business development.
We expect smooth transitions in light of these changes I'd.
I'd like to thank Tom and Bill for their many years of service and we wish them all of the best.
Turning to safety this year, we're focusing on special initiatives to ensure we keep our employees safe.
In 2021, we will implement extensive confined space training refocus on machinery safety.
<unk> with our COVID-19 safety protocols.
And host our annual Iron Shield Awards.
As a reminder, this is a program where we gather safety recommendations from our employees and reward teams for innovative ideas.
As always we will continue to leverage our relationships with our union safety reps to ensure that we provide the right level of training and the right areas.
The wellbeing of our people was of core belief and nothing we do is more important than returning employees home safely at the end of their workday.
Moving to markets, we continue to see steady automotive demand, particularly in the light truck and SUV categories and inventories remain at a historic 10 year low.
We of all read about the commodity shortages, such as semiconductors rubber and resin, which are disrupting automotive OEM production.
We are staying close to customers as they plan for recovery in the second half of the year and beyond.
Regarding the global semiconductor shortage in the.
The fourth quarter of 2020, we had not yet experienced a meaningful impact to our order book.
For the first quarter, we estimate the shortage has impacted our orders by approximately 2000 tons. We expect this will have a larger impact in the second quarter and thus far we have been successful filling any open capacity with short lead time opportunities elsewhere in our customer base.
In our industrial markets, we continue to see positive momentum as evidenced by a 33% sequential increase in our shipments into that end market.
We are encouraged that the majority of the industrial categories, we serve such as industrial machinery, agriculture power generation and defense continue to improve with the overall economy.
Distributor inventories are at historic lows, which is presenting us with free stocking opportunities.
Overall short term energy demand still remains weak we remain cautious regarding the energy market, but there has been some signs of life with modestly improving industry statistics, and a slight improvement in demand to fill inventory requirements.
Regarding scrap pricing the number one bush lean index rose by $170 in the first quarter, reaching $567 per gross ton.
We're optimistic that scrap prices will hold for the remainder of the second quarter due to higher steel mill utilization.
The highlight other events in the quarter, we announced that we signed an agreement with Dido steel to sell our timken steel Shanghai subsidiary for approximately $7 million in cash.
This deal aligns the diodes steel strategy to strengthen the sales technical and business management team and the Chinese market with our desire to provide our customers a sustainable and high quality supply chain in the region.
Together, we have enjoyed a long relationship with Dido steel and this will continue as we support key customers in both Asia and the United States.
The deal is contingent upon completion of usual and customary due diligence and is expected to close sometime in the third quarter of 2021.
As previously discussed we indefinitely idled, our Harrison melting casting assets in the quarter.
We work collaboratively with our employees suppliers and a number of customers to ensure well organized and efficient transition.
Going forward all of our melting and casting activities will take place at the fair crest the location and to date, we're fully manned at fair Kris milk with increased staffing in mid April the support improving customer demand.
By operating one melt shop, we will be using our manufacturing assets more efficiently, while producing the best possible mix of products to meet our customers' needs.
We expect our melt utilization to reach at least 80% or higher in the second quarter of 2021.
Before I turn the call over to Kris I wanted to highlight some of our current corporate sustainability efforts.
Tim can steal operating responsibly and sustainably is as important to us as making clean steel.
For years, the company has been focused on sustainability, and our safety and environmental practices and we're proud of what we've accomplished currently we are working on enhancing our ESG reporting and we recently posted our first ever SaaS fee disclosure on our website.
We believe this is an important step in becoming more transparent in terms of how we manage critical natural resources. For example, this year alone we expect to reduce our greenhouse gas emissions over 10%, we look forward to sharing our long term goals, including ghd reduction.
<unk> later this year.
Our culture is rooted in continuous improvement and being a good corporate citizen, where we work and live.
With that I'd like to turn the call over to Kris Kris.
Thanks, Mike Good morning, everyone and thanks for joining us today.
I am pleased that we started off 2021 with the significant improvement in profitability, both sequentially and compared with the prior year first quarter.
Our quarterly financial results reflect improving industrial and automotive customer demand.
And the increasing raw materials surcharge environment.
The benefit of prior restructuring and cost reduction actions and continued working capital discipline.
Our overall cash and liquidity position strengthened during the first quarter as we generated operating cash flow of $13 $2 million.
We finished march with a record $115 $7 million of cash and $357 $5 million of total liquidity.
Thanks to our employees for successful starts of the year, while remaining focused on daily execution.
Turning to our first quarter of 2021 financial results.
On a GAAP basis net income for the first quarter was $9 8 million or <unk> 20 per diluted share.
Comparatively the company reported a net loss in the first quarter of 2020 of $19 9 million or a loss of <unk> 44 per diluted share the.
The fourth quarter of 2020, net loss was $12 8 million or.
Our loss of <unk> 28 per diluted share.
On an adjusted basis net income for the first quarter was $22 $6 million of 43 per diluted share a significant improvement from prior periods.
For comparison purposes, the first quarter of 2020, adjusted net loss was $11 3 million or a loss of 25 per diluted share.
Adjusted net income in the fourth quarter of 2020 with $600000 or one penny per diluted share.
As it relates to earnings per share I would like to point out that the diluted share count in the first quarter of 2021 was $55 7 million shares for further details regarding the additional shares included in the calculation for the convertible notes and share based compensation awards as well as the treatment of the convertible debt interest expense. Please refer to the earnings per share.
Disclosure in our form 10-Q filed yesterday.
Turning back the profitability adjusted EBITDA improved to $48 million in the first quarter of 2021.
This was a substantial improvement of $31 $8 million from the first quarter of last year, and an improvement of $20 $1 million from the fourth quarter of 2020.
Adjusted EBITDA in the first quarter of 2021 represented the company's highest level of quarterly adjusted EBITDA since 2014.
Moving now to the drivers of the financial results.
Ship tons in the first quarter improved 18% to 193400 tons compared with the fourth quarter of 2020, but declined 9% from the first quarter of last year.
The order book expanded throughout the quarter in the industrial end market and we experienced continued strength in the automotive sector.
Shipments to our industrial customers increased 21100 tons sequentially or 33% to 84400 tons with demand improvement from both the industrial OEM and distribution customers.
Automotive customer shipments increased seven 200 come sequentially or 7% to 103500 tonnes in the first quarter.
In the energy end market, we continued to be impacted by weak demand with shipments of 5500 tonnes, albeit an improvement from the fourth quarter net sales of $273 6 million in the quarter increased 30% compared with the fourth quarter of 2020 and improved 5% compared with the first quarter of last year.
About half of the sequential increase of net sales was due to higher industrial and automotive shipments.
The remainder of the sequential increase in net sales is primarily due to an improvement in surcharge revenue as a result of of 65% increase in the average raw materials surcharge per ton on higher scrap prices.
From a manufacturing cost perspective, our continued focus on cost control and improved utilization rates in the quarter contributed to an $8 million sequential manufacturing cost improvements and of $19 million improvement from the prior year first quarter.
As Mike mentioned, we completed the indefinite idling of the Harrison melting casting assets and moved all melting and casting activities to our fair craft facility.
Savings associated with this action remain in line with those estimates discussed in our year end 2020 earnings call in February.
From the melt utilization perspective, higher end market demand in the industrial and automotive sectors resulted in an improvement in our first quarter melt utilization of the 59% compared with 43% in the fourth quarter of 2020 and 47% in the first quarter of 2020.
The first quarter of 2021 melt utilization rate was calculated using a melt capacity of approximately 2 million tons given that the Harrison melting casting assets were operational for most of the quarter.
Going forward, we plan to report melt utilization for fair crest, only which as a reminder has the melt capacity of approximately one 2 million tons.
For comparison purposes fair, Chris the only melt utilization in the first quarter of 2021 of 73%.
Now turning to SG&A expense in the first quarter SG&A increased slightly on a sequential basis to $19 5 million as a result of higher variable compensation expense.
In comparison to the first quarter of last year, SG&A declined by nearly $4 million or 17% largely driven by lower employment costs. As a result of prior restructuring actions supported by our continued focus on process simplification and efficiency.
Moving on to cash flow and liquidity the company generated operating cash flow of $13 2 million in the first quarter.
Working capital was a use of cash of $13 1 million in the quarter driven by an increase in accounts receivable and inventory requirements given the higher sales activity.
These cash uses were partially offset by an increase in accounts payable primarily due to higher scrap purchasing levels and prices.
Our working capital management actions implemented in 2020 remain in place and are an important area of continued focus going forward.
The positive first quarter operating cash flow drove a corresponding increase in cash on hand from the end of 2020, resulting in $115 $7 million of cash to close the quarter.
From a liquidity perspective, our total liquidity of $357 5 million at the end of March represented a $43 $4 million improvement from the end of 2020.
The increased liquidity was the result of improved profitability positive operating cash flow generation and an expanded asset borrowing base.
From a pension perspective, the company recorded a small noncash remeasurement loss in the first quarter of 2021 as the result of the required salary pension plan re measurement.
Measurement of the salary pension plan, which is excluded from adjusted EBITDA results will be required on a quarterly basis for the remainder of 2021.
In total the accounting funded status of all plans was 86% at the end of the quarter up slightly from the end of 2020.
In March the American Rescue Plan Act of 2021 was signed into law.
This act includes pension funding relief that we anticipate will have a significant impact on the timing of future required company pension contributions.
As a result of this pension funding relief and based on current assumptions and expected asset returns at this time, we believe are required future U S. Bargaining planned pension contributions will likely be delayed until 2028.
As further information is available regarding the timing and amount of future required pension contributions we will provide updates accordingly.
To wrap up we're encouraged by the improvements in our order book supported by strength in industrial and automotive demand, we're closely monitoring customer supply chain disruption and uncertainty created by the ongoing COVID-19, pandemic and will remain flexible and our operations to meet customer demand.
Looking forward in the second quarter, we expect high single digit sequential growth in our ship tons on a percentage basis as well as sequential increase in adjusted EBITDA.
Second quarter of fair crafts melt utilization is expected to be 80% or higher the support the current demand environment.
Additionally, our cash balance will be impacted by the repayment of the remaining outstanding convertible debt due on June one 2021 at the end of March the outstanding balance of the convertible debt due on June 1st was $40 2 million.
Thank you for your interest in Timken steel, we look forward to sharing our continued progress going forward, we would now like to open the call for questions.
As a reminder to ask a question you will need the press star one on go to all of all of them.
With the drawing a question press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Seth Rosenfeld Exane.
Good morning, Thank you for taking my questions today.
If I can kick off please with regards to your commentary on automotive demand. It sounds like to date that impacted the disruption has the bits of significant for your business that might be getting worse in the Q2. When you think about that mix impact what's the implication the margin perspective of selling of the spot market day versus selling on those fixed although contra.
<unk>.
Perfect.
By the way thanks for the question.
There is definitely of margin improvement on the spot business versus the contractual business and the automotive.
Customers that we have.
Except to add onto that the to the extent it shifts the industrial we would expect that to be of benefit as well.
Okay. Thank you very much and just a follow up can you give us an update on how the annual auto contract negotiations progressed I think of kind of the last quarterly call most of been federal but perhaps not all of them on given the increasing strength in the spot market is there any opportunity to go back and try to renegotiate those contracts we're going into later in the year at what point would be ex that.
Some some reset of potential.
Yes.
We do have some automotive contracts that expire at the end of the first quarter were in were negotiated and completed.
<unk>.
For the second quarter, and they were favorable to our expertise our expectation.
In regards to the existing contracts in place that activity will start later this year typically starts late August through September.
For the next year.
Okay, but you wouldn't find an opportunity to go back and try to renegotiate with January contracts at the stage.
No.
You made a promise of the commitment and we stick to it.
Okay very clear.
One more question on the ESG side of your comments in your prepared remarks explanation to reduce greenhouse gas emissions by 10%. This year can you give us a bit more color on that in terms of.
What the base year for that because of the year over year and also what are the key drivers you can expect of that significant one year since.
Sure Seth.
That's based off of our 2020 emissions in our report so we would expect that 10% improvement of.
2020, and it's primarily driven by the manufacturing footprint actions that we have previously announced and we plan to provide more color as the year progresses on our targets for the future by the end of this year.
Okay. Thank you very much.
Welcome.
Your next question comes from the line of Phil Gibbs with Keybanc capital markets.
Hey, good morning.
Good morning.
Just.
Piggyback SaaS question on pricing and mix. It was the headwind in the first quarter relative to the fourth quarter $6 million.
And with your spot increases an opportunity the shifts of motto tons of new industrial and you did have a very weak mix. It looks like in energy do you think that the first quarter of 2000.
One is the bottom for your for your pricing and mix changes for the year.
So we do expect the mix to improve based on the demand going into the second quarter by market.
I will tell you that quarter over quarter of the major influence was from a mixed price standpoint was more of where carbon versus alloy grades and also we had a strong defense.
Ship of sales level in the fourth quarter that didn't repeat itself in the first quarter. However, we do expect defense volume to increase particularly in the second half.
Okay.
So of carbon versus alloy and then defense non is rich.
In terms of your mix and then some of your spot increases that you put in and in both of <unk> and tubing over the course of the late last year early this year.
Are those starting to hit their stride in the second quarter I would presume you didnt get much given your lead times in Q1.
Yes on a base price quarter over quarter, we saw about a 6% increase overall.
But.
The price increases that were announced earlier in the first quarter.
Taking hold in the second quarter. So we do expect price improvements.
Improvements going forward.
Okay.
And then.
You have completed it appears your consolidation of Harrison of aircrafts did.
Did you have any frictional cost in the first quarter and the results that you didn't call out I know you pulled some stuff out of the numbers to get your adjusted results, but it was there anything in the results.
But you didn't pull out the.
That you would define as friction of all of that that may that may dissipate.
Yes, there were.
There were some.
MRO and spares.
Activity that we had the take charges on in Q1 that won't repeat itself going forward.
The where those where those pulled out done in because I know you didn't make a series of adjustments and the results were those.
Are those still in the results. Despite the exclusions, that's what I was just trying to figure out.
Yeah, Phil of the majority of that was excluded.
Both of the asset write downs as well as the supplies write downs those were excluded from our non-GAAP results there was a smaller amount.
Alloy raw material adjustments as we shifted all of our extra.
Raw materials over to the aircraft's location that impacted Q1, but not overly material.
Okay, Chris and then I appreciate that.
Then last one.
For me as net working capital.
Clearly you've got continued inflation in raw materials better demand levels.
What should we be thinking about in terms of net working capital over the balance of the year.
<unk>.
Sure Phil I'll take a shot primarily in the second quarter of the EBIT the growth that we commented on in our guidance and the higher volume should be of positive driver of cash flow in the second quarter.
We do have some potential working capital buildup for receivables given the higher sales prices.
And higher volumes there.
Ultimately the outcome is going to be dependent on the level of that EBIT growth and how we balance that with working capital. It's clearly going to be of focus for us and we're very well positioned in all of our working capital practices.
Sorry, I can't give you too much detail, there, but definitely still a focus for us.
Starting with the strong top line definitely helps.
And can I squeeze in one more here just for.
Housekeeping purposes, I think the.
The the bottom line number 55 million $56 million from memory.
On the share count in Q1, I know that probably did include some convertibles, what what is that number.
On a pro forma basis as we look ahead were new.
Include the the convert pay down.
There is about $3 2 million shares.
Associated with the 2016 converts that are due in June of 'twenty one during the first.
So you would expect that $3 2 million to come off of that total of share count that you mentioned the 55, 7%.
There is some additional shares for equity based compensation, that's dependent on stock price and other things at the time, so that would be an incremental add then you also have to adjust the top line to the numerator. So the interest expense component that you add back the net income at this level of income would be it would be lower by about six or 700000.
So theres two moving pieces, there lower interest expense add back and a slightly lower share count by $3 2 million and that's at current net income levels.
Does that answer the question of the one so the one three goes to 7% or something on the add back.
And then your 50 657 wherever you where it goes it goes down $3 $3 million in change absent of any changes in your compensation issues. Okay. Thanks, very much youre welcome. Thank you.
Yeah.
As a reminder to ask a question you will need the press Star then the number one on your telephone.
It's one of your question press the pound key please standby, while we compile the Q&A roster.
Our next question comes from the line of Justin Bergner with the G Research.
Oh, Hi, good morning, Michael.
Good morning, John Good morning, Chris.
Right.
I apologize I just jumped on the call little bit late so I hope I'm not redundant.
Here, but I mean, great performance in the first quarter and good outlook for the second quarter, how should we think about sort of the.
FX of inventory profits flowing through the first quarter.
EBITDA and second quarter outlook I mean once.
Steel prices and scrap prices sort of flatten the normalize is there any sort of.
Perspective, you can give us as to.
How much would come off of the EBITDA of.
The first half.
That's a little tough adjusted I mean, we're turning our inventory quickly.
All of the working capital practices that we put in place historically are continuing especially on the raw materials side. So we don't have a lot of.
Cheaper raw materials sitting in there its current purchases pretty much and trying not to do any speculative purchasing or manufacturing, we're making products for customer shipments.
And working our hardest to get it out the door to meet on those customer commitments.
Okay.
And then <unk>.
Just a reminder, I guess for US now that you've consolidated aircrafts.
Whats sort of the maximum level of shipments.
Could you.
Two annual basis, assuming that youre sort of.
Producing for the level of shipments.
Yes, so based on the nameplate capacity of one 2 million that was basically net out about 900000 tonnes of shipments per year.
And that can vary based on mix slightly but I would say that's a good number.
Okay and <unk>.
Just remind us as well I mean, you are on track to do about 400000 tonnes of shipments in the first half.
I mean normal seasonality takes the fact I assume we would annualize that at a little bit less than 400000, but if.
Theres any just the.
Reminder, you can give us as to sort of.
The seasonality in the second half versus the first half just given <unk>.
Production schedules and shifts in holiday outages.
Yes so.
So.
The seasonality of really occurs in the fourth quarter based on what we see and Thats typically driven by the holidays as well as of yearend.
Inventory.
The reductions that the.
But the customers take the managed their inventories per year and typically we see that historically, it's been about 10% to 15% less than the prior quarters.
Okay. That's helpful.
And.
Is there any sort of optimism towards the energy or is it sort of.
Phil.
The.
The a small contributor shipments forward.
Of the future.
I can tell you what we're experiencing.
Is the fact that we have seen a pretty decent increase in activity in regards to inquiries, but that hasn't necessarily translated to orders. The orders that we do of the slight increase in shipments to the energy market is predominantly driven by inventory gaps where requirements to Phil.
The inventories that have been run out or well below the safety levels. So it's kind of hit or miss on that.
The industry statistics are improving in regards to slight to modest.
The growth.
But that's pretty much what we're seeing.
No.
Okay.
Wouldn't call it optimistic but.
We do see some modest slight improvement going forward.
Okay. Thank you.
Yeah.
At this time there are no further questions I would now like to turn the call back over to the management.
Thank you all for joining us today and that concludes our call.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
Okay.
Yes.