Q2 2021 TimkenSteel Corp Earnings Call
[music].
Thank you.
Good morning, and welcome to the Timken steel.
Quarter 2021 earnings conference call I would now like to turn the conference over to your host.
Thanks for good morning, welcome to Timken Steel second quarter 2021 conference call.
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 Vice President and Chief Financial Officer, and Kevin <unk> Executive Vice President of sales marketing and business development you also.
We 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 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 for everyone on the call for joining us this morning.
Like many in our industry, we benefited from robust market demand during the quarter.
Most of our end markets performed well, despite semiconductor related customer outages, which slowed down our second quarter automotive shipments.
However, I am pleased that our teams remain agile and effectively shifted our product mix to serve industrial customer needs, while maintaining a high level of service.
In fact, our overall on time delivery was at 92% of <unk>.
Testament to our continued operational focus.
Our lead times are significantly extended but remain competitive and our order backlog is strong.
With the ongoing economic recovery favorable pricing environment and continued cost discipline, we achieved record net income and adjusted EBITDA and continued to generate positive operating cash flow.
Yes above all else is safety and we continue to focus on driving continuous improvement throughout our organization.
While there are many initiatives underway. Most recently, we focused on the sales execution of a portion of our annual maintenance shutdowns, which occurred in July with excellent safety results.
I am also encouraged that our teams have made good strides with our corporate sustainability efforts as.
As we work to refine our future strategic direction, we recognize that ESG must play an integral role in our future growth.
As you recall last quarter, we published our first ever SaaS the disclosure now.
I am pleased that we've continued the positive momentum not only has the teeth and gathering data to build a realistic and achievable targets.
But they have begun work on sustainable initiatives.
Look forward to sharing our long term goals, including ghd reduction targets as early as September.
Moving to our markets and automotive we believe the semiconductor supply chain disruption was most profound in the second quarter as our automotive shipments decreased by 10% sequentially.
We estimate that the disruption negatively impacted our automotive shipments by approximately 16000 tons in the quarter.
At this time, we expect third quarter automotive shipments to continue to be negatively impacted by periodic customer operating schedule changes. However, with many of the Oems signaling a strong second half for the year. We believe the supply chain will continue to stabilize throughout the rest of this year and into.
For 2022.
Before moving to our industrial market update I want to congratulate the team at our facility in Eaton, Ohio for being awarded the 2020 General Motors supplier quality Excellence Award.
As a reminder, this facility supports for manufacturing of 10 speed ring gear blanks, and 8 speed opinion, Brian that shipped directly into GM transmission plants.
This is the fourth time, we have been awarded this honor.
As a tier 1 supplier to GM timken steel are evaluated on business performance metrics, such as supply chain effectiveness launched delivery total enterprise cost as well as cultural priorities, including transparency communication responsiveness and total enterprise approach.
This award originates from the GM quality team and we know that to be successful quality must be supported by all of our functional teams my sincere congratulations to the teams.
As I mentioned earlier, our industrial markets continue to perform well in the second quarter.
Sequentially, we saw 33% increase in our shipments and we believe strong industrial demand is sustainable into the second half of 2021.
Most industrial categories, we serve such as distributions defense agriculture mining general industrial and bearings all increased sequentially.
Turning to energy. This short term demand remains historically low with improving industry statistics, though.
Shipments into this market increased sequentially by 58% as we experienced some demand recovery to support inventory replenishment needs.
Operationally, we are adjusting to operating with 1 melt shop.
And I am pleased with the team's effort to make this much needed transition.
Earlier, we laser focused on optimizing our product mix and continued cost control, but we are making good progress on initiatives to drive manufacturing excellence at Timken steel.
To kick start some of our efforts Andrew <unk> has joined US in May as Vice President of engineering manufacturing excellence and reliability.
Reporting directly to me Andrew is responsible for implementing our manufacturing excellence philosophy processes and best practices centered around companywide maintenance effectiveness and efficiencies.
Will help create.
For cost effective and sustainable way to ensure the reliability of our equipment, our asset lifecycle and optimize our investments.
Andrew and I have worked together for many years in the past and we have been successful in delivering on similar strategic priorities.
On the commercial side, we have begun mapping out a path to commercial excellence and an effort to improve our margin profile optimize our product portfolio and best leverage growing markets more to come on that in the future.
Last week, we completed the sale of the Timken steel Shanghai subsidiary to guidance deal for approximately $7 million in cash flow.
My congratulations to all of our teams for getting this across the finish line and particularly to our team in China.
And at corporate for their hard work and dedication throughout this process.
We wish them, well and look forward to continuing our partnership working with Idaho in the future.
And lastly, many of you know that on Monday, we began our discussions with the United Steelworkers regarding the current labor agreement that is set to expire on September 27.
The current agreement covers approximately a 180 bargaining employees in our canton facilities as always our goal is to reach a fair and equitable agreement that supports the company's vision and provides job security for our employees.
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 also wanted to extend my thanks to our hard working and dedicated employees excellent teamwork enabled the company to deliver record second quarter net income and adjusted EBITDA strong operating cash flow and record quarter end total liquidity, while continuing to improve our cost structure and maintain working capital discipline.
Turning to our second quarter results.
On a GAAP basis net income for the second quarter was a record $54 million for 98 per diluted share.
Comparatively the company reported a $15.3 million net loss in the second quarter of 2020 for loss of 34 per diluted share.
The first quarter of 2021 net income was $9.8 million for <unk> 20 per diluted share.
On an adjusted basis net income for the second quarter was $52.5 million for 96 per diluted share a significant improvement from prior periods for.
For comparison purposes for second quarter of 2020, adjusted net loss was $14.3 million for a loss of 31 per diluted share.
Adjusted net income in the first quarter of 2021 was $22.6 million or <unk> 43 per diluted share.
As it relates to earnings per share our diluted share count in the second quarter of 2021 was $56.1 million for further details refer to the earnings per share disclosure in our form 10-Q filed yesterday.
Turning back to profitability adjusted EBITDA, we proved a record $71 million in the second quarter of 2021. This was a substantial adjusted EBITDA improvement of $65.3 million from the second quarter of last year, and an improvement of $30.2 million from the first quarter of 2021.
Through the first half of this year adjusted EBITDA totaled $111.8 million and represented the company's strongest start to a year since its inception in mid 2014.
Moving now to the drivers of the financial results.
<unk> tons in the second quarter improved 11% sequentially for 214200 tonnes exceeding our guidance of high single digit sequential growth, primarily driven by strength in industrial demand.
Additionally, second quarter of 2021 shipments nearly doubled from the Covid impacted second quarter of 2020.
The order book strengthen throughout the second quarter with lead times now extending into the first quarter of 2022.
Shipments to industrial customers increased 27500 tonnes sequentially or 33% to 111900 tons in the second quarter with growth from a diverse group of general industrial and distribution customers.
We were successful in filling open second quarter capacity created by automotive semiconductor related delays with short lead time industrial demand.
As Mike previously mentioned automotive customer shipments declined 10% sequentially to 93600 tons in the second quarter, driven by semiconductor supply chain disruption at our automotive customer manufacturing locations.
In the energy end market second quarter shipments of 8700 tons represented a 3200 ton improvement from the first quarter.
Net sales of $327.3 million in the quarter increased 20% compared with the first quarter of 2021 and more than doubled compared with the second quarter of 2020.
2 thirds of the sequential increase in net sales is due to higher surcharge revenue as a result of a 39% increase from the average raw material surcharge per tonne from higher market prices for scrap in hours.
For the remainder of the sequential increase in net sales was primarily due to strength in industrial customer demand.
From a manufacturing cost perspective, our continued focus on cost control throughout the year combined with improved melt utilization in the quarter contributed to a $10 million sequential manufacturing cost improvements and a $26 million improvement from the prior year quarter.
The efficient operations of a single melt shop at our fair credit facility, coupled with higher end market demand in most sectors resulted in an improvement in our second quarter melt utilization to 84% with.
This compares to the first quarter of 2021, when total company melt utilization was 59% and fair crest only melt utilization was 73%.
Melt utilization was approximately 20% in the Covid impacted second quarter of 2020.
Now turning to SG&A expense in the second quarter of 2021, SG&A increased $1.5 million on a sequential basis for 'twenty 1 million.
Primarily due to higher variable compensation expense income.
In comparison to the second quarter of 2020, SG&A increased $4.2 million.
Largely driven by higher variable compensation expense and prior year, COVID-19 related temporary cost reduction actions.
Although SG&A is up versus the comparable periods principally from higher variable compensation expense given improved business performance. We remain intensely focused on process simplification efficiency and overall cost control.
Moving on to cash and liquidity working capital was a use of cash from the second quarter of $40.6 million with over half driven by an increase in accounts receivable given the higher sales activity.
Record quarterly net income exceeded working capital requirements and drove operating cash flow of $39.2 million in the second quarter of 2021 of $26 million sequential improvement and a $23.1 million improvement compared to the second quarter of 2020.
This marks the company's ninth consecutive quarter of generating positive operating cash flow during which time, we reduced net debt calculated as total debt minus cash by over $275 million.
Additionally, during the quarter the company settled its $42 million convertible debt obligation due on June 1.2021 with cash payments totaling $38.9 million and the issuance of 113000 shares.
We closed the second quarter of 2021 with $115.2 million of cash similar to the cash balance at the end of the first quarter.
Total liquidity was $376.5 million at the end of June and $19 million improvements since the end of March.
Thanks to our team for a strong first half cash flow performance, which included $52.4 million of operating cash flow and an increasing demand environment supported by a daily focus on working capital discipline.
From a pension perspective, the company recorded a noncash remeasurement gain of approximately $700000 from the second quarter of 2021 as a result of the required salary pension plan remeasurement.
The remeasurement of the salary pension plan, which was excluded from adjusted EBITDA results will be required quarterly for the remainder of 2021.
As a reminder, the American Rescue Plan Act of 2021 was signed into law in March consistent with the prior quarter, we continue to evaluate the impact and timing of elections permitted by the act on required future U S pension plan contributions.
There have been no significant changes since our last update where we indicated that we believe are required future U S pension contributions will be delayed until 2028.
As further information is available regarding the timing and amount of future required pension contributions we will provide an update.
Turning now to the outlook given.
Given continued strength in end market demand, we anticipate third quarter shipments to be similar to second quarter levels.
While our order book is full for the remainder of 2021 periodic automotive customer manufacturing outages due to the semiconductor chip shortage may delay some third quarter automotive shipments for future periods.
From an operational perspective during the third quarter melt utilization is expected to be at or above 85% and annual shutdown maintenance was completed at the Companys rolling and finishing operations at a cost of approximately $5 million.
Additionally, as Mike mentioned, we are beginning negotiations with the United Steelworkers regarding the labor agreement that is set to expire in late September we.
We anticipate incremental costs incurred during the course of normal and successful labor agreement negotiations to be in the range of $2 million to $3 million from the second half of 2021.
Lastly, in the third quarter cash proceeds of approximately $7 million are expected to be received from the sale of the timken steel Shanghai entity.
During the fourth quarter annual shutdown maintenance planned at the fair Crafts melt shop for 10 days at an expected cost of approximately $5 million.
We anticipate melt to be reduced by about 30000 tons during the fourth quarter as a result of the planned outage.
To wrap up thanks to our employees for their execution of our strong first half of 2021, we plan to continue the momentum into the second half while remaining focused on continuous improvement and efficiency opportunities.
Thanks for your interest in Timken steel and we look forward to sharing our continued progress going forward, we would now like to open the call for questions.
If you would like to ask a question. Please press Star then the number 1 on your telephone keypad again Thats Star then the number 1 on your telephone keypad, possibly just a moment to compile the Q&A roster.
First question is from Chris Congrats Sir with Exane BNP Paribas.
Yes, hi, Thank you for taking my question.
2 please.
You did not provide any EBITDA guidance compared to the last quarter.
With stable volumes rising prices here any particular reason why we should not expect that the results in Q2 a year.
I know you mentioned the maintenance at that in fact, the debt should be relatively small.
And how good the Q2 margins per died for.
<unk>. Thank you.
Interest in this is Chris good morning, and you are correct, we did not provide specific or even directional guidance on EBITDA, but we do still expect our profitability to be strong in the third quarter and we did provide the building blocks. There there are going to be higher maintenance costs as we alluded to.
And there are some other dynamics with surcharges in our raw material pricing as well as the volume impact semiconductors on the quarter.
The second quarter also benefited from a release of inventory reserves as you probably saw in the tables in the back. So there is some puts and takes we still believe the third quarter to be strong and we look forward to sharing those results as they are produced later in the quarter.
Alright.
That's helpful. If I may just on prices.
I know ESP, how we should think about Asps moving forward I believe you announced.
For a total of 200 per ton.
<unk> price high ASP in Q effective this year.
How much of that has already been in the P&L.
Seen much of the base sales per ton increase in Q2.
Sure.
How we should think about asps and a true okay.
Yes, so you have to remember that about 80% of our business is under contract for.
For the year and about 20%.
As more spot oriented.
However, we do expect further price appreciation.
For positive development going forward throughout the remainder of the year.
As you recall the last price increases were announced to be effective both on bar RSP issue and.
Seamless tube and just early July.
So we should expect to see that appreciate throughout the rest of the year.
Alright, thank you.
Your next question is from Michael <unk> with Keybanc capital.
Hey, guys good morning.
Good morning.
So first I wanted to follow up on the prior question on pricing.
During the call you mentioned lead times are now extending into 2022.
Debt for SB Q.
And are you expecting those longer lead times to drive a stronger pricing environment.
Contract pricing environment in 2022 versus what you were expecting maybe 3 months ago.
Sure Good question so.
Yes, so our lead times for both <unk> and seamless mechanical tubing or into next year and we do expect.
Even though pricing conversations from.
From my perspective, or a private conversation between us and our customers, but I believe we're in a very good I'm very positive about the position we're in to negotiate 2022 pricing.
Okay, and when I look at the shift from auto to industrial shipments given some of the chip shortages that your customers are facing.
Have you made any share gains there within industrial and then secondly, how quickly are you able to pivot between end markets should the chip shortage get resolved.
Sure.
Other good questions.
As you know the industrial recovery from the pandemic with a little bit.
Slower than automotive however, it's accelerated tremendously.
And.
We expect that to continue we basically are sustained and the overall increase in demand, we're sustaining our market share position in industrial.
And our ability to pivot.
We're fairly flexible.
To do that in Q2, we're able to do that through throughout the remainder of the year as well.
So we have.
Significant contractual arrangements with our automotive customers will support their needs and we will serve them as I think I mentioned.
Service capability with regards to on time delivery is extremely high.
At 92%, so we have been performing extremely well.
Got it that's helpful. And then as we look on inventories we saw a modest pickup in the quarter, but do you anticipate a further build to meet demand going forward and in the absorption benefits that come with debt.
Again, we will.
We'll react to the markets appropriately and we will have the appropriate inventory to service our customers to maintain that high level of service.
We do.
We've had some inventory because in automotive we are planning for automotive sales that didnt develop we had to quickly pivot to the industrial segment and that's where we're focused across all our segments to wherever the opportunities are that's where we'll be and will position our inventory accordingly to maintain that high level of service.
Great and then just last for me.
SG&A you had some impressive cost control in the quarter, despite the higher revenue baseline.
Just wondering what youre seeing there in terms of inflationary pressures.
How we should think about SG&A as a percentage of sales going forward. Thanks.
Hey, good morning, Michael It's Kris Westbrooks again.
Not a lot of inflationary pressures in the SG&A area. So there is just good cost control managing all of the various professional fees that rolled through there as well as our overall head count levels and feel that we're well positioned to move forward. There percentage of sales is going to vary depending on what the top line looks like in the surcharge levels, but it's improved.
And that's going to be a continued focus for us going forward.
Got it thanks for all the color guys.
Thanks for the questions.
Next question is from Justin Andrew.
Berlin from.
Good morning.
Good morning.
Mike and Chris.
Well first question for <unk>.
<unk> to the melt utilization I mean, how high can you get debt.
Sort of a quarter with maintenance in the quarter without.
Downtime.
Sure I think we can between 85% to 90%.
With the ebb and flows of the maintenance requirements within a quarter.
We could go higher in a given month.
But then you always have to maintain and keep your assets protected and operating efficiently.
Okay.
Second question would relate to the pricing it didn't seem to increase much sequentially on the face.
Basically I mean, I know that you did have some price increases it did kick in.
In the second quarter was there sort of a mix effect, maybe in some other short cycle industrial.
<unk> been a little bit lower price, yes steel.
Good question.
Yes, the primary 2 impacts for the first impact is.
We had lower sales in the area of our manufactured components, which is formerly known as value added segment.
We rebranded that to manufacturing components, because that's basically what they do.
So we had lower sales, there, which historically have higher realized prices.
And that's that product segment or area and then the other mixed shift is a mix between small small <unk> sizes.
We basically sold much larger SBU sizes in Q2 versus Q1.
Okay, and then the larger SPG size is actually have lower base sales per ton.
It's a lower unit price per ton, yes. However.
However, the margins are better.
Okay.
And how does mix look to be shaping up for the second half similar to the second quarter.
Yes.
We believe right now what we see with 1 month under our belt, it's a very similar mix.
Forward.
I think the real question is is.
What happens with the automotive segment.
What's there.
Production interruptions and what that impact is to us.
Going forward.
As we've shown we're able to pivot pretty quick in.
I think our sales goals and objectives.
Sure So I mean if.
The auto disruptions or freighter.
Do you actually pull forward some of the sort of industrial shipments Youre planning for the beginning of next year or do you sort of.
Cake.
Sort of near term orders, how does that exactly play.
Play out.
Well I think theres, a twofold approach there that we've been applying 1 is that there are customers that want more steel from other from Austin, we can provide.
So we can if we fall short in the automotive area, we can pursue those opportunities and we're also taking <unk>.
Advantage of spot opportunities, particularly in the distribution channels.
The distribution channel.
Great. Thank you it's Michael that's it for my questions.
Thank you for the questions.
I would like to ask a question. Please press Star then the number 1.
And at this time there are no questions I would like to turn the call back over to Barbara for closing remarks.
Great. Thank you everyone for joining us today, and we look forward to informing you next quarter.
Thank you this concludes our call.
This concludes today's conference you may now disconnect.
Yeah.