Q1 2022 TimkenSteel Corp Earnings Call
$52 million and net income was $37 1 million or <unk> 70 per diluted share.
Comparatively fourth quarter of 2021 net sales were $338 3 million with net income of $57 1 million or $1 <unk> per diluted share.
First quarter of 2021, net sales were $273 $6 million with net income of $9 8 million or <unk> 20 per diluted share.
On an adjusted basis net income for the first quarter improved to $48 6 million or <unk> 92 per diluted share for.
For comparison purposes, adjusted net income in the fourth quarter of 2021 was $42 3 million or <unk> 80 per diluted share.
Adjusted net income in the first quarter of last year was $22 6 million or <unk> 43 per diluted share.
Adjusted EBITDA improved to $65 $3 million in the first quarter of 2022 of $3 $2 million sequential increase.
Drivers of the increase included higher base, selling prices and improved manufacturing fixed cost leverage.
Partially offsetting these items was a lower raw material surcharge environment, driven by a decline in scrap prices.
Compared with the same quarter in 2021, adjusted EBITDA significantly increased by $24 5 million reflective of higher base selling prices and improved mix.
Turning now to the details of the financial results in the first quarter.
Shipments in the quarter were 196400 tons, a decrease of 1900 tons or 1% compared with the fourth quarter of 2021 and consistent with our expectations.
The sequential decrease in shipments was driven by lower industrial shipments, partially offset by higher shipments to mobile and energy customers first.
The first quarter of 2022 shipments increased 3000 tons or 2% from the first quarter of last year as a result of improved industrial and energy demand, partially offset by lower shipments of mobile customers.
In the industrial end market shipments totaled 94900 tons in the first quarter, a sequential decrease of 6700 tons reduction.
The reduction in the industrial shipments was primarily driven by availability of finished goods inventory for shipment as industrial customer demand remained strong throughout the quarter.
In comparison to the first quarter of 2021 shipments to industrial customers increased by 10500 tonnes, reflecting year over year improvement in demand primarily within the distribution channel.
Mobile customer shipments were 88900 tons in the first quarter, a sequential increase of 4400 tons of the increase in mobile shipments was primarily driven by normal seasonality combined with ongoing strength in customer demand.
During the first quarter, we also experienced a lower impact from supply chain disruption on our mobile shipments.
Lastly from an end market perspective continued momentum and energy demand drove shipments of 12600 tons in the first quarter, a slight increase on a sequential basis and over twice the level of shipments in the first quarter of 2021.
Net sales of $352 million in the first quarter increased 4% compared with the fourth quarter of 2021 and improved 29% compared to the first quarter of last year.
The sequential increase in net sales was driven by higher base selling prices, partially offset by a reduction in average raw materials surcharge per ton as a result of lower scrap prices.
The substantial improvement compared with the prior year quarter was driven by an increase in average raw materials surcharge per ton as a result of higher scrap and alloy prices higher base selling prices and improved industrial and energy demand.
Average base selling prices increased by $170 per ton or 16% in the first quarter of 2022 across our end markets in comparison with the full year 2021 average.
Turning to manufacturing cost decreased sequentially by $5 2 million in the first quarter, primarily driven by improved fixed cost leverage and the completion of the annual fair crafts melt shop maintenance shutdown activities that occurred in the fourth quarter of last year.
In comparison to the prior year first quarter manufacturing costs were $2 $9 million higher given the current inflationary cost environment as expected.
Inflationary pressure is anticipated to remain on non surcharge for raw materials manufacturing consumables and other operational items. During the remainder of 2022, we continue to estimate the 2022 inflationary impact to be in the range of 10% to 15% over 2021 average prices.
From an SG&A expense perspective in the first quarter SG&A increased $1 $7 million on a sequential basis to $18 $5 million, primarily driven by increased benefit cost and share based compensation expense.
In comparison to the first quarter of 2021, SG&A decreased by $1 million largely driven by lower employee expense as a result of prior restructuring actions.
These restructuring actions resulted in cash severance payments of $1 million in the first quarter of 2022 with approximately $4 million of additional cash severance expected during the remainder of this year.
Overall, SG&A expense remains well controlled and significantly lower than historical levels.
Switching gears now for an update on our targeted $80 million of profitability improvements in support of achieving our long term through cycle financial targets.
We expect to realize approximately $25 million of profitability improvements in 2022 from actions directly linked to our strategic imperatives with the remaining targeted profitability improvements expected between 2023 and 2026.
The majority of this year's profitability improvement actions are expected to be realized through commercial portfolio optimization to improve mix and margin.
Other areas of focus where we're beginning to see early signs of benefits in 2022, but are expected to have a more significant impact in the future include a variety of operational improvement projects to improve yield quality efficiency and asset reliability.
We're also actively working on the transition of our information technology support functions to a third party managed service later this year for efficiency and effectiveness.
It's great to see the energy and collaboration between our teams to identify the top areas of strategic focus and deliver on these important projects.
Moving on to cash and liquidity during the first quarter operating cash flow was $13 $3 million driven by quarterly profitability, partially offset by working capital requirements and the payment of variable compensation earned in 2021.
This marks the companys 12th consecutive quarter of generating positive operating and free cash flow.
During the first quarter, we redeployed a portion of our operating cash flow to fund capital expenditures of $6 $5 million.
We finished the first quarter with $239 $9 million of cash and total liquidity was a record $522 8 million at the end of March.
Regarding pensions the company recorded a noncash gain of $6 5 million in the first quarter of 2022 as a result of the required remeasurement of the salary and supplemental pension plans.
Remeasurement of these plans as required on a quarterly basis for the remainder of this year.
In terms of required cash contributions to our pension plans. We continue to estimate no significant required cash contributions until after 2031 based on current assumptions.
Looking now at our capital allocation strategy in December of last year, we announced a $50 million common share repurchase program, which is intended to return capital to shareholders. While also offsetting dilution from annual equity compensation Awards.
During the first quarter the company repurchased approximately 170000 common shares at a cost of $3 4 million Adil.
Additionally in April the company repurchased approximately 137000 common shares at a cost of $3 million.
As of April 32022, the company had $43 $6 million remaining under its authorized $50 million common share repurchase program. We look forward to updating you in future quarters regarding this repurchase program.
Switching gears to our convertible notes from a return on capital perspective in the first quarter, we repurchased $10 million aggregate principal amount of convertible notes due in 2025 at a cash cost of $26 $8 million.
The $16 $8 million purchase premium driven by the company's stock price now being significantly in excess of the conversion price was excluded from non-GAAP adjusted EBITDA.
The convertible note repurchase activity in the first quarter will reduce future quarterly diluted shares outstanding by approximately $1 3 million shares. In addition to further reducing outstanding debt and interest expense.
At this time the outstanding principal balance on the convertible notes is $36 million and includes approximately $4 6 million dilutive shares.
We may repurchase additional convertible notes in the future depending on the repurchase price in holder interest among other factors.
In comparison to the fourth quarter of 2021 diluted shares outstanding. The previously discussed common share and convertible note repurchase activity completed between January and April of 2022 represents a 3% reduction in diluted shares outstanding.
Turning now to the second quarter of 2022 outlook.
From a commercial standpoint.
Second quarter shipments are expected to increase from the first quarter supported by solid customer demand across all end markets as evidenced by a full order book through the end of the third quarter.
Reata customer manufacturing disruptions may continue to negatively impact shipments.
Based selling price per ton is expected to be similar to slightly higher in the second quarter compared with the first quarter.
Second quarter base price per ton changes are expected to be primarily driven by any changes in product mix negotiated based price increases on approximately 5% of the order book that resets annually on April one.
And the impact of previous spot price increases.
Additionally, surcharge revenue per ton is expected to increase sequentially in the second quarter as a result of higher scrap and alloy prices positively impacting April and May surcharges.
Operationally melt utilization is expected to be above 85% during the second quarter.
Given these elements the company expects to report a sequential increase in adjusted EBITDA in the second quarter of 2022.
From a cash perspective operating cash flow is expected to be positive in the second quarter, primarily driven by profitability and continued discipline in our working capital management. Additionally.
Additionally, we continue to estimate full year 2022 capital expenditures to be approximately $40 million.
To wrap up thanks to all of our employees, who helped the company deliver a solid first quarter. We appreciate your interest in Timken steel and look forward to sharing our continued progress in the future. We would now like to open the call for questions.
Thanks.
Ladies and gentlemen, if you wish to ask a question simply press star one on your telephone keypad.
Ask a question. Please press star one on your telephone keypad.
And your first question comes from the line of Phil Gibbs from Keybanc capital markets. Your line is open. Please go ahead.
Thanks, Good morning.
Good morning, Phil.
So you've said that volumes are expected to improve this quarter versus the first quarter does that.
Also include automotive.
Well, we think that automotive is going to continue to be choppy. So it's somewhat unpredictable.
That's about the best way I can phrase it.
There are still there's still have an impact on the supply chain.
I will tell you that our April mobile shipments were slightly down compared to the average.
The first quarter the monthly average for the first quarter.
We will react and respond accordingly, we've been very successful in.
Moving tons.
Tons to the proper markets when needed when theres openings.
So then.
So that to read the pickup will largely be in <unk>.
The stronger part of your mix and that's that's a little bit of a bounce back in industrial and continued growth in oil and gas.
Yes, that's our expectation.
Okay, and then on the <unk>.
Inflationary pressures.
Chris you mentioned largely intact versus your last iteration.
As we look at the second quarter versus the first quarter or should we be modeling or thinking about a pickup in conversion costs, even further versus the first quarter level either.
Per ton basis, or an absolute dollar amount basis. However, you want to capture that.
If it's applicable.
Well, our fixed cost leverages, an improved primarily due to increased melt shop utilization.
In the upcoming quarter this quarter versus last quarter.
So yes, we do expect our conversion costs improve.
I agree Mike.
So the inflation on alloys, and energy and all of those factors isn't getting any stronger or higher than the first quarter.
So just maintaining.
Correct, just maintaining we're locked in through our base volume for the majority of the alloys for 2022 that are non surcharge will to the extent mix changes that could create some additional.
Headwinds from an inflation standpoint, but we think it's manageable.
Comparisons of Q1.
Okay. Thank you very much.
Thanks Bill.
Thank you and your next question comes from the line of Mark covered Regus from Stonegate capital. Your line is open. Please go ahead.
Good morning, everybody. Thank you for taking my questions.
Good morning, Mark I'm wondering.
I was wondering if I can follow up on that prior question on inflation aspects.
You provided the range for the year of about 10% to 15% increase I was just wondering if maybe you can kind of frame what you've seen here in the first five months are we sort of trending to the low end or the high end any kind of color there.
So I think and I'll, let Chris provide some additional color, but I think our perspective, our view of what we're experiencing is that inflationary.
Forecast that we put forth.
Pretty much in line with what we expect in Q2.
That's right we were at around 12%, 13% range in Q1.
Maybe.
Slightly higher but still within that range as we look forward, we did refresh that just recently.
As a reminder.
Just the math on that is every percents worth about 3 million of cost.
Understood and.
In your prepared remarks, you guys talked about.
Refreshingly some of the sales and marketing activities.
I was wondering if you could provide a little detail around that are there special or changes to incentives.
Or reallocation of individuals' of different segments.
Yes, it's basically refocus orientation of what end markets and what customers within those end markets.
We really want to develop.
Our long term <unk>.
Relationship with a partnership with an expanding and really focusing on our most profitable.
Products.
Gone through some structural changes with our commercial organization.
And we've recently implemented those in Q1 there is additional.
Action plans and items that we will be implementing in the.
Throughout the remainder of the year, but thats the predominantly the execution and focus of our sales engagement.
In the right end markets and the right customers within those end markets focused on margin expansion.
And profitability growth.
Got it and is there a need to add additional heads or additional bodies into that function or do you think you have the right people thus far.
No there is no additional heads.
We've actually done a little bit of shrinking in that area.
But it's really it's about focus execution driving efficiency of our engagement with our customers.
On value creation through margin expansion and profitability growth.
Got it and if I can squeeze one more in here just on the end markets. You noted some some particular strength in the mining area. I was wondering if you could discuss that a little bit as it relates to.
Geographies or what sort of feedback youre getting us too.
The strength that you're seeing.
Well, it's really related to the heavy equipment that is utilized in the mining industry itself.
A large concentration focus for us.
That particular end market on the heavy equipment used in mining we've seen expansion in demand there.
It's good product line for us it leverages to our large bar SBU bar.
That's one of our key focus is from a commercial perspective and strategy.
Excellent. Thank you guys I really appreciate your time.
Thanks Marco.
Thank you. Your next question comes from the line of Shan Wong from BNP Paribas. Your line is open. Please go ahead.
Hi, guys. Thank you for the questions.
So I want to ask two questions on scrap plays.
The first one is can you discuss a bit or maybe quantify the impact of prime obsolete scrap spread expansion on QR name and maybe give a bit of indication on Q2 earnings if possible and then the second one is can you share your views.
Scrap availability and price trajectory <unk>. Thank you.
Okay, Chris and I will tag team. This I'll, let you take the first one I'll take the second part yes in the first quarter. It was a headwind for us and we quantified that in our earnings release.
Fourth quarter to first was about a $17 million headwind on adjusted EBITDA.
We saw the raw material spread difference between Bush and shredded grades decline in Q1, and then as you know that rapidly went the other way in Q2 at least through April and May we surcharge generally on a one month lag. So the increases that were announced in April and May are now impacting I'm sorry March.
In April and are impacting our April and May surcharges, the way to think about it is the headwind that we faced in Q1 is essentially we estimate going to reverse in Q2, two a similar if not higher level given the spike that we're seeing at least through two thirds June is still going to determined to be deter.
<unk> there in terms of how that will play out but the first two months are pretty significant increase.
In regards to your second question in regards to scrap availability.
Pricing.
There is no issues with availability predominantly based on our geographic region, where we sit.
<unk> abilities, there in regards to pricing.
It Hasnt settled May hasnt settled yet for June surcharge, but all indications are that it will decline.
<unk> will decline and we will just going to have to wait and see where it settles.
Okay.
Okay.
Okay, that's very clear thank you very much.
Thank you.
Okay.
And again, if you have any question simply press star one on your telephone keypad again to ask a question. Please press star one on your telephone keypad.
And there seems to be no further question at this point presenters. Please continue.
Great well. Thank you everyone for joining us today, and we look forward to continuing to update you next quarter. Thank you.
Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.