Q4 2022 TimkenSteel Corp Earnings Call
Okay.
[music].
Good morning, My name is Chris and I'll be your conference operator today.
At this time I'd like to welcome everyone to the Timken Steel Corporation fourth quarter and full year 2022 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
Hello hand, it over to Jennifer Beeman director of Communications and Investor Relations you may begin.
Thanks, and good morning, and welcome to Timken steel fourth quarter and full year 2022 conference call I'm, Jennifer Beeman director 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 and Chief Commercial Officer.
You also 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 or.
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.
non-GAAP financial information is referenced additional details and reconciliations to its GAAP equivalent are also included in the earnings release with that I would like to turn the call over to Mike Mike.
Thank you Jennifer and I appreciate everyone joining us this morning.
2022 was certainly a tale of two halves.
Through the first six months of the year.
We achieved record adjusted EBITDA and strong operating cash flow.
Our success was attributed to our commercial strategies, which focus on high value end markets, including defense renewables and electric vehicles.
As well as portfolio enhancements and an improved pricing environment.
Fortunately.
Strong end markets prevailed throughout the year, but in the second half of 2022, we experienced a number of operational issues, which resulted in substantial unplanned downtime and significantly impacted our financial results.
First let me categorically state our safety performance in 2022 was not acceptable.
And every single person that timken steel is dedicated to change.
We are fully committed to improving our safety performance and in 2023, we expect to invest approximately $7 million and companywide training equipment and improved safety processes to ensure we are creating a lasting culture of safety.
Ongoing improvements include enhanced response drills job safety analysis housekeeping.
Management system advancements and additional hazard mapping processes.
In recent weeks, we have kicked off the first phase of advanced safety training throughout the entire organization.
And these efforts will continue for the duration of 2023.
While safety is a continuous journey.
Job everyday is to provide the safest working environment as possible and equip our people with the best tools and training to safely perform their jobs.
Moving to operations, our production ramp up has been slow and methodical spanning several months.
Okay.
As I mentioned, we are focused on implementing additional safety processes and in some cases with completely new teams.
All while driving best in class quality to ensure we meet our customers demanding requirements.
To support our operational continuous improvement we have increased our budgeted capital expenditures for 2023 to approximately $45 million and have several work streams focused on enhancing our manufacturing excellence and asset reliability programs.
Turning to the results.
Fourth quarter net sales declined 23% sequentially as a result of a market driven reduction in surcharge revenue per ton due to lower scrap and alloy prices.
As well as the impact from lower shipments.
We are maintaining our constant and transparent dialogue with our customers.
And while there is frustration that short term demand is outpacing our supply we are steadily working to fulfill orders.
I am encouraged that in the first quarter of 2023, we're seeing consistent positive utilization trends.
I believe this momentum will continue as teams are fully trained and begin to work more efficiently together.
Moving to customer contracts are.
Our annual customer price agreement negotiations.
Which cover approximately 70% of our order book have been completed with an average base price increase.
In the mid to upper single digits on a percentage basis compared with 2022 average based pricing.
Given that market strength has continued into 2023.
Our order book is expected to remain full throughout the first half of 2023.
On a positive note demand remains robust in all of our end markets.
Infrastructure spending automation re shoring and supply chain Derisking are driving increased demand for our products and our targeted end market sectors.
Our industrial shipments decreased by 33% sequentially, given our continued melt shop restraints.
However, defense and mining sectors remained strong.
In defence the expansion of the U S industrial supply base for major Department of Defense programs continues to drive demand for our products and services.
In mobile shipments decreased by 5% compared with the prior quarter.
Similar to the third quarter mobile customers were less impacted in the fourth quarter, given our inventory on hand to support their specific needs.
Otherwise light vehicle production continues to increase to support automotive demand and the continuing inventory replenishment.
Our energy shipments declined 18% sequentially based on our shipping constraints.
However, the market is lower than normal inventory levels increased demand and sanctions against Russia continued to support U S drilling activity.
Our customers continue to order at a high rate to support drilling and completion activity, while maintaining balanced inventory levels.
Currently we are on track to achieve our targeted $80 million of profitability improvements by 2026 as a reminder.
Our actions focus on commercial excellence manufacturing and reliability excellence and administrative process simplification with a strong balance sheet as our foundation.
We have launched several initiatives related to manufacturing productivity.
Liability inefficiency that are included in our 2023 capital expenditure budget.
A few examples include adding a new flag rate two our melt shop, which will aid in refining consistency and overall shop reliability.
Upgrading our electric arc furnace control system for energy efficiencies.
Okay.
Also adding process surface quality gauges that are rolling in to making operations to improve first time quality.
And also automating final product testing and our metallurgical laboratory.
We remain committed to investing in our assets and our people.
As well as scalable AI technologies that enhance value and improve our safety quality reliability and cost.
And in some instances aiding in our sustainability efforts.
Examples include technologies that allow us to quickly detect the changing condition or events that could impact safety quality production or reliability within our manufacturing environment.
We will also embrace technologies that give us early warning signs of the deterioration of machinery and components.
Allowing us to proactively act and ultimately driving lower costs.
As you May recall, we have undertaken a process to move our scrap yards to be adjacent to our melt shop to improve efficiency and reduce emissions.
We expect to become fully operational in April .
With a run rate savings of $2 million annually.
We are grateful for the support of our customers suppliers and shareholders.
And our dedicated employees, who have embraced continuous improvement related to safety.
Manufacturing commercial excellence and process simplification, which we believe will lead to sustainable through cycle profitability.
Now I would like to turn the call over to Chris Chris.
Thanks, Mike Good morning, everyone and thanks for joining us today in the first half of 2022, the company achieved record profitability and strong operating cash flow as Mike mentioned safety and production challenges significantly impacted the second half of the year.
As we enter 2023 I'm excited to see our continued progress in achieving our strategic imperatives supported by solid end market demand and a strong pricing environment.
Turning to our full year 2022 financial results.
Net sales totaled $1 3 billion, an increase of $47 million or 4% from 2021.
Net income was $65 1 million or $1 30 per diluted share.
Adjusted net income was $94 $2 million or $1 87 per diluted share.
Adjusted EBITDA was $172 $2 million in 2022.
This includes an insurance recovery of $33 million recognized in the fourth quarter related to the recovery of certain costs associated with unplanned downtime in the second half of the year.
Of the $33 million insurance recovery $13 million was received in the fourth quarter and the remainder was received in the first quarter of 2023.
We continue to seek additional insurance recoveries related to the unplanned downtime experienced in the second half of the year, although the timing and amount of potential additional recoveries are uncertain at this time.
Turning to our fourth quarter results.
Net sales totaled $245 $4 million with a net loss of $33 2 million or a loss of <unk> 75 per diluted share.
Comparatively sequential third quarter net sales were $316 $8 million with a net loss of $13 3 million or a loss of 29 per diluted share.
Fourth quarter of 2021, net sales were $338 $3 million with net income of $57 $1 million or $1 seven per diluted share.
On an adjusted basis, the company reported a net loss in the fourth quarter of $4 6 million.
Or a loss of <unk> 10 per diluted share.
Comparatively the third quarter adjusted net loss was $4 1 million or loss of <unk> <unk> per diluted share.
Adjusted net income in the fourth quarter of 2021 was $42 3 million or <unk> 80 per diluted share.
Adjusted EBITDA was $11 9 million in the fourth quarter slightly higher than the third quarter adjusted EBITDA of $10 8 million.
In addition to the favorable impact of insurance recoveries and higher base selling prices the fourth quarter was negatively impacted by lower shipments.
The market driven decline in the scrap surcharge environment also negatively impacted the fourth quarter as expected.
These impacts as well as higher year over year manufacturing costs were also the primary drivers of lower quarterly adjusted EBITDA compared with the fourth quarter of 2021.
Turning now to the details of the financial results in the fourth quarter.
Shipments were 128300 tons in the quarter, a decrease of 3200 tons or 19% compared to the third quarter.
The sequential decline in shipments was driven by availability of inventory for shipments as a result of the previously discussed unplanned downtime.
Similarly, fourth quarter shipments decreased 70000 tons or 35% from the same quarter in 2021.
In the industrial end market shipments totaled 47500 tonnes in the fourth quarter, a sequential decrease of 23800 tons or 33% despite the sequential.
Sequential decrease due to inventory available for shipment demand remains strong from both OEM and distribution customers across a wide range of sectors.
Mobile customer shipments were 67700 tons in the fourth quarter, a sequential decrease of 3500 tonnes of 5%.
We continue to target approximately 40% of the portfolio to the mobile end market.
However, mobile shipments were higher at 53% of the fourth quarter total given inventory levels.
Shipments to energy customers totaled 13100 tons in the fourth quarter, a sequential decrease of 2900 tons or 18%.
Similar to industrial energy customer demand remains strong and the sequential decline in our shipments was attributable to inventory availability.
Of our total fourth quarter shipments approximately 20000 ship tons were sourced from third party milk producers and then rolled finished and shipped by Timken steel.
We expect shipments of third party milk to increase sequentially by approximately 50% in the first quarter to help support customer demand, while we continue to ramp up our melt shop.
As I mentioned last quarter, we plan to leverage our third party milk supply chain as an opportunity to support demand in targeted end markets over the cycle.
This strategy also improves utilization of our downstream assets without carrying the historical fixed cost and excess mill capacity.
Okay.
Net sales of $245 4 million in the fourth quarter decreased 23% compared with the third quarter and decreased 27% compared with the fourth quarter of 2021.
The sequential decrease in net sales was driven by lower shipments in our market driven 33% decline in average raw material surcharge per ton as a result of lower scrap and alloy prices.
Offsetting these items were 9% higher base selling prices and favorable sales mix.
The net sales decline compared with the fourth quarter of 2021 was primarily driven by significantly lower shipments as a result of the unplanned melt shop downtime and a market driven 27% decline in average raw material surcharge per ton.
Partially offsetting these items were higher based selling prices of 33%.
Based selling prices increased by approximately $250 per ton or 24% on average for the full year 2022 across our end markets in comparison to the full year 2021 average.
Sequentially from the third to the fourth quarter of 2022 base selling prices increased $120 per ton on average reflective of especially strong sales mix and the resulting based selling prices within the industrial and energy end markets.
Turning to manufacturing.
Costs increased slightly in the fourth quarter melt utilization and related cost absorption remained challenged as a result of the ongoing production ramp up following planned and unplanned downtime.
In comparison to the prior year fourth quarter manufacturing costs increased by $43 2 million.
<unk> have increased year over year manufacturing costs included the impact of lower cost absorption related to the unplanned downtime.
As well as increased maintenance and the impact of inflationary costs.
Melt utilization was 47% in the fourth quarter compared to 40% in the third quarter and 71% from the prior year fourth quarter.
From an SG&A perspective in the fourth quarter, SG&A increased $1 $2 million on a sequential basis to $17 4 million <unk>.
Primarily driven by higher variable compensation expense.
In comparison to the fourth quarter of 2021, SG&A increased slightly as a result of higher information technology transformation costs, mostly offset by lower variable compensation and salary expenses.
Switching gears to income taxes.
We've now consume the majority of our net operating loss carryforwards due to consecutive years of positive net income as of December 31, 2022, we have $17 million historical domestic net operating losses that we expect to utilize in 2023.
As a result, we anticipate being a U S. Federal taxpayer in 2023 with an effective tax rate between 15% and 20% this year.
From a pension perspective at the end of 2022, the funded status of the company pension plans was 82% down from 89% at the end of 2021.
This reduction in funded status is primarily related to the annuities Asian activity completed last year combined with market driven asset investment losses, partially offset by higher discount rates.
Based on year end 2022 assumptions, we anticipate total pension and retiree medical expense to increase by approximately $11 million in.
In 2023 compared to 2022, excluding the impact of re measurement.
At this time required cash contributions to the pension plans are expected to be minimal in 2023.
Moving on to cash flow and liquidity lower levels of working capital and the $13 million insurance recovery advanced payment drove operating cash flow of $23 7 million and free cash flow of $12 3 million in the quarter.
This marks the company's 15th consecutive quarter generating positive operating and free cash flow.
On a full year basis, the company generated significant operating cash flow of $134 5 million and free cash flow of $107 4 million.
Capital expenditures totaled $27 $1 million in 2022, primarily to support asset reliability and automation projects. Additionally, capex spending supported the information technology transformation and our ESG program and.
In 2023, we're targeting $45 million of capital expenditures as Mike previously mentioned.
Our cash and total liquidity positions remained strong throughout 2002 and afforded us the opportunity to execute on the capital allocation strategy that we articulated one year ago.
During 2022, the company deployed nearly $120 million of cash to repurchase 3 million common shares and over half of the convertible notes. These actions reduced diluted shares outstanding by 12%.
Specifically in the fourth quarter, the company repurchased $1 1 million common shares at a total cost of $19 6 million at the end of the year. The company had $73 million remaining on our common share repurchase program.
Cash and cash equivalents totaled $257 2 million and total liquidity was $490 7 million at the end of 2022.
As we progress forward, we expect the strength of our balance sheet and positive business outlook provide us the opportunity to continue to execute on our capital allocation strategy, which includes a balance of investing in profitable growth, maintaining a strong balance sheet and returning capital to our shareholders.
Turning now to the first quarter of 2023 outlook from a commercial perspective customer demand is anticipated to remain strong across the companys end markets with first quarter shipments expected to increase sequentially by 25% or greater.
As it relates to base selling prices Mike commented on the successful outcome of our annual customer price agreement negotiations covering approximately 70% of the order book.
Realization of the negotiated based selling price increases are expected to begin mid first quarter. Following the shipment of carryover orders from last year.
And the spot market for the remaining portion of our order book not covered biannual price agreements. We recently increased based pricing on all bar product shipments by $50 per ton effective February one 2023. Additionally spot prices for seamless mechanical tube shipments increased by $60 per ton in January .
Regarding inflation, we experienced approximately 20% inflation in 2022 on a non surcharge will costs, which equated to about $50 million of incremental costs last year were anticipating.
Inflation to persist in 2023, but a lower rate than experienced in 2022.
Melt utilization is expected to continue to improve throughout the first quarter and average approximately 70%.
January is melt utilization rate was 64% in the February month to date utilization rate is in the <unk> on a percentage basis.
Given these elements the company expects adjusted EBITDA to sequentially increase in the first quarter of 2023.
To wrap up we're excited about the opportunities that exist this year and the long term business outlook for Timken steel.
Thanks, again to our employees for their hard work and dedication to our customers suppliers and shareholders for their support and interest in Timken steel.
We would now like to open the call for questions.
Thank you as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Dave storms with Stonegate. Your line is open.
Morning, and thank you for taking my call.
I was just wondering if we could start good morning. Thank you.
I'm wondering if we could start with a little more color on some of the profitability improvements now that we're through 2022 do we think.
You guys are about a quarter of the way there on the $80 million goal.
Is that linear.
Maybe just any more color.
But you can give us on that.
Yes, so I would qualify it as well we are well on our way to achieving that $80 million.
EBITDA improvement.
Improvement by 2026, most likely we will probably achieve that earlier.
And Dave the areas we're seeing.
Momentum is in the commercial category.
We've targeted $30 million.
Profitability improvement.
We met that well.
What we're looking for is continued profitability through the cycle over that period of time, we've made a lot of progress in the other areas of manufacturing and simplification, but we want to make sure that the ops or stabilized before we begin to account those savings and Theres a lot planned later this year as well. So we did make a lot of progress in 2022.
We're going to continue to work towards that and work towards that goal.
That's perfect. Thank you.
Another question I had as utilization increases.
How should we think about the relationship between utilization and ship times is that a one for one increase given the demand market or is there a <unk>.
Lag there.
How should we think about that.
It's not necessarily a one for one because there is yield losses that occurred throughout.
The downstream operations to get to the ship ton, but it is very closely correlated.
And if you look at our capacity, which we publish externally and you were to calculate what's 1% of network on a monthly basis. It's about 1000 tonnes of milk, which then you factor that down a bit to ship tons.
I'll help you correlate that continued progress what that could mean from a shipment standpoint.
That's perfect. Thank you.
And then just one more iqos pretty general.
What are you guys seeing on more of the supply side specifically.
Specifically from labor demands.
Into 2023 here.
The supply side on the labor demand I'm not quite clear what you're asking.
Sorry.
Sure phrases.
Yes.
Increased inflation that we saw in 2000 claims.
Trying to understand how much of that was maybe from labor inflation and how much.
And that labor equation would be sticky or increasing going into 2023 does that help.
Yes, I would say a modest amount of labor inflation, just due to the fact that we have a multi year contract and the wage increases or negotiated in there. The biggest increase in inflation comes from purchase supplies and services.
That's very helpful. Thank you.
Yes.
Again, Thats star one if you'd like to ask a question. The next question is from Phil Gibbs with Keybanc capital markets. Your line is open.
Thanks very much.
<unk>.
Good morning, Phil.
How should we think about.
Inflation in 'twenty three versus 22, I know at hand.
Basically.
Crept up over the course of 'twenty two so we probably are starting from a higher spot than we did last year.
Maybe maybe talk through some of those pieces I know pricing is moving up your costs are also.
Probably higher on a unit basis versus last year, So maybe talk through some of those impacts.
Yes, so I'll give you a generalization and then I'll, let Chris talk to more specific details.
I think year over year from 'twenty to 'twenty, three we probably see an 8% to 10% inflationary impact.
Compared to 22, 20%.
And then.
I'll pass it over to Chris So he can provide you a little bit of color there.
And if you look at where most of that inflation came Dave talk a little bit about it we had a little bit on the labor side, but it was also the consumables.
The spare parts and other materials that we need for routine maintenance as well as the contractor costs.
We've probably got about half to two thirds of that hit US right as we start 2022, but it did begin to accelerate into Q3 and Q4. So the second half was a bit higher from an inflation perspective in 2022 and the first half all in it was $50 million and as Mike said, we expect that to continue a bit into 2023.
But to a lesser extent from an increase perspective than we experienced last year.
Chris how does that inflation in general I guess compare to where where we were in the second half and so.
As labor excuse me not labor, but inflationary factors crept up even relative to where we were in the second half of last year are things basically just just held at that level.
It has crept up a little bit and that went into our strategy as we negotiated based pricing to essentially recapture that in our top line.
Perfect and then as we think about networking capital.
Certainly went down with business levels in Q4 as shipments pulled back but you are.
You are looking for better business activity.
Ed.
How should we think about what the.
What the build back of networking capital could could look like.
Yes, so in the first quarter, we do expect it to be a net use of cash for us.
With higher levels of receivables and inventory that were targeting.
Set with payables.
Net and that use there there are some other considerations as it relates to cash flow in the first quarter to $20 million of insurance recovery that came in in cash that will be part of our operating cash flow in the first quarter as well as we have our annual performance award that gets paid in March that's about $7 5 million.
A couple of puts and takes there, but net net overall operating cash flow is going to dependent on profitability. We continued to manage our working capital very carefully and closely at.
To maintain that discipline that we put in several years ago and that we expect to continue to be a benefit for us as we move forward.
Thank you.
Thanks, Phil.
The next question is from John <unk> with Sidoti <unk> Company. Your line is open.
Good morning, everyone and thanks for taking the questions.
This quarter, the expectation was you'd get the utilization rate roughly to 80% to 85% by the end of the first quarter.
Is that still the expectation as it moves one way or the other can you explain why.
Okay.
No I mean, if you look at a rate of <unk>.
Our ramp up.
Progress is progressing that way and we fully expect to be prepared for significant improvement in our utilization rate in Q2.
As we finish our ramp up in Q1.
Okay.
Okay, and so the 80% to 85% bogey still in play or not.
That's our target.
Okay.
And I assume that you're.
You're starting to.
Price orders into the third quarter at this point.
How is that looking compared to demand profile in the first half of the year.
Well you have to recall that.
70% of our.
Our sales is already on contractual commitments for <unk>.
Annual pricing the remaining 30%.
Our negotiated prices either on a quarterly or semiannual basis.
And we just announced two price increases.
But as Chris mentioned in his comments right one for our tubular products one for our bar products.
We fully expect that to continue into <unk>.
Second half of the year.
Okay and has there been any notable change in the demand profile.
Base in any kind of vintage concerns about.
Global economic conditions.
Well I mean look again with all the things that are going on globally. We're concerned.
However.
Our customers are telling us.
AC stable and steady demand there are markets of subsectors within our within our <unk>.
Market.
Segments that.
Are accelerating their demand and we're reacting to that accordingly so.
Our lead times are actually out to the end of Q2 and beginning to enter into Q3, so more to come on that but.
Some of the uncertain global uncertainty some of the domestic uncertainty, we always keep our eye on the ball and.
And we'll see how things progress.
The benefit that we have going for us with the footprint that we have today is we're not out there chasing the type of volume that may have had a couple of years ago. So it's.
It's that eight to 900000 ship tons that we're targeting as we move forward.
Good about the demand in that range as we move forward.
Great. Thanks for taking the questions.
Thanks, Thanks, John .
Again star one if you'd like to ask a question.
The next question is from Dave storms with Stonegate. Your line is open.
Hey, just a follow up question on milk truck utilization and the strong demand that youre seeing.
Is there a scenario where you continue to use.
Some of that third party metal shop, just the case and if that's managed through all of 2023 or is that expected to phase out.
As you get your own house choppy utilization back up to that 85% range.
Yes, that's part of our strategy, we believe that we can flex with market demand uses a third party milk and as long as there is profit to be at <unk>.
And converting net third party melt into our finished products, we're going to pursue that.
There isn't we want.
Makes sense.
That's a perfect answer thank you.
Yeah.
Showing no further questions at this time and this will conclude today's conference call. Thank you for participating you may now disconnect.
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