TimkenSteel Corporation Q1 2023 Earnings Call
Thank you for standing by my name is Brianna and I will be your conference operator today.
At this time I would like to welcome everyone to the first quarter 2023, Timken Steel Corporation earnings call.
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The speaker's remarks, there will be a question and answer session.
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Good morning, and welcome to Timken, Steel's first quarter 2023 conference call.
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 Rakitic Executive Vice President and Chief Commercial Officer.
You also had 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 FCC. 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'd like to turn the call over to Mike Mike.
Good morning, and thank you all for joining us on this call today.
Our relentless focus on enhancing productivity and prioritizing safety in our melt shop operations contributed to strong progress in the first quarter of 2023.
We expect this momentum to continue into the second quarter.
During the first quarter, we experienced a 35% increase in shipments combined with strong base pricing.
Which resulted in improved profitability compared with the fourth quarter of 2022.
Like to express my gratitude to all of our teams for their hard work.
Turning to safety.
While we know that improving safety culture is a journey.
We have observed positive trends during the first quarter.
Our teams are actively engaged in continuous improvement activities.
And it is encouraging to see that our safety training is starting to make a difference.
As I have reiterated on numerous occasions.
Our commitment to safety remains unwavering.
We plan to invest approximately $7 million and companywide training, new equipment and enhanced safety practices processes and programs in 2023 to create a sustainable safety culture.
Our specific areas of focus will include reducing the man to machine interface through the implementation of machine guarding fencing lockout tagout programs as well as introducing artificial intelligence initiatives to assist employees in real time hazard identification.
We recently held our annual Iron Shield competition.
With our employees.
<unk> and crews.
Innovative safety projects that aim to improve the wellbeing of our workforce.
We are always amazed by the ingenuity and the care that facilitates these projects.
And this year was no exception.
In total 51 projects were implemented across our organization and submitted for consideration.
The winning project focused on enhancing safety and adding an additional layer of surveillance at our fair Chris facility.
To prevent rolling mill downtime and ensure steel stays on its intended path.
The winning idea proposed installing temperature alarm cameras that can detect irregularities in steel temperatures across multiple zones and the mill area.
If the cameras detect higher temperatures the entire mill can be shut down immediately.
Proving safety for all involved.
This type of continuous improvement that will not only keep us safer, but ensure the integrity of our assets for years to come.
Turning to our first quarter results.
Net sales increased by 32% compared with the fourth quarter as a result of higher shipments in all of our markets as we ramped up production to more normalized levels.
In addition, I am pleased to report that our melt utilization rate saw a solid improvement in the first quarter rising to 73% from 47% in the previous quarter.
Looking ahead to the second quarter, we anticipate our melt utilization rate of approximately 75%.
Which takes into account some planned maintenance downtime for our EIF furnace.
We are pleased to report significant sequential improvement in our shipments.
Our end market demand remains steady.
Evidenced by our order book, which now extends into the third quarter.
As a reminder, we operate in markets that are currently benefiting from favorable macroeconomic trends.
Such as increased infrastructure spending re shoring and supply chain derisking.
Our industrial shipments increased by 52% with continued strength in defense heavy equipment and mining sectors, along with solid demand from industrial distributors.
In mobile shipments increased by 19% compared with the prior quarter.
Sales demand remained steady.
New vehicle inventories are slowly approaching normal levels.
As a reminder, we're targeting mobile shipments to be approximately 40% of our order book in the future to better align with our market balanced commercial strategy.
Our energy shipments increased 55% sequentially as a result of elevated drilling and completion activity.
Rig counts are expected to remain relatively strong, but the forecasted U S rig count has been adjusted slightly down as higher interest rates and fears of a recession are influencing drilling activity.
The financial discipline demonstrated recently by exploration and production companies is expected to continue.
Additionally, we remain 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.
At Timken steel.
Improving manufacturing productivity reliability and efficiency is crucial to our success.
In alignment with this goal we have allocated a capital expenditure budget of $45 million for 2023 to support these efforts.
As a part of this on our 2020 for budget. Our board recently approved a $15 million capital project aimed at installing automated inspection and grinding capabilities and our Harrison facility by 2025.
This addition of automated inspection and grinding will bring about consistent repeatable, finishing and packaging, while simultaneously enhancing our yield and safety performance.
We anticipate that this project will result in at least $3 million in annual savings beginning in 2025.
Moreover, this.
This exciting development is not just a step towards driving continuous improvement, but it is also supports our long term automation strategy for future efficiency projects.
For example, we believe that scalable AI technologies will further enhance value and improve our safety quality reliability and cost and.
And in some instances aiding in our sustainability efforts.
Speaking of sustainability, we recently published our 2022 sustainability report, which showcases the progress we have made in our commitment to responsible and sustainable operations.
The report highlights several key initiatives that we've made progress on in the past year.
This include increased transparency with global reporting initiative or <unk>.
Porting.
Embedded focus on sustainability across the company.
Targeted capital allocation for continuous improvement.
Enhanced focus on employee safety and evaluation of our environmental impact.
I am proud of the progress we have made and we remain committed to reducing our environmental impact supporting our communities and operating with the highest standards of ethics and governance.
With that I, thank employees for the strong first quarter.
Thank our customers for their trust.
Our suppliers for their partnership.
And our shareholders for their continued support.
Now I'd like to turn the call over to Chris.
Thanks, Mike Good morning, everyone and thanks for joining us today.
I am pleased that we started off 2023 with sequential improvements in profitability and positive operating cash flow.
Our first quarter operating and safety performance was much improved and that operational stability combined with continued strength in customer demand and base sales prices drove our first quarter financial performance and provides us with confidence for the future.
Turning to our first quarter financial results.
Net sales totaled $323 5 million with net income of $14 4 million or <unk> 30 per diluted share.
Comparatively sequential fourth quarter of 2022, net sales were $245 $4 million with a net loss of $33 2 million or a loss of <unk> 75 per diluted share.
Net sales in last year's first quarter was $352 million with net income of $37 1 million or <unk> 70 per diluted share.
On an adjusted basis. The company reported net income in the first quarter of 2023 of $28 million or <unk> 44 per diluted share.
Comparatively the fourth quarter adjusted net loss was $4 6 million or a loss of <unk> 10 per diluted share adjust.
Adjusted net income in the first quarter last year was $48 6 million or <unk> 92 per diluted share.
Adjusted EBITDA was $36 million in the first quarter significantly higher than the fourth quarter adjusted EBITDA of $11 $9 million.
This $24 $1 million sequential improvements in adjusted EBITDA was grounded in operational stability, which supported a 35% increase in shipments.
Additionally, higher base sales prices and an increase in the raw material surcharge environment contributed to the sequential increase.
Compared with the same quarter in 2022, adjusted EBITDA decreased by $29 $3 million. This decrease was reflective of lower shipments as well as higher manufacturing costs, partially offset by higher base sales prices.
It's important to note that the first quarter of 2023, adjusted EBITDA excludes an insurance recovery of $9 $8 million related to last year's unplanned downtime of.
Of the $9 $8 million insurance recovery $800000 was received in the first quarter and the remainder was received in the second quarter.
We continue to seek additional insurance recoveries related to last year's unplanned downtime, although the timing and amount of potential additional recoveries are uncertain at this time.
Turning now to the details of the financial results in the first quarter.
Shipments were 172900 tons in the quarter, an increase of 44600 tons or 35% compared with the fourth quarter.
The sequential increase in shipments was driven by strong customer demand and a higher level of available inventory given improved operational performance.
Compared with the prior year first quarter shipments decreased 23500 tons or 12% as a result of lower industrial and mobile shipments, partially offset by higher energy shipments.
In the industrial end market shipments totaled 72200 tons in the first quarter, a sequential increase of 24700 tons or 52%.
The significant sequential increase in the industrial shipments was driven by strong demand across a wide range of sectors, such as heavy equipment and defense.
Mobile customer shipments were 8400 tons in the first quarter, a sequential increase of 12 700 tons of <unk>, 19% shipment.
Shipments in the mobile end market represented 47% of the total portfolio in the first quarter as customers pulled hard throughout the quarter to support internal combustion and electric vehicle builds.
Shipments to energy customers totaled 2300 tons in the first quarter, a sequential increase of 7200 tons or 55%.
Similar to industrial customer demand in the energy end market remains strong the sequential increase in shipments was also attributable to our improved operating performance, resulting in a higher level of inventory available for shipment.
Of our total first quarter shipments as expected approximately 28000 ship tons were sourced from third party milk producers and then rolled finished and shipped by Timken steel.
We expect a similar level of shipments of third party milk in the second quarter to further support customer demand.
As I mentioned last quarter, we plan to leverage our third party milk supply chains as an opportunity to support demand in targeted end markets over the cycle. This.
This strategy also improves utilization of our downstream assets without carrying the historical fixed costs in excess mill capacity.
Net sales of $323 5 million in the first quarter increased 32% sequentially and decreased 8% compared with the first quarter of last year.
The sequential increase in net sales was driven by higher shipments in base sales prices. Additionally, contributing to the increase in net sales was a 13% improvement in average raw materials surcharge per ton as a result of higher scrap and alloy prices.
Partially offsetting these items was a change in product mix, given the low level of shipments in the fourth quarter.
The net sales decline compared to the first quarter of last year was primarily driven by lower shipments in our market driven 13% decrease in average raw material surcharge per ton.
Partially offsetting these impacts were 12% higher base sales prices.
Base sales prices increased by $70 per ton or 5% on average in the first quarter across our end markets in comparison to the full year 2022 average.
Turning to manufacturing melt utilization was 73% in the first quarter compared with 47% in the prior year fourth quarter and 81% in the first quarter of last year.
Costs decreased sequentially by $26 $6 million in the first quarter driven by a substantial improvement in melt utilization and related cost absorption as well as higher costs incurred in the fourth quarter due to the planned annual maintenance shutdowns.
Comparison to the prior year first quarter manufacturing costs increased by $21 $8 million.
Drivers of increased year over year manufacturing costs included the impact on cost absorption related to lower melt utilization as well as increased maintenance and the impact of inflationary costs.
From an SG&A expense perspective in the first quarter SG&A increased $3 $6 million on a sequential basis to $21 million, primarily driven by higher variable compensation and benefits expense.
In comparison to the first quarter of last year SG&A increased $2 5 million as a result of higher information technology transformation costs and share based compensation.
Switching gears.
Gears to income taxes as I reported last quarter, we've now consume the majority of our net operating loss carryforwards due to consecutive years of positive net income and expect to be a federal taxpayer beginning this year.
During the first quarter the company reported an effective tax rate of 21% slightly higher than our previously guided range of 15% to 20%.
This higher than expected effective tax rate is primarily driven by the convertible note repurchase activity that we completed during the first quarter, which I will cover shortly.
At this time the company expects the effective tax rate for the remainder of 2023 to be similar to the first quarter.
Moving on to cash flow and liquidity during the first quarter operating cash flow was $9 $8 million driven by quarterly net income and $28 million of cash insurance recoveries collected during the quarter.
Partially offset by a use of cash to fund working capital requirements.
This marks the company's 16th consecutive quarter generating positive operating cash flow.
Capital expenditures totaled $10 6 million in the first quarter similar to the fourth quarter of last year. The company continues to forecast capex to be approximately $45 million in 2023.
Additionally, during the first quarter the company repurchased 514000 common shares at a total cost of $9 $4 million.
As of March 31, the company had $63 $7 million remaining on its common share repurchase program since.
Since the inception of our repurchases early last year through the end of the first quarter of 2023, we repurchased approximately three 5 million shares for $61 million.
Switching gears the convertible notes.
Similar to our last year during the first quarter of 2023, we repurchased seven 5 million of outstanding convertible notes at a total cash cost of $18 $7 million.
The $11 $2 million repurchase premium was driven by an appreciation in the company's stock price, which was significantly in excess of the instruments conversion price. This premium has been excluded from non-GAAP adjusted EBITDA as a loss on extinguishment of debt.
The first quarter's convertible note repurchase activity had the effective reducing diluted shares outstanding in addition to further reducing outstanding debt and interest expense.
At the end of March the outstanding principal balance on the convertible notes was $13 $3 million with a fair value of approximately $34 million.
As a result of the first quarter convertible note repurchases diluted shares outstanding will decrease by approximately 1 million shares in the second quarter of 2023.
In total we invested $28 $1 million in common shares and convertible note repurchases during the first quarter, which represents a 3% reduction in diluted shares outstanding compared with the fourth quarter of last year.
Dating back to the beginning of our shareholder return activities just over one year ago, our common share and convertible note repurchases in 2022, and the first quarter. This year represent a significant 14% reduction in diluted shares outstanding compared with the fourth quarter of 2021.
At the end of March 2023, the company's cash and cash equivalents totaled $227 $4 million and total liquidity was $537 million.
As we progress forward the strength of our balance sheet consistent cash flow generation and positive business outlook provides us with the confidence to continue to execute on our capital allocation strategy.
This includes investing in profitable growth and returning capital to shareholders, while maintaining a strong balance sheet.
Turning now to the second quarter outlook from a commercial.
Perspective second quarter shipments are expected to modestly increase on a sequential basis supported by steady demand across our end markets as evidenced by orders currently booking into the third quarter.
Base sales price per ton is anticipated to remain strong throughout the year with a modest increase expected in the second quarter average base sales price per ton mix dependent.
Drivers of this expected increase include the new fiscal year based price agreements and the full realization of previously negotiated annual agreements covering approximately 70% of the order book.
Additionally, second quarter base sales price per ton is expected to benefit from 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 certain alloy prices positively impacting April and May surcharges.
Operationally melt utilization is expected to average approximately 75% during the second quarter as Mike previously mentioned.
Additionally, we are in the process of planning our annual shutdown maintenance for the second half of the year with an expected cost of approximately $14 million.
At this time, we are anticipating about one third of the spend to be in the third quarter and the remaining two thirds in the fourth quarter with melt shop shutdown maintenance planned in the fourth quarter.
The estimated total spend on the annual shutdown maintenance in 2023 is similar to last year, but the timing is flipped.
Given these elements the company expects to report a solid second quarter, including an anticipated sequential increase in adjusted EBITDA and positive operating cash flow.
To wrap up thanks to all of our employees, who work safely and helped the company deliver solid start to 2023. We appreciate your interest in Timken steel and look forward to sharing our continued progress in the future.
I would now like to open the call for questions.
At this time I would like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad. Thank you.
Your first question comes from John <unk>.
With Sidoti Your line is open.
Good morning, guys and congratulations on a great quarter and thanks for taking the questions.
I'd like to start with your thoughts about the individual end markets you've discussed that the rig count may be softening in energy.
As concerns about what we're seeing in industrial and less so in mobile can you talk a little bit about your order trends are there any changes either positive or negatively.
Bookings.
On a total basis and also on a seasonal basis as you go forward bookings into the third quarter.
Well thanks for the question John .
Our bookings remain steady we're not we're not really seeing.
Any decline.
Or significant increase in bookings were just seeing it pretty steady we think automotive is in.
Off to a stronger start in Q1 and demand, we think thats going to continue throughout the year based on their build rate forecast.
On the energy side, yes, the last rig count number I saw was about 755 in the U S.
We think thats going to remain pretty steady.
We're not getting any indications that there's going to be any major change. There. However, we continue to state that.
Their capital discipline and the <unk>.
And market continues to be.
Very stringent and there are only going to buy what they need and use and theyre not going to build in inventories, which from our perspective.
That keeps us.
And efficient supply chain in place and we just see steady demand coming from our energy customers.
Got it got it and got to the third party.
20000 tonnes.
Provided.
Is that a constant number we should we should be thinking about on a go forward basis is that move.
Move marginally one way or another based on end market demand within the sector.
Yes.
Stated before.
We've ramped up our third party purchases to assist us with supporting our customers.
While we were recovering from their furnace incident from last July .
Going forward, our intentions are to utilize third party milk to better.
Absorb.
Our fixed cost in our downstream rolling and finishing operations when market demand is there for it.
We will always prioritize our melt first and then use the purchase smell to flex with the market demand.
Got it and just on the planned downtime in the quarter can you give us some color behind that and.
When do you expect to see it within the quarter.
This coming quarter.
Yes, so the planned downtime is too.
Yes.
Repair work and upgrade work at our Eas.
And that will occur this month.
Okay. Thanks, I'll get back in queue. Thanks for taking my questions.
Okay. Thanks, John .
Your next question comes from Phil Gibbs with Keybanc. Your line is open hey, good.
Morning.
Good morning, Phil.
I think last time, you had provided a cost outlook for 2023 I want to say it was something like a 10% increase in unit costs any update on that given the good first quarter performance on cost compression.
Yes, I mean.
We expect to see a little bit higher utilization in Q2. So there are fixed cost absorption will be better.
<unk>.
And.
I think we've stated already that are inflationary impact, we see our consumable cost and other material cost to operate our assets to be pretty steady throughout the remainder of the year.
So would that would that give me below that.
Previous 10% guidance, meaning cost cost performance is better than you expected.
But again, it's going to be based on our utilization rates.
As we continue to ramp up and perform our cost position should improve.
And so ill just add to that in terms of the actual items were buying the consumables, we're not seeing a lot of additional inflation on top of what we experienced in Q1 last year, So that's a pretty steady or stable.
Okay.
I appreciate that and then and then just in terms of.
Just in terms of end market color.
Color that was that was pretty solid things things are largely stable across the board. It appears from from your perspective.
But in terms of the outlook for net working capital.
What are you anticipating what.
What are you anticipating there.
Okay.
I'll, let Chris provide some color but.
We're looking at a pretty stable working capital.
Pending on.
Timing of shipments and stuff like that you can see a modest build but that you are talking one or 2% Max in that regard Chris.
Chris you want to provide any additional color accuracy, Mike if you look at the components receivables you would expect that balance to increase modestly in line with shipments and the surcharges from an inventory standpoint, we're producing the customer orders. So we're not expecting to broadly build a significant amount of additional inventory. We are looking at inventory in front of our key operations.
To make sure that we have the appropriate amount and make targeted adjustments where necessary.
And then from a payable standpoint, it's it's purely timing dependent and what looks like from a scrap price standpoint, we are in the process of transitioning from our old to new scrap yards. So we're carrying a little bit more scrap that we plan to longer term I would say the last point is around taxes, we do expect to make some estimated payments here in Q2 for the first time.
I have a more significant level related to our federal taxes.
You guys have said.
Something like a mid teens million dollars left or something on the old Nols alright.
Alright.
$17 million.
At 7% at the end of the year.
And then lastly.
The raw materials spread I believe was a bigger bigger tailwind than we were anticipating for the first quarter. I think you bridge that $14 million is it expected to be <unk>.
Be equal to that greater or less than for the second quarter, because your preface the surcharge widening.
Yes, I think we expect it to increase modestly in Q2.
<unk>.
The June the June scrap hasn't settled yet.
Everything you read says Thats going down.
But it looks like the spread is going to stay in place between prime and secondaries.
Thank you.
Thank you.
Your next question comes from Dave storms with Stonegate capital markets. Your line is open.
Good morning.
Good morning, Dave first question. Good morning first question here.
You mentioned in your release.
Product mix slightly.
A bit of a headwind how do you see that changing through.
Q2, and whatever visibility you have into Q3 of 2023 here.
Yes.
Sure.
Product mix comparison was.
<unk> over quarter sequentially, so its Q4 versus Q1.
In Q4.
Because of the inland or the lack of inventory we saw an unusual.
The product mix, where we shipped much more sold much more of our manufactured components, which of course sell for a much higher price per ton than our SBU and our tubes.
What we're seeing we saw we saw.
A more normalized mix.
<unk> in Q1, and we expect that mix to continue going forward.
Understood very helpful.
You also mentioned a couple of times that end markets are still pretty steady it seems like how is that impacting any new customer acquisition strategies that you have.
Is that making things a little more challenging a little bit easier because there is more clarity in the market.
Any color you could give there would be helpful.
Sure so from a from a.
Like a new customer.
Entrances or customer portfolio.
Our focus there is really around enriching our mix.
Our greater value growth.
And the products that we make and the end markets that they go to specifically.
Certain customers with a dozen markets, where we can generate generate greater value.
For ourselves.
I don't really see.
Anytime you bring a new customer and you have it's a challenge anyways right you're going to get qualified.
You've got to get <unk>.
<unk> supply chain is in place and you have to execute but.
We have a pretty we've done a lot over the last two years with our customer portfolio in the specific end markets. We really have a focus on a very diversified balanced strategy into each end market and which customers within those end markets markets that will partner with.
Understood. Thank you.
One more from me if I could.
Slide eight on your deck mentions that you have mitigation action mitigating actions planned for managing some of the headwinds that you see can you go in a little bit more on what those actions might look like.
Okay.
Yes sure.
Part of it.
Focused on our targeted profitability improvement actions around manufacturing and commercial excellence and process simplification.
And then the other thing is really around the inflationary impacts.
So we have very we have taken various procurement actions and.
In regards to.
Mitigating certain inflationary impacts to China.
Offset those for other areas.
And one of the biggest things we do as well.
We do our best to pass through whatever cost increases we get into our commercial arrangements.
That's perfect. Thank you very much.
Again, if you would like to ask a question at this time. Please press star followed by the number one on your telephone keypad.
There are no further questions at this time. Thank you everyone. This concludes today's conference call you may now disconnect.
Okay.