Q3 2023 TimkenSteel Corp Earnings Call
Good morning, and welcome to Timken Steel third quarter 2023 conference call.
All participants are in a listen only mode. After the speaker's presentation, we will conduct a question and answer session.
As a reminder, this conference call is being recorded.
I would now like to turn the call over to Jennifer Beeman Director of Communications and Investor Relations. Thank you. Please go ahead.
Good morning, and welcome to Timken Steel third quarter 2023 conference call I'm, Jennifer Beeman director of Communications and Investor Relations for Timken steel joining.
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 all should have received a copy of our press release, which was issued last night.
During today's conference call, we may make forward looking statements as defined by the SEC. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in yesterday's release.
Please refer to our SEC filings, including our most recent Form 10-K and Form 10-Q, and the list of factors included in our earnings release, all of which are available on that ship can still website.
There are 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, everyone and thank you for joining us today.
First and foremost I'd like to thank our employees for their hard work and collaborative spirit as we continue to chart new pathways for growth.
Our firm commitment to safety is beginning to show results and are focused on strengthening our culture and fostering teamwork across our commercial supply chain and manufacturing operations resulted in a solid profitability, while meeting the needs of our customers.
Additionally, we continue to repurchase shares while strategically reinvesting in our business.
The enhanced collaboration we've seen both with the United Steelworkers and within our teams is fueling our never ending pursuit of manufacturing excellence and helping us to create a lasting culture of safety.
Okay.
In October we launched our second employee safety survey for all employees.
Results from this survey will help us improve hazard awareness improve our engagement build a safety centric mindset and gain valuable insights from employees for continued safety improvements.
However to encourage good safety ideas.
Essential that we provide concrete support in.
In 2023.
We spent approximately $8 million on safety Capex project and $1 million in safety training.
Moving to our performance, we saw a slight sequential decrease in sales and shipments in the third quarter.
While I am encouraged we've experienced solid base prices across all end market sectors.
EBITDA was impacted by a continued decrease in surcharges, given lower market prices for scrap and alloys in the past several months.
Our melt utilization for the third quarter was approximately 76% slightly.
Slightly higher than the previous quarter, given our planned annual shutdown maintenance in October we expect to see a sequential decrease in the average melt utilization rate in the fourth quarter.
Mobile customer shipments were essentially flat with the second quarter.
I wanted to take a moment to discuss the United Auto workers strike and how it impacted demand for our products.
Overall, the impact for the third quarter was relatively minimal.
About one third of our mobile OEM shipments go to non U S based automakers with U S manufacturing operations.
Additionally, we shipped to auto manufacturers with operations in Mexico, which were not impacted by the strike.
During the early weeks of the strike the supply chain was still catching up to fulfill past due orders.
Although work stoppages directly affected a few programs. We're involved in we expect the OEM demand to quickly recover and remain strong in early 2024.
Regarding EV related products, we had a record third quarter, representing a 62% net sales increase from the second quarter.
As a reminder, last quarter, we had approved a 5 million dollar investment for two additional manufactured component machine lines to be installed at our facility in southwest, Ohio in late 2024.
This investment will broaden our EV component offering to customers and allow us to keep pace with industry growth.
In the industrial market, our shipments increased by 5% over the prior quarter we.
We saw an uptick in demand for high quality grades of steel coupled with continued strength in the defense sector due to expansion of the U S industrial supply base supporting major department of defense programs.
We expect record sales to the defense sector in the fourth quarter.
Our energy shipments in the third quarter declined 27% on a sequential basis as demand weakened.
The average U S rig count dropped approximately 10% from the second quarter. Despite an increase in oil prices during the period.
This reflects the industry's continued conservative approach.
In support of our ongoing commitment to expanding our market presence and broadening our product portfolio.
We are pleased to introduce Tim Lynch as our vice President of corporate development, our newly established role.
<unk> primary mission is to enhance the company's value by identifying and actively pursuing acquisitions that align with our strategic imperatives.
With a career spanning over three decades, Tim brings extensive expertise in steelmaking operations supply chain management procurement and strategic planning to our team.
We extend a warm welcome to Jim and look forward to his valuable contributions to our company.
We remain committed to our profitability improvement initiatives and work continues companywide to achieve our target of $80 million by 2026.
Again, our actions have been focused on commercial excellence.
Manufacturing and reliability excellence and administrative process simplification with a strong balance sheet as our foundation.
To date, we are about two thirds of the way towards achieving our target with ongoing areas of focus including manufacturing excellence.
Ministry of process simplification enabled by modernizing our it systems.
As we enter into the last few months of the year, we will remain focused on safety customer service and advancing our strategic imperatives to drive sustainable through cycle profitability and cash flows.
I, thank our customers for their trust our suppliers for their partnership and our shareholders for their continued support.
Now I would like to turn the call over to Chris.
Thanks, Mike Good morning, everyone and thanks for joining the call today Timken.
<unk> third quarter financial results reflect solid profitability and another quarter of positive operating cash flow.
Thanks to all of our employees for their teamwork and collaboration and delivering these financial results, while remaining focused on advancing the company's strategic imperatives.
Now turning to the third quarter financial results.
Net sales totaled $354 $2 million with net income of $24 8 million or <unk> 51 per diluted share.
Comparatively sequential second quarter net sales were $356 6 million with net income of $28 9 million or <unk> 62 per diluted share.
Net sales in last year's third quarter were $316 $8 million with a net loss of $13 3 million or a loss of 29 per diluted share.
On an adjusted basis. The company reported net income in the third quarter of $24 9 million or <unk> 52 per diluted share.
Comparatively the second quarter adjusted net income was $27 6 million or <unk> 60 per diluted share.
Adjusted net loss in the third quarter last year was $4 1 million or a loss of <unk> nine per diluted share.
Adjusted EBITDA was $46 8 million in the third quarter of $3 $7 million sequential decline.
Our market driven decrease in the raw material surcharge environments and the start of our planned annual shutdown maintenance were the drivers of the sequential decrease in adjusted EBITDA.
Partially offsetting these items were higher base sales prices and an improvement in product mix.
Compared with adjusted EBITDA of $10 8 million in the third quarter of last year, adjusted EBITDA increased by $36 million in the quarter.
As a reminder, the third quarter of 2022 included unplanned downtime at the melt shop.
Turning now to the details of our financial results in the third quarter.
Shipments were 175800 tons in the quarter, a slight decrease of 1700 tons or 1% compared with the second quarter of 2023.
In the industrial end market shipments totaled 82400 tons in the third quarter, a sequential increase of 4000 tons or 5%.
The increase was driven by higher third quarter shipments to the defense sector.
Sales to defense customers continue to strengthen and represented 16% of industrial shipments in the third quarter compared with 12% in the sequential second quarter and 10% in the third quarter of last year.
Shipments across other industrial sectors were fairly steady in the third quarter on a sequential basis.
Mobile customer shipments were 79100 tons in the third quarter essentially flat with the second quarter.
Through the end of September automotive work stoppages resulted in a minimal impact on net sales and shipments.
Shipments to energy customers totaled 14300 tons in the third quarter, a sequential decrease of 5300 tons or 27% as energy customer demand softened in the third quarter.
Of our total third quarter shipments approximately 16000 tons or 9% was sourced from third party milk producers then rolled finished and ship by Temkin steel.
As expected this represented a sequential decrease of 33% given improvements in our internal mill productivity.
Net sales of $354 2 million in the third quarter decreased 1% sequentially.
The decline in net sales was primarily due to a market driven 16% decrease in average raw material surcharge per ton as a result of lower scrap and alloy prices.
Additionally, slightly lower shipments contributed to the decline in net sales.
Partially offsetting these items were higher base sales prices and favorable product mix.
Turning now to manufacturing.
Melt utilization was 76% in the third quarter compared with 75% in the second quarter Manny.
Manufacturing costs increased sequentially by $6 $1 million in the third quarter as we began the planned annual shutdown maintenance at our rolling piercing and finishing operations.
Switching gears to income taxes, the company's effective tax rate was 28% in the third quarter and 27% on a year to date basis through the end of September.
Cash taxes were $8 $4 million in the third quarter.
And we anticipate cash taxes to decline in the fourth quarter.
Moving onto cash flow and liquidity during the third quarter operating cash flow was $28 $1 million driven by quarterly net income. This marks the company's 18th consecutive quarter generating positive operating cash flow.
Year to date through the end of September operating cash flow was $51 $2 million.
Capital expenditures totaled $17 $5 million in the third quarter and included various investments to drive operational efficiency growth and improvements in safety.
In the fourth quarter, the company anticipates approximately $15 million of Capex to bring the full year total to approximately $50 million consistent with previous guidance.
From a share repurchase perspective, the company bought back 353000 common shares during the third quarter at a total cost of $7 $7 million.
As of September 30, the company had $44 $5 million remaining on its share repurchase program.
Since the inception of the program early last year through the end of September 2023. The company has repurchased four 5 million shares at a total cost of $85 million.
In total the common share repurchases plus the 2022 and 2023 convertible note repurchases have resulted in a significant 16, 1% reduction in diluted shares outstanding compared with the fourth quarter of 2021.
The companys cash and cash equivalents totaled $225 $4 million and total liquidity was $519 1 million as of September 32023.
Interest income generated by the company's cash balance was $2 $4 million in the quarter and nearly $7 million year to date.
As we proceed forward, we expect the strength of our balance sheet combined with expected through cycle profitability and positive operating cash flow to provide us the opportunity to continue to execute on our capital allocation strategy.
This includes investing in profitable growth, maintaining a strong balance sheet and returning capital to shareholders through continued share repurchases.
Turning now to the outlook.
From a commercial perspective fourth quarter shipments are expected to decrease sequentially as a result of normal seasonality and potential volatility from the automotive work stoppages and restarts.
Base sales price per ton is anticipated to remain strong in the fourth quarter, while surcharge revenue per ton is expected to be sequentially lower.
The expected decline in surcharge revenue per ton is due to a reduction in the number one bushel <unk> scrap index in September which impact subsequent monthly surcharges.
Operationally melt utilization is expected to sequentially decrease in the fourth quarter as a result of the planned annual maintenance shutdown at the melt shop, which was completed in October.
Costs associated with this planned annual shutdown maintenance were approximately $7 million in the fourth quarter slightly higher than the third quarter shutdown maintenance costs. Additionally, we plan to further reduce the melt operating schedule around the fourth quarter holidays to balance inventory with current demand manage costs and set up for a strong start to 2024.
Given these elements the company anticipates fourth quarter operating cash flow to remain positive while adjusted EBITDA is expected to decline sequentially.
To wrap up thanks to all of our employees, who work together as a team to again deliver solid financial results, while continuing to strengthen our safety culture. We appreciate your interest in Timken steel would now like to open the call for questions.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Our first question comes from John Frank <unk> from Sidoti <unk> Company. Please go ahead. Your line is open.
Good morning, everybody and thanks for taking the questions.
I'd like to start stop.
Start with your comments on the UAW strike.
Did it impact october's results or are you anticipating it to impact more of November just kind of how the fourth quarter is kind of playing out.
Sure John So yeah, we had a much more significant impact.
October versus.
The prior months during.
During the strike.
And.
We also have to wait and see how quickly they ramp up and how strongly pull through the rest of this quarter. That's still a question Mark.
Okay, and then giving you know color as how that's going to play out.
Well basically they've just kind of give us what the plants are restarting and what that schedule is but we don't know what the demand requirements are going to be yet.
Okay and.
Out of curiosity are you exposed to the not truck UAW strike.
That's something that won't impact you.
No not that I'm aware of I mean, there could be possibly somewhere in the supply chain, but.
I don't think anything significant from our sales perspective would be impacted.
Okay fair enough and on the industrial side.
The sequential improvement Youre talking about in the fourth quarter is.
Excellent.
Regional question is how is it how is that business profile changed from three months ago, but I'm going to shift that to can you talk a little bit more is entirely the defense side of that business. That's driving the sequential increase that youre looking for or the other parts of it that are doing well.
So that's predominantly the.
The defense sector, that's pulling hard to restock their supply chain.
Okay got it and on the energy side, you touched on that the rig count is down would you expect the energy volumes to remain at this kind of thresholds in the fourth quarter would you expect to be sequentially weaker due to seasonality.
Well I think.
I think from our perspective.
Sure.
It's pretty much going to be flat to maybe down.
In Q4.
Energy demand.
We've seen a couple rigs added I think over the last 30 days, but they are being very disciplined with their working capital.
Okay, I was disappointed actually I'll get back into queue, and let somebody else ask some questions.
Alright, Thanks John.
Our next question comes from Phil Gibbs from Keybanc. Please go ahead. Your line is open.
Hey, good morning.
Good morning, Phil.
Just wanted to touch on the.
The comments you made on the front end of the call about having a gentleman on a roll.
Looking at acquisition.
<unk>.
Sure.
Just the.
The broader.
Broader strategy.
There has to be a little bit of.
David or an augmentation to what you guys have already been doing because you haven't been very acquisitive recently so.
Anything you could add there would be helpful.
Sure.
<unk> been going through this transformation process for a couple of years now we have a strong solid balance sheet.
We've totally revamped our commercial approach to various markets.
Beefed up our team and skill set and I think we're reaching a point in discussion with the board that we need to start looking more aggressively for some external growth opportunities that align with our strategic imperatives, which is going to be around our manufacturing footprint.
Our product capabilities and targeted.
Certain end markets for expansion.
There'll be more color to come over the next several quarters on this topic.
But we just wanted to identify the fact that.
We're kind of shifted into fifth gear.
As their overall focus and strategic evolution.
Thank you and then as it relates to the pricing and mix. Thank you or your bridge in your filing.
Spoke to somewhere around maybe 10 of $11 million sequential pick up in EBITDA from pricing and mix in the third quarter versus second.
How much of that pick up.
As related to some of the defense comments here Youre, making.
A significant amount of it is related to.
Demand growth in defense related products that we manufacture. However, we have seen also a richer alloy mix as well in the industrial sector.
And then there was a big pickup in pricing and mix is sort of across all your.
Sort of across all your targeted markets auto.
Industrial and energy.
They really really notable is there any of that that over the next couple of quarters will will normalize a bit because there was a bit of a step change in the quarter that was unique.
Yes.
Some retroactive pricing that was caught up in Q.
Q3, but thats.
Those are solid agree annual agreements that pricing will continue.
Going forward.
That was one of the big Influencer, Besides the richer mix tied to the defense market the sector.
And the alloy mix.
The product okay.
Some catch up on.
On pricing or orders that maybe.
Or where backlog from.
From.
Some of the operational issues last year.
Yes, I would say, it's more retroactive pricing.
Okay.
So I went back a couple of quarters, they've got caught up in Q3.
Great.
And then lastly, anything on the on the conversion cost.
That's notable.
Between.
Energy alloy.
Renewables anything like that that could be.
J&J or how does how does the comparator last year.
You mean for 2024.
I just mean in terms of trends in terms of what you've seen at <unk> and how that maybe compares to last year.
I think the.
Most of our consumables.
And.
Energy requirements, whether it be gas electricity or under.
The annual contracts are longer term contracts. So those pricing from that perspective is flat to the remainder of this year.
And we're in the progress of negotiating beginning the negotiation of our supply contracts for 2024.
So too early to tell you how that's going to play out, but we'll know probably by the end of the year.
Thank you.
Thanks Bill.
As a reminder to ask a question. Please press star followed by the number one our next question comes from Dave storms from Stonegate Capital markets. Please go ahead. Your line is open.
Good morning, this is John stepping in for Dave.
Hey, John.
So you had mentioned that utilization was 76% in the quarter and supposed to decrease in Q4, so relative to historical levels. What are your expectations for 2024 was reaching 80% of.
A reasonable expectation.
Yes.
Our target average per quarter.
We would have been there in Q3, however, we had an environmental system that malfunction and we had to.
It'd be down for a couple of days to repair at our melt shop.
Okay.
So we would have been definitely slightly above 80% if that wasn't the case for Q3.
And that is our basically our target for 2024 and we've given you the reasons why Q4 will be lower.
Got it very helpful. Thank you and then the cost improvements that remained in Q3, which ones are structural which of them are discretionary.
Nancy.
Well I mean, most of our cost improvements.
Are going to be structural outside of you know.
Supply agreements and arrangements in raw material purchases and energy purchases those can can vary.
But when we look at R.
Our manpower, we look at our productivity when you look at our yield and cost of quality of those things are all structural improvements.
That's what we've been focused on a number of investments.
That were.
Were implemented during the outage will start to see those improvements.
Through the remainder of this year and for the full year of 2024.
Okay got it. Thank you I appreciate you taking my questions.
Thank you.
Our next question comes from John <unk> from Sidoti. Please go ahead. Your line is open.
Just a couple quick follow ups.
Firstly.
How does the capital expenditure.
The change in 2024 versus 2023, I know you got the additional pieces of equipment that you're putting in at the end of next year, but can you kind of ballpark, what the capex spend looks like for next year.
Yeah for next year, John where we are in the planning process right now and.
We will do that through probably mid December and then we will have a discussion with the board. So at this time I don't want to make that public it would only be a guess at this time anyways.
At the year end will be able to move much more clarity on the capex for 2024.
I would say this though I don't think theres anything.
In the planning right now that would significantly increase it.
Okay.
And regarding the tax rate, it's kind of been volatile.
The past couple of quarters any thoughts on how you're going to finish the year full year fourth quarter due to one would be helpful.
Chris you want to take that one sure yeah. Thanks John.
Looking at year to date year to date rate around 27%.
Where we would be targeting for the end of the year. The things that are driving the rate higher or some of these nondeductible costs.
We experienced earlier in the year, so as we get into next year I think it should moderate absent those.
Non deductible items.
Thank you, Chris and just lastly on capital allocation, you've been buying back shares rather aggressively do you expect to continue to do so in the fourth quarter can you just talk a little bit about excess cash and plans for it.
Especially invited.
Potentially being more aggressive in M&A, so maybe contextualize it all.
And so we put in the Q in the month of October we bought back around 94000 shares I believe.
About $2 million of buybacks in the month of October and now we're just putting a new plan in place now that will go out through our next filing dates so I'm not going to speak specifically to that but.
More to come as we reported in February, but we're definitely thinking about the future adequately managing our cash as we approach year end managing working capital like we always do and being prudent in all those areas.
Okay. Thank you for taking my follow ups.
Thanks, John.
As a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Okay.
We have no further questions in queue I'd like to turn the call back over to Jennifer Beeman for closing remarks.
Thank you all for joining us today and that concludes our call.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
Yeah.