TimkenSteel Corporation
Q1 2021 Earnings Call Transcript

Published: 7 May 2021

[Operator:]

Good day, and thank you for standing by. Welcome to the TimkenSteel First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jennifer Beeman. Mam, please go ahead.

[Jennifer Beeman:]

Thanks and good morning, and welcome to TimkenSteel's First Quarter 2021 Conference Call. I'm Jennifer Beeman, Senior Manager of Communications and Investor Relations for TimkenSteel. Joining me today is Mike Williams, President and Chief Executive Officer; and Kris Westbrooks, Executive Vice President and Chief Financial Officer.

[Michael Williams:]

Thank you, Jennifer, and thanks to everyone on the call for joining us this morning. We have enjoyed a strong start to our year thanks to the recovery in the automotive and industrial markets and our improving cost structure. As a result, in the first quarter, our adjusted EBITDA nearly doubled from the prior quarter and we continued to generate positive operating cash flow. The systemic changes we've put in place over the past 18 months, have allowed us to leverage recovery markets and improve profitability. Before I continue with my remarks regarding the quarter, I'd like to cover a few changes at TimkenSteel. As announced in our earnings release, our Board of Directors has named Ron Rice as our new Chairman, following the retirement of Jack Reilly. Ron has been an Independent Member of the TimkenSteel's Board of Directors since 2015, and brings a wealth of knowledge to the role. I speak for the team, when I say, we look forward to working with Ron more closely in the future. Furthermore, we sincerely thank Jack for his dedication and leadership as Chairman over the years. He was a Founding member of our Board of Directors, and under Jack's guidance, TimkenSteel has built a strong foundation for future growth. We are grateful for his contributions and we wish Jack, well in his retirement. We also announced that Tom Moline, Executive Vice President of Commercial Operation; and Bill Bryan, Executive Vice President of Manufacturing and Supply Chain, will both be leaving in the Company. Kevin Raketich, currently serving as Executive Vice President of Strategy and Development at TimkenSteel, will assume a new role as Executive Vice President of Sales, Marketing and Business Development. We expect smooth transitions in light of these changes. I'd like to thank, Tom and Bill for their many years of service and we wish them all the best.

[Kristopher Westbrooks:]

Thanks, Mike, good morning everyone and thanks for joining us today. I'm pleased that we started off 2021 with a significant improvement in profitability, both sequentially and compared with the prior year first quarter. Our quarterly financial results reflect improving industrial and automotive customer demand, in increasing raw material surcharge environments, the benefit of prior restructuring and cost reduction actions and continued working capital discipline. Our overall cash and liquidity position strengthened during the first quarter, as we generated operating cash flow of $13.2 million. We finished March with a record $115.7 million dollars of cash and $357.5 million of total liquidity, thanks to our employees for a successful start to the year, while remaining focused on daily execution.

[Operator:]

Your first question is from the line of Seth Rosenfeld with Exane.

[Seth Rosenfeld:]

Good morning. Thank you for taking our questions today. If I can kick off please with regards to your commentary on automotive demand. It sounds like to date that impact in the semis disruption hasn't been so significant for your business, but might be getting more in the Q2. When you think about that mix impact, what's the implication from margin perspective of selling in the spot market today versus selling on those fixed auto contracts there, please?

[Michael Williams:]

By the way, thanks for the question. There is definitely a margin improvement on the spot business versus the contractual business in the automotive customers that we have.

[Kristopher Westbrooks:]

Except to add on to that, to the extent it shifts to industrial, we would expect that to be a benefit as well.

[Seth Rosenfeld:]

Okay, thank you very much and just a follow-up, can you give us an update on how the annual auto contract negotiations progress, I think it's kind of the last quarterly call, mostly been settled but perhaps not all of them and given the increasing strength in the spot market, is there any opportunity to go back and try to renegotiate those contracts, while going into later in the year, at what point would you expect some lease up potential?

[Michael Williams:]

Yes, so we do have some automotive contracts that expire at the end of the first quarter, were in -- were negotiated and completed, starting for the second quarter and they were favorable to our expectation. In regards to the existing contracts in place, that activity will start later this year, typically starts late August through September, for next year.

[Seth Rosenfeld:]

Okay. And when find an opportunity, go back and try to renegotiate with January contract at this stage?

[Michael Williams:]

No. We made a promise of a commitment and we stick to it.

[Seth Rosenfeld:]

Okay, very clear. And just one more question on the ESG side. Your comments in your prepared remarks, estimation to reduce greenhouse gas emissions by 10% this year. Can you give us a bit more color on that in terms of what the base year is for that, is it the year-over-year and also what are the key drivers that you can expect for that significant one year step?

[Kristopher Westbrooks:]

Sure, Seth. That's based off of our 2020 emissions, in our report, so we would expect that 10% improvement off of 2020. And it's primarily driven by the manufacturing footprint actions that we have previously announced. And we plan to provide more color as the year progresses on our targets for the future, by the end of this year.

[Seth Rosenfeld:]

Okay, thank you very much.

[Kristopher Westbrooks:]

You're welcome.

[Operator:]

Your next question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

[Philip Gibbs:]

Hey, good morning.

[Michael Williams:]

Good morning.

[Philip Gibbs:]

Just to piggyback Seth's question on pricing and mix, it was a headwind in the first quarter relative to the fourth quarter, $6 million. And with your spot increases and an opportunity to shift some auto tons to new industrial and you did have a very weak mix, it looked like in energy. Do you think that the first quarter of '21 is the bottom for you for your pricing and mixed cadence for the year?

[Michael Williams:]

We do expect the mix to improve based on the demand going in the second quarter by market. I will tell you that quarter-over-quarter, the major influence was from a mixed price standpoint, was more carbon versus alloy grades, and also we had a strong defense shift sales level in the fourth quarter that didn't repeat itself in the first quarter, however, we do expect that defense volume to increase, particularly in the second half.

[Philip Gibbs:]

Okay. So carbon versus alloy and then defense then is rich, in terms of your mix and then some of your spot increases that you put in, in both SBQ and in tubing over the course of late last year, early this year, are those starting to hit their stride in the second quarter? I would presume you didn't get much given your lead times in Q1.

[Michael Williams:]

On our base price quarter-over-quarter, we saw about a 6% increase overall, but we -- the price increases that were announced earlier in the first quarter are taking hold in the second quarter. So, we do expect price improvements going forward.

[Philip Gibbs:]

Okay. And then, you have completed it appears your consolidation of Harrison and the Faircrest, did you have any frictional costs in the first quarter in your results that you didn't call out? I know you pulled some stuff out of the numbers to get your adjusted results, but was there anything in the results that you didn't pull out, that you define as frictional that may -- that may dissipate?

[Michael Williams:]

Yes, there were some MRO and spares type activity that we had to take charges on in Q1, that won't repeat itself going forward.

[Philip Gibbs:]

Were those -- were those pulled out then and because I know you did make a series of adjustments in the results, were those still in the results despite the exclusions? That's what I was trying to figure out.

[Kristopher Westbrooks:]

Yes, Phil, the majority of that was excluded, that both, asset write downs as well as the supplies write downs, those were excluded from our non-GAAP results. There was a smaller amount of alloy raw material adjustments as we shifted all of our extra raw materials over to the Faircrest location that impacted Q1, but not overly material.

[Philip Gibbs:]

Okay, Kris and then, I appreciate that. And then last one for me is net working capital and clearly, you've got continued inflation in raw materials, better demand levels, what should we be thinking about in terms of net working capital over the balance of the year? Thanks.

[Kristopher Westbrooks:]

Sure, Phil, I'll take a shot. Primarily in the second quarter, the EBITDA growth that we commented on in our guidance in the higher volumes should be a positive driver of cash flow in the second quarter. We do have some potential working capital build though for receivables, given the higher sales prices and higher volumes there. Ultimately, the outcome is going to be dependent on the level of that EBITDA growth and how we balance that with working capital. It's clearly going to be a focus for us and we're very well positioned in all of our working capital practices. I'm sorry, I can't give you too much detail there, but definitely still a focus for us and starting with the strong top line definitely helps.

[Philip Gibbs:]

Can I squeeze in one more here, just for housekeeping purposes. I think the bottom line number 55 million, 56 million from memory on the share count in Q1, I know that probably did include some convertibles, what is that number on a pro forma basis, as we look ahead when you include the convert pay down?

[Kristopher Westbrooks:]

There's about 3.2 million shares associated with the 2016 converts that are due in June of '21, June 1st. So you would expect that 3.2 million to come off that total of share count that you mentioned, the 55.7 million. There is some additional shares for equity based compensation that's dependent on stock price and other things at the time, so that would be an incremental add. Then you also have to adjust the top line, there is a numerator, so, the interest expense component that you add back to net income at this level income would be -- it would be lower by about $600,000 or $700,000. So there's two moving pieces there, lower interest expense, add back and a slightly lower share count by 3.2 million and that's at current net income levels.

[Philip Gibbs:]

Okay. So the $1.3 million goes to $0.7 million or something on the add back. And then your 56 million, 57 million wherever your word goes, goes down through your $3 million and change, absolutely in your compensation issues. Okay, thanks very much.

[Kristopher Westbrooks:]

You're welcome. Thank you.

[Operator:]

Your next question comes from the line of Justin Bergner with G. Research.

[Justin Bergner:]

Hi. Good morning, Mike. And good morning, Kris.

[Kristopher Westbrooks:]

Good morning.

[Justin Bergner:]

I apologize I jumped on the phone call little bit late, so I hope I'm not redundant here, but I mean, great performance in the first quarter and good outlook for the second quarter. How should we think about sort of the effects of inventory profits flowing through the first quarter EBITDA and second quarter outlook? I mean once steel prices and scrap prices sort of flatten normalize, is there any sort of, you know perspective, you can give us as to how much would come off of EBITDA for the first half?

[Kristopher Westbrooks:]

It's a little tough, Justin. I mean we're turning our inventory quickly, all the working capital practices that we put in place historically are continuing, especially on the raw material side. So we don't have a lot of cheaper raw material sitting in there, it's current purchases pretty much and try not to do any speculative purchasing or manufacturing or making products for customer shipments and working our hardest to get it out the door to meet on those customer commitments.

[Justin Bergner:]

Okay, and then just a reminder, I guess for us, now that you've consolidated at Faircrest, what's sort of the maximum level of shipments that you could do on an annual basis, assuming that you're sort of producing for the level of shipments?

[Michael Williams:]

Yes, so based on the nameplate melt capacity at 1.2 million tons, that would basically net out about 900,000 tons of shipments per year and that can vary based on mix slightly, but I would say that's a good number.

[Justin Bergner:]

Okay and just remind us as well. I mean you're on track to do about 400,000 tons of shipments in the first half, I mean if normal seasonality takes effect, I assume we would annualize that at a little bit less than 400,000 tons, but if there is any just reminder, you can give us as to sort of the -- the seasonality in the second half versus the first half, just given production schedules and shifts and holiday outages.

[Michael Williams:]

Yes, so -- so the seasonality, really occurs in the fourth quarter based on what we see and that's typically driven by the holidays, as well as year-end inventory reductions that the customers take to manage their inventories for year-end. Typically, we see that historically spent about 10% to 15% less than the prior quarters.

[Justin Bergner:]

Okay, that's helpful. And are there any sort of optimism towards energy or is it sort of still deemed to your small contributor, your shipment levels going forward in the future?

[Michael Williams:]

Yes, I can tell you, what we're experiencing is the fact that, we have seen a pretty decent increase in activity in regards to inquiries. But that hasn't necessarily translated to orders. The orders that we do or the slight increase in shipments to the energy market, is predominantly driven by inventory gaps or requirements to fill inventories that have been run out or well below their safety levels. So, it's kind of hit or miss on that. The industry statistics are improving in regards to slight to modest rate growth. But, that's pretty much what we're seeing.

[Justin Bergner:]

Okay.

[Michael Williams:]

I wouldn't -- I wouldn't call it optimistic, but we do see some modest slight improvement going forward.

[Justin Bergner:]

Okay, thank you.

[Operator:]

At this time there are no further questions. I would now like to turn the call back over to management.

[Jennifer Beeman:]

Thank you all for joining us today, and that concludes our call.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.