TimkenSteel Corporation
Q1 2020 Earnings Call Transcript

Published: 8 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the TimkenSteel Q1 2020 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 like to now hand the conference over to your speaker today, Ms. Jennifer Beeman. Please go ahead.

[Jennifer Beeman:]

Good morning, and welcome to TimkenSteel's first quarter 2020 conference call. I'm Jennifer Beeman, Senior Manager of Communications and Investor Relations for TimkenSteel. Joining me today is Terry Dunlap, Interim Chief Executive Officer and President; Kris Westbrooks, Executive Vice President and Chief Financial Officer; as well as Tom Moline, Executive Vice President of Commercial. You all should have received a copy of our press release, which was issued last night.

[Terry Dunlap:]

Thank you, Jennifer, and thank you to everyone for joining us this morning and for your interest in TimkenSteel. Let me begin with a word about safety and our COVID-19 actions. First, I'm extremely proud that during this challenging time, we achieved some of the best safety results in company history, including our lowest OSHA recordable rate on record. I am thankful for the ongoing commitment and focus of our employees to keep everyone safe and healthy every day, every shift. Regarding the COVID-19 crisis, as you know, TimkenSteel has been designated an essential business by the Ohio governor and the Department of Homeland Security. As such, the company has continued to operate uninterrupted from the beginning of the pandemic providing products that are vital to the safety and security of our country. The TimkenSteel team has performed admirably to keep employees safe on our factories operating. In early March, we created a cross-functional COVID-19 team to lead our response and work collaboratively across the company to ensure the health and wellbeing of our employees. Employees, who can work from home or doing so and employees onsite are strictly following safe workplace practices established by the CDC, U.S. Department of Labor and Ohio Department of health. We have added enhanced cleaning procedures in all plants and offices, encouraged employees to be vigilant with their personal hygiene, workplace hygiene and physical distancing, and we regularly reinforced the message that no one should come to work sick. In the last two months, we performed hundreds of audits in our plants to ensure we remain diligent in these efforts. We are communicating regularly with our workforce and often with the community regarding the impacts of COVID-19 and have established communication channels to alert us in real time to any concerns in areas in need of attention. This includes engagement with The United Steelworkers and local government and health officials. In addition, we have also taken actions to support our community and medical professionals including the donation of N95 respirator, first-aid kits, and other supplies to local health care and community organizations.

[Kris Westbrooks:]

Thanks Terry, and good morning, everyone. I would also like to express my gratitude to our employees for their commitment to a healthy and safe working environment, while actively engaging with our customers, suppliers and other partners. Moving now on to financial matters. In the second half of 2019, we initiated a project to improve our working capital efficiency. As the first quarter evolved, we realized significant benefits from this hard work as evidenced by our first quarter of 2020 free cash flow of $60.9 million. The timing of this work was ideal as we entered what we entered what we believe will be a very challenging second quarter with a higher than historical level of cash and the most available liquidity since the inception of the company. In the last six months, we've generated over $90 million of free cash flow and approximately $110 million in cash from operations. As Terry mentioned, we accomplished our first quarter shipments net income and EBITDA guidance. In the coming months, in light of COVID-19, our actions remain focused on cost reduction, cash preservation and ensuring near-term financial stability which will serve the benefit us as the market begins to recover.

[Operator:]

Your first question comes from the line of Seth Rosenfeld from Exane BNP. Your line is now open.

[Seth Rosenfeld:]

Good morning, thank you for taking my questions today. Two different questions, please. First, on working capital and then secondly, with regards to some of the labor cost savings. On working capital, can you just give us a little bit more color, if possible, with regards to the drivers of that working capital release in Q1 and certainly, a very positive and very strong performance in that period. I want to better understand how sustainable that is medium term. I guess are you expecting further release into Q2 given the sharply lower volumes? But assuming we got back to more decent volumes in the second half of the year, would we require more of a cyclical reinvestment over that time period? And then secondly, with regards to the manufacturing staff reductions you've seen given the low utilization rates, can you again just give us a bit more color on what portion of the manufacturing staff has currently been temporarily laid off and also the union response for these efforts? Thank you so much.

[Terry Dunlap:]

Great. Thanks, Seth. So in the working capital, we've taken numerous actions, as Kris pointed out in his comments, on every front, if you will. We've gotten a lot of the low-hanging fruit that was available to us over the last six months, but there's plenty more opportunity, and we're working on those every day across the business in all areas of inventory. So we think there is more to be had for sure in improving our processes and the way we run the business. Some of the easier targets have been taken care of. And so now there's – and the work has been ongoing for six months. So we think we have more opportunity as we go forward. But certainly, we'll – we're into some – the difficult actions that we have to be taking and the business practice changes going forward. Secondly, on the manufacturing cost side, I'm going to let Kris talk about this one. But I can tell you with working with the steelworkers and the United Steelworkers, we meet with them constantly every week. I personally talk to them on a very frequent basis, and they have been nothing but totally supportive of everything we're doing and all the work that's going on to keep the company operating and keep it running well. Over the COVID period, they've been incredibly supportive and helpful, couldn't be better partners throughout this whole thing. And they fully understand the volume activities is related to COVID too. So full support from the union. Kris, you want to pick up on some of the manufacturing cost questions.

[Kris Westbrooks:]

Yes. I mean the head count moves that we've made are being managed week to week. So a lot of those actions that we're taking can be changed as necessary as demand gets adjusted. That's been our focus here as we continue to balance production with demand. And then just to add a little bit on the working capital side, we do feel like the changes that we've made are sustainable. As the business continues to improve, there will be a need to invest some as you buy and then ultimately sell to the customers, but we feel like we can manage through that. And the processes that we put in place here will benefit us into the future.

[Seth Rosenfeld:]

Thank you. Just one follow-up on working capital then. We would generally expect a quite sizable release of working capital into Q2 given the color on reduced utilization rates and shipments. Are you expecting to achieve additional working capital on a cyclical basis in Q2? Or has some of that perhaps been pulled forward into Q1 already? Thank you.

[Kris Westbrooks:]

Seth, yes, we've taken as much action as we can here in the first quarter. I'm optimistic that there could be some additional opportunities, but it all remains to be seen on how the demand environment progresses throughout the quarter. So we're not going to comment on specifics or even directionally here in the second quarter, but we did work really hard in the first quarter to deliver as much as we could, and we believe that there are some opportunities still.

[Seth Rosenfeld:]

Great, thank you.

[Kris Westbrooks:]

You’re welcome.

[Operator:]

Your next question comes from the line of Tyler Kenyon from Cowen. Your line is now open.

[Tyler Kenyon:]

Hey, good morning. Hope you're all doing well. Wondering if you could comment a little bit more on what utilizations look like today. I think Kris, you mentioned utilizations were around 25%. And wondering if you could help us try to understand as well just kind of the shipment volume impact here quarter-to-date and how that transgressed through April and into May here?

[Terry Dunlap:]

Kris, do you want to grab that one.

[Kris Westbrooks:]

Yes, no problem. You are right, Tyler. I did mention April at 25% and indicated that May was going to be low as well. We're looking at our production schedule every week and taking outages as necessary to match that demand environment. The shipments that we had in the month of April of 32,000 is pretty small in comparison to what our original business plans were. I indicated that I expect that to remain low into May as well. Mobile shipments, specifically in the month of April were very light, whereas industrial and some energy held up better than you may expect, but it was the mobile that was down so significantly as all those automotive facilities were shut down. So as those begin to open back up, we expect that our production also and our shipments will ramp in a similar fashion, although it's going to take some time and be dependent on where that automotive inventory moves and how it gets sold into the consumers.

[Tyler Kenyon:]

Got it. Perfect. Thanks.

[Terry Dunlap:]

Yes, Tyler, just to add on to add on that, just to add on. You read the same stuff we do about the automotive ramp up. And that was really the biggest impact by far. So we're paying really close attention with our customers about their ramp plans for May. Every day, there's new news about it and what the pacing is and what the inventory levels are like. So we can't be – we can't work any harder, staying close customers to be aligned and aligning our factory operations with what they're telling us and what they need. We expect that to be a normal course of business for the next couple of months.

[Tyler Kenyon:]

And just on automotive, can you share a little bit about what you're hearing from your customers right now, I mean we've all been reading about the expectation for these plants to restart middle of May. Are you seeing any improvement yet in quoting your bookings? And do you sense that the OEMs are sitting on some inventories that they need to burn through first before you realize any upside in shipments?

[Terry Dunlap:]

Tom, do you want to take that one?

[Tom Moline:]

Yes. I will offer some color on that. Good morning, everyone. As Kris was alluding to, the mobile on-highway market was down in the quarter, and that was largely a result of the COVID-19 pandemic that led to the auto OEM shutting down their transmission engine and assembly plants in the latter half of March as well as the dealerships closing. The annualized light vehicle sales rate for the quarter dropped to approximately 15.2 million units. That's down 10.5% from the 2019 sales rate of approximately 17 million units. Now our volumes were actually up 9% relative to the last quarter, primarily driven by the normal seasonality improvements that Kris mentioned in a few new program launches. And again, as Kris stated, our volume would have increased and been up approximately 20% without the 9,000 ton shipment loss at the end of March due to the plant closures. Now the OEM and tier suppliers are suggesting that plant restarts range from early to late May, and we are seeing that activity start to happen. They are also suggesting a gradual ramp-up to full production that could span several weeks, and that would include the impact of about one to two weeks of inventory in the supply chains for both long product and value-add component products. The current light vehicle sales and production forecast for 2020 is 12.5 million and 12.2 million units, respectively, and that is down 25% relative to 2019. Now the OEMs still need Governor approval and United Auto Worker Agreement for safe startup and operational protocols. On a positive note, light vehicle sales in April were actually a bit better than what was forecasted. The forecast was for 4.7 million unit annualized rate. They actually sold it at 8.6 million annualized rate. Incentives, good full-size pickup truck activity and efficient online sales were key drivers to coming in a bit better than forecast. Obviously, mix is key to our participation in auto markets. Passenger cars sales continue to be sluggish relative to total sales. Our participation is mainly in truck, SUV and CUVs. So our exposure to declining pass car market really is very modest. So from our perspective, I mean, the automotive market was in good shape prior to COVID-19. Our volumes were increasing significantly relative to recent quarters, but there's still just an extraordinary level of uncertainty due to COVID-19 right now, making it very difficult to forecast. The demand will certainly be lower in Q2. And we have to watch how the auto plant restarts progress, their ability to operate safely and see how interested consumers will be in buying vehicles going forward. And as Terry stated, we are staying very close to our customers, watching indicators at the macro level as well as the micro level. And we will stay in close contact with customers and continue to work alongside them to fulfill there are material requirements. So we will, no doubt, be ready when they are ready to start ramping up their production.

[Tyler Kenyon:]

Thanks very much.

[Operator:]

Your next question comes from the line of Justin Bergner from G. Research. Your line is now open.

[Justin Bergner:]

Good morning, Terry. Good morning, Kris.

[Terry Dunlap:]

Good morning, Justin

[Justin Bergner:]

I hought I'd just start and delve a little into the CARES Act. Just to make sure I understood, the primary benefit that you guys outlined is the social security payroll tax deferral and you mentioned the $7million and the $10 million. How are those separate? Are you effectively pushing out $17 million in cash outflows from 2020, 2021, and 2022.

[Terry Dunlap:]

Kris?

[Kris Westbrooks:]

Yes. So it was $7 million to $10 million. It would kind of rein together. So $7 million is the low end of the range, $10 million is the high end of the range depending on compensation and benefits for the rest of this year. And that gets pushed into the end of 2021 and 2022.

[Justin Bergner:]

Got you. All right. And then are you able to look back any of the NOLs that you have on your sheet as per the CARES Act into past profitable years? Or is that provision something you don't see yourself as been eligible for?

[Kris Westbrooks:]

And not as big of a benefit for us because we haven't been a taxpayer since the spin-off, given our NOL . So we still have a very high level of NOLs here at the end of March. And there will be some impact, that could grow, but not a recapture of any prior taxes given our position.

[Justin Bergner:]

Okay. Understood. Just wanted to confirm that. And in terms of the additional cost savings that you quantified, you quantified, I guess, $2 million in cost savings, I think, in April and May from the furloughs and about $2 million from suspending the 401(k) through the end of the year. I just want to make sure those are the right numbers. The other actions that you outlined, do you want to sort of quantify the savings there as well for sort of a total incremental number of savings that you might be tracking for the 2020?

[Kris Westbrooks:]

Yes. I can take that Terry.

[Terry Dunlap:]

Yes. Go ahead, if you want to take that one.

[Kris Westbrooks:]

Yes. If you add up the actions that we announced and I summarized in my release, it's about $5 million of cost benefits and cash benefits here as we complete 2020 for the items that you mentioned. Now the furlough estimate that we included in there, it's about $1 million a month. I've only included April and May, and we're continuing to evaluate our demand levels and could make adjustments to that plan as we get into June. So every month of additional furloughs, call it $1 million of incremental savings. But right now, I've captured $2 million for two months in that $5 million estimate. The 401(k) that you mentioned is approximately $2 million for the rest of 2020, assuming it continues. And the last piece was the salary reductions that will be reevaluated as business conditions improve, and that's about $800,000 of cash there as well. So those items are what adds up to the $5 million. Now the actions we're taking within manufacturing to align with demand, I didn't put numbers on those. Those are typically fairly significant the benefits as you try to align that production with demand and reduce cost.

[Justin Bergner:]

Okay. Thank you. .That’s very helpful. You made a comment earlier that energy markets were not doing as badly as might be expected and the first quarter volumes were up sequentially, although the base pricing was meaningfully down sequentially. Any sort of color on what that statement means? Is it forward-looking or just more backward-looking that would be helpful.

[Terry Dunlap:]

Yes, Tom, you want to grab that one?

[Tom Moline:]

Yes. Thanks. Again, yes, the energy market was decent in the first quarter. Operators constrained their spending in the back half of 2019, focusing heavily on reducing their inventories. They started to come back into the market in Q1, and our volumes were up 64% relative to last quarter. Now percentage-wise, that's a big increase, but we were coming off very low volume levels in Q4 of last year. And we're also able to pick up some additional OCTG spot billet business in Q1. But the energy market is without questioning, weakening again. Most of our customers are operating in the COVID environment. But volumes have been impacted by reduced consumption rate of petroleum-based products, that is largely COVID related. And more impactful are the macroeconomic factors currently in play. Oil inventory levels are high and prices are low. U.S. rig counts have dropped approximately 50% from earlier in the year to approximately 400 and could go lower in the second half. Oil prices are approximately $25 a barrel and forecasted to be approximately $30 a barrel in the second half. Again, there is extraordinary level of uncertainty due to COVID-19 and the macroeconomic factors, again, making it difficult to forecast, but in this environment, investments in exploration of oil and gas are likely to be severely curtailed, and would not be expected to recover in the near term. Now the pricing, average values that you saw in energy for the first quarter were actually aligned pretty closely with what we had expected and forecasted. I have to be cautious with those as they are – those average value selling prices are so heavily influenced by mix, a mix of product type, alloy content, heat treat requirements, and in the energy sector, in particular, we had a larger volume percentage of billets than what we had forecasted. And the energy products that were more traditional, we're more focused on those products, not requiring heat treatment, less completion type products. So those average values that you saw in Q1 are pretty indicative of what I would expect going forward in a lower demand environment.

[Justin Bergner:]

Thank you for that great detail. Just lastly, you mentioned a 30 to 60 day delay, I think, in automotive programs. Were you referring to the new sizable contract there that you expected to deliver beginning in the second half of this year, I think on the order of $35 million of revenue in the second half as envisioned a quarter ago? Or are you referring to something else?

[Terry Dunlap:]

Those were the launches we talked about with our value-add business in the last quarter. And they've been pushed out. As you would expect, the plants are down. The – but they're expecting – two of the ones we talked about, they're fully expecting to pick right back up with the 30, 60 day delay. So nothing too extreme at this point, which is good news, but we’ll keep talking with them every day to make sure those plants are still intact, and we think we'll be right back at it in the second half of the year with both of those launches. We're not able to talk about either one, just in detail, if you will, due to confidentiality issues with customers. But not – given everything else that's going on with the automotive industry, not bad.

[Justin Bergner:]

Thank you for answering my questions.

[Kris Westbrooks:]

You’re welcome.

[Terry Dunlap:]

Thanks, Justin.

[Operator:]

There are no further questions at this time. I will turn the call back over to Jennifer Beeman. Please go ahead.

[Jennifer Beeman:]

Thank you so much for joining us today. Stay healthy, and that concludes the call. Thank you so much.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.