TimkenSteel Corporation
Q2 2020 Earnings Call Transcript

Published: 7 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the TimkenSteel Second Quarter 2020 Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the call over to Jennifer Beeman. Thank you. Please go ahead, ma’am.

[Jennifer Beeman:]

Thanks. Good morning, everyone, and welcome to TimkenSteel second 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 thanks everyone on the call for joining us this morning. The second quarter presented extraordinary challenges to our country, to our customers and to our company. Our employees were exceptional in facing the challenges confronting TimkenSteel in this environment. Few highlights for the quarter. First we operated safely. Our OSHA recordable rate was in an all time low for the first half of the year. In addition to our steadfast attention to operating safely, our employees have been diligent and following the COVID-19 precautions we put in place to maintain a healthy work environment. This diligence and great teamwork across the company allowed us to maintain uninterrupted service to our customers. My sincere thanks to the TimkenSteel team for their ongoing focus on staying safe and watching out for their coworkers every day. Second, we were able to deliver positive EBITDA and cash flow despite extremely weak demand. Last quarter, we shared some of the immediate cost reduction actions we introduced when the impact of COVID-19 was becoming clear, including reduced operating schedules, rolling furloughs for salaried employees, reduced compensation for our Board of Directors and leadership team, and the suspension of 401(k) matching contributions to name just a few. These incremental cost reductions combined with other pre-COVID cost reduction actions and systemic working capital management initiatives contributed to generating second quarter EBITDA of $5.7 million and second quarter operating cash flow of $16.1 million. As expected demand in the second quarter fell significantly as a result of customer plant shutdowns, order cancellations and delays. Second quarter shipments of 108,700 tons represented the company’s lowest shipping quarter in more than 30 years. Initially our automotive sales were severely impacted by our customers immediate and widespread plant outages followed by their slow and sometimes choppy restart processes. As June progressed, we began to see a somewhat steady or recovery. In fact, June sales in the light vehicle sector exceeded industry forecast, due in part to stronger than anticipated online sales and the reopening of dealerships. And the truck and SUV markets relatively low vehicle inventory levels drove more immediate ramp up efforts during the quarter and for the products we sell for those high volume models.

[Kris Westbrooks:]

Thanks, Terry. Good morning, everyone. And thank you for joining us today. I also wanted to take the opportunity to acknowledge the hard work and dedication of our entire organization during a very challenging second quarter. Although the sequential and prior year periods are unfavorable comparisons, we safely operated throughout the second quarter to support our customers’ needs, significantly reduced costs, expanded our cash position and continued to maintain a high level of available liquidity. So thank you to all our employees for your hard work and dedication. Moving now to financial matters. On a GAAP basis, our second quarter of 2020 net loss was $15.3 million. Excluding certain items, the adjusted net loss was $14.3 million in the quarter. Adjusted EBITDA of $5.7 million in the second quarter was significantly aided by the ongoing cost reduction program that we previously discussed as well as additional COVID-19 related cost reduction actions. Our cash balance was at a record high level with $75.5 million at the end of the second quarter an improvement of nearly $10 million from the end of March. Available liquidity from our credit facility plus cash on hand was approximately $252 million as of June 30, 2020. Cash generated from operating activities in the second quarter was $16.1 million, and first half of 2020 operating cash flow generation was approximately $80 million.

[Operator:]

Thank you. Your first question comes to the line of Seth Rosenfeld of Exane BNP.

[Seth Rosenfeld:]

Good morning. Thank you for taking my questions today.

[Terry Dunlap:]

Good morning, Seth.

[Seth Rosenfeld:]

If I may – good morning. I have a question with regards to product mix and impact on ASP. And obviously, we saw a somewhat surprising improvement in net sales per ton in the quarter. You touched on earlier, the decrease in OCTG substrate sales, we think a contributing factor to that. Can you give us any more color on kind of what drove that scale of an improvement in realized pricing despite the market headwinds? And then when we look forward to Q3 and beyond. Is this Q2 print kind of a right run rate? Or should we be resetting that lower for any one off factors as we look forward? Thank you.

[Terry Dunlap:]

Seth, well, first of all, due to our much lower automotive shipments, it certainly had an impact on the average selling price. And I don’t think you should plan on it being the same for the third quarter at the highest level that was really the biggest driver. Tom, you want to add just any other color you want to put on that, please?

[Tom Moline:]

Yes. Terry, that’s exactly correct. At the comprehensive level, our average values were much more influenced by mix than they were price by a large level. And the biggest influencers of that average value from mix perspective was the lower shipments of mobile on-highway products, which are lower alloy containing type materials and the much lower shipments of oil country tubular goods billets. If you look deeper into the markets themselves within our industrial markets, the average values were reasonably high in second quarter. Again, that was a mixed related issue. And the mixed shift in industrial was based on alloy content. Average values were impacted by lower shipments of low oil or low alloy containing bar products to the general industrial markets, offset by high alloy containing products for defense type applications. And in energy, if you excuse the OCTG billets from the rest of the mix, the mix shift that happened there was more product driven. Product type two a large percentage of higher average value two products and Q2, energy shipments included 51% two products relative to only 19% in Q1. And I don’t expect – we don’t have much visibility on the as we’re still booking in Q3. So are those average value is going to hold? Not at the comprehensive level, because we’re going to be reintroducing a much larger volume of automotive products and within the sub-markets, that mix is going to shift as well as we go into Q3, but still hard to forecast because we’re still booking in that window.

[Seth Rosenfeld:]

Okay. That’s very clear. So we should expect something of a step lower just as auto volumes recover and then we’ll get a more normalized run rate thereafter based on the more specific product mixes within each end market sounds like. That’s very clear. And then second question, please. With regard to outlook for Q3 shipments, and you just touched on the fact that you’re still booking, you don’t have full clarity. Can – last quarter, you’re able to give us a little bit of color with regards to kind of current utilization rate at the time of results. As of today, we’re already working our way through the third quarter. Can you tell us a little bit about where you’ve been through July and early August with regards to volumes or utilization rates placed?

[Terry Dunlap:]

Kris, you want to take that one?

[Kris Westbrooks:]

Yes. We can’t get into a lot of details on that. We have seen our production facilities continue to be operated as demand continues. And this is a gradual improvement in demand and it’s choppy. So it can change significantly week to week, and that’s how we’re managing it, but it’s not back to say Q1 or prior levels.

[Seth Rosenfeld:]

Okay. Thank you very much.

[Terry Dunlap:]

You’re welcome.

[Operator:]

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

[Tyler Kenyon:]

Hi, good morning.

[Terry Dunlap:]

Good morning, Tyler.

[Tyler Kenyon:]

Kris, curious as to maybe how we should be thinking about working capital moving into the third quarter, another strong release in the second quarter here. And curious as to how we should be thinking about that in the third quarter. And then as we close the year realized that visibility is somewhat limited at this point, but anything you could add would be helpful.

[Kris Westbrooks:]

Absolutely. It’s still a significant focus for us. All of the tactics that we implemented late 2019 and early 2020, if continued to benefit us. We do expect to see some inventory release here, but it’s modest. We’ve taken the inventories down to a level that supports our needs today. The receivables and payables are just going to be a function of what’s happening with our demand. If we’re shipping more, you’ll see those receivables be a use of cash and we’ll be buying more. So it’s just that timing of how that comes through. So it’s still a clear focus for us sustaining all those improvements we implemented before we do believe there’s opportunity there. But I can’t guide you in terms of the size or exactly the direction.

[Tyler Kenyon:]

Got it, okay. And with respect to restructuring, is there any more cash outflow expected and do you expect to realize any further proceeds just from asset sales from some of the restructuring efforts that you’ve taken thus far?

[Terry Dunlap:]

Yes. Seth, we’re continuing to work on asset sales and you’ll hear more about that next quarter. We have a lot of things in motion there. And technically, on restructuring charges, there will be ongoing charges as we go forward. That’s just part of the rhythm of what we’re doing. Kris, you want to add anything to that?

[Kris Westbrooks:]

Yes. So at the end of June, we had $3.4 million on our balance sheet as a reserve for future payments on restructuring. So that cash will go out primarily in the third quarter. And then obviously any new activities we have will be incremental to that.

[Tyler Kenyon:]

Thank you.

[Operator:]

There are no further questions at this time. I will now turn the floor back over to Jennifer Beeman for any additional or closing comments. I’m sorry, you have another question. I apologize. Phil Gibbs of KeyBanc Capital Markets.

[Phil Gibbs:]

Thanks very much. Good morning.

[Terry Dunlap:]

Good morning, Phil.

[Phil Gibbs:]

So the $6 million of maintenance in the third quarter, is that all incremental to what you experienced in the second quarter?

[Kris Westbrooks:]

Yes, exactly.

[Phil Gibbs:]

Okay.

[Kris Westbrooks:]

Yes.

[Phil Gibbs:]

And then it sounds like we’ve already talked about mix in the third quarter volumes and you did take obviously some pretty aggressive cost actions in the second quarter due to the pandemic. Is there any costs that, that begins to return in the third quarter that, that you had taken down in Q2 and now that you’ve got incrementally better volumes visibility in the automotive supply chain?

[Terry Dunlap:]

Well, Phil, the CARES Act provided us a lot of opportunities, which we took full advantage of. And you read about it, heard about it in our numbers. And so with the CARES Act in particular the $600 furlough supplement being gone or at least gone for the moment that that will add some cost back into the business for sure. On the hourly side that, that won’t change anything. We’ll continue to run our playbook with the operations and staffing accordingly. So there’ll be no change there. So I think the single biggest thing will be just the impact of the furloughs that we were able to take advantage of on the salary employee side and what we do to mitigate that going forward. Certainly, the Congress hasn’t decided what they’re going to do or not going to do, but at the moment there’s nothing. So we would fully expect that to look different in the third and fourth quarters in the current state. Kris, you want to add anything else to that?

[Kris Westbrooks:]

It just some specificity on the furlough piece, I mentioned $5 million of administrative expense reductions in Q2 related to COVID, about two-thirds of that was furloughs that ran April, May and June. We did continue to run the furlough plan in July for about $1 million of savings, but you will see a $2 million difference with higher cost in Q3 as a result of no furloughs, no further furloughs.

[Phil Gibbs:]

Okay. So that’s relative to Q2, it’s something like that, that $5 million salary hit about half of that comes back. And then you get a little bit more of that coming back in the fourth quarter. Does that sound right?

[Kris Westbrooks:]

Yes.

[Phil Gibbs:]

Okay. And then you did talk about some of your longer-term revenue opportunities in the value-added business. Maybe talk a little bit more about exactly what you’re doing there and then some of the cadence in the timing, and then whether or not your staff and call it expense in terms of your asset capability to meet those goals as of today.

[Terry Dunlap:]

So we do have the businesses the they have happened, and we’re now in ramp up mode and for the fourth – third and fourth quarter with three major customers, which we’re not at Liberty to say who those are, but those are ongoing just on, totally on plan. The added equipments pretty much in place. The employee base is already there between training and the activity of making the products and getting into the rhythm of shipping to our customers. So that will continue to ramp up through the rest of the third and fourth quarters and be at close to full run rates in the first quarter of 2021. So wouldn’t expect any additional significant costs of staffing or other expenses that are already – there are already in the business prepared to support our three customer programs we have with the expansion. So that’s where we mentioned the run rate getting up to a full year $80 million type number as we head into 2021. So we’re staffed up ready to go, and it’s all systems go at this point with the company.

[Phil Gibbs:]

Thank you. And then last one from me.

[Terry Dunlap:]

Go ahead. Go ahead, Phil, no problem.

[Phil Gibbs:]

I was going to in terms of something else, so if you want to finish that.

[Terry Dunlap:]

No, no, no, please go ahead.

[Phil Gibbs:]

Okay. So the second quarter I would imagine had – did have some benefit from the widening of prime scrap due to obsolete scrap this quarter. Certainly that looks to be narrowing pretty aggressively. Should we consider a raw material spread impact of the third quarter best as you can see it?

[Terry Dunlap:]

Well, it’s hard to predict, right. You’ve heard from everybody else and their views on what’s happening in the scrap market, and it’s still appears to be highly unpredictable. So the spreads we’ve had over the last couple of months have been very positive. I think they’ll continue to be positive from an historical perspective, whether they stay at the same levels that we enjoy for a couple of months in the second quarter is to be determined. So but it doesn’t appear there going back to sort of historical spread levels, at least in the short-term. So whether we can sustain what we were able to achieve in the second quarter is to be determined. The one thing about the scrap market right now is, it appears to be like many other things, fairly unpredictable at the moment. So my guess would be somewhere in the middle, Phil between where we were and where the historical numbers are. But of course, since I say that by tomorrow, that’ll again, so.

[Phil Gibbs:]

Yes, forecast often. Thanks, guys. Bye, bye.

[Terry Dunlap:]

Okay. Thanks.

[Operator:]

There are no further questions at this time. No, thank you. No, I’ll go ahead and turn it over to you, Jennifer, for any closing or additional comments.

[Jennifer Beeman:]

Okay, great. Thank you, everyone. Thanks for joining us today. We look forward to updating you next quarter and stay healthy. Thank you.

[Operator:]

Thank you. That does conclude today’s conference call. You may now disconnect.