TimkenSteel Corporation
Q4 2020 Earnings Call Transcript

Published: 26 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the TimkenSteel Fourth Quarter 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. I will now turn the call over to Jennifer Beeman. Thank you. Please go ahead.

[Jennifer Beeman:]

Thank you and good morning and welcome to TimkenSteel’s fourth quarter and full year 2020 conference call. I’m Jennifer Beeman, Senior Manager of Communications and Investor Relations for TimkenSteel.

[Michael Williams:]

Thank you, Jennifer and thanks to everyone on the call for joining us this morning. Since joining TimkenSteel in January, I've spent my time getting to know the people and the business. It's still early, but I'm incredibly excited about the opportunities that lie ahead for TimkenSteel. I thank Terry Dunlap for his leadership during an incredibly difficult year, and for helping the company strengthen its financial position during his time as Interim CEO. The company's cash generation and profitability improvement initiatives certainly enabled the company to weather some difficult quarters. And I thank the employees of TimkenSteel who clearly demonstrated they have what it takes to transform this company to a consistent high performer in the industry. We're not there yet, but I am happy to be working alongside smart, dedicated employees who are driven to succeed. Turning to the safety. The wellbeing of our employees took a whole new meeting in 2020. I believe safety is our number one priority, and therefore, I am pleased TimkenSteel had the lowest rate of recordable injuries since the company's inception in 2014. Additionally, our employees have been diligent in following COVID 19 protocols. And because of this, we have not experienced any operational shutdowns due to illness. We continue to collaborate with our employees, suppliers and the USW to ensure our workplaces remain exceptionally safe. During 2020, the company focused on generating cash through discipline working capital management and was able to successfully launch numerous efficiency initiatives, improve the company's capital structure and dry systemic cost savings. All of this hard work helped to improve the cost structure and better position the company to fully leverage rebounding markets.

[Kristopher Westbrooks:]

Thanks Mike. Good morning, everyone and thanks for joining us today. Despite a challenging environment, I'm proud that our team delivered improved profitability in the quarter, as well as significant operating cash flow, which led to an increase in total liquidity. Both our operating cash flow of $173.5 million for the full year of 2020 and our total liquidity of $314.1 million at the end of the year represent record highs since the inception of the company. Turning to our quarterly results. On a GAAP basis, fourth quarter of 2020 net loss was $12.8 million compared to a net loss of $84.6 million in the fourth quarter of 2019 and a net loss of $13.9 million in the third quarter of 2020. On an adjusted basis, fourth quarter of 2020 net income was $600,000. This adjusted net income represented a significant improvement from an adjusted net loss of $27.3 million in the fourth quarter of 2019 and an adjusted net loss of $17.3 million in the third quarter of 2020. On 7% lower net sales, adjusted EBITDA improved the $20.7 million in the fourth quarter of 2020 from an adjusted EBITDA loss of $8.7 million in the same quarter of 2019. This represents a $29.4 million improvement in adjusted EBITDA in a lower demand environment reflective of our successful cost reduction actions discussed in prior quarters, and a continued focus on cost control. Additionally, adjusted EBITDA improved $18.1 million sequentially. Moving now to the drivers of the financial results. Ship tons in the quarter increased 6% to 164,000 tons compared with the third quarter of 2020, but declined 9% from the fourth quarter of 2019. From an end market perspective, improving demands in the automotive and industrial end markets stroke higher sequential shipments. Shipments to automotive customers increased 6,000 tons sequentially to 96,300 tons, while industrial shipments increased 4,000 tons sequentially to 63,300 tons. We continued to be impacted by a weak energy market with shipments of 4,100 tons in the fourth quarter, down slightly from the third quarter.

[Operator:]

Your first question comes from Justin Bergner with G. Research. Your line is open.

[Justin Bergner:]

Welcome aboard Michael, and good morning Kris.

[Michael Williams:]

Good morning, Justin.

[Justin Bergner:]

So, I want to delve a bit more into the Harrison idling. I guess, for starters, the 8-K talked about $15 million to $20 million of cash savings, is that all flowing through the income statement, or some of that in reduced CapEx? And then just to clarify your comment from a few minutes ago, so half of those $15 million to $20 million of cash savings would have sort of indirectly been realized in 2020, just given the weak level of demand and furloughs and other sort of activity taken in 2020. Is that right?

[Kristopher Westbrooks:]

Yeah. Correct, Justin. Good morning. On the first part of the question, those are cash savings. There's no CapEx element of those, and it's primarily savings from lower salaries and benefits over time. And then from a timing perspective, you again have that right as well. 2020, we realized approximately half of those savings because they were demand driven as melt utilization was very low and employees were on layoff in that period. In 2021, we're expecting incremental savings, a very minimal amount. And then in 2022 is when the run rate savings would be achieved at the beginning of the year from a cash perspective.

[Justin Bergner:]

Got it. That's helpful. Maybe just two more clarifiers there. So, the lack of incremental benefit in 2021 is that because some of the demand related savings are being around, or is it just because 2021 is a transition year? And then, I guess, secondly, how should we think about sort of normalized maintenance CapEx going forward for the business with Harrison indefinitely idled?

[Michael Williams:]

Yeah. So, the first part, we're retaining the savings from 2020, it's just -- they're not incremental to 2021. So, when -- associates are on layoff, those will continue to be savings in the company in 2021, but it's not going to add additional dollars there. In terms of the maintenance, we do expect to spend more at Faircrest to make sure that it's properly maintained, may not be one for one, but a similar level of maintenance will be required in total for the company. But there will be some incremental savings, but we do need to make sure we have Faircrest running at the highest level possible for the future.

[Justin Bergner:]

Okay. Understood. But is $20 million sort of a representative maintenance CapEx, or is it below what you think would be normalized maintenance CapEx and sort of the new plant paradigm?

[Michael Williams:]

That's a normal level. What we were incurring this year, last year, lower than prior years, but that's because we do also spend normal expense dollars on maintenance, making sure things are maintained at the highest level. But that's a level that you can expect for the foreseeable future absent, any growth investment.

[Justin Bergner:]

Okay. And then my other big question related to sort of the drivers of the strong fourth quarter EBITDA, adjusted EBITDA. You talked I think about a $15 million sequential benefit from cost savings and related efforts. I don't know if that was sort of a gross or a net number. And then the second, I guess, part of the question would be, now that you're on FIFO system, did fourth quarter results benefit from the price scrap cost timing in the fourth quarter?

[Michael Williams:]

So, the first part of the question, the $15 million I referenced was specifically in the cost of goods sold area for manufacturing, about a third of that was related to not doing our annual shutdown in the fourth quarter. We did that in the third quarter. So that's a sequential improvement in savings and costs. And then, there was another component, a big component around fixed costs, leverage. Although, the utilizations were lower, we did capitalize more costs into inventory in the quarter, because we produce more. So, it's really unrelated to our historical cost savings program at least for the two-thirds. The remaining third, I'd say, is specifically around just the continued benefit of the actions that we took previously. I'm sorry. Can you repeat the second part? You had another part to that.

[Justin Bergner:]

Now that you're on FIFO system, did the fourth quarter EBITDA benefit from sort of price scrap surcharge timing dynamics, maybe the price is sort of moving up before the scrap that you flowing through your cost of goods sold inventory moved up?

[Michael Williams:]

Not significantly in the fourth quarter.

[Justin Bergner:]

Okay. I'll hop back in the queue. I do have one more question, but thank you

[Michael Williams:]

Sure.

[Operator:]

Your next question comes from Phil Gibbs with KeyBanc Capital Markets. Your line is open.

[Philip Gibbs:]

Hey, good morning. And welcome Mike.

[Michael Williams:]

Thanks Phil.

[Philip Gibbs:]

Question on the fourth quarter, obviously very nice cost performance, I think, as Justin was alluding to. Is everything in the quarter effectively sustainable and persistent in terms of your underlying cost performance? In other words, can you take this cost momentum and operating leverage into next year versus that level of performance?

[Michael Williams:]

Yes. I absolutely believe so Phil. There's nothing overly unique in the fourth quarter. We expect that to continue and optimistic that it can improve as well.

[Philip Gibbs:]

Okay. Perfect. And then, you had mentioned in the automotive supply chain, there could be the potential for disruption, but you're not seeing it. I think you said your order book is pretty visibly solid. And then I think you also mentioned, service centers are starting to come back into the market. So, it didn't appear to be a lot of that in the fourth quarter on the service center side either. So, if I'm thinking about this right, do you think auto holds up relative to the fourth quarter? And then you get a nice boost in the industrial side from the service centers just coming back, is that the way to look at it?

[Michael Williams:]

Yeah. As we see it, the automotive recovery is almost back to pre-COVID levels. And even though the disruption to the semiconductor issue, we're not seeing any major effect to the platform -- vehicle platforms that we're on.

[Philip Gibbs:]

Okay.

[Michael Williams:]

So, we're feeling pretty good about things right now.

[Philip Gibbs:]

To where -- speaking of auto, where do you all stand on the new business awards? I know Terry last year was talking a lot about some of these new programs that you were getting in the downstream business. And any visibility you all can provide on that in terms of what -- where you're at in the process or how much more could be added here?

[Michael Williams:]

Tom?

[Tom Moline:]

Yeah. Good morning. Phil, this is Tom Moline. We started launch and ramp up of those new programs last year. And it -- we realized about a little greater than $20 million in revenue in 2020 as a result of those new programs. They are still in ramp mode, but they are going quite well. We want to experience a full -- fully annualized rate even yet this year, that won't happen until 2022, but we expect the 2021 revenue numbers to be in the $70 million to $75 million range relative to 2020.

[Philip Gibbs:]

So, you're thinking on that downstream auto business, you pick up another 50 and change this year. Is that what you're saying, Tom?

[Tom Moline:]

That's correct.

[Philip Gibbs:]

Okay. And can you just remind us guys what some of this -- some of this goes into or what you've been working on? Because I think it's not the vanilla SPQ business. It's a little bit more downstream. So, maybe just some help in terms of understanding where this goes. I realize it might be a little sensitive, but whatever you could share, that'd be helpful.

[Tom Moline:]

Okay. These are value added components that go into the automotive industry. We create or manufacturer a seamless mechanical tube that we then send into a network of machining sources. And we have, for a very long time, been very well-positioned supporting eight to nine speed transmission programs at several OEMs for truck, SUV and CUV platforms. This recent edition is for 10 speed transmissions. It's a new introduction of a product offering for new transmission planetary gear blanks. And as I said, we are well into the launch phase of these programs. These programs are without question considered upgrades to other high performance transmissions, and it's now a core transmission offering that will be there for many years to come.

[Philip Gibbs:]

Thanks for the color, Tom. Good luck guys.

[Tom Moline:]

Thank you.

[Michael Williams:]

Thank you.

[Operator:]

Your next question comes from Justin Bergner with G. Research. Your line is open.

[Justin Bergner:]

Thanks for the follow-up. I just wanted to refresh in terms of how much of your industrial tonnage typically is not contracted and effectively is priced on a spot like based?

[Michael Williams:]

If you look at our overall contract versus spot business, it's approximately 20% for the total company.

[Tom Moline:]

And then that's shifted a little bit here in recent months. If you look at pricing agreements, it is, as Kris said, about 80% of our portfolio right now. The other 20% being more in a spot type arena. And that has shifted more towards the pricing agreement volumes primarily as automotive volumes became a larger portion of our portfolio with the significant decline in energy volumes.

[Michael Williams:]

And then relative to automotive, Tom, industrials less than that, right?

[Tom Moline:]

Yes.

[Michael Williams:]

From a percentage basis.

[Tom Moline:]

Yeah. Our automotive portfolio is in the mid-50s right now. Industrial OEM, including distribution, would be in the mid-30s.

[Justin Bergner:]

I'm sorry. The mid-50s number was what and the mid-30s number was?

[Tom Moline:]

Automotive. Mid-50s for automotive, mid-30s for industrial OEM and distribution.

[Justin Bergner:]

Okay. I guess you made a comment at the start of the call, Michael, about the -- sort of contract pricing season. And I guess what I was trying to gauge is, did the season sort of play out in line with your expectations, slightly better or slightly worse in terms of contract pricing?

[Michael Williams:]

I would say, slightly better than what we were expecting going in. It was very competitive situations that we were facing. And I would say that we came out better than what we thought we were going to.

[Justin Bergner:]

Okay. That's good. And then lastly, Michael, I know it's early days for you, but you're a veteran of the steel industry. And it goes without saying that getting tonnage up at TimkenSteel and getting melt utilization up is a key driver for the future performance of the company. Are there any sort of commercial opportunities that are jumping out at you that maybe haven't been discussed? During Terry's tenure, looking out over the next couple of years, given what you've seen to date?

[Michael Williams:]

Of course. I see quite a few opportunities in the commercial area. Most of it's focused in effectiveness. And I guess market participation segmentation are the -- probably the primary areas. However, I also see quite a bit of opportunities and enhancing the manufacturing efficiencies as well.

[Justin Bergner:]

Okay. Thanks again.

[Tom Moline:]

Your are welcome.

[Michael Williams:]

Thank you.

[Operator:]

And there are no further queued up at this time. I'll turn the call back over to Jennifer Beeman.

[Jennifer Beeman:]

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

[Operator:]

This concludes today's conference call. You may now disconnect.