Metallus Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 5, 2023

Key Takeaways

  • Our operations rebounded sharply in Q1 with a 35% increase in shipments, melt shop utilization rising to 73%, and net sales up 32% sequentially.
  • TimkenSteel swung to profitability with $14.4M net income (US$0.30/share) and $36M adjusted EBITDA, driven by improved productivity and higher base sales prices.
  • Healthy end-market demand saw industrial shipments +52%, mobile +19% and energy +55%, with the order book now extending into Q3.
  • The company maintains a $45M 2023 capex program—including a $15M automated inspection and grinding project targeting $3M annual savings—and plans a $7M investment in safety and AI hazard identification.
  • On a year-over-year basis, Q1 shipments were down 12% and adjusted EBITDA declined by $29.3M versus Q1 2022, reflecting lower industrial/mobile volumes and higher manufacturing costs.
AI Generated. May Contain Errors.
Earnings Conference Call
Metallus Q1 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Thank you for standing by. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the 1st quarter 2023 TimkenSteel Corporation earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Star followed by the number 1 on your telephone keypad. Thank you. I will now turn the call over to Jennifer Beeman. You may begin your conference.

Speaker 1

Good morning, and welcome to TimkenSteel's Q1 2023 conference call. I'm Jennifer Beeman, Director of Communications and Investor Relations for TimkenSteel. Joining me today is Mike Williams, President and Chief Executive Officer Chris Westbrooks, Executive Vice President and Chief Financial Officer and Kevin Rakitic, Executive Vice President and Chief Commercial Officer. You also 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.

Speaker 1

Our actual results may differ materially from those projected or implied due to a variety of factors, which we described in greater detail in yesterday's release. Please refer to our SEC filings, including our most recent Form 10 ks and Form 10 Q and the list of factors included in our earnings release, all of which are available on the TimkenSteel website. Where non GAAP financial information is referenced. Additional details and reconciliations to its GAAP equivalent are also included in the earnings release.

Operator

Call.

Speaker 1

With that, I'd like to turn the call over to Mike. Mike?

Speaker 2

Good morning, and thank you all for joining us on this call today. Our relentless focus on enhancing productivity and prioritizing safety in our melt shop operations contributed to strong progress and the Q1 of 2023. We expect this momentum to continue into the 2nd quarter. Quarter. During the Q1, we experienced a 35% increase in shipments, combined with strong base pricing, to all of our teams for their hard work.

Speaker 2

Turning to safety, while we know that improving safety culture is a journey, We've observed positive trends during the Q1. Our teams are actively engaged in continuous improvement activities and is encouraging to see that our safety training is starting to make a difference. As I have reiterated on numerous occasions, Our commitment to safety remains unwavering, and we plan to invest approximately $7,000,000 and company wide training, new equipment and enhanced safety practices, processes and programs in 2023 to create a sustainable safety culture. Our specific areas of focus will include reducing demand to machine interface Through the implementation of machine guarding, fencing, lockout tagout programs, as well as introducing artificial intelligence initiatives to assist employees in real time hazard identification. We recently held our annual Iron Shield competition, We were always amazed by the ingenuity and the care that facilitates these projects, and this year was no exception.

Speaker 2

In total, 51 projects were implemented across our organization and submitted for consideration. The winning project focused on enhancing safety and adding an additional layer of surveillance at our Faircrest facility To prevent rolling mill downtime and ensure steel stays on its intended path. The winning idea proposed installing temperature alarm cameras that can detect irregularities in steel temperatures across multiple zones in the mill area. If the cameras detect higher temperatures, the entire mill can be shut down immediately, improving safety for all involved. It's this type of continuous improvement that will not only keep us safer, but ensure the integrity of our assets for years to come.

Speaker 2

Turning to our Q1 results. Net sales increased by 32% compared with the 4th quarter as a result of higher shipments in all of our markets as we ramped up production to more normalized levels. In addition, I am pleased to report that our melt utilization rate saw a solid improvement in the Q1, Rising to 73% from 47% in the previous quarter. Looking ahead to the Q2, we anticipate a melt utilization rate of approximately 75%, which takes into account some planned maintenance downtime for our EAF furnace. We are pleased to report significant sequential improvement in our shipments.

Speaker 2

Our end market demand remains steady as evidenced quarter by our order book, which now extends into the 3rd quarter. As a reminder, we operate in markets reshoring and supply chain derisking. Our industrial shipments increased by 52% with continued strength in defense, heavy equipment and mining sectors along with solid demand from industrial distributors. In mobile, shipments increased by 19% compared with the prior quarter. Sales demand remains steady and new vehicle inventories are slowly approaching normal levels.

Speaker 2

As a reminder, we're targeting mobile shipments to be approximately 40% of our order book in the future to better align with our market balanced commercial strategy. Our energy shipments increased 55% sequentially As a result of elevated drilling and completion activity, rig counts are expected to remain relatively strong, But the forecasted U. S. Rig count has been adjusted slightly down as higher interest rates and fears of a recession are influencing drilling activity. The financial discipline demonstrated recently by exploration and production companies is expected to continue.

Speaker 2

Additionally, we remain on track to achieve our targeted $80,000,000 of profitability improvements by 2026. As a reminder, our actions focus on commercial excellence, manufacturing and reliability excellence and administrative process simplification with a strong balance sheet as our foundation. At TimkenSteel, improving manufacturing productivity, reliability and efficiency is crucial to our success. In alignment with this goal, we have allocated a capital expenditure budget of $45,000,000 for 2023 to support these efforts. As a part of this, on our 2024 budget, Our Board recently approved a $15,000,000 capital project aimed at installing automated inspection and grinding capabilities in our Harrison facility by 2025.

Speaker 2

This addition of automated inspection and grinding We'll bring about consistent repeatable finishing and packaging, while simultaneously enhancing our yield and safety performance. We anticipate that this project will result in at least $3,000,000 in annual savings beginning in 2025. Moreover, this exciting development is not just a step towards driving continuous improvement, But it also supports our long term automation strategy for future efficiency projects. For example, We believe that scalable AI technologies will further enhance value and improve our safety, quality, reliability And cost, and in some instances, aiding in our sustainability efforts. Speaking of sustainability, we recently published our 2022 sustainability report, which showcases the progress we have made in our commitment to Responsible and Sustainable Operations.

Speaker 2

The report highlights several key initiatives that we've made progress on in the past year. This include increased transparency with Global Reporting Initiative or GRI reporting embedded focus on sustainability across the company, targeted capital allocation for continuous improvement, enhanced focus on employee safety and evaluation of our environmental impact. I am proud of the progress we have made And we remain committed to reducing our environmental impact, supporting our communities and operating with the highest standards of ethics and governance. With that, I thank employees for the strong Q1. I thank our customers for their trust, Our suppliers for their partnership and our shareholders for the continued support.

Speaker 2

Now I'd like to turn the call over to Chris.

Speaker 3

Thanks, Mike. Good morning, everyone, and thanks for joining us today. I'm pleased that we started off 2023 with sequential improvement in profitability and positive operating cash flow. Our Q1 operating and safety performance was much improved and that operational stability combined with continued strength in customer demand and base sales prices drove our Q1 financial performance and provides us with confidence for the future. Turning to our Q1 financial results.

Speaker 3

Net sales totaled $323,500,000 with net income of $14,400,000 or $0.30 per diluted share. Comparatively, sequential Q4 of 2022 net sales were $245,400,000 with a net loss of $33,200,000 or quarter or a loss of $0.75 per diluted share. Net sales in last year's Q1 were $352,000,000 with net income of $37,100,000 or or $0.70 per diluted share. On an adjusted basis, the company reported net income in the Q1 of 2023 of $20,800,000 of $0.44 per diluted share. Comparatively, the 4th quarter adjusted net loss was $4,600,000 or a loss of $0.10 per diluted share.

Speaker 3

Adjusted net income in the Q1 last year was $48,600,000 or $0.92 per diluted share. Adjusted EBITDA was $36,000,000 in the first quarter, significantly higher than the 4th quarter adjusted EBITDA of $11,900,000 This $24,100,000 sequential improvement in adjusted EBITDA was grounded in operational stability, which supported a 35% increase in shipments. Additionally, higher base sales prices and an increase in the raw material surcharge environment contributed to the sequential increase. Compared with the same quarter in 2022, adjusted EBITDA decreased by $29,300,000 This decrease was reflective quarter. Lower shipments as well as higher manufacturing costs, partially offset by higher base sales prices.

Speaker 3

It's important to note that the Q1 of 2023 adjusted EBITDA Excludes an insurance recovery of $9,800,000 related to last year's unplanned downtime. Of the $9,800,000 insurance recovery, $800,000 was received in the Q1 and the remainder was received in the Q2. We continue to seek additional insurance recoveries related to last year's unplanned down time, although the timing and amount of potential additional recoveries are uncertain at this time. Turning now to the details of the financial results in the Q1. Shipments were 172,900 tonnes in the quarter, an increase of 44,600 tonnes or 35% compared with the 4th quarter.

Speaker 3

The sequential increase in shipments was driven by strong customer demand and a higher level of available inventory given improved operational performance. Compared with the prior year Q1, shipments decreased 23,500 tons or 12% as a result of lower industrial and mobile shipments, Partially offset by higher energy shipments. In the industrial end market, shipments totaled 72,200 tons in the first quarter, A sequential increase of 24,700 tons or 52%. The significant sequential increase in industrial shipments Was driven by strong demand across the wide range of sectors such as heavy equipment and defense. Mobile customer shipments We're 80,400 tonnes in the 1st quarter, a sequential increase of 12,700 tonnes or 19%.

Speaker 3

Shipments in the mobile end market represented 47% of the total portfolio in the Q1 as customers pulled hard throughout the quarter to support internal combustion electric vehicle builds. Shipments to energy customers totaled 20,300 tonnes in the Q1, a sequential increase of 7,200 tonnes or 55%. Similar to industrial, customer demand in the energy end market remains strong. The sequential increase in shipments was also attributable to our improved operating performance resulting in a higher level of inventory available for shipment. Of our total first quarter shipments, as expected, Approximately 28,000 ship tons were sourced from 3rd party melt producers and then rolled finished and shipped by TimkenSteel.

Speaker 3

We expect the similar level of shipments of 3rd party melt in the 2nd quarter to further support customer demand. As I mentioned last quarter, We plan to leverage our 3rd party melt supply chains as an opportunity to support demand in targeted end markets over the cycle. This strategy also improves utilization of our downstream assets without carrying the historical fixed costs and excess mill capacity. Net sales of $323,500,000 in the first quarter quarter. Increased 32% sequentially and decreased 8% compared with the Q1 of last year.

Speaker 3

The sequential increase in net sales was driven by higher shipments and base sales prices. Additionally, contributing to the increase in net sales was a 13% improvement in average raw material surcharge per ton as a result of higher scrap and alloy prices. Partially offsetting these items was a change in product mix given the low level of shipments in the 4th quarter. The net sales decline compared to the Q1 of last year was primarily driven by lower shipments and a market driven 13% decrease in average raw material surcharge per ton. Partially offsetting these impacts were 12% higher base sales prices.

Speaker 3

Base sales prices increased by $70 per ton or 5% on average in the Q1 across our end markets in comparison to the full year 2022 average. Turning to manufacturing, melt utilization was 73% in the Q1 compared with 47% in the prior year 4th quarter and 81% in the Q1 of last year. Costs decreased sequentially by $26,600,000 in the 1st quarter, Driven by a substantial improvement in melt utilization and related cost absorption, as well as higher costs incurred in the Q4 due to the planned annual maintenance shutdown. In comparison to the prior year Q1, manufacturing costs increased by $21,800,000 Drivers of increased year over year manufacturing costs included the impact on cost absorption related to lower melt utilization, as well as increased maintenance and the impact of inflationary costs. From an SG and A expense perspective, in the Q1, SG and A increased $3,600,000 on a sequential basis to $21,000,000 Primarily driven by higher variable compensation and benefits expense.

Speaker 3

In comparison to the Q1 of last year, SG and A increased $2,500,000 as a result of higher information technology transformation costs and share based compensation. Switching gears to income taxes. As I reported last quarter, we've now consumed the majority of our net operating loss carry forwards due to consecutive years of positive net income and expect to be a federal taxpayer beginning this year. During the Q1, the company reported an effective tax rate of 21%, slightly higher than the previously guided range of 15% to 20%. This higher than expected effective tax rate It is primarily driven by the convertible note repurchase activity that we completed during the Q1, which I will cover shortly.

Speaker 3

At this time, The company expects the effective tax rate for the remainder of 2023 to be similar to the Q1. Moving on to cash flow and liquidity. During the Q1, operating cash flow was $9,800,000 driven by quarterly net income and $20,800,000 of cash insurance recoveries collected during the quarter, Partially offset by a use of cash to fund working capital requirements. This marks the company's 16th consecutive quarter generating positive operating cash flow. Capital expenditures totaled $10,600,000 in the Q1, similar to the Q4 of last year.

Speaker 3

The company continues to forecast CapEx Approximately $45,000,000 in 2023. Additionally, during the Q1, the company repurchased 514,000 common shares At a total cost of $9,400,000 As of March 31, the company had $63,700,000 remaining on its common share repurchase program. Since the inception of our repurchases early last year through the end of Q1 of 2023, we've repurchased approximately 3,500,000 shares for $61,000,000 Switching gears to convertible notes. Similar to our outlook last year, during the Q1 of 2023, we repurchased $7,500,000 of outstanding convertible notes at a total cash cost of $18,700,000 The $11,200,000 repurchase premium was driven by an appreciation in the company stock price, which was significantly in excess of the instruments conversion price. This premium has been excluded from non GAAP adjusted EBITDA as a loss on extinguishment of debt.

Speaker 3

The Q1's convertible note repurchase activity had the effect of reducing diluted shares outstanding in addition to further reducing outstanding debt and interest expense. At the end of March, the outstanding principal balance on the convertible notes was $13,300,000 with a fair value of approximately $34,000,000 As a result of the Q1 convertible note repurchases, diluted shares outstanding will decrease by approximately 1,000,000 shares in the Q2 of 2023. In total, we invested $28,100,000 in common share and convertible note repurchases during the Q1, which represents a 3% reduction quarter. Dating back to the beginning of our shareholder return activities just over 1 year ago, Our common share in convertible note repurchases in 2022 and the Q1 of this year represent a significant 14% reduction and diluted shares outstanding compared to the Q4 of 2021. At the end of March 2023, the company's cash and cash equivalents quarter.

Speaker 3

$227,400,000 and total liquidity was $530,700,000 As we progress forward, the strength of our balance sheet, consistent cash flow generation and positive business outlook provides us with the confidence to continue to execute on our capital application strategy. This includes investing in profitable growth and returning capital to shareholders while maintaining a strong balance sheet. Turning now to the 2nd quarter outlook. From a commercial perspective, 2nd quarter shipments are expected to modestly increase on a sequential basis, supported by steady demand across our end markets As evidenced by orders currently booking into the Q3. Base sales price per ton is anticipated to remain strong throughout the year with a modest increase expected in the 2nd quarter average base sales price per ton, mix dependent.

Speaker 3

Drivers of this expected increase include the new fiscal year base price agreements and the full realization of previously negotiated annual agreements covering approximately 70% of the order book. Additionally, 2nd quarter base sales price per ton is expected to benefit from previous spot price increases. Additionally, surcharge revenue per ton is expected to increase sequentially in the 2nd quarter As a result of higher scrap and certain alloy prices positively impacting April and May surcharges. Operationally, Melt utilization is expected to average approximately 75% during the Q2, as Mike previously mentioned. Additionally, we're in the process of planning our annual shutdown maintenance for the second half of the year with an expected cost of approximately $14,000,000 At this time, we're anticipating about 1 third of the spend to be in the 3rd quarter and the remaining 2 thirds in the 4th quarter with melt shop shutdown maintenance planned in the 4th quarter.

Speaker 3

The estimated total spend on the annual shutdown maintenance in 2023 is similar to last year, but the timing is flipped. Given these elements, the company expects to report a solid second quarter, including an anticipated sequential increase in adjusted EBITDA and positive operating cash flow. To wrap up, thanks to all of our employees who work safely and help the company deliver a solid start to 2023. We appreciate your interest in TimkenSteel and look forward to sharing our continued progress in the future. We would now like to open the call for questions.

Operator

Your first question comes from John Franzreb with Sidoti. Your line is open.

Speaker 4

Good morning, guys, and Congratulations on a great quarter and thanks for taking the questions. I'd like to start with your thoughts about the individual end markets. You discussed that the rig count may be softening in energy. Certainly, there's concerns about what we're seeing in industrial and less so in mobile. Can Can you talk a little bit about your order trends?

Speaker 4

Are there any changes either positive or negatively in the bookings On a total basis, most on a seasonal basis as you go forward book into the 3rd quarter.

Speaker 2

I mean, our bookings remain steady. We're not really seeing any decline Or significant increase in booking. We're just seeing it pretty steady. We think automotive is off to a stronger start in Q1 In demand, we think that's going to continue throughout the year based on their build rate forecast. On the energy side, Yes.

Speaker 2

The last rig count number I saw was about 755 in the U. S. We think that's going to remain pretty steady. We're not getting any indications that there's going to be any major change there. However, we continue to state that Their capital discipline in the add to end market continues to be very stringent and they're only going to buy what they need and use and they're Not going to build any inventories, which from our perspective, that keeps us an efficient supply chain in place.

Speaker 2

And we just see steady demand coming from our energy and customers.

Speaker 4

Got it. Got it. In regards to the 3rd party 28,000 tonnes provided, Is that a constant number we should be thinking about on a go forward basis? Is that move marginally one way or another based on end market demands within the sectors.

Speaker 2

Yes, I think as we've stated before, we've ramped up our 3rd party purchases to assist us With supporting our customers, while we were recovering from their furnace incident from last July. Going forward, our intentions are to utilized third party melt to better absorb our fixed cost in our downstream rolling and finishing operations When market demand is there for it, we will always prioritize our melt first And then use the purchase amount to flex with the market demand.

Speaker 4

Got it. And just on the planned downtime in the quarter, can you just give us some color behind that? And When do you expect to see it within the quarter? This coming quarter, that is.

Speaker 2

Yes. So the planned downtime is to Do some repair work and upgrade work at our EAF And that will occur this month.

Speaker 4

Okay. Thanks. I'll get back in the queue. Thanks for taking the questions.

Speaker 2

Okay. Thanks, John.

Operator

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

Speaker 5

Hey, good morning.

Speaker 2

Good morning, Phil.

Speaker 5

I think last time you had provided a cost outlook for 2023, I want to say it was Something like a 10% increase in unit costs. Any update on that given the good Q1 performance on cost compression?

Speaker 2

Yes, I mean, we expect to see a little bit higher utilization in Q2. So our fixed cost absorption will be better. And I think we've stated already that our inflationary impact, we see our consumable cost and other material cost to operate our assets to be pretty steady throughout the remainder of the year.

Speaker 5

So would that get me below that previous 10% guidance, meaning cost performance is better than you expected?

Speaker 2

Again, it's going to be based on our utilization rates. As we continue to ramp up and perform, our cost position should improve.

Speaker 3

And Phil, just to add to that, in terms of the actual items we're buying, the consumables, we're not seeing a lot of additional inflation on top of what we experienced in Q1 last year. So that's pretty steady or stable.

Speaker 5

Okay. I appreciate that. And then just in terms of end market color, that was pretty solid. Things are largely stable across the board, it appears from your perspective. But in terms of the outlook for net working capital, What are you anticipating there?

Speaker 2

I'll let Chris provide some color, but We're looking at pretty stable working capital. I mean, depending on timing of shipments and stuff like that, you can see a modest build, but You're talking 1% or 2% max in that regard. Chris, you want to provide any additional color?

Speaker 3

Yes, I agree with you, Mike. If you look at the components receivables, You'd expect that balance to increase modestly in line with shipments and the surcharges. From an inventory standpoint, we're producing the customer orders. We're not expecting to broadly build significant amount of additional inventory. We are looking at inventory in front of our key operations to make sure that we have the appropriate amount and make targeted adjustments where necessary.

Speaker 3

And then from a payable standpoint, it's purely timing dependent and what looks like from a scrap price standpoint. We are in the process of transitioning from our old to our new scrap Yards, we're carrying out a little bit more scrap than we plan to longer term. I'd say the last point is around taxes. We do expect to make some estimated payments here in Q2 For the first time, of a more significant level related to our federal taxes.

Speaker 5

You guys just had Something like a mid teens $1,000,000 left or something on the old NOLs, is that right? Got 20.

Speaker 3

That's right. Like I said, 17,000,000

Speaker 4

Yes, 17 at

Speaker 3

the end of the year.

Speaker 5

And then lastly, the raw material spread, I believe was a Bigger tailwind than we were anticipating for the Q1. I think your bridge said $14,000,000 Is it expected to be equal to that, greater Or less than for the Q2 because you prefaced the surcharge widening. Thanks.

Speaker 2

Yes. I think we expect it to Increased modestly in Q2. The June scrap hasn't settled yet. Everything in REIT says that's going down, But it looks like the spread is going to stay in place between prime and secondaries.

Speaker 5

Thank you.

Speaker 2

Thank you.

Operator

Your next question comes from Dave dorms with Stonegate Capital Markets. Your line is open.

Speaker 6

Good morning. Good morning, Dave.

Speaker 4

Good morning.

Speaker 6

First question here, you mentioned in your release that product mix slightly was a bit of a headwind. How do you see that changing through Q2 and whatever visibility happened to Q3 of 2023 here?

Speaker 2

Yes. So that product mix comparison was quarter over quarter sequentially. So it's Q4 versus Q1. In Q4, because of the or the lack of inventory, we saw an unusual product mix where we shipped much more sold much more of our manufactured components, which of course sell for a much higher price per ton than our SBQ and our tubes. So what we're seeing, we saw a more normalized mix shift in Q1 and we expect that mix to continue going forward.

Speaker 6

Understood. Very helpful. You also mentioned a couple of times out that end markets are still Pretty steady, it seems like. How is that impacting any new customer acquisition strategies that you have? Is Is that making things a little more challenging, a little bit easier because there's more clarity in the market?

Speaker 6

Any color you

Speaker 5

could give there would be helpful.

Speaker 2

Sure. So from a like a new customer entrance into our customer portfolio, Our focus there is really around enriching our mix for greater value growth In the products that we make and the end markets that they go to and specifically certain customers within those end markets Where we can generate greater value for ourselves. I don't really see I mean anytime you bring a new customer and you have a check, it's a challenge anyways, right? You got to get qualified, You got to get consistent supply chains in place and you have to execute. But we have a pretty We've done a lot over the last 2 years with our customer portfolio in the specific end markets.

Speaker 2

We really have A focus on a very diversified balanced strategy into each end market in which customers within those end markets That we'll partner with.

Speaker 6

Understood. Thank you. One more for me if I could. Slide 8 on your deck mentions that you have mitigation actions planned For managing some of the headwinds that you see, can you go in a little bit more on what those actions might look like?

Speaker 2

Yes, sure.

Speaker 3

Part of it is just focused on our targeted profitability improvement actions around manufacturing and commercial excellence and process simplification.

Speaker 2

And then the other thing is really around the inflationary impacts. So we have taken various procurement actions in regards to mitigating Certain inflationary impacts to try to offset those for other areas. And one of the biggest things we do is We do our best to pass through whatever cost increases we get into our commercial arrangements.

Speaker 4

Question.

Operator

Question. There are no further questions at this time. Thank you, everyone. This concludes today's conference call. You may now disconnect.

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