TimkenSteel Corporation (NYSE:TMST) Q1 2023 Earnings Call Transcript

May 28, 2023

TimkenSteel Corporation (NYSE:TMST) Q1 2023 Earnings Call Transcript May 5, 2023

TimkenSteel Corporation beats earnings expectations. Reported EPS is $0.44, expectations were $0.17.

Operator: Thank you for standing by. My name is Briana, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2023 TimkenSteel Corporation Earnings Call. [Operator Instructions]. I will now turn the call over to Jennifer Beeman, you may begin your conference.

Jennifer Beeman: Good morning, and welcome to TimkenSteel's First Quarter 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; Kris Westbrooks, Executive Vice President and Chief Financial Officer; and Kevin Raketich, Executive Vice President and Chief Commercial Officer. You all should 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. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in yesterday's release.

Please refer to our SEC filings, including our most recent Form 10-K 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 equivalents are also included in the earnings release. With that, I'd like to turn the call over to Mike. Mike?

Michael Williams: 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 in the first quarter of 2023. We expect this momentum to continue into the second quarter. During the first quarter, we experienced a 35% increase in shipments, combined with strong base pricing, which resulted in improved profitability compared with the fourth quarter of 2022. I'd like to express my gratitude to all of our teams for their hard work. Turning to safety. While we know that improving safety is a journey, we have observed positive trends during the first quarter. 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 million in 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 the man 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, which invites our employees and crews to submit innovative safety projects that aim to improve the well-being of our workforce. We are always amazed by the ingenuity and the care that facilitates these projects, and this year was no exception.

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 no 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. Turning to our first quarter results. Net sales increased by 32% compared with the fourth 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 first quarter, rising to 73% from 47% in the previous quarter. Looking ahead to the second quarter, 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. Our end market demand remains steady as evidenced by our order book, which now extends into the third quarter. As a reminder, we operate in markets that are currently benefiting from favorable macroeconomic trends such as increased infrastructure spending, 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. 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 in 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.

Additionally, we remain on track to achieve our targeted $80 million of profitability improvements by 2026. As a reminder, our actions focused 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 million for 2023 to support these efforts. As a part of this, on our 2024 budget, our Board recently approved a $15 million capital project aimed at installing automated inspection and grinding capabilities in our Harrison facility by 2025. This addition of automated inspection and grinding will 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 million 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. The report highlights several key initiatives that we've made progress on in the past year.

This includes 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 first quarter. I thank our customers for their trust, our suppliers for their partnership and our shareholders for their continued support. Now I'd like to turn the call over to Kris.

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Kristopher Westbrooks: 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 first quarter operating and safety performance was much improved and that operational stability, combined with continued strength in customer demand and base sales prices drove our first quarter financial performance and provides us with confidence for the future. Turning to our first quarter financial results. Net sales totaled $323.5 million with net income of $14.4 million or $0.30 per diluted share. Comparatively, sequential fourth quarter of 2022 net sales were $245.4 million with a net loss of $33.2 million, or a loss of $0.75 per diluted share.

Net sales in last year's first quarter were $352 million, with net income of $37.1 million, or $0.70 per diluted share. On an adjusted basis, the company reported net income in the first quarter of 2023 of $20.8 million or $0.44 per diluted share. Comparatively, the fourth quarter adjusted net loss was $4.6 million or a loss of $0.10 per diluted share. Adjusted net income in the first quarter last year was $48.6 million or $0.92 per diluted share. Adjusted EBITDA was $36 million in the first quarter, significantly higher than the fourth quarter adjusted EBITDA of $11.9 million. This $24.1 million 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 $29.3 million. This decrease was reflective of lower shipments as well as higher manufacturing costs, partially offset by higher base sales prices. It's important to note that the first quarter of 2023 adjusted EBITDA excludes an insurance recovery of $9.8 million related to last year's unplanned downtime. Of the $9.8 million insurance recovery, $800,000 was received in the first quarter and the remainder was received in the second quarter. We continue to seek additional insurance recoveries related to last year's unplanned downtime 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 first quarter.

Shipments were 172,900 tons in the quarter, an increase of 44,600 tons or 35% compared with the fourth quarter. 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 first quarter, shipments decreased 23,500 tons or 12% and 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 equipments and defense. Mobile customer shipments were 80,400 tons in the first quarter, a sequential increase of 12,700 tons or 19%.

Shipments in the mobile end market represented 47% of the total portfolio in the first quarter as customers pulled hard throughout the quarter to support internal combustion and electric vehicle builds. Shipments to energy customers totaled 20,300 tons in the first quarter, a sequential increase of 7,200 tons 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 third-party melt producers and then rolled, finished and shipped by TimkenSteel. We expect the similar level of shipments of third-party melt in the second quarter to further support customer demand.

As I mentioned last quarter, we plan to leverage our third-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 melt capacity. Net sales of $323.5 million in the first quarter increased 32% sequentially and decreased 8% compared with the first quarter of last year. 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 fourth quarter.

The net sales declined compared with the first quarter 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. Base sales prices increased by $70 per ton or 5% on average in the first quarter across our end markets in comparison to the full year 2022 average. Turning to manufacturing. Melt utilization was 73% in the first quarter compared with 47% in the prior year fourth quarter and 81% in the first quarter of last year. Costs decreased sequentially by $26.6 million in the first quarter driven by a substantial improvement in melt utilization related cost absorption as well as higher costs incurred in the fourth quarter due to the planned annual maintenance shutdown.

In comparison to the prior year first quarter, manufacturing costs increased by $21.8 million. 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&A expense perspective, in the first quarter, SG&A increased $3.6 million on a sequential basis to $21 million, primarily driven by higher variable compensation and benefits expense. In comparison to the first quarter of last year, SG&A increased $2.5 million 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 carryforwards due to consecutive years of positive net income and expect to be a federal taxpayer beginning this year.

During the first quarter, 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 is primarily driven by the convertible note repurchase activity that we completed during the first quarter, which I will cover shortly. At this time, the company expects the effective tax rate for the remainder of 2023 to be similar to the first quarter. Moving on to cash flow and liquidity. During the first quarter, operating cash flow was $9.8 million, driven by quarterly net income and $20.8 million 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 $10.6 million in the first quarter, similar to the fourth quarter of last year. The company continues to forecast CapEx to be approximately $45 million in 2023. Additionally, during the first quarter, the company repurchased 514,000 common shares at a total cost of $9.4 million. As of March 31, the company had $63.7 million remaining on its common share repurchase program. Since the inception of our repurchases early last year through the end of the first quarter of 2023, we've repurchased approximately 3.5 million shares for $61 million. Switching gears to convertible notes. Similar to our [Technical Difficulty] last year, during the first quarter of 2023, we repurchased $7.5 million of outstanding convertible notes at a total cash cost of $18.7 million.

The $11.2 million repurchase premium was driven by an appreciation in the company's 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. The first quarter'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 $13.3 million with a fair value of approximately $34 million. As a result of the first quarter convertible note repurchases, diluted shares outstanding will decrease by approximately 1 million shares in the second quarter of 2023.

In total, we invested $28.1 million in common share and convertible note repurchases during the first quarter, which represents a 3% reduction in diluted shares outstanding compared with the fourth quarter of last year. Dating back to the beginning of our shareholder return activities just over 1 year ago, our common share and convertible note repurchases in 2022 and the first quarter of this year represent a significant 14% reduction in diluted shares outstanding compared with the fourth quarter of 2021. At the end of March 2023, the company's cash and cash equivalents totaled $227.4 million and total liquidity was $530.7 million. 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 allocation strategy.

This includes investing in profitable growth and returning capital to shareholders while maintaining a strong balance sheet. Turning now to the second quarter outlook. From a commercial perspective, second 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 third quarter. Base sales price per ton is anticipated to remain strong throughout the year with a modest increase expected in the second quarter average base sales price per ton mix dependent. 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, second 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 second 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 second quarter, 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 million. At this time, we're anticipating about 1/3 of the spend to be in the third quarter and the remaining 2/3 in the fourth quarter with melt shop shutdown maintenance planned in the fourth quarter.

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.

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