Metallus - Q3 2023
November 3, 2023
Transcript
Operator (participant)
Good morning, and welcome to TimkenSteel's third quarter 2023 conference call. All participants are in a listen-only mode. After the speaker's presentation, we'll conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Jennifer Beeman, Director of Communications and Investor Relations. Thank you. Please go ahead.
Jennifer Beeman (Director of Communications and Investor Relations)
Good morning, and welcome to TimkenSteel's third 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 equivalent are also included in the earnings release. With that, I'd like to turn the call over to Mike. Mike?
Mike Williams (President and CEO)
Good morning, everyone, and thank you for joining us today. First and foremost, I'd like to thank our employees for their hard work and collaborative spirit as we continue to chart new pathways for growth. Our firm commitment to safety is beginning to show results, and our focus on strengthening our culture and fostering teamwork across our commercial, supply chain, and manufacturing operations resulted in a solid profitability while meeting the needs of our customers. Additionally, we continue to repurchase shares while strategically reinvesting in our business. The enhanced collaboration we've seen, both with the United Steelworkers and within our teams, is fueling our never-ending pursuit of manufacturing excellence and helping us to create a lasting culture of safety. In October, we launched our second employee safety survey for all employees.
Results from this survey will help us improve hazard awareness, improve our engagement, build a safety-centric mindset, and gain valuable insights from employees for continued safety improvements. However, to encourage good safety ideas, it is essential that we provide concrete support. In 2023, we spent approximately $8 million on safety CapEx projects and $1 million in safety training. Moving to our performance, we saw a slight sequential decrease in sales and shipments in the third quarter. While I'm encouraged we've experienced solid base prices across all end market sectors, EBITDA was impacted by a continued decrease in surcharges, given lower market prices for scrap and alloys in the past several months. Our melt utilization for the third quarter was approximately 76%, slightly higher than the previous quarter.
Given our planned annual shutdown maintenance in October, we expect to see a sequential decrease in the average melt utilization rate in the fourth quarter. Mobile customer shipments were essentially flat with the second quarter. I wanted to take a moment to discuss the United Auto Workers strike and how it impacted demand for our products. Overall, the impact for the third quarter was relatively minimal. About 1/3 of our mobile OEM shipments go to non-U.S.-based automakers with U.S. manufacturing operations. Additionally, we ship to auto manufacturers with operations in Mexico, which were not impacted by the strike. During the early weeks of the strike, the supply chain was still catching up to fulfill past due orders. Although work stoppages directly affected a few programs we're involved in, we expect the OEM demand to quickly recover and remain strong in early 2024.
Regarding EV-related products, we had a record third quarter, representing a 62% net sales increase from the second quarter. As a reminder, last quarter, we had approved a $5 million investment for two additional manufactured component machine lines to be installed at our facility in Southwest Ohio in late 2024. This investment will broaden our EV component offering to customers and allow us to keep pace with industry growth. In the industrial market, our shipments increased by 5% over the prior quarter. We saw an uptick in demand for high-quality grades of steel, coupled with continued strength in the defense sector due to expansion of the U.S. industrial supply base, supporting major Department of Defense programs. We expect record sales to the defense sector in the fourth quarter. Our energy shipments in the third quarter declined 27% on a sequential basis as demand weakened.
The average U.S. rig count dropped approximately 10% from the second quarter, despite an increase in oil prices during the period. This reflects the industry's continued conservative approach. In support of our ongoing commitment to expanding our market presence and broadening our product portfolio, we are pleased to introduce Tim Lynch as our Vice President of Corporate Development, a newly established role. Tim's primary mission is to enhance the company's value by identifying and actively pursuing acquisitions that align with our strategic imperatives.
With a career spanning over three decades, Tim brings extensive expertise in steelmaking operations, supply chain management, procurement, and strategic planning to our team. We extend a warm welcome to Tim, and look forward to his valuable contributions to our company. We remain committed to our profitability improvement initiatives, and work continues company-wide to achieve our target of $80 million by 2026.
Again, our actions have been focused on commercial excellence, manufacturing and reliability excellence, and administrative process simplification with a strong balance sheet as our foundation. To date, we are about two-thirds of the way towards achieving our target, with ongoing areas of focus, including manufacturing excellence and administrative process simplification, enabled by modernizing our IT systems. As we enter into the last few months of the year, we will remain focused on safety, customer service, and advancing our strategic imperatives to drive sustainable through-cycle profitability and cash flows. I thank our customers for their trust, our suppliers for their partnership, and our shareholders for their continued support. Now, I would like to turn the call over to Kris.
Kris Westbrooks (EVP and CFO)
Thanks, Mike. Good morning, everyone, and thanks for joining the call today. TimkenSteel's third quarter financial results reflect solid profitability and another quarter of positive operating cash flow. Thanks to all of our employees for their teamwork and collaboration in delivering these financial results, while remaining focused on advancing the company's strategic imperatives. Now turning to the third quarter financial results. Net sales totaled $354.2 million, with net income of $24.8 million or $0.51 per diluted share. Comparatively, sequential second quarter net sales were $356.6 million, with net income of $28.9 million or $0.62 per diluted share.
Net sales in last year's third quarter were $316.8 million, with a net loss of $13.3 million, or a loss of $0.29 per diluted share. On an adjusted basis, the company reported net income in the third quarter of $24.9 million or $0.52 per diluted share. Comparatively, the second quarter adjusted net income was $27.6 million or $0.60 per diluted share. Adjusted net loss in the third quarter last year was $4.1 million, or a loss of $0.09 per diluted share. Adjusted EBITDA was $46.8 million in the third quarter, a $3.7 million sequential decline.
A market-driven decrease in the raw material surcharge environments and the start of our planned annual shutdown maintenance were the drivers of the sequential decrease in adjusted EBITDA. Partially offsetting these items were higher base sales prices and an improvement in product mix. Compared with adjusted EBITDA of $10.8 million in the third quarter of last year, adjusted EBITDA increased by $36 million in the quarter. As a reminder, the third quarter of 2022 included unplanned downtime at the melt shop. Turning now to the details of the financial results in the third quarter. Shipments were 175,800 tons in the quarter, a slight decrease of 1,700 tons or 1% compared with the second quarter of 2023.
In the industrial end market, shipments totaled 82,400 tons in the third quarter, a sequential increase of 4,000 tons or 5%. The increase was driven by higher third quarter shipments to the defense sector. Sales to defense customers continued to strengthen and represented 16% of industrial shipments in the third quarter, compared with 12% in the sequential second quarter and 10% in the third quarter of last year. Shipments across other industrial sectors were fairly steady in the third quarter on a sequential basis. Mobile customer shipments were 79,100 tons in the third quarter, essentially flat with the second quarter. Through the end of September, automotive work stoppages resulted in a minimal impact on net sales and shipments.
Shipments to energy customers totaled 14,300 tons in the third quarter, a sequential decrease of 5,300 tons, or 27%, as energy customer demand softened in the third quarter. Of our total third quarter shipments, approximately 16,000 tons, or 9%, was sourced from third-party melt producers, then rolled, finished, and shipped by TimkenSteel. As expected, this represented a sequential decrease of 33%, given improvements in our internal melt productivity. Net sales of $354.2 million in the third quarter decreased 1% sequentially. The decline in net sales is primarily due to a market-driven 16% decrease in average raw material surcharge per ton as a result of lower scrap and alloy prices. Additionally, slightly lower shipments contributed to the decline in net sales.
Partially offsetting these items were higher base sales prices and favorable product mix. Turning now to manufacturing. Melt utilization was 76% in the third quarter, compared with 75% in the second quarter. Manufacturing costs increased sequentially by $6.1 million in the third quarter, as we began the planned annual shutdown maintenance at our rolling, piercing, and finishing operations. Switching gears to income taxes, the company's effective tax rate was 28% in the third quarter and 27% on a year-to-date basis through the end of September. Cash taxes were $8.4 million in the third quarter, and we anticipate cash taxes to decline in the fourth quarter. Moving on to cash flow and liquidity. During the third quarter, operating cash flow was $28.1 million, driven by quarterly net income.
This marks the company's 18th consecutive quarter, generating positive operating cash flow. Year-to-date, through the end of September, operating cash flow was $51.2 million. Capital expenditures totaled $17.5 million in the third quarter and included various investments to drive operational efficiency, growth, and improvements in safety. In the fourth quarter, the company anticipates approximately $15 million of CapEx to bring the full-year total to approximately $50 million, consistent with previous guidance. From a share repurchase perspective, the company bought back 353,000 common shares during the third quarter at a total cost of $7.7 million. As of September 30th, the company had $44.5 million remaining on its share repurchase program.
Since the inception of the program early last year through the end of September 2023, the company has repurchased 4.5 million shares at a total cost of $80.5 million. In total, the common share repurchases, plus the 2022 and 2023 convertible note repurchases, have resulted in a significant 16.1% reduction in diluted shares outstanding compared with the fourth quarter of 2021. The company's cash and cash equivalents totaled $225.4 million, and total liquidity was $519.1 million as of September 30th, 2023. Interest income generated by the company's cash balance was $2.4 million in the quarter and nearly $7 million year to date.
As we proceed forward, we expect the strength of our balance sheet, combined with expected through cycle profitability and positive operating cash flow, to provide us the opportunity to continue to execute on our capital allocation strategy. This includes investing in profitable growth, maintaining a strong balance sheet, and returning capital to shareholders through continued share repurchases. Turning now to the outlook. From a commercial perspective, fourth quarter shipments are expected to decrease sequentially as a result of normal seasonality and potential volatility from the automotive work stoppages and restarts. Base sales price per ton is anticipated to remain strong in the fourth quarter, while surcharge revenue per ton is expected to be sequentially lower. The expected decline in surcharge revenue per ton is due to a reduction in the No. 1 Busheling scrap index in September, which impacts subsequent monthly surcharges.
Operationally, melt utilization is expected to sequentially decrease in the fourth quarter as a result of the planned annual maintenance shutdown at the melt shop, which was completed in October. Costs associated with this planned annual shutdown maintenance were approximately $7 million in the fourth quarter, slightly higher than the third quarter shutdown maintenance costs. Additionally, we plan to further reduce the melt operating schedule around the fourth quarter holidays to balance inventory with current demand, manage costs, and set up for a strong start to 2024. Given these elements, the company anticipates fourth quarter operating cash flow to remain positive, while Adjusted EBITDA is expected to decline sequentially.
To wrap up, thanks to all of our employees who worked together as a team to again deliver solid financial results while continuing to strengthen our safety culture. We appreciate your interest in TimkenSteel and would now like to open the call for questions.
Operator (participant)
If you would like to ask a question, please press star followed by the number one on your telephone keypad. Our first question comes from John Franzreb from Sidoti & Company. Please go ahead. Your line is open.
John Franzreb (Senior Equity Analyst)
Good morning, everybody, and thanks for taking the questions. I'd like to start with your comments on the UAW strike. Did it impact October's results, or are you anticipating it to impact more of November? Just kind of color how the fourth quarter is kind of playing out.
Kris Westbrooks (EVP and CFO)
Sure, John. So yeah, we had a much more significant impact in October versus the prior months during the strike. We also have to wait and see how quickly they ramp up and how strong they pull through the rest of this quarter. That's still a question mark.
John Franzreb (Senior Equity Analyst)
Okay. They're giving you no color as to how that's gonna play out?
Kris Westbrooks (EVP and CFO)
Well, but basically, they've just kind of give us what the plants are restarting and what that schedule is.
John Franzreb (Senior Equity Analyst)
Right.
Kris Westbrooks (EVP and CFO)
But we don't know what the demand requirements are gonna be yet.
John Franzreb (Senior Equity Analyst)
Okay. And out of curiosity, are you exposed to the Mack Truck UAW strike, or is that something that won't impact you?
Kris Westbrooks (EVP and CFO)
Not that I'm aware of. I mean, there could be possibly somewhere in the supply chain, but, I don't think anything significant from our sales perspective would be impacted.
John Franzreb (Senior Equity Analyst)
Good. Fair enough. And on the industrial side, you know, the sequential improvement you're talking about in the fourth quarter is excellent. And my original question is, how has that business profile changed from three months ago? But I'm gonna shift that to, can you talk a little bit more, is it entirely the defense side of that business that's driving the sequential increase that you're looking for, or are there other parts of it that are doing well?
Mike Williams (President and CEO)
So it's predominantly the defense sector that's pulling hard to restock their supply chain.
John Franzreb (Senior Equity Analyst)
Okay, got it. On the energy side, you touched on that the rig count is down. Would you expect, you know, the energy volumes to remain at this kind of threshold in the fourth quarter? Or would you expect it to be sequentially weaker due to seasonality?
Mike Williams (President and CEO)
I think, you know, I think from our perspective, it's pretty much gonna be flat to maybe down in Q4, the energy demand. You know, we've seen a couple of rigs added, I think, over the last 30 days, but they're being very disciplined with their working capital.
John Franzreb (Senior Equity Analyst)
Okay. At this point, actually, I'll get back into queue and let somebody else ask some questions.
Mike Williams (President and CEO)
All right. Thanks, John.
Operator (participant)
Our next question comes from Phil Gibbs, from KeyBanc. Please go ahead. Your line is open.
Phil Gibbs (Managing Director and Metals Equity Research Analyst)
Hey, good morning.
Mike Williams (President and CEO)
Good morning, Phil.
Phil Gibbs (Managing Director and Metals Equity Research Analyst)
Just wanted you to touch on the comments you made on the front end of the call about having a gentleman in a role on looking at acquisition, you know, targets. Anything you can share in terms of just the broader strategy? This appears to be a little bit of a pivot or an augmentation to what you guys have already been doing, because you haven't been very acquisitive recently. So anything you could add there would be helpful.
Mike Williams (President and CEO)
Sure. I mean, you know, we've been going through this transformation process for a couple of years now. We have a strong, solid balance sheet. We've totally revamped our commercial approach to various markets, beefed up our team and skill set, and I think we're reaching a point, you know, in discussion with the board, that we need to start looking more aggressively for some external growth opportunities that align with our strategic imperatives, which is gonna be around our manufacturing footprint, our product capabilities, and targeted certain end markets for expansion. There'll be more color to come over the next several quarters on this topic, but we just wanted to identify the fact that, you know, we're kind of shifted into fifth gear, as our overall focus and strategic evolution.
Phil Gibbs (Managing Director and Metals Equity Research Analyst)
Thank you. Then, as it relates to pricing and mix, I think your bridge and your filing spoke to somewhere around maybe $10 million-$11 million sequential pickup in EBITDA from pricing and mix in the third quarter versus the second. How much of that pickup is related to some of the defense comments you're making?
Mike Williams (President and CEO)
A significant amount of it is related to the demand growth in defense-related products that we manufacture. However, we've seen also a richer alloy mix as well in the industrial sector.
Phil Gibbs (Managing Director and Metals Equity Research Analyst)
Then there was a big pickup in pricing and mix sort of across all your targeted markets, auto, industrial, and energy, obviously, really, really notable. Is there any of that over the next couple of quarters that will normalize a bit? Because there was a bit of a step change in the quarter that was unique.
Mike Williams (President and CEO)
Yeah. There was some retroactive pricing that was caught up in Q3, but that's, you know, those are solid annual agreements, and that pricing will continue going forward. That was one of the big influencers besides the richer mix tied to the defense market sector and the alloy mix of products.
Phil Gibbs (Managing Director and Metals Equity Research Analyst)
Okay. So some catch up on pricing or orders that maybe were backlogged from some of the operational issues last year?
Mike Williams (President and CEO)
Yeah. I would say it's more retroactive pricing that went back a couple quarters, that got caught up in Q3.
Phil Gibbs (Managing Director and Metals Equity Research Analyst)
Great. And then lastly, anything on the conversion cost side that's notable between, you know, energy, alloys, consumables, anything like that that could be changing? Or how does it compare to last year? Thanks.
Mike Williams (President and CEO)
You mean for 2024?
Phil Gibbs (Managing Director and Metals Equity Research Analyst)
I just mean in terms of trends, in terms of what you've seen at present and, and how that maybe compares to last year. Thank you.
Mike Williams (President and CEO)
Yeah, I mean, you know, I think the, you know, most of our consumables, and, energy requirements, whether it be gas, electricity, are under long, you know, long, annual contracts or longer-term contracts. So I think those pricing from that perspective is flat to the remainder of this year, and we're in the progress of negotiating, beginning the negotiation of our supply contracts for 2024. So too early to tell you how that's gonna play out, but we'll know probably by the end of the year.
Phil Gibbs (Managing Director and Metals Equity Research Analyst)
Thank you.
Mike Williams (President and CEO)
Thanks, Phil.
Operator (participant)
As a reminder, to ask a question, please press star followed by the number one. Our next question comes from Dave Storms, from Stonegate Capital Markets. Please go ahead. Your line is open.
Speaker 6
Good morning. This is John, stepping in for Dave.
Mike Williams (President and CEO)
Hi. Hey, John.
Speaker 6
Yep. So, you'd mentioned, you know, utilization was 76% in the quarter, and it's supposed to decrease in Q4. So, relative to historical levels, what are your expectations for 2024? Is reaching 80%, you know, a reasonable expectation?
Mike Williams (President and CEO)
Yeah, I mean, that's our, that's our target average per quarter. We would have been there in Q3. However, we had an environmental system that malfunctioned, and we had to be down for a couple of days to repair it at our melt shop. So we would have been definitely at slightly above 80% if that wasn't the case for Q3. And that is our basically our target for 2024, and we've given you the reasons why Q4 will be lower.
Speaker 6
Got it. Very helpful. Thank you. And then, you know, cost improvements that were made in Q3, which ones are structural, which of them are discretionary? If you don't mind me asking.
Mike Williams (President and CEO)
Well, I mean, most of our cost improvements are gonna be structural outside of, you know, supply agreements and arrangements and raw material purchases and energy purchases. Those can vary. But when we look at our manpower, we look at our productivity, we look at our yield and cost of quality, those things are all structural improvements, and that's what we've been focused on. A number of investments that were implemented during the outage, we'll start to see those improvements through the remainder of this year and for the full year of 2024.
Speaker 6
Okay. Got it. Thank you. Appreciate you taking my questions.
Mike Williams (President and CEO)
Thank you.
Operator (participant)
Our next question comes from John Franzreb from Sidoti. Please go ahead, your line is open.
John Franzreb (Senior Equity Analyst)
Yeah, just a couple quick follow-ups. Firstly, how does the capital expenditure outlook change in 2024 versus 2023? I know you got the additional piece of equipment that you're putting in at the end of next year, but can you kind of ballpark what the CapEx spend looks like for next year?
Mike Williams (President and CEO)
Yeah. For next year, John, we're in the planning process right now, and
John Franzreb (Senior Equity Analyst)
Okay
Mike Williams (President and CEO)
... you know, we'll do that through probably mid-December, and then we'll have a discussion with the board. So at this time, I don't want to make that public. It would only be a guess at this time anyways, but at the year-end, we'll be able to move much more clarity on the CapEx for 2024. I would say this, though, you know, I don't think there's anything in the planning right now that would significantly increase it.
John Franzreb (Senior Equity Analyst)
Okay. And regarding the tax rate, it's kind of been volatile for the past couple of quarters. Any thoughts on how you're going to finish the year, full year or fourth quarter? Either one would be helpful.
Mike Williams (President and CEO)
Kris, you want to take that one?
Kris Westbrooks (EVP and CFO)
Sure, yeah. Thanks, John. I think looking at that year-to-date rate, around 27%.
John Franzreb (Senior Equity Analyst)
Right
Kris Westbrooks (EVP and CFO)
... is where we'd be targeting for the end of the year. The things that are driving the rate higher are some of these nondeductible costs that we experienced earlier in the year. So as we get into the next year, I think it should moderate absent those nondeductible items.
John Franzreb (Senior Equity Analyst)
Thank you, Kris. Just lastly, on, on capital allocation, you've been buying back shares rather aggressively. Do you expect to continue to do so in the fourth quarter? Can you just talk a little bit about, you know, excess cash and, and plans for it? Especially in light of-
Kris Westbrooks (EVP and CFO)
Yeah
John Franzreb (Senior Equity Analyst)
... you know, being potentially more aggressive in M&A, so maybe contextualize it all.
Kris Westbrooks (EVP and CFO)
We put in the Q. In the month of October, we bought back around 94,000 shares, I believe.
John Franzreb (Senior Equity Analyst)
Yeah.
Kris Westbrooks (EVP and CFO)
About $2 million of buybacks in the month of October, and we're just putting a new plan in place now that'll go out through our next filing date. So I'm not gonna speak specifically to that, but you know, more to come as we report in February. But we're definitely thinking about the future, adequately managing our cash as we approach year-end, managing working capital like we always do, and being prudent in all those areas.
John Franzreb (Senior Equity Analyst)
Okay. Thank you for taking my follow-ups.
Mike Williams (President and CEO)
Thanks, John.
Operator (participant)
As a reminder, to ask a question, please press star followed by one on your telephone keypad. We have no further questions in queue. I'd like to turn the call back over to Jennifer Beeman for closing remarks.
Jennifer Beeman (Director of Communications and Investor Relations)
Thank you all for joining us today, and that concludes our call.
Operator (participant)
This concludes today's conference call. Thank you for your participation. You may now disconnect.