Metallus Inc (MTUS) 2016 Q1 法說會逐字稿

Good morning. My name is Shawn and I will your conference operator today. At this time I would like to welcome everyone to Timken Steel first quarter 2016 earnings conference call. (Operator Instructions).

Good morning and thank you for joining Timken Steel's first quarter 2016 investor call to discuss our financial results. I am joined by Tim Timken our Chairman, CEO and President as well as Chris Holding, Executive Vice President and Chief Financial Officer.

During today's conference call, we may make forward-looking statements as defined by the SEC. These statements relate to our expectations regarding future financial results, plans and business operations among other matters.

Our actual results may differ materially from those projected or implied due to a variety of factors which we describe in greater detail in today's press release, supporting information provided in connection with today's call, and in our reports filed with the SEC. All of which are available on the www.timkensteel.com website. Where non-GAAP financial information is referenced, we have included reconciliations between such non-GAAP financial information and its GAAP equivalent in the press release and/or supporting information as appropriate. Today's call is copyrighted by Timken Steel Corporation and we prohibit any use, recording or transmission of any portion of the call without our express advanced written consent. As you are probably aware, yesterday we released our results earlier than originally planned. We made the decision to accelerate our earnings release due to an inadvertent comment made in response to a question at our annual meeting of shareholders.

Now I would like to call turn the call over to Tim

Good morning and thank you for joining us. When we last talked we were facing a challenging quarter with an expectation that we could use as much as $20 million in EBITDA. I'm pleased to report that our performance continued to improve throughout the quarter and we were able to reduce the EBITDA loss to $1.6 million. This improved result was driven both by company actions and positive movements in the industrial markets. Sales were up more than 5% and we generated nearly $12 million in free cash flow. Note utilization climbed to 47%, still below our break even point of about 50% in normalized scrap markets.

While a quarter came in better than expected, we continue to face a challenging year and still have a lot of work to do. Let's take a minute to look at what happened in the quarter. First, our employees remained focused on a clear set of priorities to drive operational excellence, especially in the areas of safety, quality and service, to create value for our customers and to maintain discipline in spending. Employees across the company are working within their functions to deliver cost savings. We've been working closely with suppliers in a variety of areas to develop a creative and more efficient way of working.

For example, we simplified our natural gas transmission agreement. We reduced fuel consumption in our plant vehicles through more efficient movement and less idling and we changed the type of refractory brick we use in our ladles. Employees across the country are focused on continuous improvement and implementing ideas both large and small and that's bringing us in on the positive side of spending projections. Our sales engineers and the teams who support them are also capitalizing both on our newest capabilities and on changes in the market to win new business. One example is our re-entry into the polyethylene tubing market with a supply agreement with A &A machine and fabrication. Together we recently announced our first order of this high pressure tubing to a major petrochemical producer. With the assets we have today, we're able to streamline the process, creating cost efficiencies even in small order size and short lead times and that paved the way for a profitable re-entry to the market. This is just one example of the work our sales team is doing to deliver value and secure orders. So that's the first point.

We're taking the right actions to manage through some of the most difficult economic conditions. Second, we continue to win new business in strong automotive markets and we saw positive improvement -- positive movement in industrial markets. Distribution inventory destocking slowed a bit and we saw a slight improvement in the commodity markets. The resulting volume increase brought our melt utilization from 41% to 47% in the quarter. It's not high enough yet to break even but it's solid movement in the right direction. Looking ahead, 2016 will continue to be a challenging year. In the second quarter, we anticipate the automotive markets will remain solid, driven by strong economic fundamentals. We believe that industrial is stabilizing and in the distribution channel, inventory destocking will continue to taper. On the other hand, energy exploration and production may continue to decline. All this leads to our guidance that EBITDA in the second quarter will range from a loss of $5 million to $5 million in income.

Chris is going to talk in detail about our cash flow and liquidity as well as give an update on our financing actions we've taken. Let me just summarize by saying we're in a stable position with improved financial performance and a credit agreement that's been amended to recognize current market conditions. Before I turn it over to Chris, I want to take another minute on the topic of imports. As hard as our sales team is working to secure volume, we're facing growing pricing pressure from foreign competition. Several weeks ago, I traveled to Washington, D.C. to testify at a hearing convened by the US trade representative regarding the impact of foreign competition on US fuel markets. Essentially, I told the government officials assembled for that meeting a few things.

First, Timken is not afraid of foreign competition when trade is free and fair. We have the best engineers and operators in the world and a unique set of assets. We operate with a competitive cost structure that generates one of the lowest break even points in the business. However, manufacturers and countries are engaging in market distorting practices and we're seeing mounting competition and pricing pressure from unfairly priced imports. The world has too much steel capacity right now and some countries and companies have decided to deal with that by dumping steel in the US market. We're evaluating every tactic we have in our arsenal to combat unfair trade and I asked the government officials to do the same. The entire industry has been hurt across all companies and all products. I believe it will take action by both domestic manufacturers and the government to restore free and fair trade. At this point I'll turn it over to Chris for additional details on our financial performance and then we'll take your questions.

Thank you, Tim. Good morning. Last quarter we announced that we will no longer report out as two segments given the organizational changes made to reduce costs across the company. We have provided supplemental sales information in our presentation materials that reside under the investor section on our website at www.timkensteel.com . We believe the sales information will provide additional insight into our revenues. Shipments in the quarter of 186,000 tons represent a 6% increase over the fourth quarter of 2015. We continue to see strength in the mobile side of our business. The North American light vehicle production rate is forecast to be 18.2 million vehicles for the year and unprecedented 7 consecutive years of growth. Mobile shipments were sequentially flat from a high fourth quarter while industrial shipments increased 23%. Global commodity markets have begun to stabilize.

Positively impacting the industrial end markets along with more balanced inventories in the industrial supply chain. Shipments to the energy end market however, declined more than 30% versus the fourth quarter 2015 as US recount also dropped over 30% and customer inventory levels remain inflated. We expect these same market dynamics to continue into the second quarter of this year. Net sales for the quarter were $218 million with base sales of $202 million and surcharges of $16 million. Base sales per ton were about a 2% higher than fourth quarter 2015 from better product mix. EBIT for the quarter was a loss of $20 million, a sequential improvement of $16 million. The improvement was primarily due to a 6% higher volume and cost reduction actions taken across the enterprise. Additionally raw material spread was $6 million better than the first quarter which was in line with our expectations. The three city average scrap index dropped over 10% in the first quarter from $196 per ton to $177 per ton.

For the quarter, SG&A was $23 million down $3 million or 12% sequentially primarily from our cost reduction actions. EBITDA for the quarter was a lot of $1.6 million. Note utilization to the quarter was 47% and improvements from 41% in the fourth quarter 2015 but still below break even melt utilization of 50%. Weak market conditions were the primary driver of the low utilization rate. For the first quarter we generated a net loss of $14 million or negative $0.31 per share. The income tax rate was around 39% for the quarter and we expect our tax rate to be about 37% for the year. The effective tax rate was higher than the US federal statutory rate of 35% primarily due to the US state and local taxes and certain discreet tax items.

Capital expenditures for the quarter were about $9 million with more than 80% of the spend going to gross projects. We estimate full year 2016 capital spending will be $45 million. We generated $12 million of free cash flow during the quarter primarily due to the reimbursement from our VEBA trust for post employment benefits which were paid from operating cash flow in 2015. Total debt decreased by $15 million in the quarter to $185 million and our net debt to capital ratio was 17.1%. We amended our credit agreement in the quarter. The amendment made several changes to the agreement including eliminating the one-time $100 million liquidity requirement and provides more flexibility with respect to the amount and form of additional financing. The revised agreement provides for $265 million asset base revolving credit facility which was reduced from $300 million to align with our borrowing base. At the end of the quarter, we had about $55 million of liquidity between the revolver and cash.

We will continue to evaluate future needs related to additional financing. Turning to the outlook for the second quarter of 2016, we expect shipments to be similar to the first quarter. We anticipate automotive demand will remain strong, industrial markets will continue to improve and oil and gas end markets to remain weak. We project raw material spread to be favorable sequentially and that our melt utilization will be slightly under 50%. Finally, EBITDA is expected to be between a loss of $5 million and income of $5 million. This ends our prepared statements and we will now take your questions.

(Operator Instructions).

And your first question comes from Novid Rassouli from Cowen and Company

Good morning, Tim, Chris and Tina. Thanks for taking my question. Regarding the tapering of destocking in the industrial supply chain, are your customers restocking at all or simply buying hand-to-mouth? I'm just curious how the thought process has changed from the buyer's side and how much of an uptick we could see from a distribution channel in the coming months and quarters.

Let me comment on what we have seen so far and then I probably won't speculate as to what we're going to see going forward. But we have seen inventory in the distribution channels beginning to balance. We've seen some nice spot orders kind of coming in here and there and people filling shelves, that kind of thing. I don't think it isn't a pronounced improvement in the demand signal but I think so far at least the distributors that we deal with have done a nice job of managing their inventory through the last, you know, call it twelve months or so. It's positive improvement. It feels good. You know, we're holding our breath right now to see whether it continues along at that pace.

okay. And then on the import side that you mentioned, Tim, it sounds like it's still an issue now. I'm just wondering what products and from what country are you seeing on these imports still flowing into the US?

Well, I mean the broader steel industry you're seeing a little bit of everything. In our products we continue to see tubing coming in, mostly out of Romania. We've seen bar product coming out of China, Korea, little bit out of Western Europe. It is, we're the strongest market in the world right now and so people are taking advantage of the currency to come in pretty aggressively into the marketplace. So we're keeping a pretty close eye on it, you know, collecting all the data that we need to collect and, you know, we'll take action if appropriate at the right time.

Has the recent uptick in global steel prices helped to reduce the level of imports coming into the US or has that not really impacted you guys an at all?

You know, the import data is kind of mixed in the first quarter. You're seeing it flow a little bit but I don't think anybody's lost interest in the US market and I think given the openness of our market that we'll continue to see import activity going forward.

Great. My last question, so you guys have done a great job, in my opinion controlling cost. Very encouraging to see the ability to generate EBIT to next quarter while melt utilization remains below 50%. I'm guessing these were both contributing factors but what do you think is the more significant contributor to being able to generate EBIT with melt under 50%, the continued cost reductions or the improving raw material spreads as scrap stabilizes?

Hey Novid, this is Chris. I would say without trying to be to finite, I would say both. The cost reduction has been, you know, really important. If you go back and compare Q3 of last year and adjust for scrap spread and maintenance and $10 million to Q3 and compare it to Q1, you can see the impact of cost reduction and it's really significant. So that's big. I would say going forward, the cost reduction will not be nearly as pronounced obviously as it has been because almost all of the cost reduction programs were in place for the full first quarter 2016. And I think after that, what's going to be required to boost our earnings up to prior levels would be more from the market than cost.

Got. Great. Thanks for taking my questions.

Thanks, Novid.

Your next question comes from Justin Bergner with Gabelli And Co. Your line is open.

Good morning, everyone.

Good morning, good morning.

Nice work on the cost side. Hopefully the market will become friendly as well. My first question just related to the flat sequential shipment guidance for the second quarter. I guess would you normally see an uptick seasonally in shipments in the second quarter versus the first quarter? Or would that normally be flat seasonally?

Typically you would see a little seasonality favorable in Q1 but I think what impacted us is that our Q4 mobile sales were so strong, so that our mobile sales were kind of flat and that's unusual. But again it's attributable to the incredible strength in the US mobile market.

Yeah, I guess the only thing I would add is that you're seeing puts and takes across all the markets, right? We'll continue to see softness in oil and gas in the first half of the year. We're seeing some signs out of industrial that, you know, there are parts of it that are getting better. We're also doing a nice job at picking up some market share and then as Chris pointed out, the automotive continues to chug along at pretty high rate.

Okay. That's helpful. But in terms of looking at Q2 with the normal seasonality be for a sequentially flat Q2 versus Q1? Or would it be for a slight improvement and how to sort of weather the extra leap year day sort of play into that?

Yeah, in a flat market, right, all things being equal, you would say that Q2 would be a little bit higher normally. But, you know, when you're coming in and out of a cycle, all bets are off and so that's why our guidance is to pretty similar revenues quarter-on-quarter.

Okay. That's helpful. And then the raw material I guess tail wind looking sequentially into the second quarter, will that also be offset by a LIFO charge similar to what you experienced in the first quarter versus the fourth quarter?

No. We would expect that our LIFO will be pretty flat throughout the year. So whatever you saw in LIFO in Q1 we would anticipate in Q2 also.

Oh, okay. So we would see a similar sore the negative $9 million or some figure --

No, that's sequential. Sequentially if you look our LIFO number was $2 million. So we would expect a $2 million number in the subsequent quarter too. Outside of all the other great things that can affect LIFO but that's what we would expect.

Okay. I'm just trying to make sure I understand how the $2 million sort of compares to the negative $9 million and the sequential.

Sequential will be no change. Q1 to Q2 we wouldn't anticipate any change.

Okay. Great. And then when you think about your shipment guidance being flat in the second quarter versus the first quarter, is there any incremental headwind from increased import pressure that you're sort of baking into that flat guidance?

Yeah, I think two issues. One as I said we've seen the volumes come off a little bit but the pricing hasn't let up all that much especially on the more commodity side of the our product range. So we'll see a little bit of a drop in volume but the price pressure is still there.

Okay. Great. I'll hop back into the queue.

(Operator Instructions). And your next question comes from Tyler Kenion with KeyBanc Capital Markets. Your line is now open.

Hey, good morning.

Good morning, Tyler.

I think a lot of my questions have already been answered here but just one on the cash flow statement here and, you know, Chris it looks like the reimbursement just from the VEBA plan assets maybe hit in full in the first quarter. How should we expect that to progress throughout the course of the year and, you know, also any changes with respect to your pension obligations here moving forward through the year as well.

Yeah, I'll start with the pension. The pension obligation at year end was pretty much fully funded. If you look at our funded pension plans, they were fully funded so we don't anticipate any cash contributions to our pension plan. In the first quarter, we reimbursed for our 2015 OPEB costs so that's what the $13 million are. And then going forward, for all of 2016, we will pay the claims right from the VEBA trust rather than from operating cash flow. So the net cash out relative to OPEB will be about $2 million for the full year.

Okay. Great. And then just as far as how you're thinking about working capital here moving forward, we've clearly seen a lift in scrap prices. Anything we should be thinking of in terms of inventory, you know, as an use resource of cash here in the second quarter and kind of maybe how much you see it for progressing through the year from here?

Yeah, first of all, in guys have done a good job on working capital, taking a lot of working capital out of the business. Last year we reduced our working capital by about $150 million and then for the first quarter, you know, it was call it break evenish, even though our revenue was up. So that's a good job. You know, the story for working capital for the year will be depends what sales will be for the year and what revenues are. But so specific to Q2, we've called revenue flat so we wouldn't anticipate much change in working capital one way or another.

Okay. Great. And then just one more on the cost cutting initiatives. You know, you have done a great job of finding opportunities, quarter-to-quarter. Any sense of what the mix is between variable and fix costs there? And is there anything incremental that think you can gleam in terms of cost cutting moving forward here?

Yeah, you know, I would say most of the cost cutting programs are fully in force as of Q1. So while I think there could be some smaller additional reductions, I wouldn't anticipate them to be very large. I think what's really helped us is that enterprise-wide we've had all engagement from our employees so I don't want to sell them short because as you can tell in the first quarter, the cost reduction was a little bit better than we thought it would be. So, you know, hats off to everybody who was involved at that at Timken Steel but I would not anticipate a significant increase in cost cutting run rate after Q1.

Right, thank you.

Thanks.

And your next question comes from Justin Bergner with Gabelli And Co. Your line is now open.

Thanks for taking my follow-up question. On the revolver, I guess you have $55 million of availability. Maybe is there sort of simple way to think about how one gets to that $55 million from the $265 million? Versus the total amount that you have drawn today.

No, there really isn't. The revolver has a borrowing base and that borrowing base is based on accounts receivable, inventory and fixed assets. And so as our working capital changes, the borrowing base changes. So one of the things that we did is we now have a lot better feel for our borrowing base. It's one of the reasons we reduced the size of the revolver from 300 million to $265 million because we're never going to have a borrowing base close to $300 million so we thought $265 million would be the maximum that we would need to borrow.

Okay. That's helpful. And then in terms of sort of go forward capital raising possibilities, does that remain very much on the table or could you just sort of remind us where Timken Steel stands in terms of potentially approaching capital markets.

Sure, Justin. Probably the first thing I would point out is making, having free cash flow in the first quarter was helpful and so we're just evaluating our needs. We don't want to borrow money that we may not need but we keep our eyes open into the capital markets about what we might want to do to boost liquidity going forward.

Great. Thank you.

Thanks.

And your next question comes from Tyler Kenion with KeyBanc Capital Markets. Your line is now open.

Hey, thanks for the opportunity to follow up here. Just on the sell leaseback transaction, that still expected to close here in the second quarter? And any sense as to how that will be treated, whether it's an operating lease or a capital lease at this particular point?

We would anticipate that the sale leaseback will close in the second quarter and that would be considered an operating lease. But we'll provide more guidance on that once we're done.

Okay. Thank you.

And there are no further questions at this time. I turn the conference back to Tim Timken for closing remarks.

Well thanks for your question and thank you for your interest in Timken Steel. We've got some bright spots this quarter but 2016 will continue to be a challenging year so we're not taking our foot off the gas. Our performance in the quarter demonstrates that our employees remain diligent in taking right actions to perform in a difficult environment and I want to thank all of them for their efforts. If you have any follow-up questions as usual please don't hesitate to call Tina. Thanks again and have a great day.

And this concludes today's conference. You may now disconnect.