Metallus Inc (MTUS) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the TimkenSteel Second Quarter 2020 Earnings Conference Call. (Operator Instruction]

I would now like to turn the call over to Jennifer Beeman. Thank you. Please go ahead ma'am.

Thanks and good morning everyone and welcome to TimkenSteel Second Quarter 2020 Conference Call. I'm Jennifer Beeman, Senior Manager of Communications and Investor Relations for TimkenSteel. Joining me today is Terry Dunlap, Interim Chief Executive Officer, and President; Kris Westbrooks, Executive Vice President, and Chief Financial Officer; as well as Tom Moline, Executive Vice President of Commercial. 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 Terry. Terry?

Thank you, Jennifer, and thanks to everyone on the call for joining us this morning. The second quarter presented extraordinary challenges to our country, to our customers, and to our company. Our employees were exceptional and facing the challenges confronting TimkenSteel in this environment. A few highlights for the quarter. First, we operated safely. Our OSHA recordable rate was at an all-time low for the first half of the year. In addition to our steadfast attention to operating safely, our employees have been diligent in following the COVID-19 for cautions, we put in place to maintain a healthy work environment. This diligence and great teamwork across the company allowed us to maintain uninterrupted service to our customers. My sincere thanks to the TimkenSteel team for their ongoing focus on staying safe and watching out for their coworkers every day.

Second, we were able to deliver positive EBITDA and cash flow despite extremely weak demand. Last quarter, we shared some of the immediate cost reduction actions we introduced on the impact of COVID-19 was becoming clear, including reduced operating schedules, rolling furloughs for salaried employees, reduced compensation for our Board of Directors and leadership team and a suspension of our 401(k) matching contributions to name just a few. These incremental cost reductions, combined with other pre-COVID cost reduction actions and systemic working capital management initiatives contributed to generating second-quarter EBITDA of $5.7 million and second-quarter operating cash flow of $16.1 million. As expected demand in the second quarter fell significantly as a result of customer plant shutdowns, order cancellations, and delays. Second-quarter shipments of 108,700 tons represented the company's lowest shipment quarter and more than 30 years. Initially, our Automotive sales were severely impacted by our customer's immediate and widespread plant outages, followed by their slow and sometimes choppy restart processes. As June progress, we began to see a somewhat steady recovery, in fact, June sales in the light vehicle sector exceeded industry forecast due in part to stronger than anticipated online sales and the reopening of dealerships. In the truck and SUV markets, relatively low vehicle inventory levels drove more immediate ramp up efforts during the quarter and for the products, we sell for those high volume models. Customers in the industrial end markets, including defense, generally remained operational during the quarter with fairly stable demand and inventory levels. Our distributors continue to align inventory with changing demand from their customers and continue to be cautious and buying patterns and inventory management.

As widely reported the energy market remains under great pressure as a result of low pricing and demand and as a result, we expect very low levels of activity to continue for the foreseeable future. Most importantly, we are staying close to our customers as they navigate these many challenges and continue to align our operating schedules accordingly. Overall, we estimate our ship tons were 100,000 lower in the second quarter due to the impact of COVID-19 with a corresponding decrease of $120 million in net sales. From an operations and cost management perspective we aggressively reduce production schedules at all plants in response to the decline in demand. In addition, we instituted rolling furloughs, that impact 90% of our salaried workforce by an average of 5 weeks, further reducing administrative costs. Beyond the immediate challenge of COVID-19, we remain focused on long-term performance and profitability improvement actions. We continue to implement a number of long-term cost reduction initiatives launched in late 2019 and early 2020. As we discussed in the past 2 calls numerous cross-functional teams focused on a wide range of cost reduction and working capital efficiency workstreams are active across virtually all functions and activities of the business. A few examples include actions to restructure our organization in order to reduce costs, improve the efficiency of decision making, and ultimately further improve service to our customers. These actions have resulted in a 50% head count reduction in the first half of 2020 and a 28% reduction since the beginning of 2019. Another example is the ongoing evaluation of our overall product portfolio to focus on areas of strength and adjusting in areas, no longer critical to our customers, or where market dynamics have changed significantly.

One recent area of this focus has been on our seamless mechanical tubing product line where we will be eliminating certain historically unprofitable sizes from our product catalog. We are working closely with customers to complete a smooth transition by year-end. We anticipate the impact of this action will result in a $3 million year EBITDA improvement. There are dozens of other projects, similar to the examples I just mentioned, being worked on in all areas of the company with the goal of sustainable profitability and cash flow generation. We will continue to update you on our progress. In addition, as we have discussed on recent calls, our value-added components product line continues to be an area of focus. As a reminder, these are highly engineered parts made from TimkenSteel bars and tubes for the automotive, industrial, and energy markets. We provide solutions to our customers to simplify their supply chain and supplier base by helping to manage the supply chain from raw material to finished component providing customers with just in time parts inventory to meet their manufacturing needs. The expansion of our value-added components facility in their Dayton, Ohio remains on time and under budget. In July, production of semi-finished and finished powertrain components for our automotive customers began in the expanded machining operations at that facility. We are now working closely with 3 major customers on final qualifications and ramp up production schedules. We estimate sales from these new product launches to be modest in 2020 at approximately $25 million, increasing to approximately $80 million in 2021. In addition, we continue to review application and performance requirements to identify new opportunities.

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

Thanks, Terry. Good morning everyone and thank you for joining us today. I also wanted to take the opportunity to acknowledge the hard work and dedication of our entire organization during a very challenging second quarter. Although the sequential and prior year periods are unfavorable comparisons, we safely operated throughout the second quarter to support our customers' needs significantly reduce costs, expanded our cash position, and continue to maintain a high level of available liquidity. So, thank you to all our employees for your hard work and dedication.

Moving now to financial matters. On a GAAP basis, our second quarter of 2020 net loss was $15.3 million excluding certain items, the adjusted net loss was $14.3 million in the quarter. Adjusted EBITDA of $5.7 million in the second quarter was significantly aided by the ongoing cost reduction program that we previously discussed, as well as additional COVID-19 related cost reduction actions. Our cash balance was at a record high level with $75.5 million at the end of the second quarter, an improvement of nearly $10 million from the end of March. Available liquidity from our credit facility plus cash on hand was approximately $252 million as of June 30th, 2020. Cash generated from operating activities in the second quarter was $16.1million and first half of 2020 operating cash flow generation was approximately $80 million.

Moving now to the drivers of the second-quarter results. Net sales of $154 million in the quarter declined 41% in the first quarter of 2020 and 54% from the prior year second quarter both reflective of a significantly lower demand primarily as a result of Armor industry disruption related to COVID-19 and continued weakness in the energy sector. As Terry mentioned, we estimate the total negative impact of COVID-19 on our second-quarter net sales was $120 million and when combined with the late first quarter impact the total year-to-date impact is estimated to be $130 million.

In addition to lower volume, net sales were compressed by lower surcharge revenue in the second quarter. The decline in sequential-quarter surcharge revenue of $21.6 million was a result of lower ship tons. In comparison to the prior year second quarter, the decline in surcharge revenue of $53.6 million was a result of both lower volume and 29% decline in average raw material surcharge per ton on lower scrap and alloy prices. As Terry mentioned, shipments were 8,700 tons in the second quarter of 2020. The month of May represented the low point in the second quarter was shipments of approximately 30,000 tons. From May to June shipments improved by approximately 55%. The overall decline in second-quarter shipments drove a $16.8 million sequential reduction in adjusted EBITDA and a $26.9 million reduction versus the second quarter of 2019.

From an end market perspective, shipments to Armor customers were 320,700 tons in the quarter, a 63% decrease from the first quarter, and a 70% decrease from the second quarter of 2019. These decreases are almost entirely the result of temporary automotive plant stoppages related to COVID-19. Although demand and shipments began to improve in June, Armor shipments have not yet returned to pre-COVID stable level. Shipments were 630,200 tons to industrial and 9,100 tons to energy in the second quarter, both of which were lower sequentially and as compared to the prior year quarter. COVID-19 related demand reduction impacted the industrial and energy markets, but not as significantly as automotive. Additionally, energy shipments continued to be negatively impacted by a weak oil and gas market.

OCTG billet shipments of 300,700 tons were minimal in the quarter and are expected to remain modest for the foreseeable future. Price and mix improved in the second quarter with a favorable EBITDA impact of $7.4 million compared to the first quarter and $4.4 million compared to the second quarter of 2019. Reduced shipments of lower-margin products including OCTG billets positively impacted average price and mix. Manufacturing improved $3 million sequentially and $7 million in comparison to the prior year second quarter. These improvements were primarily a result of additional cost reductions, aided by flexible production schedules and unpaid salary furloughs, partially offset by unfavorable fixed cost leverage on significantly lower production levels in the second quarter of 2020. Plant utilization declined to approximately 20% in the second quarter as a result of the COVID-19 related low demand environment. Close collaboration between our manufacturing supply chain and commercial organizations has enabled the company to manage weekly production schedules with flexibility to ensure alignment with demand while maintaining high on-time delivery for our customers.

We're not operating hourly employees or on-off and costs are significantly reduced. We will continue to closely manage the production schedule on a weekly basis going forward while ensuring that we are positioned to meet the needs of our customers as demand recovers. SG&A expense for the quarter was $16.8 million, an improvement of $6.6 million sequentially and $3.4 million from the prior year second quarter. Lower SG&A expense was primarily due to savings from prior restructuring actions and COVID-19 related actions, partially offset by increased variable compensation.

Moving on to cash and liquidity our total available liquidity was approximately $252 million at the end of the second quarter of 2020, an improvement of $21.6 million since the end of 2019 compared to the end of the first quarter, total available liquidity declined $38.1 million as a result of the lower asset borrowing base given the current economic environment and ongoing working capital management activities. During the quarter, the company generated free cash flow of $9.4 million, and close the quarter was $75.5 million of cash. The positive free cash flow generation and high level of cash was a result of inventory reductions in all categories effective management of receivables and payables and the continued benefit of aggressive cost reduction actions.

In addition to positive free cash flow, we've continued to make progress with the ongoing sale of non-core assets and received cash proceeds of approximately $1 million during the second quarter upon the sale of certain assets located at our former facility in Houston, Texas. Year-to-date proceeds from the sale of non-core assets exceeded $8 million. Our convertible debt with the principal amount of $86.3 million was reclassified from a long-term liability to a current liability in the second quarter, reflective of its June 1st, 2021 maturity. We continue to monitor the capital markets and believe that options exist to address the convertible debt opportunistically in advance of or at its maturity. Overall, our liquidity position at the end of June remains sufficient to meet the current needs of the business.

Pension plan perspective, the company recorded a non-cash re-measurement gain of $1.9 million in the second quarter of 2020 which has been excluded from our adjusted EBITDA results. The ongoing quarterly re-measurement of the US salaried pension plan obligations and asset in 2020 was triggered in the first quarter of this year. Following the second-quarter US, salary pension plan re-measurements the total funded status of all company pension plans was approximately 85% as of June 30th, 2020. Flat to the end of the first quarter and down slightly from the end of 2019. There are no additional required pension contributions in 2020. Switching gears to our cost reduction actions last quarter I walked you through a variety of COVID-19 related actions that we implemented at the onset of the pandemic, on top of the ongoing cost-cutting acts commenced in 2019. The would 19 related actions reduced administrative expenses and preserve the approximately $5 million of cash during the second quarter

Additionally, the company deferred cash payment of $2 million of Social Security payroll taxes during the second quarter, an opportunity that was afforded by the CARES Act. Future cash deferral in the second half of 2020 is estimated to be $5 million, bringing the total 2020 estimated payroll tax deferral to $7 million that will be paid in 2 equal installments at the end of 2021 and 2022. We're currently analyzing the CARES Act employee retention credit given that our gross sales were down in excess of 50% in the second quarter of 2020 in comparison to the prior year.

We'll provide an update on this topic in the future as the analysis is complete. As it relates to manufacturing staffing demand related layoffs in the second quarter generated approximately $11 million of savings. As I mentioned, we will continue to align plant staffing to our manufacturing schedules and demand in the coming months. These actions in addition to the previously discussed ongoing $70 million run rate savings program contributed significantly to both our second quarter adjusted EBITDA results and our substantial available liquidity.

Looking forward from a commercial perspective, order bookings have improved in recent weeks with the second half of the third quarter looking stronger than the first half of the quarter, but demand has not yet returned to pre-COVID levels. Visibility continues to be limited as customer order bookings are aligned with our relatively short lead times. Operationally, we've recently performed the majority of our annual shutdown maintenance activities with an estimated cost of approximately $6 million in the third quarter.

Although this represents an increase of approximately $2 million from the third quarter last year, our full-year 2020 shutdown maintenance costs are estimated to be a reduction of $3 million in 2019. Lastly, we further reduced our planned CapEx and now expect to spend between 15 and $20 million in 2020. We believe this level of spending is sufficient to complete the value-added components expansion at our Eaton Ohio facility, as well as continue to maintain our assets at a high level and a lower-than-normal production year.

To wrap up, we remain focused on supporting our customers' needs, operating our facilities safely, and in alignment with the current demand environment and continuing the aggressive focus on cost reduction and working capital management. Given the continued uncertainty around the extent and duration of COVID-19 and the resulting volatility in our end markets, we are not providing quarterly earnings guidance at this time.

This wraps up my prepared remarks, we would like to open the call for questions.

[Operator Instruction]. Your first question comes from the line of Seth Rosenfeld of Exane BNP.

I have a question with regards to product mix and ASP and obviously, we saw excellent surprising improvements in net sales per ton in the quarter, you touched on earlier, the decrease in OCTG substrate sales, we think a contributing factor to that, can you give us any more color and kind of what drove that scale of an improvement in realized pricing despite the market headwinds? And then when we look forward to Q3 and beyond is this Q2 print kind of the right run-rate or should be resetting that lower for any one-off factors as you look forward?

What Seth. Well, first of all, due to our much lower automotive shipments it certainly had an impact on the average selling price and I don't think you should plan on it being the same for the third quarter at the highest level that was really the biggest driver.

Tom, you want to add just any other color you want to put on that, please.

Yes. Terry that's exactly correct at the comprehensive level our average values were much more influenced by mix than they were price by a large level in the biggest inflow words influencers of that average value from a mix perspective was the lower shipments of mobile on-highway products which are lower alloy containing type materials and the much lower shipments of oil country tubular goods billets. If you look deeper into the markets themselves within our industrial markets the average values were reasonably high in second quarter. Again that was a mix related issue and the mix shift and industrial was based on alloy content, average values were impacted by lower shipments of low oil or low alloy containing bar products to the general industrial markets offset by higher containing products for defense type applications. And in energy, if you excuse the OCTG billets from the rest of the mix, the mix shift that happened there was more product-driven, product tied to a large percentage of higher average value, 2 products in Q2 energy shipments included 51% to products relative to only 19% in Q1.

And I don't expect, we don't have much visibility on the forward as we're still booking in Q3 so are those average value is going to hold not at the comprehensive level because we're going to be reintroducing a much larger volume of automotive products and within the sub-markets that mix is going to shift as well as we go into Q3 but still hard to forecast because we're still booking in that window.

Okay, that's very clear so we should expect something of a step lower just as auto volumes recover and we'll get a more normalized run rate thereafter, based on the more specific product mixes within each end market, it sounds like. That's very clear.

And then second question please with regard to outlook for Q3 shipments and you just touched on the fact that you're still booking you don't have full clarity last quarter you're able to give us a little bit of color with regards to kind of current utilization rate at the time of results. As of today, already we're working our way through the third quarter, can you tell us a little bit about where you've been through July and early August with regards to volumes or utilization rates, please? Kris, you want to take that one?

Yes. So if we can get into a lot of details on that we have seen our production facilities continue to be operated as demand continues in that this is a gradual improvement in demand and it's choppy so it could change significantly week to week and that's how we're managing it, but it's not back to say Q1 or prior levels.

Your next question comes from the line of Tyler Kenyon of Cowen.

Kris, curious just maybe how we should be thinking about working capital moving into the third quarter another strong release in the second quarter here and curious as to how we should be thinking about that in the third quarter and then as we close the year realize that visibility is somewhat limited at this point, but anything you could and would be helpful?

Absolutely. It's still a significant focus for us all of the tactics that we implemented late 19 and early 20 if continue to benefit us. We do expect to see some inventory release here but it's modest, we've taken the inventories down to a level that supports our needs today the receivables and payables are just going to be a function of what's happening with our demand. If we're shipping more, you'll see those receivables be a use of cash and will be buying more so it's just that timing of how that comes through. So it's still a clear focus for us sustaining all those improvements we implemented but floor before we do believe there is opportunity there, but I can't guide you in terms of the size or exactly the direction.

Got it, okay. And with respect to restructuring is there any more cash outflow expected in do you expect to realize any further proceeds just from asset sales from some of the restructuring efforts that you've taken this far?

Yes. We're continuing to work on asset sales, and you'll hear more about that next quarter we have a lot of things in motion there. And secondly, on restructuring charges, there will be ongoing charges as we go forward that's just subpart of the rhythm of what we're, what we're doing.

Kris, you want to add anything to that?

Yes. So at the end of June, we had $3.4 million on our balance sheet as a reserve for future payments on restructuring so that cash will go out primarily in the third quarter and then, obviously, any new activities we have will be incremental to that.

There are no further questions at this time. I will now turn the floor back over to Jennifer Freeman for any additional or closing comments. I'm sorry, there's another question, I apologize. Phil Gibbs of KeyBanc Capital Markets.

So, the $6 million of maintenance in the third quarter is that all incremental to what you experienced in the second quarter?

Yes. Exactly.

Okay and then it sounds like we've already talked about mix into the third quarter volumes and you did take obviously some pretty aggressive cost actions in the second quarter due to the pandemic. Is there any cost that begins to return in the third quarter that you had taken down in Q2, I know that you've got, you've got incrementally better volume visibility in the automotive supply chain?

Well, the CARES Act provided us a lot of opportunities, which we took full advantage of you read about it in our numbers. And so with the CARES Act, in particular, the $600 furlough supplement being gone or at least gone for the moment that will add some cost back into the business for sure.

On the hourly side, that will change anything, we'll continue to run our playbook with the operations and staffing accordingly so there'll be no change there. So, I think the single biggest thing will be just the impact of the furloughs, that we were able to take advantage of on the salary employee side and what we do to mitigate that going forward certainly the Congress hasn't decided but they're going to do we're not going to do, but at the moment, there is nothing so we would fully expect that to look different in the third, fourth quarters' given the current, the current state.

Kris, you want to add anything else to that?

If just some specificity on the furlough piece I mentioned $5 million of administrative expense reductions in Q2 related to COVID about 2/3 of that was furloughs that ran April, May, and June. We did continue to run the furlough plan in July for about $1 million of savings, but you will see a couple of million-dollar difference with higher cost in Q3 as a result of no furloughs no further for us. Not half of that comes back and then you get a little bit more of that coming back in the fourth quarter that's on rent.

And then you did talk about some of your longer-term revenue opportunities in the value-added business, maybe talk a little bit more about exactly what you're doing there and then, some of the cadence in the timing and then whether or not your staff then call it expensed in terms of your asset capability to meet those goals as of today? So we do have the businesses, the PPAP's have happened and we are now in ramp-up mode and for the third and fourth quarter with 3 major customers, which we're not at liberty to say who those are, but those are ongoing just on totally on plan the added equipment is pretty much in place. The employee base is already there between training and the activity is making the products and getting it a rhythm of shipping to our customers.

So that will continue to ramp up through the rest of the third and fourth quarters and be at close to full run rates in the first quarter of 2021. So wouldn't expect any additional significant costs of staffing or other expenses that are already there already in the business prepared to support our 3 customer programs we have with the expansion so that's why we mentioned the run rate getting up to a full year $80 million, type number as we head into 2021. So we're staffed up ready to go and it's all systems go at this point with the company.

And then last one for me.

No, go ahead.

I was going to jump to something else. So if you want to finish that.

No, no, no. Please go ahead.

Okay. So the second quarter, I would imagine had did have some benefit from the widening of prime scrap to obsolete scrap this quarter certainly that looks to be narrowing pretty aggressively. Should we consider a raw material spread impact in the third quarter, best you could see it?

Well, it's hard to predict, right? You've heard from everybody else and their views on what's happening in the scrap market and it still appears to be highly unpredictable. So the spreads we've had over the last couple of months have been very positive, I think they will continue to be positive from a historical perspective, whether they stay at the same levels that we enjoyed for a couple of months in the second quarter is to be determined so but it doesn't here they're going back to sort of historical spread levels at least in the short term so whether we can sustain what we were able to achieve in the second quarter is to be determined. The one thing about the scrap market right now is it appears to be like many other things fairly unpredictable at the moment so that's my guess would be somewhere in the middle, Phil, between where we were and where the historical numbers are.

But of course, it is, and as I say that by tomorrow that will change again so.

And there are no questions at this time. I'll go ahead and turn it over to you, Jennifer, for any closing or additional comments.

Okay, great. Thank you everyone. Thanks for joining us today and we look forward to updating you next quarter and stay healthy. Thank you.

Thank you. That does conclude today's call. You may now disconnect.