Metallus Inc. (MTUS) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the TimkenSteel Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Jennifer Beeman. Thank you. Please go ahead.

Thank you and good morning and welcome to TimkenSteel’s fourth quarter and full year 2020 conference call. I’m Jennifer Beeman, Senior Manager 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; Tom Moline, Executive Vice President of Commercial; and Bill Bryan, Executive Vice President of Manufacturing and Supply Chain. 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 described 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?

Thank you, Jennifer and thanks to everyone on the call for joining us this morning. Since joining TimkenSteel in January, I've spent my time getting to know the people and the business. It's still early, but I'm incredibly excited about the opportunities that lie ahead for TimkenSteel. I thank Terry Dunlap for his leadership during an incredibly difficult year, and for helping the company strengthen its financial position during his time as Interim CEO. The company's cash generation and profitability improvement initiatives certainly enabled the company to weather some difficult quarters. And I thank the employees of TimkenSteel who clearly demonstrated they have what it takes to transform this company to a consistent high performer in the industry. We're not there yet, but I am happy to be working alongside smart, dedicated employees who are driven to succeed. Turning to the safety. The wellbeing of our employees took a whole new meeting in 2020. I believe safety is our number one priority, and therefore, I am pleased TimkenSteel had the lowest rate of recordable injuries since the company's inception in 2014. Additionally, our employees have been diligent in following COVID 19 protocols. And because of this, we have not experienced any operational shutdowns due to illness. We continue to collaborate with our employees, suppliers and the USW to ensure our workplaces remain exceptionally safe. During 2020, the company focused on generating cash through discipline working capital management and was able to successfully launch numerous efficiency initiatives, improve the company's capital structure and dry systemic cost savings. All of this hard work helped to improve the cost structure and better position the company to fully leverage rebounding markets. Speaking of our markets, in the fourth quarter, we saw a steady automotive demand recovery, particularly in the light-truck and SUV categories. Although, modest in recent months, we continue to monitor the lingering effects of COVID-19 on automotive production. Help by increasing demand in auto, our fourth quarter volumes are almost back to pre-COVID levels. Now, our attention has turned to the recent disruptions due to the global semiconductor shortage. At this time, we have not experienced a meaningful impact to our order book, as a result of this supply chain disruption and we continue to stay close to our customers to understand any long-term implications. In our industrial markets, we continue to see positive indicators, but volumes are not yet back to pre-COVID levels. The industrial markets we serve such as industrial machinery, rail, agriculture, power generation, and some areas of defense are experiencing modest growth. The distribution channel remained very cautious through 2020 year-end. However, distributors are coming back into the market at a more accelerated pace than the industrial OEMs, which we see as a common in a market recovery. Lastly, the energy market continues to remain challenged. Recently we began to experience an increase in inquiries, but this is not translated into meaningful orders. U.S. rig counts improved in the fourth quarter, but are expected to remain at depressed levels for the foreseeable future. Moving to pricing. The environment going into contract negotiations in the fourth quarter was somewhat challenging. We expected pricing headwinds for select markets and applications, but successfully maintained our market share. The spot pricing environment presented opportunities for price increases in SBQ and seamless mechanical tubing over the last three months, and as recently as this week. You probably saw those publicly announced, and we were encouraged that thus far, they have been accepted by the market. With that, I'd like to turn to the recent action we took to optimize our melt and casting assets. We continually review our operations to ensure we are properly positioned to meet our customers' needs as efficiently as possible. As a result of our thorough evaluation of our melt and casting assets, we plan to indefinitely idle the Harrison melt and casting assets late in the first quarter of 2021. This was not an easy decision to make, but given the prolonged weakness in the energy market, it is necessary. By operating one melt shop at our Faircrest location, we will be using our manufacturing assets more efficiently, while producing the best possible mix of products to meet our customers' needs. Impacted hourly employees may have continued employment opportunities as defined in their basic labor agreement. It is also important to note that this action does not impact the Harrison rolling and finishing operation. This action aligns with our goal to improve profitability through the optimization of our assets. Before I turn it over to Kris, I look forward to discussing our opportunities and focus areas in the future. Thank you for your continued support of TimkenSteel and stay safe and stay healthy. With that, I'd like to turn the call over to Kris. Kris?

Thanks Mike. Good morning, everyone and thanks for joining us today. Despite a challenging environment, I'm proud that our team delivered improved profitability in the quarter, as well as significant operating cash flow, which led to an increase in total liquidity. Both our operating cash flow of $173.5 million for the full year of 2020 and our total liquidity of $314.1 million at the end of the year represent record highs since the inception of the company. Turning to our quarterly results. On a GAAP basis, fourth quarter of 2020 net loss was $12.8 million compared to a net loss of $84.6 million in the fourth quarter of 2019 and a net loss of $13.9 million in the third quarter of 2020. On an adjusted basis, fourth quarter of 2020 net income was $600,000. This adjusted net income represented a significant improvement from an adjusted net loss of $27.3 million in the fourth quarter of 2019 and an adjusted net loss of $17.3 million in the third quarter of 2020. On 7% lower net sales, adjusted EBITDA improved the $20.7 million in the fourth quarter of 2020 from an adjusted EBITDA loss of $8.7 million in the same quarter of 2019. This represents a $29.4 million improvement in adjusted EBITDA in a lower demand environment reflective of our successful cost reduction actions discussed in prior quarters, and a continued focus on cost control. Additionally, adjusted EBITDA improved $18.1 million sequentially. Moving now to the drivers of the financial results. Ship tons in the quarter increased 6% to 164,000 tons compared with the third quarter of 2020, but declined 9% from the fourth quarter of 2019. From an end market perspective, improving demands in the automotive and industrial end markets stroke higher sequential shipments. Shipments to automotive customers increased 6,000 tons sequentially to 96,300 tons, while industrial shipments increased 4,000 tons sequentially to 63,300 tons. We continued to be impacted by a weak energy market with shipments of 4,100 tons in the fourth quarter, down slightly from the third quarter. Net sales of $211.2 million in the quarter increased 3% compared with the third quarter of 2020, but were down 7% compared with the fourth quarter of 2019. The sequential increase in net sales is largely due to the increased demand in the automotive and industrial end markets, which continue to rebound following the spring of 2020 collapse in demand, stemming from the COVID-19 pandemic and a related temporary plant shutdowns. From a manufacturing cost perspective, utilization rates in the quarter improved both sequentially and compared with the fourth quarter of 2019 in melt and other manufacturing processes, including rolling, tube piercing and finishing. However, melt utilization still remain low at 43% in the fourth quarter of 2020. Additionally, the continued focus on cost control, the completion of the annual shutdown maintenance in the third quarter of 2020 and savings from prior headcount reduction actions all contributed to a $15 million sequential manufacturing cost improvements and a $19 million improvement from the prior year quarter. Recent actions to improve manufacturing efficiency and reduced costs will continue to benefit us going forward, partially offset by inflation. Turning to SG&A expense. In the fourth quarter of 2020, SG&A of $18.6 million was a slight sequential increase as a result of higher variable compensation expense. Excluding certain items, SG&A improved 11% in both the fourth quarter and full year 2020 in comparison with the 2019 periods. In dollar terms on an adjusted basis, we reduced SG&A by $9.8 million in 2020. Total SG&A headcount declined by 23% throughout 2020. This full year reduction was primarily result of prior restructuring actions, supported by a continued focus on process simplification and efficiency. Looking now at cash flow. The company generated operating cash flow of $52.5 million in the fourth quarter of 2020, which resulted in record operating cash flow for the full year of $173.5 million. A combination of working capital management improvements and higher profitability drove the cash flow in 2020. As we start 2021, cash from operating activities is expected to be a use of cash in the first quarter, given improving demand and a rise in raw material prices, which is expected to impact all working capital elements. Capital expenditures in 2020 totaled $16.9 million and are projected to be approximately $20 million in 2021. CapEx plans in 2021 includes manufacturing equipment improvement upgrades, and maintenance, as well as modest IT investments to drive further process improvements and efficiencies. Additionally, cash from investing activities included nearly $11 million from the liquidation of non-core assets in 2020. Moving onto capital structure. In December, we successfully exchanged $46 million of convertible debt that was set to mature on June 1st, 2021 and extended the maturity date to December 1st, 2025, while maintaining a consistent 6% interest rate on the instrument. At this time, we plan to repay the remaining outstanding balance of $40.2 million on our original 2016 convertible debt upon maturity in June, 2021 with available cash and/or credit facility borrowings. The company has no additional near term debt maturities, and the outstanding balance on our credit facility was zero at the end of 2020. Total liquidity, which includes available borrowing capacity on our credit facility plus cash was a record $314.1 million at the end of 2020. This represents a significant increase of $83.8 million since the end of 2019, driven by the company strong operating cash flow generation. At the end of 2020, our cash position was $102.8 million, an increase of $75.7 million since the end of 2019. Overall, our total liquidity position at the end of 2020 remains sufficient to meet the current needs of our business. From a pension and post retirement benefit plan perspective, we recorded a $14.7 million non-cash loss from the remeasurement of all plans in 2020. Remeasurement loss, which is excluded from our adjusted EBITDA results, was driven by a reduction in the discount rate, more than offsetting another year of strong asset returns. The average discount rate dropped by approximately 75 basis points in 2020 on $1.5 billion of liabilities. And the average return on assets was approximately 15% on $1.3 billion of assets. In total, the accounting funded status of all company plans was 86% as of December 31st, 2020, unchanged from the end of 2019. Required pension contributions are expected to be modest at $1 million to $2 million in 2021. Before I wrap up the cash flow and balance sheet discussion, I'd like to highlight two matters afforded by the CARES Act that will impact our cash flow in the future. First, we deferred $6.4 million of company Social Security payroll taxes in 2020. Remittance of these deferred payroll taxes will be in two equal installments at the end of 2021 and 2022. Additionally, beginning at the start of 2021, the payroll tax deferral option ended, and we again began remitting current payroll taxes. Second, during the fourth quarter of 2020, we accrued $2.3 million for the employee retention credit on qualifying wages and benefits. Timing of receipt is expected sometime in 2021. Switching gears to the indefinite idle of the Harrison melt and casting assets, I would like to elaborate on Mike's comments with some additional financial details. As we noted in our recent filings, we expect to record an $8 million to $10 million non-cash charge in the first quarter of 2021 associated with the write-down of the Harrison melt and casting assets. Regarding the $15 million to $20 million estimated annual savings, it's important to note that all impacted hourly employees have continued employment opportunities as defined by their basic labor agreement as opportunities arise in the future. As such, the ultimate number of impacted employees is unknown at this time. However, for the previously noted annual savings estimate, we've assumed about one-third of the approximately 100 employees will be retained elsewhere, and our Canton manufacturing footprint as demand requires. And the remaining two-thirds of employees remain on layoff for the foreseeable future. From a timing perspective, approximately half of the estimated annual savings were realized in 2020, given the low utilization rate of the Harrison melt and casting assets in corresponding significant periods of time that employees were on demand driven layoffs during 2020. Following the employee benefits continuation period, we expect full run rate savings to be achieved beginning in 2022. We also expect that over time, we will realize additional manufacturing efficiency savings with a single melt and casting shop at Faircrest as well as avoiding further CapEx and maintenance expenses associated with the Harrison melt and casting assets. Following the indefinite idle of the Harrison melt and casting assets, we were projecting the Faircrest melt and casting assets to run above 70% utilization for the remainder of 2021. Faircrest is successfully operated at this and higher levels of utilization for many years in its history. As a reminder, Faircrest total annual mill capacity is approximately 1.2 million tons of raw steel. To wrap up my prepared remarks, we're encouraged by the improving demand in the automotive and industrial end markets, but remain cautious given the uncertainty in customer supply chains and the ongoing COVID-19 pandemic. Our strong 2020 cash generation and resulting total liquidity provides us with significant financial flexibility to execute on our strategic initiatives aimed at further improving the profitability of TimkenSteel. We look forward to sharing our progress going forward. We'd now like to open up the call for questions.

[Operator Instructions] Your first question comes from Justin Bergner with G. Research. Your line is open.

Welcome aboard Michael, and good morning Kris.

Good morning, Justin.

So, I want to delve a bit more into the Harrison idling. I guess, for starters, the 8-K talked about $15 million to $20 million of cash savings, is that all flowing through the income statement, or some of that in reduced CapEx? And then just to clarify your comment from a few minutes ago, so half of those $15 million to $20 million of cash savings would have sort of indirectly been realized in 2020, just given the weak level of demand and furloughs and other sort of activity taken in 2020. Is that right?

Yeah. Correct, Justin. Good morning. On the first part of the question, those are cash savings. There's no CapEx element of those, and it's primarily savings from lower salaries and benefits over time. And then from a timing perspective, you again have that right as well. 2020, we realized approximately half of those savings because they were demand driven as melt utilization was very low and employees were on layoff in that period. In 2021, we're expecting incremental savings, a very minimal amount. And then in 2022 is when the run rate savings would be achieved at the beginning of the year from a cash perspective.

Got it. That's helpful. Maybe just two more clarifiers there. So, the lack of incremental benefit in 2021 is that because some of the demand related savings are being around, or is it just because 2021 is a transition year? And then, I guess, secondly, how should we think about sort of normalized maintenance CapEx going forward for the business with Harrison indefinitely idled?

Yeah. So, the first part, we're retaining the savings from 2020, it's just -- they're not incremental to 2021. So, when -- associates are on layoff, those will continue to be savings in the company in 2021, but it's not going to add additional dollars there. In terms of the maintenance, we do expect to spend more at Faircrest to make sure that it's properly maintained, may not be one for one, but a similar level of maintenance will be required in total for the company. But there will be some incremental savings, but we do need to make sure we have Faircrest running at the highest level possible for the future.

Okay. Understood. But is $20 million sort of a representative maintenance CapEx, or is it below what you think would be normalized maintenance CapEx and sort of the new plant paradigm?

That's a normal level. What we were incurring this year, last year, lower than prior years, but that's because we do also spend normal expense dollars on maintenance, making sure things are maintained at the highest level. But that's a level that you can expect for the foreseeable future absent, any growth investment.

Okay. And then my other big question related to sort of the drivers of the strong fourth quarter EBITDA, adjusted EBITDA. You talked I think about a $15 million sequential benefit from cost savings and related efforts. I don't know if that was sort of a gross or a net number. And then the second, I guess, part of the question would be, now that you're on FIFO system, did fourth quarter results benefit from the price scrap cost timing in the fourth quarter?

So, the first part of the question, the $15 million I referenced was specifically in the cost of goods sold area for manufacturing, about a third of that was related to not doing our annual shutdown in the fourth quarter. We did that in the third quarter. So that's a sequential improvement in savings and costs. And then, there was another component, a big component around fixed costs, leverage. Although, the utilizations were lower, we did capitalize more costs into inventory in the quarter, because we produce more. So, it's really unrelated to our historical cost savings program at least for the two-thirds. The remaining third, I'd say, is specifically around just the continued benefit of the actions that we took previously. I'm sorry. Can you repeat the second part? You had another part to that.

Now that you're on FIFO system, did the fourth quarter EBITDA benefit from sort of price scrap surcharge timing dynamics, maybe the price is sort of moving up before the scrap that you flowing through your cost of goods sold inventory moved up?

Not significantly in the fourth quarter.

Okay. I'll hop back in the queue. I do have one more question, but thank you

Sure.

[Operator Instructions] Your next question comes from Phil Gibbs with KeyBanc Capital Markets. Your line is open.

Hey, good morning. And welcome Mike.

Thanks Phil.

Question on the fourth quarter, obviously very nice cost performance, I think, as Justin was alluding to. Is everything in the quarter effectively sustainable and persistent in terms of your underlying cost performance? In other words, can you take this cost momentum and operating leverage into next year versus that level of performance?

Yes. I absolutely believe so Phil. There's nothing overly unique in the fourth quarter. We expect that to continue and optimistic that it can improve as well.

Okay. Perfect. And then, you had mentioned in the automotive supply chain, there could be the potential for disruption, but you're not seeing it. I think you said your order book is pretty visibly solid. And then I think you also mentioned, service centers are starting to come back into the market. So, it didn't appear to be a lot of that in the fourth quarter on the service center side either. So, if I'm thinking about this right, do you think auto holds up relative to the fourth quarter? And then you get a nice boost in the industrial side from the service centers just coming back, is that the way to look at it?

Yeah. As we see it, the automotive recovery is almost back to pre-COVID levels. And even though the disruption to the semiconductor issue, we're not seeing any major effect to the platform -- vehicle platforms that we're on.

Okay.

So, we're feeling pretty good about things right now.

To where -- speaking of auto, where do you all stand on the new business awards? I know Terry last year was talking a lot about some of these new programs that you were getting in the downstream business. And any visibility you all can provide on that in terms of what -- where you're at in the process or how much more could be added here?

Tom?

Yeah. Good morning. Phil, this is Tom Moline. We started launch and ramp up of those new programs last year. And it -- we realized about a little greater than $20 million in revenue in 2020 as a result of those new programs. They are still in ramp mode, but they are going quite well. We want to experience a full -- fully annualized rate even yet this year, that won't happen until 2022, but we expect the 2021 revenue numbers to be in the $70 million to $75 million range relative to 2020.

So, you're thinking on that downstream auto business, you pick up another 50 and change this year. Is that what you're saying, Tom?

That's correct.

Okay. And can you just remind us guys what some of this -- some of this goes into or what you've been working on? Because I think it's not the vanilla SPQ business. It's a little bit more downstream. So, maybe just some help in terms of understanding where this goes. I realize it might be a little sensitive, but whatever you could share, that'd be helpful.

Okay. These are value added components that go into the automotive industry. We create or manufacturer a seamless mechanical tube that we then send into a network of machining sources. And we have, for a very long time, been very well-positioned supporting eight to nine speed transmission programs at several OEMs for truck, SUV and CUV platforms. This recent edition is for 10 speed transmissions. It's a new introduction of a product offering for new transmission planetary gear blanks. And as I said, we are well into the launch phase of these programs. These programs are without question considered upgrades to other high performance transmissions, and it's now a core transmission offering that will be there for many years to come.

Thanks for the color, Tom. Good luck guys.

Thank you.

Thank you.

Your next question comes from Justin Bergner with G. Research. Your line is open.

Thanks for the follow-up. I just wanted to refresh in terms of how much of your industrial tonnage typically is not contracted and effectively is priced on a spot like based?

If you look at our overall contract versus spot business, it's approximately 20% for the total company.

And then that's shifted a little bit here in recent months. If you look at pricing agreements, it is, as Kris said, about 80% of our portfolio right now. The other 20% being more in a spot type arena. And that has shifted more towards the pricing agreement volumes primarily as automotive volumes became a larger portion of our portfolio with the significant decline in energy volumes.

And then relative to automotive, Tom, industrials less than that, right?

Yes.

From a percentage basis.

Yeah. Our automotive portfolio is in the mid-50s right now. Industrial OEM, including distribution, would be in the mid-30s.

I'm sorry. The mid-50s number was what and the mid-30s number was?

Automotive. Mid-50s for automotive, mid-30s for industrial OEM and distribution.

Okay. I guess you made a comment at the start of the call, Michael, about the -- sort of contract pricing season. And I guess what I was trying to gauge is, did the season sort of play out in line with your expectations, slightly better or slightly worse in terms of contract pricing?

I would say, slightly better than what we were expecting going in. It was very competitive situations that we were facing. And I would say that we came out better than what we thought we were going to.

Okay. That's good. And then lastly, Michael, I know it's early days for you, but you're a veteran of the steel industry. And it goes without saying that getting tonnage up at TimkenSteel and getting melt utilization up is a key driver for the future performance of the company. Are there any sort of commercial opportunities that are jumping out at you that maybe haven't been discussed? During Terry's tenure, looking out over the next couple of years, given what you've seen to date?

Of course. I see quite a few opportunities in the commercial area. Most of it's focused in effectiveness. And I guess market participation segmentation are the -- probably the primary areas. However, I also see quite a bit of opportunities and enhancing the manufacturing efficiencies as well.

Okay. Thanks again.

Your are welcome.

Thank you.

And there are no further queued up at this time. I'll turn the call back over to Jennifer Beeman.

Thank you all for joining us today. And that concludes our call.

This concludes today's conference call. You may now disconnect.