TMST
#Great.
Thank you.
Good morning, everyone, and thank you for joining us.
I am here today with Tim <UNK>, Chairman, CEO and President; as well as Chris <UNK>, Executive Vice President and Chief Financial Officer to discuss our first quarter 2018 financial results.
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 <UNK>Steel Corporation, and we prohibit any use, recording or transmission of any portion of the call without our expressed advanced written consent.
With that, now I would like to turn the call over to Tim.
Well, good morning, and thank you for joining us.
We're off to a strong start this year.
Our employees went to extraordinary efforts in the first quarter and marked a turning point both in commercial and production operations.
We remain focused on a few key priorities to have an even stronger second quarter.
First, let's talk operations.
Our safety performance continued at top quartile levels on a record pace for preventing OSHA recordables.
Our employees continue to keep safety as our highest priority working to identify and eliminate risks.
We not only operated safely in the quarter, but also showed improving productivity.
Working throughout the quarter, we put behind us some of the inefficiencies that came from the steep ramp in which hundreds of new people joined the company and even more transferred to new positions within the plant.
By the end of the quarter, we achieved record bar shipments and we began the second quarter of 2018 with past due orders down 20% from the beginning of the year.
You may also have read in our annual report about the progress we've made in our environmental performance over the last year.
We reduced both our carbon footprint and waste to landfill by 8% and reduced electricity consumption in steelmaking by 10% per kilowatt hour per ship ton.
Just as we think innovatively about product development, we also bring that mindset to our steelmaking processes.
We've continuously improved efficiency and sustainability as we make some of the cleanest steel in the world.
<UNK>Steel is an environmental leader in the U.S. and the U.S. industry leads the world.
On the commercial side of things, we've seen a lot of movement in our markets in the last quarter.
One significant action was the implementation of tariffs on steel coming into the U.S. I want to thank the administration for keeping its promise to address the flood of imports, because those imports have impaired domestic producers from selling at a fair price.
The announced tariffs will begin to level the playing field in the interest of fair trade and preservation of our national security.
We trust the administration will maintain the integrity of the original steel tariff announcement as it considers requests for exemptions from the ruling.
Overall, our markets continue to strengthen, and so do prices.
We're seeing a lot of positive signs.
Mining is strong and growing, oil and gas continues to grow.
Drilled, but uncompleted wells are at an all-time high, and we expect completion activity to remain strong throughout 2018.
Industrial demand remains stable, and industrial distribution inventories are balanced.
The automotive markets remain strong, and after production cuts in the fourth quarter, inventories now seem to have come in line with current demand.
Rail also continues to recover, and even agriculture, which is had multiple years of poor performance is forecasting a recovery.
Our job is to take advantage of these market conditions to actually outpace the recovery itself.
Here are a few examples of the commercial actions that we're taking to drive that effort.
First, improving our mix is a priority.
We're working across the company to fill and deliver on our most profitable product lines.
In fact, we made sales of those products a metric in our variable pay plans to further align our employee compensation with shareholder interests and drive profitability.
The ramping of our new advanced quench-and-temper facility will also help improve mix.
We expect this facility will be near full capacity by the end of the year.
Second, we're optimizing the use of our steelmaking assets.
One measure of that is how much steel we process through the jumbo bloom vertical caster versus our bottom pour operations at our Faircrest Steel Plant.
The cast to bottom pour ratio grew to 58% in the first quarter and we expect it to reach 70% by the end of the year.
Ultimately, our goal remains to reach a ratio of 85% to realize the full benefit of the production efficiencies the caster delivers.
Both factors driving business towards profitable process paths and optimizing how we make our steel are competitive advantages and will help improve the performance of the company.
The third area of commercial activity has been around strengthening our market position.
Rebounding markets are helping to restore prices and we've announced 4 price increases actions that are impacting 2018.
We are approaching 2014 pricing levels, which is helping to stabilize the domestic steel industry.
Fourth, we're getting even better at scaling our innovation beyond individual customers to more broadly-serve demanding markets that demand critical performance.
An example is automotive transmissions.
We work with customers that are pioneering the advancement of progressively more sophisticated transmissions.
We've proven across the industry that our components enhance the performance of these advanced and highly efficient systems.
Just this quarter, we entered trials on gear blanks for some of the most high-speed transmissions made by a customer with particularly high performance requirements.
A visit by the customer to our St.
Clair facility gave them a first-hand view of what we can do for them, and it opened new opportunities to work together.
All of this activity is part of a more aggressive portfolio management that is focused on the products, processes and applications, where we deliver the most value in the market.
It's a continuing effort that will have both short-term and long-term benefits.
As we look ahead to the rest of 2018 and keep an eye on 2019, we expect to deliver greater value to our shareholders.
Our team is innovating in creative ways and executing with greater discipline than ever.
I'm looking forward to a great year.
Chris is going to give you a little bit more details on the numbers, and then we'll be back to take your questions.
Chris.
Thank you, Tim.
Good morning.
The first quarter results were in line with our guidance, excluding certain nonrecurring expenses.
EBITDA for the quarter was at the midpoint of our guidance range when adjusted for these expenses.
More importantly, the operational improvements made within the quarter have set us up for a significant increase in shipments and profits in the second quarter.
Total shipments of 300,000 tons in the quarter were 7% higher than last year and 5% higher than the fourth quarter of 2017.
The year-over-year improvement was driven by a broad-based strengthening end market demand.
Mobile shipments were 6% higher than the fourth quarter of 2017, mostly from a seasonal increase in the North American light vehicle production build rate.
The 2018 projected SAAR of 17.3 million units is a slight increase over 2017.
For the second quarter of 2018, we expect mobile shipments to be about 5% higher than the first quarter due to a shift in market demand towards light truck vehicle applications, particularly, from new domestic OEMs.
Industrial shipments were 8% higher than the fourth quarter 2017, and 14% higher than in the first quarter of last year.
Industrial shipments were helped by the strength in demand from mining, bearing and power transmission applications.
In the second quarter, we expect a sequential increase in industrial shipments of about 58% as the general economic sentiment remains positive in most of the industrial market sectors and inventory levels remain balanced.
Shipments to the energy end market increased about 4% sequentially and 71% compared to the same quarter a year ago, albeit off a low base.
The U.S. rig count has stabilized at around 1,000 active rigs and we remain encouraged by more balanced customer inventory positions.
We expect second quarter energy shipments to be about 40% higher than the first quarter.
Net sales for the quarter were $381 million, with base sales of $290 million and surcharges of $91 million.
Base sales were $45 a ton, or 5% higher than the fourth quarter 2017 due to improved pricing and mix.
Looking to the second quarter, we expect to see a price mix improvement from the continuing shift to higher alloy content in products.
As a result, we anticipate an increase in our base sales per ton of about 5% in the second quarter.
Gross profit for the first quarter was $21 million or 5.5% of net sales, which includes about $4 million of nonrecurring costs primarily related to legal expenses and employee benefit claim.
Melt utilization was 77% or 9 percentage points higher than the fourth quarter 2017 rate.
The benefit from higher melt utilization was offset by production inefficiencies and inflationary impacts.
We believe that most of the inefficiencies are behind us and anticipate improved operating performance in the second quarter.
SG&A for the quarter was about $25 million or 6.5% of sales, which was an improvement over the same quarter last year and sequentially from the fourth quarter.
We continue to manage cost to gain further leverage for the remainder of the year.
EBITDA for the first quarter was about $21 million, a 22% increase from the same period a year ago, and a $13 million improvement from the fourth quarter adjusted EBITD<UNK>
Improvement in earnings was primarily due to volumes improved price mix and favorable timing impacts related to raw material spread from a rise in the #1 Busheling Index.
In the first quarter, we reported net loss of $2 million.
Income taxes in the quarter were about $100,000 related to foreign sourced income.
For the remainder of 2018, our tax expense will be primarily from taxes paid outside of the U.S. Operating cash flow for the quarter was a use of about $20 million as we build around $40 million of working capital to support our growing sales.
Free cash flow for the quarter was a $22 million use of funds, including capital expenditures of $2 million.
We maintained our full year capital spending guidance at $40 million.
At quarter end, our liquidity remained in good shape at $203 million, which was about a $15 million increase from year-end, and our net debt-to-capital ratio continues to be low at 21.7%.
Turning to the outlook for the second quarter.
Shipments are expected to be between 5% and 10% higher than the first quarter.
Additionally, we expect the EBITDA range to be between $30 million and $40 million, driven primarily by improved operational and commercial performance.
As Tim mentioned, 2018 is shaping up to be a good year and we are well-positioned to create more value.
This ends our prepared statements, and we will now take your questions.
Yes.
Let me comment first and I'll ask Chris to add any color to it.
As of right now, the 4 price increases that we put in place that are effective this year have all stuck.
The industry, in general, has followed, and our total exposure on the spot market is about roughly 30%.
I mean, just in general, I mean, scrap markets have been pretty frothy here of late.
And the thought is we're going to see that come off a bit.
Our sense is there is not a significant correction out there.
But it's going to just kind of putter around a little bit.
No big swings either way.
Yes, that's how the math works is, you estimate the full year and divide by 4.
So we would expect about $5 million for the year.
Just to touch on the pricing one more time.
So what percentage of the increases were reflected in Q1.
And are there ---+ any that are will be flowing through and realized in 2Q.
I understand that all of them have stuck, but I'm just wondering how they're going to flow through to P&L.
Yes, <UNK>, I'll take a shot at that.
Obviously, in the first quarter, most of the contract pricing came through.
We'll have a little bit more in the second quarter.
And then until further notice, we'll see more impact in Q2.
So yes, if you ---+ in the script we talk about another increase of, call it, 5% in terms of price mix in the second quarter, so that should help you understand how the pricing flows through.
Got it.
And then, on the $6 million raw material headwind, can you just give us more insight of the driver of that $6 million headwind.
Yes, it's really the slope of what we buy in terms of various scrap and the spread between that and the Busheling Index from where we surcharge.
So it's basically the fact that shredded has gone up dramatically more than Busheling in the past couple of months or so.
Yes, that's exactly right.
The obsolete grades have accelerated versus the Busheling slope.
Okay.
And there's no other ---+ there's nothing other than scrap in that number.
Just a little bit of alloy in that number, but it's primarily over time driven by scrap.
Got it.
And then just one last one.
The billet shipments are running a bit higher than kind of our expectations.
Can you just talk about the progression of billet shipments for the year.
And should we expect those to fall as you kind of get other business.
Or should we expect those to be pretty steady from the current run rate.
The number you saw in the first quarter is us catching up on the past due that we carried into the year.
That will ---+ those will come off starting in the second quarter.
Yes, I think from a cost structure perspective, I think, it's pretty indicative.
Obviously, we had some inefficiencies in the first quarter that we look to have corrected for the second quarter.
So that will improve us on the cost side a little bit.
No, we are not caught up yet.
So we clearly have some product that's in backlog, and we're going to try to get caught up here in the second quarter.
We'll see if we're there by the third quarter or not.
I don't think our structural cost structure in Q3 should be much different than Q2.
Yes, I think the amount of the maintenance will be pretty similar, and we believe, at this point, will all take place in the third quarter outage.
Yes.
Clearly, most of the working capital build is in the first quarter seasonally and this year is no different, it's very similar to last year, if you look at the total working capital.
We'll see a little bit of working capital build in the second quarter, but considerably less than the first quarter.
And then second half of the year, that will reverse out and it ought to be on the other side and have some working capital decrements.
First question, just I hopped on a little bit late, so I hope, I know this is redundant.
But in terms of the base pricing per ton, could you maybe take us through sort of the first quarter sequential increase versus the fourth quarter by end-market, and give us a view as to how much of that was sort of mix and how much of it was real base pricing.
And then just sort of reiterate how that first quarter delta is going to translate into further second quarter increases.
Yes, sure <UNK>, I'll take a shot and Tim can provide some color, if appropriate.
The change sequentially was really pretty more broad-based.
If you look at the base sales per ton improvement in our market sectors, 5% in industrial, 2% in mobile, 6% in energy.
That's pretty broad-based and very much within our expectations, and most of this, I would call price sequentially.
And in my script, <UNK>, I'd mentioned that we anticipate between price and mix in the second quarter another 5% increase.
Okay.
That's helpful.
I guess, secondly, given that just volume price and sort of mix seem to come in line with what you expected in the first quarter.
What sort of held EBITDA back from being at the high-end of the range.
Yes.
Well, we had a couple of things.
One, we had some one-off expenses of about $4 million that are nonrecurring.
Then we had some costs to catch-up on backlog and really some manufacturing inefficiencies, I'll call it, kind of generally.
Okay.
And then in terms of that 5% base price increase for the second quarter, if I apply that to 300,000 tons, I'm getting something on the order of $15 million-or-so, or maybe not quite that much, but something close to $15 million.
What prevents you from sort of seeing the full benefit of that $15 million price increase in terms of your sequential EBITDA bridge looking at the second quarter prospectively.
Yes, there's a little bit of mix and little bit of cost is really what makes up the difference relative to the bridge you created.
Well, thank you for your questions today.
If you have any remaining questions, be sure to contact <UNK> after the meeting.
As we look ahead for the rest of 2018 and keep an eye on 2019, we expect to deliver greater value to our shareholders.
I thank you for your interest in the company.
Have a great day.
