Air China Q3 2023 Earnings Call Transcript

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November 3, 2023

There are 6 speakers on the call.

Operator

Morning, and welcome to TimkenSteel's Third Quarter 2023 Conference Call. All participants are in a listen only mode. After the speakers' presentation, we will conduct a question and answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Jennifer Beeman, Director of Communications and Investor Relations.

Operator

Thank you. Please go ahead.

Speaker 1

Good morning, and welcome to TimkenSteel's Q3 2023 Conference Call. I'm Jennifer Beavin, Director of Communications and Investor Relations for TimkenSteel. Joining me today is Mike Williams, President and Chief Executive Officer Chris Westbrooks, Executive Vice President and Chief Financial Officer and Kevin Rakitic, Executive Vice President and Chief Commercial Officer. 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.

Speaker 1

Please refer to our SEC filings, including our most recent Form 10 ks 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?

Speaker 2

Good morning, everyone, and thank you for joining us today. 1st and foremost, I'd like to thank our employees for their hard work and collaborative spirit as we continue to chart new pathways for growth. Our firm commitment to safety is beginning to show results and are focused on strengthening our culture And fostering teamwork across our commercial, supply chain and manufacturing operations resulted in a solid profitability while meeting the needs of our customers. Additionally, we continue to repurchase shares while strategically reinvesting in our business. The enhanced collaboration we've seen both with the United Steelworkers and within our teams is fueling our never ending pursuit of manufacturing excellence and helping us to create a lasting culture of safety.

Speaker 2

In October, we launched our 2nd employee safety survey for all employees. Results from this survey Will help us improve hazard awareness, improve our engagement, build a safety centric mindset and gain valuable insights from employees for continued safety improvements. However, to encourage good safety ideas, It is essential that we provide concrete support. In 2023, we spent approximately $8,000,000 on safety CapEx project and $1,000,000 in safety training. Moving to our performance, We saw a slight sequential decrease in sales and shipments in the Q3.

Speaker 2

While I'm encouraged we've experienced solid base prices Across all end market sectors, EBITDA was impacted by a continued decrease in surcharges given lower market prices for scrap and alloys in the past several months. Our melt utilization for the 3rd quarter was approximately 76%, slightly higher than the previous quarter. Given our planned annual shutdown maintenance in October, We expect to see a sequential decrease in the average melt utilization rate in the 4th quarter. Mobile customer shipments were essentially flat with the 2nd quarter. I wanted to take a moment to discuss The United Auto Workers strike and how it impacted demand for our products.

Speaker 2

Overall, the impact for the 3rd quarter was relatively minimal. About 1 third of our mobile OEM shipments go to non U. S.-based automakers with U. S. Manufacturing operations.

Speaker 2

Additionally, we shipped to auto manufacturers with operations in Mexico, which were not impacted by the strike. During the early weeks of the strike, the supply chain was still catching up to fulfill past due orders. Although work stoppages directly affected a few programs we're involved in, we expect the OEM demand to quickly recover and remain strong in early 2024. Regarding EV related products, we had a record 3rd quarter representing A 62% net sales increase from the 2nd quarter. As a reminder, last quarter, We had approved a $5,000,000 investment for 2 additional manufactured component machine lines to be installed at our facility in Southwest Ohio in late 2024.

Speaker 2

This investment will broaden our EV component offering to customers and allow us to keep pace with industry growth. In the industrial market, our shipments Increased by 5% over the prior quarter. We saw an uptick in demand for high quality grades of steel, coupled with continued strength In the defense sector due to expansion of the U. S. Industrial supply base, supporting major Department of Defense programs.

Speaker 2

We expect record sales to the defense sector in the 4th quarter. Our energy shipments in the 3rd quarter declined 27% On a sequential basis, as demand weakened, the average U. S. Rig count dropped approximately 10% From the Q2, despite an increase in oil prices during the period. This reflects the industry's continued conservative approach.

Speaker 2

In support of our ongoing commitment to expanding our market presence and broadening our product portfolio, We are pleased to introduce Tim Lynch as our Vice President of Corporate Development, a newly established role. Tim's primary mission is to enhance the company's value by identifying and actively pursuing acquisitions that align with our strategic imperatives. With a career spanning over 3 decades, Tim brings extensive expertise in steelmaking operations, Supply Chain Management, Procurement and Strategic Planning to our team. We extend a warm welcome to Tim and look forward to his valuable contributions to our company. We remain committed to our profitability improvement initiatives And work continues company wide to achieve our target of $80,000,000 by 2026.

Speaker 2

Again, our actions have been focused on commercial excellence, manufacturing and reliability excellence And administrative process simplification with a strong balance sheet as our foundation. To date, We are about 2 thirds of the way towards achieving our target with ongoing areas of focus, including manufacturing excellence As we enter into the last few months of the year, we will remain focused on safety, customer service In advancing our strategic imperatives to drive sustainable through cycle profitability and cash flows, I thank our customers for their trust, our suppliers for their partnership and our shareholders for their continued support. Now, I would like to turn the call over to Chris.

Speaker 3

Thanks, Mike. Good morning, everyone, and thanks for joining the call today. Tifkin Steel's 3rd quarter financial results reflect solid profitability and another quarter of positive operating cash flow. Thanks to all of our employees for their teamwork and collaboration in delivering these financial results, while remaining focused on advancing the company's strategic imperatives. Now turning to the Q3 financial results.

Speaker 3

Net sales totaled $354,200,000 with net income of $24,800,000 or $0.51 per diluted share. Comparatively, sequential 2nd quarter net sales were $356,600,000 with net income of $28,900,000 or $0.62 per diluted share. Net sales in last year's Q3 were $316,800,000 with a net loss of $13,300,000 or a loss of $0.29 per diluted share. On an adjusted basis, the company reported net income in the Q3 of $24,900,000 or $0.52 per diluted share. Comparatively, the 2nd quarter adjusted net income was $27,600,000 or $0.60 per diluted share.

Speaker 3

Adjusted net loss in the Q3 last year was $4,100,000 or a loss of $0.09 per diluted share. Adjusted EBITDA was $46,800,000 in the 3rd quarter, a $3,700,000 sequential decline. A market driven decrease in the raw material surcharge environment and the start of our planned annual shutdown maintenance were the drivers of the sequential decrease in adjusted EBITDA. Partially offsetting these items were higher base sales prices and an improvement in product mix. Compared with adjusted EBITDA of $10,800,000 the Q3 of last year, adjusted EBITDA increased by $36,000,000 in the quarter.

Speaker 3

As a reminder, the Q3 of 2022 Turning now to the details of the financial results in the 3rd quarter. Shipments were 175,800 tonnes in the quarter, a slight decrease of 1700 tonnes or 1% compared with the Q2 of 2023. In the industrial end market, shipments totaled 82,400 tonnes in the 3rd quarter, A sequential increase of 4,000 tons or 5%. The increase was driven by higher third quarter shipments to the defense sector. Sales to defense customers continue to strengthen and represented 16% of industrial shipments in the 3rd quarter compared with 12% in the sequential second quarter and 10% in the Q3 of last year.

Speaker 3

Shipments across other industrial sectors were fairly steady in the Q3 on a sequential basis. Mobile customer shipments were 79,100 tons in the 3rd quarter, essentially flat with the 2nd quarter. Through the end of September, automotive work stoppages resulted in a minimal impact on net sales and shipments. Shipments to energy customers totaled 14,300 tons in the 3rd quarter, a sequential decrease of 5,300 tons or 27% as energy customer demand softened in the 3rd quarter. Of our total 3rd quarter shipments, approximately 16,000 tons or 9% We sourced from 3rd party melt producers, then rolled, finished and shipped by TimkenSteel.

Speaker 3

As expected, this represented a sequential decrease of 33% given improvements in our internal melt productivity. Net sales of $354,200,000 in the 3rd quarter decreased 1% sequentially. The decline in net sales is primarily due to a market driven 16% decrease in average raw material surcharge per ton as a result of lower scrap and alloy prices. Additionally, slightly lower shipments contributed to the decline in net sales. Partially offsetting these items were higher base sales prices and favorable product mix.

Speaker 3

Turning now to manufacturing. Melt utilization was 76% in the 3rd quarter compared with 75% in the 2nd quarter. Manufacturing costs Increased sequentially by $6,100,000 in the 3rd quarter as we began the planned annual shutdown maintenance at our rolling piercing and finishing operations. Switching gears to income taxes. The company's effective tax rate was 28% in the 3rd quarter and 27% on a year to date basis through the end of September.

Speaker 3

Cash taxes were $8,400,000 in the 3rd quarter and we anticipate cash taxes to decline in the 4th quarter. Moving on to cash flow and liquidity. During the Q3, operating cash flow was $28,100,000 driven by quarterly net income. This marks the company's 18th consecutive quarter generating positive operating cash flow. Year to date through the end of September, Operating cash flow was $51,200,000 Capital expenditures totaled $17,500,000 in the 3rd quarter and included various investments to drive operational efficiency, growth and improvements in safety.

Speaker 3

In the 4th quarter, company anticipates approximately $15,000,000 of CapEx to bring the full year total to approximately $50,000,000 consistent with previous guidance. From a share repurchase perspective, the company bought back 353,000 common shares during the Q3 at a total cost of $7,700,000 As of September 30, the company had $44,500,000 remaining on its share repurchase program. Since the inception of the program early last year through the end of September 2023, the company has repurchased 4,500,000 shares at a total cost of $80,500,000 In total, the common share repurchases plus the 2022 and 2023 convertible note repurchases The company's cash and cash equivalents totaled $225,400,000 and total liquidity was $519,100,000 as of September 30, 2023. Interest income generated by the company's cash balance was $2,400,000 in the quarter and nearly $7,000,000 year to date. As we proceed forward, we expect the strength of our balance sheet combined with We expect the through cycle profitability and positive operating cash flow to provide us the opportunity to continue to execute on our capital allocation strategy.

Speaker 3

This includes investing in profitable growth, maintaining a strong balance sheet and returning capital to shareholders through continued share repurchases. Turning now to the outlook. From a commercial perspective, 4th quarter shipments are expected to decrease sequentially as a result of normal seasonality and potential volatility from the automotive work stoppages and restarts. Base sales price per ton is anticipated to remain strong in the 4th quarter, while surcharge revenue per ton is expected to be sequentially lower. The expected decline in surcharge revenue per ton is due to a reduction in the number one busheling scrap index in September, which impacts subsequent monthly surcharges.

Speaker 3

Operationally, melt utilization is expected to sequentially decrease in the Q4 as a result of the planned annual maintenance shutdown at the melt shop, which was completed in Costs associated with this planned annual shutdown maintenance were approximately $7,000,000 in the 4th quarter, Slightly higher than the 3rd quarter shutdown maintenance costs. Additionally, we plan to further reduce the melt operating schedule around the 4th quarter holidays to balance inventory with current demand, manage cost and set up for a strong start to 2024. Given these elements, the company anticipates 4th quarter operating cash flow to remain positive, while adjusted EBITDA is expected to decline sequentially. To wrap up, thanks to all of our employees We work together as a team to again deliver solid financial results, while continuing to strengthen our safety culture. We appreciate your interest in TimkenSteel.

Operator

Our first question comes from John Franzreb from Sidoti and Company. Please go ahead. Your line is open.

Speaker 4

Good morning, everybody, and thanks for taking the questions. I'd like to start with your comments on the UAW strike. Did it impact October's results or are you anticipating it to impact more of November? Just kind of color how the Q4 is kind of playing out?

Speaker 2

Sure, John. So, yes, we had a much more significant impact in October versus The prior months during the strike. And we also have to wait and see how quickly they ramp Up and how strong they pull through the rest of this quarter, that's still a question mark.

Speaker 4

Okay. And they're giving you no colors how that's going to play out?

Speaker 2

Well, basically, they've just kind of give us what the plants are restarting and what that schedule is. We don't know what the demand requirements are going to be yet.

Speaker 4

Okay. And out of curiosity, are you exposed to the Mack Truck UAW strike or is that something that won't impact you?

Speaker 2

Not that I'm aware of. I mean, some there could be possibly somewhere in the supply chain, but I don't think anything significant from our sales perspective would be impacted.

Speaker 4

Good. Fair enough. And on the industrial side, the sequential improvement you're talking about in the 4th quarter is excellent. And my original question is, How has that business profile changed from 3 months ago? But I'm going to shift that to can you talk a little bit more, is entirely the defense side of that business that's driving The sequential increase that you're looking for or the other parts of it that are doing well?

Speaker 2

That's predominantly the defense sector that's pulling hard To restock their supply chain.

Speaker 4

Okay, got it. And on the energy side, you touched on that the rig count is down. Would you expect the energy volumes to remain at this kind of threshold in the Q4? Or would you expect to be sequentially weaker due to seasonality?

Speaker 2

I think from our perspective, it's pretty much going to be flat to maybe down In Q4, energy demand. We've seen a couple rigs added, I think, over the last 30 days, but They are being very disciplined with their working capital.

Speaker 4

Okay. At this point, actually, I'll get back into queue and let somebody else ask some questions.

Speaker 2

All right. Thanks, John.

Operator

Our next question comes from Phil Gibbs from KeyBanc. Please go ahead. Your line is open.

Speaker 5

Hey, good morning.

Speaker 2

Good morning, Phil.

Speaker 5

Just wanted you to touch on The comments you made on the front end of the call about having a gentleman on a roll on looking at Acquisition targets, do you think you can share in terms of just The broader strategy, this appears to be a little bit of a pivot or an augmentation to what you guys have already been doing. You haven't been very inquisitive recently. So anything you could add there would be helpful.

Speaker 2

Sure. I mean, we've been going through this transformation process for a couple of years now. We have a strong solid balance sheet. We've totally revamped our commercial approach to various markets, beat up our team and skill set. And I think we're reaching a point in discussion with the Board that we need to start looking more aggressively for some external growth Opportunities that align with our strategic imperatives, which is going to be around our manufacturing footprint, Our product capabilities and targeted certain end markets for expansion.

Speaker 2

There will be more color to come over the next several quarters on this topic, But we just wanted to identify the fact that we're kind of shifted into 5th gear As our overall focus and strategic evolution.

Speaker 5

Thank you. And then as it relates to pricing and mix, I think your bridge in your filing Spoke to somewhere around maybe $10,000,000 $11,000,000 sequential pickup in EBITDA from pricing and mix in the 3rd quarter versus the second. How much of that pickup is related to some of the defense comments you're making?

Speaker 2

A significant amount of it is related to the demand growth in defense related products that we manufacture. However, we've seen also a richer alloy mix as well in the industrial sector.

Speaker 5

And then there was a big pickup in pricing and mix sort of across all your target markets, auto, Industrial and Energy, obviously really notable. Is there any of that, that over the next couple of quarters We'll normalize a bit because there was a bit of a step change in the quarter that was unique.

Speaker 2

Yes. There was some retroactive pricing That was caught up in Q3, but that's those are solid annual agreements and that pricing will continue Going forward, that was one of the big influencers besides the richer mix tied to the defense market sector And the alloy mix of products.

Speaker 5

Okay. So some catch up on pricing or orders that maybe Were backlog from some of the operational issues last year?

Speaker 2

Yes. I would say it's more retroactive pricing.

Speaker 5

Okay.

Speaker 2

That went back a couple of quarters. It got caught up in Q3.

Speaker 5

Great. And then lastly, anything on the conversion cost side that's notable between No energy alloys, consumables, anything like that, that could be changing or how does it compare to last year? Thanks.

Speaker 2

You mean for 2024?

Speaker 5

I just mean in terms of trends, in terms of what you've seen At present and how that maybe compares to last year? Thank you.

Speaker 2

Yes. I think the most of our consumables And energy requirements, whether it be gas, electricity or under annual contracts or longer term contracts. So I think those pricing from that perspective is flat to the remainder of this year. And we're in the Progressive, negotiating beginning the negotiation of our supply contracts for 2024. So too early to tell you how that's going to play But we'll know probably by the end of the year.

Speaker 2

Thank you. Thanks, Bill.

Operator

Our next question comes from Dave Storms from Stonegate Capital Markets, please go ahead. Your line is open.

Speaker 5

Good morning. This is John stepping in for Dave.

Speaker 2

Hi, John.

Speaker 5

So, you had mentioned, you know, utilization was 76% in the quarter, that's supposed to decrease in Q4. So relative to historical levels, what are your expectations for 2024? Is reaching 80% a reasonable expectation?

Speaker 2

Yes. I mean that's our target average per quarter. We would have been there in Q3. However, we had an environmental system That malfunctioned and we had to be down for a couple of days to repair it at our melt shop. So we would have been definitely at slightly above 80% if that wasn't the case for Q3.

Speaker 2

And that is basically our target for 2024 and we've given you the reasons why Q4 will be lower.

Speaker 5

Got it. Very helpful. Thank you. And then, cost improvements that remain in Q3, which ones are structural? Which of them are discretionary?

Speaker 5

You don't mind me

Speaker 2

asking. Well, I mean, most of our cost improvements Aren't going to be structural outside of supply agreements and arrangements and raw material And energy purchases, those can vary. But when we look at our manpower, we look at our productivity, We look at our yield and cost to quality, those things are all structural improvements. And that's what we've been focused on. A number of investments That were implemented during the outage, we'll start to see those improvements Through the remainder of this year and for the full year 2024.

Speaker 5

Got it. Thank you. I appreciate you taking my questions.

Speaker 2

Thank you.

Operator

Our next question comes from John Franzreb from Sidoti. Please go ahead. Your line is open.

Speaker 4

Yes. Just a couple of quick follow ups. Firstly, how does the capital expenditure Outlook change in 2024 versus 2023, I know you got the additional pieces of equipment that you're putting in at the end of next year, but Can you kind of ballpark what the CapEx spend looks like for next year?

Speaker 2

Yes. For next year, John, we're in the planning process right now and We'll do that through probably mid December and then we'll have a discussion with the Board. So at this time, I don't want to make that public. It would only be a guess at this time anyways, but at the year end, we'll be able to move much more clarity on the CapEx for 2024. I don't I would say this though, I don't think there's anything in the planning right now that would significantly increase it.

Speaker 4

Okay. And regarding the tax rate, it's kind of been volatile for the past couple of quarters. Any thoughts on how you're going to finish the year, Full year of Q4 either one would be helpful.

Speaker 2

Chris, do you want to take that one? Sure.

Speaker 3

Yes. Thanks, John. I think looking at that year to date rate Around 27% is where we'd be targeting for the end of the year. The things that are driving the rate higher Some of these non deductible costs that we experienced earlier in the year. So, as we get into the next year, I think it should moderate absent those Non deductible items.

Speaker 4

Thank you, Chris. And just lastly on capital allocation, you've been buying back shares Rather aggressively, do you expect to continue to do so in the Q4? Can you just talk a little bit about excess cash and plans for it? Especially in light of potentially being more aggressive in M and A, so maybe contextualize it all.

Speaker 3

So we put in the queue, in the month of October, we bought back around 94,000 shares, I believe,

Speaker 5

about

Speaker 3

$2,000,000 Buybacks in the month of October and we're just putting a new plan in place now that will go out through our next filing date. So I'm not going to speak specifically to that, but And more to come as we reported in February, but we're definitely thinking about the future, adequately managing our cash as we approach year end, Managing working capital like we always do and being prudent in all those areas.

Speaker 4

Okay. Thank you for taking my follow ups.

Speaker 2

Thanks, John.

Operator

We have no further questions in queue. I'd like to turn the call back over to Jennifer Beaman for closing remarks.

Speaker 1

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

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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