Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the TimkenSteel First Quarter 2015 Earnings Conference Call. [Operator Instructions]. Thank you. I would now like to turn the conference over to Ms. Tina Beskid, Director of Investor Relations. You may begin your conference.

Good morning and thank you for joining TimkenSteel's first quarter 2015 conference call to discuss our financial results. I'm joined by Tim Timken, our Chairman, CEO and President; as well as Chris Holding, Executive Vice President and Chief Financial Officer. During today's conference call, we may make forward-looking statements as defined by the SEC. These statements relate to our expectations regarding future financial results, plans and business operations, among other matters. Our actual results may differ materially from those projected or implied, due to a variety of factors, which we describe in greater detail in today's press release, supporting information provided in connection with today's conference 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 TimkenSteel Corporation. We prohibit any use, recording or transmission of any portion of the call without our express, advanced written consent. There will be an opportunity to ask questions at the end of Chris' prepared remarks. Now, I would like to turn it over to Tim.

Thanks Tina, and thank you all for joining us. Last year, we stood up this company with the right structure and size and on the strong foundation of a unique business model. We have a clear strategy to expand our leadership position in profitable niche markets, that require specialized steel for demanding applications. We are confident that the strategy will deliver long term value to both our customers and our shareholders. We remain focused on long term performance, but also know that navigating obstacles in the marketplace is part of operating a steel company. As I said in our last call, 2015 will be a challenging year, but we are up for that challenge. In the first quarter of 2015, we delivered increased volumes over this time last year. We had good performance in our mobile and industrial segments, which is more than half of our business. While that performance met expectation, we were faced with a number of headwinds that pressured margins. The volatility in the scrap markets in the first quarter hit us hard in March, as higher value scrap was indexed at significantly lower levels. This, combined with higher manufacturing cost, had a significant impact on profitability. Obviously, the elephant in the room is the activity in the oil and gas sector. While we knew oil and gas demand would be low in 2015, North American rig count collapsed a lot quicker than anyone envisioned. First quarter shipments to the sector actually were not that bad, as we worked off our backlog. We will feel the true impact of that lower demand in the second quarter, when EBITDA will be somewhere between breakeven and a $15 million loss. Chris will talk about this in a few minutes. It’s a tough environment, but we are a better business…

Thanks Tim. The first quarter was in line with expectations in all respects, expect that scrap prices dropped more than anticipated. As we discussed in prior calls, declining scrap costs negatively impact our results, because of the timing associated with our customer surcharge mechanism. The surcharge we pass on to our customers is generally about three months after the scrap is purchased. As a result, we end up with a timing difference between how much we pay for this scrap and the surcharge recovery. The sequential earnings impact from the fourth quarter was $9 million unfavorable and we expect to have a similar sequential financial impact in the second quarter. Sales for the first quarter were $389 million, essentially flat with 2014. Base sales increased by $13 million from the prior year, but were offset by lower surcharges of $14 million. Base demand was higher in both segments than the prior year, and company shipped 271,000 tons in the quarter, which was an 8% increase over the first quarter 2014. Geographically, 97% of the sales were to North American customers in the first quarter of both years. Gross profit of $42 million was $32 million lower from a year ago. The decrease in gross profit was driven primarily by raw material spread and higher manufacturing costs, partially offset by increased volume price mix and LIFO. The unfavorable raw material spread was driven by timing associated with declining scrap costs which I previously discussed manufacturing costs were up higher, due primarily to timing of related non-structural items, along with additional depreciation expense associated with the caster and higher pension costs to mortality table changes that we noted last quarter. Gross margin of 10.7% for the quarter was 820 basis points lower than the first quarter 2014, melt utilization was 66% in…

[Operator Instructions]. Your first question comes from Luke Folta with Jefferies. Your line is open.

Good morning Tim, Chris.

Hey Luke.

Just some questions on the second quarter, the EBITDA guidance. Are you able to give us some sense of how that would split up between the divisions? Just trying to get a sense of what the lower production utilization from E&D, how that translates into the I&M segment?

Yeah, let me take that Luke. A couple of things, as you know, our resources are shared, so when you have lower demand in one segment, it can have adverse impacts. So there will be negative leverage impacts that fall over into the Industrial and Mobile segment from Oil and Gas. Overall, if you look at the second quarter, the big impact obviously is going to be the lower demand from oil and gas, and that's going to be the single largest driver of earnings in the second quarter. And then the associated costs with reducing inventory, because we are going to take significant amount of inventory out of the system, and lower fixed cost leverage. Those are the big items, and obviously as I said in my prepared statement, we are still going to have some spread impact in the second quarter too.

All right. But when we think about the distribution of consolidated EBITDA, I am sure we are going to see the big impact in the energy distribution segment, but given the shared nature of the assets, is I&M not profitable, just given the production effects you're talking about in scrap?

Well I will tell you what, I don't want to call about profitability by segment, we are calling for profitability for the quarter for the whole enterprise. I think if you look at, taking 50% out of the energy and distribution segment, you should be pretty close in your model.

Okay. All right. And then in terms of the scrap impact, you noted similar sequential change in spread, but just looking at it in a different way, just to make it easier to understand for the quarter, if we just look at where raw material spreads are -- actually a surcharge recovery, versus your average inventory for scrap. What's that dollar mismatch for the quarter? So if you didn't have the inventory issue in your buying spot, what sort of impact would that have in 2Q?

Yeah. I am not sure how to answer that one, Luke, that might be one I'd have to [indiscernible] on a little bit offline.

Okay. Because I guess you are coming into the second quarter, 1Q had already seen some impact of that, about $9 million sequentially, and then you're going to see another, let's call it $9 million. So you are at least $18 million impact, like in total, just given surcharge. But I recall scrap prices have fallen in the second half of last year as well, so I imagine that there is even more cumulative impact?

I think you're thinking about it right. And keep in mind, it is a timing thing. So if you follow the bundles index, as -- pardon me, its Busheling. If you follow the Busheling index, most of the pain of this is -- will be gone three months after the sharp drop in the Busheling index. So from a timing perspective, we anticipate it will stop in the second half. Obviously depending on markets, right?

Right. Just trying to get a sense of what that snapback profitability would be when that happens. Then the $25 million of cost reductions, it sounds like the measures that you have taken are going to be in place in the second quarter, but you expect to realize the full benefit of the annualized $25 million in 2Q, or is it more of a second half --?

No, we will have most of them in place in the second quarter, and actually, at this point in time, we have most of them in place already. But call it on an 80-20 basis, there is 20% more that will come in later in the quarter. So we will have, most of this, if not all of it, ramped up by the first day of the third quarter.

Okay. And then just on the outlook for -- there is an inventory destock cycle that's playing out. When you think about how shipments trend throughout the remainder of the year, and we have seen the worst of the destock in 2Q, and does that start to abate you think, into 3Q and in 4Q, and can you just give us some sense of how much inventory is out there, and what sort of duration you think you will take to work through that?

You know, Luke, its Tim. I mean you have heard all of the service center calls, as well as I have. And I think there is still some uncertainty out there. I can tell you, they threw the brakes on pretty hard already, and so the inventories in the channel should begin to tighten up. A lot of it obviously, will depend on oil and gas activity in the second half of the year, and I think there is just still a lot of uncertainty there. Automotive is going to be good. The base industrial economy is okay, although we are seeing a little bit of spillover from oil and gas into some of the forgers and that kind of thing. And then the real question is, what's rig count going to do in the second half of the year, and how does that translate through the service centers from an inventory point of view. And so we are watching it pretty carefully at this point.

Okay. Last question and I will turn it over, when we think about the moving parts, with 50% drop-off in shipments in 2Q, there is significant inefficiency associated with having to reduce inventory internally, and I am sure your production rates are below that of what you're shipping, as a result. As we start to move into the second half, production probably moves more in line with shipments, the inventory destock runs its course, you got the scrap headwinds will abate, and I've just -- thinking through these factors, it would seem to me, the second quarter should be by far the weakest quarter of the year, and as we get into the second half just -- even if we don't get a pickup in end used demand, we should see a nice snapback in insurance profitability, just because of those factors sort of working through the system. Is that the right way to think about it?

I think you got the red light, Luke. I think the second quarter, just because of the confluence of events is going to be pretty bad, obviously, and we think it should be the bottom.

Okay. All right. I will turn it over. Thank you.

Thanks.

[Operator Instructions]. Your next question comes from Justin Bergner with Gabelli & Company. Your line is open.

Good morning.

Hey Justin.

Hi Justin.

Hi. I have a number of questions. I will start with the waterfall chart on the EBIT performance on slide 4. I am just trying to make sure I better understand the manufacturing bar of that chart or those charts, I am not sure I understand what's leading to that negative manufacturing delta, both quarter-on-quarter and year-on-year?

All right Justin. We will handle this one first. I think I will probably start with the second chart, and you can see the sequential Q4 to Q1, and it’s a $5 million unfavorable impact, and that's fully due to lower melt utilization. So sequentially the answer is, we just had a lot lower melt utilization in Q1 and Q4. Year-over-year, you're really comparing different spots, but we'd say that -- most of the costs on a year-over-year basis were timing and not structural. Maintenance is probably the single largest item that I would point to, and these are costs that we have already taken out in the second quarter. And then again, the only items that weren't primarily timing was the depreciation on the caster and the pension expense in mortality tables.

Okay. Thank you. With respect to the melt utilization, I think you mentioned that the melt utilization was relatively similar year-on-year, but down quarter-on-quarter.

Yeah. So quarter-on-quarter, we are down to 66 from 74.

Okay. And I mean, outside of the change in the melt utilization, you think the fourth quarter pace in terms of the manufacturing is a reasonable base, like the fourth quarter base wasn't depressed, in terms of where things were situated on that manufacturing delta?

No. I think fourth quarter is a good quarter to base from. There is nothing unusual in the fourth quarter.

Okay. Great. Secondly, I want to shift to $25 million in costs takeout, does that include the reduced or the shift that you had eliminated from one of your plants?

Yeah, it does. Again, some of the tactics have already begun to be put in place in the first quarter. Call it 80% are already in effect right now, and call it the last -- call it 15% to 20% will be put into effect, sometime during the quarter.

Great. Is there sort of a rough percentage of that $25 million that is captured by the shift that you have eliminated?

I would say, there is a small amount, the $25 million that was in the first quarter results, and on an annualized basis, I would call it about $4 million.

Okay. So the first quarter benefit on an annualized basis by $4 million, now is primarily the --

That's annualized. Sorry Justin, remember, that's annualized basis. So the impact in the quarter was about $1 million.

Okay. And the benefit in the first quarter was primarily related to the shift that you eliminated for that portion of the quarter?

Yeah it was just labor cost reductions.

Okay. Great. Switching gears to the issue of scrap and purchasing, I know that you lose operating profit in the raw material spread, and then you obviously recover a decent percentage of that on the LIFO piece, could you give us a sense as to, what the profit decline associated with the comment that you made at the start of the call, about your sort of high value scrap not being fully recovered by the indexing? Could you sort of provide some clarity as to the magnitude of that aspect specifically?

Justin, I am not so sure I fully understand your question. Did we kind of call out the raw material spread, year-over-year and sequentially. So I am not fully comprehending your question?

I guess, maybe I should ask you a little bit better, could you -- is it possible to quantify the element of the raw material spread that isn't timing related, that maybe probably its too -- the purchasing abilities that you have that aren't quite as monetizable when there is a softer environment?

No, I get it Justin, sorry. No, for the quarter, and these comparisons in both charts, this is just about all timing.

Okay. So you don't expect, once things stabilize you will be at a lower profitability due to the purchasing advantages you have, not being as beneficial as they were in the past?

No. We don't see that at this point in time.

Okay. Thank you. Sorry for the confusion there. With respect to imports, are you seeing increased import pressure affect the demand for any of your products?

Well Justin, this is Tim. Obviously, imports are a big issue. You have heard all of the major producers talk about it. We are seeing increased imports based on -- coming in on the back of the dollar; because of our model, we are a little bit buffered compared to the rest of the industry, just based on the diversified nature of the products that we make, but we are still feeling it, without a doubt, particularly in places like oil and gas and distribution. To-date, we have done a very nice job of maintaining pricing, maintaining penetration, but obviously there is ongoing pressure there.

Okay. Would you say, that as you look forward over the next year or two, your view on challenges created by imports has become more of a headwind versus three to six months ago?

Well, we have always dealt with imports quite frankly in the markets that we deal with. I would say, over the last three to six months, because of the change in the currency, and because of the relatively low economic activity in Asia and Europe, that certainly the North American market has become more of a target.

Okay. Thank you. And one last question, regarding repurchases, what is the primary driver for TimkenSteel to slow down the rate of repurchases, as it looks out for the remainder of second quarter?

Yeah, I will take that. This is Chris. It's really the economic environment more than anything else. When we provided our guidance last quarter, we had thoughts about revenues, profit and really cash flow, and as the environment has become more negative, we decided that we didn't want to be quite as aggressive on the share repurchases.

But obviously, we are going to keep an eye on the way the year develops and look at it as part of our balance capital allocation approach.

Okay. So is it safe to say that, there is not as much emphasis on completing the share repurchase in 2015, as was indicated in the December quarter call?

Agree, its timing. We are still committed to repurchasing the remaining 2 million shares on the 3 million share board authorization. But it's probably going to take longer than we originally thought.

Okay, Chris and Tim; thank you for taking all my questions this morning.

Thanks Justin.

Your next question comes from Luke Folta with Jefferies. Your line is open.

Thanks. So just wanted to ask on -- I think you booked about $5 million in LIFO income in the first quarter, should we think of that as 25% of your full year assumption of around 20? Is that right?

Yeah. The number for the first quarter was $6 million Luke. And what are you using --

Typically, it seems like the kind of practice is to take 25% of your full year LIFO assumption in the first quarter, and then true that up over the course of the year. I just wanted to make sure, that that's how you're looking at it?

Yeah, that's not going to be too far off. Although, I suspect, because of the timing around the scrap, the second quarter will probably be a little bit higher in LIFO.

I see. Okay. All right. And then on oil and gas pricing, with the rate of shipments declining as we are seeing, just give us some color in terms of how base pricing in the oil and gas side of business is holding up so far?

Well you got to remember Luke, that 75% of what we sell in the average year is contracted. We have said in previous calls, that we those negotiations went well, and we held that for the most part. Spot markets are getting a little bit tougher obviously, with some of the import pressure and just lack of activity in the oil patch right now. I would say, we have done a nice job of holding in there, but certainly, if we do not see any kind of turn in the second half of the year, that that pressure could get a little bit more significant.

Okay. All right. Last question, I hate to beat this scrap thing to death, but I just hopefully want to sure everyone understands how it works. So I looked at your fourth quarter flowchart, and in that you talked about there being a $6 million impact from raw material spread. There was a $9 million impact in 1Q and then another $9 million in 2Q, so it's roughly almost $25 million in cumulative, sequential of negative impact from raw material spreads. So in the event that scrap prices stabilize here and just trend for the next six months, we should look at that $25 million or so, as coming back into the model, as we get through the high cost scrap and things sort of normalize, all else equal. Is that the way to think about it?

I think that's the right way to look at it. Obviously, we are trying to predict scrap markets, but I think directionally, you're in line.

Okay. All right. That's all I have. Thank you.

[Operator Instructions]. And there are no further questions in queue at this time. I'd turn the call back to Mr. Tim Timken for any closing comments.

Well thank you for your questions and your continued interest in the TimkenSteel Corporation. As I said, we are aggressively managing our current challenging conditions, but we are also preparing ourselves for the opportunities ahead. TimkenSteel is a solid company with tremendous potential, and I want to thank all of our employees for their hard work, and you, all of our shareholders, for your continued support. If you have any follow-up questions, please don't hesitate to contact Tina. Thank you very much for joining us, and have a good day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.