Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the TimkenSteel Second Quarter 2015 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Tina Beskid, you may begin your conference.

Thank you, Amy. Good morning. And thanks to all of you for joining TimkenSteel's second 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 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 take the opportunity to turn it over to Tim.

Thanks Tina, and thank you all for joining us. We recently celebrated the first anniversary of TimkenSteel Corporation. Looking back it’s obviously been quite year. At this time last year we had just completed a well executed separation and stood up a strong independent company with the unique business model. Our markets were good, customer demand was high and we're commissioning new capability -- new capabilities in assets. At the time we're at the height of the oil cycle. No one could have imagined how quickly or deeply our business model and alls of us have been tested. That’s been -- that’s both the good news and the bad news. Our work since that time to operate a new company in these conditions gives you valuable insight into how we do business and how we will perform when our markets recover. We operate the business that is diversified across many markets. Today, automotive demand is strong, but the demand in energy -- in the energy market is as week as it was in 2009. Our Distribution business is down and while inventory levels in the channel are better than in previous cycles, we are keeping a close eye on it. In our industrial markets we are feeling weakness from both commodity markets and industries related to the energy industry. With this drop in demand in key markets, as well as our inventory management efforts, we are now operating at less than 50% of melt utilization, which is hurting the profitability of the products we are producing. We forecasted that this quarter would have us in a loss position. It is obviously not where we want to be, but it’s the reality the situation. Our leadership team knows what to do when market conditions erode in this way and we have…

Hey. Thanks, Tim. Net sales in the quarter were $278 million, broken out between base sales of $240 million and surcharges of $38 million. Weak demand from North American oil and gas markets was the primary driver of our results. Shipments of 212,000 tons were 22% lower than the first quarter. Base sales per ton held up well in the quarter, despite a shift in end-market demands and product mix. We expect these market dynamics to continue into the third quarter. The impact from lower volumes, manufacturing costs and raw material spread resulted in a $38 million EBITDA loss for the quarter. Low melt utilization of 47% increase manufacturing costs, which were driven by de-leveraging of fixed cost and operating efficiencies from the pace of the utilization declined. We again anticipate operating below 50% melt utilization in the third quarter. The sequential earnings impact from raw material spread was unfavorable by $2 million. As we discussed in our first quarter conference call, declining scrap prices 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. So as a result we end up with a timing difference between how much we pay for scrap and the surcharge recovery. Scrap prices stabilized in the second quarter, however, which should favorably impact our raw material spread in the third quarter. EBITDA for the quarter was a loss of $19 million and was outside of our guidance range, primarily due to our LIFO estimate, which had no impact on our positive free cash flow. Additionally, we did not factor into guidance about $2 million employee severance cost from our cost reduction activities and a large enough inventory reduction. We reaffirm our expectation…

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

Good morning, guys.

Hey, Luke.

I guess first question just on shipments. So, we are looking for another pretty decent step down in the oil and gas business for Energy & Distribution in the third quarter. Clearly, demand is not huge but there is also inventory destocking that’s going on. And I would guess there is probably some share loss to imports as well, just given some of the dollar and pricing dynamics there. Is there I guess -- I know it’s hard to get to an exact number but if you -- can you give us some color around just how much you think the shipment decline, the 70% year-over-year shipment decline you are expecting in the third quarter is driven to a real demand pullback versus some of these supply factors, which is the destocking and on the import side? And I guess what I’m going with this is that one that supplies work through, shipments will bounce back to some degree and I'm just trying to get a sense of like kind of when that happens and how to think about the magnitude?

Yeah. Luke, I’m not sure I can give you an exact number. But let me talk to you about what we are hearing from our customers. Obviously, at a time like this, you spend an awful lot of time face-to-face trying to understand what's going on from a market share point of view. At this point, despite a lot of inbound import pressure that we are seeing, we feel actually pretty good about our penetration. We have not -- we believe seen significant erosion in the quarter or really even in the year in oil and gas. Little bit more pressure in distribution but obviously when we feel that pressure, we will reach now and talking to our distributors and trim or adjusting when we need to. But for the most part, we’ve been holding pretty steady through this thing. Really, I think what we're seeing now is just a pure reflection of a sub 900 rig count. Fact of the matter is people just aren't buying anything. They are using what they have on the shelves right now and sooner or later, we are going to begin to see that restocking have to take place. And you’ve seen it in the past. When it goes, it can go pretty quick. So that’s the kind of environment we're looking at right now.

Very tough to tell how it’s going to play out. But if you had to take a guess on when you think your bottom would be in oil and gas shipments, is it the third quarter?

The challenge we have right now, Luke is that our lead times are five weeks on bar and eights weeks on two. And so that limits our visibility later in the year. Obviously, third quarter shipments are going to be lower and it's just a reflection of the weakness that we see in the industrial or in oil and gas markets as well as distribution. Inventory levels for the most part as you pointed out are reasonable we think. So when we begin to see structural demand creation, when people start completing some of these uncompleted well and they start punching holes then obviously that’s going to trigger upward motion or upward pressure on revenue.

Okay. And then just on the scrap impact, so your raw material spread as you characterized it, it become less negative -- that excess overhang works itself through to some degree in the third quarter. Can you give us some sense like on a dollar basis how much improvement we expect just from the raw material spread, 2Q to 3Q? And at this point, is the third quarter reflective of that excess scrap inventory being totally worked through the system?

Yeah, Luke. This is Chris. Relative to the scrap, if you look at the pace of the decline in the scrap markets that occurred in the first quarter that what’s really impacted our results in the first and second quarter. That being said in the second quarter, things flattened out quite a bit. And so what that would mean going forward that some of the negative impacts and most of them do not go away. Now the question turns out to be, it's hard to go too far out in the future but in the third quarter I think we look okay.

Okay. All right. And then just a couple of cost items. The outlook for LIFO income for the full year, how we should think about the third quarter and the full year estimate there? And you mentioned some additional restructuring actions that would drive cost savings in addition to the 25, any color on magnitude and timing around that would be helpful?

No, we’ll talk about that once some of the actions are done but we did take some cost out of one of our value added facilities at the end of July. So we’ll quantify that for you later. In addition, on the LIFO, we’re looking to call out the LIFO at this point in time.

Okay. Then just, I guess, the last question, I’ll turn it over but the CapEx outlook for you going forward, could you just tell us how much of the quench-and-temper spending is going to happen this year and then if you can give us any early indication of what you are thinking for 2016?

Well, it’s probably little bit too early to call 2016 because obviously we want to match our demand and cash flow to understand what our CapEx spend would be. We’ll clearly have some growth expenditures next year but we’ll delineate that quite a little bit later. If you look at the quench-and-temper for this year, we look to spend about $20 million in that facility and probably two-thirds of that will be in the second half.

Okay. I’ll turn it over. Thank you.

Thanks.

Your next question comes from the line of Novid Rassouli from Cowen And Company. Novid, your line is open.

Good morning guys. Just wanted to dig in on the cost side a little bit more. Based on kind of what I have been seeing, it looks like on the energy and distribution side, you guys really make some pretty good cost reductions. It seems like industrial mobile kind of more flat. I just wonder if you can walk us through, it looks like it was on kind of the raw material side, but I was wondering if you could just give us a little more color on kind of the moving pieces on the cost side, if kind of what happened and what could happen going into the third and fourth quarters?

Yeah. Great. Novid, I’ll handle that. If you look at our cost, you have to remember that we have shared manufacturing facilities. So when you look at the segment results, one, when oil and gas is down on the industrial and mobile side, you get some negative impact because of the fixed cost leverage on the shared facilities. If we look at the quarter on the manufacturing side, we were really impacted by three items, one, melt utilization decreases from 47 -- down to 47% from 66%. You end up with a 29% drop in utilization and you just can’t keep up with the pace of that drop. I think our guys when you look at what they did, they really did an outstanding job. They just can’t keep up with 29% drop. And then we’ve also taken out a lot of inventories. So we’ve been managing the business in this kind of period. You manage for cash and that’s what they did. So again the short answer is you get shared facilities but our guys took up on a variable cost basis, a really good hop. We’re happy with the progress that was made.

Okay. And then for the industrial and mobile segment, I guess, at this point, given that it seems like auto shipments are doing okay but industrial is struggling. Could you give us some color on the mix of what the percentage of end markets that are tied to energy because it seems like that’s kind of bleeding into that segment as well at this point?

Yeah. I’ll give you a little bit of color. I mean, where we see some of the energy exposure is really to some of our forgers. And on a percentage basis of that segment, you have to just give me a minute, Novid, and I’ll get back to that one because I don’t have it on the tip of my tongue. It’s a relatively small exposure in our industrial business that that’s the top of my head and I can’t quantify it.

I think what we’re actually seeing now is a bit of contagion from the oil and gas markets that’s spreading through industrial distribution in small manufacturers. People who you wouldn’t normally think of as being tied to the oil and gas industry, pump makers and these kind of things that are suddenly -- not suddenly, they have been feeling the pullback in drilling. And I think that’s a lot of what we saw in the second quarter and probably leading into third quarter.

And so stabilization there as well as for the energy and distribution segment is really going to have to stem from kind of a stabilization of rig counts and maybe a rebound there. That’s pretty much going to be the driver at the end of the day for the guys you mentioned in industrial and mobile as well as the energy and distribution segment?

Yeah. I think that’s fair. I mean, obviously you got to factor the inventory burn in that as well because the channels are working very hard to manage their inventory. So there are lot of uncompleted wells out there that will get blown first. And you start new drilling and then you got to factor the inventory on top of that. But yeah, I mean, at the end of the day, we’ve got to start punching more holes.

Great. Thanks guys.

Yeah. Thanks.

Your next question comes from the line of Aldo Mazzaferro from Macquarie. Aldo, your line is open.

Hi. Good morning.

Good morning.

A quick question on the cost reductions, Tim, when you say $25 million has come out, does that involve headcount reductions at all or is it and if it doesn’t -- if it doesn’t involve headcount, could you tell us little bit about where they derive from?

Yeah. So if you look at the $25 million that we announced last quarter, between 15% and 20% of that would be SG&A. When we stood the business up, we stood at up pretty lean. But as we when in from the second quarter or first quarter to second quarter, we said well I’ll step back, take a look at the organization, let’s tune it, now that we’ve been living with it for a year. And so we’re able to generate some S&A savings through some high level restructuring. I took one of my direct report positions out and that obviously close down. So that would be 15% to 20%, the rest is just growing. It’s making sure that we’re aligning our manufacturing within markets. So we have taken cruise out of both, Harrison and Faircrest. We took one big cutout at Houston and have since done another. So that’s the nature of the work that we’re doing right now.

Great. So can you give us an update on what the headcount in the entire company is, let’s say, mid year?

Aldo, we haven’t -- we provided cost stated. We haven’t provided headcount data publicly.

Okay. All right. Let me switch to second question on your guidance of the 0 to 15 negative on EBITDA rate. Is the assumption you’re making in there is that say scrap prices remains stable through the end of the quarter or if they would have fall say in August or September, would that impact the third quarter or would that be pushed out you think fourth quarter impact?

Yeah. We say it’s going to be pretty smooth. That’s -- our underlying assumption is that it’s a relatively stable environment.

Good. And then on the final question, on the jumbo caster, you say you’re getting 50% yield. Is that comping because of the lack of spillage, say in the bottom pouring or is coming more from the handling downstream of the caster where you don’t have as much loss on the [indiscernible].

Yeah. It’s more of the croppage that we have to take in our bottom pour operations relative to continuous cast operation. It’s just that the nature of the process allows us to use more of the material from melt to roll.

Great. So assuming your utilization rates stay under 50s, you still think you make progress in passing more of that material through the caster?

Yeah. I mean, as we said the customer certification process is gone extraordinarily well. In fact, I’d say we are ahead of where we though we would be. So to the extent that people are buying steel and we can pass it through the caster, we will absolutely realize those savings.

Great. And finally, Tim, where do you think we are in this cycle? Are we seeing in terms of oil and gas more downside you think and what kind of things you watch to see where the cycle may bottom out? I guess the same on industrials as well.

Yes. Well, obviously automotives in this market to read right now and that’s the good news. This industrial and oil cycle is a very, very difficult one to read. And everybody is trying to compare it to '09 or the '13. And at the end of the day, each one of these cycles is very, very different. It seems like oil has settled a bit. Now it was picking up there for a while and then obviously it pulled back. We saw some rigs come online last week, but then the price went down. So right now, although we’re just staying focused on the orders that are in front of us, we’re staying very, very close to our customers, both on the OE side and through distribution. To the extent that we see the needle start to move, I mean we’re ready to react. I think we’re fighting shape. So when this thing turns, you'll be able to see what the business is really capable of, but it's very, very murky with five to eight week lead times.

Okay. And I just want to say congrats on the free cash flow. That was quite impressive. And I am wondering whether there is any more inventory receivables shrinkage that you might have in the next couple quarters.

Yes. The cash flow obviously was a bright spot for us. I mean, that takes a lot of hard work to strip that kind of inventory out in down cycle like this. I think our teams have done a fantastic job of managing that. I'll let Chris answer the second part of the question.

Yes. So we do expect to take more out in the third quarter on the inventory side and it is tough because at the end of the day the global business is cranking. So you can’t take that inventory out. And so it’s just the oil and gas inventory that they've really done a really good job of reducing in a pretty short period of time.

Great. I will turn it over. Thanks very much.

Thanks.

Your next question comes from the line of Phil Gibbs from KeyBanc Capital Markets. Phil, your line is open.

Good morning.

Hi, Phil.

I just had a question on the qualification progress at the bloom caster. Tim, I don’t know if you mentioned that in too much detail, but just how that’s moving along and when you can effectively move toward more of the 75%, 80%, utilization that facility relative to your relative of the rest?

Yes. As I said to Aldo, the process itself is going really, really well. In fact, we are ahead of where we thought we would be. Quite frankly, the quality that we’re seeing coming out of this caster is really just spectacular and that made our job easy as we go and work with customers who have very, very high expectations for us. So right now, I would say Chris we’re probably how far along.

Yes. We expect by the end of the year to be 50 to 60% along with a significant part of our yield improvement realized and the rest will come by the end of the next year.

Okay. And I know this question has been asked in a variety of ways, but are you anticipating that the so-called destocking from your customer base is likely going to last a year or less than that, just given the fact that the decline in your business has been so drastic?

As we said earlier Phil, we think we’ve been keeping a pretty close eye on inventories, on imports and on end market activity. And ultimately, those three factors have to come together. We feel reasonably good about the inventory levels. The import obviously is continuing. And then the real question is when are we going to see any kind of uptick in these end markets? I mean, there certain industrial markets for us are still going well. The rail business is still good. Some of the base machinery is still okay, but foreseeing continued pronounced weakness in mining, ag, and oil and gas, and that put downward pressure on it. So the real question is when spurt comes. But the other factors we’ve got a pretty good handle on.

Okay. Terrific. And does this at all compare in your mind to 2000 to 2009, or how was it the same, how was it different?

Yes. Well, as I said, and everybody's trying to get a comparison here, '09 was obviously a very, very different cycle because you effectively had all markets collapsed at the same time. This one really is a commodity down cycle as far as we can read it. So, started with mining back in kind of '13. Oil and gas was actually running pretty well last year and then obviously we hit first part of this year and it came off. So, just a very, very different, different cycle. You also have obviously a very different currency and different outlook from OPEC on the oil and gas side. So we look at it on the positive side. Unlike '09, automotive is thank god for automotive right now. And so when we’re in a down cycle like this, we do our best to prepare for the up cycle right. And so regardless of when it comes, we’re going to make sure that we have our inventories right, that we have accruing right, that we’re investing in new products to be able to support growth etcetera, etcetera. etcetera. So I think we are pulling all the right levers.

Okay. Terrific. And then lastly if I could, any thoughts on the impact of a potential led up on the ban on US oil exports and whether or not you really think that does much? Thanks.

I think there is a lot of debate about it right now. I think the oil export ban is a leftover from a very, very different time. We live in a very different oil market than we did back in the 60s and the 70s. So at the highest level, I would say, yes, probably we’re taking a hard look at lifting that ban. Now the problem is there is a lot of oil globally and the light sweet that we do is got to be able to find markets. So at the end of the day, you hope the markets balance out, but we believe on an ongoing basis that there is structural demand creation for oil globally and that long-term that should support the dynamics in the industry.

Thank, Tim. Appreciate it.

Thanks, Phil.

Your next question comes from the line of Justin Bergner with Gabelli & Company. Justin, your line is open.

Good morning, Tim. Good morning, Chris.

Hi, Justin.

Most of my questions have been answered. I will address topic of share repurchases. You I guess indicated that you've repurchased some shares month to date. Any detail you want to provide there at this time?

Yes. We tell you we’ll probably purchase a little over 300,000 shares in this month and we would expect to be active in the third quarter.

Okay. I guess given that the goal is still to complete the share repurchase program by the end of 2016. If conditions get really bad or I guess kind of stay at these levels in terms of the oil price and the rig count for some time, would you choose to delay the completion of the share repurchase program or would you be more incline to complete it and think about I guess improving your access to credit?

Yes. The way I would answer that is that it’s a balance. So we have to look at our investment opportunities and the balance of where we are in the cycle to be able to answer that one fully. So I wouldn’t make a call specifically just on share repurchases differential from what we’ve guided to.

Okay. That’s fair. Switching gears to the $25 million of cost savings, can you maybe frame for us on an annualized basis how much benefit you’re going to see from the cost savings in the second half versus the first half? I assume probably the full $25 million in the second half, but maybe just compare to the first half or the second quarter?

Yes. If you look at the whole program, right, it’s started been putting impact in the second quarter. So I’d say we get about 75% in the second half.

Got it. So you wouldn’t get the full 100% or $12.5 million in the second half?

It will be at the run rate, the full run rate in the third quarter. But if you asked -- I think your question was how much do you see in the second half? So if you look at the total cost reductions based on a $25 million run rate, we’ll have 75% of that in the second half.

Okay. Got it. And then sort of that $25 million, how much of those cost savings were enjoying in the second quarter? Or if you take $6 million on a quarterly basis, of that $6 million how much?

It’s a relatively small number. I mean, most of it’s on the manufacturing side. So we would see cost reduction in the manufacturing side of -- I got to do a little bit of math here. It’s pretty small. I mean, we’re really going to see the bulk of it in the run rate post Q2.

Got it. All right. Thank you for that clarification. So as I look at sort of the third quarter and I look at the projection for EBITDA flat to down $15 million versus the down $19 million in the June quarter, I mean it seems like utilization is going to be running at fairly similar level. So is the main delta in the third quarter versus the second quarter going to be the effect of these cost savings coming through or there other sort of sequential factors that are going to be meaningful?

It’s the scrap spread dynamics and our cost savings.

Got it. And there would be this scrap spread dynamics for the LIFO accounting.

Yes. I mean, it's not as much a LIFO issue as much as the scrap market has stabilized in the second quarter.

Got it. Okay. And with respect to imports, obviously, people are very concerned in the steel industry about what's going on in China and the overcapacity that may exist in China’s -- Chinese steel beyond the current level of overcapacity. Are there any areas of your business that are pressured by Chinese exports? Or is it almost entirely non-Chinese exports that you’re subject to?

No, I mean, I think it’s a combination of China. We see a lot of product out of Korea. We see product out of Romania read Russia. Japan, obviously, is present in the marketplace. So it’s a little bit of everybody. You got to remember that the model that we run is a little bit different than everybody else as we said in the past. And so to a certain extent, there is a buffer there. But with that said, they are coming. All of them are coming aftermarkets. They think they can access, so they’re banging away distribution pretty hard. They’re banging away at big industrial kind of product. And obviously, oil and gas is a very attractive market but it's one that requires a lot of certification work. But they are actively engaged in trying to gain penetration there. So, this is something that we’ve been fighting forever. Quite frankly imports aren’t a new thing. The currency has made them worse and obviously, the excess global capacity is aggravating it but we know how to fight these guys.

Got it. All right. Is there a specific end market within your portfolio where Chinese imports are relevant competition? I mean, obviously, probably not oil and gas but which area might you see Chinese imports?

Yeah. I mean, I think they’re probably, they are first -- the first market they tend to go after is distribution on relatively standard grades, so that’s obviously a place that we look at pretty closely. But we like to sell a richer mix of product than most folks. So, you'll see pressure in carbon product coming in through distribution would be one place you would look.

Okay. Thank you, Tim. And best of luck for second half.

Hey. Thanks, Justin.

[Operator Instructions] Your next question comes from the line of Luke Folta with Jefferies. Luke, your line is open.

Hey. Thanks for the follow-up, guys. Just a couple of quick ones. On base pricing, if you strip surcharges out of realized prices for the segments, the oil and gas business, that base price number that you can back into is, it’s a several percentage points down relative to where it’s been over last couple years. Your customers -- one of your big customers had talked about pricing being, base pricing been stable for large SBQ, wall tubing into energy. So is the price movement in the base price that we’ve seen sequentially, is that more of a function of mix than anything else or is there actual some movement in the base pricing going on?

Yeah. Luke, this is Chris. It’s really a product mix issue. I think the base pricing has been one of our bright spots.

Okay. All right. And then just as a question on -- I mean I think when you’re in a situation where EBITDA is negative like it is, at least for this quarter and perhaps next. I think sometimes tough to figure out where the bottom could be in terms of valuations. And I think our major people tend to look at is tangible book value. And when you look at tangible value for you, if I use, I think, 2 million ton capacity number, imply something like 350 bucks a ton, which I don’t think you’re building re-bought mill or anything for that amount? Can you give us some sense of what you think your replacement cost would be? I mean, rounding -- rounded to the nearest couple 100 bucks a ton. I’m just trying to get like a broad sense of just how the equity value or the enterprise value looks today based on that metric?

Yeah. Luke, this is Chris. That’s the replacement value is a little bit tough to answer. In part of the reason this without being to quite is that, we set this business up over 100 years has been part of the Timken Company. And the asset structure and mix that we have is we’re very happy with and provides us some competitive sustainable advantages. But I don't think that you would set up your business in the way that this one is set up because of the evolution of our time.

It's hard to put a value on 100 years of knowledge as well.

Yeah.

Right. Obviously, even stripping out the knowledge, just the asset themselves?

Yeah. We’ll have to get back to you on that one, Luke, because I don't have that one at like the tip of my tongue.

Okay. And then just last one, we haven’t heard anything recently any filings on Ellwood. Just curious if there's anything to update us on in terms of any conversation that have happened there or anything in general?

No.

Okay. Thanks again.

Thanks, Luke.

There are no further questions at this time. I will turn the call back over to the presenters.

Okay. Well, thanks a lot everybody for joining us. As we wrap up, I want to take a moment to thank American metal market for naming us Steel Producer of the Year. The award is a real honor and it recognizes the extraordinary efforts of our people over this past year. And I think they truly are the leaders in the industry who were unafraid to tackle the world's toughest challenges. We really do have just a phenomenal team here in TimkenSteel. I also want to thank all of you for joining us today. We appreciate your interest and your confidence in the business. Obviously, if you have any follow-up phone calls, please do not hesitate to call Tina. Thanks again and have a great day.

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