Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the TimkenSteel First Quarter 2017 Earnings Conference Call. 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. Ms. Tina Beskid, you may begin your conference.

Thank you. Good morning. And thank you for joining TimkenSteel's first quarter 2017 earnings call to discuss our financial results. I am 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 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 expressed advanced written consent. Now, I would like to turn the call over to Tim.

Good morning and thank you for joining us. Two weeks ago we released preliminary financial results, followed by complete results last night. The good news is the demand is up in key markets and the work we have done to gain penetration for core areas of our offering, while also broadening our portfolio has accelerated sales growth, which is up 50% compared to the first quarter last year and 40% sequentially. At the same time, EBITDA did not track with our original guidance due to the impact of an aggressive ramp up in production and a change in mix in the first quarter. While every economic cycle is unique, increasing production quickly always presents challenges. As we began to see demand ramping through the quarter, we also began ramping up operations. We boosted manufacturing staffing by 7% in the quarter and continue to hire to bring on additional crewing. In the first quarter, we shipped 280,000 tons by drawing from both increase in production and inventory, which had a positive impact on cash. That was all good work, but we still have more to do as lead times extended beyond where we want them and we didn't achieve the melt utilization we would have liked in the quarter. A steep ramp is, like I said is always a tough thing, but it's also temporary and we are moving through it quickly. You can see the overall performance continues to improve. Sales are up and growing, production is increasing, safety performance has improved, both in terms of metrics and in the strengthening of our systems and processes, raw material is favorable in building, liquidity is strong and EBIT has improved. Our focus is squarely on operating with excellence and returning to profitability. Our intention has been to emerge from this cycle…

Thank you, Tim. Good morning. Our results for the first quarter represent a significant improvement in both operating and financial performance compared to 2016, yet below our original expectations. Shipments were higher than anticipated particularly in markets where we captured new business. As our order intake increased we drew down more inventory than had been anticipated and in response we have begun to ramp up our operations to support improving demand. Total shipments of 280,000 tons in the quarter were 44% higher sequentially and 50% higher year-over-year. This improvement was a result of focused market penetration and new business gains and was greater than the expected first quarter restocking. Mobile shipments were 20% higher than the fourth quarter 2016. The North American light vehicle production rate increased by 4% to 18 million vehicles, another high in the industry and our shipments outpace the production rate increase. For the second quarter we expect mobile shipments to be similar to the first quarter with market conditions at their peak. Industrial shipments increased about 50% from the fourth quarter 2016 primarily due to market share gains and low customer inventory levels. Our strategy to broaden our base includes products that are more carbon bar oriented and less alloy intensive compared to our normal mix. The additional volume contributes to a higher melt utilization but at lower margins. Moving into the second quarter, we expect industrial shipments to be flat to the first quarter as the general economic sentiment remains positive in those subsectors. First quarter shipments to the energy end market increased about 160% sequentially off historic low levels as customer inventory positions became more balanced with demand. The U.S. rig count has about doubled since hitting a low in May 2016 and continues to increase. We remain encouraged by improvements in market…

[Operator Instructions] Your first question comes from the line of Novid Rassouli from Cowen And Company. Please go ahead.

I am Novid, Cowen. So just starting, Tim, you had mentioned in slide five, starting with that, your outlook. It seems like it’s pretty positive on essentially all of your end markets. It seems like a significant change from the slide in the fourth quarter. So can you just give us a sense of what has changed so dramatically within the past few months?

Yeah, Novid. Good morning. I wouldn’t say, well, let me just kind of walk top to bottom there real quick and hopefully that will answer your question. North American automotive despite the concerns about the dealer inventories at this point seems to be running along pretty smoothly. Certainly, the order book that we see out of the spaces has been stable. It's skewing towards the heavy side on SUV and pickup truck which always helps us. The past softening that we've seen in pass car hasn't really hit us all that bad. In fact, through the first quarter they were falling pretty hard. So my sense is you might see a little bit of softening in the space, but they are still at all time record levels and so we are pretty comfortable there. The big swing and kind of the surprising swing really -- has really been on the commodity side. Mining activity has picked up pretty significantly. You heard some of that reflected in Cats call this week. They talked about the heavier side of their order book beginning to fill up and we are seeing that. That -- a lot of that translates back through the machinery sector. So bits and pieces that we sell in the pump makers and those kind of things. We are seeing some pretty healthy activity there. Rail, we are calling flat. Rail actually was supposed to just get pummeled in this current down cycle. They are certainly off, but not off as bad as everybody thought they would be off and so there is little bit of a positive kick there. Ag, ag for us is not a significant market, but that's been flatish, which again, I think, is a little bit better than most people expected. And then, obviously, we’re seeing some pretty good activity out of the oil and gas space. Mostly on the completion side, but any time you see rig count move as aggressively as it move, that’s going to translate back through on the drilling side as well and we are seeing that in our order book. And then, obviously, the billet business, the OCTG stuff that we've recently got into is running pretty hot right now. And then, finally, distribution channels, inventory, especially on the industrial side of distribution seem to be pretty light, so we are seeing a pretty good order pattern out of our big distributors here in North America. So, yeah, I mean, the page went green for the first time in a long time. It makes us feel good about the outlook for the quarter and the year.

Great. And then, touching on energy shipments a little bit further, so rose roughly 17,000 from 6000 quarter-over-quarter, based on my math, it sounds like you guys guided to nearly 25,000 in the second quarter, which should be about 100,000 ton run rate. Can you give us some color what drove the increase in the first quarter, what's driving increase in the second quarter, if it's new customers coming, stepping up to the plate or is it buyers that are just buying more, purchasing more than they did in the fourth quarter and in the first quarter, if you just frame that a bit for us?

Yeah. I guess, I would say, it’s a little bit of all of it. As we went through the down cycle, we had a clear focus on holding and gaining penetration with our existing customers, as well as bringing new customers on and what we've seen as we've begun to turn the corner in oil and gas is all of that's kicking in and so we saw the benefit of that in the first and we continued -- we see that continuing into the second.

Okay. And lastly, Tim, what was your melt-to-ship ratio in the first quarter and based on your guidance, what would be the implied melt-to-ship ratio in the second quarter?

Chris is digging aggressively into his book right now, give me a second, Novid.

Sure. The reason I was asking is, as you guys used inventory in the first quarter and you has mentioned that, higher cost and so you didn’t quite get the fixed cost leverage that you guys thought you would. And so, I was curious that if in the second quarter, if you use inventory, will you be trying to make up for that, so running under your average melt -- melt-to-ship in the first quarter and then potentially running over that in the second quarter, that was the crux of the question?

Yeah. Novid, this is Chris. I think essentially you got it right. As we look into the second quarter, again we will have a little bit higher melt utilization and we wouldn't anticipate as much working capital or inventory build in the second quarter as we had in the first.

Great. Thanks guys.

Your next question comes from the line of Seth Rosenfeld from Jefferies. Please go ahead.

Good morning. Seth Rosenfeld from Jefferies. I have a couple of questions. First, just to go back to your comments earlier on the outlook for raw materials and for metal spreads. I think, in your commentary you are guiding to stable spreads, just to clarify, I mean, you are expecting no headwinds nor tailwinds in raw materials costs position, if so, how would that change from Q2 and then going into Q3? And the second question, can you talk a little bit about some of the costs you had to bring back into the system in light of the higher volumes, rehiring, for example, any color you can give there. Just trying to understand what portion of the past cost savings have actually been sustainable and how much are now reversing in the current strengthening environment? Thank you.

Yeah. Let me -- this is Tim. Let me take a pass at the first one and I'll let Chris talk about the cost side of things. Right now in the raw material markets, we are seeing kind of sideways movement. It's run up pretty aggressively here in the last call it six months or so and so, I think, the market seems to be taken a little bit of a breather at this point. We don't see a dramatic swing one way or the other though in the second quarter. On the cost front, we have talked about the $100 million cost reduction that we did during the down cycle. We have always said about $25 million of that was structural, the other $75 million -- other $75 million would come back with volume. We are bringing crewing back on at this point, so you obviously have the impact of labor cost benefits and any variable pay there. But, Chris, do you want go into details.

Yeah. To give you a little bit more color, as we stated that operative headcount was up almost 7% in the first quarter versus year end, so that was part of the ramp. And we would expect a little bit lower number in terms of addition in the second quarter call it another 3% to 5%. And we anticipate additional ramp cost because of all the crewing changes that will be maybe call it $2 million higher in Q2 than Q1.

Okay. That's helpful. On the raw material side, just to go back there. Was there any issue with the inventory cost of raw materials you’d acquired kind of back in Q4 at lower scrap price, which benefited you in Q1? I guess, I am just wondering, how that could be so stable going into the second quarter, many of your peers comments on the benefit unique to Q1?

Yeah. Remember that we are on LIFO. So, you get the most recent inventory costs that affect your P&L and so you don't get prior period cost run through the P&L, because LIFO impacts it. Now, if you look from a FIFO basis, you see a little bit more favorable on FIFO basis than LIFO.

So would you expect those FIFO margins then perhaps have a bit more of an impact going into Q2?

No. We really wouldn't, I mean, and again, we would expect our LIFO to be pretty flat quarter-on-quarter. We expect our the spread dynamics to be pretty flat quarter-on-quarter, so we wouldn’t expect a whole lot of change on the material side.

Okay. Thank you very much.

[Operator Instructions] Your next question comes from the line of Tyler Kenyon from KeyBanc. Please go ahead.

Hey. Good morning, Tim, Chris, Tina.

Hi, Tyler.

Good morning.

So, I just -- this one my first question here. Tim, there's been a lot of change in the business over the last couple years and including a very perverse down cycle here? Has the mix of contracts in terms of annually priced contract business, has that changed at all? I know historical you referenced probably about 70% of the business being under annual contract with the rest spot. I just trying to get a sense if that's changed, call it over the last couple years and kind of where we stand here in the first quarter?

Yeah. It has changed and swung a little bit more to the contract side. We are running, probably, 80% to 85% right now, lot of that -- really two drivers of that. One is, spot markets were effectively gone for a long time and so it pushed it to the heavier mix of contract. But also we brought on the billet business which is obviously from a tonnage point of view a pretty big driver. I don't think either of those are structural changes and I still think 70%, 30% in a kind of normalized market is still the right balance, but right now we are running pretty heavy contract.

Is that 70% to 30% including the billet business or are you -- can you draw the conclusion that that's more or less just kind of the core business, meaning excluding billet?

I would say from an overall portfolio point of view 70%, 30% is still a pretty good number, range.

Okay. Got it. And then, there's been, obviously, a significant uptick just in your shipment volumes year-to-date without expected to continue here into the second quarter. I know probably difficult to gauge but how much of that do you think is more or less a parent demand or restocking and how much would you sense is an improvement kind of in real core fundamentals just within some of the end markets that you are participating?

Our sense is just based on the order activity that we are seeing, the most of the stuff is making it to the market, that people aren't built on piles, in fact, it’s we are ramping, we are being very careful with our customer base to make sure they're not building piles. And so, it feels pretty structural at this point.

Okay. And Chris just one for you, just -- how should we be thinking about the working capital kind of as we progress through the remainder of the year here?

Well, that's actually a good question, because we will have to see with the whole year holds in terms of revenue. We did a really nice job in terms of controlling working capital in the first quarters. Our revenues were up so significantly and our inventory was only up about 16%. So that was good. I think we will for the second quarter I will talk to, I wouldn't anticipate near the inventory build in Q2 that we had in Q1 and that’s just a function of trying to ship everything that you can to meet the growing demand and the second half the year we will -- maybe we will talk about that in the next part of the or next quarter once we see how the demand materializes.

Got it. Thanks so much for taking our questions.

[Operator Instructions] Your next question comes from the line of Justin Bergner from Gabelli & Company. Please go ahead.

Good morning, Tim. Good morning, Chris. Good morning, Tina.

Good morning.

Justin.

Hi. I just want to delve into a couple parts of your guidance. The industrial shipments expected to be I think flat quarter-on-quarter in the second quarter. I mean does that suggest that the industrial sort of momentum is sort of stabilizing at the high level or is that actually an improvement given what you would normally expect seasonality in the second quarter?

Yeah. On the industrial side, Justin, I would say, that’s a little bit of the stabilization. There is a couple dynamics. In the first quarter you always get some restocking in the distribution side. So the fact that the industrial is flat quarter-on-quarter, I think, is a good sign for us.

Okay. Secondly, I want to switch to price, I mean, given the price volume price mix pressure of certain negative $8 million in the first quarter versus the fourth quarter. Is -- are you expecting similar price mix pressure in the second quarter versus the first quarter or is that starting to taper versus what you experienced in the first quarter?

Yeah. Justin, I will take a shot at this and it’s a little bit above. By and large when you look at the second quarter, we see pretty much similar dynamics, although, we do anticipate maybe a little bit better mix and that's because of the increased energy shipments and the spot market clearly has changed and you can see from two price increases that we've announced that that will clearly help. Although, keep in mind, as Tim said, this year we are running the spot stuff is more 15% to 20% this year. So there will be an element of smaller part of your business than the rest of the OE side.

Okay. And then, I guess, if I look at sort of the incremental 1,500 tons or 1,000 tons or so that you're expecting to ship, I mean, you're -- at the midpoint you are guiding sort of incremental $3 million of, I guess, EBITDA, which would only be about $200 a ton. So should I then assume that the price mix is going to remain -- I mean, remain negative in the second quarter and prevent the EBITDA from extending more than what you're guiding towards?

Yeah. I think, that's pretty fair, I mean, if you look at the billet business we will increase in the second quarter and so that will mixes down a little bit.

Okay. On the billet business, is this still the same customer that's taking more billets, I mean, is the higher than 50,000 per ton rate, the 60,000 per ton rate that you are ramping to sort of you think sustainable at this new higher level as you look for in your business. What are the dynamics in the billet -- your billet business?

Yeah. In this particular case, it is A customer ramping up to kind of stable level. But we are also seeing a lot of interest from other producers in the industry as well, who have come in and are interested in investigating the model and so what we are, obviously, pursuing those opportunities and we are beginning to see just the broader in oil and gas, economy coming back to life, which obviously benefits us as well.

Great. Thank you for taking my questions.

Hey. Thanks.

[Operator Instructions] Your next question comes from Novid Rassouli from Cowen And Company. Your line is open.

Thanks for taking my follow-up. So just to continue on that billet topic, how high percentage of your ship tons are you guys willing to allow billet shipments to reach?

I would say as we look forward for the year what we see in the second quarter is probably what will be seeing later on to.

And beyond that, is there an upper limit that you guys are going to cap out where you don't want to tie up so much of your utilization in the lower margin billet, just to get a sense of on a earnings power, run rate over the next two year, three years, four years, where you guys see that going. Because it sounded like last time when we chatted you guys are saying that it's a nice sustainable kind of baseline. So I just want to get a sense of how this business line progresses?

Yeah, I guess, the way I would answer that Novid. I think we are kind of comfortable where we are at this point. I think the bringing on this business served its purpose by putting a little bit balance in the bottom of the boat and providing some stability. Certainly as we look at our overall portfolio across the cycle we do have to manage that and so at this point I would not see it getting significantly larger.

Okay. And then the recent price hike that we saw earlier this week, just wanted to see how, I mean, if the end markets are strong, it seems like acceptance would be good from customers, but I just wanted to see what the response has been the acceptance and when we would see that impact on the P/L? Thanks.

So the $40 price increase we announced yesterday is effective June 5th in the spot side of our portfolio, which again is kind of 10% to -- it’s running about 15% right now and that -- so you'll see that starting in June. Obviously, we put it out yesterday, so getting any sense of acceptance is a little bit difficult but prior to going out with these kind of increases we do spend time talking to our customers and getting engaged on how well it’s going to stick and our sense is given what we’re seeing in the marketplace right now that it was a timely move that it was the appropriate level of move and that it will end up sticking in the marketplace.

Thanks Tim.

Yeah. Thanks.

[Operator Instructions] We do not have any questions over the phone at this time. I'll turn the call over to Mr. Tim Timken.

Well, thank you, for your questions this morning and your attention. As I wrap up I want to make sure I thank all of our employees including the new ones have come on board recently to help us with the ramp of the business. I want to thank you for your interest and your continued confidence in the business. We are executing a strategy that we believe will generate real value and we look forward to more fruitfully utilizing our new assets to demonstrate that value. Thank you for joining us today and if you have any follow-up questions, please don't hesitate to contact Tina. Have a great day.

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