Good morning. My name is Cassie, and I will be your conference operator today. At this time, I would like to welcome everyone to the TimkenSteel Second Quarter 2017 Earnings Conference Call. [Operator Instructions] Tina Beskid, you may begin your conference.

Thank you, and good morning. I appreciate you all joining for our second quarter 2017 earnings call to discuss our financial results. I am joined here today 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. With that, I would like to now turn the call over to Tim.

Good morning and thank you for joining us. The first six months of the year have been a real sprint to ramp production and meet demand. Sales have grown quickly as markets rebounded and we continue to increase market penetration. I'm pleased to say that sales are up 47% year-to-date versus the first half of 2016, operations ramped up in the first half hitting record labor productivity levels which is remarkable given that nearly 15% of our plant workforce came on board within the last year. Melt utilization increased more than 25 percentage points since the end of last year and safety performance continues to be the top quartile among our peers, in fact OSHA recordables in the first half of the year were at a record low. This has been a steep ramp in all respects. We are now on the back side of it and gaining operating cost improvements which will be beneficial as we expect continued improvements in market demand. North American light vehicle demand remains at high levels even when some trimming of passenger car inventories. Industrial markets continue to strengthen particularly in the mining sector. The slow and steady improvement of oil and gas markets continues. We also expect raw material markets to remain stable similar to the second quarter. As a result of this market outlook, we expect to see an increase in shipments in the third quarter and EBITDA between $10 million and $20 million. As we manage both the opportunities and the challenges of the market environment, we also remain focused on long-term performance improvements. We are executing a strategy that I have spoken about often in our calls that will improve and sustain profitability over the cycle. We announced some leadership changes in the quarter. Shawn Seanor has wrapped up the…

Thanks Tim, good morning. Our second quarter results came in pretty much as expected. Total shipments of 295,000 tons in the quarter were 5% higher sequentially and 55% higher year-over-year. The improvement was a result of strength in end market demand and increased market penetration. Mobile shipments were down about 5% from the first quarter 2017. The mobile sales decrease was in line with the decline in the North American light vehicle production rate from $18 million to $17.2 million vehicles which resulted from the OEMs effort to rebalance inventory levels. For the third quarter we expect mobile shipments to be about 3% lower sequentially due to seasonal customer production shutdowns. Industrial shipments increased about 3% from the first quarter 2017 primarily due to market share gains and fundamental end market demand. Global commodity markets began to stabilize in the first half of the year was positively impacted our industrial end markets. Moving into the third quarter, we expect industrial shipments to be about 10% higher than the second quarter as the general economic sentiment remains positive t most of the industrial sectors. Second quarter shipments to the energy end market increased about 52% sequentially as customer inventory positions became more balanced with demand from the rising U.S. rig count. We remain encouraged by the steady improvements in market supply and demand dynamics in the energy sector and expect third quarter energy shipments to be similar to the second quarter. Net sales for the quarter were $339 million with base sales of $262 million and surcharges of $78 million. Base sales were $10 per ton lower than the first quarter of 2017 due to increase billet shipments, end market product mix changes and price pressure. Our strategy to broaden our base business includes products that are more carbon bar oriented…

[Operator Instructions] And your first question comes from Novid Rassouli with Cowen & Company. Your line is open.

If we could start on mix, would you guys mind discussing mix in this 3Q and if we could see a drag from mix on potentially seasonally lower auto shipments or increased billet shipments, if you could just maybe just speak to that for a second.

We don't expect much in the way of mix differential between Q1 and Q3. Net, net, net the mix out would be fairly similar.

And then commentary on SBQ was very strong from other steel players including service centers and mills. I'm guessing it's probably weighted more towards the smaller diameter but I just wanted to see if you guys can comment on, if you guys are seeing the same thing where you're seeing the strength is it small diameter, large diameter across the board and maybe just give us some context there.

I would say it's more or less across the board. Obviously automotive has pulled in a little bit but still running at pretty healthy rates and that tends to consume the small size of our range up to - maybe in intermediate a little bit but if you see the oil and gas markets fire back up or continue to fire up, as you see mining activity coming back through Caterpillar, that's beginning to consume the larger size of our range as well. And we're also seeing some pretty healthy demand through the seamless mechanical side. So we're really kind of seeing it across the product line at this point.

And then my last question. On contract negotiations, can you discuss the environment now or this year versus last year going into contract negotiations? And if you can comment on the overall a potential order of magnitude perhaps maybe just rough percentage terms for the potential lift in contract pricing and when we might see that hit the P&L?

Let me answer your first question and then not answer your second question. Obviously, we’re seeing a lot better environment this year than we did really last two cycles. Lead times are out, markets are firming, you know all of the chatter on the trade side has injected an interesting wrinkle into the whole thing. So, we feel pretty good going into the end of the year, that we'll be in a position to have good conversations with our customers. And then on the pricing side, we obviously don't - we don't speculate on that.

Sure. And then when would we see it come up in your P&L once they do reset.

It’s calendar year, so generally we get most of them done, a couple might drag into January, February. But for the most part we try to get everything wrapped up by the end of the year.

And your next question comes from the line of Seth Rosenfeld with Jefferies. Your line is open.

I have a couple of questions, starting out on the ramp cost as your volumes continue to recover. I remember last quarter perhaps you noted that ramp up cost would perhaps accelerate through H1 and then stabilize in late Q3 or early Q4. Following your Q2 results, can you confirm if we should expect further meaningful cost growth into the back half of the year or are you now already at a pretty stable run rate on the cost side, we should expect moving forward? Thank you.

Our ramp up cost were incurred all through the first half of the year with a little bit more in the second quarter than the first. We have fully ramped up. We don't expect additional cost to come in that are meaningful in the second half of the year.

And just one second question on the outlook for your raw materials and for metal spreads that you note that for your Q3 guidance, expect metal spreads roughly similar to Q2. With scrap prices looking to be pretty well supported and perhaps increasing that more people expect to stay given the strength in virgin raw materials. Do you see any risk of incremental margin pressure looking through Q3 perhaps going into the fourth quarter of the year. Given some of the seasonal headwind you’re going to face from the demand side? Thank you.

Seth, we look for Q3 to be pretty much in line with Q2. At this point, we can see - have clear visibility to both July and August. So, we feel pretty good about that. In September so far, we've no reason to see anything different there either. So, in line with - I think you probably heard this from the other folks in our space that the scrap dynamics are pretty stable and so I don't really think we're anywhere up lime on this outlook.

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

I had a question on the oil and gas market in particular and why as we look into the third quarter that, the outlook is perhaps not a bit more optimistic given the rise in the rig count and the fact that you are coming off of a reasonably low level?

Phil, obviously when you go from that the high-high peaks that we run into the depth of this downturn reading inventory is always a challenge. We've said consistently in last couple of calls that we think it's getting into balance, we still think that that's happening. So, the dynamic - end market dynamics are good. You've seen oil inventories down about 14 to last 16 weeks. They put Baker Hughes claimed six mores in the field last week. So all of that is positive, we just have to continue to kind of churn through the supplies that are sitting on the shelves. We're seeing good activity in the shale side, both on the completion side and increasingly on the drilling side. So, that should help consume some of the inventories that are sitting out there. But, it's a process.

Would you anticipate at this point in time that once you get the Q& T align operational that you'll be able to tap into a bigger share of the market?

We hope that as the markets continue to grow that capacity will come online in a stronger market. Again, we should be able to take a larger portion of that market. You remember in the past, we've been throttled by the amount of Q&T capacity that we've had in place when the markets run and we were determined not to be in that position this time.

And then got a second question on the net working capital. What's the outlook in the second half in terms of source or use of net working capital?

If you look at the second half of the year, the main drivers going to be CapEx, right. We guided the $40 million for the year in CapEx. In the first half we've only spent $6 million. So, the back half will see higher CapEx with probably call it, $10 million to $12 million next quarter.

Chris, I was more asking on the side of inventories and receivables and payables just in terms of the cost to run the business on the net working capital side?

We filled up for the year about $50 million of net working capital in the first half of the year and we don't expect to build more in the second half.

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

First question, just relates to I guess the sequential EBITDA guide for the 10 to 20 in the third quarter versus a 20 in the second quarter. Clearly, your shipments are expected to go up a bit, maybe if you could just sort of talk about the headwinds on a sequential basis seasonal or otherwise that might constrain third quarter EBITDA that would be helpful?

Justin, this is Chris. Basically structurally, there is not much difference between Q2 and Q3. When you take out supplier refund and then recognizing we’re going to have some bargaining contract related costs and then, you look at the midpoint of our guidance, there's not much difference there. So, you think midpoint of $15 million and then you make some subtraction for this other two items, you get pretty close.

Okay. Is there normally some seasonality in the third quarter, just - even if shipments are growing up, are there any sort of cost headwinds that you would seasonally incur in the third quarter?

I think by enlarge, SG&A is a little bit seasonal typically our SG&A gets to be a little bit back loaded. But other than that there's nothing significant.

We also normally take some shutdown time that now pushed into - later into the year, this year.

Yes. For Q3, we're not going to have planned outages that albeit in the last quarter.

And the increase for billet shipments in Q3 versus Q2, I think that was mentioned in the presentation. Should we expect that Q2 shipment number on the billet side to go materially higher than it was this quarter or just sort of marginally higher?

Yes, marginally higher.

Okay. Shifting to sort of another topic of questions, the section 232 potential tariffs, I'm sure you've done some thinking internally as to what they may or may not mean for TimkenSteel. Any sort of color you could provide on how they would affect the grades of steel that TimkenSteel supplies. Should they go into effect in your forward limited version would be, I think helpful?

Step back from 232 for a second and look at the broader market dynamics. I mean everybody is concerned that the 232 sliding and that they may not do it, whatever. At the end of the day our markets are getting better. Lead times are going up, utilization rates are going up. So as I said earlier, I think we're in a better position this year than we have been in the last two, to begin talking with our customers about 2018. So, that's just background. On the 232 itself, depending on the remedy that is recommended by Treasury, our understanding is that it would be a relatively comprehensive list of products. So, all steel products should be impacted in one way or the other assuming it gets done. In our particular case, we've seen imports on SBQ in the first half of this year go up by 20% to 25% on bar, and tubing is up 50. So the imports are definitely returning to the market as markets continue to strengthen. And so that import volume that we’re seeing right now would be directly impacted depending on the remedy that's put into place. So it would have a significant impact, but I also would not underestimate just the overall strength of the market and the position. That puts us to have contract discussions going into '18.

Okay, thanks for that background. I mean, would you - to estimates or how much of the U.S. or North American SBQ into market is imports today?

Let me give you an example rather than talking through all our product. Let me give you an example that is important for us. If you look at the 6-inch and above market, kind of, 6 to 16 inch for us, we’re obviously a significant player in the North American market. In fact, a very few people who can make that range of products. Approximately 30% of that product is from overseas. Increasingly from China, but also Korea, and a little bit out of Western Europe. So that market itself is a very good one for us. It's traditionally been our sweet-spot, and increasingly, it’s been under pressure from foreign sources. So that would be one of the areas that we would look at closely assuming this 232 goes in place.

Your next question is from Phil Gibbs with KeyBanc Capital Markets. Your line is open.

Thanks very much. Just had a question on the QNT startup. Had there been any startup costs associated with that in the number so far? And then secondarily, what are you anticipating for LIFO on the third quarter relative to the second quarter from just more of a housekeeping standpoint? Thanks very much.

So, Chris, no, we really haven't had much on the expense side relative to the quench and temper. A lot of that has been capital spending, just finishing up the project. So it's not material. And second question, can you [indiscernible]. Oh, LIFO. Our LIFO is going to be - I mean, we look at year end and work backwards. So LIFO will be, call it, a $2.5 million run rate, $2 million to $2.5 million run rate through the rest of the course, through the rest of the year, I should say.

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

Thanks for the follow up. In terms of employee additions, I think at the start of the call you mentioned the percentage of employees that had joined in the last year. Is there further hiring taking place or you’ve pretty much completed the hiring that corresponds to current market conditions?

We brought on about 200 people in the first half of the year. At this point, we would think that that will fill out accruing, and then anything after that would just be to handle attrition.

And on the continuous caster, I assume it continues to sort of ramp up in the background of the operations of the company. Could you maybe just give us an update as to where it stands and sort of the potential for further profitability improvement as it reaches higher levels of utilization from here?

Let me talk about the loading, and I'll let Chris take a shot at the impact of it. We continue to load the caster. Obviously, the billet business that we picked up, allowed us to put a pretty significant load through that piece of equipment. As the industrial and oil and gas markets continue to build, that will help us well. So we are very much focused on getting that piece of equipment loaded.

Yes, so I’d give you a little bit more color. We continue to move more product to the caster because of the yield benefits and that will go on through this year and well into next year. So we have not realized the full benefit of the caster just yet and that’s more a function of not only having more loaded, but in terms of the mix between our bottom put process and utilizing the castor.

Your next question is from Jim Kitzinger with KLCM Advisors. Your line is open.

Can you comment on where lead times are these days, and your view of that? And then the follow up to that is, with 70% melt utilization, how do you get that up and how do you have to crew up to make that happen?

Yes, I’d say just a high level statement about lead times they’re about pretty far. Quite frankly, right now, we’re doing our best to try to bring them back in. From a crewing point of view, we are running four crew through most operations, all operations, at Faircrest. At Harrison, we're four crew everywhere but melt but we’re role constrained in that operation. And then tubing, we’re ramping tubing with an additional crewing, but we still have more capacity there to take to the market assuming that the oil and gas markets continue to build. So we continue to look at ways that break-in constrains. In our Harrison operation for instance, we’re looking at outside converters who could help us with a role constrains side of things. That work is actually going pretty well. Hopefully, we’ll begin to see the impact of that soon. So it’s really just a matter of working through process by process to make sure we’re getting every ton to the street.

And there are no further questions at this time. I’ll turn the call back to Tim Timken.

Well, thanks for joining us today. I’m feeling obviously optimistic about where we are, not just because our markets are rebounding, but also because we’ve taken the action over the last few years that have positioned us better than ever to deliver value. We appreciate your continued confidence in the business, and we remain focused on safety and profitability as our highest priorities. If you have any follow-up questions, please don’t hesitate to contact Tina. Have a great day.

And ladies and gentlemen, this concludes today’s conference call. You may now disconnect.