Good morning. My name is Kim and I will be your conference operator today. At this time, I would like to welcome everyone to the TimkenSteel Second Quarter 2018 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. Mitchell Byrnes, Senior Manager of Steel Finance, you may begin your conference.

Great. Thank you. Good morning, everyone. And thank you for joining us. I’m here today with Tim Timken, Chairman, CEO, and President; as well as Chris Holding, Executive Vice President and Chief Financial Officer to discuss our second quarter 2018 financial results. 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 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 and we prohibit any use, recording, or transmission of any portion of the call without our express advance written consent. With that, now I would like to turn over the call to Tim.

Good morning. Thanks, Mitch. And thank you all for joining us. We’re off to a good start this year. Let me begin by congratulating our employees for our safety performance. The first half of 2018 was the safest in our history topping a record we set in 2013. This is notable because our production levels were very high and nearly 500 new employees have joined us since the beginning of last year. I want to thank all of our team members for keeping a steady focus on safety. The year is unfolding just as we anticipated with strong demand and improvements in sales and net income, EBITDA was up 45% quarter-over-quarter and the second quarter marked our highest ship ton months since early 2012. As our asset utilization has climbed, we remain focused on producing a better mix of product. Through our variable pay plans, we’ve encouraged employees across the company to sell, make and deliver our most differentiated and profitable products, including large bar, seamless mechanical tubing, heat treated products and components. As a result, we’re delivering a richer mix of products that makes the most of our unique asset base. We make higher value products like no one else in the industry with the quality, consistency and reliability that helps our customers’ product platforms perform better. In the quarter, American Metal Market recognized that leadership. Our Endurance Steels were named Best Product Innovation of the Year. The metallurgists among us understand how difficult it is to achieve both strength and toughness in steel. We’ve achieved that in our line of Endurance Steels. While a leading edge innovation like this takes time to impact sales in a big way, collectively, our technology leadership provides the differentiation that keeps us competitive. One area of focus this quarter was improving customer…

Thank you, Tim. Good morning. The second quarter results were in line with our guidance apart from the impact of LIFO expense. EBITDA for the quarter was at the midpoint of our guidance range when adjusted for the $5 million of higher LIFO. Our markets remain robust and operational improvements made within the year have increased shipments and revenues. Total shipments of 310,000 tons in the quarter were 5% higher than in the same period last year and 3% higher than the first quarter of 2018. The year-over-year improvement was driven by a broad-based strengthening end market demand and operating improvements. Mobile shipments were similar to the first quarter of 2018 and 3% higher than the second quarter of 2017. The 2018 projected SAAR rate of 17.2 million units remains strong and has a slight increase over the 2017 production level. For the third quarter 2018, we expect mobile shipments to be slightly lower than the second quarter due to some platform specific changes. Industrial shipments were 8% higher than the first quarter 2018 and 20% higher than in the second quarter last year, helped by the strength in demand for bearing and power transmission applications. In the third quarter, we expect a sequential increase in industrial shipments of about 8% as the general economic sentiment remains positive in most of the industrial market sectors and inventory levels remains balanced. Shipments to the energy end market increased about 41% sequentially and 57% compared to the same quarter a year ago, albeit off a low base. The US rig count has risen to around 1,050 active rigs and we remain encouraged by more balanced customer inventory positions. We expect third quarter energy shipments to be about 13% higher than in the second quarter. Net sales for the quarter were $414 million…

[Operator Instructions]. Your first question comes from the line of Seth Rosenfeld from Jefferies. Your line is open,

Thanks. Could you please help us better understand the increase in maintenance cost that you’re forecasting for the third quarter. Can you help us understand to what that’s attributed and how we should expect it to flow through I guess going into the fourth quarter as well? It’s just one-off or higher run rate we should forecast thereafter? And then to better understand, I guess assuming this is perhaps improving some of your efficiencies at the mill, what scale of uplift could you see in terms of the returns or margins going into 2019 and the back of this larger step up in CapEx? Thank you.

Yes. Great, Seth, I’ll take a shot at the maintenance and we can talk a little bit about what we see going into 2019 later on. We have maintenance outages where we shut down the plants and do large overhauls of all of our equipment. And this year, all of the plant maintenance outages will occur in Q3, so it is a one-time step up from Q2 and then we will return in Q4 to Q2 type of maintenance levels. Related to probably high level to the rest of this year, obviously our markets remain strong. We’re working to improve our customer service and our -- clearly our plant efficiencies are improving lockstep. If you -- in my script you’ve heard that we anticipate again better price mix going into Q3. And as we get into 2019, we’d expect a little bit more of the same.

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

Hey, Good morning.

Hey, Phil.

Good morning, Phil.

So, kind of best way to read the bridge here in terms of third quarter, so the third quarter midpoint you’ve got, $20 million of EBITDA, you’ve got $14 million of outage costs which you’re largely taking for the year. In that quarter, you’ve got better pricing and mix and you’ve got better mix going into the fourth quarter, and there will be some seasonality. But I should think about that $20 million -- excuse me that $20 million becoming all else equal absent any change in shipments something like a $35 million number in the fourth quarter just as we kind of normalize for the maintenance expense. Is that a good way to think about it?

Yes. I mean at a high level clearly you can take Q2 and normalize for the maintenance costs. And you’re right, that takes you from a $20 million to kind a $35 million to the fourth quarter, but we’ll get to the fourth quarter obviously in about three months but that maintenance clearly is one-time and it won’t appear in the fourth quarter.

Got it. And any reason specifically why you’re taking it all in the third quarter versus splitting it?

We’ve traditionally -- yes, we’ve traditionally used the third quarter as our big maintenance outage spread through July and August. So, this is kind of a return to normal. Last year was a little bit of an anomaly because we pushed everything -- we back end loaded everything into fourth quarter. So, this is a more normal pattern for us.

Got you. And any color on the billet shipments in Q3?

As we said in the beginning of the year, we’ve been working that down as our mix has improved. We’re still in that business but it’s a kind of about where we wanted to be.

And that’s contemplated in your expectation that shipments will be flattish or so for the quarter, okay.

Yes. That’s correct.

And then just last question, Tim. I know automotive business is typically pretty stable in terms of three year pricing and we saw base prices dip a good bit in Q2 versus Q1. Any thoughts behind that, was that mix related and should we expect that to sort of bounce back to the average that we saw in the first half of the year versus the second quarter of the year? Thanks.

Well, the step down was definitely mix related. Where we go from here? I mean obviously we’re beginning to look at ‘19 already from a pricing point of view and have -- beginning to have those discussions with customers. And so, we’ll get into that as we get a little bit later into the year.

Thanks.

Yes. Thanks, Phil.

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

Good morning, Tim. Good morning, Chris.

Hey, Justin.

I guess first off, in terms of the guidance, you indicated that third quarter was structurally higher EBITDA. So, I guess are you suggesting then that if that $35 million of sort of EBITDA without the maintenance expense were to be further nudged up for any additional sort of raw material spread, it would be above that $36 million that you would have done in the second quarter ex-LIFO?

Justin, I’ll be honest with you, I lost in the numbers but I’ll probably restate it a little bit different way. So, if you look at that second quarter EBITDA of $31 million and we’ve guided to $15 million to $25 million, I mean just the difference in spread and maintenance. You can see we should have structural improvements based on the $25 million range, because you’ve got kind of $31 million in Q2, minus maintenance spread $18 million, which takes to like $13 million and that in the midpoint is $20 million.

Got it. So, even if I was to add back the LIFO expense in the second quarter of $5 million, if I add back to maintenance and sort of raw material spread to the third quarter, it’ll still be slightly above the second quarter number?

Yes. Just let me to talk to LIFO and LIFO is kind of funny rate, what the calculation is and I’m sure is you know, you try to project what your year end LIFO is which is just a projection and then you try to equalize it throughout the quarter, but as the year end changes then you have to catch up in the quarter. So in Q2 we had a little bit of catch up and that’s what created the higher LIFO. So, we wouldn’t anticipate at this point, if you do the math that LIFO would be call it $2 million lower in Q3 and Q4 than in Q2.

So, it would be a sequential tailwind then because …?

Yes, yes.

Okay.

So, $2 million better than Q2, yes. And so, that kind of pushes like a $15 million structural Q2 and we’ve provided a range of $15 million to $25 million, so that’s kind of where the structural improvement math lies.

Okay. I think I got that. I guess it’s bringing me to sort of a bigger picture question. So, I mean when I compare 3Q to 2Q, it’s slightly better when you make adjustments for some of these timing and maintenance issues. So, it seems then that the general framework is that most of the improvement in mix and pricing is being offset by cost inflation to keep EBITDA flat to slightly up on sort of a non-timing affected basis?

Yes. I’ll take that one, Justin. Clearly our margins are improving sequentially. Obviously Q3 is going to be a little bit different because of maintenance. But outside of the maintenance, our margins would look to increase structurally in Q3 also. And yes, we have put price into the market. There is no question that inflation is pretty significant and you’re well aware because you follow the space, the electrodes and refractories are very significant throughout the industry.

You’ve bought the -- you’re buying some of the electrode and refectories on spot or is that contracted and sort of known earlier in the year?

Well, I think what we would have talked to last time is that we had -- have contracts for the whole year. And so, we have guaranteed supply. We had known pricing for the first half and now the second half pricing has come in and it’s higher.

Okay.

Yes. None of these electrodes guys are making contracts out as six months, I mean they’re planning it really tough.

Okay. Got it. And then lastly, the industrial tonnage only being up 8% I guess quarter-on-quarter in the second quarter versus I think the guide of around 15%, what sort of constrains you there I guess coming up the bit short your overall volume target, I mean mainly on the industrial side?

Yes. As much as anything else that’s just the mix of the product that we ship and we take our best shot in terms of guidance from a market sector mix perspective. But -- by and large we were little bit off on the industrial side. It’s nothing from a market perspective.

Yes, nothing structural. We had some -- a couple of customers not take shipments and we had a little bit of ship -- or transportation issues, but nothing structural from a market point of view.

Okay. And are you expecting sort of any pick ups there in the third quarter or is that just mainly in the second quarter?

I think where the industry in general is going to be fighting this transport issue going forward, the shortage of drivers and available trucking is definitely a challenge for all of us. But we fortunately have long-term relationships with our transport partners and we’re kind of working our way through that.

Okay. Thank you.

Yes. Thanks.

Your next question comes from Seth Rosenfeld from Jefferies. Your line is open.

Hi. Thanks for taking my follow-up. Just wanted to understand a little bit better how you’re seeing the competitive dynamics in the SBQ market. And when we talk to some of your competitors who are medley but larger than you, they’re pretty consistently talking about share gains in the SBQ market and also some meaningful capacity growth in that product category as well over the coming years. Can you talk a little bit about how you’re seeing that impact your own market share and also product pricing dynamics in SBQ? Thank you.

Yes. Let me reverse the order and talk a little bit about the capacity side and then I’ll come back to the share question. I think we’ve seen a lot of the announcements made already and most of that capacity is in the market at this point we believe, with the exception of potentially Republic bringing back their Lorain facility. The investments made by the other guys I believe are up and running and in the marketplace. But I think what you’re seeing right now is a lot of share shifting going on with the impact of the 232, really beginning to have some teeth starting in April. We’ve seen bar imports down by 25% to 27% and May and June we’ve seen it down another 32%. So, there is a lot of movement going on amongst the players with that slowdown on the import side. There is no doubt though that we’ll have to continue to focus on our competitiveness. We are definitely the preferred supplier. But there -- some of the other guys are getting pretty good at making SBQ. So, it’s up to us to make sure that we can get our product to market competitively and continue to create value for our customers.

Okay. Thank you very much.

Thanks.

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

Hey, Tim. Can you just kind of give us a feel for the energy markets right now hearing lead times for a lot of those products, particularly heat treat are out quite a bit several months. And how -- and just based on the existing market conditions, how much lag should we think that the energy sort of sequential momentum should have as we move into ‘19. And any kind of market post commentary you can make would be helpful?

Yes. I mean obviously the supply chain is struggling to keep up with the production side, with the drilling side. All of the sentiment we’re hearing out of the oil and gas markets are positive. If you look at our shipments, we’re up 40% sequentially. Rig count is up another 10% year-over-year they’re what 1,050 in that neighborhood. The DUC inventory is okay. So, all of those market dynamics seem to line up pretty well. It’s helped us actually ramp that -- the AQTF. We’re seeing good shipments in the second quarter. We shipped about 9,500 tons. We see that tonnage continuing through the year. So, that’s all positive. So on the whole, I would say the market dynamics are healthy. The supply chains are definitely stressed but are doing their best to kind of keep up with the drilling side.

Thank you.

Yes. Thanks.

Your next question comes from Justin Bergner from Gabelli & Company. Your line is open.

Thanks for the follow-up. You mentioned earlier that auto would be down I guess slightly sequentially in the third quarter on line model shift I believe. Is there just sort of a temporary one quarter disruption or does that represents sort of a small step down in your automotive volumes? And then I guess secondly, any sort of comments on additional sort of new product introductions that you’re working on, on the automotive or other fronts?

Yes. We -- as Chris said, we had one platform roll off that will impact the third quarter and going forward. Obviously, we’re always looking at renewal of that portfolio, specifically on our value-added side. And so, we have a number of different platforms and that works at any given time. So, over the long run, we’re still very committed to that market. We see that’s a great growth opportunity for us. And so, we’re comfortable where we are right now despite the loss of the one platform. Market dynamics are good. SAAR rate is holding up, production rate is holding up despite some of the grumbling you heard on their calls the other day. When you look at the schedules, they’re actually pretty good. And in our case, they skew into the heavy side now away from the light vehicle from the light -- the passenger car to the light trucks and that’s good for us. So, all-in-all that side of the -- that segment of our business is lining up really well.

Okay. Got it. So, the platform rolling off that was sort of nune a couple of quarters ago expected?

Yes.

Okay. Great. Thank you.

Great. Thanks.

There are no further questions at this time.

Well, thank you very much for the questions today. If you have any remaining questions, please get in touch with Chris. Before we wrap up, I want to thank our employees for their extraordinary efforts in the quarter to improve both safety and our financial performance. We’ll continue those efforts in the second half and focus on improving our delivery performance. Thank you very much for joining us today. And have a good day.

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