Ladies and gentlemen, thank you for standing by and welcome to the TimkenSteel Fourth Quarter 2019 Earnings Conference Call. At this time all participants are in listen-only mode. After the speakers' presentation there will question and answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jennifer Beeman. Thank you. Please go ahead.

Thanks[Jody]. Good morning and welcome to TimkenSteel’s fourth quarter and full year 2019 conference call. I'm Jennifer Beeman, Senior Manager of Communications and Investor Relations for TimkenSteel. Joining me today is Terry Dunlap, Interim Chief Executive Officer, Kris Westbrook, Executive Vice President and Chief Financial Officer as well as Tom Moline Executive Vice President of Commercial. You all should have received a copy of our press release which was issued last night. During today's conference call we may make forward looking statements as defined by the SEC. Our actual results may differ materially from those projected or implied due to a variety of factors which we described in greater detail in yesterday's release. Please refer to our SEC filings including our most recent Form-10K and Form-10Q and the list of factors included in our earnings release all of which are available on the TimkenSteel website, where non-GAAP financial information is referenced, additional details and reconciliations to its GAAP equivalent are also included in the earnings release. Finally immediately following the conclusion of today's call we will post supplemental information regarding sales and volume by end market on the Investor Relations' page on TimkenSteel website. This information is consistent with information we have provided in previous quarters and can be located under financial information to historical data. With that, I'd like to turn the call over to Terry. Terry?

Thank you Jennifer and thank you to everyone for joining us this morning and for your interest in TimkenSteel. First the word about safety. Safety is a core value of TimkenSteel and the most important priority for all of our 2,500 employees. This safety first mindset has been a cornerstone in maintaining the overall health and well-being of our employees for many years and our team continues to implement plans and actions that reduce risk, incidents and injuries on a daily basis. Safety results for 2019 did not meet our expectations. While results were good at most plants overall we experienced slightly higher incident rates compared with the prior year. With the full engagement of our employees and the USW we have a renewed focus on safety for 2020 and are implementing a number of new initiatives including special attention to the prevention of life-threatening incidents. With our ongoing journey towards zero incidents I continue to be impressed by the motivation and commitment of all our employees to find solutions to keep everyone safe every day every shift. Nothing we do is more important than safety. Now let's move on to our results for the quarter and the year. As expected the demand environment in many of the markets we serve did not improve as we headed into the end of the year resulting in disappointing results for the quarter. Although our fourth quarter adjusted EBITDA of negative $8.7 million exceeded the high end of our guidance range when adjusted for the inventory valuation method change. Our shift tons decreased by 39% compared with the prior year quarter. This decline in demand coupled with lower raw material surcharges led to a decline in sales of $180 million or 44% compared with the prior year quarter. While our energy and industrial…

Thanks Terry. Good morning everyone. As Terry mentioned our fourth quarter results came in above the high end of our adjusted EBITDA guidance range after considering the LIFO inventory valuation change. Despite end market challenges driving lower customer demand and plant utilization we made significant strides during the fourth quarter to better position our business for improved financial performance. During the quarter we generated positive free cash flow through enhanced working capital management and cost reduction actions. Additionally, we increased the available liquidity through the refinance of our credit facility and further debt repayments. As mentioned in our earnings release we changed our inventory valuation method in the fourth quarter of 2019 from last-in-first-out or LIFO, the-first-in-first-out or FIFO. We believe that the FIFO method improves comparability with our peers or closely resembles the physical flow of our inventory and aligns best with how we internally manage the business. This change has been retrospectively applied to our prior year financial statements and none of the company's inventory remains on LIFO going forward. Further details on the LIFO to FIFO inventory valuation change will be provided in our Form 10-K that we plan to file next week. On a GAAP basis the fourth quarter of 2019 net loss was $84.6 million or a loss of $1.89 per diluted share compared with a net loss of $29.4 million or loss of $0.66 per diluted share in the fourth quarter last year. Excluding certain items the fourth quarter of 2019 adjusted net loss was $27.3 million or an adjusted net loss of $0.61 per diluted share and adjusted EBITDA was negative $8.7 million for the quarter. Turning to the main drivers of the fourth-quarter financial results. As expected shipments of 180,000 tons were 14% lower in total across all of our end markets…

Thank you. [Operator Instructions] Our first question comes from a line of Martin Englert of Jeffries. Please go ahead. Your line is open.

Hi good morning everyone.

Morning.

Morning Martin.

Can you discuss what happened with the annual contract pricing across some of your businesses here? I know you commented you expected declines but any more color context you could discuss across the business units?

Tom you want to take that one?

Yes and good morning. This is Tom Moline. A comprehensive look at base pricing is difficult because it is so heavily influenced by -- but I can't -- sorry it's difficult to offer specifics on steel based pricing other than it was most definitely pressured as a result of excess domestic supply and continued import competition and it was pressured across all markets that we participate in.

Okay. Any kind of sense for a modeling purpose what we should be thinking about versus where things were averaging? I understand that mix is going to push things around a bit but should we be thinking down like $5 a ton across the businesses or $10 a ton versus we're at average ton base is in 2019?

Martin it's Kris. It's higher than 5 to 10 but lower than say 50. So it's in that range but it's modest but impactful.

Okay. That's helpful. I appreciate it and then beyond the seasonal improvement that you're seeing in 1Q activity and that you're guiding to, are you seeing any underlying growth within any specific end markets versus a year ago in 1Q, ‘20 versus 1Q, ‘19?

Not specifically to growth. In fact most of the markets that we are participating in are forecasted to be flat to slightly weak but we seem to be gaining share in all markets to offset some of that market weakness.

Okay. Understood. And I understand that company is undergoing a lot of changes and raining in the capital spending and trying to generate cash but have you explored or discussed expanding the product offer and speak you in tubular a number of years ago. You started doing some increased external billet sales but if you thought about merchants bar or rebar to better leverage your fixed costs and improve the utilization on the mill?

Martin this is Terry. So we are evaluating our whole product portfolio right now. I think we talked about our value add business expanding and the efforts that we put forward there and investments were making to drive up the value chain if you will and we are currently one of our work streams is evaluating our product portfolio right now. So nothing to report but certainly an area of thought and consideration.

Okay. I appreciate all the color and good luck.

Thank you.

Thank you.

Our next question comes from a line of Seth Rosenfeld of Exane BMP. Please go ahead, your line is open.

Good morning. Thanks for taking the questions. I appreciate that and implementation but you can say with regard to the contract negotiations and return contracts to come through but with regards to the auto wins you commented achieving last year I think you said [indiscernible] by second half 2020 and then again some additional easy applications in the coming one to three years, especially with the contracts starting to kick-in second half of this year, can you give us any sense of scale with regard to either volume or value you should attribute to these contracts on the horizon? I'll stop there. Thank you.

I can offer something specifically with the new program business that we have been awarded in our mobile on highway value add business segment. The magnitude of that for 2020 as we've reported in the past will be in the range of 30 million to 35 million on the top line.

Thank you. Do you think color margin perspective compared to other products can you give a sense of how that would compare higher or lower versus base load?

A bit higher than base load.

Okay. Thank you. And then lastly when it comes to balance sheet please obviously you've made some good success with extending your liquidity profile. Can you give us any more sense with regards to additional flexibility around your balance sheet. Liquidity of course quite good but leverage is still elevated given where current profitability stands. How comfortable is a management team with that and what else can be done to evade any remaining risks? Thank you.

Sure. I'll take that one. This is Kris. The ABL definitely helped us from a liquidity perspective. We continue to make progress from a working capital as well generating free cash flow from that. The one maturity we do have coming in about a year and a half is the convertible debt for $86 million. Similar to what I mentioned last quarter we continue to monitor the markets closely there and believe that there are options to refinance that opportunity in advance or at the maturity date. So we're comfortable where we're at today. You can never have too much liquidity. So we will always look for opportunities but we're comfortable where we're at.

Okay. Thank you very much.

Our next question comes from the line of Justin Bergner of G. Research. Please go ahead. Your line is open.

Good morning everyone.

Good morning Justin.

I apologize my voice is a little scrappy just a handful of clarifying questions, the 30 million or 35 million of auto revenue from these new contract awards in 2020, I mean is that on an annualized basis or is that only partially, I guess benefiting 2020 and larger annual basis?

Yes. That is just the impact in 2020. On an annualized basis it'll be in the range of 85 million to 95 million.

Okay. Great. And any sort of perspective on the awards coming due in 2021, 2023 or would you rather share that a later point?

There are still two too early at this point to share any specific. So we'll provide that guidance in future calls.

Okay. Got it. In terms of the cost savings program, I mean I’ve realized that you're driving productivity every year but is the program outlined last year effectively done or are there other areas to sort of drive at and in terms of ‘70 versus the ‘60 what was sort of the incremental activity or activities drove the higher number that we're looking at now?

Yes. So the cost reduction actions are definitely not done. They are ongoing. Many of the actions we put in place in ‘19 were done throughout the year. So we'll have an ongoing benefits into the future in an incremental piece that's part of that incremental 30 million for 2020. The manufacturing continuous improvements always been part of our DNA and that will continue where we expanded as in other areas and in selling general administrative costs and other corporate functions. So if you look at the bigger piece the increase from 60 to 70 the main driver there is the incremental restructuring that we did in December as well as the announced closure the facility in Texas. Those two things drove our ability to raise that range as we got into 2020.

Okay. Got it and then in terms of the performance at the high end of your expectations in 4Q was that mainly driven by the cost side of things coming in 40 million of savings versus a 35, you've been sort of tracking a quarter ago?

That's exactly right. Yes. It was lower cost and it's not just reductions there but it’s also careful management that where we're spending in the operations. So all of that was the drivers for the improved performance. You can see it with a 35% utilization rate not getting a lot of great fixed cost leverage but manufacturing was actually favorable quarter-over-quarter if you look at the charts, the appendix of the earnings release.

Okay. Understood. Maybe one or two more. I guess sell the scrap processing facility it didn't mention the press release the impact on EBITDA is that because the impact on EBITDA is pretty negligible?

That's right. It was a profitable business but just very small.

Okay. Understood. And the severance charges that were recorded I guess and adjusted back in 2019 have those all been paid or is there a cash impact that remains in 2020?

There is a cash impact for the actions taken in the fourth quarter. It's about $5 million and that will be paid in the first quarter of 2020.

So that would be on top of the 5 million in restructuring cash charges associated with I guess book charges.

Same number. Yes that's what I'm talking about. Yes the restructuring that I mentioned on the call the cash costs associated with that is exactly the same as I just spoke up. So it's a total of five that will be paid in Q1 related to those actions in the fourth quarter.

But in terms of the executive severance and transition cost if those all been paid out or this part of that?

I am sorry. I missed the executive part of your question. My apologies. That's been paid.

Okay. Thank you and then lastly just to clarify, well I guess maybe two more, the pension you mentioned there was a $36 million re-measurement impact in 2019 that will be seen when I guess more detail on the 10-K comes out.

That's right. And we typically have large mark to market adjustments at the end of each year with the discount rate it came down close to 90 basis points when we ran our valuation that drove all of that loss and then it was offset by a 15% return on our assets realized in 2019.

Okay. And then just lastly big picture just a little more detail on the Dayton investment at any sort of new business opportunities that are material in terms of driving volume in the coming year or two? I know a couple quarters ago there was some discussion of the defense and market but anything you can share there?

Yes. Just a couple of things. Obviously we've talked a little bit about our putting more focus on the battery electric vehicles and hybrid vehicles which historically has not been an area that we've put a lot of attention on but with the shift to that technology we're moving very quickly to get engaged with those programs as they begin to launch in 2021, ‘22 and ‘23. So a heavy focus there. Those components look different than what we're accustomed to and traditional combustion, transmissions and engines. So heavy focus there. We've talked a little bit about the defense application side of things and the defense market is rather robust, one of the stronger of the industrial market sub-segments and our focus is absolutely in that area as well and a number of different applications from missiles, missile bodies, fuse components, large bombs, general munitions and projectiles and not just in the supply of SPQ products and seamless mechanical tube products but venturing further down the supply chain for those types of applications as well to get into more of the machining aspects. So those are our primary focuses at the moment.

And our next question comes from a line of Tyler Kenyon of Cowen. Please go ahead. Your line is open.

Hey good morning.

Morning Tyler.

Question is just on how we should be thinking about raw material spreads heading into 2020? I mean clearly a big headwind in 2019, I think nearly $50 million or so but if you were to take current scrap and alloy prices hold those constant and of course giving some deference to kind of the stronger leg on your cost versus surcharging how should we think about any tailwind or headwind for the year and moving into the first quarter?

Well, unpredictable as you know but certainly seeing the uptick over the last three months has been a good thing. It's always better when raw material prices are moving up versus down especially at the amplitude of the drop we saw in 2019. So from what we're gathering from all of our sources and the market is that scrap is leveling off at this point. I think the little dip we saw here recently was I'd call it probably unexpected. So I think it's moving in an upward trend but sort of again leveling off I think it's the best way to think about it. On the alloy side which matters it's been pretty stable on many fronts. Nickel certainly has dropped significantly along with a lot of other LME traded materials. So I'm predicting that is pretty tough because it moves, there's a lot of other drivers other than demand that move that materials trade on the LMA of course. So I think everything else seems like it's going to be a pretty level if you will and as I mentioned on the scrap hopefully continuing to move up but unpredictable as you know.

Sure. Would you expect a headwind or tailwind in the first quarter relative to the fourth?

Well, when it's on its way up it's always good and so I think that's what we're thinking and we don't try to make money on raw materials. We just try to make sure we have good alignment between our raw material buys and our surcharges to our customer but given the scrap in particular the precipitous drop in ‘19 month after month after month. That's certainly a very much of a headwind. So even if it's flat it's better.

A pretty rough year makes it a little bit easier. So yes that's I think Terry's depicted it properly.

Does that help Tyler?

Okay. Sure. And with respect to additional productivity benefits yet to be realized how should we be thinking about the build to that $70 million or so annual run rate as we progress through the year and what's embedded in your first quarter guidance?

Can you repeat that again? Sorry Tyler I missed that.

Sure. So just on the productivity benefits you have yet to realize just curious as to how you're thinking about the build up to that $70 million annualized run rate kind of as we projected this year and also curious as to what level, what annualized run rate you are assuming in your first quarter guide?

Yes. So I mean it's going to benefit us quickly. All those restructuring actions have been taken through the fourth quarter that were utilized and developing that incremental amount of savings. So we have a significant amount of the actions already behind us. Obviously continue to work on others but it should be fairly even throughout the year. We quickly and efficiently close down the facility in Houston. So those savings are quickly starting here as we wrap up the first quarter as well. So pretty even is how I would depict that into 2020.

Thank you.

You are welcome.

[Operator Instructions] Our next question comes from a line of Michael Leshock of KeyBanc Capital Markets. Please go ahead. Your line is open.

Hey good morning.

Good morning Michael.

So first you noted working capital focus as you are driving free cash flow. I'm just wondering how comfortable are you with current inventory positioning and how are you thinking about inventory going forward?

We have plenty of opportunity Michael. We've made a lot of progress and we have plenty of opportunity. We're working on every, every line item of working capital that we have and there's plenty of opportunity for improvement in 2020.

Got it. And then on the sequential decline in mobile shipments was that due entirely to the GM strike? Just wondering if you could provide any magnitude there and do you expect that those shipments will be pushed into 2020?

Yes. If I could the mobile on highway market as Kris alluded to was down in the quarter as a result of the strike at General Motors and a supply chain disruption that was caused by that strike as well as general seasonality across the balance of the automakers. Now our volumes were down 12% relative to the last quarter and more than half of that was a result of the strike and the balance attributed to seasonality along with a couple of one-off inventory adjustments and we have seen some very modest strike recovery pull in recent schedules through the supply chain which is a signal or a sign of an attempt to recover some of the lost production from last year. As we look at the whole market I mean vehicle sales for ‘19 were robust at 17 million units and light vehicle inventory decreases in ‘19 has the industry very well positioned for an overall healthy balance between sales and production going forward. The 2020 sales forecast is 16.8 million units which is 1% down but the production forecast is 16.5 million units which is up 1%. Now mixes is key to our participation in the auto markets. Passenger car sales continue to decline at roughly or approximately 30% of total sales but our participation is largely in truck, SUV and CUVs. So our exposure to that declining passenger car market is modest. So from our perspective the auto market is in good shape and our Q1 volumes will recover significantly relative to Q4 and likely exceed the type of levels that we saw in Q3 of 2019.

Okay. And then just lastly for me on CapEx. It looks like you're closer to your historical maintenance levels now. I'm just wondering what you're taking out of the CapEx budget relative to prior years?

It's not necessarily taking out a lot of the big investments are behind us that we've made over a four or five year stretch. So now the focus is on different areas. It's maintaining the assets like we always have in great condition. We're going to continue to do that. That's part of our budget for 2020 and in the spending the estimates there and we do have some spending still for the expansion and the facility down near Dayton Ohio. So that's really the focus. Not a lot of major investment required to achieve our objectives here in 2020.

Got it. Thanks.

There are no further questions in the queue. I will turn the call back over to Jennifer Beeman.

Thank you. Terry would you like to conclude?

Sure. We truly appreciate your interest in TimkenSteel. We are committed to driving the financial and structural improvements in our business that will benefit our customers and shareholders and doing it with safety as our highest priority. Thank you and I look forward to updating you on our progress next quarter.

Thanks everyone and that concludes our call for today.

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