Good morning, and welcome to the 2Q 2022 TimkenSteel Corporation 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. Jennifer Beeman, Director of Communication and Investor Relations. You may begin your conference.

Thank you, and good morning, and welcome to TimkenSteel's second quarter 2022 conference call. I'm Jennifer Beeman, Director of Communications and Investor Relations for TimkenSteel. Joining me today is Mike Williams, President and Chief Executive Officer; Kris Westbrooks, Executive Vice President and Chief Financial Officer; and Kevin Raketich, Executive Vice President and Chief Commercial Officer. 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 describe in greater detail in yesterday's release. Please refer to our SEC filings, including our most recent Form 10-K and Form 10-Q 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. With that, I'd like to turn the call over to Mike. Mike?

Thank you, Jennifer, and I appreciate everyone joining us on the call today. Let me begin by saying that I am proud our team delivered strong results in a robust demand environment. I find our employees to be dedicated, flexible and resilient. Unfortunately that resiliency was tested last week. As many of you know, we experienced a safety incident at our Faircrest melt shop which resulted in the injury of three employees. Our thoughts are with the employees, their families, and co-workers who were impacted. Safety in our industry is paramount. As you may recall, we kicked off several safety initiatives at the start of the year. During the second quarter, we began safety leadership training for all levels of our operational leaders. Our leadership is committed to taking tangible actions to improve our safety culture. As far as the impact to our third quarter shipments from the Faircrest melt shop incident in late July, we do not expect a significant shipment impact in the near-term given inventories on hand. We also intend to leverage purchased melt to secure additional capacity. We are targeting mid-August to complete the necessary repairs and resume melt operations. Turning to our second quarter results, we reported record adjusted EBITDA and strong operating cash flow in the second quarter. Our success was in part attributed to our ability to increase our base pricing in targeted end markets and products. This is further evidence that our commercial strategy is gaining traction. And I thank our commercial team for their efforts. Our business development efforts remain focused on high value end markets, including defense, renewables, and electric vehicles. And we continue to drive greater market diversification as we aim to create an optimized portfolio. As I have stated many times, our goal is to sustain profitability through…

Thanks, Mike. Good morning, everyone. And thanks for joining us today. During the second quarter, our collective team delivered record adjusted EBITDA results and strong operating cash flow, while also making progress on our long-term strategic imperatives. Thanks to all of our employees for a successful second quarter and strong first half of '22. Turning to our second quarter results, net sales totaled $415.7 million and net income was $74.5 million, or $1.42 per diluted share. Comparatively, sequential first quarter net sales were $352 million with net income of $37.1 million, or $0.70 per diluted share. Second quarter of 2021 net sales were $327.3 million with net income of $54 million or $0.98 per diluted share. On an adjusted basis, net income in the second quarter improved to $67.4 million or $1.29 per diluted share. For comparison purposes, adjusted net income in the first quarter was $48.6 million, or $0.92 per diluted share. Adjusted net income in the second quarter of last year was $52.5 million or $0.96 per diluted share. Adjusted EBITDA improved to a record at $84.2 million in the second quarter, an $18.9 million sequential increase. Drivers of the increase included higher base selling prices on an improved product mix, as well as the impact of higher scrap and alloy prices on raw material surcharges. Compared with the same quarter in 2021, adjusted EBITDA increased by $13.2 million reflective of higher base selling prices and improved mix. Turning now to the details of the financial results in the second quarter. Shipments in the second quarter were 208,900 tons, an increase of 12,500 tons or 6% compared with the first quarter and consistent with our expectations. The sequential increase in shipments was driven by higher energy and industrial shipments, partially offset by lower shipments to mobile customers. Comparatively,…

[Operator Instructions] Your first question comes from Marco Rodriguez from Stonegate Capital Markets.

I was wondering, Mike, if you could maybe spend a little bit more time on the strategic initiatives. You sort of touched on it briefly in your prepared remarks specifically around the commercial improvements that you are aiming to make here over the next five years, that maybe you can kind of frame. What might be on track, what else was coming up the pipe? I know you mentioned the scrap yard, putting that a little bit closer, maybe you can kind of walk through some of those efficiency and cost goals?

Sure. Well around the commercial strategic initiative, it's really focused around our product portfolio optimization, as well as our participation in more of a diverse -- particularly in the industrial space, a more diverse end market participation. There's particular markets around defense, renewables that were focused on, that we have some participation today. But those are really high valued end markets and we put together and restructured a business development organization with high performing team members that are focused on expanding our participation as high end valued markets. On the operational side, I mean, there's a wide portfolio of opportunities there. We mentioned a couple of them, particularly the scrap yard. When we were operating two melt shops, the scrap yard was in between both melt shops, so about 1 mile, 1.5 mile away from each melt shop and we are moving the melt shop adjacent to the Faircrest melt shop. Therefore, we were also contracting out the operation of the scrap yard to a third-party versus our internal use, our internal manu. So we would bring better variability to business conditions in that scenario. But really, it's really a reduction in operating costs really tied to transportation costs of moving scrap 1.5 mile versus a couple of 100 yards into the melt shop. But we have a number of projects around yield improvements. We've already started to realize some of those projects, particularly in the melt shop. But we have specific projects focused around our rolling mills, where we can improve our yield and our quality. And the quality improvements will reduce our rework costs, which in my view are a little bit higher than norm compared to the best-in-class in our industry. So I could go on and on, on this, there's specific projects around our people, and skill developments, and organizational SG&A optimizations. I mentioned our IT transformation, that's a key project, that's a multiyear project. So there's a quite a portfolio, several 100 projects that we have identified in our pipeline, many of them are in action right now and many of them will come in the future. But a lot of projects focus around safety and asset reliability improvements as well. So all of that improving asset uptime, improves productivity, improves yield, improves quality, and also improves safety.

And then also in terms of the comment that you made there about trying to move more towards the renewables and then also in your prepared remarks you’re talking about some wins that you had on the EV side or mobile side. Can you maybe just talk about those two particular opportunities? Would you classify the electric vehicle market as falling into the renewable focus? Or is that just more kind of a different type of mobile application?

Well, no, the EVs is totally separate from the renewables and we have a team that's targeted. Mobile -- EVs in the mobile market are very important to us, particularly for our manufacturer components business. As the automotive OEMs move away from the internal combustion engines that require crankshafts and transmissions and all kinds of other components, we are actively pursuing EV programs. As you know, these programs tend to be multiyear programs between eight and 10 years. And we're working closely with the automotive OEMs and developing our capability to serve the EV market around the motors and some of the smaller transmissions that go with those electric motors. That's our focus. When you look at the renewable side, our focus there is really around wind. There’s tremendous amount of building applications for offshore wind mills. There's also gearing and rotor shafts that are in those turbine applications. So we're actively pursuing and working with -- and we've -- like I said, we've restructured our sales organizations have dedicated, high performing team members focused in penetrating those markets and expanding within those markets because we pretty much serve some of those markets in a small way today, and we want to grow that because that's where we see the value proposition for our product portfolio.

Got it, understood. Then I just kind of want to get a bit of a clarification. In your press release, last time you talked about some operational disruptions and you mentioned a negative impact on the melt utilization rate in the quarter. And you obviously at the beginning of the call mentioned the accident in the one plant. Were those one in the same or there -- was there something different in relation to this? And if at all, if I missed this or not, can you quantify the impact on the melt utilization rate in the quarter?

So they are related. So we had an incident in our melt shop is currently under investigation. We're working with the United Steelworkers and the regulatory agencies to investigate the incident and get to the root cause and identify any recommended actions we need to take. And our thoughts and prayers are with our employees, their families that were injured, and any other employee that was impacted by the incident. The operational impact, as we've said, is, we are in the middle of our repair activities to get the furnace back online. And we expect that to be around mid-August.

And then I know you've made some comments in terms of your expectations of base pricing, at least in Q3, but if may be you can share some of your thoughts on what sort of dynamics you might be thinking about for the remainder of the fiscal year?

Sure. Again, we see demand study through remainder this year. And even, we -- the communications and interactions we're having with our customers, in discussions around 2023 look pretty favorable in regards to continued steady demand, or at least what I would say, from a horizon standpoint, the first half of 2023. And our expectation is, prices are going to align with that steady demand as they have been.

Your next question comes from Seth Rosenfeld from BNP.

Can you just give a bit more detail to better understand how the recent decline in scrap prices and in particular, the narrowing of the prime scrap, obviously, premium will impact your surcharge revenues and also profitability? And looking forward maybe can you give us a bit more color on your outlook for prime and obsolete as we move through Q3?

Hi, Seth, this is Kris. You are correct, though, we are seeing that decline in the prime as well as the shredded grades. And that will drive some contraction force in Q3. The way I'm thinking about it is the incremental benefit that we received in Q2 that benefited our results, I'd expect that to reverse in Q3 as those contractions continue definitely through July and August. September still hasn't settled up yet. So we'll see how that plays out. But that's what we're seeing, at least for the first two months.

Maybe can you give us a bit more color with regards to the -- or quantify the scale of benefit you saw in Q2? I know in the past, you talked about surcharge revenue but the fact that you were able to have a surcharge based on prime, but purchase a mix of obsolete. How large was that, you can quantify in the quarter Q2?

In Q2 it was about a $23 million benefit is what we lay out in the earnings release.

And one more question please about working capital. As you see scrap prices and surcharges decline in H2, can you give us a bit more color on your expectations for a scale of working capital release that could be realized?

Yes, that definitely has an impact on it. I'd say the bigger impact is the operational disruption that Mike mentioned and us continuing to work through inventory on hand. We had quite a bit of inventory and receivables on hand at the end of June and that would get released into Q3 and drive a more significant working capital release is what we're expecting.

[Operator Instructions] Your next question comes from Philip Gibbs from KeyBanc Capital Markets.

Mike, and Kris, and team, the inflation raise for the year to 20% from 12.5%, just curious what changed so drastically in the last three months in terms of primary versus maybe secondary drivers there?

Yes. Kris, can provide some additional color. But my perspective has been the maintenance repair parts and supplies that come in at a higher level than we expected. The other areas we've seen, we tend to use contractors in an ad hoc basis for surge maintenance activity, we're seeing those rates increase. And that's not what we really anticipated when we put our prior -- our outlook together for Q2. So Kris, do you have any more color you want to add there?

Yes. Those are the two primary areas that the majority of other spend is contracted on a fixed rate, primarily for the full year as volumes change, and you need a little bit more, you pay a bit of spot rates there. But it's those two areas that Mike mentioned, the contractors and the spare parts that drove most of that change for us.

Thank you. And then was good to hear the volume impact being reasonably benign, given the use of inventories and purchase melt in the third quarter following the accident. But is there any way to couch the cost impact to the third quarter due to the accident and cost to serve the customers versus what you would have been expecting a few weeks ago?

Well, again, that's really undetermined yet, because we're still in the recovery process and the repair process. What I do expect is, we are going to see higher costs predominantly tied to the repair cost, as well as the fixed cost leverage being lower. And the third-party purchase melt is also slightly higher than our manufacturing capability. So that's how I see it. Kris, do you have anything to add there?

Those are the drivers. Yes. I wish we could quantify it better for you, but we're working through it real time and going to manage it the best as we can as we go through the quarter to drive that profitability.

So I know a lot of your grades of VAR typically are higher alloyed content and very specialized. And you guys own the secret sauce to a lot of the chemistry. So just curious how easy it is to supplant that with purchase melt unless you're just kind of buying the base substrate and then I guess remelting it yourself and handling. And so maybe just talk through that?

Well, we have been working with a partner in developing particularly around small, high alloy grades. We've been working and developing a partner since earlier this year. And that partner is a fantastic partner and they're stepping up to help us through this situation even more. So, we've already done some of the great development with them. And we're looking to others. One of the unique things from my perspective about this industry, when you have somewhat of a situation that occurred like ours, your competitors step up to try to help you. So we're seeing that. We appreciate that. And we're going to acquire what we need to try to satisfy all our customers through this time. And then we're going to be back up and running again very soon.

If I could just add to that, Mike, mobile space we're supporting with inventory on hand. That's not where you go outside for this purchase melt. What we do expect back online is that we're going to need to allocate our tons close to there, given the contractual arrangements. So we may see a bit of a mix shift in Q3, a little bit heavier mobile, and maybe even into Q4.

Good point, Kris.

And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

Thanks, everyone. And that concludes our call today.

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