Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator torday. At this time, I would like to welcome everyone to the TimkenSteel Third Quarter 2022 Earnings Conference Call. Today’s conference is being recorded and 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. And I will now turn the conference over to Jennifer Beeman. You may begin.

Thanks, and good morning, and welcome to TimkenSteel's third quarter 2022 conference call. I am 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 of Sales, Marketing and Business Development. 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 this morning. Our financial performance in the third quarter was notably impacted by the July incident at our melt shop. However, I am encouraged that demand in our markets, mobile, industrial, energy remains robust now and into the foreseeable future. Currently, we have customer order backlog in excess of 300,000 ship tons and the majority of our 2023 production capacity is allocated to customers. We are experiencing a positive trend in base sales pricing, which we expect to continue into 2023 and our balance sheet is strong. I am confident that this momentum, along with the execution of our strategic imperatives will position us for long-term success. Turning to safety, we remain firmly focused on enhancing our safety culture with important initiatives and advance training that will continue into 2023. Training is focused on improving safety communications, hazard recognition, and systemic change through leading indicator data. We have now trained most managers and operational supervisors. In 2023, we will extend the first phase of this advanced training to the rest of the organization and begin to implement the next phase of our advanced training initiatives. Related to our melt shop incident and future utilization, we expect to average approximately 50% to 60% utilization during the fourth quarter, which reflects the continued monthly ramp up of production and some planned annual maintenance shutdown. We are in the process of implementing new and additional melt shop manning to help us return to our targeted utilization of approximately 80% to 85% by the end of the year. While the assets are fully repaired, we are being cautious in taking our time to ensure new team members are proficient and working well together. Turning to our results, third quarter net sales, as well as adjusted…

Thanks, Mike. Good morning, everyone, and thanks for joining us today. As Mike mentioned, the July melt shop incident significantly impacted our third quarter profitability. While we expect the continued unfavorable impact on profitability in the fourth quarter as we ramp up melt production, we are actively pursuing a business interruption insurance recovery to recoup our losses. I’ll be sharing more details shortly regarding the insurance recovery process, as well as our fourth quarter outlook and views on 2023. Turning to our third quarter results. Net sales totaled $316.8 million with a net loss of $13.3 million or a loss of $0.29 per diluted share. Comparatively, sequential second quarter net sales were $415.7 million with net income of $74.5 million or $1.42 per diluted share. Third quarter of 2021 net sales were $343.7 million with net income of $50.1 million or $0.94 per diluted share. On an adjusted basis, the company reported a net loss in the third quarter of $4.1 million or a loss of $0.09 per diluted share. For comparison purposes, adjusted net income in the second quarter was $67.4 million or $1.29 per diluted share. Adjusted net income in the third quarter of last year was $55.2 million or $1.04 per diluted share. Adjusted EBITDA was $10.8 million in the third quarter, compared to $84.2 million in the second quarter. Drivers of the decrease included lower shipments and higher manufacturing costs, both linked to the melt shop incident in July, as well as the market-driven decline in the raw material surcharge environment. Partially offsetting these items were higher base selling prices and lower variable compensation expense. Compared to the same quarter in 2021, adjusted EBITDA decreased by $61.2 million. This decrease is reflective of higher manufacturing costs, a decline in the scrap raw material surcharge environments and…

[Operator Instructions] We will take our first question from Phil Gibbs with KeyBanc Capital Markets. Your line is open.

Hey, good morning.

Good morning.

First question I had was on the raw material spread headwinds. I think it was over $30 million in the third quarter relative to the second. Is there going to be incremental headwinds in the fourth quarter? Or should we just start to see those stabilize this month?

No, we believe there is still going to be some headwinds in the fourth quarter. I don’t know, Kris, if you want to provide any color?

Yeah, the first two months, and because we’ve already set surcharges for the month of November, as well, are both down. I think the first month it was down around $25 a ton. In the second month, down around $30 and to be determined about what December looks like. The shredded scraps that we use in our manufacturing did not go down by as much, because that would create some additional compression in Q4. Not likely as big as Q3, however.

Okay. So, a fraction of that amount or a third of that amount or something like that?

Yeah, I can’t give you the specifics, just because I don’t know that last month, but it’s trending in that manner.

Okay. And then, as it relates to net working capital, obviously, a massive source of inflows as your activities temporarily went down, as you recover that, you said that it was going up in 2023, but are we likely to see a pickup in net working capital in Q4?

No, we are most likely not going to see a pickup in net working capital and our expectation is, you’ll see modest increases in net working capital in the first half to three quarters of 2023.

And, Phil, just to add on to that, the one wildcard there is payables and just depending on where our mine patterns are and scrap prices are as we conclude the year and begin that ramp higher into 2023. That could drive a higher payables balance. We do have likely a bit more CapEx in AP, as you saw at the end of the third and our guidance here we revised our CapEx spend and most of that’s just because of the cash spend is pushing into 2023 of $6 million to $8 million.

Okay. And then, last question I have is on the production rates at Faircrest and maybe just talk about the progression when you think you can – I think you mentioned when you perhaps pick up to 80% but I didn’t know if that was a progression as you move through next year or is that something that you start to learn or start to had? And then, secondly, how do we factor in or how comfortable are you having the demand power of the labor to accommodate those? Because I know you have been training some new folks. Thanks.

Sure. So, what our expectation is, is that, we will be back to our targeted utilization rate around that 85%, towards the end of the year going into the first quarter of 2023. From a manpower standpoint, we have a fair amount of new employees that we are training and we are working towards getting there and that’s why we are taking a very – I would say, cautious calculated ramp up approach to the Faircrest melt shop. And we are just working and focused on training to get their proficiencies in collaboration working as a team at the level that we expect to be able to return to our targeted utilization rates.

Thank you.

Thank you, Phil.

And we will take our next question from Dave Storms with Stonegate Capital Markets. Your line is open.

Good morning. This is John sitting in for Dave Storms. Thank you for taking my questions.

Good morning, John.

You, had touched on this earlier, just considering the current melt utilization rate of 40%, should we expect the current backlog to drive that rates back in the high 70%, 80% range, and if so, what is the timeline to get back to those levels?

Well, like I just said, we are targeting to ramp up through the remainder of this quarter and get back to our targeted utilization rate of 80%, 85% by year end and/or early Q1 of 2023.

Got it. Understood. And then, given the refinance revolver and high cash balance, can you speak a little bit more about any plans that you feel has the great liquidity position? How do you balance internal and external growth opportunities when it comes to the cash deployment?

Sure. We have a capital allocation strategy that we review with our Board. So we have a go forward strategy to plan and first our focus is on investing in our assets and our product capability to service our customers and those investments are centered around reliability, manufacturing, productivity, improvements, quality improvements and service improvements to our customers. Secondly, we are focused on our balance sheet and continue to ensure that we have a strong balance sheet. And then, thirdly our shareholders and that’s why we came out and announced an increase in - year-over-year increase in our share buyback program. But we always will be – as we go forward, we’ll always be looking for growth opportunities that could possibly lead to M&A possibilities. So, if the opportunity exists and it aligns with our strategic imperatives, we would be open to pursuing those. Kris, anything you want to add on that?

I think you covered it nicely, Mike. Yeah, thank you.

Great. Thank you. And lastly, just dig into a little more, with the continued rise in interest rates, how that’s going to impact your end-market demands

Yeah, well, there is no doubt as the cost of money gets more expensive, it’s going to have an effect on the consumer. Everything that – as we talk to our customers regarding our contract negotiations for 2023, things look pretty solid, at least I would say for the first half. We’ll see what develops post election and other things as they develop globally, it may imply to the second half of 2023. But we are pretty positive of what we hear as we’ve said earlier that we’ve allocated all our ship ton capacity for 2023. So, we are feeling pretty good about that.

All right. Awesome. Thank you.

Thank you.

Thanks, John.

And ladies and gentlemen, this concludes today’s conference call and we thank you for your participation. You may now disconnect.