Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the TimkenSteel Corporation Fourth Quarter and Full-Year 2022 Earnings 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] I will now hand it over to Jennifer Beeman, Director of Communications and Investor Relations. You may begin.

Thanks, and good morning, and welcome to TimkenSteel's fourth quarter and full-year 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 Web site. 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. 2022 was certainly a tale of two halves. Through the first six months of the year, we achieved record adjusted EBITDA and strong operating cash flow. Our success was attributed to our commercial strategies which focused on high-value end markets, including defense, renewable, and electric vehicles, as well as portfolio enhancements and an improved pricing environment. Fortunately, strong end markets prevailed throughout the year. But in the second-half of 2022 we experienced a number of operational issues which resulted in substantial unplanned downtime and significantly impacted our financial results. First, let me categorically state, our safety performance in 2022 was not acceptable. And every single person at TimkenSteel is dedicated to change. We are fully committed to improving our safety performance. And in 2023, we expect to invest approximately $7 million in companywide training, equipment, and improved safety processes to ensure we are creating a lasting culture of safety. Ongoing improvements include enhanced response drills, job safety analysis, housekeeping, management system advancements, and additional hazard mapping processes. In recent weeks, we have kicked off the first phase of advanced safety training throughout the entire organization. And these efforts will continue for the duration of 2023. While safety is a continuous journey, our job, every day, is to provide the safest working environment as possible and equip our people with the best tools and training to safety perform their jobs. Moving to operations, our production ramp up has been slow and methodical spanning several months. As I mentioned, we have focused on implementing additional safety processes, and in some cases with completely new teams, all while driving best-in-class quality to ensure we meet our customers' demanding requirements. To support our operational continuous improvement, we have increased our budgeted capital expenditures…

Thanks, Mike. Good morning, everyone. And thanks for joining us today. In the first-half of 2022, the company achieved record profitability and strong operating cash flow. As Mike mentioned, safety and production challenges significantly impacted the second-half of the year. As we enter 2023, I am excited to see our continued progress in achieving our strategic imperatives supported by solid end market demand and a strong pricing environment. Turning to our full-year 2022 financial results, net sales totaled $1.3 billion, an increase of $47 million or 4% from 2021. Net income was $65.1 million or $1.30 per diluted share. Adjusted net income was $94.2 million or $1.87 per diluted share. Adjusted EBITDA was $172.2 million in 2022. This includes an insurance recovery of $33 million recognized in the fourth quarter related to the recovery of certain cost associated unplanned downtime in the second-half of the year. Of the $33 million insurance recovery, $13 million was received in the fourth quarter. And the remainder was received in the first quarter of 2023. We continue to seek additional insurance recoveries related to the unplanned downtime experienced in the second-half of the year although the timing and amount of potential additional recoveries are uncertain at this time. Turning to our fourth quarter results, net sales totaled $245.4 million with a net loss of $33.2 million or a loss of $0.75 per diluted share. Comparatively, sequential third quarter net sales were $316.8 million with a net loss of $13.3 million or a loss of $0.29 per diluted share. Fourth quarter of 2021, net sales were $338.3 million with net income of $57.1 million or $1.07 per diluted share. On an adjusted basis, the company reported a net loss in the fourth quarter of $4.6 million or a loss of $0.10 per diluted share. Comparatively,…

Thank you. [Operator Instructions] Our first question is from Dave Storms with Stonegate. Your line is open.

Good morning, and thank you for taking my call. Just wondering if we could start --

Hi, Dave.

Good morning, thank you. Wondering if we could start with little more color on some of the profitability improvements, now that we're through 2022, do we think you guys are about a quarter of the way there on the $80 million goal, is that [curve] [Ph] linear, maybe just any more clarity -- excuse me, that you could give us on that?

Yes, so I would qualify it as we are well on our way to achieving that $80 EBITDA improvement by 2026. Mostly likely we'll probably achieve that earlier.

And, Dave, the areas we're seeing the most momentum is in the commercial category. We've targeted $30 million of profitability improvement, and we met that. But what we're looking for is continued profitability through the cycle over that period of time. We've made a lot of progress in the others areas of manufacturing and simplification, but we want to make sure that the ops are stabilized before we begin to account those as savings. And there's a lot planned later this year as well. So, we did make a lot of progress in 2022, we're going to continue to work towards that, and work towards that goal.

That's perfect, thank you. Another question I had, as the melt utilization increases, how should we think about the relationship between melt utilization and shipped tons? Is that one-for-one increase given the demand in the market or it that a quarter lag there, how should we think about that?

It's not necessarily a one-for-one because there is yield losses that occurred throughout the downstream operations to get to the shipped ton, but it's very closely correlated.

And if you look at our capacity, which we publish externally, and you were to calculate what's 1% of melt worth on a monthly basis; it's about 1,000 tons of melt, which then you factor that down a bit to ship tons. That'll help you correlate that continued progress and what that could mean from a shipment standpoint.

That's perfect, thank you. And then just one more, if I could, pretty general, what are you guys seeing on more of the supply side, specifically from labor demand going into 2023 here?

Supply side and labor demand, I'm not quite clear what you're asking, Dave?

Sorry, I probably should have phrased it as, with the increased inflation that we saw in 2022, trying to understand how much of that is maybe from labor inflation? And how much of then that labor inflation would be steady or increasing going into 2023? Does that help?

Yes, I would say a modest amount of labor inflation just due to the fact that we have a multiyear contract, and the wage increases are negotiated in there. The biggest increase in inflation comes from purchase, supplies and services.

That is very helpful. Thank you.

[Operator Instructions] The next question is from Phil Gibbs with KeyBanc Capital Markets. Your line is open.

And thanks very much. Good morning.

Morning, Phil.

How should we think about inflation in '23 versus '22? I know it had basically crept up over the course of '22. So, we probably are starting from a higher spot than we did last year. But maybe talk through some of those pieces. I know pricing is moving up, your costs are also probably higher on a unit basis versus last year. So, maybe talk through some of those impacts?

Yes, so, I'll give you a generalization, then I'll let Kris talk to more of the specific details. I think, year-over-year from '22 to '23, we're probably seeing an 8% to 10% inflationary impact compared to '22's 20%. And then I'll pass it over to Kris so he can provide you a little bit of color there.

And if you look at where most of that inflation came, Dave talked a little bit about it; we had a little bit on the labor side. But it was also the consumables, and the spare parts, and other materials that we need for routine maintenance, as well as the contractor costs. And we've probably got about half to two-thirds of that hit us right as we started 2022. But it did begin to accelerate into Q3 and in Q4. So, the second-half was a bit higher from an inflation perspective in 2022, in the first-half. All in, it was $50 million. And as Mike said, we expect that to continue a bit into 2023, but to a lesser extent from an increase perspective than we experienced last year.

And, Kris, how does that inflation, in general, I guess compared to where we were in the second-half? And so, has labor -- not labor, but inflationary factors crept up even relative to where we were in the second-half of last year or have things basically just held at that level on a net basis?

It has crept up a little bit, and that went into our strategy as we negotiated base pricing to essentially recapture that in our top line.

Perfect. And then, as we think about net working capital, certainly went down with business levels, in Q4, as shipments pulled back. But you are looking for better business activity ahead. So, how should we think about what the build back of net working capital could look like?

Yes, so in the first quarter, we do expect it to be a net use of cash for us with higher levels of receivables and inventory that we're targeting, offset with payables, so a net use there. But there some other considerations as it relates to cash flow in the first quarter, the $20 million of insurance recovery that came in, in cash, that'll be part of our operating cash flow in the first quarter. As well as we have our annual performance award that gets paid in March, that's about $7.5 million. So, a couple puts and takes there, but net-net, overall operating cash flow is going to depend on profitability. We continue to manager our working capital very carefully and closely to maintain that discipline that we put in several years ago. And that we expect to continue to be a benefit for us as we move forward.

Thank you.

Thanks, Phil.

The next question is from John Franzreb with Sidoti & Company. Your line is open.

Good morning, everyone, and thanks for taking the questions. Last quarter, the expectation was you would get the utilization rate roughly to 80% to 85% by the end of the first quarter. Is that still the expectation or has it moved one way or the other, can you explain why?

No, I mean, if you look at our rate of our ramp up progress, it's progressing that way. And we fully expect to be prepared for a significant improvement in our utilization rate in Q2, as we finish our ramp-up in Q1.

Okay. And so, the 80% to 85% bogey is still in play or not?

That's our target.

Okay. And I assume that you are starting to place orders into the third quarter at this point, how is that looking compared to the demand profile in the first-half of the year?

Well, you have to recall that 70% of our sales is already on contractual commitments for annual pricing, the remaining 3% are negotiated prices either on a quarterly or semi, annual basis. And we just announced two price increases, as Kris mentioned in his comments, one for our tubular products, one for our bar products, we fully expect that to continue into the second-half of the year.

Okay. And is there ever been a noticeable change in the demand profile at your customer base and any kind of venting concerns about global economic conditions?

Well, I mean, look, we can with all the things that are going on globally, we're concerned. However, what our customers are telling us, as they see stable and steady demand, there are pockets of sub-sectors within our market segments that are accelerating their demand, and we're reacting to that accordingly. So, our lead times are actually out to the end of Q2 and beginning to enter into Q3. So, more to come on that, but with some of the uncertain global uncertainty, some of the domestic uncertainty, we always keep our eye on the ball, and we'll see how things progress.

The benefit that we have going forward with the footprint that we have today is we're not out there chasing the type of volume we may have had a couple of years ago. So, it's that 800,000 to 900,000 ship tons that we're targeting as we move forward and feel good about the demand in that range as we move forward.

Great, thanks for taking the questions.

Thanks.

[Operator Instructions] The next question is from Dave Storms with Stonegate. Your line is open.

Hey, just a follow-up question on a melt shop utilization and the strong demand that you're seeing, is there a scenario where you continue using some of that third-party melt shop, just to cater to meet that demand throughout 2023 or is that expected to phase out as you get your own melt shop utilization back up to that 80%, 85% range?

Yes, that's part of our strategy. We believe that we can flex with market demand using third-party melt. And as long as there's profit to be added in it and converting that third-party melted into our finished products, we're going to pursue that. If there isn't, we won't. Does it make sense?

That's a perfect answer. Thank you.

Showing no further questions at this time, and this will conclude today's conference call. Thank you for participating. You may now disconnect.