Thank you for standing by. My name is Briana, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2023 TimkenSteel Corporation Earnings Call. [Operator Instructions]. I will now turn the call over to Jennifer Beeman, you may begin your conference.

Good morning, and welcome to TimkenSteel's First Quarter 2023 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 equivalents are also included in the earnings release. With that, I'd like to turn the call over to Mike. Mike?

Good morning, and thank you all for joining us on this call today. Our relentless focus on enhancing productivity and prioritizing safety in our melt shop operations contributed to strong progress in the first quarter of 2023. We expect this momentum to continue into the second quarter. During the first quarter, we experienced a 35% increase in shipments, combined with strong base pricing, which resulted in improved profitability compared with the fourth quarter of 2022. I'd like to express my gratitude to all of our teams for their hard work. Turning to safety. While we know that improving safety is a journey, we have observed positive trends during the first quarter. Our teams are actively engaged in continuous improvement activities, and is encouraging to see that our safety training is starting to make a difference. As I have reiterated on numerous occasions our commitment to safety remains unwavering. And we plan to invest approximately $7 million in company-wide training, new equipment and enhanced safety practices, processes and programs in 2023 to create a sustainable safety culture. Our specific areas of focus will include reducing the man to-machine interface through the implementation of machine guarding, fencing, lockout-tagout programs as well as introducing artificial intelligence initiatives to assist employees in real-time hazard identification. We recently held our annual Iron Shield competition, which invites our employees and crews to submit innovative safety projects that aim to improve the well-being of our workforce. We are always amazed by the ingenuity and the care that facilitates these projects, and this year was no exception. In total, 51 projects were implemented across our organization and submitted for consideration. The winning project focused on enhancing safety and adding an additional layer of surveillance at our Faircrest facility to prevent rolling no downtime and ensure steel stays on…

Thanks, Mike. Good morning, everyone, and thanks for joining us today. I'm pleased that we started off 2023 with sequential improvement in profitability and positive operating cash flow. Our first quarter operating and safety performance was much improved and that operational stability, combined with continued strength in customer demand and base sales prices drove our first quarter financial performance and provides us with confidence for the future. Turning to our first quarter financial results. Net sales totaled $323.5 million with net income of $14.4 million or $0.30 per diluted share. Comparatively, sequential fourth quarter of 2022 net sales were $245.4 million with a net loss of $33.2 million, or a loss of $0.75 per diluted share. Net sales in last year's first quarter were $352 million, with net income of $37.1 million, or $0.70 per diluted share. On an adjusted basis, the company reported net income in the first quarter of 2023 of $20.8 million or $0.44 per diluted share. Comparatively, the fourth quarter adjusted net loss was $4.6 million or a loss of $0.10 per diluted share. Adjusted net income in the first quarter last year was $48.6 million or $0.92 per diluted share. Adjusted EBITDA was $36 million in the first quarter, significantly higher than the fourth quarter adjusted EBITDA of $11.9 million. This $24.1 million sequential improvement in adjusted EBITDA was grounded in operational stability, which supported a 35% increase in shipments. Additionally, higher base sales prices and an increase in the raw material surcharge environment contributed to the sequential increase. Compared with the same quarter in 2022, adjusted EBITDA decreased by $29.3 million. This decrease was reflective of lower shipments as well as higher manufacturing costs, partially offset by higher base sales prices. It's important to note that the first quarter of 2023 adjusted EBITDA excludes…

[Operator Instructions]. Your first question comes from John Franzreb with Sidoti.

Congratulations on a great quarter. I'd like to start with your thoughts about the individual end markets. You discussed that the rig count may be softening in energy so there's concerns about what we're seeing in industrial and less so in mobile. Can you talk a little bit about your order trends? Are there any changes, either positive or negatively in the bookings on a total basis and also on a seasonal basis as you go forward book into the third quarter?

Well, thanks for the question, John. I mean, our bookings remain steady. We're not really seeing any decline or significant increase in bookings. We're just seeing it pretty steady. We think automotive is off to a stronger start in Q1 in demand. We think that's going to continue throughout the year based on their build rate forecast. On the energy side, yes, the last rig count number I saw was about 755 in the U.S. We think that's going to remain pretty steady. We're not getting any indications that there's going to be any major change there. However, we continue to state that their capital discipline in the -- at end market continues to be very stringent and they're only going to buy what they need and use and they're not going to build any inventories, which, from our perspective, that keeps us an efficient supply chain in place, and we just see steady demand coming from our energy end customers.

Got it. Got it. And in regards to the third-party 28,000 tons of provided. Is that a constant number we should be thinking about on a go-forward basis? Does that move moderately one way or another based on end-market demands within the sectors?

Yes. I think as we've stated before, we've ramped up our third-party purchases to assist us with supporting our customers while we were recovering from their furnace incident from last July. Going forward, our intentions are to utilize third-party melt to better absorb our fixed cost in our downstream rolling and finishing operations when market demand is there for it. We will always prioritize our melt first and then use the purchase met to flex with the market demand.

Got it. And just on the planned downtime in the quarter, can you give us some color behind that? And when do you expect to see it within the quarter -- this coming quarter, that is.

Yes. So the planned downtime is to do some repair work and upgrade work at our EAF and that will occur this month.

Your next question comes from Phil Gibbs with KeyBanc.

I think last time you have provided a cost outlook for 2023. I want to say it was something like a 10% increase in unit costs. Any update on that given the good first quarter performance on cost compression.

Yes. I mean we expect to see a little bit higher utilization in Q2. So our fixed cost absorption will be better. And the -- I think we've stated already that our inflationary impact, we see our consumable costs and other material costs to operate our assets to be pretty steady throughout the remainder of the year.

So would that get me below that previous 10% guidance, meaning cost performance is better than you expected?

Again, it's going to be based on our utilization rates as we continue to ramp up and perform, our cost position should improve.

And Phil, just to add to that, in terms of the actual items we're buying, the consumables, we're not seeing a lot of additional inflation on top of what we experienced in Q1 last year. So that's a pretty steady or stable.

Okay. I appreciate that. And then just in terms of end market color that was pretty solid, things are largely stable across the board. It appears from your perspective. But in terms of the outlook for net working capital, what are you anticipating -- what are you anticipating there?

I'll let Kris provide some color, but we're looking at pretty stable working capital. I mean depending on timing of shipments and stuff like that, you can see a modest build, but you're talking 1% or 2% max in that regard. Kris, do you want to provide any additional color?

Yes, I agree with you, Mike. If you look at the components, receivables, you'd expect that balance to increase modestly in line with shipments in the surcharges. From an inventory standpoint, we're producing the customer orders. So we're not expecting to broadly build a significant amount of additional inventory. We are looking at inventory in front of our key operations to make sure that we have the appropriate amount and make targeted adjustments where necessary. And then from a payable standpoint, it's purely timing dependent and what looks like from a scrap price standpoint. We are in the process of transitioning from our old to our new scrap yards. We're carrying a little bit more scrap than we plan to longer term. I'd say the last point is around taxes, we do expect to make some estimated payments here in Q2 for the first time at a more significant level related to our federal taxes.

You guys just had something like a mid-teens million dollars left or something on the old NOLs, is that right...

That's right. That's $17 million at the end of the year. Yes.

And then lastly, the raw material spread, I believe, was a bigger tailwind than we were anticipating for the first quarter. I think your bridge is at $14 million. Is it expected to be equal to that, greater or less than for the second quarter because you prefaced the surcharge widening.

Yes. I think we expect it to increase modestly in Q2. The June scrap hasn't settled yet. Everything you read says that's going down. But it looks like the spread is going to stay in place between prime and secondaries.

Your next question comes from Dave Storms with Stonegate Capital Markets.

First question here. You mentioned in your release that a product mix slightly was a bit of a headwind. How do you see that changing through Q2 and whatever visibility happen to Q3 of 2023 here?

Yes. So that product mix comparison was quarter-over-quarter sequentially. So it's Q4 versus Q1. In Q4, because of the -- or the lack of inventory, we saw an unusual product mix where we shipped much more sold, much more of our manufactured components, which, of course, sell for a much higher price per ton than our SBQ and our tubes. So what we're seeing -- we saw a more normalized mix shipped in Q1, and we expect that mix to continue going forward.

Understood. Very helpful. You also mentioned a couple of times now that end markets are still pretty steady, it seems like. How is that impacting any new customer acquisition strategies that you have -- is that making things a little more challenging, a little bit easier because there's more clarity in the market. Any color you could give there would be helpful.

Sure. So from a -- like a new customer entrants into our customer portfolio, that our focus there is really around enriching our mix or greater value growth in the products that we make and the end markets that they go to, and specifically certain customers with those end markets where we can generate greater value for ourselves. I don't really see -- I mean, any time you bring a new customer and you have a -- it's a challenge anyways, right? You got to get qualified, you've got to get consistent supply chains in place, and you have to execute. But we have a pretty -- we've done a lot over the last 2 years with our customer portfolio in the specific end markets. We really have a focus on a very diversified, balanced strategy into each end market and which customers within those end markets that we'll partner with.

Understood. One more for me, if I could. Slide 8 on your deck mentions that you have mitigation action -- mitigating actions planned for managing some of the headwinds that you see. Can you go in a little bit more on what those actions might look like?

Yes, sure.

Part of it start just focused on our targeted profitability improvement actions around manufacturing and commercial excellence and process simplification.

And then the other thing is really around the inflationary impacts. So we have very -- we've taken various procurement actions in regards to mitigating certain inflationary impacts to try to offset those for other areas. And one of the biggest things we do is, we do our best to pass through whatever cost increases we get into our commercial arrangements.

[Operator Instructions]. There are no further questions at this time. Thank you, everyone. This concludes today's conference call. You may now disconnect.