Good morning. My name is Chris, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the TimkenSteel Corporation Q2 2023 Earnings Call. [Operator Instructions] After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you, Jennifer Beeman, Director of Communications and Investor Relations. You may begin.

Good morning, and welcome to TimkenSteel’s second 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 reconciliation 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, everyone, and thank you for joining us today. First, I’d like to thank our employees for their hard work and unwavering dedication to TimkenSteel. Because of their ongoing focus on safety and enhancing productivity, the company generated continued positive momentum during the second quarter. Thanks to these efforts, we realized sequential improvement in shipments and profitability. It’s worth noting that our consistent positive operating cash flow trend remains strong, allowing us to strategically invest in the growth of our business and deploy our capital allocation strategy, while maintaining a healthy balance sheet. As we progress on our journey to foster a culture deeply rooted in safety, we remain focused on bolstering machine guarding, fencing and our lockout/tagout programs alongside an array of comprehensive training initiatives throughout the organization. When it comes to the safety of our employees, we believe we can never over-communicate or over-trained anyone. One notable endeavor has been enhancing our job safety analysis training. Through this industry proven process, we map each job or task into individual steps, while identifying potential hazards and strategizing effective measures to mitigate these risks. This proactive approach empowers our team to carry out their responsibilities with a heightened sense of confidence, awareness and readiness, ultimately reducing the likelihood of accidents or injuries. To underscore our commitment to safety, we have invested approximately $4 million in various safety training and other investments through the first half of 2023. This allocation is part of our larger commitment, as we have allocated approximately $7 million for safety programs in 2023. Turning to our second quarter performance, we achieved sequential growth in net sales of 10%, driven by solid customer demand and base pricing. As anticipated, these results translated into improved profitability. We remain dedicated to sustaining this momentum and look forward to…

Thanks, Mike. Good morning, everyone, and thanks for joining the call today. As expected, TimkenSteel’s financial results in the second quarter included sequential increases in melt utilization, shipments and profitability combined with positive operating cash flow. We’re encouraged by this performance and the company’s outlook. Turning to the second quarter financial results, net sales totaled $356.6 million with net income of $28.9 million, or $0.62 per diluted share. Comparatively, sequential first quarter of 2023, net sales were $323.5 million with net income of $14.4 million, or $0.30 per diluted share. Net sales in last year’s second quarter were $415.7 million with net income of $74.5 million, or $1.42 per diluted share. On an adjusted basis, the company reported net income in the second quarter of $27.6 million, or $0.60 per diluted share. Comparatively, the first quarter adjusted net income was $20.8 million, or $0.44 per diluted share. Adjusted net income in the second quarter last year was $67.4 million, or $1.29 per diluted share. Adjusted EBITDA was $50.5 million in the second quarter, a 40% increase from the first quarter. This $14.5 million sequential improvement in adjusted EBITDA was driven by higher base sales prices on increased shipments combined with an increase in the raw material surcharge environment, compared with record adjusted EBITDA of $84.2 million in the second quarter last year, adjusted EBITDA decreased by $33.7 million in the quarter. This year-over-year decrease was reflective of lower shipments, given our finished goods inventory position as well as a market decline in the raw material surcharge environment, which was at peak levels during the second quarter of last year. Higher manufacturing and pension costs also contributed to the decline in adjusted EBITDA from the record second quarter of 2022. During the first and second quarters of 2023, the company had…

Thank you. [Operator Instructions] The first question is from John Franzreb with Sidoti & Co. Your line is open.

Good morning, everyone, and thanks for taking the questions and congratulations on a good quarter.

Good morning, John.

I’d like to start on the demand profile. I was kind of impressed with the industrial growth in the quarter, you called out defense and mining. I’m curious about what that outlook looks like in the second half of the year. It would seem that could be pretty volatile. Are there any kind of changes in the demand profile in the second half versus the first half? And, I guess, you could also apply that to the mobile business. We seem to be seeing a lot of tick-up in the production rates versus what we’ve seen, say, three months ago?

Sure, John. So, I think, the profile that we would expect to see would be modest increases in our industrial sales and some modest increases in mobile. But, I think, the larger part is going to come in industrial, particularly around the defense area or sector. So, I think, energy is going to be fairly flat quarter-over-quarter. So as the sales rates and the build rates continue to increase, we may also see some increased demand tied to potential UAW work stoppage with the automotive OEMs. So we’re going to watch that very closely and see how that develops over the next couple of months.

Fair enough. And can you talk a little bit about your ability to track new business? I know that’s been part of the growth profile kind of an update on new customer captures.

Yeah, I mean, I don’t know that we’ve had a whole lot of new customer captures. I mean, there’s always customers that come in and out depending on what product requirements they need. But what we continue to see is solid growth in the EV products that we manufacture. We’ve been informed of several uplifts by the automotive OEMs on various EV platforms that we participate in. We expect mining continues to be pretty solid in the industrial space, and then we expect the demand for defense products that we produce to continue to increase in the third quarter.

Got it. And the changes of the lack of utilization of third-party producers in the coming quarter, what’s driving that?

Well, I would say the predominant thing is that our melt utilization is increasing. So as you can understand, our internal costs are cheaper to manufacture than it is to procure it. So we expect to see margin improvement as we continue to ramp up our melt utilization and use our own melt for our sales versus third-party. There is also a second component there as well. We can only apply third-party melt, where it makes financial sense. So we’re working on some projects that could work out to be very positive for us. I’m not going to get into great details on those, because those are in the trial stages right now. But there’s some opportunities to maybe do a little bit product diversification with third-party melt. We just need to make sure that financially it makes very positive sense to do so.

Got it. And one last question, then I’ll get back into queue. On the raw material spread looks like it was a little bit more of a headwind than we thought maybe 3 months ago, at least more than I was looking at. Can you talk a little bit about your expectations for that going into the third quarter?

Yeah. I mean, again, scrap prices are somewhat, at times, very volatile. They change from month-to-month. So from a forecasting standpoint, it can become a little difficult. However, we do expect further compression on the spread in Q3.

Great. Thanks, guys. I’ll get back into queue.

Thanks, John.

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

Hi, everyone. Thanks for taking my questions. John stepping in for Dave here.

Okay.

I guess you touched on melt utilization, could we see that 80% mark in Q3, what steps would it take to get there? And is an 80% average over Q4 still reasonable?

I think in that the 80% to 84% is somewhat reasonable, I mean, we’re off to a pretty good start for the quarter already. We have 1-month over the quarter completed, and we’re seeing positive improvement from our 75% in Q2.

John, when you get into Q4, we do have our planned downtime, so we’re expecting to be down for about 10 days; that’ll be about 30,000 tons of melt. So I would expect that utilization rate to trend down in Q4 just based on the typical annual schedule.

All right. Got it. Very helpful. And with the 2 new machine lines, can you provide any additional color? How do you expect they’ll support the increasing demand going forward? Will they have enough, or do you see additional lines being open sometime in the future?

Yeah, so the investment in those lines is directed specifically at the EV market. We’ve been informed by several OEMs that their demand for the EV components that we manufacture is going to increase. So we’re just aligning our capability with the demand with this investment. And what we will do – going forward, we stay close to our customers as we see opportunity with our customers for increased demand. We’ll make the appropriate investments to make sure we support our customers.

John to add to that, we do expect modest incremental revenue and EBITDA from those investments. And from a timing perspective, it’s likely going to be late 2024 once production commences on those assets.

Right. Got it. Thank you for taking my questions.

Thanks.

Thanks, John.

We have no further questions at this time. I’ll turn it back to the presenters for any closing remarks.

I think that concludes our call today. Thanks everyone for joining and we look forward to updating you next quarter. Thank you.

This concludes today’s conference call. Thank you for participating. You may now disconnect.