Good morning, and welcome to TimkenSteel's Third Quarter 2023 Conference Call. All participants are in a listen-only mode. After the speakers' presentation, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Jennifer Beeman, Director of Communications and Investor Relations. Thank you. Please go ahead.

Good morning, and welcome to TimkenSteel's third 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 equivalent 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 and foremost, I'd like to thank our employees for their hard work and collaborative spirit as we continue to chart new pathways for growth. Our firm commitment to safety is beginning to show results and are focused on strengthening our culture and fostering teamwork across our commercial, supply chain and manufacturing operations resulted in a solid profitability while meeting the needs of our customers. Additionally, we continue to repurchase shares while strategically reinvesting in our business. The enhanced collaboration we've seen both with the United Steelworkers and within our teams is fueling our never-ending pursuit of manufacturing excellence and helping us to create a lasting culture of safety. In October, we launched our second employee safety survey for all employees. Results from this survey will help us improve hazard awareness, improve our engagement, build a safety-centric mindset and gain valuable insights from employees for continued safety improvements. However, to encourage good safety ideas, it is essential that we provide concrete support. In 2023, we spent approximately $8 million on safety CapEx projects and $1 million in safety training. Moving to our performance. We saw a slight sequential decrease in sales and shipments in the third quarter. While I'm encouraged, we've experienced solid base prices across all end market sectors, EBITDA was impacted by a continued decrease in surcharges given lower market prices for scrap and alloys in the past several months. Our melt utilization for the third quarter was approximately 76%, slightly higher than the previous quarter. Given our planned annual shutdown maintenance in October, we expect to see a sequential decrease in the average melt utilization rate in the fourth quarter. Mobile customer shipments were essentially flat with the second quarter. I wanted to take a moment to…

Thanks, Mike. Good morning, everyone, and thanks for joining the call today. TimkenSteel's third quarter financial results reflect solid profitability and another quarter of positive operating cash flow. Thanks to all of our employees for their teamwork and collaboration and delivering these financial results, while remaining focused on advancing the company's strategic imperatives. Now turning to the third quarter financial results. Net sales totaled $354.2 million with net income of $24.8 million or $0.51 per diluted share. Comparatively, sequential second quarter net sales were $356.6 million with net income of $28.9 million or $0.62 per diluted share. Net sales in last year's third quarter were $316.8 million with a net loss of $13.3 million or a loss of $0.29 per diluted share. On an adjusted basis, the company reported net income in the third quarter of $24.9 million or $0.52 per diluted share. Comparatively, the second quarter adjusted net income was $27.6 million or $0.60 per diluted share. Adjusted net loss in the third quarter last year was $4.1 million or a loss of $0.09 per diluted share. Adjusted EBITDA was $46.8 million in the third quarter, a $3.7 million sequential decline. A market-driven decrease in the raw material surcharge environment and the start of our planned annual shutdown maintenance were the drivers of the sequential decrease in adjusted EBITDA. Partially offsetting these items were higher based sales prices and an improvement in product mix. Compared with adjusted EBITDA of $10.8 million in the third quarter of last year, adjusted EBITDA increased by $36 million in the quarter. As a reminder, the third quarter of 2022 included unplanned downtime at the melt shop. Turning now to the details of the financial results in the third quarter. Shipments were 175,800 tons in the quarter, a slight decrease of 1,700 tons or…

[Operator Instructions]. Our first question comes from John Franzreb from Sidoti & Company. Please go ahead. Your line is open.

Good morning, everybody. And thanks for taking the questions. I'd like to start with your comments on the UAW strike. Did it impact October's results? Or are you anticipating it to impact more of November? Just kind of color how the fourth quarter is kind of playing out?

Sure, John. So yes, we had a much more significant impact in October versus the prior months during the strike. And we also have to wait and see how quickly they ramp up and how strong they pull through the rest of this quarter. That's still a question mark.

Okay. And then giving you no color as to how that's going to play out?

Well, basically, they've just kind of give us what the plants are restarting and what that schedule is, but we don't know what the demand requirements are going to be yet.

Okay. And out of curiosity, are you exposed to the Mack Truck UAW strike? Or is that something that won't impact you?

Not that I'm aware of. I mean some -- there could be possibly somewhere in the supply chain, but I don't think anything significant from our sales perspective would be impacted.

Good. Fair enough. And on the industrial side, the sequential improvement you're talking about in the fourth quarter is excellent. Then my original question is how is that business profile changed from three months ago, but I'm going to shift that, so can you talk a little bit more, is it entirely the defense side of that business that's driving the sequential increase that you're looking for? Or are there other parts that are doing well?

That's predominantly the defense sector that's pulling hard to restock their supply chain.

Okay. Got it. And on the energy side, you touched on that the rig count is down. Would you expect the energy volumes to remain at this kind of threshold in the fourth quarter? Or would you expect it to be sequentially weaker due to seasonality?

I think the -- I think from our perspective, it's pretty much going to be flat to maybe down in Q4 to energy demand. We've seen a couple of rigs added, I think, over the last 30 days, but they're being very disciplined with their working capital.

Okay. At this point. Actually I'll get back into queue. And let's somebody else ask some question.

All right. Thanks John.

Our next question comes from Phil Gibbs from KeyBanc. Please go ahead. Your line is open.

Hey, good morning.

Good morning, Phil.

Just wanted you to touch on the comments you made on the front of the call about having a gentleman on our role on looking at acquisition targets. Do you think you can share in terms of just the broader strategy? This appears to be a little bit of a pivot or an augmentation to what you guys have already been doing, because you haven't been very acquisitive recently. So anything you could add there would be helpful?

Sure. I mean, we've been going through this transformation process for a couple of years now. We have a strong solid balance sheet. We've totally revamped our commercial approach to various markets, beefed up our team and skill set. And I think we're reaching a point in discussion with the Board that we need to start looking more aggressively for some external growth opportunities that align with our strategic imperatives, which is going to be around our manufacturing footprint, our product capabilities and targeted certain end markets for expansion. There'll be more color to come over the next several quarters on this topic. But we just wanted to identify the fact that we're kind of shifted into fifth gear as our overall focus and strategic evolution.

Thank you. And then as it relates to the pricing and mix, I think your bridge and your filing spoke to somewhere around maybe $10 million, $11 million sequential pickup in EBITDA from pricing and mix in the third quarter versus the second. How much of that pickup is related to some of the defense comments you're making?

A significant amount of it is related to the demand growth in defense-related products that we manufacture. However, we've seen also a richer alloy mix as well in the industrial sector.

And then there was a big pickup in pricing and mix is sort of across all your target markets, auto, industrial and energy, obviously really, really notable. Is there any of that that over the next couple of quarters will normalize a bit, because there was a bit of a step change in the quarter that was unique?

Yes. There was some retroactive pricing that was caught up in Q3, but that's -- those are solid annual agreements, and that pricing will continue going forward. That was one of the big influencer besides the richer mix tied to the defense market sector and the alloy mix product.

Okay. So some catch-up on pricing or orders that maybe were backlogged from some of the operational issues last year?

Yes. I would say it's more retroactive pricing that went back a couple of quarters. They got caught up in Q3.

Great. And then lastly, anything on the conversion cost side that's notable between energy alloys, consumables, anything like that that could be changing? Or how does it compare to last year?

You mean for 2024?

I just mean in terms of trends, in terms of what you've seen at present and how that maybe compares to last year? Thank you.

Yes. I think the most of our consumables and energy requirements, whether it be gas, electricity or annual contracts or longer-term contracts. So I think those pricing from that perspective is flat to the remainder of this year. And we're in the progress of negotiating -- beginning the negotiation of our supply contracts for 2024. So too early to tell you how that's going to play out, but we'll know probably by the end of the year.

Thank you.

Thanks, Phil.

[Operator Instructions]. Our next question comes from Dave Storms from Stonegate Capital Markets. Please go ahead. Your line is open.

Good morning. This is John stepping in for Dave.

Hey, John.

Hi, so you had mentioned utilization was 76% in the quarter and it's supposed to decrease in Q4. So relative to historical levels, what are your expectations for 2024, was reaching 80% a reasonable expectation?

Yes. I mean that's our target average per quarter. We would have been there in Q3. However, we had an environmental system that malfunction and we had to be down for a couple of days of repair at our melt shop. So we would have been definitely at slightly above 80%, if that wasn't the case for Q3. And that is our -- basically our target for 2024. And we've given you the reasons why Q4 will be lower.

Got it. Very helpful. Thank you. And then cost improvements that remain in Q3, which ones are structural, which of them are discretionary [indiscernible]?

Well, I mean, most of our cost improvements are going to be structural outside of supply agreements and arrangements in raw material purchases and energy purchases, those can vary. But when we look at our manpower, we look at our productivity, we look at our yield and cost of quality, those things are all structural improvements. And that's what we've been focused on. A number of investments that were implemented during the outage, we'll start to see those improvements through the remainder of this year and for the full-year 2024.

Okay. Got it. Thank you. Appreciate you taking my questions.

Thank you.

Our next question comes from John Franzreb from Sidoti. Please go ahead. Your line is open.

Yes, just a couple of quick follow-ups. Firstly, how does the capital expenditure outlook change in 2024 versus 2023? I know you got the additional piece of equipment that you're putting in at the end of next year, but can you kind of ballpark what the CapEx spend looks like for next year?

For next year, John, we're in the planning process right now. And we'll do that through probably mid-December, and then we'll have a discussion with the Board. So at this time, I don't want to make that public. It would only be a guess at this time anyways. But at the year-end, we'll be able to give much more clarity on the CapEx for 2024. I don't -- I would say this, though. I don't think there's anything in the planning right now that would significantly increase it.

Okay. And regarding the tax rate, it's kind of been volatile for the past couple of quarters. Any thoughts on how you're going to finish the year, full-year or fourth quarter, either one would be helpful?

Kris, do you want to take that one?

Sure, yes. Thanks, John. Looking at that year-to-date rate around 27% is where we'd be targeting for the end of the year. The things that are driving the rate higher are some of these non-deductible costs that we experienced earlier in the year. So as we get into the next year, I think it should moderate absent those non-deductible items.

Thank you, Chris. And just lastly on capital allocation. You've been buying back shares rather aggressively. Do you expect to continue to do so in the fourth quarter? Can you just talk a little bit about excess cash and plans forward? Especially in light potentially being more aggressive in M&A, so maybe contextualize at all?

So we put in the queue in the month of October, we bought back around 94,000 shares, I believe, about $2 million of buybacks in the month of October. And we're just putting a new plan in place now they'll go out through our next filing date. So I'm not going to speak specifically to that. But more to come as we reported in February, but we're definitely thinking about the future, adequately managing our cash as we approach year-end, managing working capital like we always do and being prudent in all those areas.

Okay. Thank you for taking my follow-ups.

Thanks, John.

[Operator Instructions] We have no further questions in queue. I'd like to turn the call back over to Jennifer Beeman for closing remarks.

Thank you all for joining us today, and that concludes our call.

This concludes today's conference call. Thank you for your participation. You may now disconnect.