TimkenSteel Corporation

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 Timken Steel Corporation fourth quarter and full year 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. I'll now hand it over to Jennifer Beeman, Director of Communications and Investor Relations. You may begin.

Thanks and good morning, and welcome to Timken Steel's fourth quarter and full year 2022 conference call. I'm Jennifer Beeman, Director of Communications and Investor Relations for Timken Steel. Joining me today is Mike Williams, President and Chief Executive Officer, Chris Westbrooks, Executive Vice President and Chief Financial Officer, and Kevin Rakitic. 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 Timken Steel 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. 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, renewables, 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 Timpkins Steel is dedicated to change. We are fully committed to improving our safety performance, and in 2023, we expect to invest approximately $7 million in company-wide 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 safely 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 for 2023 to approximately $45 million and have several work streams focused on enhancing our manufacturing excellence and asset reliability programs. Turning to the results, fourth quarter net sales declined 23% sequentially as a result of a market-driven reduction in surcharge revenue per ton due to lower scrap and alloy prices, as well as the impact from lower shipments. We are maintaining a constant and transparent dialogue with our customers, and while there is frustration that short-term demand is outpacing our supply, we are steadily working to fulfill orders. I am encouraged that in the first quarter of 2023, we are seeing consistent positive utilization trends I believe this momentum will continue as teams are fully trained and begin to work more efficiently together. Moving to customer contracts, our annual customer price agreement negotiations, which cover approximately 70% of our order book, have been completed with an average base price increase in the mid to upper single digits on a percentage basis compared with 2022 average base pricing. Given that market strength has continued into 2023, our order book is expected to remain full throughout the first half of 2023. On a positive note, demand remains robust in all of our end markets. Infrastructure spending, automation, reshoring, and supply chain de-risking are driving increased demand for our products in our targeted end market sectors. Our industrial shipments decreased by 33% sequentially given our continued melt shot restraints. However, defense and mining sectors remain strong. In defense, the expansion of the U.S. industrial supply base for major Department of Defense programs continues to drive demand for our products and services. In mobile, shipments decreased by 5% compared with the prior quarter. Similar to the third quarter, mobile customers were less impacted in the fourth quarter given our inventory on hand to support their specific needs. Otherwise, light vehicle production continues to increase to support automotive demand and the continuing inventory replenishment. Our energy shipments declined 18% sequentially based on our shipping constraints. However, the market's lower than normal inventory levels increased demand and sanctions against russia continue to support u.s drilling activity our customers continue to order at a high rate to support drilling and completion activity while maintaining balanced inventory levels currently we are on track to achieve our targeted 80 million dollars of profitability improvements by 2026. as a reminder our actions focus on commercial excellence manufacturing and reliability excellence, and administrative process simplification with a strong balance sheet as our foundation. We have launched several initiatives related to manufacturing productivity, reliability, and efficiency that are included in our 2023 capital expenditure budget. A few examples include Adding a new slag rate to our melt shop, which will aid in refining consistency and overall shopper liability. Upgrading our electric arc furnace control system for energy efficiencies. Also adding in process surface quality gauges that are rolling into making operations to improve first time quality. And also automating final product testing in our metallurgical laboratory. we remain committed to investing in our assets and our people, as well as scalable AI technologies that enhance value and improve our safety, quality, reliability, and cost, and in some instances, aiding in our sustainability efforts. Examples include technologies that allow us to quickly detect a changing condition or events that could impact safety, quality, production, or reliability within our manufacturing environment. We will also embrace technologies that give us early warning signs of the deterioration of machinery and components, allowing us to proactively act and ultimately driving lower costs. As you may recall, we have undertaken a process to move our scrapyard to be adjacent to our melt shop to improve efficiency and reduce emissions. We expect to become fully operational in April with a run rate savings of $2 million annually. We are grateful for the support of our customers, suppliers, and shareholders, and our dedicated employees who have embraced continuous improvement related to safety, manufacturing, commercial excellence, and process simplification, which we believe will lead to sustainable through cycle profitability. Now, I would like to turn the call over to Chris.