TimkenSteel Corporation

Thank you for standing by. My name is Brianna and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2023 Timken Steel Corporation 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. I will now turn the call over to Jennifer Beeman. You may begin your conference.

Good morning and welcome to Timken Steel's first quarter 2023 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 of 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?

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 culture is a journey, we've observed positive trends during the first quarter. Our teams are actively engaged in continuous improvement activities and it 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 demand 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 were 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 mill downtime, and ensure steel stays on its intended path. The winning idea proposed installing temperature alarm cameras that can detect irregularities in steel temperatures across multiple zones in the mill area. If the cameras detect higher temperatures, the entire mill can be shut down immediately, improving safety for all involved. It's this type of continuous improvement that will not only keep us safer, but ensure the integrity of our assets for years to come. Turning to our first quarter results, net sales increased by 32% compared with the fourth quarter as a result of higher shipments in all of our markets as we ramped up production to more normalized levels. In addition, I am pleased to report that our melt utilization rate saw a solid improvement in the first quarter. rising to 73% from 47% in the previous quarter. Looking ahead to the second quarter, we anticipate a melt utilization rate of approximately 75%, which takes into account some planned maintenance downtime for our EAF furnace. We are pleased to report significant sequential improvement in our shipments. Our end market demand remains steady as evidenced by our order book, which now extends into the third quarter. As a reminder, we operate in markets that are currently benefiting from favorable macroeconomic trends, such as increased infrastructure spending, reshoring, and supply chain de-risking. Our industrial shipments increased by 52% with continued strength in defense, heavy equipment, and mining sectors, along with solid demand from industrial distributors. In mobile, shipments increased by 19% compared with the prior quarter. Sales demand remained steady, and new vehicle inventories are slowly approaching normal levels. As a reminder, we're targeting mobile shipments to be approximately 40% of our order book in the future to better align with our market-balanced commercial strategy. Our energy shipments increased 55% sequentially as a result of elevated drilling and completion activity. Rig counts are expected to remain relatively strong, but the forecasted US rig count has been adjusted slightly down as higher interest rates and fears of a recession are influencing drilling activity. The financial discipline demonstrated recently by exploration and production companies is expected to continue. Additionally, we remain on track to achieve our targeted $80 million 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. At Timken Steel, improving manufacturing productivity, reliability, and efficiency is crucial to our success. In alignment with this goal, we have allocated a capital expenditure budget of $45 million for 2023 to support these efforts. As a part of this, on our 2024 budget, our Board recently approved a $15 million capital project aimed at installing automated inspection and grinding capabilities in our Harrison facility by 2025. This addition of automated inspection and grinding will bring about consistent, repeatable finishing and packaging while simultaneously enhancing our yield and safety performance. We anticipate that this project will result in at least $3 million in annual savings beginning in 2025. Moreover, this exciting development is not just a step towards driving continuous improvement, but it also supports our long-term automation strategy for future efficiency projects. For example, we believe that scalable AI technologies will further enhance value and improve our safety, quality, reliability, and cost, and in some instances, aiding in our sustainability efforts. Speaking of sustainability, we recently published our 2022 Sustainability Report, which showcases the progress we have made in our commitment to responsible and sustainable operations. The report highlights several key initiatives that we've made progress on in the past year. This includes increased transparency with global reporting initiative or GRI reporting, embedded focus on sustainability across the company, targeted capital allocation for continuous improvement, enhanced focus on employee safety, and evaluation of our environmental impact. I am proud of the progress we have made. And we remain committed to reducing our environmental impact, supporting our communities, and operating with the highest standards of ethics and governance. With that, I thank employees for the strong first quarter. I thank our customers for their trust, our suppliers for their partnership, and our shareholders for the continued support. Now I'd like to turn the call over to Chris.