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 Q2 2023 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 1 on your telephone keypad. To withdraw your question, please press star 1 again. Thank you. Jennifer Beeman, Director of Communications and Investor Relations. You may begin.

Good morning and welcome to Timken Steel's second 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, 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 reconciliation 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, I'd like to thank our employees for their hard work and unwavering dedication to Timken Steel. 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-train 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 delivering on our commitments in the upcoming quarters. As anticipated, our melt utilization for the second quarter was approximately 75%. This rate included the impact of a few days of planned downtime to proactively complete maintenance on the furnace transformer. We are encouraged by the ongoing positive macroeconomic trends that bode well for our company's growth in our targeted areas. Particularly promising is the continued upswing in electric and hybrid vehicle production, which represents a significant opportunity for us. Notably, our base sales in EV-related products grew by 77% year over year. We have been awarded approximately 20 essential component parts for EVs from various customers, indicating our strong market presence. We anticipate that this momentum will persist and even strengthen as we continue to foster valuable partnerships with our customers. Given the market trend, we recently approved a $5 million investment for two additional manufactured component machining lines to be installed at our facility in Southwest Ohio in late 2024. This investment will broaden our EV components to customers and allow us to keep pace with the projected growth. Currently, approximately 6% of our mobile manufacturer components portfolio is attributed to electric vehicle components versus internal combustion parts. And we anticipate that the EV mix will continue to grow in the future. In general, we experienced steady mobile shipments in the second quarter. as the industry continued to see an easing of supply chain issues. However, we are staying close to our customers and suppliers who continue to work through raw material shortages and labor issues. Moving to our industrial products, we are benefiting from the expansion of the U.S. industrial supply base, particularly in support of major Department of Defense programs. In the second quarter, Our industrial shipments increased by 9% compared with the prior quarter, reflecting strength in defense and mining sectors. Our energy shipments in the second quarter were relatively flat on a sequential basis. Concerns for weakening demand have slowed drilling activity. However, inventories remain relatively low for current and forecasted demand. We remain committed to our profitability improvement initiatives and work continues company-wide to achieve our target of $80 million by 2026. Again, our actions focus on commercial excellence, manufacturing and reliability excellence, and administrative process simplification with a strong balance sheet as our foundation. I look forward to continuing our positive momentum into the second half of 2023 with an ongoing focus on safety, manufacturing excellence, customer service, and advancing our strategic imperatives to drive sustainable through-cycle profitability and cash flows. I thank our customers for their trust, our suppliers for their partnership, and our shareholders for their continued support.