TimkenSteel Corporation

conference call. All participants are in a listen-only mode. After the speaker's presentation, we'll 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 Timken Steel's third 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 Timpkins 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, 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 our focus 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 discuss the United Auto Workers strike and how it impacted demand for our products. Overall, the impact for the third quarter was relatively minimal. About one-third of our mobile OEM shipments go to non-U.S.-based automakers with U.S. manufacturing operations. Additionally, we shipped to auto manufacturers with operations in Mexico, which were not impacted by the strike. During the early weeks of the strike, the supply chain was still catching up to fulfill past due orders. Although work stoppages directly affected a few programs we're involved in, we expect the OEM demand to quickly recover and remain strong in early 2024. Regarding EV-related products, we had a record third quarter representing a 62% net sales increase from the second quarter. As a reminder, last quarter we had approved a $5 million investment for two additional manufactured component machine lines to be installed at our facility in Southwest Ohio in late 2024. This investment will broaden our EV component offering to customers and allow us to keep pace with industry growth. In the industrial market, our shipments increased by 5% over the prior quarter. We saw an uptick in demand for high quality grades of steel coupled with continued strength in the defense sector due to expansion of the U.S. industrial supply base supporting major Department of Defense programs. We expect record sales to the defense sector in the fourth quarter. Our energy shipments in the third quarter declined 27% on a sequential basis as demand weakened. The average U.S. rate count dropped approximately 10% from the second quarter despite an increase in oil prices during the period. This reflects the industry's continued conservative approach. In support of our ongoing commitment to expanding our market presence and broadening our product portfolio, we are pleased to introduce Tim Lynch as our Vice President of Corporate Development, a newly established role. Tim's primary mission is to enhance the company's value by identifying and actively pursuing acquisitions that align with our strategic imperatives. With a career spanning over three decades, Tim brings extensive expertise in steelmaking operations, supply chain management, procurement, and strategic planning to our team. We extend a warm welcome to Tim and look forward to his valuable contributions to our company. 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 have been focused on commercial excellence, manufacturing and reliability excellence, and administrative process simplification with a strong balance sheet as our foundation. To date, we are about two-thirds of the way towards achieving our target with ongoing areas of focus, including manufacturing excellence, and administrative process simplification enabled by modernizing our IT systems. As we enter into the last few months of the year, we will remain focused on safety, 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.