Q2 2019 Earnings Call

The Conference Center, please hold for the next available operator.

Good morning, I have the name of the conference call him to join.

The Timkensteel earnings call.

In Q they have your first and last name what the spelling plays.

Evan look long at the K E V I and.

L.A.S.

A M M E.

Thank you.

May I have your company name please.

Era A.I.E.R. J.

Thank you and they have a telephone number please.

Evan seven four to 650 382.

Thank you.

Your line will be placed on music hold until the conference begins one moment. Please.

Okay, Great and are you seeing any encouraging signs just yet from customers.

And and you know those those area of the markets, particularly at the distributors.

How long until you think we're we're better balance just within the supply chain.

Well I guess just to two pieces of data one the M. A C bar.

Data that we receive would indicate that they've got their inventory levels down to about three and a half months switch.

If you look at it by historical standards is not a crazy number and generally we begin to see restocking in around that.

That number we have seen distributors spot filling for holes on the shelves right now.

We just haven't seen that that more robust demand signal that we really need to see to turn this thing back on but I do think there is enough evidence out there that would say that.

They are being cautious, but when they go they are going to go.

Thanks very much.

Yes, thanks out.

Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.

Our next question comes from Justin Bergner from GE Dot Research. Your line is open. Please go ahead.

Good morning, Tim.

Morning morning, Justin how are you.

Well Justin.

Couple of questions here, so in the second quarter, what came in better than plan I mean, if we take out that $11 million year on year life. So.

I guess you are still at 16, and a half million to EBITDA. So what what part of the Twoq you sort of equation came in better than planned.

And the other piece that was relatively significant in the quarter.

Is the variable compensation, which we adjusted downward during the quarter.

Bringing that down that it was about $7 million of.

Benefit when you compare quarter over quarter.

So those are the two big items and that gets us closer to probably what you were expecting.

Got it but you still I mean came in short of your I guess shipment guide so that was a negative that you had to offset.

Somewhere else, so right or sort of another ingredient there or was it just a little bit here and there across the different categories like price mix manufacturing.

It is a little bit from everywhere, but the cost reduction as well you know that's starting to see the benefits.

That weve implemented and that will continue to benefit us in the future.

Okay. That's helpful. As I look at the base sales price per ton.

It looks you know to be down in most of your business units accepting for industrial but if I look at the Chew Q1 Q.

I guess EBITDA bridge price mix is only a 1 million dollar headwind. So maybe if you could just sort of elaborate on how price mix.

Is trending sequentially in the second quarter and looking to the third quarter I know there are a lot of moving parts there.

And there are a lot of moving parts. When you look at just price per ton Nics is a significant driver throughout those end markets that you mentioned and then you also have a higher level of billets then.

You had in the prior quarter as well so that impacts your mix favourably.

But we do see some price changes given the mix change.

Within the product lines.

Okay would you say that price then.

Is trending relatively flat sequentially in the second quarter and looking into the third when you think of but think of it on sort of an apples to apples.

Yes, yeah, when you like product by product.

Yeah, it's it's holding.

So you have price on an individual product level is pretty apples to apples there.

Drilling within the products Yep.

All right that's helpful.

On the auto side, you mentioned, a big win and it seems based upon your guide for the third quarter of.

I think flat shipments year on year, if I remember correctly that you're probably doing a little bit better than the industry. So maybe if you could just quantify or how you think about your level of outperformance in automotive versus the broader market, whether it's you know wins or you know more heavy exposure versus you know late auto exposure.

I think there are two primary drivers of adjusted one is we as we said we are gaining market share. So we are targeting a specific set of customers in our mobile market to grow our overall presence and we're seeing we're seeing.

Good results there, but we're also winning new applications of the some of the the the $90 million that we talked about coming on late in the year.

Would be new applications for us and and so and that's across a.

A targeted group of customers as well so I think its focus it's it's having the right value proposition the right service model and obviously are the differentiation in our technology technological capabilities I think has positioned us for that.

Okay could you elaborate a bit more in the differentiation in technology and service because.

The service one is not one that you've emphasized as much in the past.

On calls well I mean, yeah. The service model is is getting our is satisfying our customers that expectation from a delivery point of view right. It. So it is making sure we're operating our facilities in such a way that that that our on time delivery rates are high it's putting the right inventory programs in place to support that.

It is targeted.

Uh huh.

Targeted programs to put a whip in place for short lead times, so that that we believe that it positions us well relative to to our competition.

From a technological point of view, we've always we've always believed that we differentiate ourselves on our metallurgical knowledge, but also in the case of our value add business the ability to manage a relatively complex supply chain to provide up a the right product into the right application for our customers. So all of those pieces combined I believe to two and show the results that you saw in the in the in the quarter.

And for the rest of the year.

Okay. That's helpful. And then lastly, the 6 million LIFO benefit that you are expecting a third quarter. That's the six months a year on year benefit.

Or so last year was a cost.

I don't have it's an absolute numbers for the third quarter, we expect income of $6 million currently forecasted and that would compare with a cost last year I don't have the number off top of my head, but it would be a change there is a bigger than $6 million number.

Okay. So the 6 million is comparable to the 17 in the second quarter.

It's not the absolute okay.

Thanks for taking my questions.

Thanks, Justin.

And our next question comes from Phil Gibbs from Keybanc capital markets. Your line is open. Please go ahead.

Hi, Good morning, Tim Chris How're, you could go to bill.

As we look out into the third quarter just relative to the second are you expecting much of an impact positive or negative from raw material spread.

Yeah. The the Busheling are starting to show signs of trending upward that that should help us that's been factored into our guidance. This 20 or so dollar improvement that we expect to see here in the next month.

But that's all we factored in thus far anything beyond that would be a benefit for us.

So a little bit of a benefit relative to Q2 factored in.

And then your earlier comp your earlier comments on electrodes in Refractories and alloys, I guess consumables in general.

There there is some relief.

There that you're seeing or or you're just saying that from a trend standpoint, that's moving in that direction and you eventually expect to see the relief I just want to qualify that.

Yeah, we're starting to see it in the second half.

And we go typically on six month arrangements and that and the electrode market.

Last question just on that working capital.

What are you expecting that working capital to be in the second half in terms of a source or use and specifically what do you anticipate your your inventory positioning to end the year. Thanks.

Thanks, Phil So we're actively managing working capital as we've done in the past.

Working hard to manage that down but at the same time make sure position for any recoveries in the market, but we will be closely managing inventory levels as we approach the end of the year.

Trying to reduce where we can but like I said not impacting the customer service model.

Sorry, I can't give you a specific number other than to say, it's a focus for us.

Thank you.

You're welcome.

And our next question comes from Justin Bergner from GE Dot Research. Your line is open. Please go ahead.

Oh, Thanks, one quick follow up here.

The industrial.

I guess shipment guidance for flat quarter on quarter.

In the third quarter.

Is that assuming some and to de stocking.

I'm, just sort of looking back and I guess.

You know historically it looks like you've been relatively flat sequentially and industrial third quarter versus the second quarter. I mean, I would assume that demand is still stepping down a bit sequentially. So are you getting some benefit on the end of Destocking side, there and how you're looking at the shipments for the third quarter.

No our expectation on the third is and it's it's pretty flat.

The the distributors are still going to be pretty cautious in.

Going from Destocking to restocking.

So then the demand outlook for industrial Wood would also be sort of flat sequentially, if you're thinking about flat shipments in the third quarter.

Probably probably a little bit of a mixed bag some up some down.

Okay and on the on the energy side are you, suggesting that there's also going to be de stocking.

There that's weighing on the third quarter the second quarter.

Or is there also some weakening in demand that is contributing to the down 12000 tons.

I think the problem is that there's just no demand.

Coming out of the sector I mean at that level of activity is very very low right. Now. So we just see that kind of staying where it is right now based on what we're seeing from a.

From a rig count foot drilled you know the DUC inventory all of the factors that we look at says that Theyre just going to sit tight for for the third looks like.

Okay. That's helpful. Thanks.

All right thanks doesn't.

There are no further questions at this time I turn the call back over to Tim Timken for closing remarks.

Well. Thank you all for your questions. Today, if you have any additional questions. Please don't hesitate to contact Jennifer Thanks, again to our employees are dedicated to making timkensteel better each day and to you for your continued interest and support of our company I look forward to updating you on our progress next quarter. Thank you.

Thank you and that concludes our call today.

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