Metallus Inc (MTUS) 2015 Q2 法說會逐字稿

Good morning. My name is Amy and I will be your conference operator today. At this time, I would like to welcome everyone to the TimkenSteel second-quarter 2015 earnings conference call and webcast.

(Operator Instructions)

Tina Beskid, you may begin your conference.

Thank you Amy. Good morning and thanks to all of you for joining TimkenSteel's second-quarter 2015 conference call to discuss our financial results. I'm joined by Tim Timken, our Chairman, CEO and President; as well as Chris Holding, Executive Vice President and Chief Financial Officer.

During today's conference call, we may make forward-looking statements as defined by the SEC. These statements relate to our expectations regarding future financial results, plans and business operations among other matters. Our actual results may differ materially from those projected or implied due to a variety of factors which we describe in greater detail in today's press release, supporting information provided in connection with today's conference call and in our reports filed with the SEC, all of which are available on the www.TimkenSteel.com website. Where non-GAAP financial information is referenced, we have included reconciliations between such non-GAAP financial information and its GAAP equivalent in the press release and/or supporting information as appropriate. Today's call is copyrighted by TimkenSteel Corporation. We prohibit any use, recording or transmission of any portion of the call without our express advance written consent. There will be an opportunity to ask questions at the end of Chris's prepared remarks. Now I would like to take the opportunity to turn it over to Tim.

Thanks Tina and thank you all for joining us. We recently celebrated the first anniversary of TimkenSteel Corporation. Looking back, it's obviously been quite a year. At this time last year, we had just completed a well-executed separation and stood up a strong, independent company with a unique business model. Our markets were good, customer demand was high and we were commissioning new capabilities and assets. At the time, we were at the height of the oil cycle. No one could have imagined how quickly or deeply our business model and all of us have been tested. That's both the good news and the bad news. Our work since that time to operate a new company in these conditions gives you valuable insight into how we do business and how we will perform when our markets recover.

We operate a business that is diversified across many markets. Today, automotive demand is strong, but the demand in the energy market is as weak as it was in 2009. Our distribution business is down, and while inventory levels in the channel are better than in previous cycles, we are keeping a close eye on them. In our industrial markets, we're feeling the weakness from both commodity markets and industries related to the energy industry. With this drop in demand in key markets as well as our inventory management efforts, we are now operating at less than 50% of melt utilization, which is hurting the profitability of the products we are producing. We forecasted that this quarter would have us in a loss position. It's obviously not where we want to be, but it's the reality of the situation. Our leadership team knows what to do when market conditions erode in this way, and we have been taking and will continue to take actions to tackle this from both sides, both reducing costs and driving new business.

On the cost side, we completed the actions we committed to on our last call, which will result in more than $25 million in annual savings. We also continue to scale operations to demand in both our steel making and value-added service plans so when we are operating, we are doing it in a way that is as lean as possible. We are a culture that is focused on continuous improvement throughout the cycle, and our teams across the Company have sharpened that focus. We're continuing to reduce cost and realize the efficiencies that come from moving production between plants to produce on the most competitive assets for any particular order. Our people are working hard and are working smart to operate solidly.

We're also staying close to our customers. We have a strong position with industry-leading customers who are experts in their markets. Customer service continues to be a primary focus. We are relentless in ensuring the quality and customization of our output and that it remains at industry-leading standards. We've also maintained our new product development efforts. Our sales engineers are continuing to generate a significant percentage of sales from new products. Even with demand down in key markets, we are out there solving problems and innovating to create value for our customers. Our new assets are also delivering. The jumbo bloom vertical caster which American Metal Market names the best process innovation in the industry has caught the attention of our customers. Our data from the caster shows world-leading quality, and we continue to gain a steady stream of customer certifications. 22% of melt at the Faircrest plant now runs through the caster, and we are still on track to achieve a 15% yield savings. We're also executing other elements of our capital plan to support profitable product lines that typically are in high demand. For example, by mid-year next year, our new advanced quench-and-temper facility will be fully operational. These examples are fundamental to the success of our business model. We have sharpened our competitive advantages so when the cycle does turn, and it will turn, we will be ready to make the most of the rebound.

Now Chris will take you through more details of our financial results, and then together we will take your questions. Chris?

Thanks Tim. Net sales in the quarter were $278 million, broken out between base sales of $240 million and surcharges of $38 million. Weak demand from North American oil and gas markets was the primary driver of our results. Shipments of 212,000 tons were 22% lower than the first quarter. Base sales per ton held up well in the quarter despite a shift in end market demands and product mix. We expect these market dynamics to continue into the third quarter. The impacts from lower volumes, manufacturing costs and raw material spread resulted in a $38 million EBIT loss for the quarter. Low melt utilization of 47% increased manufacturing costs, which were driven by deleveraging of fixed costs and operating efficiencies from the pace of the utilization decline. We again anticipate operating below 50% melt utilization in the third quarter. The sequential earnings impact from raw materials spread was unfavorable by $2 million. As we discussed in our first-quarter conference call, declining scrap prices negatively impact our results because the timing associated with our customer surcharge mechanism. The surcharge we pass on to our customers is generally about three months after the scrap is purchased, so as a result, we end up with a timing difference between how much we pay for scrap and the surcharge recovery. Scrap prices stabilized in the second quarter, however, which should favorably impact our raw material spread in the third quarter.

EBITDA for the quarter was a loss of $19 million and was outside of our guidance range, primarily due to our LIFO estimate which had no impact on our positive free cash flow. Additionally we did not factor into our guidance about $2 million in employee severance cost from our cost reduction activities and a large enough inventory reduction. We reaffirm our expectation that the second quarter will be our lowest EBITDA quarter for the year. Obviously we are disappointed with these results. While we have completed our initial cost reductions, we will react to the evolving market dynamics and continue to evaluate additional actions. Beginning in the third quarter, we expect to realize some additional savings from reductions in manufacturing on top of the $25 million in annualized savings from already implemented cost reductions. For the second quarter of 2015, we generated a net loss of $24 million or negative $0.54 per diluted share. Income tax rate was 37.5%, and we expect it to remain around 37% for the full year 2015.

Turning to segment performance, our industrial and mobile segment sales were $211 million for the quarter, which was about a 10% sequential decline. We continue to see strength in the mobile side of our business. The North American light vehicle production rate increase from 2% to 18 million vehicles, a 10-year high in the industry, and our shipments increased 4% sequentially, outpacing the production rate increase. While we continue to see strength in the mobile markets, the industrial end markets are more challenging. Industrial markets were negatively impacted by weak mining and declining oil and gas market demands. Shift tons declined in the segment by 13% compared to the first quarter of 2015. In our energy and distribution segment, sales were about $67 million for the quarter or a 57% decline sequentially. The 50% drop in US rig count since last year significantly impacted our energy and distribution businesses. Energy shipments dropped 68% sequentially, and customer inventory levels remain inflated due to speed of the market decline. Shipments to industrial distributors declined 36% sequentially due to reduces demand from mining and industrial equipment end markets that support US-based tracking. Additionally, strong purchases made in the first quarter in anticipation of future growth resulted in higher inventories within the channel. Distributors now in the process of adjusting inventory levels to match demand expectations.

We generated free cash flow from operations of $31 million in the second quarter with operating working capital providing about $62 million as we reduced inventory and associated spend in line with demand. We have been pleased with the pace of our working capital reduction efforts relative to our expectations, and we plan to further reduce inventory again in the third quarter. Capital expenditures during the first six months totaled $35 million, more than 30% of the spend going to growth-related projects. We estimate full-year 2015 capital spending will be between $75 million and $85 million, which is a $5 million reduction from our previous guidance. We reduced our total debt by $20 million in the quarter to $175 million from our free cash flow. Our net debt to capital is 15.4% and well within our debt covenants.

We paid a quarterly cash dividend to shareholders and expect to maintain this dividend going forward. We believe this action is a testament to our financial position and longer-term prospects. In July 2014, our Board of Directors authorized a three million share repurchase program over a three-year period. We intend to repurchase the two million shares remaining under the authorization before it expires at the end of 2016. While there were no repurchases made in the second quarter, we have been active in the market this month.

Turning to the outlook for the quarter, we expect industrial and mobile shipments to be slightly lower to the second quarter. Automotive demand is strong, but will be offset by oil and gas impacts in some of our industrial end markets. For the energy and distribution segment, we expect the current market dynamics in oil and gas will not change for the third quarter, and as a result, expect shipments to be about 30% less in the second quarter. Given these lower volumes and the stabilizing impacts from spread, we project EBITDA to be between a breakeven and a loss of $15 million.

This ends our prepared statements. We will now take your questions.

(Operator Instructions)

Luke Folta, Jefferies.

Morning guys. I guess first question, just on shipments -- so we're looking for another pretty decent step down in the oil and gas business for energy and distribution in the third quarter. Clearly demand is off huge, but there's also inventory destocking that's going on and I would guess there's probably some share loss to imports as well just given some of the dollar and pricing dynamics there. I know it's hard to get to an exact number, but can you give us some color around just how much you think the shipment decline, the 70% year-over-year shipment decline you're expecting in the third quarter is driven to a real demand pullback versus some of these supply factors which is the destocking on the import side? I guess where I'm going with this is that once that supplies work through, shipments will bounce back to some degree and I'm trying to get a sense of when that will happen and how to think about the magnitude?

Yes, Luke. I'm not sure I can give you an exact number, but let me talk to you about what we're hearing from our customers. Obviously at a time like this, you spend an awful lot of time face to face trying to understand what's going on from a market share point of view. At this point, despite a lot of inbound import pressure that we're seeing, we feel pretty good about our penetration. We have not we believe seen significant erosion in the quarter or really even in the year in oil and gas. A little bit more pressure in distribution, but obviously when we feel that pressure, we're reaching out and talking to our distributors and adjusting when we need to. But for the most part, we've been holding pretty steady through this thing. Really I think what we're seeing now is just a pure reflection of a sub-900 rig count. Fact of the matter is people just aren't buying anything. They're using what they have on the shelves right now, and sooner or later we're going to begin to see that restocking have to take place. And you've seen in the past - -when it goes, it can go pretty quick. That's the environment we're looking at right now.

Very tough to tell how to play out, but if you had to take a guess on when you think your bottom would be in oil and gas shipments, is it the third quarter?

Well, the challenge that we have right now, Luke, is that our lead times are five weeks on bar and eight weeks on tube. That limits our visibility later in the year. Obviously third-quarter shipments are going to be lower. It's just a reflection of the weakness that we see in the industrial and oil and gas markets as well as distribution. Inventory levels for the most part as you pointed out are reasonable we think. So when we begin to see structural demand creation, when people start completing some of these uncompleted wells and they start punching new holes, then obviously that's going to trigger upward motion or upward pressure on revenue.

Okay. And then just on the scrap impact, so your raw materials spread as you characterize it becomes less negative or that excess overhang works itself through to some degree in the third quarter. Can you give us some sense on a dollar basis how much improvement we expect just from the raw materials spread 2Q to 3Q? And at this point, is the third quarter reflective of that excess scrap inventory being totally worked through the system?

Yes Luke, this is Chris. Relative to the scrap, if you look at the pace of the decline in the scrap markets that occurred in the first quarter, that's what's really impacted our results in the first and second quarter. That being said, in the second quarter things flattened out quite a bit, so what that would mean going forward that some of the negative impacts and most of it ought to go away. Now the question turned out to be -- it is hard to go too far out in the future, but in the third quarter, I think we look okay.

All right. And then just a couple cost items. The outlook for LIFO income for the full year, just how we should think about the third quarter and the full-year estimate there. And you mentioned some additional restructuring actions that would drive cost savings in addition to the $25 million. Any color on the magnitude or timing around that would be helpful.

We will talk about that once some of the actions are done, but we did take some costs out of one of our value added facilities at the end of July. So we will quantify that for you later. In addition on the LIFO, no, we are not going to call out the LIFO at this point in time.

Okay. Then just last question and I will turn it over, but the CapEx outlook for going forward. Can you talk about how much of the quench-and-temper spending is going to happen this year? And then if you can give us any early indication on what you're thinking for 2016.

It's probably a little bit too early to call 2016 because obviously we want to match our demand and cash flow to understand what our CapEx spend will be. We will clearly have some growth expenditures next year, but we will delineate that for you a little bit later. If you look at the quench-and-temper for this year, we look to spend about $20 million in that facility, and probably two-thirds of that will be in the second half.

Okay. I will turn it over. Thank you.

Novid Rassouli, Cowen and Company.

Just want to dig in on the cost side a little bit more. Based on what I have been seeing, it looks like on the energy and distribution side, you guys were able to make some pretty good cost reductions. It seems like industrial mobile went flat. I want to see if you can walk us through -- it looks like it was on the raw materials side, but I was wondering if you could give us a little more color on the moving pieces on the cost side. As what happened and what could happen going into the third and fourth quarters.

Great Novid, I will handle that. If you look at our costs, you have to remember that we have shared manufacturing facilities. So when you look at the segment results, one, when oil and gas is down on the industrial and mobile side, you get some negative impact because of the fixed cost leverage on the shared facilities. If we look at the quarter on the manufacturing side, we were really impacted by three items. One, when melt utilization decreases from -- down to 47% from 66%, you end up with that 29% drop in utilization. And you just can't keep up with the pace of that drop. I think our guys when you look at what they did, they really did an outstanding job, but they just can't keep up with a 29% drop. Then we've also taken out a lot of inventory, so we have been managing this business in this kind of period. You manage for cash and that's what they did. Again, the short answer is you have shared facilities, but our guys took our on a variable cost basis a really good hunk, and we are happy with the progress that was made.

Great. And then for the industrial and mobile segment, I guess at this point given it seems like auto shipments are doing okay but industrial is struggling, could you give us some more color on the mix of what -- the percentage of end markets that are tied to energy? Because it seems like that's bleeding into that segment as well at this point.

I will give you a little bit of color. Where we see some of the energy exposure is really to some of our forgers. On a percentage basis at that segment, you have to just give me a minute and I will get back to that one because I don't have it on the tip of my tongue. It's a relatively small exposure in our industrial business, but off the top of my head I can't quantify it.

I think what we're actually seeing though is a bit of contagion from the oil and gas markets that's spreading through industrial distribution and small manufacturers. People who you wouldn't normally think of as being tied to the oil and gas industry pump makers and these kind of things that are suddenly -- not suddenly, they've been feeling the pullback in drilling. And I think that's a lot of what we saw in the second quarter and probably leading into the third quarter.

And so stabilization there as well as the energy distribution segment is really going to have to stem from stabilization of rig counts and maybe a rebound there. That's pretty much going to be the driver at the end of the day for -- the guys you mentioned in industrial mobile as well as the energy and distribution segment?

I think that's fair. Obviously you have to factor the inventory burn in there as well because the channels are working very hard to manage their inventories. There are a lot of uncompleted wells out there that will be blown first and then you start the new drilling and then you have to factor the inventory on top of that. But at the end of the day, we've got to start punching more holes.

Great. Thanks guys.

Aldo Mazzaferro, Macquarie.

Good morning. Quick question on the cost reductions, Tim. When you say $25 million has come out, does that involve a headcount reduction at all? And if it doesn't involve a headcount, can you tell us a little about where that derived from?

If you look at the $25 million that we've announced last quarter, between 15% and 20% of it would be SG&A. When we stood the business up, we stood it up pretty lean, but as we went in from the second quarter or first quarter into second quarter, we said -- wow, step back, take a look at the organization, let's tune it now that we've been living with it for a year. And so we were able to generate some S&A savings through some high-level restructuring. I took one of my direct report positions out, and that obviously closed down. So that would be the 15% to 20%. The rest is just crewing. It's making sure that we're aligning our manufacturing with end markets, so we've taken crews out of both Harrison and Faircrest. We took one big cut out of Houston and have since done another, so that's the nature of the work that we are doing right now.

So could you give us an update on what the headcount in the entire Company is at say mid year?

Aldo, we provided cost data but we haven't provided headcount data publicly.

Let me switch to the second question, on your guidance of the zero to $15 million negative on EBITDA, is the assumption you're making in there, is that scrap prices remaining stable through the end of the quarter? Or if they were to fall say in August or September, would that impact the third quarter or would that be pushed out you think fourth quarter impact?

We say it's going to be pretty smooth. That's our underlying assumption is it's a relatively stable environment.

Good. On the final thing, on the jumbo caster, you say you're getting 15% yield. Is that because of the lack of spillage say in the bottom pouring, or is it coming more from the handling downstream of the caster where you don't have as much loss on the reheat?

Yes, it's more the croppage we have to take in our bottom pour operations relative to continuous cast operation. It's just the nature of the process allows us to use more of the material from melt to roll.

Right. Assuming your utilization rates stay under 50%, do you still think you make progress in passing more of that material through the caster?

As we said, the customer certification process has gone extraordinarily well. In fact I would say we are ahead of where we thought we would be. So to the extent that people are buying steel and we can pass it through that caster, we will absolutely realize those savings.

And finally, Tim, where do you think we are in this cycle? Are we seeing in terms of oil and gas more downside you think? And what things do you watch to see where the cycle may bottom out? I guess the same question on industrial as well.

Obviously automotive's an easier market to read right now, and that's the good news. This industrial and oil cycle is a very difficult one to read. Everybody's trying to compare it to 2009 or to 2013, and at the end of the day, each one of these cycles is very different. It seems like oil has settled a bit. Now it was picking up there for a while and obviously it pulled back. We saw some rigs come online last week, but then the price went down. Right now, although -- we're just staying focused on the orders that are in front of us. We are staying very close to our customers both on the OE side and through distribution. To the extent that we see the needle start to move, we are ready to react. I think we are in fighting shape. So when this thing turns, you will be able to see what the business is capable of. It's very, very murky with five- to eight-week lead times.

I just want to say congrats on the free cash flow. That was quite impressive, and I'm wondering if there's any more inventory receivable shrinkage that you might have in the next couple quarters.

The cash flow, obviously, was a bright spot for us. That takes a lot of hard work to strip that inventory out in a down cycle like this. I think our teams have done a fantastic job of managing that. I will let Chris answer the second part of the question.

We do expect to take more out in the third quarter on the inventory side, and it is tough because at the end of the day, the mobile business is cranking. So you can't take that inventory out. And so it's just the oil and gas inventory that they've really done a good job of reducing in a pretty short period of time.

I will turn it over. Thanks very much.

Phil Gibbs, KeyBanc Capital Markets.

Morning. Just had a question on the qualification progress at the bloom caster. Tim, I don't know if you mentioned that in too much detail, but just how that's moving along and when you can effectively move toward more of a 75% to 80% melt utilization on that facility relative the rest?

As I said to Aldo, the process itself is going really well. In fact, we are ahead of where we thought we would be. Quite frankly, the quality that we're seeing coming out of this caster is really just spectacular, and that's made our job easy as we go and work with customers who have very, very high expectations for us. So right now I would say, Chris, we are probably how far along?

We expect by the end of the year to be 50% to 60% along with a significant part of our yield improvement realized, and the rest will come by the end of next year.

Okay. And I know this question's been asked in a variety of ways, but are you anticipating that the so-called destocking from your customer base is likely going to last a year or less than that given the fact that the decline your business has been so drastic?

As we said earlier, Phil, we think we've been keeping a pretty close eye on inventories, on imports and on end market activity, and ultimately those three factors have to come together. We feel reasonably good about the inventory levels. The import obviously is continuing. And then the real question is when are we going to see any uptick in these end markets. Certain industrial markets for us are still going well, the rail business is still good. Some of the base machinery is still okay, but we're seeing continued pronounce weakness in mining, ag, and oil and gas, and that's put downward pressure on it. So the real question is when the spark comes. But the other two factors we've got a pretty good handle on.

Okay. Terrific. Does this at all compare in your mind to 2009, or how is it the same, how is it different?

Well as I said, everybody's trying to get a comparison here. 2009 was obviously a very, very different cycle because you effectively had all markets collapse at the same time. This one really is a commodity down cycle as far as we can read it. It started with mining back in 2013. Oil and gas was actually running pretty well last year, and then obviously we hit first part of this year and it came off. So just a very, very different cycle. We also had obviously a different currency and different outlook from OPEC on the oil and gas side. We look at it -- and on the positive side, unlike 2009 automotive is -- thank God for automotive right now. And so when we are in a down cycle like this, we do our best to prepare for the up cycle right? So regardless of when it comes, we will make sure we have our inventories right, we have our crewing right, that we're investing in new products to be able to support growth, et cetera, et cetera. So I think we're pulling all the right levers

Terrific. Lastly if I could, any thoughts on the impact of a potential letup on the ban on US oil exports and whether or not you think that does much? Thanks.

Yes I think there's a lot of debate about it right now. I think the oil export ban is leftover from a very different time. We live in a very, very different oil market than we did back in the 1960s and 1970s. So at the highest level, I would say yes, probably worth taking a hard look at lifting that ban. The problem is there's a lot of oil globally, and the light sweep that we do has got to be able to find a market. At the end of the day, you hope the markets balance out, but we believe on an ongoing basis that there is structural demand creation for oil globally and that long-term that should support the dynamics in the industry.

Thanks Tim. Appreciate it.

Justin Bergner, Gabelli & Company.

Good morning, Tim. Good morning, Chris. Most of my questions have been answered. I will address the topic of share repurchases. You indicated you repurchased some shares month to date. Any detail you want to provide there at this time?

Yes. We tell you we will probably purchase a little over 300,000 shares this month, and we would expect to be active in the third quarter.

Okay. I guess given that the goal is still to complete the share repurchase program by the end of 2016, if conditions get really bad or I guess stay at these levels in terms of the oil price and rig count for some time, would you choose to delay the completion of the share repurchase program? Or would you be more inclined to complete it and think about I guess improving your access to credit?

The way I answer that is it's a balance. We have to look at our investment opportunities and balance of where we are in the cycle to be able to answer that one fully. I wouldn't make a call specifically just on share repurchase differential from what we've guided to.

Okay. That's fair. Switching gears to the $25 million of cost savings, can you maybe frame for us on an annualized basis how much benefit you're going to see from the cost savings in the second half versus the first half? I assume probably the full $25 million in the second half, but maybe just compare it to the first half or the second quarter?

Yes. If you look at the whole program right, it started being impacted in the second quarter. So I'd say we get about 75% in the second half.

Got it. You wouldn't get the full 100% or $12.5 million in the second half?

We will be at the run rate -- the full run rate in the third quarter, but if you asked -- I think your question was how much do you see in the second half. So if you look at the total cost reductions based on a $25 million run rate, we will have 75% of that in the second half.

Okay. Got it. Of that $25 million, how much of those cost savings were you enjoying in the second quarter, or if you take $6 million on a quarterly basis --?

It's a relatively small number, and most of it's on the manufacturing side. So we would see cost reduction in the manufacturing side of -- I've got to do a little math here. It's pretty small, we're really going to see the bulk of it in the run rate post Q2.

Got it. Thank you for that clarification. So as I look at the third quarter and look at the projection for EBITDA flat to down $15 million versus the down $19 million in the June quarter, it seems like utilization is going to be running at fairly similar levels. So is the main delta in the third quarter versus the second quarter going to be the effect of these cost savings coming through, or are there other sequential factors that are going to be --?

The scrap spread dynamics and our cost savings.

Got it. And that would be the scrap spread dynamics per the LIFO accounting.

Yes. It's not as much a LIFO issue as much as the scrap markets have stabilized in the second quarter.

Got it. Okay. And with respect to imports, obviously people are very concerned in the steel industry about what's going on in China and the overcapacity that may exist in Chinese steel beyond the current level of overcapacity. Are there any areas of your business that are pressured by Chinese exports, or is it almost entirely non-Chinese exports that you are subject to?

I think it's a combination of China, we see a lot of product out of Korea. We see product out of Romania, Russia. Japan obviously is present in the marketplace. So it's a little bit of everybody. You've got to remember that the model that we run is a little bit different than everybody else's as we've said in the past. To a certain extent, there's a buffer there. With that said, they are coming -- all of them are coming after markets they think they can access. So they're banging away at distribution pretty hard, they are banging away at big industrial products. And obviously oil and gas is a very attractive market, but it's one that requires a lot of certification work. But they are actively engaged in trying to gain penetration there. So this is something we have been fighting forever. Frankly imports aren't a new thing, the currency has made them worse, and obviously the excess global capacity is aggravating it, but we know how to fight these guys.

Got it. Is there a specific end market within your portfolio where Chinese imports are relevant competition? Obviously probably not oil and gas, but which area might you see Chinese imports?

I think probably the first market they tend to go after is distribution on relatively standard grades. So that's obviously a place we look at pretty closely. We like to sell a richer mix of products than most folks, so you will see pressure and carbon products coming in through distribution would be one place you would look.

Okay. Thank you, Tim. And best of luck for second half.

(Operator Instructions)

Luke Folta, Jefferies.

Thanks for the follow-up, guys. Just a couple quick ones. On base pricing, if you strip the surcharges out of realized prices for the segments, the oil and gas business, that base price number that you can back into is several percentage points down relative to where it's been over the last couple years. Your customers, one of your big customers had talked about pricing being -- base pricing being stable for large SBQ and thick wall tubing and energy. Is the price movement in the base price that we've seen sequentially, is that more a function of mix than anything else or is there actual movement in the base pricing going on?

This is Chris. It's really a product mix issue. I think the base pricing has been one of our bright spots.

Okay. All right. And then just as a question on -- I think when you're in a situation where EBITDA is negative like it is at least for this quarter and perhaps next, I think sometimes it's tough to figure out where the bottom could be in terms of valuation. And a measure people tend to look at is tangible book value. And when I look at tangible book value for you, if I use a 2 million ton capacity number, it implies something like $350 a ton which I don't think you're doing rebar mail or anything for that amount. Can you give us some sense of what you think your replacement cost would be rounded to the nearest couple hundred bucks a ton? I'm trying to get a broad sense of how the equity value or the enterprise value looks today based on that metric.

Yes, this is Chris. That's a -- replacement value's a little tough to answer, and part of the reason is without being too coy is we set this business up over 100 years as being part of the Timken Company. And the asset structure and mix that we have is we're very happy with and provides us some competitive, sustainable advantages. But I don't think you would set up your business in a way this one is set up because of the evolution of our time.

It's hard to put a value on 100 years of knowledge as well.

I was saying even stripping out the knowledge, just the assets themselves.

Yes we will have to get back to you on that one, Luke, because I don't have that one at the tip of my tongue.

Okay. This last one, haven't heard anything recently, any filings out of Ellwood. Just curious if there's anything to update us on in terms of any conversations that have happened there or anything in general.

Nope.

Okay. Thanks again.

There are no further questions at this time. I will turn the call back over to the presenters.

Okay. Well thanks a lot everybody for joining us. As we wrap up, I want to take a moment to thank American Metal Market for naming us steel producer of the year. The award is a real honor, and it recognizes the extraordinary efforts of our people over this past year. They truly are the leaders in the industry who are not afraid to tackle the world's toughest challenges. We really do have just a phenomenal team here at TimkenSteel.

I also want to thank all of you for joining us today. We appreciate your interest and your confidence in the business. Obviously if you have any follow-up phone calls, please do not hesitate to call Tina. Thanks again and have a great day.

This concludes today's conference call. You may now disconnect.