Hello! And thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Metallus, Inc. Second Quarter 2024 Earnings Conference 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. I would now like to turn the conference over to Jennifer Beeman. Please go ahead.

Good morning. And welcome to Metallus' second quarter 2024 conference call. I'm Jennifer Beeman, Director of Communications and Investor Relations for Metallus. Joining me today is Mike Williams, President and Chief Executive Officer; Kris Westbrooks, Executive Vice President and Chief Financial Officer; and Kevin Raketich, 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 Metallus website. Where non-GAAP financial information is referenced, additional details and reconciliations to its GAAP equivalent are also included in the release. With that, I'd like to turn the call over to Mike.

Good morning, everyone. And thank you for joining us. During the second quarter, we focused on what we can control to mitigate the impact of challenged market conditions. Our shipments to the aerospace and defense end market remained strong, and our automotive shipments were steady. Unfortunately, the sluggishness in the industrial and energy end markets seen in the first quarter extended into the second quarter. This weakness is attributed to softening global economic conditions, elevated imports, customer and supply chain inventory positions, as well as scrap price uncertainty. Despite some unfavorable end markets, we remain committed to managing what's within our control by aligning our production with demand, carefully managing our working capital and costs while investing in our assets and employees for future growth. During the quarter, we maintained positive profitability and operating cash flow, a testament to our business model and disciplined financial management. I am confident that as market dynamics evolve, we are well positioned to take advantage of the demand recovery and anticipate improved profitability. At Metallus, safety is not just a priority; it's a core value. We believe that a safe workplace is a productive and successful one. We have established a comprehensive safety strategy and have set ambitious goals to ensure the well-being of our employees, contractors, and guests. We have made considerable progress in executing our safety strategy, which involves enhancing our safety processes and systems, along with our physical environment, cultural environment, and safety capabilities, with a strong focus on serious injury and fatality prevention. In the second half of the year, we will continue executing our safety strategy with a focus on comprehensive pre-job safety planning and inspections, maturing our serious injury and fatality prevention programs, continuing to invest in our physical equipment and equipment guarding upgrades, and targeted injury reduction strategies related to hand injuries and ergonomics. Our safety strategy is having a positive impact, as we are observing positive indicators in employee engagement, hazard identification, and incident prevention. To date, we have allocated $4.5 million towards safety initiatives. As a reminder, our projection for the total annual safety investment was approximately $7 million. Turning to our end markets, as I mentioned earlier, demand in our industrial and energy markets remains weak. For example, we believe agricultural machinery investments are being delayed in the face of higher prices and interest rates. Industrial distribution inventory levels remain elevated due to lower end customer demand, short lead times, and scrap price uncertainty. Lastly, rail and mining markets are expected to remain soft for the year. Looking at our automotive performance, we saw a sequential 2% increase in shipments, although there have been and continue to be periodic disruptions in the automotive supply chain; demand has remained resilient. We are pleased to provide our automotive customers with high-quality bar and tube products, as well as manufactured components for internal combustion, hybrid, and electric vehicles. The aerospace and defense market remains strong in the second quarter, despite our initial expectation of a sequential decline due to the timing of customers' orders. That anticipated decline, however, has been delayed by one quarter, and we now expect third quarter shipments in this end market to be lower than those in the second quarter. Earlier, I mentioned the negative impact of imports on our business. To put this in perspective, SBQ imports constituted roughly 10% of the market from 2020 to mid-2022, but this number rose to about 17% from the fourth quarter of 2023 through the first half of this year. Similarly, we continue to be pressured by an elevated level of tubing imports. Turning to our capital investments, we are making significant progress by investing in assets to drive growth, as well as improve product quality, asset reliability, customer service, and cost structure. Earlier this week, we marked a groundbreaking ceremony at our Faircrest steelmaking plant to celebrate the building of a bloom reheat furnace. The event was attended by numerous local, state, and federal officials, including Ohio's Lieutenant Governor, John Eustis. It was announced that we have been awarded $3.5 million in grants from JobsOhio to support the planned expansion of our steelmaking facilities. These grants are intended to facilitate training, modernize equipment, and enhance skills for deploying cutting-edge steelmaking technologies. The installation of a continuous bloom reheat furnace will help us meet growing demand from both existing and new customers. We are grateful for the support from the community, the State of Ohio, and our federal government, which will enable us to enhance and optimize our assets, increase our capacity of high-quality defense products, and support key training initiatives focused on safety and technology through a workforce development grant. As a reminder, in February, we announced an agreement for up to $99 million in funding from the United States Army to support our national defense efforts. We expect the bloom reheat furnace to be operational in late 2025. During the quarter, we invested $14 million in capital expenditures, with further progress on the installation of an automated grinding line, inline saw technology, and new camera inspection technologies. These initiatives are part of our broader strategy to achieve significant cost reductions, generate free cash flow, and improve our profitability. While the current demand environment has its challenges, we remain confident in our strategic imperatives and our ability to navigate market volatility. We are committed to driving growth, enhancing profitability, and delivering value to our shareholders. Now, I will turn the call over to Kris Westbrooks, who will provide more details on our financial performance.

Thanks, Mike. Good morning, and thank you for joining Metallus' second quarter of 2024 earnings call. Throughout the quarter, we continued to navigate challenging market conditions, demonstrating the resilience of our business model and the strength of our team. From a financial perspective, second quarter net sales totaled $294.7 million, a sequential decrease of 8%. The decline in net sales was primarily due to lower shipments, unfavorable price mix, and a 12% market-driven decline in the average raw material surcharge revenue per ton as a result of lower scrap prices. Net income in the second quarter was $4.6 million, or $0.10 per diluted share. Comparatively, sequential first quarter net sales were $321.6 million, with net income of $24 million, or $0.52 per diluted share. Net sales in last year's second quarter were $356.6 million, with net income of $28.9 million, or $0.62 per diluted share. On an adjusted basis, net income in the second quarter of 2024 was $6.7 million, or $0.15 per diluted share. Comparatively, first quarter adjusted net income was $26.1 million, or $0.56 per diluted share. Adjusted net income in the second quarter of last year was $27.6 million, or $0.60 per diluted share. Adjusted EBITDA was $19.9 million in the second quarter of 2024, a sequential decline primarily driven by the impact from lower melt utilization as we balance production with demand. Other drivers of the sequential decline in adjusted EBITDA were modestly lower shipments, a reduction in price mix, and a market-driven decrease in the raw material scrap surcharge environment. Turning now to the details of financial results in the second quarter. Shipments were 150,100 tons in the quarter, a decrease of 5,100 tons, or 3%, compared with the first quarter. In the industrial end market, shipments totaled 56,400 tons in the quarter, a sequential decrease of 4,400 tons, or 7%. Industrial shipments remained soft, with distribution customers resistant to stock inventory given short lead times, the current interest rate environment, and uncertainty in scrap prices. Automotive shipments were 67,800 tons in the second quarter, up 2% from the first quarter on steady customer demand. In aerospace and defense, or A&D for short, shipments totaled 16,400 tons in the quarter, relatively in line with the first quarter as demand continued to remain strong. We expected a decline in A&D shipments from the first to second quarter based on customer order timing. However, that expected decline was pushed out one quarter, and we're now anticipating third quarter A&D shipments to be sequentially lower than the second quarter. We expect A&D shipments to increase in the fourth quarter from the third, with continued strength into 2025. Compared to the prior year quarter, A&D shipments doubled in the second quarter of 2024. Shipments to energy customers remained soft at 9,500 tons in the quarter, a sequential decrease of 1,900 tons. Turning now to manufacturing. As expected, alignment of production with demand drove unfavorable cost leverage during the quarter. In May, we took approximately one week of downtime to install new technology on our electric arc furnace to drive higher levels of asset reliability and safety performance. Additionally, in June, the melt shop was down approximately one week for electricity supplier infrastructure upgrades. As a result of these actions and the continued balancing of production with demand, the melt utilization rate was 53% in the second quarter, compared with 72% in the first quarter and 75% in the same quarter last year. That said, our manufacturing team is carefully managing variable costs given the lower levels of production. Now, switching gears to pensions, in the second quarter, the company made $5.9 million of required contributions to the bargaining pension plan. Including previous required contributions from the first quarter, as well as planned required contributions of $3 million in the third quarter and $5 million in the fourth quarter, we expect a total of approximately $43 million of required pension contributions this year. This forecasted level of required pension contributions is $2 million lower than previous guidance. As it relates to the salary pension plan, during the second quarter, we successfully completed the transfer of $121 million of salaried pension plan liabilities to a highly rated insurance company. As I mentioned last quarter, the salaried pension annuitization, as well as a similar bargaining pension annuitization of $256 million in 2022, represents significant steps towards further strengthening our balance sheet and de-risking our legacy pension plans. At the end of June, the company's remaining pension liabilities totaled approximately $550 million, a significant reduction from the $1.3 billion of total pension liabilities at the end of 2021. Moving on to cash flow and liquidity. During the second quarter, operating cash flow was $8.3 million, driven by profitability and lower working capital, partially offset by required pension contributions. Capital expenditures totaled $14.1 million in the second quarter. We estimate full-year CapEx to be approximately $55 million, a $5 million reduction from the previous guidance. This 2024 CapEx guidance does not include government-funded investments. As a reminder, in February, the company entered into an agreement with the U.S. Army for up to $99.75 million in funding to support the Army's mission of ramping up munitions production. Specifically, the funding is expected to substantially pay for a new bloom reheat furnace at our Faircrest facility. As Mike mentioned, earlier this week, we broke ground on this new investment, and we're targeting late 2025 to be operational. The new bloom reheat furnace is expected to increase throughput of high-quality, bar-based products and support approximately $60 million of incremental defense product-based sales annually. During the second quarter, we received an initial payment of $10 million from the government. In July, we received a payment of $20 million. Additional funding is expected to be provided as mutually agreed-upon milestones are achieved throughout the project. Through the end of June, project spending has been minimal. We look forward to providing updates on this significant growth project in future quarters. Switching gears to shareholder return activities, given the progress on previous common share repurchase programs as summarized last quarter, the company's Board of Directors authorized an additional $100 million common share repurchase program in May. During the second quarter, the company repurchased 440,000 shares at a cost of $9.6 million. To date, in 2024 through the end of July, share repurchases totaled 836,000 at a cost of $17.9 million. In total, as of July 31st, the company had $122.5 million remaining under its authorized share repurchase program. We remain committed to exhausting this authorization as we progress forward, supported by the continued strength of our balance sheet and cash flow generation. At the end of the second quarter, the company's cash and cash equivalents totaled $272.8 million, and total liquidity was $512.1 million. We expect the strength of the company's balance sheet, combined with expected through-cycle profitability and positive operating cash flow, to provide us the opportunity to continue to execute on our capital allocation strategy. This includes investing in profitable growth, maintaining a strong balance sheet, and returning capital to shareholders through continued share repurchases. Turning now to the outlook. Third quarter shipments are expected to be lower than the second quarter. From an end market perspective, automotive shipments are expected to remain relatively steady, while industrial and energy demand remains soft. While long-term aerospace and defense demand is expected to remain strong, we anticipate a sequential decline in third quarter A&D shipments based on customer order timing. Base price per ton is anticipated to remain relatively steady in the third quarter, while product mix is expected to be less favorable than the second quarter, given lower A&D shipments. Operationally, annual shutdown maintenance is planned for the second half of the year at a total cost of approximately $13 million, split relatively evenly between the third and fourth quarters. Additionally, the third quarter melt utilization rate is expected to sequentially increase while the company continues to balance production with demand. With lead times currently in the late third to early fourth quarter and melt shop shutdown maintenance planned for October, much of the third quarter melt production will support fourth quarter shipments. Given these elements, the company anticipates third quarter adjusted EBITDA to be lower than the second quarter. To wrap up, thanks to our employees for their daily collaboration while focusing on finishing each and every day incident and injury-free. We remain committed to controlling what we can control in a challenging market environment while investing in the future and returning capital to shareholders. The hard work of our team to deliver on our strategic imperatives has positioned us well to capitalize as demand recovers and we expect to realize significant improvements in future profitability. Thanks for your interest in Metallus. We would now like to open the call for questions.

Good morning, everyone, and thanks for taking the questions. I'd like to just talk about the second quarter. When you look back, what were the biggest surprises and the puts and takes on both, a revenue and a cost basis relative to what you were thinking, say three months ago?

Well, good morning, John. I think that probably one of the biggest surprises for us on the revenue side was the lack of demand, particularly from the spot market. As you recall, we went into 2024 with around a 60% to 65% contractual mix, and the remainder spot. Our view is that the high interest rates and the economic uncertainty are weighing on people, and they are just not buying at the levels, not only in the order quantities, but buying in total much less and really operating at a hand-to-mouth perspective. So from a volume standpoint, that was a large influence in Q2 compared to what our expectation was going into Q2. Secondly, it's really the mix of customers that affected base pricing, where those spot customers tend to pay a higher per ton base price versus our contractual customers, and the lack of that demand from the spot customers influences our ASP, our Average Selling Price. I would say from a revenue standpoint, those two things – additionally, the fact that our electrical supplier came in and wanted to upgrade their distribution facility that feeds our Faircrest Steel plant, and based on the order demand pattern, we agreed to go ahead and allow them to make all the upgrades to reduce voltage loss and increase reliability for our long-term benefit. So that took a week of operations that heavily influenced our fixed cost leverage.

Mike, if I could add one thing. On the automotive space, we did have a couple of customers that experienced downtime during the quarter, so that was unplanned on their part, and that impacted. It was about 5,000 tons that we expected to ship in Q2. Now they are back and operating again, but that uncertainty creates some disruption.

Okay. So the electrical upgrade was an unplanned downtime in the quarter, and the auto downtime, is that expected to be recaptured in the third quarter? Can you just walk me through those puts and takes?

Well, actually, yeah, the customers that were affected with their unplanned downtime, that will recover in the third quarter, but unfortunately, we've been informed by at least two large OEMs that they are – one of them is trying to optimize their supply chain inventory, so that will reduce demand from that OEM. And the other one has other issues, whereby we were informed that their plant is going down for an unspecified period of time to correct a number of issues. So that will affect us in Q3. Combine that with the lack of our expectation is a number of our large defense customers. You know, we've said we thought it was going to happen in Q2, but now we believe it's going to happen in Q3, that they had ramped up for commissioning new equipment with advanced orders. They have all the supply they need, so we don't expect those orders to repeat until they get all that equipment commissioned later this year.

Okay. You actually walked into one of my other questions about A&D. What's the magnitude of the drop-off you expect in the third quarter, and is that reset back to this current sales level in the fourth quarter? How should we think about that on a go-forward basis?

I think it's going to reset to prior year levels.

Okay.

If you look at our comparison of Q2 of last year to Q2 of this year, it's going to drop back to those prior levels. That's our expectation, but it's day-by-day, John, to be honest with you.

And how much do you expect it to fall off in Q3?

John, it's going to be a rather significant drop in Q3, just given how well they are positioned right now, and that's what's going to drive that price mix.

If you look at the comparison between Q2 of 2023 to Q2 of 2024, I think we're up about 10,000 tons quarter-over-quarter. That's what we expect potentially will drop in Q3.

Okay, okay. All right. I think I've monopolized the call enough. I'll get back into queue. Thank you for taking the questions.

All right. Thanks, John.

Good morning, and thank you for taking my questions. Just wanted to get a sense of if this market softness gives you an opportunity to maybe cut costs further and any levers you could potentially pull there.

Yeah. I mean look, we're being very disciplined in our financial management. We've already reduced, which we put in the earnings release, some of the CapEx spending for this year, and we're optimizing our cost the best we can with the current demand levels. But at the same time, what we're really focused on is implementing and accelerating our strategic imperatives on our key strategic investments around our automated grinding line, installing our inline saws, getting the new camera technology to drive higher yields and higher quality and lower costs, and that's what we're focused on. We're also focused on taking the opportunity to increase the training of our employees. Cross-training to make them multi-crafted, to be able to run multiple pieces of equipment, be more mobile and move throughout the plant to operate equipment to optimize our workforce. So those are the things that are in our control, and that's what we're focused on.

Understood. That's very helpful. Thank you. And then you mentioned CapEx in that. I know you've reduced CapEx guidance. Is that a specific program or initiative that you are taking off the table? And as you are thinking about CapEx, kind of what's the split between maybe maintenance versus hardware, purchases versus IT, and automation initiatives?

Well, it's not affecting the IT transformation project that we're doing. It's two-fold. Dave, it's some maintenance that we're deferring, but most of it is certain projects that we've just decided have become a lower priority at this time as we focus on the bigger beneficial projects to get them implemented while we have the time to accelerate them when we don't have the demand level as high as we usually expect.

Understood, and if I could ask just one more. You mentioned that you've reached a milestone on the Bloom project. That was announced back in February. Is this maybe a typical pacing for the milestones every, call it, two quarters or so? Just how should we be thinking about those?

Well, in the arrangement with the Department of Defense and U.S. Army, there are certain milestones that we have to meet to receive the funding step-by-step throughout the project. So we've met a number of those to receive that funding. What recently happened, we just did the groundbreaking ceremony where we actually put a couple of shovels in the ground and started the execution of the excavation for the foundations, the new building, and everything to begin the erection of the new facility.

Understood. Thank you for taking my questions, and good luck in the third quarter.

All right. Thank you.

Hey, good morning.

Good morning.

The step-up in absolute costs sequentially in the second quarter, I think, was a bit surprising to us. You guys mentioned the two outages in the quarter, one in May and one in June, but you also have your planned outages in the third quarter. So does that sort of mute that sequential pickup or that would be sequential pickup given you already had some downtime in the second quarter?

Well, the first extended downtime was for us to install technology on our EAF for safety, reliability, and improved quality. We would have done that project in the October, early November time frame. However, with the lack of demand, we had the opportunity and it's such a beneficial improvement to our EAF and our efficiencies and costs; we decided to do it in Q2. The other extended downtime, Phil, was that the electrical company approached us and we would have done this in the October time frame as well. They approached us. They had reliability issues that we've experienced over the last couple of years. They were in a position to totally upgrade their delivery system into our Faircrest facility. At the same time, they were also experiencing significant voltage loss on that equipment. So actually, it was a win-win for both companies and we just decided to go ahead and do it, because the lack of spot demand made it feasible. But that doesn't change the time frame in which our outage in October, early November is going to occur, because that was all a part of it, in parallel with what we're doing during that time frame. There were other projects that had longer execution times in the planning schedules. So they were all going to be tucked in within the overall long lead time planning schedule for the outage in October. Does that make sense to you?

No, it does make sense. I'm more so asking about the typical maintenance. I think you said $13 million split equally between the third and fourth quarter, but you did have some things in the second quarter that may be, I wouldn't say one-time, but less routine in nature. So is it fair to just add the cost associated with the split of that $13 million in the third quarter, or should we take into account the fact that you carried a little bit more elevated cost in the second quarter, I guess is my question.

Yeah, we did carry a little bit of elevated cost for the first project I talked about. But the second project, which was really the electrical providers, we had very little cost except for the fixed cost leverage effect of the downtime for seven days.

To add to that, Phil, it was about 60,000 tons lower in Q2 versus Q1. That was a sizable step down from a cost leverage standpoint.

Okay. And then in the third quarter, you are saying you are picking up your melt rates to meet the demand in the third and fourth quarters. So should we expect a pickup in your inventory then in the third quarter given that?

Yeah. Again, the melt rates are going to increase, because the electrical outage isn't going to occur. Later this quarter, we'll have very soon, we'll start to melt for fourth quarter orders, and we do expect a pickup in melt utilization.

And then the last one I have is just on the Bloomcaster – excuse me, the Bloomer. So it sounds like you have already received through July about $30 million from the government, if I heard your remarks correctly. The $55 million in CapEx does not include anything that you may have to spend this year. It doesn't really sound like you may spend anything this year given the lead times of the equipment. So we should expect basically next year's CapEx numbers to, on a gross basis, reflect this investment and then some receipt this year from the government and then some receipt next year from the government? Is that the thought process?

Yes. We expect, based on the milestone agreements that we have, that there will be some additional payments later this year. There will be down payments that we have to put in place for ordering a number of the equipment. But yeah, the cash inflows are going to outpace the cash outflows. And then you'll start to see all that cash outflow occur the next year.

Okay. Got it. Makes perfect sense. Thank you.

Thank you, Phil.

Yeah. I apologize if I missed this, but how much was the melt utilization impacted in the quarter by the downtime in the electrical upgrade?

Do you have a breakdown of that?

Yeah. It was between seven and 10 days. So 7% to 10% honestly. It's like a percent a day, essentially.

Okay. And Kris, if I heard your comments properly, I think you used the words exhaust or share authorization. How aggressively should we be considering share repurchases as we model out for the balance of the year?

We're going to maintain flexibility there. We're committed to exhausting it, not over a specific time frame. But we are going to continue to do that as the prices allow and at lower prices you buy a bit more. We'll continue to provide updates on that on a quarterly basis going forward.

Okay. Thank you for taking my follow-ups.

No problem.

Thanks, John.

Great. Thanks everyone for joining us today and that concludes our call.

Thank you all for joining. You may now disconnect.