Metallus Inc. Q2 FY2025 Earnings Call

Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2025 Metallus Earnings Call. It is now my pleasure to turn the call over to Jennifer Beeman. Jennifer, you may begin.

Good morning, and welcome to Metallus' Second Quarter 2025 Conference Call. I'm Jennifer Beeman, Director of Communications and Investor Relations for Metallus. Joining me today is Mike Williams, Chief Executive Officer; Kris Westbrooks, President and Chief Operating Officer; John Zaranec, 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 the 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 equivalents are also included in the earnings release. With that, I'd like to turn the call over to Mike.

Good morning, and thank you for being with us today. I want to start by welcoming John Zaranec to the team. John is our new Executive Vice President and Chief Financial Officer, bringing over 20 years of financial leadership in the manufacturing and industrial sectors, as well as a strong track record of working with the investment community. We are thrilled to have him with us and I’m confident you will enjoy collaborating with him. I also want to highlight Kris, who has recently taken on new responsibilities as President and Chief Operating Officer after serving as our CFO since 2018. Kris now oversees our safety, manufacturing operations, and supply chain organizations. Now, regarding the trade environment, Section 232 steel tariffs remain at 50% for most countries, with little change stemming from the country-specific agreements being negotiated by the administration. A fair trade environment is essential for the long-term sustainability of the steel industry, which is crucial for our national defense and infrastructure. Due to recent trade actions, we expect an increase in demand for domestically produced steel. I would also like to share how honored we were to host Vice President J.D. Vance at our Faircrest plant in Canton, Ohio. He spoke to around 300 of our employees and local stakeholders, reaffirming the federal government's commitment to investing in American workers and businesses. He recognized our contribution to national defense, highlighting our investment in a new bloom reheat furnace and our support for the Army's increased artillery shell production. This visit invigorated many of our employees and instilled a sense of pride in their vital role in enhancing our nation's industrial and defense capabilities. Moving on to safety, our objective is to be recognized as having the safest specialty metals operation in the world. By 2025, we expect to invest about $5 million to improve our safety management systems and upgrade critical equipment. I’m pleased to report that our past safety investments are yielding positive results. So far in 2025, we have recorded zero serious injuries, a 40% reduction in injury severity, and a 6% reduction in injury frequency compared to the same period last year. Our leading indicators are also encouraging, showing a 25% increase in employee participation in the first aid provider program and safety committee roles, a 41% rise in near miss reporting, and a 48% increase in proactive safety engagement interactions. These trends reflect enhanced employee engagement and trust in our safety culture. We are committed to mitigating risks in our operations through thorough serious injury and fatality prevention measures, comprehensive risk assessments, and targeted improvements. Now, looking at our business results for the second quarter, overall shipments rose by 10% compared to the first quarter, driven by higher aerospace and defense, automotive and energy shipments. In the first half of 2025, we shipped 28% more tons than in the second half of 2024. Increased shipments and improved manufacturing performance resulted in a $26.5 million adjusted EBITDA, a significant rise from the first quarter. Additionally, we recently announced a price increase of $100 per ton on seamless mechanical tubing products, effective in November for customers not covered by annual pricing agreements. Current lead times are extended to October for our SBQ bars and seamless mechanical tubing products. In terms of specific markets, industrial shipments saw a slight increase in the second quarter. Inventory levels among distribution customers have declined recently, and both SBQ and seamless mechanical tubes are being ordered consistently. Energy shipments improved by 17% sequentially as we continue to invest in thermal treatment capabilities for high-pressure, high-temperature applications to extend our reach in the energy market. Tariffs aimed at supporting domestic steel producers are aiding in reducing imports and boosting demand. Automotive shipments increased by 9% sequentially, with improvements stemming from market share gains and heightened demand for existing programs. The high-volume light truck and SUV programs that we are involved in remain robust. We are also observing increased customer inquiries linked to tariff-driven onshoring. Aerospace and defense shipments nearly doubled sequentially, and although the industry is facing short-term supply chain challenges, we expect this market to continue growing in the near future, which excites us. Our VAR steel sales have more than doubled compared to the first half of 2024, driven by our extensive downstream processing capabilities and strategic relationships. We are on track to achieve roughly $30 million in VAR-related revenue by the end of 2025. Regarding our operations, our melt utilization rate improved to 71%, up 6 percentage points sequentially due to higher production volumes. We're reaping the benefits of continuous process enhancements in our manufacturing facilities and anticipate further increases in the third quarter to sustain our robust order book. However, we see significant opportunities to improve our operating performance and cost structure. We have initiated a program aimed at refining our manufacturing operating system at all levels of the organization, which we believe will support the long-term sustainability of our operations while lowering costs and enabling profit growth. On the capital investments front, our automatic grinding line at our Harrison facility has completed hot commissioning and is fully operational, already yielding daily improvements in safety and throughput. Our government-funded projects are also progressing well, with key milestones reached on the new bloom reheat furnace and roller furnace to support the Army's demand for artillery shells. The construction of the bloom reheat furnace is on schedule to begin commissioning by year-end, and we expect to start commissioning the new roller furnace facilities in the first half of 2026. Lastly, a reminder that we will begin labor negotiations with the United Steelworkers on August 18 regarding the current labor agreement, which expires on September 29. Our goal remains to secure a timely, fair, and equitable contract for both the company and our employees. We remain focused on supporting our strong order book while prioritizing safety, delivering exceptional customer service, and making strategic capital investments. These priorities are vital for ensuring sustainable profitability, generating robust cash flow, and creating long-term value for our shareholders. I will now hand the call over to Kris to discuss our financial results for the second quarter, followed by John who will present the company’s outlook.

Thanks, Mike. Good morning, and thank you for joining our second quarter earnings call. During the quarter, our team delivered a sequential increase in shipments, net sales, melt utilization and profitability, consistent with our earnings guidance. We also continue to invest in the business to drive profitable growth while maintaining a strong balance sheet. From a top line revenue perspective, second quarter net sales totaled $304.6 million, a sequential increase of $24.1 million or 9%, primarily driven by higher shipments across all end markets. Net income was $3.7 million in the second quarter or $0.09 per diluted share. On an adjusted basis, net income was $8.4 million or $0.20 per diluted share in the quarter, more than double first quarter levels. Adjusted EBITDA was $26.5 million in the second quarter, a sequential increase of 50%, primarily driven by higher shipments and continued improvement in melt utilization, driving better fixed cost leverage. During the second quarter, operating cash flow was $34.8 million, driven by profitability, lower inventory and the receipt of a $6.5 million federal income tax refund. At the end of the second quarter, the company's cash and cash equivalents balance was $190.8 million, inclusive of approximately $34 million of government-funded cash on hand for future investments. In the second quarter, capital expenditures totaled $17.8 million, including approximately $15 million of second quarter CapEx supported by previous government funding. Planned capital expenditures for the full year 2025 remain at approximately $125 million, consistent with previous guidance and inclusive of approximately $90 million of capital expenditures funded by the U.S. government. As it relates to government funding, during the second quarter, the company received $5.1 million of cash funding from the government as part of the previously announced nearly $100 million funding agreement in support of the U.S. Army's mission of increasing munitions production. Additionally, during July, the company received an additional $10 million of cash funding from the government. To date, through the end of July, the company has received $81.5 million of government funding. Receipt of the remaining committed government funding is expected throughout the remainder of 2025 and into 2026 as mutually agreed upon milestones are achieved. As a reminder, this funding will substantially pay for both the new bloom reheat furnace at the company's Faircrest facility as well as the new roller furnace at the Gambrinus facility. Now switching gears to pensions. In the second quarter, the company made $5.9 million of required pension contributions related to the U.S. bargaining plan. Following a recent actuarial update, we're now estimating only $3.5 million of additional required pension contributions in the second half of 2025, which is $6.5 million lower than previously stated guidance. As we proceed forward into 2026, the company is estimating a significant reduction in required annual pension contributions subject to investment performance, actuarial assumptions and funding laws. We continue to actively manage the pension. We'll provide further updates as available. In terms of shareholder return activities in the second quarter, the company repurchased 255,000 shares of common stock for $3.3 million. In July, an additional 67,000 shares were repurchased for $1.1 million. At the end of July, a balance of $92.8 million remained under our share repurchase authorization. As it relates to convertible notes, during the second quarter, we settled the remaining $5.5 million of outstanding convertible notes at a cash cost of $9.1 million. As of June 30, 2025, the company had no outstanding borrowings. Since the inception of common share repurchases in early 2022, combined with the convertible note repurchase activities, we've reduced diluted shares outstanding by a significant 25% or over 13 million shares compared to the fourth quarter of 2021. These actions reflect the strength of the company's balance sheet and confidence in through-cycle cash flow generation.

Thanks, Kris. I'm excited to be part of the Metallus team, and I look forward to engaging more deeply with our shareholders and analysts in the near future. In terms of the near-term business outlook, commercially, third quarter shipments are expected to be similar to the second quarter, with lead times currently extending to October for both bar and tube products. Additionally, base price per ton is anticipated to remain relatively steady in the third quarter, dependent on our mix in the quarter. Effective November 1, we expect base price per ton to begin to benefit from the recently announced $100 per ton spot price increase on seamless mechanical tubing products. This price increase is reflective of the improving demand environment for domestically produced products. From an operational perspective, melt utilization is expected to increase sequentially in the third quarter on improved operational performance. Consistent with prior years, planned annual shutdown maintenance will be completed in the second half of the year at a total cost of approximately $15 million. From a timing perspective, about $5 million of the planned shutdown maintenance will occur in the third quarter for non-melt shop assets. The balance of approximately $10 million of planned shutdown maintenance will occur in the fourth quarter and include the melt shop. We are also expecting a full quarter of higher electricity costs starting in the third quarter as the previous long-term electricity contract expired midway through the second quarter. Additionally, as Mike mentioned, we're beginning negotiations with the United Steelworkers regarding the labor agreement, which is set to expire in late September. We anticipate incremental nonrecurring labor agreement negotiation costs of $3 million to $5 million in the second half of 2025, which we plan to report as an operational cost and not exclude from adjusted EBITDA, consistent with treatment in prior years. Given these elements, the company expects third quarter adjusted EBITDA to be modestly lower than the second quarter. To combat some of these cost pressures and in the spirit of continuous operational improvement, we have engaged external resources to accelerate process optimization efforts, which include improving manufacturing efficiency within targeted facilities. The engagement began in July and will progress until targeted operational efficiencies are realized. We expect to realize annual savings of approximately $10 million as a result of this initiative, with savings ramping up throughout the first half of 2026. To wrap up, thank you to all of our employees, customers and suppliers for their support in the first half of the year. I'm looking forward to partnering with all of you during this exciting time for Metallus, and I'm optimistic about the opportunities that lie ahead. We are well positioned as a high-quality U.S.-based specialty metals producer supporting critical markets. We remain committed to delivering value to our shareholders by driving profitable growth and executing our capital allocation strategy. As always, thank you for your interest in Metallus. We would now like to open the call for questions.

Our first question comes from the line of John Franzreb with Sidoti.

Congratulations, Kris, and welcome to the call, John. I'd like to start with maybe the new market share gains or new customers you're grabbing as a result of the change in the tariff environment. Can you talk a little bit about the magnitude of the increased bidding for your products relative to what you maybe would have seen a year ago?

Sure, John. I would say that a majority of the increase in the share gain was gaining back some industrial and automotive business that we had lost in prior years, not necessarily to imports, but to domestic competitors. However, we do see a modest increase in new customer inquiries and orders tied to the tariff environment. But I have to qualify the fact that until the agreements are signed, there are a lot of people sitting on the sidelines waiting to see what is the final tariff and what is the impact on their supply chain. I will tell you they are inquiring to get domestic supply, but they haven't pulled the trigger yet until those agreements are really finalized with the signature on those agreements with both parties.

Okay. So this is probably, I don't know, maybe a fourth quarter event if it happens that you're thinking, right?

Well, I'm not going to try to speculate my expertise on forecasting the administration. So as they are finalized, yes, we do expect to continue to see, as we said in our comments, increased demand. That's what's being signaled to us. And that's actually what we're expecting going forward.

And in A&D, can you talk a little bit about the supply chain issues? It's kind of been an overhang for a couple of quarters now. When do you expect that to be resolved?

We've recently received positive news indicating a potential improvement in demand, and we have seen an increase in orders, although not at the anticipated rate. These orders are part of investments made by the supply chain to enhance munitions production. However, they have faced startup and commissioning challenges that have caused delays of up to a year in some cases. We expect to see further orders in the fourth quarter of this year.

Great. It's good to see this progress. One of my prepared questions was regarding melt utilization. We had set a target above 80%, and it sounds like you're bringing someone in to help achieve that. Can you discuss what has held you back from reaching that target and your confidence in attaining the $10 million in savings by 2026?

We experienced some efficiency savings, although our melt utilization was affected in the second quarter due to interruptions in our electrical supply. We rely on interruptible power supply, which benefits us by providing lower electricity rates when there's high demand on the grid. This allows us to reduce our usage and help the residential community maintain their electricity during peak times. Our utilization was also impacted by issues with auxiliary equipment, particularly cranes. We are working with a third party to enhance our crane reliability but our main focus is on how we manage scheduling, planning, and execution on the shop floor to boost efficiency. This includes various aspects, from cultural improvements to the tools and data we utilize. The third party brings industry expertise and best practices specifically for steel industry operations.

Our next question comes from the line of Chris Olin with Northcoast Research.

You might have answered my question here a bit, but I was wondering on the SBQ bar side, are there any price increases on the books, on that side? And then I guess, if not, and to your thoughts on kind of this customer apprehension, how does that impact your contract discussions for 2026? Is that going to complicate things?

I don't want to discuss pricing publicly. We haven't experienced price increases since earlier this year, when it was a modest one. That has remained stable. I do expect that as demand continues to grow, historically, prices tend to increase to support demand. Regarding the trade situation, people are waiting to see what the final tariff environment will be. Smaller companies have already taken steps to adapt, while larger steel-consuming companies are being more cautious; they are inquiring to ensure they can secure supply before making any decisions. It's important to keep in mind that there was a significant amount of import inventory in the United States before the tariffs were implemented, and we know that this inventory still exists but is being used. We anticipate that it will be mostly depleted by the end of this quarter or early in the fourth quarter, which will contribute to the increasing demand for domestic supply. Did I answer your question, Chris?

Yes, I would like to ask about the contracts. Can you remind us what will come up for renewal?

Yes. Looking ahead to 2025, we are expecting that 70% of our demand will be secured under contracts while around 30% will be spot-based. We haven't started the contract negotiations yet, although a few parties have shown interest. These discussions are likely to ramp up from late September through October and into early December. By our next call, we should have more insight into how those negotiations are progressing.

Your next question comes from the line of Dave Storms with Stonegate.

With the planned downtime coming up, are you going to be able to use this as a chance to implement more technology into your operations? Or is this going to be more of a maintenance update?

I would say the majority of it is maintenance, but there are some technology upgrades that we're planning to implement. But I would say the majority of it is really maintenance-related infrastructure, reliability-oriented investments in our shutdown.

Perfect. And then I guess, double-clicking on that. Could you maybe spend a little bit of time talking about any tech improvements you're planning on implementing in your operations? Or will that maybe come after your previously stated operational efficiencies?

Yes, I believe these efforts are primarily centered on enhancing reliability. We anticipate an increase in melt shop utilization due to our significant maintenance investments. Moving forward, the focus will be on optimizing efficiency on the shop floor, which should yield at least $10 million in savings on our manufacturing costs. Additionally, as we roll out major capital investments later this year, such as the reheat bloom furnace, and early next year with the roller furnace, we expect to see considerable cost efficiencies from these projects that will become evident in 2026.

Understood. Very helpful. Switching gears a bit, with lead times extending to October, can you share any insights about the current state of the order book and any indications regarding pricing and product mix?

Sure. Our lead times extend into the second half of October. Our order book is double the size it was at this time last year, which gives us a more long-term perspective to optimize our scheduling and improve efficiencies. The defense sector will likely remain stable, as will the automotive sector. We anticipate some modest price increases to continue as previously announced adjustments take effect in our shipments throughout the year. Overall, the situation looks significantly better than in the second half of last year. As the tariff landscape becomes clearer, we expect demand to keep growing.

With no further questions in queue, I will now hand the call back to Jennifer for closing remarks.

Thanks, everyone, for joining us this morning, and that concludes our call today. Thank you.

Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.