Q3 2024 Metallus Inc Earnings Call
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Audra: Good morning, my name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2024 Metallus, Inc. earnings call. Today's conference is being recorded. 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. If you would like to ask a question during this time, simply press the star key, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again.
Andre: Good morning, My name is Andre and I will be your conference operator today.
Andre: At this time I would like to welcome everyone to the third quarter 2020 for metallic Inc earnings call.
Andre: Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.
Andre: I would like to withdraw your question Press Star one again.
Jennifer Beeman: At this time, I'd like to turn the conference over to Jennifer Beeman, Director of Communications and Investor Relations. Please go ahead.
Speaker Change: At this time I would like to turn the conference over to Jennifer Beeman Director of Communications and Investor Relations. Please go ahead.
Jennifer Beeman: Good morning and welcome to Metallus' third 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, Chris Westbrooks, Executive Vice President and Chief Financial Officer, and Kevin Rakitic, Executive Vice President and Chief Commercial Officer. You all should have received a copy of our press release, which was issued last night. During today's conference call, we may make forward-looking statements as defined by the SEC. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in yesterday's release.
Speaker Change: Good morning, and welcome to <unk> third quarter 2024 conference call I'm, Jennifer Beeman director of Communications and Investor Relations for <unk>.
Joining me today is Mike Williams, President and Chief Executive Officer, Kris Westbrooks Executive Vice President and Chief Financial Officer, and Kevin <unk> Executive Vice President and Chief Commercial Officer, you. All Should've received a copy of our press release, which was issued last night.
Jennifer Beeman: 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 equivalent are also included in the earnings release.
Speaker Change: and others, which we describe in greater detail in yesterday's release.
Speaker Change: 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.
Speaker Change: Where non-GAAP financial information is referenced, additional details and reconciliations to its GAAP equivalent are also included in the earnings release. With that, I'd like to turn the call over to Mike. Mike?
Jennifer Beeman: With that, I'd like to turn the call over to Mike. Mike?
Michael Williams: Good morning and thank you for joining us today. Throughout the quarter, we continue to navigate challenging market conditions, demonstrating the resilience of our business model and the strength of our team. Our third quarter net sales saw a sequential decrease of 23%, primarily due to lower shipments across our market. During the third quarter, we continue to maintain and invest in our world-class assets. aimed at improving safety, efficiency, and quality. Additionally, we continue to offer training and development opportunities for our employees. I believe these two focus areas are the key to our near term success. allowing us to better serve our customers and quickly capitalize on future demand recovery.
Good morning and thank you for joining us today.
Mike: Throughout the quarter, we continue to navigate challenging market conditions, demonstrating the resilience of our business model and the strength of our team.
Mike: Our third quarter net sales saw a sequential decrease of 23%, primarily due to lower shipments across our markets.
Mike: Additionally, we continue to offer training and development opportunities for our employees.
Mike: I believe these two focus areas are the key to our near-term success, allowing us to better serve our customers and quickly capitalize on future demand recovery.
Michael Williams: Speaking of customers, we recently completed our annual customer survey, and I'm pleased to report that our customers rank us highly in both service and quality. I'm proud of our team's outstanding performance on both fronts.
Mike: Speaking of customers, we recently completed our annual customer survey and I'm pleased to report that our customers rank us highly in both service and quality.
Michael Williams: This is also the time of the year when we initiate our annual contract negotiations with our customers. Generally, we target around 70% of our business to be linked to annual contracts. Currently, we are still early in this process, but discussions are going well.
I'm proud of our team's outstanding performance on both fronts.
Mike: This is also the time of the year when we initiate our annual contract negotiations with our customers. Generally, we target around 70% of our business to be linked to annual contracts.
Mike: Currently, we are still early in this process, but discussions are going well.
Michael Williams: Turning to safety, in late October and early November, we completed our annual maintenance shutdown at the Faircrest facility. Shutdowns are complex operations that depend on the coordinated efforts of additional contractors and vendors working alongside our team. required maintenance, which took us 12 and a half days as scheduled. is critical for ensuring the reliability of our assets. Most importantly, I'm pleased to report that we completed the shutdown without any serious safety intent. During these shutdown periods, we take time to further train our people in important safety measures. Starting in October, we begin our safety stand-up program.
Mike: Turning to safety, in late October and early November, we completed our annual maintenance shutdown at the Faircrest facility.
Mike: Shutdowns are complex operations that depend on the coordinated efforts of additional contractors and vendors working alongside our teams.
Mike: The required maintenance, which took us 12 and a half days as scheduled, is critical for ensuring the reliability of our assets.
Mike: Most importantly, I'm pleased to report that we completed the shutdown without any serious safety incidents.
Mike: During these shutdown periods, we take time to further train our people in important safety measures.
Michael Williams: We put an even sharper focus on preventing serious injuries and fatalities. This is about identifying potential hazards and stopping them immediately. This program consists of a series of hands-on stations. where we provide our employees with real equipment, tools. situations to ensure they are just not hearing about safety, but feeling and practicing it too. Working with operations, our safety team, union leadership representatives, and company leadership, we are demonstrating that safety is a shared responsibility. It continues to be our top priority. Our commitment to safety is evident in our investment of $6 million year-to-date. As a result, we achieved a 29% year-over-year reduction in our OSHA recordable rate for the third quarter.
Mike: Starting in October, we begin our safety stand-up program, where we put an even sharper focus on preventing serious injuries and fatalities.
This is about identifying potential hazards and stopping them immediately.
This program consists of a series of hands-on stations
where we provide our employees with real equipment, tools.
Mike: and situations to ensure they are just not hearing about safety, but feeling and practicing it, too.
Mike: working with operations, our safety team, union leadership representatives, and company leadership, we are demonstrating that safety is a shared responsibility and continues to be our top priority.
Michael Williams: Our investments are paying off and we look forward to continuing this trend into 2025.
Michael Williams: moving to our end market. shipments decreased by 20% compared with the second quarter. Shipments to our industrial customers declined 6% sequentially, primarily driven by weaker mining and agricultural markets, as well as continued softness in distribution. On the other hand, we see a slight uptick in sales from our rail customers. Although not enough to offset other declines in the sector. As expected, energy customer demand remains weak as drilling activity is expected to remain flat in the near future. Despite the market being down, we anticipate some additional volume in the energy space going forward as inventory levels will need replenishing at some point, and that is expected to drive demand for our highly engineered steels.
Moving to our end markets.
Shipments decreased by 20% compared with the second quarter.
Mike: Shipments to our industrial customers declined 6% sequentially, primarily driven by weaker mining and agricultural markets, as well as continued softness in distribution.
Mike: On the other hand, we see a slight uptick in sales from our rail customers.
although not enough to offset other declines in the sector.
Mike: As expected, energy customer demand remains weak, as drilling activity is expected to remain flat in the near future.
Mike: Despite the market being down, we anticipate some additional volume in the energy space going forward as inventory levels will need replenishing at some point, and that is expected to drive demand for our highly engineered steels.
Michael Williams: Automotive shipments declined by 16% sequentially. Our customers have faced several issues. including ongoing equipment issues, recalls, and unexpected downtime. Additionally, the third quarter tends to be seasonally weaker in terms of demand. As expected, we saw a sequential decline in aerospace and defense third quarter shipments due to customer order patterns. However, based on our defense customers needs, we anticipate an increase in aerospace and defense shipments in the fourth quarter, as well as in 2025. with ongoing investments by our customers to increase capacity and targeted growth in new programs. We expect to grow aerospace and defense sales to over $250 million by 2026.
Automotive shipments declined by 16% sequentially.
Our customers have faced several issues.
including ongoing equipment issues, recalls, and unexpected downtime.
Mike: Additionally, the third quarter tends to be seasonally weaker in terms of demand.
Mike: As expected, we saw a sequential decline in aerospace and defense third-quarter shipments due to customer order patterns.
Mike: However, based on our defense customers' needs, we anticipate an increase in aerospace and defense shipments in the fourth quarter as well as in 2025.
Mike: with ongoing investments by our customers to increase capacity and targeted growth in new programs.
Mike: We expect to grow aerospace and defense sales to over $250 million by 2026.
Michael Williams: Overall, we are confident in the long term growth prospects for aerospace and defense, driven by strong customer demand and strategic investment.
Mike: Overall, we are confident in the long-term growth prospects for aerospace and defense, driven by strong customer demand and strategic investments.
Michael Williams: In the current market landscape, the influx of SVQ and seamless mechanical tubing imports continues to exert pricing pressure, especially within the industrial and energy sector. China holds the largest share of seamless mechanical tubing imports to the U.S. and therefore increased Section 301 tariffs may help us moving forward. As background, China's share of the US seamless mechanical tubing market has grown significantly, rising from approximately 6% 2021 is 16% in 2024.
Mike: China holds the largest share of seamless mechanical tubing imports to the U.S.
Mike: and therefore increased Section 301 tariffs may help us moving forward.
Mike: As background, China's share of the U.S. seamless mechanical tubing market has grown significantly, rising from approximately 6% in 2021 to 16% in 2024.
Michael Williams: Regarding our capital investment We are actively progressing with investments in assets that not only promote growth, but enhance safety, product quality, improve asset reliability, elevate customer service, and optimize our cost growth. During the quarter, we invested over $17 million in capital expenditures. Investments include the installation of an automated grinding line in our Harrison facility, which is designed to improve safety, quality and efficiency. This should be operational by the end of this year. At Harrison, we are also targeting the installation of two inline saws in the first quarter of 2025. They are connected to the new grinding line.
Mike: Regarding our capital investments, we are actively progressing with investments and assets that not only promote growth, but enhance safety, product quality, improve asset reliability, elevate customer service, and optimize our cost structure.
Mike: During the quarter, we invested over $17 million in capital expenditures.
Mike: Investments include the installation of an automated grinding line in our Harrison facility, which is designed to improve safety, quality, and efficiency. This should be operational by the end of this year.
Mike: At Harrison, we are also targeting the installation of two inline saws in the first quarter of 2025.
Michael Williams: These new assets will enhance safety and efficiency while also eliminating the need to outsource cutting of certain bar sizes.
Mike: They are connected to the new grinding line. These new assets will enhance safety and efficiency while also eliminating the need to outsource cutting of certain bar sizes.
Michael Williams: As you know, we are in the process of installing a bloomery heat furnace at our Furcraft facility intended to significantly increase the ability to serve the needs of the Department of Defense as well as support our broader customer base. Lastly, we recently approved a thermal treatment roller furnace at our Gambrinus facility. This is another example of our commitment to investing in state-of-the-art technologies. while also doubling our heat-treating capacity for specialty grades primarily used in defense-related products. We have received funds from the Department of Defense for both the bloomery heat and the roller furnace.
Mike: As you know, we are in the process of installing a bloomery heat furnace at our Furcraft facility intended to significantly increase the ability to serve the needs of the Department of Defense as well as support our broader customer base.
Mike: Lastly, we recently approved a thermal treatment roller furnace at our Gambrinus facility.
Mike: This investment is another example of our commitment to investing in state-of-the-art technologies.
Mike: while also doubling our heat treating capacity for specialty grade, primarily used in defense-related products.
Mike: We have received funds from the Department of Defense for both the bloomery heat and the roller furnace.
Michael Williams: Chris will cover the details of our government funding in a moment. These efforts align with our overall objectives to drive cost reduction. increase free cash flow, and boost our profitability. Despite challenges in the current market demand environment, we remain committed to our capital allocation strategy. balancing investments and growth with returning capital to shareholders.
Mike: Chris will cover the details of our government funding in a moment.
Mike: These efforts align with our overall objectives to drive cost reductions, increase free cash flow, and boost our profitability.
Mike: Despite challenges in the current market demand environment, we remain committed to our capital allocation strategy, balancing investments and growth with returning capital to shareholders.
Michael Williams: Looking ahead. We are cautiously optimistic. as we see our order book picking up in the fourth quarter and into early 2025. With a strong balance sheet, an active share repurchase program, and a positive long-term outlook, we remain well-positioned for future growth.
Looking ahead.
We are cautiously optimistic.
Mike: as we see our order book picking up in the fourth quarter and into early 2025.
Mike: With a strong balance sheet, an active share repurchase program, and a positive long-term outlook, we remain well-positioned for future growth.
Chris Westbrooks: Now I'll turn the call over to Chris who will provide more details on our financial performance. Thanks, Mike.
Chris: Now I'll turn the call over to Chris, who will provide more details on our financial performance.
Chris Westbrooks: Good morning, and thank you for joining Metallus' third quarter of 2024 earnings call. During the quarter, we continued to navigate challenging market conditions while ensuring the company is well positioned to capitalize on future demand recovery. Additionally, we've taken advantage of market conditions and our strong balance sheet to repurchase 4.2% of our shares outstanding to date. From a top line perspective, third quarter net sales totaled $227.2 million, a sequential decrease of 23%. The decline in net sales was primarily due to lower shipments, unfavorable product mix, and a 5% market-driven decline in the average raw material surcharge revenue per ton as a result of lower scrap rates.
Chris: Thanks, Mike. Good morning, and thank you for joining Metallus' third quarter of 2024 earnings call.
Chris: During the quarter, we continued to navigate challenging market conditions, while ensuring the company is well positioned to capitalize on future demand recovery. Additionally, we've taken advantage of market conditions and our strong balance sheet to repurchase 4.2% of our shares outstanding to date this year.
Chris: From a top-line perspective, third-quarter net sales total $227.2 million, a sequential decrease of 23 percent.
Chris: The decline in that sales was primarily due to lower shipments, unfavorable product mix, and a 5% market-driven decline in the average raw material surcharge revenue per ton as a result of lower scrap prices.
Chris Westbrooks: The company reported a net loss in the third quarter of $5.9 million, or a loss of 13 cents per diluted share. On an adjusted basis, the third quarter net loss was $4.4 million, or a loss of 9 cents per diluted share. Adjusted EBITDA was $6.1 million in the third quarter, a sequential decline primarily driven by lower shipments and unfavorable product mix, partially offset by an increase in melt utilization. these drivers of sequentially lower adjusted EBITDA are consistent with our third quarter earnings guidance. On a year-to-date basis through September, the company reported net sales of $843.5 million, a decline of 18% from the prior year, driven by softer market demand.
Chris: The company reported a net loss in the third quarter of $5.9 million, or a loss of $0.13 per diluted share. On an adjusted basis, the third quarter net loss was $4.4 million, or a loss of $0.09 per diluted share.
Chris: Adjusted EBITDA was $6.1 million in the third quarter, a sequential decline primarily driven by lower shipments and unfavorable product mix, partially offset by an increase in melt utilization.
Chris: These drivers of sequentially lower adjusted EBITDA are consistent with our third quarter earnings guidance.
Chris: On a year-to-date basis through September, the company reported net sales of $843.5 million, a decline of 18% from the prior year driven by softer market demand.
Chris Westbrooks: The benefits of our strategic imperatives and cost reduction actions are proving out in this challenging demand environment, as evidenced by year-to-date net income of $22.7 million on a gap basis and $28.4 million on an adjustment. Additionally, year-to-date adjusted EBITDA was $69.4 million, and the company has generated $26.4 million of operating cash. Our previously communicated objective was to deliver sustainable profitability and cash flow in all business cycles, and 2024 is proving out the business model in a challenging market environment. The company remains well-positioned for profitability improvement in the future, and we remain on track to achieve our through-cycle adjusted EBITDA margin and return on capital employed target.
Chris: The benefits of our strategic imperatives and cost reduction actions are proving out in this challenging demand environment, as evidenced by year-to-date net income of $22.7 million on a gap basis and $28.4 million on an adjusted basis.
Chris: Our previously communicated objective was to deliver sustainable profitability and cash flow in all business cycles, and 2024 is proving out the business model in a challenging market environment. The company remains well-positioned for profitability improvement in the future, and we remain on track to achieve our through-cycle adjusted EBITDA margin and return on capital employed targets.
Chris Westbrooks: Turning now to the details of the financial results in the third quarter. shipments were 119,900 tons in the quarter, a decrease of 30,200 tons or 20% compared with the second quarter. Mike covered the drivers of third quarter shipments by end market in his counter. Elaborating further on the aerospace and defense end market, or A&D for short, fourth quarter A&D shipments are expected to increase from third quarter levels, but not quite to the level of the first half quarterly average, as the first half of 2024 was positively impacted by an acceleration of customer orders. In 2025, A&E customer shipments are expected to increase from 2024 as defense industry capacity and demand continues to ramp up.
Chris: Turning now to the details of the financial results in the third quarter. Shipments were 119,900 tons in the quarter, a decrease of 30,200 tons, or 20%, compared with the second quarter.
Speaker Change: Mike covered the drivers of third quarter shipments by end market in his comments.
Speaker Change: elaborating further on the aerospace and defense end market, or AND for short.
Speaker Change: Fourth quarter A&D shipments are expected to increase from third quarter levels, but not quite to the level of the first half quarterly average, as the first half of 2024 was positively impacted by an acceleration of customer orders.
Speaker Change: In 2025, A&E customer shipments are expected to increase from 2024 as defense industry capacity and demand continues to ramp up.
Chris Westbrooks: Turning now to Manufacturing. As expected, manufacturing costs decreased sequentially by $13.9 million in the third quarter. The consequential decrease in manufacturing costs was a result of improved fixed cost absorption from higher production levels, as well as a continued focus on process improvement to reduce variable costs. Partially offsetting these decreases were $6 million of annual shutdown maintenance costs in the third quarter. The melt utilization rate improved to 60% in the third quarter, compared to 53% in the second quarter, while the company continued to balance production with demand. As mentioned earlier, the company's manufacturing assets and operations team are well positioned to run at a higher rate of utilization as demand recovers.
Turning now to manufacturing.
Speaker Change: As expected, manufacturing costs decreased sequentially by $13.9 million in the third quarter.
Speaker Change: The sequential decrease in manufacturing costs was a result of improved fixed cost absorption from higher production levels, as well as a continued focus on process improvement to reduce variable costs.
Speaker Change: Partially offsetting these decreases were six million dollars of annual shutdown maintenance costs in the third quarter.
Speaker Change: The melt utilization rate improved to 60% in the third quarter, compared to 53% in the second quarter, while the company continued to balance production with demand.
Speaker Change: As mentioned earlier, the company's manufacturing assets and operations team are well positioned to run at a higher rate of utilization as demand recovers.
Chris Westbrooks: Now switching gears, the pension. In the third quarter, the company made $3.2 million of required contributions to the bargaining pension. The company also made an additional required contribution of $5.3 million to the plan during October, resulting in total pension contributions of approximately $43 million this year. No additional required pension contributions are expected for the remainder of 2024. With the benefit of the previous annuitization activities, as well as asset returns and cash contributions, the total pension and retiree medical benefit liability has declined by approximately $800 million since the end of 2021. As of September 30, 2024, the underfunded position of the company's pension and retiree medical plans totaled one hundred and sixty eight million dollars.
Now switching gears, the pensions.
Speaker Change: In the third quarter, the company made $3.2 million of required contributions to the bargaining pension plan.
Speaker Change: The company also made an additional required contribution of $5.3 million to the plan during October, resulting in total pension contributions of approximately $43 million this year.
Speaker Change: No additional required pension contributions are expected for the remainder of 2024.
Speaker Change: With the benefit of the previous annuitization activities, as well as asset returns and cash contributions, the total pension and retiree medical benefit liability has declined by approximately $800 million since the end of 2021.
Speaker Change: As of September 30, 2024, the underfunded position of the company's pension and retiree medical plans totaled $168 million.
Chris Westbrooks: The current estimate for required pension contributions in 2025 is similar to 2024 levels. This estimate will be firmed up following the close of the calendar year and will provide an update to the next quarter's report.
Speaker Change: The current estimate for required pension contributions in 2025 is similar to 2024 levels.
Speaker Change: This estimate will be firmed up following the close of the calendar year and will provide an update in next quarter's report.
Chris Westbrooks: Moving to cash flow and liquidity. The primary uses of cash during the third quarter included share repurchases of $20.1 million, capital expenditures of $17.6 million, and an increase in working capital of $15.1 million, primarily driven by higher inventory to support customer requirements in the fourth quarter, given the milk shop's annual shutdown maintenance in October. As it relates to government funding, earlier this year, the company received a funding commitment of $99.75 million from the U.S. government to support the Army's ramp-up of munitions production, as well as a grant of $3.5 million from JobsOhio to support the related capacity expansion and employee training.
Moving to cash flow and liquidity.
Speaker Change: The primary uses of cash during the third quarter included share repurchases of $20.1 million,
Speaker Change: capital expenditures of $17.6 million, and an increase in working capital of $15.1 million, primarily driven by higher inventory to support customer requirements in the fourth quarter, given the milk shop's annual shutdown maintenance in October.
Speaker Change: As it relates to government funding, earlier this year the company received a funding commitment of $99.75 million from the U.S. government to support the Army's ramp-up of munitions production, as well as a grant of $3.5 million from JobsOhio to support the related capacity expansion and employee training.
Chris Westbrooks: During the third quarter, the company received $35.5 million of cash funding from the government. When combined with $10 million of initial funding received in the second quarter and $7.5 million received in October, the company has received a total of $53 million year-to-date through the end of October of the approximately $103 million of total committed funding. Receipt of the remaining $50 million of committed funding is expected throughout 2025 and into 2026 as mutually agreed upon milestones are achieved. As Mike mentioned, 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 Once commissioned, these investments will support the company's targeted growth in aerospace and defense product sales, as well as support all customers with more efficient and modern assets.
Speaker Change: During the third quarter, the company received $35.5 million of cash funding from the government.
Speaker Change: When combined with $10 million of initial funding received in the second quarter and $7.5 million received in October, the company has received a total of $53 million year-to-date through the end of October of the approximately $103 million of total committed funding.
Speaker Change: Receipt of the remaining $50 million of committed funding is expected throughout 2025 and into 2026 as mutually agreed upon milestones are achieved.
Speaker Change: As Mike mentioned, 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.
Speaker Change: Once commissioned, these investments will support the company's targeted growth in aerospace and defense product sales, as well as support all customers with more efficient and modern assets.
Chris Westbrooks: As previously mentioned, capital expenditures totaled $17.6 million in the third quarter, of which $5.8 million was related to spending on projects supported by the government funding. In total, we estimate full-year CapEx to be approximately $65 million in 2024, inclusive of approximately $15 million of CapEx supported by government funding. The base CapEx forecast of $50 million in 2024. Net of investments supported by government funding is a $5 million reduction from our previous guidance. As we look towards 2025, we anticipate Base CapEx to be below 2024 levels. However, FX spending on investments supported by government funding will ramp up in 2025.
Speaker Change: As previously mentioned, capital expenditures totaled $17.6 million in the third quarter, of which $5.8 million was related to spending on projects supported by the government funding.
Speaker Change: In total, we estimate full-year CapEx to be approximately $65 million in 2024, inclusive of approximately $15 million of CapEx supported by government funding.
Speaker Change: The Base Cap-Ex forecast of $50 million in 2024 and that of investments supported by government funding is a $5 million reduction from our previous guidance.
Speaker Change: As we look towards 2025, we anticipate Base CapEx to be below 2024 levels.
Speaker Change: However, FX spending on investments supported by government funding will ramp up in 2025.
Chris Westbrooks: We've included a slide in the third quarter investor presentation available on our website to show the timing of anticipated government funding in advance of related CapEx.
Speaker Change: We've included a slide in the third quarter investor presentation available on our website to show the timing of anticipated government funding in advance of related CapEx spending.
Chris Westbrooks: Switching Gears, the Shareholder Return Act. During the third quarter, the company repurchased 1.2 million shares at a cost of $20.1 million. The date in 2024 through the end of September, 1.8 million shares were repurchased at a cost of $34.1 million. In total, as of September 30th, the company had $106.3 million remaining under its authorized share repurchase program. We remain committed to exhausting this authorization as we progress forward. At the end of the third quarter, the company's cash and cash equivalents were $254.6 million, and total liquidity was $496.8 million. We expect the strength of the balance sheet combined with expected three cycle profitability and cash flow to enable the company to continue to execute its capital allocation strategy.
Switching gears to shareholder return activities.
Speaker Change: During the third quarter, the company repurchased 1.2 million shares at a cost of $20.1 million.
Speaker Change: The date in 2024 through the end of September, 1.8 million shares were repurchased at a cost of $34.1 million.
Speaker Change: In total, as of September 30th, the company had $106.3 million remaining under its authorized share repurchase program, and we remain committed to exhausting this authorization as we progress forward.
Speaker Change: At the end of the third quarter, the company's cash and cash equivalents were $254.6 million and total liquidity was $496.8 million.
Speaker Change: We expect the strength of the balance sheet, combined with expected three-cycle profitability and cash flow, to enable the company to continue to execute its capital allocation strategy.
Chris Westbrooks: This includes investing in profitable growth, maintaining a strong balance sheet and returning capital to shareholders through continued share repurchase.
Speaker Change: This includes investing in profitable growth, maintaining a strong balance sheet, and returning capital to shareholders through continued share repurchases.
Chris Westbrooks: Turning now to The Outlook. Fourth quarter shipments are expected to increase slightly on a sequential basis driven by higher AMD shipments. The order books support shipment levels between second and third quarter levels. However, we are awaiting input on customer operating schedules in December around the holidays, which may impact the timing of shipments leading up to year end. Lead times have extended in recent months with bar product lead times in late December and two product lead times in January. Operationally, planned annual shutdown maintenance was recently completed in the fourth quarter at a cost of approximately six million dollars, consistent with the level of annual shutdown maintenance completed in the third quarter.
Turning now to The Outlook.
Speaker Change: Fourth quarter shipments are expected to increase slightly on a sequential basis driven by higher AND shipments.
Speaker Change: The order books support shipment levels between second and third quarter levels, however, we are awaiting input on customer operating schedules in December around the holidays, which may impact the timing of shipments leading up to year-end.
Speaker Change: Lead times have extended in recent months, with bar product lead times in late December and two product lead times in January.
Speaker Change: Operationally, planned annual shutdown maintenance was recently completed in the fourth quarter at a cost of approximately $6 million, consistent with the level of annual shutdown maintenance completed in the third quarter.
Chris Westbrooks: Additionally, the fourth quarter melt utilization rate is expected to be similar to the third quarter, given the impact of the recently completed annual melt shop shutdown maintenance, combined with continued balancing of production with demand. Fourth quarter CapEx is expected to be approximately $16 million, inclusive of approximately $9 million of CapEx supported by previous funding from the government. Given these elements, the company anticipates fourth quarter adjusted EBITDA to modestly increase compared with the third quarter.
Speaker Change: Additionally, the fourth quarter melt utilization rate is expected to be similar to the third quarter, given the impact of the recently completed annual melt shop shutdown maintenance, combined with continued balancing of production with demand.
Speaker Change: Fourth quarter CapEx is expected to be approximately $16 million, inclusive of approximately $9 million of CapEx supported by previous funding from the government.
Speaker Change: Given these elements, the company anticipates fourth quarter adjusted EBITDA to modestly increase compared with the third quarter.
Michael Williams: 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, ensuring our assets and teams are prepared when market dynamics shift, and continuing to invest in the business while returning capital to shareholders. Thanks for your interest in Metallus.
Speaker Change: To wrap up, thanks to our employees for their daily collaboration while focusing on finishing each and every day incident and injury free.
Speaker Change: We remain committed to controlling what we can control in a challenging market environment, ensuring our assets and teams are prepared when market dynamics shift, and continuing to invest in the business while we're turning capital to shareholders.
Jennifer Beeman: We would now like to open the call for questions. Thank you.
Speaker Change: Thanks for your interest in Metallus. We would now like to open the call for questions.
Audra: We will now begin the question and answer session. If you have dialed in, we would like to ask a question. Please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.
Speaker Change: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.
John Franzreb: We'll go first to John Franzreb at Sidoti. Good morning, everyone. And thanks for taking the questions. I'd like to start with the sales profile in the quarter and the shipments. Certainly, we had some unexpected weakness in the automotive cycle, and it seems like it's continuing to the fourth quarter. But I guess the drop in the aerospace and defense business was more considerable than I was looking for.
We'll go first to John Franzreb at Sidotian Company.
John Franzreb: Good morning, everyone, and thanks for taking the questions. I'd like to start with
John Franzreb: sales profile in the quarter and in the shipments. Certainly we had some unexpected weakness in the automotive cycle and it seems like it's continuing to the fourth quarter. But I guess like the drop in the aerospace and defense business was more considerable than I was looking for. Has that
Michael Williams: Has that Thanks for joining us. Thanks. I think that yeah, we've been expecting this because of the significant ramp up in demand in the first half. And some of the delays in their capacity expansion, John, from our from the downstream customers. So, as that capacity continues to ramp up, demand is going to increase slightly in Q4. We already have those orders on hand, and we expect to continue to ramp up in demand in 2025. But I think we've been saying for two quarters, we've been expecting a decline in A&D shipments because of the accelerated ordering that happened in the first half of 2024.
Speaker Change: Mix played out or that demand played out as you expected. I know you certainly signaled that I was going to drop it. Was it to that magnitude?
Speaker Change: So I think that, yeah, we've been expecting this because of the significant ramp-up in demand in the first half and some of the delays in their capacity expansion, John, from the downstream customers.
Speaker Change: So, as that capacity continues to ramp up, demand is going to increase slightly in the
Speaker Change: in Q4. We already have those orders on hand and we expect that continue to ramp up in demand in 2025.
Speaker Change: But I think we've been saying for two quarters, we've been expecting a decline in A&D shipments because of the accelerated ordering that happened in the first half of 2024.
Michael Williams: Okay, and on the flip side of that, the target that you put out there for $250 million in 2026, Can we just speak to the cadence of that ramp, what does it kind of look like, and that 2026 number, is that a full year number, or is that a run rate that we're thinking about? That's a that's a run rate number. You know, What's driving that is not only the known demand for the munitions contracts that we have going into 2025, but we are working on new defense programs with some current customers and existing customers into other aspects of defense products, not necessarily focused on munitions.
Speaker Change: Okay, and on the flip side of that, the target that you put out there for $250 million in 2026.
Speaker Change: Can we just speak to the cadence of that ramp? What does it kind of look like? And that 2026 number, is that a full year number? Is that a run rate that we're thinking about?
That's a run rate number, you know.
Speaker Change: What's driving that is not only the known demand for the munitions...
Speaker Change: contracts that we have going into 2025. But we are working on new defense programs with some current customers and existing customers.
Speaker Change: into other aspects of defense products not necessarily focused on munitions.
Michael Williams: I don't want to get into the details of those right now because we're in the negotiations on those potential future programs, but that's what's going to drive the increase in demand over what's already been publicly stated about the munitions demand required over the next several years by the Department of Defense, particularly the U.S. Army.
Speaker Change: I don't want to get into the details of those right now because we're in the negotiations.
Speaker Change: on those potential future programs. But that's what's going to drive the increase in demand over what's already been publicly stated about the munitions demand required over the next several years by the Department of Defense, particularly the U.S. Army.
Michael Williams: make sense, plus we don't want the bad guys to know.
Speaker Change: make sense, plus we don't want the bad guys to know.
John Franzreb: One last question.
Chris Westbrooks: John and Mike, sorry to interrupt. This is Chris Westbrooks. I just wanted to clarify on that 2026 target. We do expect a steady increase into 2026, but Mike, that was a full year estimated total sales number for 2026. It wasn't a run rate as you get to the fourth, for example. It's a full year. Expect to realize that in 2026.
Speaker Change: One last question. John and Mike, sorry to interrupt. Sure. Sorry to interrupt. This is Chris Westbrooks. I just wanted to clarify on that 2026 target. We do expect, you know, a steady increase in the 26.
Speaker Change: But Mike, that was a full year estimated total sales number for 2026. It wasn't a run rate as you get to the fourth, for example, it's a full year. Expect to realize that in 2026.
John Franzreb: Thanks for the clarification. Thank you. Also, Chris, I appreciate that.
John Franzreb: Well, one last question out back in the queue.
Speaker Change: Thanks for the clarification. Thank you also, Chris. I appreciate that. One last question. I'll go back in the queue. I'm just curious, given the downtime we've had in the third quarter and we're seeing again in the fourth quarter, have you pulled forward any maintenance or cost-saving actions that you might have been considering in the first quarter of 2025 into the 2024 calendar year?
Michael Williams: I'm just curious, given the downtime we've had in the third quarter and we're seeing again in the fourth quarter, have you pulled forward any maintenance or cost saving actions that you might have been considering in the first quarter of 2025 into the 2024 calendar year? I would not, no, because where our significant cost-saving opportunities are coming is these investments. We commented in our... Earlier, the presentation about the automatic grinding line that's going to provide significant safety, cost reduction, efficiencies, improvements, as well as quality.
Speaker Change: I would not say no, because where our significant cost-saving opportunities are coming is these investments. We commented in our
Speaker Change: earlier the presentation about the automatic grinding line that's going to provide significant
Speaker Change: safety, cost reduction, efficiencies, improvements, as well as quality. We didn't really pull anything forward from Q1. We're pretty
Michael Williams: We didn't really pull anything forward from Q1. We're pretty, you know, with the market demand as soft as it's been, we're just very focused on cash flow, conserving it, taking opportunities to reduce our costs by reducing our outside spend, trying to bring everything inside as much as possible where our cost structure is lower than outside suppliers we may be using. So, you know, we're very focused on what we can control. Right now, the big focus outside of safety is really delivering on the significant investments we're making to improve our safety, quality, enhance efficiencies, reduce costs, and improve reliability.
Speaker Change: With the market demand as soft as it's been, we're just very focused on cash flow, conserving it.
taking opportunities to reduce our costs.
Speaker Change: by reducing our outside spend, trying to bring everything inside as much as possible where our cost structure is lower than
Speaker Change: outside suppliers we may be using. So, you know, we're very focused on what we can control. Right now the big focus or outside of safety is really delivering on these significant investments we're making.
Speaker Change: to improve our safety, quality, enhance efficiencies, reduce costs, and improve reliability.
John Franzreb: Okay.
John Franzreb: Thank you, Mike.
John Franzreb: I'll go back to the queue. Thanks, John.
Okay. Thank you, Mike. I'll go back to the queue.
Robert Lynch: We'll move next to Robert Lynch at Stonegate Capital Park. Hey, good morning, guys. Thank you everyone for coming out today.
Thanks, John.
We'll move next to Robert Lynch at Stonegate Capital Partners.
Robert Lynch: Hey, good morning guys. I appreciate you taking my questions today.
Michael Williams: or Bob needs some more details on the current bidding environment in the aerospace and defense sector. Well, I think, as I said to John earlier, is You know, we expect the munitions demand to continue to improve because of the capacity investments downstream to manufacture our steel into munitions is increasing and will continue to increase and it will ramp up throughout the rest of this year and in 2025. So, we expect that demand to continue. We are also negotiating longer term agreements with certain defense customers because they want to guarantee that stability of long term supply.
Robert Lynch: If you could provide me some more details on the current bidding environment in the aerospace and defense sectors and like any significant trends you are observing in the macro space.
Well, I think as I said to John earlier is.
Robert Lynch: is increasing and will continue to increase, and it will ramp up throughout the rest of this year and in 2025.
Robert Lynch: So, we expect that demand to continue. We are also negotiating longer-term agreements with certain defense customers because they want to guarantee that stability of long-term supply.
Michael Williams: And as I said, we are pursuing new programs and other areas within the defense and market to continue to improve our participation in those markets, which we see strong growing demand over the next several years. appreciate the color there.
Robert Lynch: And as I said, we are pursuing new programs in other areas within the defense end market.
Robert Lynch: to continue to improve our participation in those markets which we see strong growing demand over the next several years.
Michael Williams: Second, is there any? other than A&E and lead times moving out a little bit, sinking down. Well, again, you know, the biggest softness we see is really in the distribution that serves energy and in the industrial end markets. You know, the month of supply has slightly ticked up, even though from a tonnage perspective, the inventories are reducing, but not as fast as the demand has softened. So our lead times have gone out because we've seen a better order book development over the last, you know, five out of six weeks. And that gives us a view that demand's increasing in Q4 slightly or modestly.
Speaker Change: I appreciate the color there. Second, is there any other green shoes other than A&D and lead times moving out a little bit thinking downstream in terms of inventory levels?
Speaker Change: Well, again, you know, the biggest softness we see is really in the distribution that serves energy and the industrial end markets.
You know the month of supply has slightly ticked up
Speaker Change: Even though, from a tonnage perspective, the inventories are reducing, but not as fast as
Speaker Change: the demand has softened. So our lead times have gone out because we've seen a better order book development over the last, you know, five out of six weeks.
and that gives us
Speaker Change: a view that demand's increasing in Q4 slightly or modestly. And then we also, as we are negotiating our annual contract, we expect higher demand in 2025. But again, you know, there's a lot of moving parts here.
Michael Williams: And then we also, as we are negotiating our annual contract, we expect higher demand in 2025. But again, you know, there's a lot of moving parts here.
Robert Lynch: We've talked about trade. We've seen a lot of trade import increases in some of our end markets, particularly around our tubing markets. And we expect with this administration that's coming in, that maybe we expect them to be tougher on trade. We'll wait and see who they put in these specific positions in the administration. But we think that's a positive thing for how our market will develop in 2025 and beyond. Okay, great. I appreciate the color again.
Speaker Change: We've talked about trade. We've seen, you know, a lot of trading, import increases in some of our end markets.
particularly around our tubing markets.
Speaker Change: And we expect with this administration that's coming in, that may be, we expect them to be tougher on trade. We'll wait and see.
Speaker Change: who they put in these specific positions in administration, but we think that's a positive thing for how our market will develop in 2025 and beyond.
Robert Lynch: I think that's it for me. Thanks, Robert.
Speaker Change: Okay, great. I appreciate the color again. I think that's that's it for me and good luck in Q4.
Thanks, Robert.
Audra: And that concludes our Q&A session. I apologize.
Robert Lynch: We do have a follow-up from Robert Lynch at Stonegate Capital. Apologize, guys.
John Franzreb: and a follow-up from John Franzreb at Sidotia. Yeah, I guess relative to the change in mix as we start to look to 2026 and assume and assume a normalized automotive market and a recovery in the energy market with a change of administration. How does that that kind of an out? reconcile with some of your long-term targets that you've kind of outlined, you know, being, you know, you know, utilization rates or your adjusted EBITDA margins, you know, return on capital. Do you think you'd be able to hit those kind of targets by the 2026 timeframe in that kind of environment?
Thank you.
and a follow-up from John Frensrep at Sidonian Company.
John Franzreb: Yeah, I guess relative to the change in mix as we start to look to 2026 and assume
John Franzreb: and assume a normalized automotive market and a recovery in the energy market with a change of administration. How does that kind of an outlook?
reconcile with some of your long-term targets.
John Franzreb: that you've kind of outlined, you know, being, you know, utilization rates or adjusted EBITDA margins, you know, return on capital. Do you think you'd be able to hit those kind of targets by the 2026 timeframe in that kind of environment? And on top of that, I guess, the A&E mix.
Michael Williams: And on top of that, I guess, the A&E mix? Well, again, if you look at the investments we're making, particularly in the roller furnace, and the bloom reheat furnace, that's all targeted to provide that in increased capacity that we pretty much are working to get under contract right now. So we're pretty positive about being able to deliver those kinds of higher levels of demand, because those investments are going to drive that capability. Now, if you assume other markets go back to their historical demand patterns for, you know, whatever cycle period of time. That's very positive for us.
Speaker Change: Well, again, if you look at the investments we're making, particularly in the roller furnace
Speaker Change: and the Bloom Reheat Furnace, that's all targeted to provide that increased capacity that we pretty much are working to get under contract right now. So, we're pretty positive about being able to deliver those kinds of higher levels of demand because those investments are going to drive that capability.
Speaker Change: Now, if you assume other markets go back to their historical demand patterns for, you know, whatever cycle period of time, that's very positive for us.
John Franzreb: Okay, just wanted to check that out. Thank you, Mike. Appreciate it. Sure.
John Franzreb: Thanks, John. And that concludes our Q&A session.
John Franzreb: Okay. Just wanted to check that out. Thank you, Mike. Appreciate it. Sure. Thanks, John.
Jennifer Beeman: I will now turn the conference back over to Jennifer for closing remarks. Thanks all for joining us today, and that concludes our call. And this does conclude today's conference call. Thank you for your participation.
Speaker Change: And that concludes our Q&A session. I will now turn the conference back over to Jennifer for closing remarks.
Jennifer Beeman: Thanks all for joining us today and that concludes our call.
Audra: You may now disconnect.
Jennifer Beeman: And this does conclude today's conference call. Thank you for your participation. You may now disconnect.