Q2 2025 Metallus Inc Earnings Call

Speaker #1: Related today. At this time, I like to welcome everyone to the second quarter 2025 Metallus earnings call. All lines have been placed on mute to prevent any background noise.

Speaker #1: What can the speakers mark? There will be a question-and-answer session. To ask a question, simply press star followed by the number one on your telephone keypad.

Speaker #1: It is now my pleasure to turn the call over to Jennifer Beeman. Jennifer, you may begin.

Speaker #2: Good morning and welcome to Metallus's 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; Chris Westbrooks, President and Chief Operating Officer; John Zarenek, Executive Vice President and Chief Financial Officer; and Kevin Raketich, Executive Vice President and Chief Commercial Officer.

Speaker #2: 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 FCC.

Speaker #2: 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 #2: Please refer to our FCC filings, including the most recent Form 10K and Form 10Q, and the list of factors included in our earnings release all of which are available on the Metallus website.

Speaker #2: We're 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.

Speaker #2: Mike?

Speaker #3: Good morning, and thank you for joining us today. Before we begin, I'd like to take a moment to welcome John Zarenek to the team.

Speaker #3: John is our new Executive Vice President and Chief Financial Officer and brings with him more than 20 years of financial leadership in the manufacturing and industrial sectors along with a strong track record of engaging with the investment community.

Speaker #3: We're excited to him on board and I'm confident you'll joy working with him. Also, I'm excited that Chris recently assumed new responsibilities as President and Chief Operating Officer after serving as our CFO since 2018.

Speaker #3: Chris now has oversight of our safety, manufacturing operations and excellence, and supply chain organizations. Now, turning briefly to the trade environment, Section 232 steel tariffs remain firmly in place at 50% for most countries, with little change resulting from the country-specific agreements currently under negotiation by the administration.

Speaker #3: A fair trade environment is very important for the long-term sustainability of the steel industry and industry that is vital to our national defense and infrastructure.

Speaker #3: As a result of the recent trade actions, we anticipate growing demand for domestically produced steel. Before we dive into safety and the corollary results, I want to take a moment to share how honored we were to recently host Vice President JD Vance at our Faircrest plant in Canton, Ohio.

Speaker #3: He spoke to approximately 300 of our employees and local stakeholders. He emphasized the federal government's commitment to investing in American workers and businesses. He also acknowledged our role in supporting national defense.

Speaker #3: He highlighted Metallus's investment in a new Bloom reheat furnace and our support of the Army's increased artillery shell production. The visit left many of our employees energized and deeply proud of the vital role they play in strengthening our national industrial and defense capabilities.

Speaker #3: Moving on to safety, our mission remains clear: to be recognized as having the safest specialty metals operation in world. In 2025, we're on track to invest approximately $5 million to enhance our safety management systems and upgrade critical equipment.

Speaker #3: I'm ased to report that our previous safety investments are delivering meaningful results. So far, in 2025, we've had zero serious injuries; a 40% reduction in injury severity; and a 6% reduction in injury frequency compared to the same period a year ago.

Speaker #3: Even more encouraging are our leading indicators. A 25% increase in the number of employees actively participating in the first aid provider program and serving as safety committee representatives.

Speaker #3: A 41% rise in near-miss reporting and a 48% increase in proactive safety engagement interactions. These trends reflect growing employee engagement and trust in our safety culture.

Speaker #3: We're also continuing to de-risk our operations through robust, serious injury and fatality prevention measures. Comprehensive risk assessments, and targeted lockout/tagout tryout enhancements, we recognize that safety is a journey.

Speaker #3: However, these positive indicators give us confidence that we're ing in the right direction toward our goal of industry-leading safety performance. Moving to business results for the second quarter, overall shipments increased by 10% compared with the first quarter.

Speaker #3: Driven by higher aerospace and defense, automotive, and energy shipments. When looking at the first half of 2025, we shipped 28% more tons than the second half of 2024.

Speaker #3: Higher shipments coupled with better manufacturing performance resulted in a 26.5 million dollar adjusted EBITDA. A significant increase from the first quarter. Additionally, we recently announced a price increase on seamless mechanical tubing products of $100 per ton effective in November for customers not covered by annual pricing agreements.

Speaker #3: Lead times are currently extended to October for our SPQ bars and seamless mechanical tubing products. Turning to our specific markets, industrial shipments increased slightly in the second quarter on a sequential basis.

Speaker #3: Distribution customer inventory levels have declined over the last few months, SPQ and seamless mechanical tubes are consistently turning over and customers are regularly ordering from us.

Speaker #3: Energy shipments improved 17% on a sequential basis. We continue to invest in our thermal treat capabilities for high-pressure, high-temperature applications to further expand our reach in the energy market.

Speaker #3: Tariffs aimed at protecting domestic steel producers are helping to reduce imports and stimulate demand. Automotive shipments improved by 9% sequentially. We sequential increased in shipments, including some market share gains and increased demand on existing programs.

Speaker #3: The highest running light truck and SUV programs that Metallus participates in remain strong and, as we mentioned last quarter, we are continuing to see increased customer inquiries driven by tariff-related onshoring.

Speaker #3: As expected, aerospace and defense shipments nearly doubled sequentially. While the industry continues to work through their short-term supply chain challenges, this market remains on target to continue to grow for the foreseeable future.

Speaker #3: And we are energized by our participation in this market. We continue to build momentum with vacuum arc remount or var steel. Driven by our broad downstream processing capabilities, and a strategic relationship with a var supplier.

Speaker #3: Metallus is uniquely positioned to procure, engineer, process, and sell these var products in an efficient manner that is desired by customers. Year to date, var-related sales, at more than double compared to the first half of 2024, reflecting the focused efforts of our teams.

Speaker #3: Alongside growing volumes with existing customers, the enhanced strength and durability of var steel has enabled us to win new business in aerospace defense and industrial sectors.

Speaker #3: As previously shared, we remain on track to achieve approximately $30 million in var-related revenue by the end of 2025. Switching gears to operations, our Mount utilization rate improved to 71%, or by 6 percentage points sequentially on higher production volumes.

Speaker #3: We're seeing the benefits of ongoing process improvements across our manufacturing facilities, and we expect Mount utilization to further increase in the third quarter to support our solid order book.

Speaker #3: That said, we believe there are still meaningful opportunities to drive improvement in operating performance and cost structure. To support this, we've launched an initiative focused on optimizing the execution of our day-to-day manufacturing operating system across the organization.

Speaker #3: We expect this initiative will support the long-term sustainability of our operations while reducing costs and enabling profitability growth. In terms of recent capital investments, our automatic grinding line at our Harrison facility has successfully completed hot commissioning, and is now fully staffed and operational.

Speaker #3: We're already seeing daily improvements in safety and throughput. Clear indications of the project's positive impact. Additionally, our government-funded investments continue to hit key milestones related to the installation of the new Bloom reheat furnace, and roller furnace.

Speaker #3: To support the Army's increased demand for artillery shells. The Bloom reheat furnace's construction continues to remain on schedule to begin commissioning by the end of the year.

Speaker #3: The new roller furnace building and equipment foundations are nearing completion. And equipment has begun to arrive. We remain on schedule to begin commissioning in the first half of 2026.

Speaker #3: Lastly, as a reminder, we will begin labor negotiations with the United Steel Workers on August 18th, regarding the current labor agreement, which expires on September 29th.

Speaker #3: As always, our aim is achieve a timely, fair, and equitable contract for both the company and our employees. We remain focused on our daily execution to support our solid order book while maintaining a commitment to safety, delivering exceptional customer service, and making strategic capital investments.

Speaker #3: These priorities are key to supporting sustainable profitability and generating strong cash flow and creating long-term value for our shareholders. I'm now going to turn the call over to Chris to review our financial results for the second quarter since he served as CFO for the majority of the quarter, and John will share the company's outlook.

Speaker #4: Thanks, Mike. Good morning and thank ou for joining our second quarter earnings call. During the quarter, our team delivered a sequential increase in shipments, net sales, Mount utilization and profitability, consistent our earnings guidance.

Speaker #4: We also continue 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 dollars, sequential increase of 24.1 million dollars, or 9%.

Speaker #4: Primarily driven by higher shipments across all end markets. Net income was 3.7 million dollars in the second quarter, or 9 cents per diluted share.

Speaker #4: 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.

Speaker #4: Adjusted EBITDA was 26.5 million dollars in the second quarter, and sequential increase of 50% primarily driven by higher shipments and continued improvement in Mount utilization driving better fixed cost leverage.

Speaker #4: 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.

Speaker #4: At the end of the second quarter, the company's cash and cash equivalent balance was 190.8 million dollars, inclusive of approximately 34 million dollars of government-funded cash on hand for future investments.

Speaker #4: In the second quarter, capital expenditures totaled 17.8 million dollars, including approximately 15 million dollars of second quarter CapEx supported by previous government funding. Planned capital expenditures for the full year 2025 remain at approximately 125 million dollars, consistent with previous guidance, and inclusive of approximately 90 million dollars of capital expenditures funded by the US government.

Speaker #4: As it ates to government funding, during the second quarter, the company received 5.1 million dollars of cash funding from the government as part of the previously announced nearly 100 million dollar funding agreement in support of the US Army's mission of increasing munitions production.

Speaker #4: 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.

Speaker #4: Receipt of the remaining committed government funding is expected throughout the remainder of 2025 and into 2026 as mutually agreed on 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.

Speaker #4: Now switching gears to pensions. In second quarter, the company made 5.9 million dollars of required pension contributions, related to the US bargaining plan. Following a recent actuarial update, we're now estimating only 3.5 million dollars of additional required pension contributions in the second half of 2025, which is 6.5 million dollars lower than previously stated guidance.

Speaker #4: 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.

Speaker #4: We continue to actively manage the pension. We'll ide 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 dollars.

Speaker #4: In July, an additional 67,000 shares were repurchased for 1.1 million dollars. At the end of July, a balance of 92.8 million dollars remained under our share repurchase authorization.

Speaker #4: As it relates to convertible notes, during the second quarter, we settled the remaining 5.5 million dollars of outstanding vertible notes at a cash cost of 9.1 million dollars.

Speaker #4: As of June 30th, 2025, the company had no outstanding borrowings. Since the inception of common share repurchases in early 2022, combined 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.

Speaker #4: These actions reflect the strength of the company's balance sheet and confidence in through cycle cash ow generation. With that, I'll turn it to our CFO, John Zarenek, to cover the business outlook.

Speaker #5: Thanks, Chris. 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.

Speaker #5: 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 var and tube products.

Speaker #5: Additionally, base price per ton is anticipated to remain relatively steady in the third quarter. Dependent on our mix in the quarter. Effective November 1st, 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.

Speaker #5: This price increase is reflective of the improving demand environment for domestically produced products. From an operational perspective, mount utilization is expected to increase sequentially in the third quarter on improved operational performance.

Speaker #5: 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 dollars.

Speaker #5: From a timing perspective, about $5 million of the planned shutdown maintenance will occur in the third quarter for non-Mount shop assets. The balance of approximately $10 million of planned shutdown maintenance will occur in the fourth quarter and include the Mount shop.

Speaker #5: 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.

Speaker #5: Additionally, as Mike mentioned, we're beginning negotiations with the United Steel Workers regarding the labor agreement, which is set to expire in late September. We anticipate incremental non-recurring labor agreement negotiation costs of 3 to 5 million dollars in the second half of 2025.

Speaker #5: 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.

Speaker #5: 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.

Speaker #5: 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 dollars as a result of this initiative.

Speaker #5: With savings ramping up throughout 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.

Speaker #5: 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, US-based, specialty metals producer supporting critical markets.

Speaker #5: 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.

Speaker #5: We would now like to open the call for questions.

Speaker #1: Has a reminder to ask a estion simply press star followed by the number one on your telephone keypad. Our first question comes from the line of John Zarenek with Sidoti.

Speaker #1: Please go ahead.

Speaker #6: Good morning, everyone, and congratulations, Chris, and welcome to the call, John. I'd like to start with maybe the new market share gains or new customers you're rabbing.

Speaker #6: As a result of maybe the change of 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 saw a year ago?

Speaker #3: Sure, John. You know, I would say that a majority of the increase in the share gain was gaining back some industrial and omotive business that we had lost in prior years.

Speaker #3: I'm not necessarily to imports, but to domestic competitors. However, we do see modest increase in new customer inquiries and orders tied to the tariff environment.

Speaker #3: But I have to qualify that fact that until the agreements are signed, there's a lot of people sitting on the sidelines waiting to see what is the final tariff.

Speaker #3: And what is the impact? Because 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 a signature on those agreements with both parties.

Speaker #6: Okay. Okay. So this is probably I don't know, maybe a fourth quarter event if it happens that we're thinking of?

Speaker #3: Well, you ow, I'm not I can't I'm not going to try to speculate my expertise on forecasting the Trump administration. So as they are finalized, yes, we do expect to continue to see as we said in ur comments, increased demand.

Speaker #3: That's what's being signaled to us, and that's actually what we're expecting going forward.

Speaker #6: And in A and D, can you talk a little bit about the supply chain issues? It's kind of been I don't ow, an overhang for a couple quarters now.

Speaker #6: When do you expect that to be resolved?

Speaker #3: Actually, we've been receiving good news recently that things are starting to potentially improve in demand. And we've all seen some increased orders, just not at the rate we expected.

Speaker #3: These were investments being made by the supply chain to ramp up the munitions production. And they've had startup and commissioning issues that have delayed that at least by sometimes six months to a year.

Speaker #3: So we have we are getting word that things we expect to see additional orders in the fourth quarter of this year.

Speaker #6: Great. Great. That's good to see. And it's it's interesting. One of my prepared questions was about Mount utilization. You know, we had that north of 80% target sounds like now ou're bringing somebody in to help you to achieve that number.

Speaker #6: Can you talk a little bit about maybe what's what's held back and held you back from hitting that number and your confidence in hitting that 10 million?

Speaker #6: Was it 10 million dollars in savings? In

Speaker #3: Yes.

Speaker #6: 2026? Yeah.

Speaker #3: Efficiency savings. Yeah.

Speaker #6: Yeah.

Speaker #3: So you know we had couple percents of Mount utilization impacted in Q2 by electrical supply interruptions. Because of we have interruptible power supply. It's a benefit to us because it actually provides us with a lower rate electricity.

Speaker #3: If the electrical company when the grid is under extreme demand that we can idle and allow them to provide the electricity into the residential community to provide you know so they have air conditioning and they keep the lights on.

Speaker #3: So we had a couple percent utilization there. We had a couple percent utilization tied to some reliability on auxiliary equipment. Primarily cranes is the is the one thing that we're focused on.

Speaker #3: We have engaged a third-party to help us improve our crane reliability. But that's not the company we're referring to. 're referring to a company that is looking from how we how we schedule how how we plan and how we execute on the shop for and really drive a higher performance of efficiency in our execution.

Speaker #3: And that'll be anything from you know culture to what tools, data, etc. of what we should have this is an industry-based expertise. And they bring a global best practice approach to shop floor particularly for the steel industry execution.

Speaker #6: Okay. All right. I'm good. Good luck with that, and I'll get back to you on that one.

Speaker #3: Sounds good.

Speaker #1: Our next question comes from the line of Chris Allett with North Coast Research. Please go head.

Speaker #7: Hey. Good morning.

Speaker #3: Good morning.

Speaker #7: You might have answered my question here a bit, but I was wondering, on the SPQ bar side, are there any price increases on the books on that side?

Speaker #7: And then I guess if not, and you know to your thoughts on kind of this customer apprehension how does that impact your contract discussions for 2026?

Speaker #7: that going to be a complicated things?

Speaker #3: Yeah. I mean, 'm not I don't want to really publicly k about price. We haven't seen price increases since you ow really earlier this year.

Speaker #3: It was a modest one. That stuck; we really haven't seen that. Do I expect, as demand continues to grow? You know, typically, historically, price follows.

Speaker #3: An increasing to support that higher demand. In regards to the trade situation and people are waiting to see what the final tariff environment's going to be, I just think you know the small what I see is the smaller companies have already taken action to move.

Speaker #3: The larger companies are more the larger steel consuming companies are a little bit in a more a wait and see. They're inquiring to make sure that they have the ability to to get supply when they decide to make that decision.

Speaker #3: And then you also have to keep in perspective there was a fair amount of import inventory already in the United States prior to the tariffs going into play.

Speaker #3: And we are you know we're definitely aware that that inventory still exists, but it is being consumed. So we expect that inventory to be somewhat exhausted by the end of this quarter.

Speaker #3: Early fourth quarter. And that will also play into increasing demand for the domestic supply. Did I answer your question, Chris?

Speaker #7: Yeah. I was just I guess the other question I would have is just in terms of the contracts, can you remind us like in terms of what would come up for renewal or?

Speaker #3: Yeah. So look, if you look at 2025, as we've said, 70% of our demand is under contract. And about 30% spot is a spot-based.

Speaker #3: The contract discussions haven't really begun yet. There are a couple that have inquired, but we're basically expecting that discussion and activity will pick up in late September through October.

Speaker #3: Through November into early December. So probably the next time we have a call of a better look at how that's developing.

Speaker #7: Thank you.

Speaker #1: Our next question comes from the line of Dave Storms with Stonegate.

Speaker #8: Hey, Dave. 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?

Speaker #8: Or is this going to be more of a maintenance update?

Speaker #3: I would say the majority of it is maintenance, but there are some technology upgrades that we're planning to implement. However, I would say the majority of it is really maintenance-related, infrastructure reliability-oriented investments in our shutdowns.

Speaker #8: Perfect. And then I ess 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?

Speaker #8: Or will that become after your previously stated operation efficiencies?

Speaker #3: Yeah. I think, well, I ink these are more focused on reliability. So we do expect to see Mount shop utilization to improve. On some of our key investments.

Speaker #3: Our key maintenance investments. But really, I ink you know from a go-forward, it's really going to be this optimization and efficiency of shop floor execution that's really going to net you know at ast $10 million in savings in our manufacturing costs.

Speaker #3: And then as we some of these big CapEx investments come on, later this year, the reheat Bloom furnace and then early next year, the roller furnace, they're significant cost efficiency and improvements that we're going to out of these investments.

Speaker #3: That really will materialize in 2026.

Speaker #8: Understood. Very helpful. ank you. And then just switching gears a little bit here, with order books or excuse me, with lead times out to October is there anything you can kind of tell us about the texture of the order book that ou're eing?

Speaker #8: Maybe indications on the price to mix texture that you're seeing?

Speaker #3: Sure. Our lead times are relatively in the second half of October. If you look at our order book, it's double the size it was a year ago at this time.

Speaker #3: So we have a much longer-term view that allows us to optimize our scheduling and increase some of our efficiencies. In that regard, defense is going to continue to be fairly stable.

Speaker #3: Automotive looks like it's going to continue to be very stable. And really, what's going to develop in that order book we do see expect some price appreciate modest price appreciation to continue to develop throughout the year.

Speaker #3: As the prior announced price increases, work into the shipments that we actually make. From a timing standpoint. So things look a hell of a lot better than they did the second half of last year.

Speaker #3: I could just tell you that. And then as this tariff environment becomes much more clear, then we expect demand to continue to grow.

Speaker #8: That's great. I appreciate the commentary. And good uck in Q3.

Speaker #3: Hey, thanks. Appreciate it.

Speaker #1: Once again, to ask a estion, simply press star followed by the number one on your telephone keypad. And with no further questions in queue, I will now hand the call back to Jennifer for closing remarks.

Speaker #2: Thanks, everyone, for joining us this morning. And that concludes our call today. Thank you.