Good morning. My name is Krista, and I’ll be your conference operator today. At this time, I would like to welcome everyone to Metallus Fourth Quarter and Full Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Jennifer Beeman. Jennifer, you may begin.

Good morning, and welcome to Metallus’ fourth quarter and full year 2023 conference call. I’m Jennifer Beeman, Director of Communications and Investor Relations for Metallus. Joining me today is Mike Williams, President and Chief Executive Officer; Kris Westbrooks, Executive Vice President and Chief Financial Officer; and Kevin Raketich, Executive Vice President and Chief Commercial Officer. You all should have received a copy of our press release, which was issued last night. During today’s conference call, we may make forward-looking statements as defined by the SEC. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in yesterday’s release. Please refer to our SEC filings including our most recent Form 10-K and Form 10-Q and the list of factors included in our earnings release, all of which are available on the Metallus website. Where non-GAAP financial information is referenced, additional details and reconciliations to its GAAP equivalent are also included in the earnings release. With that, I’d like to turn the call over to Mike. Mike?

Thank you, Jennifer, and I appreciate everyone joining us this morning. First, let me begin by welcoming you to our first call as Metallus. Our exciting brand change reflects our expertise in high performance specialty metals and we believe this distinguishes us in the marketplace. As Metallus, we will continue to serve our valued customers and pursue growth in our established markets and beyond. As we embark on this new chapter, we remain committed to our core values and unwavering commitment to safety, quality, collaboration and the well being of our employees. Turning to our financial performance in 2023, our teams diligently pursued our strategic imperatives with a strong focus on targeted markets, particularly the aerospace and defense end market. This strategic focus significantly contributed to our profitability, supported by a solid pricing environment. Additionally, we continue to return capital to shareholders via our share repurchase program while maintaining a strong balance sheet. Safety remains a fundamental priority at Metallus. Over the past year, we have kept you informed about our continuous safety efforts, investing approximately $10 million in 2023 towards safety enhancements. This includes an important investment in a comprehensive company-wide safety training program with a specific emphasis on eliminating potential serious injuries. Looking ahead to 2024, our commitment to safety remains firm. We are building a safety culture that is achieved through clearly defined roles, responsibilities and objectives. Our goal is to instill [ph] everyday safety practices to ensure that every employee ends their workday free from injury or incidents. Turning to the results, as expected, fourth quarter net sales declined 7% sequentially as a result of lower shipments as well as lower scrap and alloy prices. On a full year basis, net sales increased 2%, largely driven by an increase in base sales prices. Shipments adjusted EBITDA…

Thanks, Mike. Good morning, and thank you all for joining our earnings call. We’re proud of our team’s accomplishments in 2023. Specifically, the organization advanced our safety management system in a positive manner, increased our participation in the high growth aerospace and defense market, and made important investments in our manufacturing facilities that will benefit future years. These accomplishments were achieved while continuing to return capital to shareholders and maintaining a strong balance sheet. Thanks to all of our employees, customers and suppliers who helped us achieve our objectives last year. Turning now to our full year 2023 financial results. Net sales totaled $1.4 billion in the year, an increase of $32.5 million or 2% from 2022. Net income was $69.4 million, or $1.47 per diluted share. Excluding certain items such as insurance recovery income and pension remeasurement losses, adjusted net income was $89.8 million in 2023, or $1.91 per diluted share. Additionally, adjusted EBITDA was $169 million for the year. As it relates to the insurance recovery process associated with the unplanned downtime in 2022, the claims process is now complete. In 2023, we recognized $31.3 million of insurance recoveries, of which $20 million was recognized in the fourth quarter. In total, the company recognized $64.3 million of insurance recoveries over the past two years. These cash recoveries have and will be used to reinvest in the business as well as return capital to shareholders via our share repurchase program. Now, turning to the fourth quarter of 2023 financial results. Net sales totaled $328.1 million with net income of $1.3 million or $0.03 per diluted share. Comparatively, sequential third quarter of 2023 net sales were $354.2 million with net income of $24.8 million or $0.51 per diluted share. Net sales in the fourth quarter of 2022 were $245.4 million…

Thank you. [Operator Instructions] Your first question comes from the line of John Franzreb from Sidoti. Please go ahead.

Good morning, everyone, and thanks for taking the questions. I’d like to start with the fourth quarter. Could you provide a little bit of color on why the reconstructed industrial segment was down so much sequentially? Can you give us maybe the layer of depth of what was going on in demand profile?

Sure, John. Thanks for asking the question. Predominantly, where we’re seeing – slowdown is in the distribution channels to service the industrial market. Our direct OEM business was pretty steady. The distribution – if you look at the number of days of inventory or months of inventory, they’re high compared to the historical average. So typically what we see with these cycles like this is the distributors will work the inventory off and then you’ll start to see the volume activity return at more normal rates. The other aspect that we saw – is that we saw some price deterioration in certain competitors, chasing some volume purchases for lower prices, and we chose not to participate in that activity.

Fair enough. Well, I got a bunch of questions, but I think I’m going to shift gears here to the aerospace and defense segment. Can you just provide some context? How much of artillery business did you actually finish 2023 in total revenue? Maybe context to how the margin contribution of that business is relative to the rest of the other end markets and also about capacity currently in production of the artillery business. And there’s a lot there.

I can give you some color there, but I do have to be forthright and say, there is some confidentiality between this partnership with the U.S. army. So we have to be very careful about what information we share and what we don’t share. What I will tell you is the majority of our aerospace and defense sales is around defense and predominantly artillery shells. Actually, it’s not the shell itself, it’s the warhead that we’re manufacturing, very complex, difficult to manufactured specialty grades to service those products. In regards to the capacity, the funding that the federal government or the U.S. Army Department of Defense is providing is really for us to debottleneck our operations from rolling through finishing, to be able to make more of these very complex, difficult grades of manufacture. So it’s purely – I use the word investment to debottleneck to get the capacity to meet the supply chain demand to satisfy the U.S. Army’s defense strategy long-term.

Okay, so it’s fair to say you’re at capacity now. We shouldn’t assume a sizable growth in that business in 2024. Is that what I’m hearing?

Again, if you look – on the call, when you look, Kris provided the statistics that the percent of growth that we’ve seen around the defense products and what our full run rate for 2024 is expected to be, the $60 million in additional revenue, will not occur until we get the investments made, the assets in place or upgraded assets to get the debottlenecking, which we are seeing would happen at the end of 2025 as those assets ramp up.

Perfect. And I guess one last question and I’ll get back into queue. Given the slow start that you expect for the year, what are your thoughts about hitting your targeted melt rate of 80% to 84%? Is that something that’s still achievable in 2024? Or has that been maybe pushed to the right given current conditions?

I think it’s achievable. Our assets are in really good shape. Our workforce has been well trained. It’s just that right now, commercially, the demand is not there for us. We could run at that rate right now, if the demand was there. Our utilization rate is really aligned to customer demand.

Okay, thanks. I’ll get back into queue.Thanks for taking the questions.

Thanks, John.

Your next question comes from the line of Phil Gibbs from KeyBanc Capital Markets. Please go ahead.

Hey, good morning.

Good morning, Phil.

Can you talk a little bit about the CapEx budget this year, the $60 million? I think you alluded to the safety expenditures perhaps being somewhat equivalent to the 2023 spend. But maybe break out what’s become core and then maybe some of the growth investments that you’re making in the business.

Sure. So our CapEx plan for this year around – safeties around is actually less than last year, because of the investment, the significant investment we made last year. So it’s about probably half of what we spent last year around focus on safety. There’s some modest sustainability investments that we’re making to achieve our ongoing sustainability targets. I think majority around 30 is about maintenance CapEx, and then the rest is really targeted to growth in regards to lowering manufacturing costs, improving yields, improving quality, improving productivity. That’s where the remainder of the balance of the CapEx is focused towards.

Thank you. And then I wanted to ask a question on the retroactive pricing adjustments. Pretty heavy in the fourth quarter, I think maybe even a little bit heavier than you experienced in the third quarter. Is the majority of that first question in the mobile business? And then secondly, what is the outlook for mobile in 2024? So firstly on the retroactive adjustments, and then secondly, just on the demand outlook.

Sure. Yes. I mean the retroactive pricing predominantly is over with there is – I think there’s one other customer out there that we’re still engaged, but it’s pretty small in nature. Then we do have the second quarter agreements that we’re in negotiation right now. But again, as we said in our outlook, we basically expect pricing to be flat year-over-year. We do – from an automotive perspective, it’s pretty steady. I would say that most of the impact in the fourth quarter was around the strike effect for the several weeks that they were out, but we see that pretty steady. You look at their forecasted build rates around 15.8 million units this year. The mix of that, we think is very positive because strong ice demand still is there. The EV programs are still launching, but at a slower rate. And then now there’s this big focus on hybrid, and we play in all three of those. So we think automotive is going to be good this year. I refrain from using the word great good because interest rates are high and what the customer demand seems to still be there, and we watch it closely.

Thank you.

Your next question comes from the line of Dave Storms from Stonegate Capital Markets. Please go ahead.

Good morning.

Good morning, Dave.

Just hoping we could start with some of the cost savings initiatives. I know you mentioned you’re about 75% of the way there. Should we think of the remainder of the cost savings initiatives on kind of a linear trajectory, or are there some plans there that would make this look a little lumpier?

Actually, I would say it’s fairly linear because I would say most of the majority of the remaining – to achieve the remaining target is tied to these CapEx investments that we’re making that will materialize by the end of this year. Now, we have other efforts around productivity and cost of quality reduction. That’s more – I guess that’s more hard work, not so much CapEx investment. So we’re working – that will continue to work throughout this year. I think majority of the remaining savings is coming out of these investments, these large CapEx investments for us.

Understood. Thank you. And then just you kind of just touched on it, but with the remainder of the order book, should we expect maybe hitting that 70% goal by next quarter? Is this kind of a waiting game for the overall inventory to decline? How should we be thinking about that?

Yes. So the way I kind of describe it, Dave is, there’s higher levels of inventory in the supply chain, specifically in the distribution channels. We’ve been here before over many decades of being in this industry. I’d say we’re approximately about a month over inventory in the months of supply. That will work off their short lead time so customers can get what they – distribution customers can get what they want, when they need it within a very short lead time. And they’ll work those inventories down. We already see that starting to happen. So as they work that down, they’ll go back to what I would say are their historical ordering patterns and demand requirements going forward.

That’s very helpful. Thank you for taking my questions.

Thank you, Dave.

[Operator Instructions] Your next question comes from the line of John Franzreb from Sidoti. Please go ahead.

Yes. Just a couple of quick follow-ups. I’m curious about the decision to take the targeted pre-negotiated pricing level from 70% down to 65%. What was behind that decision?

Again there was – in the fourth quarter, there was some price pressure out there for the spot market, which then was trying to be rolled into annual agreements, and we chose not to chase those declining prices. So we ended up with 65% under contract, and the remainder will be spot pricing through the rest of the year.

Okay. Got it. And but year – about a year ago today, there was discussion about being more active in the M&A market. I believe the original timeline was 12 months to 18 months. Can you give us maybe an update on that process? Should we expect something in the coming six months? Any kind of additional color be helpful.

Yes. Like I can – my crystal ball doesn’t forecast what’s going to happen in regards to M&A activity. What we did do is we have an individual that’s primarily focused on M&A. We’ve built the tools and the processes for the analytics required to assess M&A targets. We have – we’re involved in pipelines of getting the published opportunities of certain possibilities that are aligned with our strategic comparatives, which is really focused around expanding our aerospace and defense capability or products. I can’t give you a firm commitment of when it’s going to happen, but I will tell you that it will be strategic aligned with our strategic imperatives. It’ll be aligned with our footprint. It’ll be aligned with the end markets that we want to grow in with, particularly specialty metals, and it will not threaten our balance sheet in any way.

Okay. You took my follow-up to that. I was curious how willing you are to lever up to do an acquisition.

Well, John, you’ve been – you and I have been talking for about a year now. I think you got an idea of the type of conservative person I am because I constantly talk about protecting our strong balance sheet.

Okay. Fair enough. Thanks for taking the follow-ups.

Thanks, John.

We have no further questions in our queue at this time. I will now turn the call back over to Jennifer Beeman for closing remarks.

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

This concludes today’s conference call. Thank you for your participation. And you may now disconnect.