Hello! And thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Metallus, Inc. Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. [Operator Instructions]. I would now like to turn the conference over to Jennifer Beeman. Please go ahead.

Good morning. And welcome to Metallus' second quarter 2024 conference call. I'm Jennifer Beeman, Director of Communications and Investor Relations for Metallus. Joining me today is Mike Williams, President and Chief Executive Officer; Kris Westbrooks, Executive Vice President and Chief Financial Officer; and Kevin Raketich, Executive Vice President and Chief Commercial Officer. You all should have received a copy of our press release, which was issued last night. During today's conference call, we may make forward-looking statements as defined by the SEC. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in yesterday's release. Please refer to our SEC filings, including our most recent Form 10-K and Form 10-Q, and the list of factors included in our earnings release, all of which are available on the Metallus website. Where non-GAAP financial information is referenced, additional details and reconciliations to its GAAP equivalent are also included in the release. With that, I'd like to turn the call over to Mike. Mike.

Good morning, everyone. And thank you for joining us. During the second quarter, we focused on what we can control to mitigate the impact of challenged market conditions. Our shipments to the aerospace and defense end market remained strong, and our automotive shipments were steady. Unfortunately, the sluggishness in the industrial and energy end markets seen in the first quarter extended into the second quarter. This weakness is attributed to softening global economic conditions, elevated imports, customer and supply chain inventory positions, as well as scrap price uncertainty. Despite some unfavorable end markets, we remain committed to managing what's in our control by aligning our production with demand, carefully managing our working capital and costs, while investing in our assets and employees for future growth. During the quarter, we maintained positive profitability and operating cash flow, a testament to our business model and disciplined financial management. I am confident that as market dynamics evolve, we are well positioned to take advantage of the demand recovery and anticipate improved profitability. At Metallus, safety is not just a priority, it's a core value. We believe that a safe workplace is a productive and successful one. We have established a comprehensive safety strategy and have set ambitious goals to ensure the well-being of our employees, contractors, and guests. We have made considerable progress in executing our safety strategy, which involves enhancing our safety processes and systems, as well as our physical environment, our cultural environment, and our safety capabilities with a strong focus on serious injury and fatality prevention. In the second half of the year, we will continue executing our safety strategy with a focus on comprehensive pre-job safety planning and inspections, maturing our serious injury and fatality prevention programs, continuing to invest in our physical equipment and equipment guarding upgrades, and…

Thanks, Mike. Good morning, and thank you for joining Metallus' second quarter of 2024 earnings call. Throughout the quarter, we continued to navigate challenging market conditions, demonstrating the resilience of our business model and the strength of our team. From a financial perspective, second quarter net sales totaled $294.7 million, a sequential decrease of 8%. The decline in net sales was primarily due to lower shipments, unfavorable price mix, and a 12% market-driven decline in the average raw material surcharge revenue per ton as a result of lower scrap prices. Net income in the second quarter was $4.6 million, or $0.10 per diluted share. Comparatively, sequential first quarter net sales were $321.6 million, with net income of $24 million, or $0.52 per diluted share. Net sales in last year's second quarter were $356.6 million, with net income of $28.9 million, or $0.62 per diluted share. On an adjusted basis, net income in the second quarter of 2024 was $6.7 million, or $0.15 per diluted share. Comparatively, first quarter adjusted net income was $26.1 million, or $0.56 per diluted share. Adjusted net income in the second quarter of last year was $27.6 million, or $0.60 per diluted share. Adjusted EBITDA was $19.9 million in the second quarter of 2024, a sequential decline primarily driven by the impact from lower melt utilization as we balance production with demand. Other drivers of the sequential decline in adjusted EBITDA were modestly lower shipments, a reduction in price mix, and a market-driven decrease in the raw material scrap surcharge environment. Turning now to the details of financial results in the second quarter. Shipments were 150,100 tons in the quarter, a decrease of 5,100 tons, or 3%, compared with the first quarter. In the industrial end market, shipments totaled 56,400 tons in the quarter, a sequential…

[Operator Instructions] Our first question will come from the line of John Franzreb with Sidoti. Please go ahead.

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

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

Mike, if I could add one thing.

Sure.

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

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

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

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

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

Okay.

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

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

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

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

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

All right. Thanks John.

Our next question comes from the line of Dave Storms with Stonegate. Please go ahead.

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

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

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

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

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

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

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

All right. Thank you.

[Operator Instructions] Our next question will come from the line of Phil Gibbs with Keybanc Capital Markets. Please go ahead.

Hey, good morning.

Good morning.

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

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

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

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

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

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

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

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

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

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

Thank you, Phil.

Our next question is a follow-up from the line of John Franzreb with Sidoti. Please go ahead.

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

Do you have a breakdown of that?

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

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

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

Okay. Thank you for taking my follow-ups.

No problem.

Thanks John.

And that will conclude our question-and-answer session today. I'll turn the call back to Jennifer Beeman for closing remarks.

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

Thank you all for joining. You may now disconnect.