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. [Operator Instructions]. At this time, I would like to turn the conference over to Jennifer Beeman, Director of Communications and Investor Relations. Please go ahead.

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; 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 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. With that, I'd like to turn the call over to Mike. Mike?

Good morning and thank you for joining us today. Throughout the quarter, we continued 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 percent, primarily due to lower shipments across our markets. During the third quarter, we continued to maintain and invest in our world-class assets aimed at improving safety, efficiency, and quality. Additionally, we continued 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. 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. 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. 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 teams. The required maintenance, which took us 12.5 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 incidents. 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 [ph] program, where we put an even sharper focus on…

Good morning and thank you for joining us today. Throughout the quarter, we continued 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 percent, primarily due to lower shipments across our markets. During the third quarter, we continued to maintain and invest in our world-class assets aimed at improving safety, efficiency, and quality. Additionally, we continued 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. 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. 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. 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 teams. The required maintenance, which took us 12.5 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 incidents. 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 [ph] program, where we put an even sharper focus on…

Thanks, Mike. 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 this year. 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 prices. 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. 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. 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 GAAP basis and $28.4 million on an adjusted basis. Additionally, year-to-date adjusted EBITDA was $69.4 million, and the company has generated $26.4 million of operating cash flow. Our previously communicated objective was to deliver sustainable profitability and cash flow in all business cycles, and 2024 is proving…

[Operator Instructions] We'll go first to John Franzreb at Sidoti and Company.

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. Has that mix played out or that demand played out as you expected? I know you certainly signaled that it was going to drop, but was it to that magnitude?

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. 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.

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?

No, that's a run rate number. 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. 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 increasing 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.

Makes sense. Plus, we don't want the bad guys to know. One of those questions...

John and Mike, sorry to interrupt. This is Kris 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.

Thanks for the clarification.

Thank you. Also, Kris, I appreciate that. One last question. I'll get 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?

I would not know because where our significant cost saving opportunities are coming is these investments. We commented in our earlier presentation about the automatic grinding line that's going to provide significant safety, cost reduction, efficiencies, improvements, as well as quality. We didn't really pull anything forward from Q1. We're pretty -- 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. 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.

Okay. Thank you, Mike. I'll go back to the queue.

Thanks, John.

We'll move next to Robert Lynch at Stonegate Capital Partners.

Hey, good morning, guys. I appreciate you taking my questions today. Can you provide me some more details on the current bidding environment in the aerospace and defense sectors and any significant trends you are observing in the macro space?

Well, I think as I said to John earlier, 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. And as I said, we are pursuing new programs in other areas within the defense end markets to continue to improve our participation in those markets, which we see strong, growing demand over the next several years.

Got you. 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?

Well, again, the biggest softness we see is really in the distribution that serves energy and the industrial end markets. 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 five out of six weeks, and that gives us a view that demand is 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, there's a lot of moving parts here. 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. I think that's it for me, and good luck in Q4.

Thanks, Robert.

And that concludes our Q&A session. I apologize. We do have a follow-up from Robert Lynch at Stonegate Capital Partners.

Apologize, guys. That was a mistake.

And a follow-up from John Franzreb at Sidoti and Company.

Yes, I guess relative to the change in mix as we start to look to 2026 and assume a normalized automotive market and a recovery in the energy market with the change of administration, how does that kind of an outlook reconcile with some of your long-term targets that you've kind of outlined, being utilization rates or adjusted EBITDA margins, return on capital? Do you think you'll 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&D 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 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 whatever cycle period of time, that's very positive for us.

Okay. Just wanted to check that out. Thank you, Mike. Appreciate it.

Sure. Thanks, John.

And that concludes our Q&A session. 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. You may now disconnect.