Metallus Inc. Q3 FY2024 earnings call

Key Points

• Navigated challenging market conditions, with third quarter net sales down 23% due to lower shipments.
• Maintained and invested in world-class assets for safety, efficiency, quality. Invested over $17 million in capital expenditures during the quarter.
• Completed annual maintenance shutdown at Faircrest facility with no serious safety incidents; initiated Safety Stand-Up program to focus on preventing injuries.
• End markets: Industrial shipments down 6% due to weak mining, ag, and distribution; rail sales slightly up but not offsetting declines; energy demand weak but expected to recover as inventories replenish; automotive shipments down 16% due to customer issues; aerospace and defense shipments expected to increase in Q4 and 2025, with goal to grow sales to over $250 million by 2026.
• Capital investments: Automated grinding line at Harrison to be operational by end of 2024; inline saws at Harrison in Q1 2025; Bloom Reheat furnace at Faircrest to serve DoD; thermal treatment roller furnace at Gambrinus to double heat treating capacity for defense products. Received government funding for these projects.
• Repurchased 4.2% of shares outstanding in 2024 to date.

Third quarter net sales totaled $227.2 million, a sequential decrease of 23%. Shipments were 119,900 tons in the quarter, a decrease of 30,200 tons, or 20%, compared with the second quarter. Year-to-date through September, net sales were $843.5 million, a decline of 18% from the prior year. Third quarter net loss was $5.9 million, or $0.13 per diluted share. Adjusted EBITDA was $6.1 million in the third quarter. Year-to-date adjusted EBITDA was $69.4 million, and operating cash flow was $26.4 million.

Forward-Looking

• Fourth quarter shipments expected to increase slightly on sequential basis, driven by higher aerospace and defense shipments. Order books support shipment levels between second and third quarter levels, but holiday schedules may impact timing.
• Fourth quarter CapEx expected to be ~$16 million, inclusive of ~$9 million supported by government funding. Anticipates fourth quarter adjusted EBITDA to modestly increase compared to third quarter.
• Remains cautiously optimistic with order book picking up in Q4 and early 2025, strong balance sheet, and active share repurchase program.

Risks

• Influx of SBQ and seamless mechanical tubing imports exerting pricing pressure, especially in industrial and energy sectors. China's share of U.S. seamless mechanical tubing market has grown from 6% in 2021 to 16% in 2024.
• Market demand volatility, including softness in automotive, energy, and some industrial segments.
• Trade uncertainties, as increased Section 301 tariffs could impact import pressures.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.