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Operator
Thank you for standing by. My name is Mark and I will be your conference operator today. At this time, I would like to welcome everyone to Metallus Inc. First Quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session. If you would like to ask a question, simply press star followed by a number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Jennifer Beeman. Please go ahead.
Jennifer Beeman
Good morning and welcome to Metallus' First 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, Chris Westbrooks, Executive Vice President and Chief Financial Officer, and Kevin Rakitic, 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 10K and Form 10Q 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?
Mike
Good morning and thank you for joining us today. Before I cover our performance in the first quarter, I wanted to reflect on the progress we've made over the past several years. If you've been following us, you know that we have significantly transformed our business with a focus on through-cycle profitability and positive operating cash flow in all business cycles. We recognize the need to build a model capable of withstanding volatility, whether substantial or minor, in any of our markets or the broader macroeconomic landscape. Our performance in the first quarter of 2024 is evidence that our efforts have proven effective. Given the sequential increase in profitability and continued solid cash generation, despite the softer demand environment, primarily from our industrial distribution and energy customers, additionally, we continue to return capital to shareholders via our share repurchase program. In fact, our board just authorized an additional $100 million share repurchase program, which reinforces our board's confidence in our ability to generate through-cycle profitability and positive operating cash flow while maintaining a strong balance sheet. Our efforts to further diversify our portfolio are also yielding results as we continue to identify new opportunities for growth in the aerospace and defense and market, where we have also won significant programs and continue to build our portfolio of offerings. Turning to safety, our mission remains firm to be recognized as having the safest specialty metals operation in the world. Our goal is for all employees to finish each and every day injury and incident free. In 2024, we anticipate investing approximately $7 million toward continued safety training and equipment enhancements. In fact, our dedicated focus on preventing potential serious injuries has yielded positive results, with our team completing corrective actions related to near misincidence in a timely manner. This is a direct result of effective investigations and enhanced root cause analysis. Additionally, several key initiatives were launched in the first quarter related to improving our safety governance processes, as well as standardizing enhancing the lockout, tagout, tryout program. We continue to build our capabilities through technical and leadership training, including hazardous identification skill building training. We recently held our annual iron shield competition, which invites our employees and crews to submit innovative safety projects that aim to improve the well-being of our workforce. In total, over 100 projects were submitted for consideration this year. The winning project prioritized safety and efficiency at our quench and temper lines in our Gambrianas facility. The team utilized video technology for furnace pre-inspections prior to plant colleges. By affixing a video camera to an in-process material, the camera captured images of the inner workings of the furnace, enabling real-time analysis of asset conditions, thus reducing the possibility of failures. Not only does this process eliminate unplanned downtime and reduce costly maintenance, but it enables our teams to safely adjust our operations as needed. I congratulate this cross-functional team for their creativity, collaboration, and follow through. Turning to the financial results, first quarter net sales in shipments saw a slight sequential decline of 2% with pockets of strength, consistency, and some softness that I will discuss shortly. Our sequential profitability improvement was driven by strong product mix and lower manufacturing costs. In the first quarter, our metal utilization improved to 72% from 58% in the fourth quarter as we balanced our production to changing demand and year-end outages. Moving to our industrial end market, shipments increased by 4% compared with the prior quarter. Shipments to both industrial OEM and distribution customers improved in the fourth quarter but remained below optimal levels as an inventory correction persists among our distribution customers. We continue to maintain close contact with our customers to support their needs in this environment. Automotive shipments were relatively consistent when compared with the fourth quarter. We continue to experience a steady pull from our diversified automotive customers for both long products and manufactured components. Through our concentrated efforts, growth in our aerospace and defense market continues. Net sales increased by 5% sequentially and 166% on a -over-year basis. We currently participate in over 20 different defense-related programs in a variety of applications such as missiles, bombs, artillery, gun barrels, and ground support equipment. We are currently providing value-added processing services for multi-metals, including stainless and other high-alloy steels. We also recently began new trials of titanium processing for select defense and high-value oil and gas and renewable energy applications. Thanks to the capabilities of our rolling mill and two-making assets, employee metallurgical expertise, and comprehensive knowledge of material processing and conversion, we have the ability to streamline supply chain lead times by several months. This enables us to expedite the integration of essential materials into the defense supply chain, ensuring timely availability when needed most. We recently had the honor of hosting members of the U.S. Air Force along with an important defense customer to discuss process innovations for weapons systems critical to national defense. We are grateful for this collaboration as we continue to support the Department of Defense's mission. Our energy customers continue to demonstrate strict capital discipline as North American oil and gas demand remains challenged for the foreseeable future. We continue to engage with our customers in this important end market as our products are critical to their many demanding applications. In terms of our strategic comparatives, we remain on track to achieve our targeted $80 million of profitability improvements expected between 2022 and 2026. To date, we have achieved approximately 75% of our targeted profitability improvements with continued focus on manufacturing excellence as well as administrative process simplification. I want to thank our employees for their hard work, our customers for their enduring trust, our suppliers for their partnership, and our shareholders for their steadfast support. Now I would like to turn the call over to Chris.
Chris
Thanks, Mike. Good morning and thank you all for joining Metallus's first quarter of 2024 earnings call. I'm pleased that we started off the year with a sequential improvement in profitability and strong operating cash flow. We also continue to invest in the business, returning capital to shareholders through our share repurchase program while maintaining a strong balance sheet. During the first quarter, net sales totaled $321.6 million and net income was $24 million, or $0.52 per diluted share. Comparatively, sequential fourth quarter of 2023 net sales were $328.1 million with net income of $1.3 million, or $0.03 per diluted share. Net sales in last year's first quarter were $323.5 million with net income of $14.4 million, or $0.30 per diluted share. On an adjusted basis, the company reported net income in the first quarter of 2024 of $26.1 million, or $0.56 per diluted share. Comparatively, fourth quarter adjusted net income was $16.5 million, or $0.36 per diluted share. Adjusted income in the first quarter of last year was $20.8 million, or $0.44 per diluted share. Adjusted EBITDA was $43.4 million in the first quarter, a $7.7 million sequential increase, resulting in a .5% adjusted EBITDA margin for the quarter. First quarter performance exceeded guidance driven by higher than planned shipments of aerospace and defense products with a strong price mix. Additionally, the first quarter benefited from sequentially higher melt utilization, lower shutdown maintenance costs, and a market driven increase in the raw material scrap surcharge environment. Partially offsetting these items were $11 million of full year 2023 retroactive price increases on automotive manufactured components recognized during the fourth quarter. Compared with adjusted EBITDA of $36 million in the first quarter of last year, adjusted EBITDA increased by $7.4 million in the quarter. Turning now to the details of the financial results in the first quarter. Shipments were 155,200 tons in the quarter, a decrease of 2,400 tons, or 2%, compared with the fourth quarter. In the industrial end market, shipments totaled 60,800 tons in the first quarter, a sequential increase of 2,100 tons, or 4%. First quarter shipments to industrial, original equipment, and distribution customers both improved on a sequential basis. However, industrial distribution shipments remained soft given ongoing customer inventory rebalancing. Automotive customer shipments were 66,500 tons in the first quarter, relatively in line with the fourth quarter as automotive demand remained steady. In aerospace and defense, shipments totaled 16,500 tons in the quarter, a sequential decrease of 2,000 tons, or 11%. With record fourth quarter of 2023 aerospace and defense shipments, first quarter shipments moderated a bit while demand continued to remain strong. Compared to the prior year first quarter, aerospace and defense shipments more than doubled. Shipments to energy customers totaled 11,400 tons in the first quarter, a sequential decrease of 1,600 tons, or 12%, as energy customer demand remained soft in the first quarter. Compared to the first quarter of last year, total shipments in the quarter decreased by 10% as a result of lower automotive, energy, and industrial shipments, partially offset by higher aerospace and defense shipments. Net sales of $321.6 million in the first quarter decreased 2% sequentially. The decline in net sales was primarily due to slightly lower shipments in the previously discussed retroactive pricing recognized in the fourth quarter of 2023. Partially offsetting these items were sales of higher mixed aerospace and defense products, as well as a market-driven 6% increase in average material surcharge revenue per ton as a result of higher scrap prices. Turning now to manufacturing. As expected, manufacturing costs decreased sequentially by approximately $10 million in the first quarter. The sequential decrease in manufacturing costs was a result of improved cost absorption from increased production levels combined with lower annual shutdown maintenance costs. The melt utilization rate was 72% in the first quarter compared to 58% in the fourth quarter of 2023. Now switching gears to pensions. In the first quarter, the company contributed $28.4 million to its pension plans, of which most was related to the required bargaining plan contributions. We expect to make required pension contributions of approximately $6 million per quarter for the remainder of 2024, resulting in total required pension contributions of approximately $45 million this year. At the end of March, the company's pension plans were funded at approximately 80% on an accounting basis. As it relates to the salary pension plan, at the end of March, the previously frozen and terminated salary plan was 104% funded and its liabilities totaled $122 million. During the second quarter, we plan to transfer the salary plan's assets and liabilities to a highly rated insurance company. It's important to note that the gross benefits payable to recipients will remain the same as a result of this transaction. Additionally, the group annuity contract is an irrevocable commitment by the insurance company to make annuity payments covered under the contract. This upcoming salary plan annuitization action follows a similar 2022 bargaining plan annuitization of $256 million. Both annuitizations represent significant steps towards further strengthening our balance sheet and de-risking our legacy pension plans. Excluding the salary plan, the company's remaining pension liabilities have declined to approximately $550 million at the end of March compared to $1.3 billion of total pension liabilities at the end of 2021. Moving on to cash flow and liquidity. During the first quarter, operating cash flow is $33.4 million driven by profitability and the receipt of $20 million of previously recognized insurance recoveries. This marks the company's 20th consecutive quarter of generating positive operating cash flow. Capital expenditures totaled $17.4 million in the first quarter and we continue to estimate full year capbacks to be approximately $60 million. Planned investments this year include approximately $20 million to support the automated grinding and finishing line at our Harrison facility, an automated inline saw also at our Harrison facility, and two new automotive manufactured component lines at our facility in southwest Ohio. Additionally, maintenance, tooling, and safety projects represent the remainder of the 2024 capex budget. Regarding the government funding of up to $99 million that we announced earlier this year, our team is making progress on the balloon reheat furnace investment to support the U.S. Army's mission of ramping up artillery shell production. We expect approximately $45 million of funding to be received this year, with the majority of that amount to be received in the second half of the year. Spending on the balloon reheat furnace investment will generally follow the receipt of the government funding. An overview of the anticipated accounting treatment for the government's funding is available on our recently filed form 10Q. We're targeting late 2025 for the new asset to be operational and look forward to providing updates on this significant growth project in future quarters. Switching gears now to shareholder return activities. During the first quarter of 2024, the company repurchased 212,000 common shares at a total cost of $4.4 million. Since the beginning of 2022 through May 6, 2024, the company repurchased $92.9 million of its common stock using available cash on hand. These repurchases represent 74% previous board authorizations. When combined with convertible note repurchases, the company's repurchase activities have resulted in a significant 17% reduction in the company's diluted shares outstanding since the end of 2021. Given the company's progress in its common share repurchase activities, earlier this week, the board of directors authorized an additional $100 million share repurchase program. In total, as of May 6, the company has $132.1 million remaining under its authorized share repurchase program. We are committed to exhausting this authorization as we progress forward as supported by the continued strength of our balance sheet and cash flow generation. At the end of the first quarter of 2024, the company's cash and cash equivalents were $278.1 million and total liquidity was $549 million. We expect the strength of the company's balance sheet combined with the expected through cycle profitability and positive operating cash flow, provide us the opportunity to continue to execute our capital allocation strategy. This includes investing in profitable growth, maintaining a strong balance sheet, and returning capital to shareholders through continued share repurchases. Turning now to the second quarter of 2024 outlook. Second quarter shipments are expected to be similar to the first quarter. From an end market perspective, we anticipate second quarter automotive and industrial shipments to remain relatively steady with continued softness and distribution and energy demands. While aerospace and defense demand remains strong, we expect a modest sequential decline in second quarter aerospace and defense shipments based on customer order timing. With lead time fairly short, we continue to target short lead time opportunities in the spot market to support our customers' needs. Base price per ton is anticipated to remain solid in the second quarter while product mix is expected to be less favorable in the first quarter. Additionally, surcharge revenue per ton is expected to sequentially decline in the second quarter due to a lower average number one Bushling scrap index. Operationally, second quarter melt utilization is expected to be sequentially lower than the first quarter. During the second quarter, we're planning to take one week of downtime to install new technology on our electric arc furnace to drive higher levels of asset reliability and safety performance. Additionally, the company continues to balance production with demand. Given these elements, the company anticipates second quarter adjusted EVTA to be lower than the first quarter of 2024. To wrap up, thanks to all of our employees who work safely to help the company deliver a solid start to 2024. Thanks for your interest in Metallus. We would now like to open the call for questions.
Operator
We will now begin the question and answer session. If you have dialed in and would like to ask a question, simply press star and one on the telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when you're asking a question. Again, press star one to join the queue. Your first question comes from the line of John Sreb with the OTA Company. Please go ahead.
John Sreb
Good morning everyone and thanks for taking the questions. I'd like to start with some of your end market expectations on a go-forward basis. Two things I'm curious about. One, in the automotive side of the business, it seems like production rates are actually gradually improving except for maybe at one large OEM. I'm curious if you're overexposed at one large OEM that may find itself excess inventory.
Mike
I don't believe we are, John. We are heavily focused on our working capital and we produce to the orders that we get. So if they're ordering it, we're going to make it and ship it, but we're not doing any hedging on putting inventory on the ground for any automotive customer.
John Sreb
Okay, fair enough. On the industrial side, you referenced that the distributors continue to dwindle down on inventory. Any sense when we're going to reach equilibrium and that trend reverses?
Mike
Well, we just got the MSCI shipment numbers for the month of March and we've had them for a few months. If you look at the bar products, it's about three and a half months of inventory in the distribution supply chain and on the seamless mechanical tubing, it's about eight months. So those are historically, tubing is probably lower than its historical average, but the bar products are up. We like to see that around 2.8 months to three. I believe it's going to take quarter or two to work that off.
John Sreb
Okay, makes sense. On the quarter itself, SG&A was up 15% year on year. I recognize in part that's due to the rebranding. I wonder if you could maybe, how much of the rebranding was that increase on a -over-year basis? Maybe what we should be thinking about is ongoing SG&A numbers and go-forward basis.
Mike
I'll give you my two cents and then I'll turn it over to Chris. From the rebranding perspective, it's a modest increase on our SG&A. We have an implementation plan on rebranding from signs and et cetera, et cetera, et cetera, but I don't think that's the major driver of the increase. Chris, do you have any further insight? There's
Chris
really two components. It's and begin to be realized in the beginning of the year. Then the other component is stock-based compensation. There's a higher level of awards out there that are driving expense and we do not eliminate that for our non-GAAP reporting that's included. To Mike's point, the rebranding, it's a modest cost and most of it's behind us at this point.
John Sreb
Okay. I guess one last question I'll get back into queue. You mentioned that you're about 75% done in your profit enhancement programs. I'm just curious about the remaining 25%, what still remains to be done and what's the general thoughts on the timeline on that?
Mike
Yes, that remaining 25% is really going to be accomplished through the investments that we are making with the automatic grinding line, the inline saw, other investments that we're making. We announced that we're going to take some downtime for the EAF. As those investments are constructed, commissioned, we expect that to happen throughout this year and probably the first half of next year before we'll see the full run rate realization of the remaining 25%. But it's all centered around manufacturing improvements.
Chris
One additional piece we're working on is our IT transformation. That's going to drive some efficiency as well. We're about midway through that. We'll do more lives later this year and next year. Once that's complete, we believe that that'll drive some additional cost reduction from an efficiency of our historical legacy systems.
John Sreb
Great. Thanks for taking my questions. I'll get back into queue.
Operator
Thanks,
Phil
John.
Operator
Your next question comes from the line of Philip Gibbs with KeyBank Capital Markets. Please go ahead.
Philip Gibbs
Hey, good morning. Morning, Phil. Hey, Chris. Based on your commentary, are we to take away that there were no further retroactive pricing adjustments in the first quarter in automotive components? It was just a rich mix in the quarter?
Mike
I think that's pretty spot on, Phil. The retro pricing that hit in Q4, the average pricing negotiating will continue throughout 2024. We had a richer mix coming out of higher manufactured component shipments to the
Phil
automotive and market. Okay. Then on
Philip Gibbs
the share repurchase, you gave a lot of numbers. What's the implied shares repurchase quarter to date? You gave a through early May number. April and through early May, what's that number?
Chris
Yes, it's around 100,000 shares in that range. The month of March, if you look at the queue, we bought back about 3 million. April is a similar amount and a bit more in May. 3.9, believe, is what we purchased in dollar terms a quarter to date in Q2.
Philip Gibbs
Your current diluted share count is somewhere around 45.5? Is that correct?
Phil
Sorry, Q1 share count. Let me just pull it up real quick. I think you're close.
Chris
Let me take a look at that, Phil. Similar to Q1, I would imagine the main adjustments is just ongoing share repurchases and then any equity comp adjustments that you'd have from that. Q1 was 46.8 was the diluted share count.
Philip Gibbs
Okay. I might be a little high then on that. Okay. I don't think I took into account the stock compensation as a partial offset. Then the networking capital outlook for the second quarter or just maybe the balance of the year, how are you thinking about networking capital?
Chris
We continue to manage that closely with Q1. The receivables and payables tend to offset with a lower level of production in Q2. We're going to be buying a bit less, similar level of shipments in Q2, but a little bit lesser mix. Receivables could be down a little bit and then from an inventory standpoint, you tend to see that trend down a little bit as you produce less as well. Some puts and takes there, but not a significant move one way or the other. It's really profitability. The other things we have going on Q2 is we do have tax payments that have gone out in April. We talked about that in the 10Q. It's around $21 million and then about 6 million of pension contributions in the quarter as well.
Philip Gibbs
Did you not have any tax payments in the first quarter then? Was that part of the timing there? Very
Phil
minimal
Philip Gibbs
payments in Q1. Okay. Then lastly for me, just on the cost side, I know it's difficult for us to model it based on different mix points that you have. Generally speaking though, when you have less utilized mill as you're talking about in the second quarter, does that lead to some absorption issues relative to Q1 or is that not something we're going to see until Q3 because of inventory?
Mike
No, you're going to see it in Q2 and potentially whatever is left in inventory or on a balance sheet, you may see a little bit of that in Q3. But yeah, cost will go up because our utilization rate is aligned with the market demands from our customers.
Phil
Thank you guys. Appreciate it. Hey, thanks Phil. Thank you.
Operator
Your next question comes from the line of Dave Storms with StoneGate Securities. Please go ahead.
Dave Storms
Good morning. This is Justin sitting in for Dave.
Phil
Hey Justin.
Dave Storms
How are you guys this morning? We're
Phil
hanging in there.
Dave Storms
We just wanted to see what kind of melt utilization level should we expect for the rest of 2024 and then what's kind of the reliance on third-party melt utilization?
Mike
Very little reliance on third-party melt utilization. Hard to predict the rest of the remaining part of 2024 on a melt utilization standpoint. With lead times so short, our visibility is short. So we stay in alignment with our customers. We're doing the best to serve, providing the best service and the best quality and we'll continue to do that. If the market demands improve, so will utilization rate.
Dave Storms
Thanks for that. And then I guess kind of order book. Do you have any kind of visibility on your order book for the remainder of the year and or kind of price mix?
Mike
From my perspective, I think our prices are going to remain steady. You know, 65% of our order book is contractual. So those prices are set for the remainder of the year. The spot market has softened a little bit, but we're not seeing a lot of spot business right now.
Phil
Thanks guys, that's it for me. All right, thank you.
Operator
Again, if you would like to ask a question, simply press star one on your telephone keypad to raise your hand and join the queue. There are no questions. There are no questions at this time. I will now turn the conference back over to Jennifer Beeman for closing remarks.
Jennifer Beeman
Thank you all for joining today and that concludes our call and thank you again for your support of
Operator
Metellus. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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