Metallus Inc.

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2025 Metallus, Inc. earnings 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. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. I would now like to turn the call over to Jennifer Beeman. Jennifer, please go ahead.

Good morning, and welcome to Metallus' third quarter 2025 conference call. I'm Jennifer Beeman, Director of Communications and Investor Relations for Metallus. Joining me today is Mike Williams, Chief Executive Officer, Chris Westbrooks, President and Chief Operating Officer John Zarenek, 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 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?

Good morning, and thank you for joining us today. I want to start with safety. Throughout the year, we've been dedicated to our mission of being recognized as having the safest specialty metals operation in the world. In line with this mission, we continue to make substantial investments in the safety of our people. We remain on track to spend $5 million to further enhance our safety management systems and critical equipment this year. To date in 2025, we've had zero serious injuries. These are events which are life threatening or life altering. We have also had a 15% reduction in days away and restricted work cases and a 34% reduction in lost and restricted work days compared to the same period a year ago. In October, we successfully completed our planned annual maintenance shutdown at the Faircrest facility. These shutdowns are highly coordinated efforts involving collaboration between our teams and external contractors. Over the course of nine days, we performed essential maintenance to ensure the 2026 reliability and performance of our melt shop assets. Most importantly, I'm proud that the Faircrest shutdown was completed without any serious safety incidents. As a reminder, we will see additional shutdown activities in our other facilities in the late fourth quarter. Customer feedback continues to reaffirm the strength of our service and quality. We recently wrapped up our annual customer survey, and I'm pleased that over 97% of respondents said they would recommend Metallus products to others, a testament to the exceptional work our teams deliver every day. As expected, the survey showed that most customers prefer buying steel made in the United States, and it's a key factor in their purchasing decision. We're seeing continued interest from both new and longstanding customers who are actively shifting toward domestic supply chain solutions. So far in 2025, we've successfully sold to over two dozen new customers, which will contribute to the future business growth. In addition, we saw a substantial year-over-year increase in our overall order backlog. Specifically, aerospace and defense backlog is up approximately 80% compared to a year ago. As we enter the final quarter of the year, we've begun our annual commercial contract negotiations. Our goal remains to secure approximately 70% of our long products business through annual agreements. While we're in the midst of negotiations, customer conversations have been encouraging for 2026. Now turning to business results for the third quarter. Despite shipments being down slightly from the second quarter, sales increased as a result of favorable product mix with continued expansion in the aerospace and defense end market. On a year-over-year basis, shipments in the third quarter improved by 36%, driven by broad-based improvements across all end markets. Our current lead times extend to late January for our SPQ bars and February for our seamless mechanical tubing products. Adjusted EBITDA rose sequentially to $29 million, driven by our growing participation in the aerospace and defense end market and stability across the other end markets. Additionally, higher levels of production during the quarter resulted in greater fixed cost leverage. Now let's cover some of the third quarter highlights of our specific end markets. Industrial shipments decreased slightly in the third quarter on a sequential basis. Distribution customer inventories have improved, but still remain lean and in line with demand. Several key customers have indicated plans to ramp up operations and are projecting stronger forecasts for 2026, while others remain cautious mostly monitoring year-end inventory levels. Automotive shipments increased slightly on a sequential basis. Key automotive customer demand was solid throughout the quarter, and we have not yet experienced any disruption due to global supply chain challenges. Energy shipments remain at reduced volumes on a sequential basis, with import levels declining and tightened enforcement of tariffs we are beginning to capture greater customer share for 2026. However, overall energy market conditions still remain subdued. Finally, higher shipments in aerospace and defense contributed to a favorable product mix this quarter. We continue to gain traction across both new and existing programs, all supporting our targeted annual A&D sales run rate of $250 million by mid-2026. In the quarter, we added several new customer opportunities for our specialty bar and tubing products for applications, including new munitions programs, gun barrels, and aerospace bearings. We also recently secured prototype orders with multiple customers that, once fully commercialized, will utilize Metallus's carbon and specialty alloys in newer warheads, and in rocket motor casings, these are applications where strength, efficiency, quality, and shorter lead times are critical. Today, Metallo supports several dozen defense programs, with growth coming from both traditional prime contractors and emerging industry producers. We are on track with the construction of the bloom reheat and roller furnaces. Both assets will increase our capability and optimize our throughput. We remain optimistic about the future in the growing aerospace and defense market. Turning to another bright spot, we are focused on growing our participation in the vacuum arc remount or VAR steel product line. We recently executed a long-term supply agreement with a trusted partner for VAR Steel, strengthening our strategic position and securing a reliable, high-quality material source to support ongoing sales and profit growth. Before I turn it over to John, I'd like to provide a brief update regarding our labor negotiations. As we announced on October 30th, members of our local usw voted not to ratify the tentative labor agreement we had reached with the union negotiating committee while we're disappointed by the outcome we remain committed to securing a fair agreement that supports our employees and aligns with metallis's long-term strategic goals the current contract has been extended by 90 days to january 29 2026. and we expect our operations to continue without disruption. We appreciate the support of our shareholders, the trust of our customers, and the dedication of our employees as we look forward to a stronger 2026. Now I'd like to turn the call over to John.

Thanks, Mike. Good morning, and thank you for joining our third quarter earnings call. During the quarter, our team delivered sequential increases in net sales, melt utilization, and profitability, consistent with our earnings guidance. We also advanced our capital investments safely, on budget, and on schedule. As it relates to our top line, third quarter net sales totaled $305.9 million, a sequential increase of $1.3 million, primarily driven by higher shipments in aerospace and defense and steady volume across auto and industrial end markets. Net income was $8.1 million in the third quarter, or 19 cents per diluted share. On an adjusted basis, net income was $12 million, or 28 cents per diluted share. Adjusted EBITDA was $29 million in the third quarter, a sequential increase of 9%, primarily driven by improved product mix and continued improvement in melt utilization, driving better fixed cost leverage. This marks the fourth consecutive quarter of sequential growth in both net sales and adjusted EBITDA, underscoring the consistency of our commercial execution, improving operations, sustained demand in our core markets, and our focus on growing in aerospace and defense. During the third quarter, operating cash flow was $22 million, primarily driven by profitability, partially offset by a slight increase in working capital needs to support the growing business. At the end of the third quarter, the company's cash and cash equivalence balance was $191.5 million, inclusive of approximately $21 million of government-funded cash on hand for future outlays as we finalize our capital projects funded by the U.S. government. In the third quarter, capital expenditures totaled $28.4 million, including approximately $22 million of third quarter CapEx supported by previous government funding. Planned capital expenditures for the full year 2025 are approximately $120 million, slightly lower than previous guidance due to timing of cash payments. The full year CapEx guidance includes approximately $90 million of spending, which is funded by the U.S. government, consistent with our previous guidance and the continued successful execution of the project. As it relates to government funding, during the third quarter, the company received $10 million of cash from the government. as part of the previously announced nearly $100 million funding agreement in support of the U.S. Army's mission of increasing munitions production. To date, through the end of September, the companies received approximately $82 million of government funding, with an additional $4.1 million received in October. Receipt of the remaining committed government funding is expected in early 2026, as mutually agreed-upon milestones are achieved. As a reminder, this funding will substantially pay for both the new Bloom reheat furnace at the company's Faircrest facility and the new roller furnace at the Gambrinus facility. In terms of shareholder return activities, in the third quarter, the company repurchased 178,000 shares of common stock for $3 million. At the end of September, a balance of $90.9 million remained under our share repurchase authorization. Since the inception of common share repurchases in early 2022, combined with the convertible note repurchase activities, we've reduced diluted shares outstanding by a significant 25%, or 13.5 million shares, compared to the fourth quarter of 2021. These actions reflect the strength of the company's balance sheet and the confidence in through cycle cash flow generation. As it relates to liquidity, Total liquidity remains strong at $437 million and no outstanding borrowings as of September 30, 2025. Turning to our near-term business outlook, commercially, fourth quarter shipments are expected to be 5% to 10% lower than the third quarter, primarily due to normal year-end seasonality and customers' potential global supply chain challenges. Base price per ton is anticipated to increase slightly as we realize the previously announced but bar and tube price increases of 5% that will take effect through the fourth quarter. Product mix is expected to be less favorable than the third quarter due to the mix of sales within the industrial and aerospace and defense markets, which is primarily timing related. In summary, commercially we expect lower shipments and slightly weaker product mix compared to Q3, slightly offset by increased base price per ton, But the net impact is expected to be a $2 to $3 million adjusted EBITDA sequential headwind. From an operational perspective, annual shutdown maintenance in the fourth quarter will be approximately $11 million, a sequential increase of approximately $8 million from the third quarter. The planned annual shutdown maintenance timing and the normal fourth quarter commercial seasonality will result in a decrease in melt utilization from the 72% achieved in the third quarter. and is anticipated to result in a sequential decrease in fixed cost leverage of approximately $3 million. And finally, depending on the status and timing of a new labor agreement, we could also face additional labor and benefit costs that could result in a sequential fourth quarter cost increase. Given these elements, the company expects the fourth quarter adjusted EBITDA to be lower than the third quarter, primarily driven by our normal year-end seasonality, planned annual shutdown maintenance costs and timing, and a few potential customer global supply chain challenges. As compared to the fourth quarter of 2024, we expect adjusted EBITDA to improve slightly. To wrap up, thank you to all of our employees, customers, and suppliers for their support. We're well positioned for a successful 2026 and beyond as a high-quality, U.S.-based specialty metals producer supporting critical markets. We remain committed to delivering value to our shareholders by driving profitable growth and executing our capital allocation strategy. As always, thank you for your interest in Metallus. We would now like to open the call for questions.

At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of John Frantrip with Sidoti and Company. Please go ahead.

Good morning, everyone, and thanks for taking the questions. I'd like to start with the automotive business. It was up nicely on a year-over-year basis, and last quarter you talked about regaining share domestically. I'm curious if that's the case, and I have a follow-up to that when you answer it.

Sure, John. Thanks for asking the question. Yeah, I mean, if you look at the platforms that we're on, those are the typically the SUVs, trucks, etc. that continue to sell at a decent rate. And they actually, you know, the auto companies were giving us a forecast that they thought the quarter would be lower, but that didn't materialize. So People are still buying vehicles. They're still having to build transmissions and motors, et cetera, to supply those vehicles. And that's our sweet spot. So we'll see how the fourth quarter develops. We do expect seasonality from them. And then there are some risks with some supply chains in the fourth quarter. There are supply chains disrupting potentially vehicle production at the level that we saw in Q3. Does that answer your question?

Yeah, and when you reference supply chains, you actually said global. So I'm curious, are you referencing specifically the Ford problems, or is there something more to it?

Well, there's concern, or at least there's been public voice concern over chip supply and other issues with their supply chain. But yeah, Ford's the one that stands out because we've seen a lot of that in the public Okay.

Um, and regarding the three to $5 million that you expected to incur, um, with the labor negotiations, how much did you, um, incur in the third quarter, um, relative to your expectations?

Um, barely nothing except for our costs to negotiate. Um, a lot of those, uh, three to five is tied on the final negotiations. So more to come yet on that.

Fair enough. And have you seen any impact from the tariffs? You know, we talked a little bit last quarter that there was kind of a wait and see status. I wonder if you've seen customers gravitate more to reacting to the tariff environment. And maybe another thought on that is, does a government shutdown impact maybe the A&D business at all?

No, we've seen no A&D impact. You know, this is the number one priority is national security, and they need the volumes of munitions and weapons programs supplied. So, no, we've not seen any impact on that. What was the first part of your question?

Any impact on tariffs and customers? You know, last quarter you kind of said there was a wait and see.

So, tariffs... Actually, the terrorist environment has been favorable to us. We are taking new customers. We've seen new customers come in and we've seen a tremendous amount of inquiry activity for 2026 where more people are trying to position a domestic supply chain as you heard us in our comments. From a commercial sales perspective, it's been pretty positive. It's just the rate of speed in which that domestic awards are made. But there is a negative in the fact that we are seeing some tariff impacts on certain materials that we purchase offshore for our operating supplies and manufacturing.

Okay. I'll get back into Q. Thanks for taking the question, Mike.

Thanks, John.

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

Hey, thanks very much. Good morning. Hey, Phil. Mike, and I know you talked a little bit about that with the last question, but What are exactly the global supply chain challenges you're mentioning? Is that more so with automotive and Ford, or is there more to it? Just wanted some context.

No, I mean, there's been information out there that we've been told that there is concern over, again, some chip supply issues. Of course, you know, the impact of the Ford F-150 with the aluminum supply domestically. So those are kind of things that, you know, we're aware of. We haven't seen that impact yet, but that's a potential going forward. So we just wanted to put it out there. Honestly, it's just a timing issue. So, you know, whatever... whatever they don't produce, they will produce because they'll want to meet sales targets and et cetera for 2026.

Got it. And with your commentary of, uh, improve year over year EBITDA in the fourth quarter, does this contemplate any of the potential employee contract negotiations or would that be separate to that commentary?

Well, I'm not quite clear what your question is. We've identified if we do get a contract settlement in the fourth quarter, we're going to see those outlined costs that John referenced in his comments.

And we didn't quantify it yet, but I think there would be potentially some additional costs. It really depends on the timing. Yeah, it's all about timing.

I mean, right now we went extension until January 29th. We just We're going to work hard to negotiate a fair and equitable contract and align with our longer-term strategic objectives.

Thank you. Thanks, Phil.

Your next question comes from the line of Dave Storms with StoneGate. Please go ahead.

Good morning, and thank you for taking my questions. Good morning, Dave. Good morning. I wanted to start with energy and market here. What do you see as a potential for volumes to rebound over 2026?

Well, I mean, you know, a lot of it's driven by the price of oil and overall global demand, right? I think there are some other influencing factors like, you know, what sanctions and how effective sanctions against Russian oil are. And would that increase domestic production in North America? And then we most likely would benefit from that increased production. Higher oil prices tend to drive increased production too. Other areas where as these LNG plants come on over the next couple of years that they're building, that'll drive gas consumption, pipelines, et cetera, or natural gas production, et cetera, to feed the global markets that they're targeting. That's all positive stuff for, but that takes time. We are seeing where we're actually probably where we're seeing potential increases in 2026 is that energy and market has historically procured a lot of SBQ into offshore and those tariffs are starting to affect their thinking and they're buying So we've seen a tremendous amount of inquiries for 2026 for our energy and markets and customers.

Understood. That's very helpful. Turning to your order book, just curious as to how you feel it's tracking relative to this point last year. I know you mentioned you want to be about 70% booked going into the year. Do you feel like you're on pace to meet that goal relative to last year or just maybe a word of thinking on there?

Yeah, we're pretty strong believers that we're going to get to that 70%. It could be a little bit higher depending on the pricing landscape. We are seeing customers telling us, not every customer, but some key customers telling us their internal production forecast for next year are going up, and we see them asking for more volume for 2026. So we're very happy about that, and we look forward to delivering an even better 2026.

Understood. That's very helpful. And then just maybe one more for me. I know last quarter we talked about energy input prices and that you were working on a new negotiation there. We'd just love to hear where that stands going into the new year.

I think the biggest one is electrical energy. We had a long-term contract that expired in May of this year, and we had to go to market. I can tell you that market prices changed significantly for the time of that really nice electrical energy contract we had. We've been transparent that we're seeing cost increases on our electrical energy purchases. We currently have a two-year agreement. for a large portion of our requirements, but there is a small portion that's exposed to market pricing, and we'll watch that very closely. We have many projects in the pipeline to work on reducing our electrical energy consumption, and let alone also increase our efficiency of production with how much kilowatt per ton we use. And on the natural gas side, we're purchased forward for 70% to 80% of our needs for next year. And we actually probably are out five years at various supply requirements. But we're an active buyer in the market. And we're very opportunistic. So we look for the best competitive prices we get and position ourselves for the best cost in those unit prices for both electricity and natural gas.

Yeah, and Dave, real quick, one thing to add to that, what Mike was saying on electricity is if you recall at the end of Q2, we said $2 million to $3 million of sequential cost increase. That's what we experienced. So we kind of guided that, and that's what we saw, and that's – aligned with the contract that we've lined up for the next two years.

Anderson, that's great commentary. Thank you for taking my questions. Good luck for Q4. Hey, thanks, Dave.

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question is a follow-up from John Frenchrep with Sidoti & Company. Please go ahead.

Yeah, I'm just curious about the CapEx spend. You dropped it down a little bit this year. What does next year's look like?

Well, we're in the planning phases of that right now. The reason why we dropped down the forecast is it's all about timing. It's tied to completion of work as well as payment terms tied to after that completion and how long before we have to pay them. So it's all a timing issue. For 2026, we're in the planning phases right now, John, so we'll talk more to that early next year.

Okay. And if I recall, you brought in a third party to help you maybe with your floor operations. Any kind of progress you can report about that and how that's going?

Yeah, we're very pleased with the progress, and you're going to start to see those results throughout the remainder of this year. The project's not over. But we're very pleased with the outcomes, the findings, the improvements that they're assisting with and helping my team implement them. This project goes on until late March. So a lot of those benefits will be realized in 2026.

That's actually helpful. And I guess lastly, on the new A&G Awards. Maybe any additional call you want to provide and maybe the timing of revenue recognition or material revenue recognition from those jobs?

Yeah, we're starting to actually see some of that now, particularly in the VARVIM sales that continues to grow, which is just value creation for this company. And that's only going to continue to grow in 2026. We expect the munitions to continue to demand build as some of the downstream supply chain issues get resolved throughout the end of this year and early next year. And then we're getting awarded, as we commented earlier, a number of new programs, weapons programs, gun barrel programs, aircraft bearings, et cetera. That demand and the realization of that value growth is really going to materialize in 2026, in my view, as a notable rate. And like we said, our objective overall was to achieve or exceed a run rate of $250 million a year of revenue, and we're very confident that we'll hit at least that by mid-2026.

Perfect. Thank you for taking my follow-ups. I appreciate it.

Hey, thanks, John.

That concludes our question and answer session. I will now turn the call back over to Jennifer Beaman for closing remarks.

Thank you all for joining today, and that concludes our call.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.