Metallus (MTUS) Q2 2025 Earnings Transcript

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DATE

Aug. 8, 2025, 9 a.m. ET

CALL PARTICIPANTS

• Chairman, Chief Executive Officer — Michael S. Williams
• President, Chief Operating Officer — Kristopher R. Westbrooks
• Executive Vice President, Chief Financial Officer — John M. Zaranec
• Vice President of Investor Relations, Corporate Communications, and Chief Legal Officer — Jennifer K. Beeman

TAKEAWAYS

• Net Sales -- $304.6 million, up 9% sequentially on broad-based shipment increases.
• Shipments -- Total shipments increased 10% sequentially and 28% for the first half versus the prior second half.
• Adjusted EBITDA -- $26.5 million, up 50% sequentially, due to higher shipments and utilization.
• Net Income -- $3.7 million GAAP, or $0.09 per diluted share; adjusted net income was $8.4 million, or $0.20 per diluted share, more than double the prior quarter.
• Operating Cash Flow -- $34.8 million, driven by profitability, reduced inventory, and a $6.5 million federal tax refund.
• Cash and Cash Equivalents -- $190.8 million, including roughly $34 million of government-funded cash.
• Capital Expenditures -- $17.8 million in the quarter, with $15 million funded by prior government grants; full-year CapEx planned at $125 million, of which $90 million will be government-funded.
• Government Funding -- $5.1 million of cash received in Q2, $10 million additional in July; total of $81.5 million received to date, aligned with nearly $100 million for Army munitions support.
• Melt Utilization Rate -- 71%, increasing by 6 percentage points sequentially, with further increases expected next quarter.
• Market Segment Performance -- Energy shipments grew 17% sequentially, automotive increased 9%, and aerospace and defense nearly doubled; industrial shipments rose slightly.
• VAR-Related Revenue -- Year-to-date sales have more than doubled compared to the prior year's first half, with $30 million targeted for 2025.
• Lead Times -- Extended out to October for SBQ bar and seamless mechanical tubing products.
• Announced Price Increase -- $100 per ton on seamless mechanical tubing, effective in November for spot customers.
• Pension Contributions -- $5.9 million contributed this quarter; remaining obligation for the year lowered by $6.5 million to $3.5 million after a recent actuarial update.
• Share Repurchases -- 255,000 shares bought for $3.3 million in Q2; 67,000 more repurchased in July for $1.1 million; $92.8 million remains authorized as of July.
• Diluted Shares Outstanding -- Reduced by 25%, or over 13 million shares, since the end of 2021, through share and convertible note repurchases.
• Convertible Notes -- Remaining $5.5 million settled at a cost of $9.1 million; no outstanding borrowings as of period-end.
• Operational Investments -- Harrison facility’s automatic grinding line now fully operational; bloom reheat and roller furnace projects on schedule.
• Planned Maintenance -- $15 million in shutdown costs for the second half, with $5 million in Q3 and $10 million in Q4.
• Labor Negotiations -- United Steelworkers’ contract set to expire September 29; negotiations begin August 18.
• Safety Performance -- 0 serious injuries year-to-date, 40% drop in injury severity, and 6% fewer injury incidents; key safety engagement metrics improved 25%-48%.
• Operational Efficiency Initiative -- External consultants engaged in July to drive process optimization, expected to yield $10 million in annual savings, ramping through the first half of 2026.
• Third Quarter Adjusted EBITDA Guidance -- Expected to be modestly lower than Q2, reflecting higher maintenance and electricity costs plus labor negotiation expenses of $3 million-$5 million.
• Spot and Contract Mix -- 70% of demand is under contract, and 30% is spot-based for 2025.
• Order Book -- Size is double that of a year ago, with notably longer visibility into future demand.

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RISKS

• Higher Operating Costs -- CFO Zaranec stated, "We are also expecting a full quarter of higher electricity costs starting in the third quarter as the previous long-term electricity contract expired midway through the second quarter."
• Nonrecurring Labor Negotiation Expenses -- CFO Zaranec noted, "We anticipate incremental nonrecurring labor agreement negotiation costs of $3 million to $5 million in the second half of 2025, which we plan to report as an operational cost and not exclude from adjusted EBITDA."
• Potential Supply Chain Delays -- Company representative said, "they've had start-up and commissioning issues that have delayed that at least by sometimes 6 months to a year."
• Customer Demand Uncertainty -- Company representative commented, "I have to qualify the fact that until the agreements are signed, there's a lot of people sitting on the sidelines waiting to see what is the final tariff and what is the impact to their supply chain."

SUMMARY

Metallus (NYSE:MTUS) reported sequential growth in sales, shipments, and profitability, underpinned by strong performance in energy, automotive, and aerospace and defense segments. Management cited extended lead times, a substantially larger order book, and ongoing government-funded investments in strategic production capacity, including Army munitions support projects. While guidance calls for slightly lower adjusted EBITDA in the third quarter due to increased maintenance, power, and one-time labor negotiation costs, cost-saving initiatives are expected to deliver $10 million in annualized savings beginning in 2026.

• Government support for capacity projects remains robust, with $81.5 million of nearly $100 million in funding already received and further disbursements tied to project milestones.
• Price increases for seamless mechanical tubing will take effect in November, with additional modest pricing benefits expected as earlier increases are realized in shipments.
• Persistent industry tariffs and ongoing trade policy evolution continue to generate increased customer inquiries, though final demand remains contingent on regulatory outcomes.
• Reduced annual pension funding obligations following an actuarial update may support additional free cash flow and flexibility.

INDUSTRY GLOSSARY

• SBQ (Special Bar Quality) Bars: High-grade steel bars with precise metallurgical properties and strict quality standards, primarily used in demanding automotive, energy, and industrial applications.
• VAR (Vacuum Arc Remelt) Steel: Specialty steel produced through vacuum arc remelting, improving cleanliness, strength, and performance for aerospace and defense uses.

Full Conference Call Transcript

Michael S. Williams: Good morning, and thank you for joining us today. Before we begin, I'd like to take a moment to welcome John Zaranec to the team. John is our new Executive Vice President and Chief Financial Officer and brings with him more than 20 years of financial leadership in the manufacturing and industrial sectors, along with a strong track record of engaging with the investment community. We're excited to have him on board, and I'm confident you'll enjoy working with him. Also, I'm excited that Kris recently assumed new responsibilities as President and Chief Operating Officer after serving as our CFO since 2018. Kris now has oversight of our safety, manufacturing operations and excellence and supply chain organizations.

Now turning briefly to the trade environment. Section 232 steel tariffs remain firmly in place at 50% for most countries with little change resulting from the country-specific agreements currently under negotiation by the administration. A fair trade environment is very important for the long-term sustainability of the steel industry, an industry that is vital to our national defense and infrastructure. As a result of the recent trade actions, we anticipate growing demand for domestically produced steel. Before we dive into safety and the quarterly results, I want to take a moment to share how honored we were to recently host Vice President, J.D. Vance at our Faircrest plant in Canton, Ohio.

He spoke to approximately 300 of our employees and local stakeholders, emphasizing the federal government's commitment to investing in American workers and businesses. He also acknowledged our role in supporting national defense, highlighting Metallus' investment in a new bloom reheat furnace and our support of the Army's increased artillery shell production. This visit left many of our employees energized and deeply proud of the vital role they play in strengthening our national's industrial and defense capabilities. Moving on to safety. Our mission remains clear to be recognized as having the safest specialty metals operation in the world. In 2025, we're on track to invest approximately $5 million to enhance our safety management systems and upgrade critical equipment.

I'm pleased to report that our previous safety investments are delivering meaningful results. So far in 2025, we've had 0 serious injuries, a 40% reduction in injury severity and a 6% reduction in injury frequency compared to the same period a year ago. Even more encouraging are our leading indicators, a 25% increase in the number of employees actively participating in the first aid provider program and serving as safety committee representatives. A 41% rise in near miss reporting and a 48% increase in proactive safety engagement interactions -- these trends reflect growing employee engagement and trust in our safety culture.

We're also continuing to derisk our operations through robust serious injury and fatality prevention measures, comprehensive risk assessments and targeted lockout, tagout, tryout enhancements. We recognize that safety is a journey. However, these positive indicators give us confidence that we're moving in the right direction toward our goal of industry-leading safety performance. Moving to business results for the second quarter. Overall, shipments increased by 10% compared with the first quarter, driven by higher aerospace and defense, automotive and energy shipments. When looking at the first half of 2025, we shipped 28% more tons than the second half of 2024. Higher shipments, coupled with better manufacturing performance resulted in a $26.5 million adjusted EBITDA, a significant increase from the first quarter.

Additionally, we recently announced a price increase on seamless mechanical tubing products of $100 per ton effective in November for customers not covered by annual pricing agreements. Lead times are currently extended to October for our SBQ bars and seamless mechanical tubing products. Turning to our specific markets. Industrial shipments increased slightly in the second quarter on a sequential basis. Distribution customer inventory levels have declined over the last few months. SBQ and seamless mechanical tubes are consistently turning over and customers are regularly ordering from us. Energy shipments improved 17% on a sequential basis. We continue to invest in our thermal treat capabilities for high-pressure, high- temperature applications to further expand our reach in the energy market.

Tariffs aimed at protecting domestic steel producers are helping to reduce imports and stimulate demand. Automotive shipments improved by 9% sequentially. The sequential increase in shipments included some market share gains and increased demand on existing programs. The highest running light truck and SUV programs that Metallus participates in remain strong. And as we mentioned last quarter, we are continuing to see increased customer inquiries driven by tariff-related onshoring. As expected, aerospace and defense shipments nearly doubled sequentially. While the industry continues to work through their short- term supply chain challenges, this market remains on target to continue to grow for the foreseeable future, and we are energized by our participation in this market.

We continue to build momentum with vacuum arc remelt or VAR steel, driven by our broad downstream processing capabilities and a strategic relationship with a VAR supplier. Metallus is uniquely positioned to procure, engineer, process and sell these VAR products in an efficient manner that is desired by customers. Year-to-date, VAR-related sales have more than doubled compared to the first half of 2024, reflecting the focused efforts of our teams. Alongside growing volumes with existing customers, the enhanced strength and durability of VAR steel has enabled us to win new business in the aerospace, defense and industrial sectors. As previously shared, we remain on track to achieve approximately $30 million in VAR-related revenue by the end of 2025.

Switching gears to operations. Our melt utilization rate improved to 71% or by 6 percentage points sequentially on higher production volumes. We're seeing the benefits of ongoing process improvements across our manufacturing facilities, and we expect melt utilization to further increase in the third quarter to support our solid order book. That said, we believe there are still meaningful opportunities to drive improvement in operating performance and cost structure. To support this, we've launched an initiative focused on optimizing the execution of our day-to-day manufacturing operating system across the organization. We expect this initiative will support the long-term sustainability of our operations while reducing costs and enabling profitability growth.

In terms of recent capital investments, our automatic grinding line at our Harrison facility has successfully completed hot commissioning and is now fully staffed and operational. We're already seeing daily improvements in safety and throughput, clear indications of the project's positive impact. Additionally, our government-funded investments continue to hit key milestones related to the installation of the new bloom reheat furnace and roller furnace to support the Army's increased demand for artillery shells. The bloom reheat furnaces construction continues to remain on schedule to begin commissioning by the end of the year. The new roller furnace building and equipment foundations are nearing completion and equipment has begun to arrive.

We remain on schedule to begin commissioning in the first half of 2026. Lastly, as a reminder, we will begin labor negotiations with the United Steelworkers on August 18 regarding the current labor agreement, which expires on September 29. As always, our aim is to achieve a timely, fair and equitable contract for both the company and our employees. We remain focused on our daily execution to support our solid order book while maintaining a commitment to safety, delivering an exceptional customer service and making strategic capital investments. These priorities are key to supporting sustainable profitability, generating strong cash flow and creating long-term value for our shareholders.

I'm now going to turn the call over to Kris to review our financial results for the second quarter since he served as CFO for the majority of the quarter, and John will share the company's outlook.

Kristopher R. Westbrooks: Thanks, Mike. Good morning, and thank you for joining our second quarter earnings call. During the quarter, our team delivered a sequential increase in shipments, net sales, melt utilization and profitability, consistent with our earnings guidance. We also continue to invest in the business to drive profitable growth while maintaining a strong balance sheet. From a top line revenue perspective, second quarter net sales totaled $304.6 million, a sequential increase of $24.1 million or 9%, primarily driven by higher shipments across all end markets. Net income was $3.7 million in the second quarter or $0.09 per diluted share.

On an adjusted basis, net income was $8.4 million or $0.20 per diluted share in the quarter, more than double, first quarter levels. Adjusted EBITDA was $26.5 million in the second quarter, a sequential increase of 50%, primarily driven by higher shipments and continued improvement in melt utilization, driving better fixed cost leverage. During the second quarter, operating cash flow was $34.8 million, driven by profitability, lower inventory and the receipt of a $6.5 million federal income tax refund. At the end of the second quarter, the company's cash and cash equivalents balance was $190.8 million, inclusive of approximately $34 million of government-funded cash on hand for future investments.

In the second quarter, capital expenditures totaled $17.8 million, including approximately $15 million of second quarter CapEx supported by previous government funding. Planned capital expenditures for the full year 2025 remain at approximately $125 million, consistent with previous guidance and inclusive of approximately $90 million of capital expenditures funded by the U.S. government. As it relates to government funding, during the second quarter, the company received $5.1 million of cash funding 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. Additionally, during July, the company received an additional $10 million of cash funding from the government.

To date, through the end of July, the company has received $81.5 million of government funding. Receipt of the remaining committed government funding is expected throughout the remainder of 2025 and into 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 as well as the new roller furnace at the Gambrinus facility. Now switching gears to pensions. In the second quarter, the company made $5.9 million of required pension contributions related to the U.S. bargaining plan.

Following a recent actuarial update, we're now estimating only $3.5 million of additional required pension contributions in the second half of 2025, which is $6.5 million lower than previously stated guidance. As we proceed forward into 2026, the company is estimating a significant reduction in required annual pension contributions subject to investment performance, actuarial assumptions and funding laws. We continue to actively manage the pension. We'll provide further updates as available. In terms of shareholder return activities in the second quarter, the company repurchased 255,000 shares of common stock for $3.3 million. In July, an additional 67,000 shares were repurchased for $1.1 million. At the end of July, a balance of $92.8 million remained under our share repurchase authorization.

As it relates to convertible notes, during the second quarter, we settled the remaining $5.5 million of outstanding convertible notes at a cash cost of $9.1 million. As of June 30, 2025, the company had no outstanding borrowings. 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 over 13 million shares compared to the fourth quarter of 2021. These actions reflect the strength of the company's balance sheet and confidence in through-cycle cash flow generation. With that, I'll turn it over to our CFO, John Zaranec, to cover the business outlook.

John M. Zaranec: Thanks, Kris. I'm excited to be part of the Metallus team, and I look forward to engaging more deeply with our shareholders and analysts in the near future. In terms of the near-term business outlook, commercially, third quarter shipments are expected to be similar to the second quarter, with lead times currently extending to October for both bar and tube products. Additionally, base price per ton is anticipated to remain relatively steady in the third quarter, dependent on our mix in the quarter. Effective November 1, we expect base price per ton to begin to benefit from the recently announced $100 per ton spot price increase on seamless mechanical tubing products.

This price increase is reflective of the improving demand environment for domestically produced products. From an operational perspective, melt utilization is expected to increase sequentially in the third quarter on improved operational performance. Consistent with prior years, planned annual shutdown maintenance will be completed in the second half of the year at a total cost of approximately $15 million. From a timing perspective, about $5 million of the planned shutdown maintenance will occur in the third quarter for non-melt shop assets. The balance of approximately $10 million of planned shutdown maintenance will occur in the fourth quarter and include the melt shop.

We are also expecting a full quarter of higher electricity costs starting in the third quarter as the previous long-term electricity contract expired midway through the second quarter. Additionally, as Mike mentioned, we're beginning negotiations with the United Steelworkers regarding the labor agreement, which is set to expire in late September. We anticipate incremental nonrecurring labor agreement negotiation costs of $3 million to $5 million in the second half of 2025, which we plan to report as an operational cost and not exclude from adjusted EBITDA, consistent with treatment in prior years. Given these elements, the company expects third quarter adjusted EBITDA to be modestly lower than the second quarter.

To combat some of these cost pressures and in the spirit of continuous operational improvement, we have engaged external resources to accelerate process optimization efforts, which include improving manufacturing efficiency within targeted facilities. The engagement began in July and will progress until targeted operational efficiencies are realized. We expect to realize annual savings of approximately $10 million as a result of this initiative, with savings ramping up throughout the first half of 2026. To wrap up, thank you to all of our employees, customers and suppliers for their support in the first half of the year. I'm looking forward to partnering with all of you during this exciting time for Metallus, and I'm optimistic about the opportunities that lie ahead.

We are well positioned 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.

Operator: [Operator Instructions] Our first question comes from the line of John Franzreb with Sidoti.

John Edward Franzreb: Congratulations, Kris, and welcome to the call, John. I'd like to start with maybe the new market share gains or new customers you're grabbing as a result of maybe the change in the tariff environment. Can you talk a little bit about the magnitude of the increased bidding for your products relative to what you maybe would have saw a year ago?

Unidentified Company Representative: Sure, John. I would say that a majority of the increase in the share gain was gaining back some industrial and automotive business that we had lost in prior years, not necessarily to imports, but to domestic competitors. However, we do see a modest increase in new customer inquiries and orders tied to the tariff environment. But I have to qualify the fact that until the agreements are signed, there's a lot of people sitting on the sidelines waiting to see what is the final tariff and what is the impact to their supply chain.

I will tell you they are inquiring to get domestic supply, but they haven't pulled the trigger yet until those agreements are really finalized with the signature on those agreements with both parties.

John Edward Franzreb: Okay. Okay. So this is probably, I don't know, maybe a fourth quarter event if it happens that you're thinking, right?

Unidentified Company Representative: Well, I'm not going to try to speculate my expertise on forecasting the Trump administration. So as they are finalized, yes, we do expect to continue to see, as we said in our comments, increased demand. That's what's being signaled to us. And that's actually what we're expecting going forward.

John Edward Franzreb: And in A&D, can you talk a little bit about the supply chain issues? It's kind of been, I don't know, an overhang for a couple of quarters now. When do you expect that to be resolved?

Unidentified Company Representative: Actually, we've been receiving good news recently that things are starting to potentially improve in demand, and we've actually seen some increased orders, just not at the rate we expected. These were investments being made by the supply chain to ramp up the munitions production. And they've had start-up and commissioning issues that have delayed that at least by sometimes 6 months to a year. So we have -- we are getting word that things -- we expect to see additional orders in the fourth quarter of this year.

John Edward Franzreb: Great. Great. That's good to see. And it's interesting, one of my prepared questions was about melt utilization. We had that north of 80% target. It sounds like now you're bringing somebody in to achieve that number. Can you talk a little bit about maybe what's held back -- how is you back from hitting that number and your confidence in hitting that $10 million -- was it $10 million in savings in 2026?

Unidentified Company Representative: Efficiency savings, yes. So we had a couple of percents of melt utilization impacted in Q2 by electrical supply interruptions because of -- we have interruptible power supply. It's a benefit to us because it actually provides us with a lower electricity if the electrical company when the grid is under extreme demand that we can idle and allow them to provide the electricity into the residential community to provide. So they have air conditioning and they keep the lights on. So we had a couple of percent utilization there. We had a couple of percent utilization tied to some reliability on auxiliary equipment, primarily cranes is the one thing that we're focused on.

We have engaged a third party to help us improve our crane reliability, but that's not the company we're referring to. We're referring to a company that is looking from how we schedule, how we plan and how we execute on the shop floor and really drive a higher performance of efficiency in our execution. And that will be anything from culture to what tools, data, et cetera, of what we should have. This is an industry-based expertise, and they bring a global best practice approach to shop floor, particularly for the steel industry execution.

Operator: Our next question comes from the line of Chris Olin with Northcoast Research.

Christopher David Olin: You might have answered my question here a bit, but I was wondering on the SBQ bar side, are there any price increases on the books, on that side? And then I guess, if not, and to your thoughts on kind of this customer apprehension, how does that impact your contract discussions for 2026? Is that going to be complicate things?

Unidentified Company Representative: Yes. I mean I don't want to really publicly talk about price. We haven't seen price increases since really earlier this year. It was a modest one. That's stuck. We really haven't seen that. Do I expect as demand continues to grow, typically, historically, price follows and increasing to support that higher demand. In regards to the traded situation and people are awaiting to see what the final tariff environment is going to be. I just think the small -- what I see is the smaller companies have already taken action to move. The larger companies are more -- the larger steel consuming companies are a little bit of more of a wait and see.

They're inquiring to make sure that they have the ability to get supply when they decide to make that decision. And you also have to keep it in perspective, there was a fair amount of import inventory already in the United States prior to the tariffs going into play. And we're definitely aware that, that inventory still exists, but it is being consumed. So we expect that inventory to be somewhat exhausted by the end of this quarter, early fourth quarter. And that will also play into the increasing demand for the domestic supply. Did I answer your question, Chris?

Christopher David Olin: Yes. I was just -- I guess the other question I would have is just in terms of the contracts, can you remind us like in terms of what would come up for renewal or...

Unidentified Company Representative: Yes. So if you look at 2025, as we've said, 70% of our demand is under contract and about 30% is spot-based. The contract discussions haven't really begun yet. There's a couple that have inquired, but we're basically -- that will pick up in activity and discussion late September through October through November into early December. So probably the next time we have a call, we'll have a better look at how that's developing.

Operator: Your next question comes from the line of Dave Storms with Stonegate.

David Joseph Storms: With the planned downtime coming up, are you going to be able to use this as a chance to implement more technology into your operations? Or is this going to be more of a maintenance update?

Unidentified Company Representative: I would say the majority of it is maintenance, but there is some technology upgrades that we're planning to implement. But I would say the majority of it is really maintenance-related infrastructure, reliability-oriented investments in our shutdowns.

David Joseph Storms: Perfect. And then I guess, double clicking on that. Could you maybe spend a little bit of time talking about any tech improvements you're planning on implementing your operations? Or will that maybe come after your previously stated operation efficiencies?

Unidentified Company Representative: Yes. I think -- well, I think these are more focused on reliability. So we do expect to see melt shop utilization to improve on some of our key investments, our key maintenance investments. But really, I think from a go forward, it's really going to be this optimization and efficiency of shop floor execution that's really going to net at least $10 million in savings in our manufacturing costs. And then as we -- some of these big CapEx investments come on later this year, the reheat bloom furnace and then early next year, the roller furnace, there's significant cost efficiency and improvements that we're going to get out of these investments that really will materialize in 2026.

David Joseph Storms: Understood. Very helpful. And then just switching gears a little bit here. With order books -- or excuse me, with lead times out to October, is there anything you can kind of tell us about the texture of the order book that you're seeing, maybe indications on the price to mix texture that you're seeing?

Unidentified Company Representative: Sure. So our lead times are out to the second half of October. We have -- if you look at our order book, it's double the size it was a year ago at this time. So we have a much longer-term view, allows us to optimize our scheduling and increase some of our efficiencies in that regard. Defense is going to continue to be fairly stable. Automotive looks like it's going to continue to be very stable.

And really, what's going to develop in that order book, we do see -- expect some price appreciate, modest price appreciation to continue to develop throughout the year as the prior announced price increases work into the shipments that we actually make from a timing standpoint. So things look a hell of a lot better than they did in the second half of last year, I could just tell you that. And then as this tariff environment becomes much more clear, then we expect demand to continue to grow.

Operator: [Operator Instructions] And with no further questions in queue, I will now hand the call back to Jennifer for closing remarks.

Jennifer K. Beeman: Thanks, everyone, for joining us this morning, and that concludes our call today. Thank you.

Operator: Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.

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