Metallus Inc. (NYSE:MTUS) Q1 2024 Earnings Call Transcript

Metallus Inc. (NYSE:MTUS) Q1 2024 Earnings Call Transcript May 10, 2024

Metallus Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing my. 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 speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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; Kris Westbrooks, Executive Vice President and Chief Financial Officer; and Kevin Raketich, Executive Vice President and Chief Commercial Officer. You all should have received a copy of our press release, which was issued last night. During today’s conference call, we may make forward-looking statements as defined by the SEC. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in yesterday’s release.

Please refer to our SEC filings including the most recent Form 10-K and Form 10-Q and the list of factors included in our earnings release, all of which are available on the Metallus website. Where non-GAAP financial information is referenced, additional details and reconciliations to its GAAP equivalent are also included in the earnings release. With that, I’d like to turn the call over to Mike. Mike?

Mike Williams: 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 and 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 end 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 miss incidents 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 and 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 Gambrinus facility. The team utilized video technology for furnace pre inspections prior to planned outages. 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 reduced costly maintenance, but 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 and 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 melt 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 markets, in 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 remains below optimal levels as an inventory correction persists among our distribution customers. We continue to remain 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 pool from diversified automotive customers for both long products and manufactured components. Through our concentrated efforts, growth in our aerospace & defense market continues. Net sales increased by 5% sequentially and 166% on a year-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 multimetals 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 tube 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 imperatives, 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 Kris.

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Kris Westbrooks: Thanks Mike. Good morning and thank you all for joining Metallus’ first quarter of 2024 earnings call. I am 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 net 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 13.5% 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 2100 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 2000 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 1600 tons, or 12% as energy customer demand remained soft in the first quarter. Compared with 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 is 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 mix aerospace and defense products, as well as a market driven 6% increase in average raw 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 salaried 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 salaried 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 salaried 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 derisking our legacy pension plans. Excluding the salaried 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 was $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 CapEx 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 components 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 bloom 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 bloom reheat furnace investment will generally follow the receipt to the government funding. An overview of the anticipated accounting treatment for the government’s funding is available on our recently filed Form 10-Q. 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% of 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 and 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 expected through cycle profitability and positive operating cash flow to 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 in distribution and energy demand. 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 times 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 busheling 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 EBITDA to be lower than the first quarter of 2024. To wrap up, thanks to all of our employees who work safely and helped the company deliver a solid start to 2024. Thanks for your interest in Metallus. We would now like to open the call for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of John Franzreb with Sidoti & Company. Please go ahead.

John Franzreb: 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, on the automotive side of the business. It seems like production rates are actually gradually improving, except for maybe one large OEM. I’m curious, if you’re over-exposed to that one large OEM that may find itself excess inventory?

Mike Williams: 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 Franzreb: Okay. Fair enough. And 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 debt trend reverses?

Mike Williams: Well, we just got the MSCI shipment numbers for the month of March and we’ve had them for a couple of weeks. And we see their shipments declining year-over-year. So hard to forecast. If you look at the bar products, it’s about 3.5 months of inventory in the distribution supply chain. And on the tubular – on the seamless mechanical tubing, that’s about eight months. So those are historically – tubing is probably lower than its historical average, but the bar products are – we like to see that around 2.8 months to three months. I believe it’s going to take a quarter or two to work that off.

John Franzreb: Okay. Makes sense. And 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 the rebranding – what’s that increase on a year-over-year basis? Maybe what we should be thinking about as an ongoing SG&A number on a go-forward basis?

Mike Williams: I’ll give you my two cents [ph] and then I’ll turn it over to Kris. From the rebranding perspective, it’s a modest increase in 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. Kris, do you have any further insight?

Kris Westbrooks: There’s really two components. It’s annual merit increases, which generally hit and begin to be realized in beginning of the year. And then the other component is stock-based compensation. So 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. And to Mike’s point, the rebranding, it’s a modest cost and most of it is behind us at this point.

John Franzreb: Okay. All right. And I guess, one last question and I’ll get back into queue. You mentioned that you’re about 75% done on your profit enhancement programs. I’m just curious about the remaining 25%, which still remains to be done? And what’s the general thoughts on the timeline on that?

Mike Williams: Yes. That remaining 25% is really going to be accomplished through the investments that we are making with the automatic grinding line, the in-line saw, other investments that we’re making in the – we announced that we’re going to take some downtime for the EAF. So 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.

Kris Westbrooks: And one additional piece we’re working on is our IT transformation. So that’s going to drive some efficiency as well. So we’re about midway through that. We’ll do more lives here later this year and next year. And once that’s complete, we believe that that will drive some additional cost reduction from an efficiency of our historical legacy systems.

John Franzreb: Great. Thanks for taking my questions. I got back into queue.

Mike Williams: Thanks, John.

Operator: Your next question comes from the line of Philip Gibbs with KeyBanc Capital Markets. Please go ahead.

Philip Gibbs: Hey, good morning.

Mike Williams: Good morning, Phil.

Philip Gibbs: Hey, Kris. Based on your commentary, was – 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?

Kris Westbrooks: I think that’s pretty spot on, Phil. The retro pricing that hit in Q4, the average pricing negotiating will continue throughout 2024, and we had a richer mix coming out of higher manufacturer component shipments to the automotive end market.

Philip Gibbs: Okay. And then on the share repurchase, you gave a lot of numbers. What’s the implied shares repurchase quarter-to-date? You gave it through May, through early May number. So April and through early May. What’s that? What’s that number?

Mike Williams: Yes, sure. It’s around 100,000 shares in that range. So the month of March, if you look at the Q, we bought back about $3 million, April is a similar amount and a bit more in May. So we’re 3.9, I believe is what we purchased in dollar terms year to – quarter-to-date in Q2.

Philip Gibbs: So your current share count is, diluted share count is somewhere around 45.5 million shares, is that correct?

Kris Westbrooks: So our Q1 share count is pull that up real quick. I think you close. 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. So, Q1 was 46.8 million shares was the diluted share count.

Philip Gibbs: Okay. So I might be a little high then on that. Okay. But I don’t think I took into account the stock, the stock compensation as an partial offset, and then the net working capital outlook for the second quarter, or just maybe the balance of the year. How are you thinking about networking capital?