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Metallus beats the odds: Q1 profit soars

Written by Stephanie Ritenbaugh

Metallus reported first-quarter net income of $24.0 million, or $0.52 per diluted share, up from net income of $14.4 million, or $0.30 per diluted share, during the same period in 2023.

The Canton, Ohio-based company, which manufactures high-performance specialty metals from recycled metals, saw net sales of $321.6 million, down from $323.5 million last year, according to the company’s first quarter earnings report.

Compared with the prior-year first quarter, net sales were relatively flat with lower shipments and a reduction in raw material surcharge revenue per ton being offset by favorable price/mix, the company said in its quarterly financial report.

In the first quarter, Metallus’ ship tons of 155,200 fell by 2% on a sequential basis, driven by lower shipments in the aerospace and defense, energy, and automotive end markets. However, it was partially offset by higher industrial shipments. Compared with the prior-year first quarter, shipped tons dropped 10% as a result of lower automotive, energy and industrial shipments, which was partially offset by higher aerospace and defense shipments.

“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,” Mike Williams, president and chief executive officer, told analysts on the company’s earnings call.

Asked if there’s a sense of when the market will reach equilibrium, Williams said, “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. Tubing is probably lower than its historical average, but the bar products, we like to see that around 2.8 months to three months,” Williams responded. “I believe it’s going to take a quarter or two to work that off.”

Manufacturing costs decreased by $10 million on a sequential basis, primarily driven by higher fixed cost leverage on increased production volume and lower planned annual maintenance shutdown costs.

Melt utilization improved to 72% from 58% in the fourth quarter, while the company continued to balance production with demand, Metallus said in its report.

Compared with the prior-year first quarter, manufacturing costs rose $13 million, primarily driven by the year-over-year impact of plant costs capitalized into inventory and released as inventory was sold.

Melt utilization was 72% compared with 73% in the same quarter last year.

Williams said, “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.

“I’m pleased that our efforts have proven effective, and we are seeing solid profitability and cash generation, despite the current softer demand environment, primarily from our industrial distribution and energy customers,” Williams told analysts.

Williams said the company participates in over 20 different defense-related programs and continues to identify new opportunities for growth in the aerospace and defense end market.

“We are pursuing new programs requiring specialty metal solutions tailored to critical defense applications,” Williams said. “Additionally, we are conducting trials with a range of metals, including titanium, to expand our conversion opportunities and enrich our portfolio, in line with the evolving needs of our customers.”

Looking forward, Metallus expects second-quarter of 2024 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be lower than Q1 2024.

“Second quarter shipments are expected to be similar to the first quarter,” Kris Westbrooks, executive vice president and chief financial officer, told analysts. “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.”

On the commercial side, the company reported that Q2 shipments are expected to be similar to the first quarter. Lead times for bar products currently extend to June and tube product lead times extend to July. The base price per ton is anticipated to remain solid in Q2 while product mix is expected to be less favorable compared to Q1. Surcharge revenue per ton is expected to fall in Q2 given a lower average of No. 1 busheling scrap index in Q2 compared with Q1.

Busheling averaged $490/gt in January and slipped to $455/gt in February and $410 in March and April, according to Steel Market Update data.

In terms of operations, the company expects the average melt utilization rate to be less than Q1, as the company continues to balance production with demand, it said.

In addition, the company said its planned capital expenditures are about $60 million in 2024, consistent with previous guidance. An effective income tax rate of about 25% is expected for the full-year 2024. Required pension contributions are expected to be $6 million in Q2 with an estimated additional $12 million of required pension contributions in the second half of 2024, Metallus said.

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