Okay, we're going to go ahead and get started with the next presentation. First off, thank you all for joining us here in person and who's joining on the webcast. My name is Joe Noyons , I'm a Three Part Advisors . Up next, we have Metallus, which is traded on the New York Stock Exchange under MTUS. Presenting on behalf of the company today is going to be the President and Chief Operating Officer, Kris Westbrooks, and the Executive Vice President and Chief Financial Officer, John Zaranec. All right, thanks guys.
Thanks, Joe. Good morning, everyone. Good afternoon, everyone. Hope everyone's doing well. As you introduced, my name is Kris Westbrooks, our Chief Operating Officer, and joining me today is John Zaranec, our recently appointed CFO. John joined us a couple of months ago. He has over 20 years of experience in the specialty, manufacturing, especially metals, high-performing manufacturing companies. Welcome, John, to the team. We have our normal disclaimers here for those that want to take a read. Jumping into who we are, Metallus, we're a specialty metals manufacturing company based in Canton, Ohio, in operation for over 100 years. We were a division of The Timken Company back until 2014 when the company spun out as a separate independent public company as TimkenSteel. About a year and a half ago, we rebranded the company to Metallus.
As a result of the legacy that we have and continued advancement over the years, we're regarded as a high-quality, clean steel producer supporting our demanding customer applications. The rebranding that we completed a year and a half ago recognized our evolution into a specialty metals company, more than just steel. That includes processing and finishing other metals to serve the aerospace, defense, and industrial customers. We employ about 1,900 people, including about 1,200 United Steelworkers. Since the spin-out of Timken in 2014 through about 2020, the company struggled to be consistently generating profitability through the various demand cycles of the steel industry. Under new leadership, we began a significant period of transformation, taking out over $100 million of costs throughout 2020 and 2021. That cost takeout continues to benefit us today, partially offset by some inflation.
Over the past few years, our focus has transitioned into operational and commercial excellence, supported by a new safety management system. Currently, we're focused on driving profitable growth as we meet our customers' growing need for domestically produced steel in the specialty metals space, while continuing to maintain focus on our operational excellence and safety. In terms of the diversity of our end markets that we participate in and our product offering, on this page, you can see the mix of our shipments in 2024 by end market as well as by product. Last year was a low point for the steel industry, and specifically, our shipments came in at about 555,000 tons last year. That was on about 60% melt utilization, and that resulted in $1.1 billion of sales.
Through the first half of this year, we've shipped 28% more tons in the first half of this year than we did in the second half of last year, which is encouraging to see. Our product offering includes steel bars known as SBQ, special bar quality steel. We also produce seamless mechanical tubing and manufactured components. For the SBQ and the seamless mechanical tubing products that we produce, we have the widest range of product sizes offered in the United States. Our SBQ share in the U.S., it's about 12% of U.S. consumption. Imports make up about 15% of the U.S. market, across the variety of size ranges, with a much higher level of imports on the larger diameter sizes where we participate. For seamless mechanical tubing, our share in the U.S., it's about 40%, and the imports have a similar share, around 35%, 40% historically.
We are expected to benefit from the strengthening tariff environment and need for domestically produced steel. Our end market participation is fairly balanced between automotive and industrial, but it also includes a strong position in the energy market and a growing position in aerospace and defense. In terms of our end market participation in a bit more detail, as a material solutions provider, Metallus has many long-term customer relationships with blue-chip customers across our end markets, including in the distribution channel. In the industrial market, our products are utilized in a variety of off-highway applications, such as bearings and wheel hubs and axles and gears for large construction and mining equipment, as well as tractors. We also supply steel into the rail industry for crankshafts, gears, bearings, axles, and numerous other applications across the various industrial sectors.
Our automotive steels are used in propulsion systems, internal combustion, hybrid, as well as electric vehicles. We're really indifferent into what application it goes into because our steel is used in all of them, and primarily the highest volume light truck and SUV applications. We're providing steel to the OEMs, GM , Ford, Toyota, Honda, Stellantis, as well as the tier one customers, and also some motorsport customers with both long-length product as well as manufactured components, which is pretty unique for a steel provider to make not just the steel, but also the components that go into those applications. We manage the supply chains for our customers, which creates stickiness and long-term relationships. On aerospace and defense, I'll cover that a bit more in a second because that is a growing area for us.
We continue to support the energy market with a variety of products used offshore, onshore, as well as for renewable and petrochemical applications. Our products are used in choke and kill systems, drilling tools, coupling stock, as well as another area, low-density polyethylene tubing that's used in some of the petrochemical production. For aerospace and defense particularly, we're a critical supplier to the defense sector. Last year, we were awarded a $100 million contract from the U.S. Army, and that was a grant from the government to increase our capacity to support the demand for 155 mm shells. We're currently the sole domestic producer of that steel, and it's a specialized high-fragmentation steel used entirely for that program. This government grant enables us to de-bottleneck our production with several new important investments.
All of these investments will benefit not just the defense customers, but also our broader customer mix because all of our volume will run through these assets. To date, we've received over $80 million in government funding and cash. That's represented by the orange bars on this chart. Over $80 million have been received. We expect to receive the remainder of the funds for the remainder of this year and into early 2026. The CapEx is following that, so we're going to see a higher amount of CapEx in the second half of this year to support these government investments. Overall, we're targeting $250 million of sales to that end market as the capacity in the supply chain ramps up throughout 2026. That's more than double our historical level of sales to this end market in the past.
We do expect demand to remain strong as we move forward for these important munitions to support the replenishment in the U.S., as well as the government's need for global conflicts. One last area of focused growth for us as a company is vacuum arc remelt steel. We're currently procuring this steel from other companies. We have an arrangement with an important supplier to help support our growth in this area. What we bring to the table is a very efficient downstream capacity that's able to produce the steel in rolled form in bars and tubes in a much shorter lead time than our competition can because they're using more of a 4G process. This will go into the aerospace, defense, and industrial markets. It's used in extremely demanding applications such as landing gear and some helicopters used by the military.
Other applications include crankshafts for light aircraft, as well as high-caliber gun barrels for the military. Our product sales in this category historically were zero. It's a growth area for us. We're targeting $30 million of sales in this market just in 2025. We expect to see additional opportunities as we move forward. Again, we're procuring steel on the outside. We're finishing it, excuse me, downstream using our rolling and tube-making capabilities. Then we're selling this to the end market customers in a much shorter lead time. Those are a couple of focused areas of growth for us. We're really excited about the future for our company and where we're taking the business. With that, I'd like to turn it over to John, who's going to run through some of the financials.
Okay, thanks, Kris. All right, and thank you to the Three Part Advisors for having us here today. As Kris noted, I joined Metallus in June and been extremely impressed with our experienced team. Prior to joining, I was aware of the company and followed the transformation that began in 2020, 2021. They did all the hard work, and now I get to join as we reap those benefits and continue to advance the company. I'm really looking forward to the sustainable, profitable growth on the backdrop of that. With that, let's look at some numbers. I'll turn our attention to our most recent quarterly financial performance, our second quarter results, which are the red bars here on the chart in the top left paragraph. They support a good, strong second quarter, a good story across the board with net sales totaling over $300 million, a sequential increase of $24 million and 9%, primarily driven by higher shipments across all end markets from Q1 to Q2.
In addition, it was the third consecutive quarter of sequential growth in the bottom line. In the second quarter, we were able to deliver adjusted EBITDA that represents the highest quarterly profits in over a year. We accomplished it while generating operating cash flow of 1.3x EBITDA in the quarter. We maintained a good, strong balance sheet position. From a CFO's perspective, it was a good quarter to join there. As we look forward to the third quarter, the third quarter shipments are expected to be similar to the second quarter, with lead times currently extending into late October, early November for most of our products. The base price per ton is expected to remain relatively steady. We did announce recently a price increase effective November 1 on our spot prices, so not our contract business, but our spot business on the seamless mechanical tubing.
It's about a 7%- 8% increase depending on the application, and we'll start to see that as we exit 2025. From an operational perspective, melt utilization, which is really a key metric for us and obviously drives some profitability, is expected to increase sequentially in the third quarter. Consistent with prior years, we do have some planned annual shutdown costs in the quarter, and it's going to be about $15 million in the back half of the year. About 1/3 of that is going to be in the third quarter related to our non-melt shop assets, and about 2/3 of it, or about $10 million, is going to be in the fourth quarter. That's a normal seasonal thing we address each year, but it's obviously a little bit different in the second half versus first half of the year.
One other item, we are dealing with some higher electricity costs, which I think is prevalent across many in the country and in the world. That really started in the end of the second quarter. We had a pretty favorable arrangement that expired in Q2. Going forward, it'll be about $2 million- $3 million of additional electricity costs a quarter just from the utility cost. A few other points I wanted to hit as it relates to the near term. We started our negotiations with the United Steelworkers Union on August 18th. We remain committed to maintaining an open dialogue, reaching a mutually beneficial agreement for both us and the union. We have a really good relationship with them. The negotiations are advancing as expected, and discussions are continuing even later this week.
As part of the negotiations, we do anticipate some non-recurring labor agreement costs of $3 million- $5 million in the back half of the year. Those only come up every four to five years, depending on the length of the arrangement. Those are kind of unique one-timers in the back half of the year. Given some of those cost headwinds, especially as we look to systemic pressures like electricity costs, we engaged some experts to help us advance some of our operational improvements. They started in late July and will be progressing until targeted operational efficiencies are achieved. We expect to realize annual savings at a run rate of about $10 million as a result of this initiative. That will start ramping up throughout the beginning of 2026. We look forward to providing additional updates on the labor negotiations and the operational improvements as this year progresses.
That's the short term. Let me turn now to how our long-term operational and financial targets are progressing. We set pretty fairly aggressive targets back in 2021 with a goal of achieving them by the end of 2026. The targets include a balanced approach of leveraging our strong balance sheet and liquidity to increase our capital spending to focus on improving operational performance. We continue to advance our ability to expand EBITDA margin, but without significantly increasing our leverage position on the balance sheet. Prior to 2024, we were on a pretty clear path to hit most of these targets. 2024 was a historic down year for volume and temporarily reduced some of the positive trending EBITDA margin trends. 2025 is building better momentum, and it's expected to be a stronger year than 2024.
As we enter the final year of the long-term target goal, the market continues to pick up steam, and we execute well in 2026. We have a path to achieving these through cycle targets. I want to turn next to the balanced approach to capital allocation. Metallus maintains a pretty disciplined balance. We'll continue to maintain a strong balance sheet and plan to consistently have $250 million- $300 million of liquidity, regardless of what we're doing. We really want to maintain that liquidity. We'll continue to grow the business by using our capital for organic and inorganic opportunities. Returns in excess of our cost of capital, looking for things over 15%, 16% to help grow our profitability. Organically, we normally will use about $30 million- $40 million in base CapEx, which is made up of about $20 million- $25 million of maintenance.
That leaves the remainder of $10 million- $15 million of growth assets or efficiency assets. Both ways, the efficiency assets can still grow our profits pretty substantially. Inorganically, we'll continue to target accretive bolt-on acquisitions. We're always monitoring for these opportunities with a focus on downstream bolt-ons that will consume our steel and still diversify our product offering and market participation. We also maintain the capital required to fund our pension obligations. As a reminder, we terminated the salary pension in Q4 of 2021 and froze the bargaining plan from new entrants as of January 1, 2022. The total liability risk, which was over $1 billion in 2021, is more than half reduced, less than $500 million as of today. Our funded position is about 84%, so we're unfunded by about $115 million.
We made some capital contributions in 2025 that will total to about $60 million, and we expect a significant decrease in those cash requirements as we get into 2026. Finally, we'll continue to return capital to our shareholders. We have a share buck authorization with over $93 million remaining. At a minimum, we're going to continue to offset the equity compensation that ranges from $12 million- $14 million a year. We'll be opportunistic as well when appropriate. We've reduced the diluted shares by over 25% since the start of 2022. Finally, as our last slide here, why invest? Why invest in Metallus? We feel we're a pretty attractive entry point at the current stock price and trading multiples. We're built to navigate uncertainty and come out stronger.
This was a lot of the transformation that Kris mentioned when he started talking about, with a strong balance sheet, liquidity, and a focus on continuously improving our operational efficiencies. We really feel like we've right-sized the cost structure, but we'll always focus on aligning our cost to what the market can support. We have nearly 100% domestic production, and we expect to continue to be a longer-term beneficiary from recent trade actions, supply chain risk mitigation actions, and onshoring. We feel we have a pretty friendly shareholder distribution policy, and we also are a different steel company with a strong backlog of solutions and ranges that are pretty unique, as Kris was mentioning earlier. We're also a strategic part of the domestic supply chain, supporting national defense, as highlighted by the investment of $100 million that will benefit the supply chain for national defense.
It's also going to accelerate our efficiencies and our delivery to the market for all of our products, not just defense, because those assets can be used and have capacity to be used for everything. As Kris mentioned, we're investing in the vacuum arc remelt with titanium, stainless solutions, the remelt steel, and that's really aligned with the market trends of growing aerospace and defense. Those are our prepared remarks. I think we'll turn it over to any questions.
Do you guys see a strong growth potential in the inventory contracts? It's a strong growth potential to be kind of like a future that you guys are making a whole new practice that's kind of like a step up. We're going to keep going after the islands, meaning the commercial islands that are used there either, which are with a different mix of customers. We see a lot of opportunity to avoid the presence of new programs. The funding that we received was specifically to address that issue that the U.S. was facing. There are other opportunities out there. Congress actually just put a bill forward that we're going to approve another $10 million of funding for us to advance and to build capabilities that we have. It needs to go through the Senate and ultimately be signed into law. Who knows about it?
If there are not, there are other opportunities. What I look for is the pretty unique one.
It's a unique one too, where obviously they have some expectations, but commercially we can use these assets. I mean, we would strategically look for things that were not going to pin us down or lock us into something. It really was a beneficial arrangement.
You mentioned 70% price increases. I couldn't remember what in a second. What's driving that? Is it the cost or?
That was our seamless mechanical tubing. It's a smaller part of our portfolio, but the demand supports it. We announced them, and the order inquiries didn't stop after we announced it.
You guys are all EAF, just in terms of what's going on. I know you want to try to decommand electrodes. I know you have a nice thing. I think we're going to go there. We have all sources of supply there. Typically, we use six-month buys. Price is down a little bit. As demand was lower last year, that's been stable. No issue with supply. There's involvement of suppliers on the subordinates and TA.