Metallus Inc (MTUS) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the TimkenSteel Third Quarter 2020 Earnings Conference Call. (Operator Instructions) I will now turn the call over to Jennifer Beeman. Please go ahead.

Thank you. Good morning, and welcome to TimkenSteel's Third Quarter 2020 Conference Call. I'm Jennifer Beeman, Senior Manager of Communications and Investor Relations for TimkenSteel. Joining me today is Terry Dunlap, Interim Chief Executive Officer and President; Kris Westbrooks, Executive Vice President and Chief Financial Officer; as well as Tom Moline, Executive Vice President of Commercial. 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 TimkenSteel website where non-GAAP financial information is referenced, additional details and reconciliations to GAAP equivalent are also included in the earnings release.

With that, I'd like to turn the call over to Terry. Terry?

Thank you, Jennifer, and thanks to everyone on the call for joining us this morning. The third quarter was one of transition as our customers and TimkenSteel began to recover from the onset of the COVID-19 outbreak.

During the third quarter, our shipments improved, we generated positive EBITDA and cash flow and we continued to make progress on many important initiatives. Much uncertainty remains in the market, however, so we are working hard to have a positive impact on those things that are in our control. That includes working safely, supporting customers, reducing costs and managing cash.

A few highlights for the quarter. First, we continue to operate safely. Safety remains our top priority, highlighted by our all-time best OSHA recordable rate for the first 9 months of the year. In addition, our employees continue to be diligent in following the COVID-19 protocols we've established to maintain a healthy work environment. Fortunately, we have not experienced any operational shutdowns due to illness, and we continue to work collaboratively with our employees, suppliers and the USW to ensure everyone remains safe. My sincere thanks to the TimkenSteel team for their ongoing focus on staying safe and watching out for their coworkers every day.

Second, we delivered positive EBITDA and another quarter of excellent operating and free cash flow. Despite the challenging demand environment, our team remains focused on generating cash through disciplined working capital management and efficiency initiatives, continued implementation of systemic cost reduction actions across the company, most of which began prior to the pandemic and supporting our customers as they begin transitioning to more normal operating schedules in the second half of the year.

Combined, these efforts helped generate a third quarter operating cash flow of $41.1 million and adjusted EBITDA of $2.6 million, a $4 million improvement over the prior year period. During the quarter, we maintained our cash position, repaid $40 million of outstanding debt and, as a result, we had sufficient liquidity at the end of the quarter to meet the current needs of the business.

Moving to our end markets. During the third quarter, we saw positive momentum in sales and shipments as our customers began to recover from COVID-related shutdowns. Our ship tons increased 42% sequentially, primarily driven by the recovery in the automotive market. However, our shipments in the second quarter were historically low, so we are still below our pre-COVID levels for our overall business.

Shipments to automotive customers during the quarter were aided by higher-than-expected OEM vehicle sales and the corresponding pressure in the supply chain to meet demand, especially in the light truck category.

As a result, we expect to see continued robust SBQ demand from automotive customers in the months ahead. Customers in the industrial end markets generally saw slower recoveries, resulting in weaker demand for our products as our customers reduced inventory and closely managed cash. Real customers were particularly hard hit. Our distributors remain cautious but have reported month-over-month sales increases, improving inventory turns and end customer buying patterns.

Finally, the energy market remains under significant pressure as oil and natural gas prices remain low and drilling rigs in operation are expected to remain at reduced levels for the foreseeable future. We believe we are well positioned to continue servicing our customers in the energy sector as they adjust their business operations to align with the current market conditions. As always, we are staying close to our customers as they navigate these many challenges and transitions and continue to align our business activities accordingly.

Beyond the immediate challenges related to COVID-19 and short-term market constraints, we remain focused on long-term performance and profitability improvement actions. I am pleased that our cost reductions are on track to deliver $100 million of run rate savings, exceeding our previous target of $70 million. Kris will cover this in more detail in a minute.

As we discussed in previous calls, numerous cross-functional teams focused on a wide range of cost reduction and working capital efficiency work streams, are active across virtually all functions and activities of the business. A few examples include, during the third quarter, we continued our organizational restructuring plans to create a more efficient business. These actions are the primary driver of a 17% headcount reduction in the first 9 months of 2020 and a 30% reduction since the beginning of 2019. While these actions are never easy, we are committed to building a more efficient and cost competitive organization structure.

The evaluation of our overall product and service portfolio continues as we focus on areas of strength and adjust in areas no longer critical to our customers or where market dynamics have changed significantly. For example, the changes to our seamless mechanical tubing product line discussed in our second quarter earnings call, are being implemented after working with customers to ensure a smooth transition by year-end. We anticipate the impact of this action will result in approximately $3 million per year of EBITDA improvement. We have begun consolidating administrative office space in Canton. This will result in $2.5 million of near-term CapEx avoidance in addition to ongoing savings of $250,000 per year. This project will be completed in early 2021.

As noted in our last call, there are dozens of similar projects being worked on in all areas of the company, each with a goal of sustainable profitability and cash flow generation. In addition, our value-added components product line continues to be an area of focus. As a reminder, these are highly engineered parts made from TimkenSteel bars and tubes for the automotive, industrial and energy markets. The expansion of our value-added components facility near Dayton, Ohio was completed on time and under budget in the third quarter.

In August, I mentioned that we were in the qualification stage for new product launches with 3 major customers. During the third quarter, we began production shipments for 2 large OEMs and are on target to begin shipments for the third customer in the fourth quarter.

We estimate sales from these new product launches to be in excess of $20 million in 2020, increasing to approximately $75 million in 2021. In addition, we continue to review application and performance requirements to identify new opportunities for this product line.

Finally, our Board of Directors has asked that I continue in my current role as Interim Chief Executive Officer and President until a successor can be identified. I remain committed to serving our customers, shareholders and employees as we strive to safely improve the performance of the business.

With that, I'd like to turn the call over to Kris. Kris?

Thanks, Terry. Good morning, everyone, and thanks for joining us today. On a GAAP basis, our third quarter of 2020 net loss was $13.9 million. Shipments and production levels improved from the prior quarter but remain below historical levels as the impact of COVID-19 and a weak energy market continued to affect the top and bottom lines of our business. Adjusted EBITDA of $2.6 million in the third quarter represented a $4 million improvement compared with an adjusted EBITDA loss from the prior year quarter. The primary driver of the improved adjusted EBITDA performance in a lower demand environment is the significant benefit of our ongoing cost reduction program.

Sequentially, adjusted EBITDA declined $3.1 million due to the third quarter planned annual maintenance shutdown costs and lower savings from COVID-19-related actions, partially offset by an increase in shipments. Our cash balance remains at a high level with $74.8 million at the end of September, relatively consistent with our historically high cash balance at the end of June. Total liquidity, which represents available borrowing capacity on our credit facility plus cash and cash equivalents, improved $28.1 million from the end of June to $280 million at the end of September.

Cash generated from operating activities in the third quarter was $41.1 million. Through the first 9 months of 2020, we generated $121 million of cash from operating activities, which represents a record amount of cash generation since the inception of the company.

Moving now to the drivers of the third quarter results. Net sales of $205.9 million in the quarter increased 34% from the second quarter of 2020, in large part due to increased demand in the automotive market following significant COVID-19 disruption and temporary plant outages in the second quarter. We estimate the negative impact of COVID-19 on net sales in the third quarter was approximately $70 million.

Additionally, third quarter net sales were negatively impacted by lower raw material surcharge revenue per ton of 10% on a sequential basis. Shipments of 154,300 tons in the third quarter increased 42% sequentially as a result of higher automotive shipments, partially offset by lower industrial, energy and OCTG billet shipments. This higher volume drove a sequential improvement in adjusted EBITDA of approximately $8 million that was more than offset by other items to be discussed shortly.

From an end market perspective, shipments to automotive customers were 90,300 tons in the quarter, an increase of 176% from the second quarter and slightly below the third quarter of 2019. Shipments were 59,300 tons to industrial and 4,700 tons to energy in the third quarter, both of which were lower sequentially and as compared to the prior year quarter.

Lower demand continued to prevail in the industrial and energy markets, with energy shipments negatively impacted by a weak oil and gas market. OCTG billet shipments were minimal in the quarter and are expected to remain modest in the foreseeable future. Price and mix declined in the third quarter with an unfavorable adjusted EBITDA impact of approximately $5 million compared with the second quarter. The sequential decline is primarily due to the impact of higher automotive shipments on average price and mix.

As anticipated, manufacturing costs increased sequentially by $7 million, primarily due to the successful completion of our planned annual maintenance shutdown in the third quarter. In comparison to the prior year quarter, manufacturing costs improved by $5 million as a result of aggressive cost reduction actions aided by flexible production schedules, partially offset by unfavorable fixed cost leverage.

Melt utilization improved sequentially but remained low at 36% in the third quarter. We plan to continue to align our operating schedules with near-term demand while maintaining our commitment to customer on-time delivery. SG&A expense for the quarter was $17.9 million, an increase of $1.1 million sequentially as a result of lower third quarter savings from COVID-19-related actions. SG&A expense decreased $3.5 million from the prior year third quarter, largely due to savings from restructuring actions.

Moving on to cash and liquidity. Our total available liquidity was $280 million at the end of the third quarter of 2020, which represents an improvement of nearly $50 million since the end of 2019.

During the third quarter, the company generated free cash flow of $37.7 million and repaid $40 million of outstanding borrowings. Additionally, earlier this month, we repaid the remaining outstanding balance of $20 million on the credit facility to bring borrowings on the facility to 0 for the first time in the history of the company.

In addition to positive free cash flow, we've continued to make progress with the ongoing sale of noncore assets. We've received cash proceeds of $1.6 million during the third quarter upon the sale of machinery and equipment located in our former facility in Houston, Texas. Year-to-date, cash proceeds totaled $10 million from the sale of noncore assets with additional real estate and assets remaining for sale. Our convertible debt with a principal amount of $86.3 million will mature on June 1, 2021. We continue to monitor the capital markets and believe options exist to address the convertible debt opportunistically in advance of or at its maturity. Overall, our liquidity position at the end of September remains sufficient to meet the current needs of the business.

From a pension plan perspective, the company recorded a noncash remeasurement gain of $4 million in the third quarter of 2020, which has been excluded from adjusted EBITDA. The ongoing quarterly remeasurement of the U.S. salary pension plan obligation and assets in 2020 was triggered in the first quarter this year. Following the U.S. salary pension plan remeasurement in the third quarter, the total funded status of all company pension and post-employment benefit plans was approximately 85% as of September 30, 2020, consistent with the prior quarter. There are no additional required pension contributions in 2020 and minimal contributions required in 2021.

Switching gears to our cost reduction actions. Last quarter, I walked you through a variety of COVID-19-related actions that we implemented at the onset of the pandemic on top of the ongoing cost-cutting actions commenced in 2019. In the third quarter of 2020, the COVID-19-related actions saved approximately $5 million in cash and reduced administrative expenses by approximately $2 million.

In total, since implementation in the second quarter, our COVID-19-related actions saved approximately $12 million in cash and reduced administrative expenses by approximately $7 million.

As discussed last quarter, the company continues to defer its share of Social Security payroll taxes as afforded by the CARES Act. Through the end of September, the company deferred $4.3 million of payroll taxes and expects an additional $2 million to $3 million to be deferred in the fourth quarter as well. Payroll tax deferrals will be remitted in 2 equal installments at the end of 2021 and 2022.

In addition to these COVID-19-related actions that have provided us with savings in 2020, we recently completed a detailed review of our overall cost reduction program that was initiated in early 2019. This review includes allocation of previously executed savings projects and where applicable, adjustments to the savings estimates for current 2020 volume levels.

As Terry noted, we're pleased to report that we're on pace to deliver over $100 million of run rate savings in 2020, exceeding our previous target of $70 million. Approximately half of the run rate savings relate to a 30% permanent reduction in salaried and hourly employees since the beginning of 2019. Additionally, significant actions that contributed to the over $100 million of run rate savings include items such as the closure of the former facility in Houston, Texas, which resulted in approximately $8 million of annual savings; changes to employee and retiree benefit programs to more closely align our offerings with market benchmarks will result in approximately $15 million of annual savings; and a variety of manufacturing continuous improvement initiatives that are expected to benefit our operational efficiency going forward.

As Terry mentioned, many of these actions impacting people were not made easily, but they were necessary to improve the cost structure and long-term competitiveness of TimkenSteel. At this time, we do not plan to report on this cost reduction program going forward, given that the target has been exceeded, and we are nearing the end of 2020.

Instead, in the future, we will highlight significant incremental new savings actions as completed. We believe additional opportunities for simplification and profitability improvement exists and look forward to providing updates, as appropriate, going forward.

In summary, we believe our consistent cash flow generation and substantial liquidity provide us with flexibility to execute our short- and long-term profitability improvement strategies. Given the continued uncertainty and volatility in our end markets, we are not providing quarterly earnings guidance at this time. This wraps up my prepared remarks, and we would like to open up the call for questions.

(Operator Instructions) Your first question today comes from the line of Seth Rosenfeld with Exane BNP.

I have a couple of different questions. Starting out, please, on the demand outlook, if I may. Your commentary on auto seems to align with what we've heard from many of your peers in the results season. But I think that your commentary on maybe the industrial customer base struck me as a little bit more cautious, I've heard from your peers. Can you walk us through some of the dynamics within an industrial customer base, what might be holding back demand? And also your expectations for shipment growth into Q4. To what extent were the new value-add components will they drive a boost in shipment volumes? Are we looking at more stable sequentially? Start there, please.

Great. So I'll make a few comments and then hand off to Tom Moline. But the automotive business came back very strong as you've heard from everyone and was robust. And industrial space has been more muted. The rail area was very difficult, as I noted in my remarks. Other industrial activities were balanced, if you will. The defense market was still pretty good for us, very much in line with where we were earlier in the year. But others in the large equipment space were not nearly as robust as we had hoped for.

So Tom, do you want to add a few comments there, please?

Yes. This is Tom Moline. I'll add a little color on the industrial side, in particular, and also energy. The general industrial markets were down modestly in the quarter, certainly relative to Q2, somewhat as a result of the COVID-19 pandemic. But most of our customers continue to operate with modest disruptions within all state-mandated restrictions. But we did see submarket declines in the 15% to 25% range relative to earlier in the year, with some select markets being even deeper, specifically rail, somewhat on the excavation earthmoving equipment side. And certainly, any of the industrial forging group that were supporting or are supporting oil and gas pipe applications.

Now our volumes were down 6% relative to last quarter and approximately 25% relative to earlier in the year. And although difficult to quantify, we approximate about half of that was driven by the effect of the COVID-19 pandemic. Now what we're seeing right now is customer inventories are reported to be generally in good condition. Order book cancellations from industrial customers have been modest, well within historical levels. Initially, we saw a significant increase in requests to push material who wanted dates out a bit, but that has subsided. And most customers are taking advantage of short mill lead times in the industry.

In our distributors, the service center channel, continue to manage their inventory to align with changing demand, specifically their shipping rates, placing only replacement orders at small order quantities. There's really no speculative buying going on at present at all. So from our perspective, while the industrial markets have retracted, we continue to book orders, albeit at smaller order quantities. And there still is a lot of uncertainty with regard to COVID-19 and also the election, making it difficult to forecast, but booking levels are improving with some large industrial accounts. And there is cautious optimism amongst the distributors moving into Q1.

And if you look at the real submarkets within industrial, mining, agriculture, industrial machinery and power gen are all relatively stable with mining and agriculture actually beginning to show some strength. Wind energy and defense have shown a solid resiliency through the pandemic, and that appears to be in a good position to continue. But as Terry mentioned, the one submarket within industrial that is still in decline is rail.

I can offer some color on the -- okay.

I was going to say if you can -- something that happened to your view for Q4 volumes, whether or not you saw opportunity for further sequential growth across the group.

I think Q4 will look much like Q3 just because of some general seasonality with improvements going into Q1.

That's very clear. And if I can ask a separate question, please, on cash generation. Obviously, continuing to execute really excellent performance on working capital management. So congrats on that. Wondering if you can please talk us through what's continuing to drive that going forward as demand does seem to be improving. Certainly in Q3, we saw volumes tick higher. Do you see opportunity for further working capital release into Q4 and into 2021? Or have kind of the structural measures we've discussed in the past and exhaust at this stage?

Seth, this is Kris. Clearly, as we've talked about before, working capital remains a significant focus for us going forward. We do believe there are certain categories of inventory that we can still optimize. For example, certain pockets of finished goods and supplies as examples. However, those do take time, and we have addressed a lot of low-hanging fruit from an optimization perspective already.

Q3 actually is our lowest point of inventory in the history of the company.

From a receivables and payables perspective, we expect those to follow the demand in the future and be very somewhat matched. So overall, we do believe all those process improvements we implemented, those are going to continue. They're systemic. They'll benefit us going forward. That said, the last 9 months have been very strong from a cash generation perspective.

And going forward, it's going to be dependent on demand and EBITDA generation from one respect. And then the working capital tactics, we believe will be less impactful because we have completed a lot of those larger, more significant items.

Your next question comes from the line of Tyler Kenyon with Cowen.

Terry, in your prepared remarks, I think you referenced just some broader operating constraints. So I was wondering if maybe you could talk a little bit more about those.

Operating constraints? Did I hear your question, right, Tyler?

Yes. I think you were referring more so as to what you're seeing out in the market with customers. But yes, if you could just expand upon that a bit more.

Oh, yes, it's very -- it's customer based, right? It's the demand side. So operationally, we're in really good shape where things are running well, plants are running well, managing our capacities nicely, keeping our lead times short. So on the operating side, quite good.

On the demand side, Tom just went through it. That's where the concerns are, if you will, the uncertainty is a better word for it. Automotive has been pretty clear. You've all read about it and heard about it endlessly in the last 3 months. It's all the other activities that just have a level of uncertainty that Tom went through for us, so I won't repeat it. So -- and then the energy, I don't -- it's at a very low level, and that's I think everyone expects that to continue all the experts in the oil and gas and natural gas business. So when we mentioned the constraints, it's really market constraint as opposed to operationally constrained.

Got it. Okay. Kris, could you help us with some of the major levers for the fourth quarter EBITDA bridge? I have a bit of a view now here on perhaps volume trajectory moving from 3Q to 4Q. Would you expect the $7 million tailwind just from lower maintenance that you took in the third quarter? And maybe how we should be thinking about raw material spreads and costs coming back and then again, some potential offsets to those from cost reduction initiatives.

Sure, Tyler. When we think about the annual shutdown maintenance of that $7 million additional manufacturing costs we experienced in Q3 versus Q2, about 2/3 of that is related to the annual maintenance. So not all of that is in the $7 million. So that obviously would go away. There is one piece that we are focused on here in the fourth quarter. We do plan to take a 3-week planned outage at our Faircrest facility. This has been planned for months. No disruption to the business. We'll continue to ship to customers. There is some required work that we need to do there from a maintenance perspective. It's going to come at a cost of about $1.5 million, about half of that will be CapEx, half of that will be expense. So that's an important action for us in the fourth quarter that we typically don't do at that time of year.

Besides that, from a spread perspective, we have seen some contraction. The scrap prices, as Terry mentioned, are fairly stable, though. So I can't think of any other major puts and takes to really walk through from a fourth quarter perspective, unless Terry or Tom, do you have anything to add?

No. The spreads, I think you mentioned specifically, Tyler, on the raw material spreads. Things have been pretty stable. You hear from everyone else when you talk about it that are really the big guys in scrap business. So it stayed relatively stable. There has been some compression on the spreads from the second quarter when it was a quite uncertain time for everyone. So I think this is actually, from my perspective, stabilized pretty nicely on the raw material front.

And just lastly, with respect to the new $100 million run rate savings target from some of these cost reduction initiatives, what proportion do you think you've realized here in the third quarter? And kind of how should we think about the pace of the -- what's left to be realized moving into the fourth and into the first half of 2021?

Yes, Tyler. So related to the cost reduction, we've taken the opportunity, as I mentioned in my prepared remarks, to review all of that and feel very comfortable that we are on pace this year to deliver over $100 million of savings. There will be some actions that we took -- taken later in the year that will continue to provide an incremental benefit as we get into '21, but you will see those savings in our numbers. I know it's challenging, the low volume levels and our EBITDA level to see all of that. But it's in there, and over half of that is coming from all the reductions we've taken from a headcount perspective. So you'll see those savings in our figures, and we're wrapping up the year strong.

And your next question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

Tom, I missed what you had said toward the end of your comments. You said volumes could be reasonably consistent with the third quarter and then you made some comment after that, that I missed.

Yes. With some modest seasonality that would be expected in the general course of the calendar year.

The seasonality is...

Yes, we're still booking this...

I was going to say...

Yes, we're still booking the fourth quarter, right? The lead times are very tight, as Tom mentioned. So we're still booking the fourth quarter on everything we have every product we have. So a lot of uncertainty there, if you will, but we'll know more in the weeks ahead, how that's going to look.

Okay. So you're saying normal seasonality then for Q4? Is that what I should take away?

Yes, I believe that to be true.

Okay. And then on the auto side specifically, clearly, a snapback in the third quarter. And as you look to the fourth quarter and the first quarter, I guess, what are your customers telling you in terms of readiness in ramp? Have they secured the material needed to get them through the next 3 to 6 months? Because I know, obviously, the production rates are way up, but they probably did have some states inventory going into this. So trying to balance out all those thoughts.

Demand -- Demand's real -- Tom, let me grab that one for start. The demand continues to be very good. The pool is very good. It appears that there is choppiness. There's no doubt there. There's movement with some people that have too much or have too little as they're adjusting maybe some suppliers and moving things around for next year and get in line with that.

So -- but it's -- the demand signals are all really good, and you read about it every day, especially with the pickup trucks and SUVs. Very, very strong. Can't make them fast enough. The Mexico supply chain seems to have settled down a bit. Other issues that are out there with one of the main producers in the supply chain had a difficult event at one of their plants. It's forced them to move some things around. So we're dealing with all of that. But overall, overarching on the auto side, very strong in the supply chain. Stresses are very good in a good way on the pool side. But definitely some choppiness, Phil. I mean everybody is working hard to get it right and to get back on track with where they were in the first quarter.

Terry, you've been doing this for a while in terms of metal supply chain and psychology and seeing a bunch of elections. I guess how is the general presidential election playing into CapEx psychology? I know it might be tough to decipher given everything else going on, but do you think that's a factor in terms of people restraining capital spending?

I think everyone just can't wait until it's over so they can get on with their life. I would say the oil and gas folks, in particular, are the ones as bad as it is or waiting to see what happens just given the different views that each group has on fossil fuels. So I'm not sure how it could be a whole lot worse, but we'll see what happens.

On The CapEx side, I would just say people are cautious. They can't wait to get through it. It's only 4 to 5 days away. And I think everyone will be just happy to know what direction we're going to go, and they can get back to trying to plan their lives and plan their business. So I wish I had a better answer for you, but we can now watch CNBC and Bloomberg and find out what's going to happen.

I was going to say that's assuming the outcome of the election is decided next week. So that's another matter.

I think -- yes, that's another matter.

(Operator Instructions) Your next question comes from the line of Jim Kitzinger with KLCM Advisors.

A couple of questions. Where are you or how do you feel you're doing market share-wise relative to your competitors? And have you changed in this down cycle, what you are trying to do mix-wise? I mean a couple of years ago, the objective was to build a richer mix and give up some of the grades that others could do at a cheaper price than you guys from a manufacturing standpoint. So I'm interested in some color there.

I'm also interested in -- you made a comment that the revenues would be $70 million more ex-COVID, and I'm assuming you look at some mix, blah, blah, blah. Help me if that $70 million was there in the third quarter, how much incremental EBITDA would show up relative to the cost structure? And I think Tyler or Phil were trying to get to this. Where you had a $25 million quarterly savings rate in Q3, are you or are you going to be there in Q4? And that's the kind of number we should be looking at rolling forward. Because it appears you've staunched the bleeding, but the real question longer term is, do you have a viable business model with somewhat better volumes to generate some operating profitability at some point in the cycle? So a lot of questions, but I guess I'd like some broad views.

Okay. Jim, Terry here. I'll try to get them all. I'm going to hand the baton off, I think, at least on one to Kris. But on the market share question, the latest data that we have, our market share has actually gotten a little bit better. Again, it's not perfect information. We get it from a variety of sources. But I think on that front, we think on the SBQ front end and the seamless mechanical tube front that, that continues to be a good thing. Less imports, for sure, as we go forward. Again, imperfect data but than what we do get from external sources seems to be pretty good.

As far as the mix goes, absolutely. Trying to move up the value chain as best we can. The energy, if you follow the company for a long time, energy is a high-value product for us. And given the dramatic declines in the energy sector, that certainly does not help our overall mix efforts. The work we've done to continue to grow our business in the defense market has been a really good thing because that is very much on the high end of the value chain. So we're continuing to work very hard in that area to continue to grow our business with the really important customers that we have and the work that they're doing. And that's been very successful this year, and we're hoping that's going to continue looking ahead.

So on the mix front, we very much want to go up the value chain. Energy is a tough one to overcome in a short period of time, but we're working hard at doing that. And we also spent a tremendous amount of time in the last year on the specialty side of our business of how to better monetize the things we do that not everybody else wants to do. How do we make it more efficiently? How do we manage the working capital more efficiently? How do we price it more efficiently, whether it's products or services? And we spend a lot of time on that, we're going to continue to work. Again, you can't flip a switch and make all that get better in a week. But I can tell you, it's an area that we've been spending a lot of time on for many months.

On the cost side, Kris, I'm going to let you take that one, if you can, to just reiterate some of the things you talked about a few minutes ago.

Yes. Absolutely. There's really 2 parts to your question there, Jim. First on the COVID sales and the impact to EBITDA, and we're not going to pro forma what that looks like at this time. But from a savings perspective, what I will share is about 75% of the $100 million, over $100 million savings that we're on track to achieve is structural. It's related to all the actions that are behind us and they're not related to volume. 25% of that approximately is variable and it relates to volume, but it's calculated at today's lower volume levels. So from my perspective, I view that as an upside opportunity. As volume recovers in the future, you'll see those savings to continue to grow and develop.

But in 2020, we have delivered on those savings with 75% of those being structural.

And Jim, the last question, I think, was the business model. The volume clearly is not what we're aspiring to do. But I would say, given how low the volume was in the third quarter from a historical perspective and to still generate positive EBITDA and cash in that environment I think bodes well when the volume does start to come back. That will be -- the leverage on the added volume will be something we'll like. And as Kris just mentioned, the cost that we've stripped out, 2/3 of it -- 75% of it, if you will, is systemic structural and it will benefit from added volume across the business. So we have to work really hard at that. We have to keep making sure we have our customers taken care of, and they want to keep giving us their orders, and we can keep making products for them. And that's where tremendous amount of our focus is. And I think the model we'll like it better with the new cost structure that we've been working so hard to put in price over the last year.

I get that, and I appreciate it. And once again, I think everyone was very pleased at the cash flow generation with the working capital work you've done and to hold the operating profitability about where it is now at a -- hopefully, we see -- this is a cyclical low point. My broader question though is, okay, if this is -- I mean, we've owned cyclical companies for a long time. This is as bad as it gets in a down cycle. I get that. But what does the business model look like over the next up cycle so that there are some return metrics that investors can begin to think about going forward. I mean investors and companies like this understand deep cycles. But they also want a viewpoint of what does it look like when volume comes back. I mean you can't affect volume. We all understand that. But you -- I mean the cost structure has changed dramatically over the last 2 years.

I'm trying to get an understanding of what a business model looks like with volumes up 30%, 40% from here, which would not be a heroic move across these business -- these end markets.

Well, those are great questions, Jim, and I wish I had a better crystal ball for you, but I think we do know that getting the cost structure right in a business like this is absolutely critical, and will serve us well in the worst of the downtime, which is where we think we are today and serve us really, really well when markets come back. So I think we're going to have 2018 anytime in the next year or so. I wish, but who knows, but I don't know -- if we're going to see a 2018 or 2014 for quite a while.

So we have to continue to focus on just stripping the cost out of this place to lean it up as much as possible to generate cash and EBITDA in the worst of times and then leverage that volume across the same asset and cost structure in the best of times, get paid for what we do, the special stuff that we do that others don't really care much about and be in a position to compete cost-wise, be competitive with the bigger guys that we have to face every day. So that's our goal, that's our mission, and that's what we're striving to do.

I'll ask 2 follow-ups. Where do you think you are from a cost structure standpoint relative to your big competitors? Are you 5% higher in cost, 10%, 20%? Where do you have to get to, to be competitive? And then secondly, Terry, obviously, the Board likes what you're doing or no one has chosen to throw their hat in the ring here to run the place. I'd like some thoughts on both of those topics.

Well, when you talk about the people you compete with, we know we have to keep working on the cost structure and we think about the gaps all the time and what we have to do to get those closed. And we don't usually talk about the details around that, but you can be sure we're focused on getting a cost structure on every front fixed and operationally to compete with everybody and anybody.

As far as my job goes, I've been here for 12 months. We've worked hard to keep the company moving forward. And the Board has asked me to continue to do this for the foreseeable future until my successor is found. And we'll keep you posted on that in the weeks and months ahead. And when we have something to tell you, we'll be able to tell you. I wish I could expand on it more than that, but that's about what I can say about me at the moment.

(Operator Instructions) And there are no further questions in queue. I turn the call back to Jennifer Beeman.

Thank you, Amy, and thank you, everyone, for joining us today and that concludes our call this morning.

This concludes today's conference call. Thank you for your participation. You may now disconnect.