Olympic Steel Inc (ZEUS) 2021 Q1 法說會逐字稿

Good morning, and welcome to Olympic Steel's 2021 First Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to hand the conference over to Rich Manson, Chief Financial Officer at Olympic Steel. Please go ahead, sir.

Thank you, operator. Welcome to Olympic Steel's earnings call for the first quarter of 2021. Our call this morning will be hosted by our Chief Executive Officer, Rick Marabito; and we will also be joined by our President and Chief Operating Officer, Andrew Greiff.

Before we begin, I have a few reminders. Some statements made on today's call will be predictive and are intended to be made as forward-looking within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and may not reflect actual results. The company does not undertake to update such statements, changes in assumptions or changes in other factors affecting such forward-looking statements. Important assumptions, risks, uncertainties and other factors that could cause actual results to differ materially are set forth in the company's reports on Forms 10-K and 10-Q and the press releases filed with the Securities and Exchange Commission.

During today's discussion, we may refer to adjusted net income per diluted share, EBITDA and adjusted EBITDA, which are all non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures is provided in the press release that was issued this morning and can be found on our website. Today's live broadcast will be archived and available for replay on Olympic Steel's website.

At this time, I'll turn the call over to Rick.

Thank you, Rich. Good morning, everyone, and thank you for joining us to discuss Olympic Steel's results for the first quarter of 2021. I'll begin with some comments about our record performance in the first quarter and the overall strength of our markets, then Andrew will review our business segment performance, and Rich will provide more detail about our financial results. And then after that we'd, of course, be glad to take your questions.

So as noted in this morning's release, our strong momentum continued in the first quarter, which was our most profitable first quarter ever. And overall, it was our third most profitable quarter in the company's history.

Our performance resulted from the combination of several factors, but most importantly, I'd like to recognize and thank our employees whose hard work, talent and dedication to our internal disciplines around safety, expenses and inventory management were really critical to our success. Together, their focus on safety and performing for our customers every day helped drive an outstanding start to the year.

Rapidly changing market conditions, which began to appear in the fourth quarter of 2020, also played a big role in shaping the first quarter of 2021. During the pandemic, mill production capacity was reduced; end-user demand has strongly returned and returned faster than forecasted, resulting in constrained metal supply and depleted inventories.

This supply/demand dynamic has caused a disruption in the supply chain. Metal became difficult to source, lead times extended and prices have risen to unprecedented levels. While long mill lead times and disruptions in the metal supply chain kept inventory at service centers at historic lows, our long-standing relationships with domestic mills enabled us to support our customers with metal during this supply-constrained environment.

We performed well in all of our end markets, with record net sales of $463 million in the first quarter, and that's compared with $354 million in the first quarter of last year.

Net income totaled $22 million or $1.91 per diluted share. That's compared with net income of $0.6 million or $0.05 per diluted share a year ago. Adjusted EBITDA was $37.8 million compared with $7.5 million in the first quarter of 2020.

The strong first quarter has not changed our long-term focus. We understand that continuing to diversify our business is critical to the long-term value creation for all of our shareholders. Since 2018, through our strategic M&A focus, we have completed 4 acquisitions that enabled us to add higher-margin Carbon and Specialty Metals businesses. We are especially pleased with the smooth integration and strong financial performance of Texas-based Action Stainless & Alloys, which we acquired in December 2020 to geographically expand our Specialty Metals product offerings. We're actively pursuing additional strategic growth via acquisitions and organic investments, which Andrew will discuss in a moment.

Turning to the outlook for our markets, we expect strong demand, supply chain constraints and high metal prices to continue in the near term. We believe we are still in the early stages of a strong demand cycle. And Olympic is in excellent position to continue to benefit from growing demand in all of our segments. We expect strong profitability to continue in the second quarter.

Longer term, legislation to rebuild the nation's infrastructure, combined with the potential shift in supply chains closer to our domestic manufacturing industry, would extend the current demand cycle as infrastructure projects last multiple years. Olympic Steel is extremely well positioned to support an American rebuilding effort. So we're watching this legislation with significant interest and anticipation.

So now I'll turn the call over to Andrew for some additional comments.

Thank you, Rick, and good morning. The first quarter of 2021 was sensational in many ways as all 3 of our segments capitalized on the market recovery with strong EBITDA and pretax results. Shipments for our higher-margin products in Specialty Metals and Pipe and Tube outpaced the market in the first quarter. Meanwhile, our Carbon segment was the most profitable of the 3 segments, generating over $24 million of EBITDA in the first quarter even though volumes were impacted by the supply chain disruption that Rick mentioned earlier.

Inventories throughout the supply chain have been at historic lows. We are fortunate to have strong, long-standing mill relationships to support our customers during this supply-constrained environment. The longer lead times have challenged our spot sales. To put it simply, demand is strong.

Our Specialty Metals segment continues to perform extremely well and had a record quarter, resulting in a 43% increase in sales compared with the first quarter of 2020, while generating $8.9 million of EBITDA. Stainless steel is in short supply as the domestic mills have put customers on allocation, which has and will limit our ability to service the spot market. Recent government actions in aluminum will continue to reduce imports, but our strong domestic aluminum mill relationships will allow us to continue our accelerated growth in this market.

Pipe and Tube, which tends to be our most consistent segment, had a spectacular first quarter with a 44% increase in sales for the quarter compared with a year ago, while generating $8.7 million of adjusted EBITDA. Our newly commissioned LT-FREE machine 5-axis laser cutting system has performed exceedingly well and has created new opportunities to service our existing as well as new customers.

Our Carbon segment produced the most EBITDA in all of our segments in the first quarter, with a $22 million improvement over the first quarter of 2020. Carbon Flat segment sales were up 21% compared with the first quarter of last year due to higher pricing as volumes were market constrained. We recently added 2 new fiber optic lasers in Cleveland to further support our value-added growth efforts.

As Rick mentioned earlier, we continue to make progress on our diversification strategy with our Specialty Metals and Pipe and Tube segments now accounting for approximately 47% of net sales. We are especially pleased with our recent acquisition of Action Stainless, which had an excellent first quarter. We are also excited about our initiatives to organically grow our aluminum distribution business which significantly outpaced the market during the first quarter.

Turning now to our outlook for the coming months, sustained levels of strong demand, coupled with limited metal supply, have caused metal prices to continue to increase in the second quarter. We believe that prices will remain elevated until more balance in supply in demand is achieved, as additional mill capacity is expected to come online later this year.

Our industrial OEMs are reporting optimistic projections for the second quarter and the remainder of the year. However, we are concerned that supply chain disruptions will continue as shortages in metal, microchips, freight, containers, ships, building supplies and other areas may suppress production even though end demand is strong and growing.

Markets for industrial equipment, agriculture, construction, truck trailer and recreational vehicles continued to be very strong. In construction, our sales of coated products has been especially strong. And in the industrial appliance market, consumer-backed orders remain at high levels, indicating that demand will remain robust in that market as we move through the second quarter and into the second half of the year.

As well publicized, the automotive market continues to experience shortages of parts and semiconductor chips, but demand remains strong. Our 2020 investments in the Buford and Winder facilities in Georgia have enhanced our ability to service our growing auto market in the Southeast. We have excellent relationships with the automakers and their sub-tier suppliers. And we are optimistic about our ability to further grow in that area as evidenced by our second Southeast automotive stamping line that will be commissioned in early 2022.

For the longer term, infrastructure legislation could have a significant impact on growth next year and beyond. We are well positioned with customers who manufacture the construction and industrial equipment that will be needed for this rebuild effort. This would be a further long-term boost to the current demand cycle.

Now let me turn the call over to Rich.

Thank you, Andrew, and good morning, everyone. As Rick noted, we delivered the most profitable first quarter in the history of Olympic Steel and the third most profitable quarter overall as a result of strong market dynamics, record high metals pricing and our continued focus on controlling working capital and operating expenses. We saw dramatic increases in our profitability compared with the first quarter a year ago.

Net income was $22 million compared with $600,000 in the first quarter of 2020, and adjusted EBITDA was $37.8 million compared with $7.5 million a year ago. Results include $1 million of LIFO pretax expense in the first quarter of this year compared with $500,000 of LIFO pretax income in the same period last year.

Net sales were also a record high $463 million compared with $354 million a year ago. However, volumes were impacted by disruptions in the supply chain. These supply chain concerns continue into the second quarter. And while we are seeing strong end-user demand, second quarter sales volumes are expected to be similar to the first quarter.

We also continue to benefit from our disciplined approach to inventory management. Our team has made tremendous progress, and our focus on efficiency drove record flat-rolled inventory turns of 6.3x and record pipe and tube inventory turns of 4.2x. We continue to maintain an intense focus on overall inventory management as we navigate an historically high metals pricing environment.

Total debt was $192 million at the end of the first quarter, an increase of $31 million since year-end 2020, resulting from the need to fund approximately $60 million in higher working capital levels associated with higher metals pricing. While debt levels modestly increased, it is important to note that our availability under our asset-based loan actually increased to $162 million at the end of the quarter.

Given our healthy liquidity position and access to capital, Olympic steel is well positioned to finance additional investment and acquisition opportunities to further our growth strategy.

Capital expenditures totaled $2.3 million for the first quarter compared with depreciation of $4.7 million. We expect 2021 capital expenditures to be in the range of 75% to 100% of depreciation expense. The effective income tax rate for the first quarter was 26.5% compared with 25.4% for the first quarter of 2020. We expect our tax rate to approximate 26% to 28% in the upcoming quarters.

We also announced that the Board of Directors has approved a regular quarterly dividend of $0.02 per share payable on June 15, 2021, to shareholders of record on June 1, 2021.

In conclusion, we are incredibly proud of the Olympic Steel team for delivering record performance during the first quarter. We believe that many of the factors that contributed to our success in the first quarter will continue, leading to strong profitability again in the second quarter of 2021.

Now operator, let's open the call for questions.

(Operator Instructions) Our first question today is from Andreas Bokkenheuser of UBS.

Congratulations on the good set of results. Just a question on end demand. And there was a question I've asked you guys before, and I think I did on the last call as well. But where are you seeing the strength kind of specifically in your end markets? And is there any markets that are lagging a bit?

And maybe related to that, I mean, obviously, on a year-on-year basis, we're going to be looking at a very low base of last year now due to COVID in the first quarter of last year. So how are you kind of looking at demand versus 2019, which is something that I get the sense a lot of people are looking at, where are we versus '19? Are we above 2019 in terms of kind of end demand for your primary products in end markets? Or are we in line with that? Or are we still kind of trailing it a bit? I realize prices are up, but that's probably also got a lot to do, like you mentioned, with the supply constraints in steel. So where are we on end demand and kind of versus 2019 in your view?

Well, Andreas, this is Andrew. So I'll try to attack both parts of your question. So first, the strength that we're seeing in our markets from our industrial OEMs, recreational vehicles, auto, really right before the chip issue, and construction really have driven our Carbon business.

What we're seeing on the Specialty Metals side of the business is that appliance, our clamp business, kitchen, restaurant food equipment is really coming back very strong. Truck trailer and auto exhaust has been strong. And so for us, there really has not been a segment of the market that is underperforming at the moment. I think the concern certainly is the supply chain disruption, you've read it, everybody has read it, relative to auto and production that has been curtailed at a number of the auto companies. And so that's certainly impacting us as auto is certainly an important part of our business.

What I would tell you is that, initially, customers were looking from a demand to get back to 2019 levels. They're not there. They really are not there even at the pre-pandemic levels at this time. I would expect as we're heading to the second half of the year, that the demand will certainly be there. But then the question will be whether there'll be enough steel to be able to supply. And if there are other supply chain disruptions, that will impact their ability to be able to make product.

Yes. This is Rick, Andreas. Thanks for the question. And the only other thing I'd add is where we really see still the biggest differential from '19 to '21 is in the transactional spot business. And that's just a function of all the things that Andrew just commented on in terms of the supply chain constraints.

That's really interesting. And you obviously mentioned that we should be -- we should start to see more supply as more mills kind of get commissioned into the back -- in the back half of the year. Have you had any conversations with your suppliers in terms of the ramp-up there, and where you see the market kind of, like, balancing out in terms of additional supply? I mean, obviously, a number of the new EAFs have been talking about a 6-month ramp up. We've even heard 12-month ramp-ups in some cases. But is there like an inflection point where you really see, right, by this time, we should have more -- materially more volumes to -- from our suppliers to sell to customers?

Well, Andreas, I think the way we look at it is we think that it's going to take the full second half of the year for most of this capacity really to come on. So the impact really wouldn't be until the beginning of '22.

The next question is from Marco Rodriguez of Stonegate Capital Markets.

Yes. I was wondering, obviously, if you can maybe shed a little bit more light with some -- perhaps some data points just kind of, obviously, on the metal supply, remains pretty tight, mill times extended. Can you kind of give us a sense as far as where those numbers are versus now versus sort of a more normalized environment, if you will?

Sure. Well, hot roll, if you go back pre-pandemic, probably in normalized times, hot roll is typically 4 weeks, maybe 5 weeks. Today, it's closer to 8 weeks. Tandem products, so cold roll is typically 6 weeks. Today, it's closer to 8 to 10 weeks, and coated product about the same. On the Specialty Metals side, about the same as you were seeing, 300, 400 series stainless, 4 to 5 weeks. And today, it's closer to 7 to 8 weeks. So -- and we've seen this really starting at the end of last year, and it's really continued through now.

Understood. And you've obviously mentioned the automotive chip shortage, and it's obviously all over the place in terms of its impact on some of the supply chains. But can you just talk a little bit about your thoughts there on your expectations, if you have any that might be different? Or are you sort of in line with kind of the consensus thinking as far as when that might be alleviating? And then how that kind of sort of impacts your overall business?

Well, I think it depends who you're listening to. If you listen to the chip manufacturers, they're telling you that this is going to be a problem that's going to continue on for another year or 2. There have been differences from the automakers themselves as to when this is going to alleviate itself. As well as not just the automakers, but you're certainly seeing it with some of the recreation vehicle guys and other industrial OEMs.

I would expect that we're going to see challenges through the balance of this year. You continue to see almost weekly production shutdowns, extension of shutdowns. I mean Ford talked about second quarter, a 50% reduction. I don't think we've seen that as much from some of the other domestic auto suppliers. But I think the news is, it's really mixed. So the way that we look at it is we have to prepare for these disruptions for the balance of the year.

Understood. Got it. And I know it's still pretty early, but just in terms of the prior acquisition, our most recent acquisition, Action Stainless & Alloys. Can you maybe just provide a little bit an update on the integration efforts there?

Sure. Thanks for the question, Marco. The integration is going very well. As we commented earlier, it's been a great fit, both from a product expansion in terms of geography and some of the product offerings in stainless that Action has. And then culturally, I'll tell you, it's a great company. And so on both sides, on both the business execution side and on the cultural side, it's been one of the smoothest integrations of an acquisition that we've done.

We are very excited about the strong results we've seen from Action, and we're really optimistic about growing that business as well as growing the rest of our -- continuing to grow the rest of our Specialty Metals business.

Understood. Very helpful. And last question for me. Just wondering if you can maybe update us on the M&A landscape. I know it's obviously an important component of the overall strategy. If you can kind of give us a sense as far as what the pipeline looks like today? And maybe where valuations are kind of shaking out?

Sure. So the M&A market has rapidly recovered in terms of the activity levels. So obviously, as we went through 2020 and COVID, a lot of things came to a screeching halt in terms of the buy-sell activity for companies. I think that quickly -- as the recovery happened in fourth quarter, quickly companies reengaged. I use our example of Action as a perfect example of that. We were -- we were pretty far along in our conversations with Action. And obviously, in the heat of COVID, we took a slight pause, but we were able to still get that transaction done in December. First quarter, we have seen a lot of activity. Maybe, Rich, you can comment on the other part of Marco's question on sort of what we're seeing in terms of pricing and multiples and value and that type of?

Yes. I think -- thanks for the question, Marco. I think the best way to look at it is with the -- with all of this heating up, is that it is going to push multiples up a little bit. And that's certainly what we're seeing. The hard part is when you're in a hot market like this, it's not really the multiple, but what are you basing the multiple on? And certainly, 2021 versus in 2020, produced some very unique results. And so you have to kind of temper that.

And in our view point, when we look at M&A, is we look at EBITDA streams over a cycle, not just in a particular period of time. And so the multiple is really going to depend on what the base you're using to look at that multiple for. So is it 1 year? Is it 3 years?

Right. And the way I'd end that question is, and we talked about it in our prepared comments earlier, but we are actively continuing to look at acquisitions. And we intend to continue to supplement our growth through acquisitions. We've made 4 acquisitions over the last couple of years, and we're looking forward to and fully expecting to continue to execute on acquisitions that are of very well run, high-return companies like Action.

(Operator Instructions) Our next question is from Chris Sakai of Singular Research.

A lot of my questions were asked already. But just, I guess, I've got one, maybe you could help me understand. I've heard about the supply chain constraints, which has put a damper on the volume. But I wanted to know why -- could you help me understand why inventory in flat assets are up?

Sure. Sure, Chris. And really, what you're looking at there, and there'll be more detail in the 10-Q that will come out later today, is that, where you're seeing, even though inventory -- our inventory volume is actually down a little bit from the previous quarter. And it's been relatively flat from the last 6 months. But what you're seeing is the effect of the average cost increasing. So the CRU has been on a steady march upwards since August of last year, at this point having tripled that rate.

And so what you're seeing is a higher cost per ton in the inventory. And you're also seeing higher selling prices. So we had record sales in the first quarter of this year, which leads to much higher balances in accounts receivable. So where you're seeing it is really in accounts receivable and inventory. Those balances are up higher, offset a little bit by higher payables. But as we commented earlier, it's about a $60 million increase in working capital on a consolidated basis for the year, and a lot of that did fall in the Carbon Flat segment.

Okay. All right. Great. And I guess, we'll all wait -- from what I heard before, and it sounds like until 2022, that the supply chain constraints will get better?

Well, we think, Chris, certainly as we look out in the near term, certainly the next 3 to 6 months, we believe that the environment we're in is going to continue. Andrew talked about a lot of the areas besides just metal, different supply chains that are feeding a lot of our customers really are tight, constrained global supply chains and even just the transportation to get it here is an issue. And we do see that continuing. Like everything, I think businesses, economies adjust. And we will get back into a better equilibrium. But certainly here in the second quarter, I think it's going to continue to be really tight, and we didn't really talk much about it, but labor is really tight, too.

So I think all of those things, we're pretty bullish that demand, while some of it may be disrupted by some of these supply chain constraints, but we think the overall demand environment is going to be pretty good. And we're pretty excited about the rest of the year. We're certainly excited about where we sit as Olympic in the supply chain, the things that we've done in the last year or so. And certainly, we are exceptionally well positioned if this country does an infrastructure spend. So that's how we're looking at it.

There are no additional questions at this time. I would like to turn the call back to Rick Marabito for closing remarks.

Thank you, operator, and thank all of you for joining us on our call this morning. We greatly appreciate your continued interest in Olympic Steel. And we look forward to speaking with you again next quarter. Thank you very much. Bye-bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.