Olympic Steel Inc (ZEUS) 2020 Q3 法說會逐字稿

Good morning, and welcome to the Olympic Steel 2020 Third Quarter Financial Results Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

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 third quarter of 2020. 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 release is 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 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 on our call to discuss Olympic Steel's third quarter results. I'll begin with some brief comments about our third quarter performance and our near-term outlook, then I'll turn the call over to Andrew, who will discuss our business segment results. Rich will then provide more detail about our financial results, and then we'll take your questions.

So first, I want to thank everyone on the Olympic Steel team for coming together to ensure the safety of our people and the continuity of our operations as we continue to successfully navigate an unprecedented environment. Through the exceptional efforts of our team, our COVID-19 protocols are working, and we are producing and delivering products with excellent service that our customers expect. I also want to reinforce that our safety efforts extend well beyond our response to the pandemic. Our employees understand that safety and health is mission 1 every day for everyone in our organization, and that commitment is making us a safer company.

Turning now to our third quarter results. As noted in today's earnings release, we reported net sales of $300 million and a net loss of $1.5 million or $0.13 per share. While these results are not on pace with the same period of 2019, we saw significant sequential improvement in our performance. Compared to the second quarter of 2020, our shipping volumes increased 23%. Our sales rose by 21%, while our expenses only increased by 1%, resulting in our operating income improving by more than $7 million. However, falling carbon steel pricing in July and August pressured gross margins and overall profitability in the first 2 months of the third quarter. For the quarter, our volumes reached approximately 90% of pre-pandemic levels. This strong recovery in demand and improved pricing during September, coupled with our decisive actions around health and safety and the rightsizing of expenses and inventory during the early stages of COVID enabled us to deliver positive EBITDA across all of our segments in the quarter and provides us with a strong dose of optimism going forward. During the third quarter, we executed on our near-term priorities to improve inventory turns, reduce our operating expenses per ton shipped and generate free cash flow to reduce our debt. These disciplines, combined with our capital allocation strategy to diversify our business into higher return areas such as specialty metals and metal-intensive branded products support our long-term vision for Olympic Steel to be a more nimble, efficient and consistently profitable business.

We are very pleased with the progress we have made in a number of areas. Our flat roll inventory is at the lowest level since May 2010, and we are currently turning this inventory in excess of 5x. We continue to diligently monitor our operating expenses, which declined by 13% from last year's third quarter, demonstrating that we are permanently able to safely do more with less. Our head count remains down by over 300 or 17% compared with the beginning of the year.

We also generated free cash flow and reduced our debt by $26 million in the third quarter. And our borrowing availability under our asset-based revolving credit facility is actually higher than before the pandemic. These steps have served us well in the near term and will benefit the company as we move forward.

Looking at the fourth quarter, we continue to see strengthening demand with October daily shipping volumes remaining in excess of 90% of pre-COVID levels. Pricing continues to increase and is also now above pre-COVID levels. These dynamics support a positive pricing environment, and we expect a strong finish to 2020.

I will now turn the call over to Andrew for his comments on our operations.

Thank you, Rick, and good morning. I'd like to take a few moments to review our business segment results and share trends we are seeing in the industries we serve. Our specialty metals segment has rebounded toward pre pandemic business levels as shipping volumes rose sequentially in each month of the third quarter. And we continue to profitably gain share in specialty markets, particularly in aluminum products. While our contract customers did account for some of the volume growth, the return of our transactional business, which was buoyed by rising prices and stainless surcharges, was the main contributor to the increase in volumes. The combination of increasing volumes, reduced operating expenses and leaner inventory helped the segment post strong EBITDA and pretax earnings for the quarter despite lingering demand challenges in certain end-use markets such as truck trailer and food service.

Our most recent addition in Schaumburg, Illinois, of our dedicated white metals cut-to-length line, along with our newest slitter in Streetsboro, Ohio, continued to perform exceptionally well. We intend to continue to expand this fast-growing segment and anticipate adding new geography and processing capabilities in the future.

Our carbon segment made significant progress this quarter, generating positive EBITDA on stronger flat roll volumes and continued operating expense discipline. We benefited from a robust rebounding in the automotive market and we also saw stronger volume from a number of our industrial OEMs. We have seen greater demand in the spot market, specifically in tandem products. Historically low inventory throughout the industry and at end users, combined with temporary and potentially permanent mill shutdowns has extended lead times and created near-term shortages in key products and in certain markets. As a result, index pricing quickly continued to improve in September, and that momentum has carried into the fourth quarter.

Our pipe and tube segment felt the impact of falling carbon steel prices in July and August, but rebounded with a strong September, generating positive EBITDA and pretax earnings for the quarter. The momentum for pipe and tube demand and pricing continues into the fourth quarter. In all of our segments, we continue to drive efficiencies and strengthen our strategic position for long-term success. One of the highlights has been the new Buford, Georgia facility, which opened in the second quarter, is our primary flat roll fabrication hub in the southeast. The new Buford facility has allowed us to expand our automotive stamping capabilities in our Winder, Georgia facility, which allowed us to capitalize on the hot automotive market during the third quarter. These changes will allow us to grow our specialty metals business in the Southeast.

As we move forward, we look for margin-enhancing opportunities to continue to strengthen and diversify our portfolio. Our strong balance sheet gives Olympic Steel the flexibility to move quickly as opportunities arise in an increasingly active M&A marketplace.

Now I'll turn the call over to Rich.

Thank you, Andrew, and good morning to everyone. As Rick mentioned earlier in this call, carbon steel pricing fell dramatically in the early months of the quarter, which put pressure on our margins. As pricing and demand improved, our bottom line benefited from the actions we have taken to make Olympic Steel a leaner, more efficient organization. We ended the quarter with all segments posting positive adjusted EBITDA, and total consolidated adjusted EBITDA of $4.3 million compared to breakeven adjusted EBITDA for the second quarter of 2020. Sales for the quarter were $300 million compared with $384 million in the third quarter of 2019 due to lower average selling prices and volumes. However, our third quarter 2020 flat roll sales volume was up 23% from the second quarter of 2020. Net loss for the quarter was $1.5 million or $0.13 per diluted share compared with net income of $591,000 or $0.05 per diluted share in the third quarter of 2019. The results include $100,000 of LIFO pretax income in the third quarter of 2020 compared with $1 million of LIFO pretax income in the same period 1 year ago.

During the third quarter, we witnessed the continued benefits of the asset and operating efficiencies that Rick identified earlier in this call. Our operating expenses during the quarter were over $9 million lower or 13% when compared to the third quarter of 2019. We continue to generate free cash flow. At September 30, our total debt was $171 million, down $26 million from the end of last quarter. Our availability at September 30 was approximately $106 million, an amount higher than our pre-pandemic availability. Our credit department did an excellent job of navigating through the pandemic with minimal bad debt write-offs and the return of our average days sales outstanding to normalized levels of approximately 42 days. Year-to-date capital expenditures totaled $8 million, which includes the new operations in Buford, Georgia. We will continue this lower level of capital spending into the near-term future with no reductions to maintenance and safety-related items.

As a final note, the Board of Directors approved the regular quarterly dividend of $0.02 per share for this quarter. Olympic Steel is proud to have now paid dividends for 62 consecutive quarters.

In closing, I would like to echo Rick's comments about the outstanding efforts of our team, which drove all of our achievements during the quarter and give us a positive outlook onto the fourth quarter.

Before we take questions, I'll turn the call over to Rick for a few closing remarks.

Thanks, Rich. In closing, we remain acutely aware of the continuing potential challenges of the COVID environment and the impacts on our business as well as our customers. Some customers and industries still remain significantly below their pre-COVID activity levels. So we will continue to stay vigilant on health, safety expense controls and inventory turnover.

So now operator, let's open up our call for questions.

(Operator Instructions)

First question comes from Michael Leshock with KeyBanc Capital Markets.

So first question I had, just wanted to get a sense for the cadence in terms of daily demand momentum that you saw in October versus kind of the average 3Q levels or versus September levels. Just any color you can provide there would be great.

Sure, Michael. This is Andrew. We saw -- at September, towards the middle of the month, we saw a shift from what we had seen in the previous 2.5 months, saw that rise into October, saw that continue to rise that -- while not back to pre-pandemic levels, was certainly significantly better as we got into October and continued through October to show good strength.

And to go off of that, how -- what are your expectations versus normal seasonality on the demand side into 4Q?

Michael, it's Rich. And so what we've been seeing pretty much from the back half of the third quarter, and we kind of see continuing into the fourth quarter is pretty much the low 90% compared to pre-pandemic levels. Sequentially, we do expect the fourth quarter to have the seasonality, especially once you kind of hit Thanksgiving in that time through the end of the year that we normally do. And so if you're thinking of fourth quarter of 2020, I think if you were to compare it to the fourth quarter of 2019, I think kind of in that low 90s level of pre-COVID shipments is kind of where we'll end up the year.

Yes. And Michael, it's Rick. I'd add, as Andrew commented, what we really saw was a lot of strength in September and October in the spot marketplace, just given some of the dynamics on the supply and the pricing side. We anticipate as both these guys have said that volumes remain pretty strong, and we'll just see some of the normal seasonal end to the year.

Got it. That's helpful. And then are you seeing any inflationary pressures reemerging? And are you seeing any upside in freight or other consumables?

Yes. I mean, certainly -- I'll let Andrew comment. But yes, certainly, freight is one of the areas we are definitely seeing inflation.

No. That's true. So we're seeing it in flat. And as you know, index pricing has started to rise. We've seen about 12 straight weeks of the index pricing starting to come up, Michael. So we would anticipate that that's going to continue to move up certainly on the carbon side, and we've seen nickel and ingot pricing and aluminum staying at relatively high prices, nickel in the $7 range. And we've certainly seen aluminum in the -- ingot at about $0.85. And Midwest spot has started to climb up as well partly because of freight. So we definitely would expect that throughout the fourth quarter, we'll see prices continue to rise.

Okay. And then just lastly for me. If you could provide your outlook for net working capital in the fourth quarter? And what are going to be the drivers of that?

Sure. Mike, it's Rich. And so with the normal seasonality, typically, what you see at the end of the year is pretty much our lowest AR levels of the year. I think inventory from a quantity standpoint is going to stay relatively stable. But as Andrew indicated, with the increase in index pricing, we'll probably see a little bit of a pop-up in the inventory dollars going forward. What I would expect, though, which you'll see in the fourth quarter, is you'll can see some modest debt reduction off of the $171 million that we reported at the end of the third quarter. I think that just through normal working capital means, you may see another $10 million or $15 million come off of that here in the fourth quarter.

(Operator Instructions) The next question comes from Chris Sakai with Singular Research.

I just had a question on the expense side of things. I wanted to know and get a better idea of what are you guys doing for -- to reduce operating expenses for carbon flat. That seems to be an issue for the profitability there. And I just wanted to know if there's going to be any improvements in there in the future?

Well, Chris, I'll start, and I'll let Rich answer. So certainly, if you look at our consolidated results, we've taken a significant amount of expense out of the equation from 2019 to 2020. A large piece of that was actually taken out of the carbon side. And so if you look at our operating expenses and certainly, once the 10-Q gets filed later today, you'll see we've taken significant amounts out of administrative costs, warehouse costs, selling costs. And as I said, the majority of those cost increases have come on -- have come out of the carbon segment. I think as we move forward, we're going to be really diligent in terms of operating at a much lower cost per ton rate. You've -- we've started to see that already as our volume rebounded into the kind of 90% to 92% of pre-COVID levels. But maybe, Rich, you can add a little more color on that.

Sure. Thanks, Rick. And just to expound a little bit on what Rick said there, Chris, is that if you were to look at each -- and you'll have more detail this afternoon when the 10-Q is filed. But on -- overall, we were down over $9 million Q3 of '20 versus Q3 of '19, and that's about 13%. And on the carbon side, we're actually down 16% on the expenses. So of all the segments, carbon, we actually have the highest amount of expense decrease kind of year-over-year. And as Rick said, I think that's where you've seen it. And on total flat roll, we're down about $7 a ton for the quarter. So not quite sure what you're seeing, but maybe take a look at the [Q] when it comes out later today. That will have a little more segment detail for you.

This concludes the question-and-answer session. I would like to turn the conference back over to the presenters for any closing remarks.

Thank you, operator. And once again, we thank all of you for joining us this morning and for your continued interest in Olympic Steel. I sincerely hope all of you stay safe and healthy. And we certainly look forward to speaking with you again in the near future. Thanks. Have a good day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.