Olympic Steel Inc (ZEUS) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Olympic Steel third quarter 2003 earnings results conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference please press the star followed by the 0. I would now like to turn the conference over to Mr. Michael Siegal, CEO of Olympic Steel. Please go ahead sir.

Thank you. Good morning everyone. On the call with me this morning are David Wolfort, our President and Chief Operating Officer, and Rick Marabito, our Chief Financial Officer. First again, I'd like to thank all of you for your participation this morning and your continued interest in Olympic. Before we begin, let me remind you that forward-looking statements on this call are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Please refer to our SEC filings for further information regarding that.

Hopefully as you read in the release this morning Olympic Steel reported a loss of $115,000, or approximately 1 cent per share in the third quarter compared to a net profit of 2 cents per share in the year-ago period. For the first nine months we reported a loss of 12 cents per share compared to a net loss of 25 cents per share for the first nine months of 2002. And of course last year's results included the loss associated with our discontinued tubing operation and a one-time non-cash charge of a write-off of goodwill. Our third quarter results do show improvements over the first two quarters of 2003.

As we entered 2003 we set out a plan to increase our sales volume, to improve our inventory and depositions and to lower our expense base. We're now beginning to realize those benefits of those very profound efforts. So the third quarter tons are 8.7% higher than last year's third quarter and 8.3% higher than second quarter. Our operating expenses were reduced by 10% over the first nine months of 2002.

As we entered 2003 with the new credit facility which is yielding savings, interest expense declined by $1.8 million, or 36% from last year's first nine months as we continue to work on debt reduction and we reduced inventory during the year by nearly $19.5 million, or 19%, and debt reduction by $6.4 million. So all of the targets that we set out at the beginning of the year are coming to fruition and we're very pleased about the progress we're making in that regard.

We are experiencing an increase in demand at the present time but we still see, as I indicated in the press release, that the market is very fragile for a variety of reasons. Bank consolidations certainly puts a constraint on credit. We wish those banks good luck. We're seeing a greater discipline by the supply consolidation and obviously we're very concerned about what the Feds will do about interest rates relative to what appears to be inflation factors. We're very pleased that they kept them stable for the present time but as we look forward we don't really anticipate that to be the case. But we intend to remain diligent regardless of all those factors in managing our cash flow, our balance sheet, our operating expenses, and focused the management on the growth side of good sales volumes.

So we're pleased with the progress and I'll turn the phone call over to Rick for financial details. Rick?

Thanks, and good morning, everyone. As Michael indicated, our sales volume increased by 8.7% in the third quarter while sales dollars remained flat. That was due to a higher proportion of toll sales in the quarter. We were pleased with our efforts to manage expenses. Expenses were reduced by $2.3 million, or 8.8% in the quarter. On an 8.7 increase in tons sold. The 9 months expenses have been reduced by $8.1 million. Third quarter income taxes were recorded at 21.2% benefit on the loss, and that was in order to have the year to date benefit at 34%. We are in compliance with all of our loan covenants.

In our bank borrowing availability approximated $24 million at September 30. Capital spending in 2003 has totaled $549,000, and that was primarily equipment upgrades. Our capital expenditures are expected to remain under $1 million for the year. I'll now turn the presentation over to David.

Good morning. I have some limited comments regarding the industry and the industry's dynamics. And as we turn to the industry outlook, what we see today is the continued consolidation among steel producers bringing more stability to the long-term pricing environment. Coupled with that, as expected, strong pricing for steel scrap and higher energy costs keeping the base price of our steel up in the near term and we see that continuing to rise through the early part of 2004. Potential for fed interest rate increases as we progress through 2004, and as Mike had indicated, somewhat of an unpredictable demand environment from our steel consumers but a general steel environment that's more up-beat and improved as we enter the new year.

As we take a look at all of these issues we see our demand increasing and we would characterize the marketplace as returning to more normalcy on the demand side from an overall perspective from all three of our regions, the Eastern region, our automotive region, and our Central region. So we're seeing the return of our customer base, we're seeing our customers get more and more active and busier and forecasting a stronger fourth quarter and first half in terms of their demand cycle even though it remains somewhat unpredictable and we really haven't seen a tremendous amount of new employment from our customers.

With that, this concludes the presentation, and we'll now open the call for your questions.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. If you have a question, please press the star followed by the 1 on your push-button phone. If you would like to decline from the polling process, please press the star followed by the 2. You will hear a three-tone prompt acknowledging your selection. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment please for our first question. Our first question comes from Aldo Mazzaferro. Please state your company name followed by your question.

Hi, Michael, it's Goldman Sachs.

(Laughter) Really?

In terms of the trend sequential quarter-to-quarter trend, isn't your pattern usually for third quarter to be seasonally slower? I'm wondering if that's true and this represents a little more of a sequential increase than might appear to the naked eye.

Yeah, I said to people about once every ten years the back half of the year has a greater demand than the front half of the year. It certainly appears like this is the one year in ten. There's no question that there was bank constraints and credit constraints in the first half of the year, lots of concerns about China and all these other things, which seem to have fallen away. If you talk to the economists all of these factors of low interest rates and productivity gains, it was eventually going to come to fruition.

There was no question that with inventory reductions and low interest rates, while we don't see a lot of long-term building projects, there's no question that with farm pricing, the commodity pricing up, the ad market seems to be more robust, so all of the factors that have put in place to try and create the recovery did not have the impact in the front half of the year as it did seem to have in the back half of the year. We're pleased about where our customers are in terms of demand in what looks like a build schedule for the back half of the year, it certainly [INAUDIBLE] for the first half of next year.

Great. If I could ask one more, you're seeing imports lower in the marketplace now than did you previously in the last two quarters. Do you have a feel for the availability of imports as you go forward into the fourth quarter, maybe the first quarter? Do you think it trends up or down from here?

Aldo, Dave Wolfort, I'll take that question. I think the trend is cautious. I think the 201 is in place, and I forgot as you well know, we do see fewer offerings, the exclusions that are in place are being handled appropriately, most foreign sources entering the U.S. are cautious about how they're going to be construed today and beyond '05, so we do see limited offerings.

So, David, when you see that now, you're one of the bigger buyers around in the country, do you sense any discipline on the pricing side from the domestic mills? At some point this has got to give, right? We're in kind of a shortage, potentially a shortage environment it seems.

Given what regard?

We'll call it controlled supply rather than shortage.

Given what regard Aldo?

You know, I've heard some people say that the mills want to hold the pricing to a level $3.20, $3.40, that kind of might not attract imports back, but frankly the way the cycle looks to me if demands improve, imports have to come back, and I don't know whether they're going to come back at a price of $3.20 or $3.30 when you've got higher prices overseas. I'm wondering how you see that supply gap being resolved?

I think you're right on. I think that the people bringing product in here are as sophisticated as people manufacturing the product here, and I don't think, I think they'll bring the product in at even a higher cost level. Obviously, to prevent the scrutiny of trade and also because the U.S. prices still low relative to the Asian and European market places.

If I can comment also, Aldo, we like to look at, as we express it, we like to look at a report card as a customer. Not our customer but Olympic as a customer to our suppliers. Our assessment is, if you're in an A-plus player on your report card with your supplier,, you're going to have a hard time getting steel next year. Okay? And so we like to view ourselves as an A-plus student and that we don't think all of our competitors are. So I think there's going to be a real risk of some people not being able to get steel at an affordable price to re-sell,

Great. Thanks, Michael. I'll come back if there's more later. Thank you.

Thank you.

Thank you. Our next question comes from Thomas Carl. Please state your company name followed by your question.

Smith Barney.

Hey, Tom.

How you doing guys?

Good. Yourself?

Great job on your cost reduction efforts. I guess my question is, margins. They continue to come in at the low end of the range. I know part of that is because of the aggressive sales growth incentives that you're trying to stimulate, capture market share and so forth. I was hoping for a little higher margin for the quarter and I'm just curious, can you give any guidance as to what you expect margins to be next year? I'm not really concerned about the fourth quarter because it's usually not very good anyway.

Boy, that's a tough one, Tom. The answer is, like you say, we're at the low eb for a number of factors. But I would anticipate margin next year would be relatively equal to our historical of 22 to 23, not the 21 you're seeing now.

Good. Ok.

Tom our margins, David here, our margins should continue as Mike said, to be on equal footing, especially in an environment where the domestic producers are moving prices north. Obviously our inventory increases in value, and we should be able to sustain our profitability on a go-forward basis.

But the margins should be normal. There's a couple factors into that in the short term about trading tons and some other things. In the normal course of business next year, we should be relatively equal to the historical basis you and I've talked about.

The other question I have, you had mentioned currency fluctuations and having an effect on the near term. What did that mean exactly?

Well, you know again, there's two factors out there. One of the things that Aldo just mentioned, we're no longer in the United States, the high price market in the universe for steel. There's a variety of factors that go into that but predominantly is the value of currency, and so as there are alternatives in the global market of places to go, obviously, you know, it's going to go to the high price market. With the dollar weakening it does make ourselves, I would say, less competitive in the global market for a place to bring steel into, from the producer's standpoint. So that fluctuation of currency, a strong dollar does not help us as Olympic Steel.

But the dollar has been weakening. Wouldn't that be a positive for you?

Yes, it is. Yes, it is.

So you meant that as a potential positive or negative? I'm a little bit...

A potential positive if it continues to weaken.

You're concerned that it might go the other way?

We're concerned about China. China seems to be rampant on their 8% compounded growth. They're screwing up the world's scrap market, they've screwed up the global transportation market. As we saw a year and a half ago, that's one phone call away from not being the case. So we're very concerned that the Chinese government decides to stem their growth that that will impact not only the world demand but will also impact the dollar currency evaluations.

Okay. I'm looking forward to the day when you have a conference call and you have something good to say without any negatives.

You and me both.

Hopefully next year.

Thank you.

Thank you.

Thank you. Our next question comes from David Goldberger [ph]. Please state your company name followed by your question.

This is David Goldberger with Fortress. Just want to get some detail in terms of demand from various end markets? In particular from which industries have you seen improvement or lack of improvement in demand?

It's broad-based. It's broad-based. Obviously, anything that has wheels on it that we service is a little bit more active today. Also anything that's related to the box stores, Lowe's, Home Depot, so forth and so on, we supply rack manufacturers that go in there, we supply any number of manufacturers that are supplying products anywhere from lights to flag poles, so forth, that go into these box stores, and the demand has just, as a broad-base, increase, hard to specifically target any one particular industry that's robust, because what we generally say is that when our customers get busy they all get busy at the same time, and that's where the demand equation is coming from, and obviously the recovery. We see a pretty broad-based increase.

Obviously, it's also coming off of some very, some really low demand times of last year. Now, remember, too, that the consolidation process is also going on within our customers, and fortunately we're in an advantageous position where we find that some of our customers are buying other of our customers, so our participation is really not waning but, in fact, we are gaining the multiple and providing the business solutions that our mission statement speaks of and assisting those customers in the consolidation process within their own industry. Very broad-based.

The one thing I would add to that though is, obviously from a supply standpoint everything is driven somewhat by automotive demand. Without automotive demand all the rest of it doesn't much matter because capacity freeze up very quickly, particularly in the hot-well product, which is the major of what we sell. It does appear that auto remain strong and looks like it will be stronger going forward and that from our standpoint in terms of our auto participation is a good thing but as it relates to the overall market it's critical that automotive stay strong, and it looks like it is better.

And a compliment to that, just to accentuate that, David, a compliment to that is that we do an awful lot of spot market business, and as market places increase in value and as Aldo had pointed out earlier, as we see constraints within the supply side our spot market elevates, and obviously we are able to garner more business because our appropriate inventory position across the country.

Excellent. Thank you very much.

Thank you. Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by the 1, and as a reminder if you are using speakerphone equipment you will need to lift the handset before pressing the numbers. Our next question comes from Eric Fell. Please state your company name followed by your question.

Hi, from [INAUDIBLE] just wondered, in terms of automotive, do you all have a sense of how much of that, of the in demand, is the domestic auto makers versus the transplants, or do you not really have a good sense of that, is it hard to tell where your steel ends up really?

We know where ours ends up. Clearly we have a much greater participation with the Big Three than with the transplants

Is it 90/10?

I'm sorry?

Is it 90% of it goes to Big Three? Great than that? Closer to 100% of it?

We have a growing participation with the transplants Eric. Our original focus in our acquisition of our Detroit operations, we were originally narrowly focused on the Big Three but we've expanded that participation. Mike is 100% correct as we see that growth continue to increase our transplants. Our transplant participation is also increasing as we bring our automotive participation down south to compliment our Georgia operation.

But the preponderance, 90/10 or 80/20, because I don't know, we actually have that statistic at hand, the preponderance is with the Big Three.

Ok, thank you.

Thank you. Gentlemen, we have no additional questions at this time. Please continue.

This concludes our call. Thank you for your interest in Olympic Steel, as a reminder, we would tentatively have our year-end earnings release scheduled for mid February. Thank you.

Thank you.

Ladies and gentlemen, this concludes the Olympic Steel third quarter 2003 earnings results conference call. At this time you may disconnect. Thank you and have a great day.