Olympic Steel Inc (ZEUS) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Olympic Steel Incorporated 2003 annual and fourth quarter conference call.

At this time, all participants in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs any assistance at any time during the conference, press the star followed by the zero.

I would now like to turn the call over to Mr. Michael Siegal, Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning and welcome to our call.

The call with me is Rick Marabito, our Chief Financial Officer and Dave Wolfort is not with us today. He is out visiting customers and on that basis, he will not be presenting today.

So -- before we begin, let me remind you that forward-looking statements in this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please refer to Olympic Steel's SEC filings for further information.

As you read in the release this morning, Olympic, the company that you're hopefully listening to, reported a very strong sales quarter. With tonnage growth of 29.3% and sales dollars growth of 15.7% growth. Unfortunately, however, due to an unexpected $3.3 million bad debt charge, primarily for a customer bankruptcy, we recorded a net loss of $2.1 million or 22 cents per share in the fourth quarter. The bad debt charge equates to 24 cents of earnings per share so we actually were profitable by about 2 cents in the fourth quarter.

For the full year we reported a net loss of $3.6 million or 34 cents per share.

As we entered 2003, you know, we set out an on a plan to increase our sales volume and to lower our expense base. He accomplished those objectives in a year that started in recession.

We increased our sales by 2%, even though the overall, I think, consumption of stainless service center market was down. We reduced our expenses by $4.2 million or 4%. We reduced our debt by $9 million and aggressively managed our inventory through the beginning recession, and the beginning of the recovery that we saw in the fourth quarter.

So it was indeed a favorable year. There are lots of circumstances that led to that. Some of that is in our release. I will be happy to talk about any of the other aspects, if you care to discuss that. But we believe that the 2003 actions combined with the favorable business environment, that we have positioned ourselves exceedingly well to benefit in 2004 in this very unusual market.

So I will turn it over to Rick for some of the financial aspects.

Thanks and good morning.

I will focus on a few of our items from the fourth quarter and the year.

First, as Michael indicated, our sales volume increased by 29% in the fourth quarter and this was our highest shipping quarter since the first quarter of 2000.

We also reduced our expenses in every expense category during the year, with the exception of the selling expense. And, again that was due to the bad debt charge that Michael referenced. Bad charges were recorded in December, and as a result, we also acquired a waiver from our bank group related to a fourth quarter fixed charge covenant. And we amended the agreement to remove the charge from the test going forward.

Our bank borrowing availability remains very strong, increased to $27 million at year-end. And, as planned, we did increase our inventory about $10 million during the quarter and we believe or $93 million of year-end inventory is very well positioned as we enter 20004.

Capital spending for the year totaled about $836,000 and that primarily related to equipment upgrades and some maintenance items on those equipment in the building.

This concludes the formal part of our presentation. We'd just like to open it up for questions at this time.

Thank you, sir.

Ladies and gentlemen at this time, we will begin the question-and-answer session. If you have a question, press the star followed by the one on your push button phone. If would you like to decline from the polling process, press the star followed by the two. You will hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order they are received. If you are using speaker equipment you will need to lift the hand set before pressing the numbers. One moment, please for the first question.

Your first question comes from Mark Parr, please state your company name, followed by your question.

McDonald Investments. Good morning.

Good morning, Mark.

Can you hear me okay?

Yes. Absolutely.

Fine.

Terrific.

Just first of all, Michael, could you talk a little bit about the source of the tonnage strength in the quarter? And also, how sustainable that might be moving into the first half of '04?

Okay.

Really, we saw it began somewhere in the beginning of the fourth quarter, Mark. We saw it from a central region at first in the ag market, you know commodity prices, for a lot of farm products were up. We really started to see it sort of in the -- let's call it from North Dakota, South Dakota, through the Iowa scenario, the John Deere's, the Cats and all related fabricators from that.

That's where it began and it started to migrate east. And it really didn't really hit the East Coast until really kind of December. So it really was a migrating demand that really began in ag and sort of just permeated through that.

So do we think it's sustainable? I can tell you there is some tremendous build schedules, you know, the all-time low of business inventories are really having an impact when demand starts to increase.

Right.

I think the best line I heard was, you know, the life cycle of a tractor is one more year. You know, a farmer can make it last, you know, one more year until the ag commodity prices go up, which they have done, and there's a tremendous demand and a lack of inventory in the dealer networks and so what you see is with the demand, a real increase to replenish inventories that have been depleted over the last three years. But I think it is absolutely real demand.

You know, the question Mark, I think is also from the standpoint in terms of everybody wonders about automotive all the time, because that's the big consumer of steel. And people forget there really is less than one ton of steel in a car. And so even if steel were to go up, you know, $200 a ton, I mean the real impact to the cost of an auto maker is not significant, relative to the cost of the car. I think automotive's going to come down, I think automotive's going to have a strong year and I think the other sectors are improving.

Yeah. I mean, it's -- steel is not nearly as significant a portion of the cost as it used to be, that's for sure.

That's correct. I don't see the steel price increases having any impact on auto demand at all. And as long as auto demand stays strong, there's going to be a real tight availability and clearly the other sectors are recovering.

All right.

Another question, I wanted to ask about the equity earnings, you know, that's, you know, clearly, you know, showing signs of reversal. And I believe that that's primarily -- is that the laser weld joint venture?

Yes, Mark, it is.

Okay.

Is there -- you know, I guess -- I'm just wondering if -- you know, what is the carrying value of those -- of that asset, and, you know, have you, you know, done any impairment tests apply? I mean it looks like it's losing a lot of money. Maybe it's just the weak automotive environment in the second half of '03, I mean I would just like to get some more color around that and what your plans are for it.

Sure.

Yeah, you know, we have done, you know, in accordance with the accounting rules we have done the impairment analysis, and the assets are not impaired there. And really, as you know, Mark, you know, as we have ramped up that facility, really last year was a big impact on the volume on some of the platforms we were on, were a lot less on those certain platforms than were projected from the auto makers. So we were hit last year with some lower volumes.

Okay.

Is there any -- is there any sense of, you know, based on what you are seeing with the platform sensitivity, I mean, would you -- would you expect that to -- to begin experiencing improved contributions or reduced losses in '04?

Well, I would tell you, we -- we would -- we do look in '04, where we picked up some additional volume on a new platform, which will help us out, and a couple of platforms that we talked about are still not back to the levels and forecasted levels that we had -- at the time we had quoted. So, you know, I would expect the performance out of that joint venture to improve in '04.

I expect it to be a contributor in '04.

Okay. All right. Just one last question. Actually, I have two last questions.

First, on gross margins, you had a little bit of deterioration in the fourth quarter, relative to the third. Now, some of that is normal, but you had very strong volume gains and I'm just wondering, you know, what -- what the -- you know if you could just talk a little bit about gross margins in the context of the strong tonnage growth in the fourth quarter and what your outlook for gross margin might be in the first quarter of '04?

Well, we anticipate improved gross margin. That's first answer.

The second is, is what we're -- what we're finding Mark, is there's an urgency for cash, not because of Olympic Steel but just, you know, with the rising nature of inventory costs there's just a sense of making sure that everything is flowing through the system, both in the fourth quarter and beyond, and what you see is, you know, the beginning of a process of liquidating sort of aged and decrepit inventory that impacted the gross margin.

OK, and so I think the gross margin was not reflective of, let's take a lot of volume for lower margin, as we are starting to clean house as it relates to, you know, things that were on your floor for a while, that customers weren't taking, you know you are sort of discounting that to make sure you have the cash flow back in, so selling it at a reasonable profit, but, again, maybe at lower margins than you historically entertained.

Okay.

Is there any way you can characterize the magnitude of that cleanup in the context of fourth quarter shipping volumes?

No, I mean, I -- I think as Michael said, it wasn't -- that wasn't the impetus for the increased volume. What Michael is saying is we did reach into some of that, sell it at slightly lower margins.

We sell it for break-even. Which is, you know, a lot of that stuff was just to just get it out, and induce the customer to take it.

But, Mark that was not a cause of the increase in the volume.

Yeah, but it was the cause of the degradation of the gross margin.

OK, all right.

Just one last question. In the last couple of years you've done a great job of lowering total operating expenses per ton, and looking at -- you kind of peaked out in '01 at $90 a ton and '02, you're at $85.5 and then this past year you were a little over $81. Do you have an outlook for what you think operating expenses per ton ought to be in '04?

You know, what I will tell you, Mark is we expect you our tonnage levels to be sustainable and to grow in '04, and we're not going to be adding a lot of operating expenses. So I think the levels you are looking at, you know on a per ton basis or sustainable and as we get more tons in, could even decrease. So we're not looking at -- at adding to our expense base.

Okay.

So -- and if I was going to use like an $85 number for '04, would that be reasonable, you know, based on increases in insurance and, you know, increases in distribution costs, et cetera, you know, off -- more than offset by cost reductions.

I think it's reasonable.

Reasonable.

Okay. Okay. Thank you very much, guys.

Thank you.

Thank you.

Ladies and gentlemen, if there are any additional questions, please press the star, followed by the one at this time. As a reminder, if you are using speaker equipment, you will need to lift the hand set before pressing the numbers. One moment, please, for the next question.

And our next question is from John Tumazos. Please go ahead and state your company name, followed by your question.

John Tumazos from Prudential.

Hello, John.

How are you?

I'm fine, yourself?

Good.

What percent of the regular quarterly purchase of steel that you make is getting delivered this quarter? And does it vary much by grade, are the higher priced more profitable grades for the mills getting delivered better than, say, hot rolled or plate?

Well, again, we're only sort of midway through the quarter. The answer is, the struggles of our producing industries is clearly apparent.

You know, we don't anticipate a significant cutback overall. We have some mills that are delivering their commitments. We have obviously some others that are cutting back relative to their metallic shortage.

I think we have bode well in terms of the investments we have made with our suppliers and we've acted with integrity during the recession where we continue to take the steel that we ordered and pay our bills on time. And so we think that we -- that strategy has been favorable to us, in terms of, you know, the kinds of stories that are out there in terms of cutbacks from various mills relative to the universe.

So we are not seeing significant cutbacks in terms of our everyday supply in the first quarter. Obviously it is a fight.

So you are getting every ton you want, or if a particular producer isn't, you are getting more from another?

In some cases the answer is true. No, we will not get every ton that we need or want. Obviously you've got a rising market. We've got, like everybody else, an insatiable desire to grow.

Is the shortfall more like 2% or more like 10%?

I would say probably a 10% number overall.

Is it constant concentrated in a particular grade, like hot rolled?

Clearly hot rolled is the tighter commodity, no question about it.

And that's because the big mills would rather -- are going to ship tin plate and galvanized and cold rolled first because it's more bucks for them?

Well, you would think so. I think that some mills are just out of control in terms of their order entry and they have to -- you know they really got to get themselves in better balance. I mean, I can't tell you that.

The reality is, in some cases, John, it's the reverse. We're having, in some cases, some of the high strengths deals are being delayed worse than the commercial carbon.

The tough to make grades because they don't have melt time.

You got it.

Now, in terms of the American industrial economy, the suppliers to G.M. -- G.M. is not going to get hurt because it's a big customer, it's some poor guy that's buying one or two tons at a lot from who's going to get hurt if you don't have steel, if it gets to that point

I think the guy who is going to get hurt is the guy who doesn't have cash to pay his bills, okay?

The guy who has not managed himself, you know in terms of integrity and in terms of the way he's operated -- you know, our expression here, John, is the recession was difficult, the recovery might be worse. If guys don't have bank credit and guys have stretched their payables out there, I mean, you're going to find that the guy who's not going to get steel is not the small guy, or the big guy, it's the guy who can't pay his bill.

When you place orders -- and this is a -- an unusual question. Can you verify that the mill is going to deliver?

For example, I'm concerned that there's electric furnace operators who can't bring themselves to pay $270 for scrap.

I think they're over that. From our conversations, John, I think that's not a true statement.

I think today -- well, everybody -- it's distasteful in terms of what is going on, in many respects. I think that, you know, you've got an ongoing need, you know, to pay your bills and preserve your marketplace.

So your mills -- the mills that supply you have raw materials on hand, and are not going day by day?

Not to the extent, you know -- no.

The answer is the mills that we're dealing with on a proactive basis are not having those problems.

Okay. Thank you.

Thank you.

Our next question comes from Tom Carl with Smith Barney. Please go ahead.

Hello, gentlemen. How are you?

Hi, Tom.

The question is regarding the tonnage for this first quarter. How do you see the tonnage in the first quarter versus the fourth quarter,and versus last year?

Well, last year, first quarter was despicable. So I think it's more relevant to talk about the first quarter to fourth quarter. So far in the first quarter we have seen an increase of activity.

All right. Can you give us any idea of what percentage? We're seeing -- I'm hearing numbers in the 10% to 15% range. Is that reasonable?

Hmm...

You know, let's just say that, you know, the tracking of the phone calls and the -- you know, guy's trying to beat price increases on all kinds of different things, some of it is false demand. A lot of it is being controlled by us in terms of, you know, guy's trying to triple his order pattern, and we're managing that to the point, and we're saying, no you can't have three times what you forecasted. Because you're not going to produce that kind of stuff, plus you don't have the credit limit for that.

All I can tell you is that, you know, from the fourth quarter on, Tom, we have seen a steady increase of demand. That increase continues to be there. And we don't anticipate any fall off in terms of that -- that continued increase in demand.

Well, if you anticipate an increase for the fourth quarter in demand, a reasonable increase in a per ton sales, I mean we could see sales in the range of $150 to $160 million, is that reasonable to assume?

Yeah.

And margins, you are saying margins are going to be higher than they were in the fourth quarter, in the first quarter?

That's what we would expect.

And that would would be with the add-on surcharges.

Yep.

And in terms of passing on those surcharges, how successful have you been?

99%.

So we could see a substantial profit in the first quarter, am I right or am I in dreamland.

That's what we're in business for.

Okay.

So in terms of your guidance, the bottom line is that we're finally starting to see the fruits of all of your intense labor over the last three to four years? Hopefully if the things continue the way they are, you should have a profitable year?

That is our expectation.

Very good. Well, good luck. Continue to do a great job, and we'll keep in touch.

Thank you very much.

Thank you. Mr. Siegal, there are no further questions at this time. Please continue.

Well, thank you, everyone, for your continued interest in Olympic Steel. You know, obviously about 90 days from now, we'll be happy to talk about the first quarter in greater detail, but I do really appreciate all of your continued support.

As Tom indicated a lot of hard work over the last three, four years, and all the factors in the general economy are certainly in -- in an arena in which we would expect to, as Tom said, benefit from the fruits of our labors. So thank you all again.

Bye-bye.

Thank you, sir.

Ladies and gentlemen, this concludes the Olympic Steel incorporated 2003 annual and fourth quarter conference call.

Thank you for participating. You may now disconnect.