Olympic Steel Inc (ZEUS) 2004 Q1 法說會逐字稿

Olympic Steel Incorporated First Quarter 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 zero. I would like to now turn the conference over to Mr. Michael Siegal, CEO of Olympic Steel. Please go ahead sir.

Good morning and welcome to our call everyone. On the call with me this morning is David Wolfort, our president and Rick Marabito, our chief financial officer. First I'd like to thank you all for your participation and your continued interest, and maybe even new interest in Olympic Steel. Before we begin let me remind you that forward looking statements in this call are made pursuant to the safe harbor provisions in the private securities litigation reform act of 1995 and please refer to Olympic Steel's FEC filings for further information.

As hopefully you have read this morning in our release, Olympic Steel reported record sales and earnings for the first quarter with tonnage growth of 43.2% and sales dollar growth of 62.8% from last years first quarter. We are very pleased with our sales volume increase which far outpaced the service center shipment increase of 25.2% reported by the MFCI for the first quarter. This was also our second consecutive quarter of substantial growth as our fourth quarter tons as you may recall grew by 29.3% on a year over year basis.

Our efforts over the past four years have been guided by our mission statement and core values, and we are happy to report that the profitable growth that is the basis of our mission statement has been achieved. We also recorded our highest ever quarterly net income of $10.8m or $1.12 per share. As we stated on our fourth quarter conference call the execution of our plans to build our inventory at year end, manage our working capital and debt positions and lower our expense base positioned Olympic Steel well into the current tight steel market. We intentionally increased our inventory levels by about 45,000 tons or 22% between November 2003 and January 2004 in anticipation of a strengthening market. This allowed us to fully participate with our customers rapidly growing demand during the first quarter, and maybe beyond. We believe the steel market will remain robust into the seasonally stronger second quarter. We expect customer demand to remain strong as inventories in the steel supply chain are still low as well as they are low at the customer level as well.

We therefore expect prices to remain elevated and even increase, and steel availability to remain exceedingly tight. These dynamics will present a challenging marketplace for many. We believe we continue to be well positioned with $95m of inventory at March 31st and a $43m dollars of borrowing availability. We will continue to have our commercial relationships guided by our core values of integrity, respect and financial stability. I will now turn it over to Rick to comment on the financial details.

Thanks and good morning. I would like to focus on a few financial items. First we have been intensely focused on accelerating our cash turnover during the first quarter based on the dramatic pull on working capital caused by rapidly increasing steel prices. Our receivables have increased by $25.8m to December 31st, but our DSL actually decreased by almost six days during the quarter.

Inventory dollars are up to $2m since year end but we have reduced our days of inventory on hand by almost fourteen ship days since year end. We remain a prompt payer to all our vendors, so we're not accelerating our cash turnover at our suppliers expense. Capital spending in the first quarter was only $107,000 and we are not planning any significant spending in the second quarter.

As a result of this focus we've reduced our cash turnover cycle by more than 50% since year end. This has resulted in our borrowing availability growing to approximately $43m. This availability allows us to fully participate in working capital intensive environment today. Based upon our strong first quarter financial performance our interest rate at or over [Inaudible] decreased by 175 bases points this week. This rate reduction lowers our interest expense by more than $100,000 per month starting in May.

In terms of operating expenses our cost as a percentage of sales decreased to 18.5% from 20.5% last year. expense increases are variable in nature and have increased in relation to the steep increases in sales and profit. We have not added any people or any fixed costs during the first quarter. As a result of us carrying a net tax NOL, net operating loss we paid no federal income tax in the first quarter, and we anticipate starting to make federal tax payments again later this year. Now I will turn the call over to David.

Thanks Rick and thanks Mike. I'd like to further this comments. First I'd like to expand on our efforts during the market downturn over the past four years, cause these efforts are what positioned us so well for second, for record results that were reported this morning. Expense reductions in response to the market downturn of '99 to 2003 we really tightened our expenses. So again from 1999 to 2003 we reduced operating expenses by approximately $17m.

During that time we closed two processing facilities, and two administrative offices, consolidated our divisional structure into regions, and subsequently combined those regions from four regions into three and made the appropriate manpower reductions of 23% both in administration and in labor, and asked our employees to make wage and benefit concessions from '99 to 2003.

Working capital management during the downturn were also diligent in self funding our business through operating cash flow. We stuck to our philosophy of not using our vendor base as a source of short term credit and still reduced our total debt from $145m to $100m as of March 31st of this year.

On the capital spending front, we've controlled but not neglected it. And we were very good, we were very, we were in a very good facility and equipment position prior to the economic downturn. Consequently we were able to grow our tons 43% in the first quarter without adding fixed costs or processing facilities and equipment.

In terms of inventory management we significantly improved our inventory turnover during the past four years by reducing our inventory days on hand from 72 ship days in 1999 to approximately 50 days on average during the past two years. This focused inventory management combined with our borrowing availability allowed us to strategically add inventory in the fourth quarter in anticipation of a stronger market this year.

In terms of sales growth we believe in our approach to growing sales by maintaining representation in the field. Even during down cycles as a result when the market turned we had the advantage of quickly and accurately communicating changes in the marketplace to our customer base. We believe our solid customer relationships are only enhanced by communicating with the integrity and respect Michael spoke of earlier. These actions over the past four years have, are what allowed us to achieve our record results in the first quarter, and are the same principles that we will follow in the growing marketplace.

Let me turn to some of the industry dynamics that we are viewing. As we turn to the industry outlook we see the following, continued strong demand for steel on a worldwide basis, China continues to consume raw materials and steel at an increasing rate. We see strong global demand coupled with a weaker US dollar that prevented any significant influx of price advantaged foreign steel into the United States, and has allowed our customers robust domestic demand to be augmented with export opportunities for their products again.

Additionally first quarter steel service center shipments were up 25% over the first quarter of 2003. We believe this demand is real and sustainable versus the opposite view that the demand is being driven by an inventory build to buy ahead of price increases. Our belief was recently confirmed by the US Commerce Departments report that first quarter durable goods grew at a 5% rate while corresponding inventories remained relatively flat growing only at .1% in the first quarter.

Olympic's customers demand has also been robust. Our agricultural customer base is reporting record sales and earnings in the first quarter. The ag market looks to remain quite strong based on low worldwide feedstock inventories. Our railcar manufacturing businesses that we support are now projecting to double it's car build levels from last year.

Our material handling and construction equipment customers are also reporting very strong demand. Our energy generation customers are anticipating continued strength throughout this year based upon proposed government tax credits targeted to the sector.

And although steel scrap pricing has recently receded and is expected to decrease through the second quarter, we expect steel pricing to continue to rise primarily due to the robust demand and continued worldwide shortages of steel making raw materials. Based upon these unprecedented dynamics we do not see any slowing of the hectic pace in the steel industry during the second quarter, and we believe these dynamics will have a positive impact on Olympic Steel. Thank you, that concludes my comments and we will now open the call up to 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 one on your pushbutton phone. If you would like to decline from the polling process please 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 handset before pressing the numbers. One moment please for our first question. Our first question comes from Mark Parr from G. McDonald. Please go ahead with your question.

Hi, good morning guys.

Good morning Mark.

Nice quarter.

Thank you.

All right, enough of that. Dave I'm wondering if you have any sense whether or not or if you could give an outlook I guess for June spot pricing for just for heavy gauge hot rolled and also for plate relative to May? And what your sense is as regarding the third quarter and the outlook for base pricing or for spot pricing in the third quarter given that Korea, Japan, the EU and Russia have all increased prices for the third quarter or announced increases for the third quarter?

Yes, you know Mark it's a good question. And I do have sense. And so I'm glad you expanded on that. You know we see as we said before, as we mentioned in our comments, we see a marketplace continuing to rise. We see no slowing of demand from our customer base. And we continue to see a short supply side driven by the factors that we talked about. So in terms of anticipating where market prices are going, you know they seem to be driven by the fundamentals of supply and demand.

Okay, it's a nice way to weasel out of that question. Can I ask another one?

Sure.

All right, second question would be you know there's been a lot of I guess of discussion even in this morning's Wall Street Journal. And you know some people believe that the flat rolled import numbers for March and the first quarter which ironically are down 25% year to date, that somehow that translates into rising imports in the second half, and a dramatic reduction in domestic pricing. And I guess if, you know along those lines I was wondering if you could comment on some of the, you know there have been some expanded offerings, but what I'm hearing is that there isn't much tonnage behind them. I just wondered what you know the, you know from your perspective and in your context what's the real availability of additional imports over the next several months? And when would they show up assuming if there isn't really anything available?

Mark let me jump in, David will answer the specifics. Let me just say to the first part of your question which is you know people who assume you know the lack of China demand related to the two fundamentals, lower pricing and further imports, we disagree with both of those assessments, and then I'll let David answer.

Now Mark I didn't mean to weasel out of your first question. But from that perspective obviously demand is going to be very high and supply is going to continue to be short. And that dovetails nicely into your second question, and I think we're as good a barometer as anybody moving the sort of ton flat roll that we move, and I will tell you that the foreign offerings that we have seen have been few. We are a buyer of some foreign product that [Inaudible] shipments will see from June through September. But the availability is not real strong. We don't see a whole lot of offerings and we do not think we're atypical. We think that China has taken a small pause. We expect them to come back after the holiday which ends on the 8th and start to consume again. The preponderance of what we've seen from a foreign standpoint has been CIS country offerings and they're narrow. The European offerings are non existent. {Inaudible] Delay [ph] who is the chairman of Osaler [ph] has indicated that he will raise prices in the third quarter by I think 16% or so. And he recognizes the European market needs to catch up. So again we don't see any additional supply coming to the marketplace.

Okay, one last question, and this would be related to the domestic supply pipeline. US Steel earlier this week now indicated that they were having, seeing some production shortfalls in the second quarter due to coke shortages. And I'm wondering if you're seeing a similar type of production shortfalls at any other of the domestic mills in the second quarter?

Yes, we participate with all the mills. US Steel is a premier supplier to us as is ISG and Newcore [ph], Ipsco [ph] and others, Algoma. All terrific vendors and all are suffering under the weight of a shortage of raw material supply. Coke is an issue and a variety of other products are issues. So they're all being constrained in their production, and we are witnessing their inability to produce as much product as they would like to produce.

Okay. And given is there anything, just lastly, is there any, you know Rick I'm wondering you know at what level of cumulative earnings will you begin to accrue federal taxes again? And also could you give us some sense of you know the trend line for earnings in the second quarter versus the first quarter? Would you expect it to be the same, maybe up a bit, down a bit, you know talk about what's going to drive the you know the change in the earnings momentum, 2Q versus 1Q.

Let me take the first one first. Obviously we've been accruing taxes and in the prior year we accrued tax benefits, so you know our first quarter we do have a tax accrual, it's a matter of when we start paying taxes. And we will you know our anticipation is second to third quarter tax payments will commence.

So I must have looked at it wrong because, oh, okay, I take it back. I'm sorry.

Yes, it's just the cash side. So we've been, you know we've been accruing the expense.

Okay, all right. Terrific.

And you know obviously in this marketplace I mean the comments that we've made we see the demand outlook to continue to be strong in the second quarter, and you know like we've said, we think we've got a pretty good inventory position and that's how we're looking at the second quarter in terms of customer demand and kind of where it's been in the first quarter.

Yes, so I guess my full year estimate of $0.70 may be a little low at this point.

I'd say so.

All right, congratulations again, great job.

Thank you.

Thank you sir. Our next question comes from Tom Call [ph] from Smith and Barney [ph]. Please go ahead with your question.

Good morning gentlemen.

Hi Tom.

Terrific job. Unbelievable numbers. Not unexpected but very good numbers. Amazingly this is I think the first time you've come out with nearly positive news and with nothing negative to boot. Which is kind of unusual and now we see the stock barely moving up. Obviously you know you guys have performed well and continued good luck.

But the two questions I have is the second quarter gross margins obviously are not going to be as high as the first quarter. Can you give us any guidance on the margins you expect? And secondly you know in terms of what would happen if your projections are incorrect about the third and fourth quarter pricing? Cause I am little worried about pricing going forward and I think a lot of people are and it's probably why we're not getting any positive moves in the stock at this point.

Tom this is Rick. You know your first question, we typically don't, we don't give guidance on you know next quarter gross margins. You know obviously we'll kind of repeat what we've been saying, we see the demand continuing to be strong in the second quarter. You know I think our inventory position is good as it can be in this marketplace. So we don't really give guidance in terms of what you know whether the margins will be, you know up or down.

And then in terms of your second question, that I will tell you is we are diligently managing our inventory and you know if and when the market turns you know we will continue to manage it like we did in the downturn four years ago. So we're not, you know you're not going to see us go out and do anything stupid or anything that we haven't done in the past. I mean we're going to stick to the discipline that got us to this place. So I think we'll continue to manage our inventory well and if the market turns I think we'll, you know we know how to manage through that.

And Tom it's Michael. Let me just make this statement, rather obviously in all cyclical universes there's always a concern about when the backside of the market will occur and how do you manage the backside. We will disagree with those today that believe that the downside of this marketplace is in the back half of this year emphatically.

Okay. Number two, I guess one other question is that what is your expectation regarding the economy obviously in the short run you're bullish. Do you see this as a multi year phenomena or do you expect this to be a short lived type of a move?

Well you know I don't know who's going to win the presidential election, I don't know what the value of the dollar is going to be, I don't know what the terrorist attack you know that's going to come somewhere in the world will be, how impactive. But the answer is there are some very fundamental differences in terms of steel consumption in China. On a per capita basis if you look at the per capita consumption of steel in China it is something less than 1 1/20th of the United States. You know they're producing twice as much steel as we are in this country today. They are consuming twice as much steel in a per capita basis, they're 1 1/20th of what we are. So there's tremendous infrastructure needs in China. There are tremendous needs in India. There are tremendous needs in eastern Europe. And we're looking at the potential growth of the Latin and Central American regions as well. We're looking at limited steel production in the United States as it relates to the 85m or 90m tons of production against 116m or 117m tons of consumption. We're looking at all time low business inventories. We're looking at the degradation of service center inventories almost on a month by month basis Tom. So there's lots of indications in the universe that this is not short term but how long it is is you know why Mark Parr makes a living.

Terrific. That's what I was hoping you would say. Thanks very much for all your good efforts and doing a great job, all of you. And you guys are incredible.

Thank you.

Thank you sir. Our next question comes from Aldo Mazafero [ph] for Goldman Sachs [ph]. Please go ahead with your question.

Hi Michael.

Good morning.

So that dollar a share after tax in the quarter was kind of like a religious experience. But the question I have is your inventory levels, can you give us a forecast of what you think your inventories are going to do relative to your shipments over the next few months?

Well to begin you know you've got tons and you've got dollars. And so let me just say that you know it is, we will probably see as Rick indicated during his statistical analysis that we've taken in our steel inventory from something like 79 days to 50 days. Our best guess, it will be below 50 days.

That would be down from current then.

That's probably true. How much down is you know anybody's guess.

And in terms of your demand side Mike, I know you commented how the demand looked real to you. But the way I'm looking at is it fair to say that the demand is kind of segmented into more of the what you might call your industrial customers and not really so much from areas like non residential construction or in terms of growth, really not so much from automotive?

Well automotive still remains strong, that's the one market David didn't mention. You know I don't see growth in automotive but I also don't see degradation there either. I mean their numbers are, have gotten bounced from you know the year end predictions where they went down and now they're back up again. So from that standpoint you know with auto being let's just say consistent with no growth and no degradation and the other marketplaces you know add some significant growth and as I said the lack of with the commerce department is showing with the business inventories being built I think that you know may just be at the beginning of inflation and not in the middle of it.

And then in terms of your internal numbers for the second quarter, I know you don't want to forecast, but can you give us a sense of whether you're able to raise price by, or how your ability to raise price would compare with your expected cost increase on your cost of goods sold?

Well we would expect to raise our prices in accordance with our core values. We're going to do it with the integrity of honesty to our customers, we're going to do it with the full respect towards them and the difficulty that it creates. You know I've heard some of my contemporaries characterize this as fun, I've heard them characterize this as you know sort of an alienable rights and it's about time on some of these other conference calls. I will tell you Aldo it is our position that this is hard work for us. And it is very disruptive to our customers. And we don't want to take this for granted and we're very concerned about creating within our mission statement, in our business system solutions for all of our customers. And part of the solution that we have to create for them is how do they buy steel competitively and recognizing that prices are still going to go up, and we have to have a respect for their desire, for their market share. And I will tell you we're going to operate on that basis you know with the responsibility to our shareholders Aldo, and our employees as well as our customers needs and desires. That's the way I can describe it.

Okay. And one final question, on the import, the import availability you're seeing can you give us a feeling for what kind of pricing they're asking for delivered material?

Aldo this is David. We see very comparable prices to the domestic marketplace. We don't really see any advantage. The advantage would be timing. Obviously there's a lag, shipping lag and with the domestic mills raising transaction prices depending on when you consummated the deal, you may have a, and it lands you may have an advantage there. But the offering prices that we're seeing from around the world are very comparable to the domestic numbers at the time the offering was made.

And you're aware of this Aldo. I mean you know there's some [Inaudible] on some of these countervailing duties but don't forget they're still CVD's you know out there and you know it's a great sensitivity to not surging into this market by a number of the marketplaces.

Great. Okay, thanks Michael, thanks David.

You're welcome, thanks for the question.

Thank you. Our next question comes from Dominic Brald [ph] for Longbow Research [ph]. Please go ahead with your question.

Good morning gentlemen.

Hey Dominic.

I was wondering if you could talk about the linearity of demand throughout the first quarter, kind of January to March?

Each month progressively up.

Okay. And what's kind of the outlook for second quarter by end market if you could kind of talk about that, your [Inaudible] in that markets and what you're seeing right now in them?

We would describe that Dominic in my comments and we're seeing robust demand across the board. Mike's right, I didn't comment on automotive, but automotive is not any different than the balance of the marketplace as we're seeing our large highly engineered product bases that we supply building, growing, growing their businesses. Now it came off of lows in the last few years like we did, so we see the demand continuing to accelerate. Typically this second quarter is always a bigger quarter, typically. Last year it was not but typically it is. And we see demand from the customer base continuing to grow.

So seasonally stronger in the second quarter, kind of brings me to my next question. I was wondering if you could maybe about the seasonality in some of our larger end markets? You know ag, auto.

Well [Inaudible] in the summer months. You know it's you know they shut down in July and August, or they shut down in July, I mean so you know that's seasonality there. I mean there's model change overs in a lot of the, in sort of the farm ag stuff that occurs sort of late, you know third and early fourth quarter in terms of new model introduction. You know obviously auto is probably the biggest seasonal scenario. We have other sort of consumer related products that we sell into that have built schedules in the first half of the year and then [Inaudible] through the end of the year, but you know really it's, you know it's just you know there's a number of days differential in the back half of the year because of holidays. And it's really once you get through the summer months it really comes back on fairly robust in September, October.

And Dominic you know I think that one of the things that we often lose sight of is that Mike commented earlier when we began this conversation is that our fourth quarter tons had increased by 29%. So we see this growth, this growth just didn't come about in '04. We recognized the recovery in the early part back half of 2003. So we're really starting to see our customer base recover toward the tail end of third quarter and certainly in fourth quarter as Mike had commented. And this is a continuation of that growth.

On the other side of the seasonality portion Dominic to answer that question, I think Aldo mentioned that you know first quarter imports were down 25%. You know when the lakes open up for navigation because of the frozen scenario there's usually a big surge of imports around April to take care of the seasonality issue of the short fall of the domestic mills production relative to consumption. You know one, I think it's down 25% was the number Aldo used. I will tell you I think it's going to be greater than that in the second quarter. And that in fact you know some of that surplus of imported product that meets the demand that historically has been there is not going to be there. And so as the seasonality takes place it's going to be I think exacerbated by the lack of inventory.

Okay. With hot rolled prices quoted you know around $600 per ton in the June timeframe I was wondering if you could talk a little bit about you know the cash situation among your more small to mid tier customers that supply the OEM's and how they're doing as far as you know their availability to cash to pay for this you know $600 per ton?

We'll let Rick comment on that.

I mean obviously that's a concern, we're working very closely with them. Our credit people are very focused on that and I think you know in terms of the whole manufacturing base that's an issue that's facing people. There's a huge working capital pull that's happening due to the pricing. Compounded with you know [rolled blocks] sales and demand going on. So that is obviously something we're keeping our eye closely on. And that is an industry risk, it's credit.

Although Dominic from Olympic Steel's individual perspective, you know we averaged about a little bit over 45 days DSO's in the first quarter. But we were down to 41 days in March. And we'd anticipate you know further reduction in our DSO's.

Are you guys seeing any opportunities arise from that for you guys to move further downstream into some of those applications in the [Inaudible]? As far as you know they have to go through bankruptcy or whatnot. It's kind of an opportunity for you guys to take over their operations?

There's all kinds of opportunities out there Dominic. You know we want to stay focused on our mission. At the moment you know if opportunities present themselves obviously we'd like to be in the position to take advantage of them. But obviously a lot of people will fail for lack of cash or lack of steel availability. It's not like we have a surplus of steel availability anyway. So you know we'll see as opportunities arise how we take advantage of them.

Okay, great, thanks. And congratulations on a good quarter.

Thank you.

Thank you. Our next question is a follow up question from Tom Call [ph]. Please go ahead with your question.

Hi Tom.

One other question came to mind, and I guess I've been thinking about this for quite a while. Mainly when your stock was selling at substantially below book, although it's still selling below book today, the question is do you see with the consolidation in the supplier realm [eventually] leading to consolidation in the service center or in your business in terms of your possibly merging with somebody else or being bought out or entertaining an idea of adding on, you know making acquisitions? And also the second question I guess is if the stock you know moves to a respectable level which would be significantly above book, would you then consider perhaps selling some shares to reduce debt in a pretty large way?

There's a lot of questions at once. I don't think there's a correlation between consolidation at my suppliers to the consolidation at the distribution end. I don't think there's necessarily a correlation between consolidation of my end user, or my banks. Obviously you know one would argue that there's been almost no consolidation at the distribution level. There clearly is a change of disciplines in the universe that I think is beneficial for all of us, whether that leads to consolidation or not remains to be seen. Nobody seems to be taking a very strong lead in that position as we sit here today. You would be, you know we certainly Tom want to be in a position to access you know capital markets and opportunities you know should they arise and we want to do those things that are necessary for us to accelerate our mission statement of growth. But we want to do it you know on the basis of accretive opportunities to our shareholders, and that's going to be the driving focus of anything that we do. I hope that answers pretty much all of them.

Well yes.

It's the same fashion.

In terms of the secondary offering, you know later in the year for assuming everybody else is wrong and you're right about the pick up in demand.

It's good to be contrarian especially when you're right. The answer, I'm not, I don't want to speculate you know but clearly if the marketplace is such that you know it's you still open to cyclical, you know small cap, mid cap, less than large cap units and it's appropriate, clearly debt reduction is one of our stated objectives. It's on our presentation, it's on the web site. Obviously to accelerate debt reduction would be a good thing for us.

Okay, thank you.

At this time there are no further questions.

Well I want to thank everybody for all their continued interest and participation. We really want to thank our employees who have really are stepping forward you know to work very hard and really as I said we have a great sensitivity to our other stakeholders, our customers and our suppliers. But I do want to thank all of you, our shareholders for your continued support of Olympic Steel. Thank you very much.

Ladies and gentlemen, this concludes the Olympic Steel Incorporated First Quarter earnings results conference call. We appreciate your participation on today's teleconference. You may now disconnect.