Olympic Steel Inc (ZEUS) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Olympic Steel, Inc.

Third Quarter 2004 Earnings Results.

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.

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I would now like to turn the conference over to Michael Siegal, president and CEO.

Please go ahead.

Good morning, and welcome to our call.

On the call with me this morning is David Wolfort, our president, Rick Marabito, our CFO.

First, I want to thank all of you for your participation and for whatever interests you have 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 of the Private Securities Litigation Reform Act of 1995.

Please refer to Olympic Steel's SEC filings for further information.

In addition to making our third-quarter earnings release of this morning, hopefully, you are aware that we also filed a press release last Thursday related to the withdrawal of our S3 registration statement, for the purposed offering of our common stock.

I would like to start the call by reviewing Thursday's press release, in case you did not see it.

On Thursday, we announced that we withdrew our S3 registration statement with the SEC, relating to a proposed public offering of 2,817,500 shares of our common stock.

This registration statement had not become effective, and no securities were sold under that S3.

The Company intended to use the net proceeds of the offering to repay a portion of our indebtedness, as there has been a general decline in the equity prices, including today of numerous public steel producers and service centers.

We decided that it was not in our shareholders' best interest to proceed with an offering.

I would like to thank our investment banker, Citicorp, Key Bank Capital Markets and Jefferies for their support during this process.

Now I will review our third quarter financial results, and we'll leave time at the end of the call for any questions.

We are pleased again to report our highest-ever quarterly sales and earnings results.

Sales grew by 111 percent form last year's third quarter, to $244 million.

Net income totaled $18.6 million, or $1.80 per diluted share.

For the first 9 months of 2004, our sales increased 90 percent, to $654 million -- and net income totaled $47.9 million, or $4.70 per basic share.

This marked our fifth consecutive quarter of year-over-year tonnage growth.

Year-over-year tons sold increased by 7.2 percent in the third quarter, and 24 percent for the 9 months.

We continue our focus on accelerating our asset turnover and managing debt, this year.

Strong steel demand, coupled with almost tripling of steel prices in 2004, has created a tremendous increase in the commitment to working capital in the steel-supply chain.

In this environment, we have reduced our debt by $4.5 million in 2004, while increasing our investments in accounts receivable by $52 million, and in inventory by $55 million.

We accomplished the debt reduction and self-funded our growing working capital needs by reducing our accounts receivable days sales outstanding by 5 days during the year, and inventory-shipped days on hand by 11 days, on a year-over-year basis.

At the end of the third quarter, our book value per share was $16.40.

As indicated in our release, we ended the third quarter with $48 million in availability under our increased $110 million bank credit line -- which is more than adequate to meet our near-term working capital and growth needs.

We are optimistic that the steel market will remain favorable in the fourth quarter and into the start of 2005.

We expect demand to remain strong -- particularly in the farm-construction equipment, energy and transportation sectors.

We also expect steel prices to remain elevated over that cycle, as raw material costs are on the rise.

I will now turn it over to Rick to comment on some financial details.

Thanks, and good morning.

I'd like to expand on a few financial items.

EBITDA totaled $88.8 million, or 13.6 percent of sales in the first 9 months, and $33.6 million or 13.8 percent of sales in the third quarter.

One other item -- the [470] that we refer to on EPS.

That's a diluted number -- not a basic.

That's for everybody.

Third-quarter operating expenses decreased to 13.9 percent of sales, from 20.3 percent last year.

And our expense dollar increases are all variable in nature.

And they've all increased in relation to the significant increase in sales and profits.

We have not added any significant fixed costs to our expense base of 2004.

Since the end of 2003, our debt-to-equity ratio has improved 2.57 to 1, from 0.87 to 1.

Our equity-per-share has increased 41 percent since the beginning of the year.

And our annualized 2004 return on invested capital is approximately 25 percent.

At the same time, based upon this morning's trading price, our stock is trading at only 8 percent more than our book value, and at less than 4 times our last 12-months' earning.

Capital spending in 2004 has been $1.7 million, while depreciation for the 9 months totaled $6.1 million.

And the capital spending has primarily been for IT and communications systems and laser-processing equipment.

We plan to continue to add laser-processing capacity during the next six months, and we would expect to lease those investments in laser equipment.

Lastly, be aware that we have three less scheduled ship days in the seasonably slower fourth quarter, as compared to the recently-completed third quarter.

Now, I will turn the call over to David for a market overview.

Thanks, Rick.

Let me start off by commenting on supply-and-demand, and reiterating what Mike said earlier, which is that we are optimistic about the steel market, and remain favorable in the fourth quarter and into the start of 2005.

We expect demand to remain strong -- particularly in farm and construction equipment, energy and transportation.

We also expect steel prices to remain elevated, as raw material costs are on the rise.

Specifically, as we move into the supply side of the equation, although there are many different signals in the market today, the domestic supply environment continues to be one of discipline from the steel manufacturers.

And we continue, at Olympic Steel, to enjoy an outstanding association with each of our key vendors.

Raw material costs such as scrap, iron ore and coke continue to be on the rise, and are expected to remain high as we view this trend through the first part of 2005.

Additionally, energy and transportation costs are expected to remain at elevated levels, as well, increasing the cost of supply.

Global steel prices are still on the rise, and the heavy import season has concluded here in the lakes.

We see synchronized recovery from North America and Asia, and Europe catching up.

Service center inventories are elevated slightly from in August, while days-on-hand are up from a total perspective of about a day.

We continue to foster our supply relationships in our prompt vendor-payment practices.

We believe this affords us access to steel, as we continue to grow.

On the demand side of the equation, we continue to operate in a strong steel-demand environment.

North American steel consumption outlook continues to be favorable, as I reiterated Mike's earlier comments.

Specifically, the industrial sectors referenced earlier by Michael, which were rail car, farm equipment, construction, material-handling equipment and energy generation look to all be strong as we enter into 2005.

Many of Olympic Steel's customers have a favorable outlook in 2005, and we look to increase our participation with those customers.

Participate significantly in large manufacturers of highly engineered products, along with low-tech environment customers, also.

We're well-positioned to grow with these customers from the equipment capacity, inventory position and a customer-service perspective.

I'm particularly proud of the accomplishments of this last quarter.

In conclusion, we are currently in a market that has some confusing headlines in their messages, as opposed to the strong trend lines which we have seen and I've just commented on, and were commented on earlier by Mike.

We believe the current environment is one of disciplined supply, higher raw material costs and strong US industrial demand -- which bodes well for Olympic Steel, as we enter the fourth quarter and the beginning of 2005.

That concludes my comments.

Then we will open the call up to your questions.

Thank you, sir.

Ladies and gentlemen, at this time, we will begin the question-and-answer session.

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Our first question comes from [Barry Heims] with Sage Asset Management.

Please go ahead.

Great quarter.

I had two questions.

One -- the tonnage growth in the quarter was less than it had been in the first half of the year.

I wonder if you could just talk through that a little bit.

Secondly, could you talk a little bit about what you are seeing in imports currently, both in terms of volume and pricing, relative to US spot prices?

Relative to US spot prices.

Okay.

Let's deal with the first part of your question.

The tonnage is down because I think there is a more-balanced, universal approach to supply-and-demand.

When you look through the first half of the year, there was some significant amount of disruption in terms of peoples' identification of whether or not this market was real.

Olympic Steel, as early as the fourth quarter and actually as early as the third quarter of last year was predicting an industrial recovery, while others were not.

So I think that we were favorably positioned to take advantage of other peoples' shortfall, in terms of their ability to perform for their customers.

What we see now is a much more balanced approach in terms of supply-and-demand.

And what you're seeing now is sort of -- real sort of demand growth, in terms Olympic's participation in the market, where the objective is to try to grow between 8 and 12 percent on an annualized basis.

So we're very comfortable with the fact that the demand is still growing, and we're still growing our market share.

Second side, there's no question that imports are up.

The statistics prove that.

But it doesn't necessarily -- it's not the material necessarily that you want to buy for yourself.

I mean there are lots of different products that are coming in.

When you look at plate, which is one of our product lines, there's very little plate coming into the US.

When you look at the sort of hot roll shipments, there is some availability out there from second-tier suppliers.

Nothing of great consequence.

It's certainly not meeting the overall demand.

I think Mr. [Mesapheros] has done a nice job of analyzing that.

As it relates to prices, there's clearly no question that the gap between the US price and the international price is closing rapidly.

Let me make a couple of other comments, here, relative to third quarter and second quarter.

Today, we have one less day of billing.

That's one issue.

The other issue revolves around the first month of the quarter, which is July.

Our automotive region is down for two weeks, and that retards some of the tonnage.

Also, we have a heavy participation in vacation schedules.

The month of July and early August, from our Eastern region -- where our companies are down for two weeks.

The first two weeks -- the last two weeks -- they alternate, depending on the company.

So third quarter is always a little bit softer because of those two items on the calendar.

Great.

Thanks a lot.

[Debra Vine], [Vine] Capital.

Congratulations on the strong quarter.

Mike, could you talk a little about where you're seeing demand?

Either from which industries or which region of the country?

If you could also comment on what you think the next round of raw material prices impact might have on steel prices.

Well, you know I think we indicated, [Debra], that we certainly see the farm equipment -- although there's some concern about John Deere, today, because of corn pricing.

But we clearly have indications from the road machinery, construction machinery, transportation, railcar, barges -- literally every high-lift manufacturer.

All of those markets have very robust forecasts, in terms of their 2005 outlooks.

Clearly, automotive is everybody's big question mark.

Big 3 versus transplants.

There's lots of discussion about that.

I still think that there will be a relatively strong on an historical basis of sales in automotive.

It just comes down to construction and housing construction and appliance, which I still think will be relatively good, on a historic basis.

And non-residential construction?

Non-residential construction is really not a market that we service a great deal.

But in terms of infrastructure, I think it's going to be very heavy as it relates to the demand from clearly states like Florida.

When finally the FEMA money and the insurance money gets through, it should be sometime the end of the first quarter.

And re-engineered -- I think it's going to be very, very strong.

Okay.

And in terms of the next round of raw material price increases...

Yes.

I'll let David answer that.

Let me comment on that, [Debra].

First of all, from an iron ore perspective, over the last couple of years, we've seen a 9 percent increase in '03 in iron ore.

A 19 percent increase this year in iron ore costs.

And it's forecasted 10-15 percent increase in iron ore expenses for '05.

Of course, both unions have settled up in Canada.

However, that has caused a shortfall in the iron ore side of the equation.

So iron ore is up, as our good friend John [Cerma], who's CEO of US Steel says.

On the coal side of the equation, there's not a lot of Apalachicola at $30 a ton, but there's an awful lot at $60 and $70.

So coal is up, and iron ore is up.

Obviously, scrap continues to rise, and is a substitute for some of the iron ore, and obviously the key element for electric furnace smelt.

So we look at all of these, and all the ferro alloy prices are up as they're dollar-monetized.

We see this raw material demand literally around the world, beginning with China's enormous appetite -- regardless of whether that market is softening or not.

The amount that they use is still very robust.

That's driving all costs of raw material up.

Obviously, that is going to propel the basic cost of steel, and continue to hold it these particular levels.

Just going on to your balance sheet -- given that you're going to generate significant amounts of cash just from this quarter's earnings alone.

Have you revised anything about what you're going to do with excess cash or what you're going to do with the balance sheet?

I'm particularly thinking about a share buyback.

Well, one of the issues of offering the secondary was to increase our float.

We have very little float out there, even though we get lots of trend.

We discuss all possibilities, [Debra].

I don't think we're prepared to discuss what our outlook is at this particular time.

But again, we have the least amount of float of anybody in our sector.

Could it be beneficial?

The answer is -- the math works, but we don't want to comment on what our plans are at the moment.

So in lieu of a share buyback, what are you plans for excess cash?

Well, right now, we still as you see on our balance sheet, have $90-some million of cash.

Obviously, we're generating lots of cash flow, and we would expect to continue to do that through next year.

The immediate plans are to continue to pay down debt, and we obviously continue to look at growth opportunities.

I mean we've stated that we would like to continue to grow internally at a 10 percent target.

We look at all of our options, in terms of how we would achieve that 10 percent growth.

As we continue to pay down debt, that would give us the availability to look at those options and do them.

Thank you.

Adam Weiss, Chilton Investment.

Good morning.

A couple of questions.

I didn't quite understand when you made your comment about the tonnage trends.

If I'm correct here, your [total] tonnage was down almost 60 percent versus last year?

No.

No.

It's up.

Our [total tonnage is up.

I don't know where you're getting that statistic on the...

The number of tons pulled for the quarter?

Oh.

For the quarter.

Yes.

For the year, we're up.

No.

The quarter.

For the quarter, again, I don't have to comment.

I mean I have no comment on that.

We didn't.

I don't have any analysis.

That could just be timing.

Our [tolling] is up.

We expect it to remain up.

Again, [inaudible]

Unsold told -- 40. 40 versus 48

Let me comment on that, Adam.

First of all, we expect our total in tons to be up on an annualized basis.

Why was it down in the quarter?

That's a function of storage.

It's a function of storage and it's also a function of [toll] processing.

We had a great deal of participation with one significant customer who is Straight Line.

We did a lot of business with Straight Line.

Straight Line is currently out of business, today.

We have filled the ranks of that absence.

Our year -- our [toll] revenue increased in '03 versus '02, with revenue.

But it leads tons by approximately 25-30 percent.

We would expect about a 15-20 percent growth on the toll processing for '04.

That's just as Mike said -- a timing issue.

It involves storage in addition to [toll] processing.

We have lost no significant contracts.

Right.

If that's what you're referring to.

But let me further comment to you, Adam.

That is a strong initiative of ours -- [toll] processing -- along with a couple of other marketing directions. [Toll] processing has a specific manager associated with it, which came on with us 2 years ago, after 34 years in the business.

He has grown the business dramatically with us, and we continue to realize our expectations, which are significant growth in that field.

Then comparing the second quarter to the third quarter on a sequential basis.

In the second quarter, your gross profit per ton went up about $70, sequentially.

Then in the third quarter, your gross profit per ton was down a dollar or two, even though your selling prices continued to go up.

Could you address that?

Yes.

Basically, the increases in the raw material costs and the sell price basically were aligned in the third quarter.

Whereas in the second quarter -- first and second quarters, you were on an increasing gross margin per ton spread, as you had the lower cost of inventory at the end of last year.

Okay.

I know you don't report -- your inventory's on a FIFO basis.

Right?

It's actually specific identification.

We're not on a layered FIFO.

We receive in our steel at actual costs, and when we sell it -- whichever coil or plate of steel we sold is the cost that's relieved out of inventory.

Isn't that the same as FIFO?

Not necessarily.

No.

What's the difference?

FIFO is a layered technique, where you take the first steel that you bought, and that is what's applied to the sale, versus what I just explained on a specific-identification.

We tag every coil.

Do you have a question, Adam?

I was trying to compare your inventory evaluation to some of the other processors.

Like [Ryerson] Reports inventory on a LIFO and FIFO basis.

I didn't know if you could give us kind of the LIFO value.

We have no LIFO value.

It's the actual cost.

What you see is what you get.

There's no hidden anything in ours.

I can't speak for the other guys.

But if you want to have an accounting discussion, please call Rick after the conference call.

Okay.

I will.

Thank you.

Okay.

Our next question comes from [Neil Goriha] with [Ensell Capital].

Please go ahead.

It's actually [Steven Korn].

Can you give a little bit of clarity as to what the carrying value of the inventory is to current spot prices, and how that's changed throughout the quarter?

No.

We can; we won't.

Okay.

Fair enough.

Can you comment -- you made a comment as the US price and international prices are starting to -- the gap is starting to close rapidly.

Yes.

It was my understanding that that gap was around $250 a ton.

Should I assume then that US prices are coming down toward international prices?

Or are they both meeting somewhere in the middle?

They're both -- they're both moving.

And the question was from the spot prices as opposed to the contract price.

On the peak of the spot price, it clearly has come down somewhat, but I will tell you that it's rising more in the international marketplace than it's coming down in the US marketplace.

Okay.

Then how should we think about a normalized gross margin holding inventory -- I'm sorry -- holding spot prices flat for a quarter, from a margin-per-ton standpoint?

Well actually, you can go back to Olympic's history since it's been public.

Our normalized gross margin has operated between 22 and 25 percent.

Yes.

But I mean you have -- you have higher -- you have higher volumes, now.

So I would assume that there's some -- there's some savings in that sense.

Not on the gross margin.

Our gross margin is just material costs plus inbound freight.

So anything from a fixed-cost application would fall below the line on the expense side.

Right.

Thank you very much.

Tom Carl.

Gentlemen, I just want to congratulate you, not only on a good quarter, but [inaudible] phenomenal year.

Thanks, Tom.

I know you're not being fully appreciated in the stock market right now, but keep doing the job you're doing, and I'm sure you will.

My question, I guess, is in terms of inventory.

Give us the tonnage on the inventory as it relates to a year ago.

Well, let's see.

We're turning relatively -- I don't have the exact numbers in front of us.

We're turning our inventory more rapidly this year than we were last year.

I believe our tonnage is down from last year's level.

Our net tons that we now own at the end of the third quarter are probably below where it was in the [third] quarter of last year.

Right.

[So the big] increase is solely [inaudible] price?

That's right.

That's right.

The average cost per inventory item is much higher.

The other -- my next question is in terms of your rationale for pricing staying high.

Can you explain why you're the only ones [inaudible] feel that way?

Well, we're the only ones who thought it was going up last year, too.

You know, we like to listen to our customers, as opposed to the experts.

You know?

The experts who have little invested into the universe.

We like to listen to the people that are in the business.

As we look at the basic rationale of supply-and-demand in the domestic marketplace, it still appears that there's going to be a very disciplined approach to the supply as it relates to the Oligopoly.

Even our investors use that word.

On the domestic flat roll side.

Clearly, plate production is going to be very constrained.

The demand looks very strong, so the imbalance is there.

And we do not believe, based upon things like energy pricing, transportation issues, currency valuations -- that there's going to be a robust import market, next year.

So we still believe there's going to be just basic economics.

There's going to be a very large demand against a very constrained supply.

At least what I was taught, that means a good pricing.

And the net result of that should be a continuation of decent profit margins [inaudible] foreseen level that we saw in this past year, into the new year.

You know, yes.

I think that you will see strong demand.

I think you will see robust pricing.

And for those who -- you know -- have the discipline on the cost structures and understand the velocity of cash turnover, there should be very, very strong earnings potential.

Thank you very much.

At this time, we have no further questions.

I'd like to turn the conference back to management for any concluding comments.

Please go ahead.

Well again, we'd like to thank you all for your interest.

As a reminder, it is our policy not to provide forward-looking earnings estimates for the upcoming quarter.

So this concludes our call, and thank you again.