Olympic Steel Inc (ZEUS) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Olympic Steel, Inc. second quarter 2005 earnings results conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Michael Siegal, Chairman and CEO of Olympic Steel.

Please go ahead.

Thank you.

Good morning and welcome to our call.

On the call with me this morning is David Wolfort, our President and Chief Operating Officer, and Rick Marabito, our Chief Financial Officer.

First, I want to thank all of you for your participation, and for your 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 of the Private Securities Litigation Reform Act of 1995, and please refer to Olympic Steel's SEC filings for further information.

As indicated in our earnings release this morning, second quarter sales increased 8.4% to 241.5 million, and net income for the quarter totaled 3 million, or $0.29 per diluted share.

In the release, we also noted that our second quarter results included 1.7 million of bad debt expense related to Chapter 11 filings for two customers in June, one more significant than the other.

The bad debt charge lowered our diluted EPS by $0.10 per share in the second quarter.

For the first half of 2005, net sale increased 28.4% to 526 million, our largest ever, and net income totaled 12.6 million, or $1.21 per diluted share.

Funds sold in the second quarter and first half were down from the robust levels of 2004 by 7.4%, and 7% respectively, as carbon flat-rolled inventories remain high at other service centers.

During the second quarter, we saw good demand from most sectors of the market.

The expectations would be that domestic -- excuse me, the exceptions were the domestic auto sector in Detroit, Big 3, and other service centers with their large inventories.

Service center spot marketplace was impacted by the inventories that remain higher than expected during the quarter and during through the first half.

We are encouraged to see a meaningful drop in the steel service centers inventories during June, and the continuation of the inventory correction may result in an easing of pricing pressure later this year.

We continue to focus our efforts on maintaining discipline over expenses, receivables, and credit, and inventory turn over.

We believe our diligence in these areas have helped to mitigate some of the market's pricing and margin fluctuations.

Our balance sheet remains strong.

We finished the quarter with shareholders equity per share of $18.80 and a debt-to-equity ratio of .43 to 1.

And we accelerated inventory terms and account receivable terms as well.

I'll now turn it over to Rick to comment on the financial details.

Thanks and good morning, everyone.

I'll expand on a few financial items that we haven't covered yet.

Our accounts receivable decreased by 22.6 million from the first quarter, and the decrease was primarily attributable to lower sales, volumes, and lower selling prices.

Our DSL remains strong and was in the low 40s.

We also decreased our inventory very significantly during the quarter.

It was down by $37.3 million.

That's a 21% decrease during the three -- the three-month period.

And we continue to turn our inventory in excess of five times per year.

We also decreased, and primarily again as a result of the inventory decrease, but we also decreased our total debt from the first quarter by 37.3 million as well.

And that was a 31% decrease.

And as we move into the third quarter, we would expect that our total debt levels will continue to decline.

Our gross margin percentage was 14.9% for the quarter, and that was down from the first quarter levels of 17.4%.

The decrease in the gross margin percentage is primarily attributable to the soft spot market that was caused by higher inventory levels at other service centers.

Our EBITDA for the first half of the year totaled $26.8 million, and we continue our focus -- diligent focus on expense management during the year, and our expenses for the second quarter decreased by 8.7 million to 30.1 million from last year's second quarter.

And as a percentage of sales, the operating expenses in the quarter decreased to 12.4%, compared to 17.4% in the second quarter of 2004.

Looking at -- at taxes, our effective tax rate for the second quarter was 36.9%, and that reflects our estimated benefit of the new manufacturing deduction that would be provided by the American Jobs Creation Act of 2004.

Our effective tax rate for the first six months was 38.5%, and that would be the rate that we would expect going forward in the third and fourth quarters of 2005.

Looking at capital spending for the first half, our spend was under $1 million.

It was 906,000.

And in the second quarter, we did enter into two new operating leases for the two new laser burning machines that we added in Cleveland that we had talked about last quarter on our call.

And we're currently installing two additional laser burning tables, which we would expect to be operational during our third quarter, and then we have another, a third, that would be on order that we would expect to have in place by the end of the year.

And we would anticipate financing these three additional laser burning machines also through operating leases.

At this point, I will turn the call over to David and he'll provide a brief market overview.

Thanks, Rick, and thanks, Mike.

Let me just briefly comment on our -- on Olympic Steel's second quarter.

Market -- we saw a gradual decrease in business over this quarter, when compared to the robust markets of 2004.

Overall, we've managed a consistent levels of sales when comparing each of 2005's quarters to its comparable 2004 quarters.

During the second quarter, the marketplace continued to exert demand pressure, which compelled us to accelerate our inventory reduction efforts.

Our early recognition that the market was in an adjustment period allowed us to initiate a multi-phased inventory and debt reduction plan, which we have executed in totality as Rick has commented on -- on some of the aggregate monies we returned.

We responded to a marketplace -- we responded to a marketplace that displayed high levels of inventory, modest reductions in demand, falling scrap prices, and general concern over the entirety of steel industry, and we continue to proactively adjust inventory levels according to mill lead times and availability.

From our highest levels of inventory in the early first quarter, we have decreased inventory by over $53 million, or 27%.

The majority of the decrease occurred in the second quarter.

During the execution of our inventory reduction plan, we were able to maintain a profitable presence in the marketplace.

Our ability to effectively reduce inventory response to a marketplace which continued to display a large overhang of inventory, has prepared us for the final stages of a strong cycle that began in late 2003.

We are beginning to see the manifestation of an overall reduction in service center inventories, which has allowed the market to begin catching up to our inventory reduction efforts.

Industry statistics in June indicated that the average service center is turning inventory approximately four times.

On average, we have turned our inventory in excess of five times during '05 as Rick had commented, and we are now approaching inventory turns of six.

Our success in 2004 and 2005 have a common element: our ability to react quickly to market conditions.

Our ability to react to the market and act in a highly responsible manner, has allowed us to maintain profitability, while undertaking aggressive inventory reduction plans and achieving inventory turns that are comparable with our best inventory turns since our IPO in 1994.

Let me turn it back over to -- to Mike.

Yes.

Operator we'll take the questions now.

[OPERATOR INSTRUCTIONS] Our first question comes from Mr. Mark with KeyBanc Capital Markets.

Please go ahead with your question.

Yes, good morning.

It's Mark Parr.

Good morning, Mark.

I was wondering, Michael, if you could give a little more color on what you would expect as far as average price realized, tonnage volume trends and margin -- gross margin trends for the third quarter.

I realize that's not very much, but --

Sure, Mark, we'll just tell you what we're going to make.

Depending on -- on who you want to believe, what -- when is the pricing going to recover?

We're very encouraged that the inventory numbers went down at the service centers -- the answer is I'm probably not going to be able to answer your question, long and short of it, Mark.

But, we still anticipate being able to react to the market effectively in terms of growing our market share.

We have bypassed a lot of business for two reasons in terms of really low pricing, as people have liquidated their inventory in an inordin -- unorderly fashion, so we have bypassed some opportunities to increase volume and lose money.

We're encouraged by the numbers that we see.

We expect the service center numbers to fall further in July from an inventory perspective, which means that the mills may have the opportunity to -- to maybe stabilize and -- and raise pricing.

So, we would anticipate probably comparable volumes on the level that we're at today.

We probably see some margin expansion, but maybe not.

But, it depends -- it depends how fast this market recovers.

We got to get through July's.

We know July is pretty much a blah month because of automotive shutdowns and retooling.

So overall, I think it's what David said.

We expect our tonnage to be relatively in the scale that it's at today.

We expect debt and expense reduction, and the margin will be where it falls out to be.

Okay, terrific.

Well, anyway, congratulations for managing through this volatile process.

Thank you.

Thank you.

And our next question comes from Mr. Aldo Mazzaferro with Goldman Sachs.

Please go ahead with your question.

Good morning, Michael.

Morning, Aldo.

How you doing?

Say, how do you see the price recovery in steel developing?

Do you see it that the mills have to get the utilization rates back up full first, or do you think -- or do you think the discipline is going to hold with pricing -- as pricing starts rising, do you think utilization rates have to be high first before that happens?

I think it was your report, Aldo, that said at the present time, that consumption's higher than production.

So, as long as they manage the production to a level that's below consumption, they have the ability to raise prices.

So, I don't know that they need to get to full capacity to raise prices.

They just need to control it to a level that creates surplus of demand.

We don't see a lot of import opportunities on flat-roll.

There's some import opportunities on plates, but clearly this market is -- is being managed to have the opportunity with consistent consumption, and maybe growing consumption, to have a price rising environment.

It's just a question of when does it occur?

We don't necessarily believe that -- to answer your question, that they have to have full capacity to raise prices.

Right.

So, as -- as of your steel prices right now, have you paid higher prices on your last purchase than previous at this point?

Yes.

Every -- every purchase is unique to itself, Aldo.

Overall, we would characterize the market as flat and yet to recover.

Yes.

All right.

And then a real quick one for Rick, say, Rick, after you get these operating leases going on these laser machines and you get to the year-end.

On a -- on a run rate, what do you think your lease expense would be compared to say what it was in the second quarter?

Aldo, the -- the equipment that we're talking about, the lasers, are about $1million, give or take, but they are about $1million, so we typically do 5 to 7-year leases on them.

So, based on the residuals and that, you're talking about for five -- five leases the expenses going up maybe a 100 -- 100 to 200 grand for the year.

Oh, so you take $1 million divided by 5 to 7 -- ?

Well, there's -- there's big -- the resid -- you have the residual values on them, too.

Yes, right.

So, you don't -- you don't -- it's like a car lease you don't -- you don't pay for the residual you are just leasing --

So, it's couple hundred dollar thing.

Couple hundred thousand dollars.

Yes.

I can give you -- I can give you a call back.

I don't have the exact numbers in front of me, but I'd be happy to get those.

That's for the full five, Aldo, not for the three accounts.

And the reason -- obviously, the reason that we lease those is because of technology.

We have chosen to lease those so that as those lease terms expire, we're able to replace them with the newer -- newer technology on the lasers.

That's -- that's the reason why.

Right.

Alright.

Thanks.

Thank you.

Our next question comes from Ms. Michelle Appelbaum with Michelle Appelbaum Research.

Please go ahead.

Hi.

Nice looking quarter.

I wanted to ask you about my same question I ask all the time, M and A activity.

I was surprised that the guys from Reliance the other day said that they were seeing more activity than anytime ever.

So, I was wondering if you had any thoughts on what's going on.

Well, I think a lot of guys made a lot of money last year in -- in their businesses.

I think they're seeing, perhaps with the changing dynamic of the marketplace that -- that don't want to put money back into their businesses, and they just said I'm tired.

I don't want to fight these battles, I don't want to get back to "a normal steel market" and fight the same battles I fought for 30 years.

So, there is lots of activity and there's no shortage of investment bankers who are looking out -- who are there today in the marketplace encouraging people because the -- the money market -- the debt market is very low right now.

So, from the standpoint in terms of access to capital at long term historically low rates, it's encouraging buyers to take a more serious look, and you are looking at an environment where lots of service centers just want to be part of this particular consolidation play, because they just don't see themselves surviving without attaching themselves to something substantive.

So, there -- there clearly is a lot of activity out there.

Okay.

Thank you.

Thank you.

We have a flow-up question from Mr. Mark Parr.

Please go ahead with your question.

Okay.

Thanks.

This is a question for -- for Dave.

I was wondering if you could give some color on how you see plate pricing in the third quarter relative to sheet pricing.

Well, Mark, plate has -- plate typically plateaus rather than -- rather than having the -- the ebb and flow of sheet.

Plate has been pretty steady -- pretty steady throughout the -- throughout the year, and we really don't see any degradation in the -- in the plate market.

As a matter of fact, our plate participation on a tonnage basis continues to grow.

That's one of the reasons why we are continuing to add lasers to our operations, as many of our customers are asking us to do a lot of their first stage processing for them.

But in general, plate has stayed a lot more stable than -- than sheet, Mark.

Can you talk about your mix of plate versus sheet products in the second quarter, and how does that compare to last year?

Boy, I don't have that -- I don't have that in front of me, Mark.

Our plate has continued to grow in a very steady -- steady, measured way.

Literally since 1998, when we put [Chambersburg] into operation.

Many of our OEM customers that avail themselves of the services that we provide, continue to have very strong years, and last year was no different.

Last year was very strong, we made -- we had some nice tonnage growth with them.

Even though availability was tight, we managed to grow our participation.

As you well know, we continue to do that -- we continue on that same growth curve.

I would say it's measured and steady -- steady growth.

Okay.

Thank you.

Thank you.

And gentlemen, there are no further questions at this time.

Please continue.

Okay.

Thank you, operator.

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

We would anticipate releasing our second quarter earnings around the last week of October.

I want to thank you, again, for your interest in Olympic Steel and this concludes our call.

Thank you.

Ladies and gentlemen, this concludes the Olympic Steel Inc. second quarter 2005 earnings results conference call.

You may now disconnect.