Olympic Steel Inc (ZEUS) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Olympic Steel Incorporated fourth quarter 2005 earnings release conference call. [OPERATOR INSTRUCTIONS].

I would now like to turn the conference over to Mr. Michael Siegal.

Please go ahead.

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 continued interest in Olympic Steel, and let me remind you that the 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.

Before I review our fourth quarter earnings performance, I'm very pleased to announce that Olympic Steel will be making its first [everly] quarterly cash dividend, highlighting our confidence in the future of Olympic Steel.

The dividend of $0.03 per share will be paid on March 15, 2006, to the shareholders of record on March 1, 2006.

We expect to make regular quarterly cash dividends in the future, obviously, subject to the continuing determination by our Board that this dividend policy remains in the best interest of our shareholders.

We are pleased to have the financial strength to both fund our growth and objectives and reward our shareholders through a regular quarterly cash dividend.

Now, let's turn to the earnings performance.

As indicated in our release this morning 2005 was the second most profitable year in Olympic Steel's 51-year history.

Our fourth quarter sales totaled 204.8 million, and net income for the quarter totaled 7.3 million, or $.70 per diluted share.

Our fourth quarter results included a pretax charge of 3.5 million related to the closure of our Olympic Laser Processing operation in Detroit.

The charge equates to approximately $0.21 per share after tax, so our pretax earnings for the fourth quarter on operations were $0.91.

For the full year 2005, net sales totaled 939.2 million, and net income totaled 22.1 million, or $2.11 per diluted share.

Tons sold in the fourth quarter and year were down from the robust levels of 2004 by 2.3% and 5.6%, respectively, primarily due to the challenging conditions for our automotive operations in Detroit and some domestic and international supply disruptions that led to some lost sales through the lack of having the proper inventory.

Our strong profitability in 2005 combined with our continued focus on inventory and accounts receivable turnover, cash management, and expense controls resulted in the elimination of all of our bank debt during the fourth quarter of 2005.

We are commit to do investing our excess cash in value-added services and supply solutions for our customers, including facilities and equipment that reached further downstream in the value-added processing area such as lasers and machining equipment.

We added four new laser cutting lines in 2006 and plan to install at least six additional laser lines in 2006.

I guess we added the four and six, right?

Okay.

In January, 2006, we purchased 150,000 square foot new facility of additional warehouse space in Chambersburg, Pennsylvania, to complement our existing plate processing operations there.

We believed our migration towards more value-added processing will allow for sustained, imbedded margin improvement and growth.

We are also excited about the continued consolidation of the steel industry and the valve creation opportunities it brings to all participants in the steel supply chain.

Consolidation is one of the significant factors for steel prices to remain at high historical levels.

This, coupled with the favorable durable goods statistics released in January, points to a relatively strong steel market in the near term.

As we stated it in our release, we plan to substantially increase our capital spending in 2006 over recent years.

Our strong balance sheet allows to us explore ways to invest in profitable growth initiatives such as acquisitions, greenfield start-ups, new processing equipment, as well as the necessary infrastructure to support such growth while rewarding our shareholders with a regular quarterly cash dividend.

I will now turn it over to Rick to comment on the financial results in more detail.

Thanks, and good morning, everyone.

Before I start, I just wanted to clarify two things.

We added four laser lines in 2005, and we are installing six laser lines in 2006.

And then the second is the charge for O.L.P., the $0.91 s a precharge number after tax, not pretax, so just so everybody is clear on that.

Just highlighting some more of the financial information, our tons sold did decrease 2.3% in the fourth quarter and 5.6 % for the year, yet our sales dollars were up 5%, or $45 million for the year, while they decreased 14.7%, or 35 million in the fourth quarter.

These variances are due to the large price swings we've seen over the past two years.

On average, steel selling prices were significantly higher in 2005 versus the full year 2004, yet they were actually lower in the fourth quarter of '05 compared to the fourth quarter of '04.

As Michael indicated, 2005 was our second most profitable year ever, behind 2004.

Our EBITDA in 2005 totaled $52 million, and over the past two years we've generated over $163 million of EBITDA.

The 3.5 million pretax O.L.P. closure charge has been displayed on one line in our income statement, which shows up after operating income, and it's called "loss from disposition of joint venture."

The corresponding $1.3 million investment in the joint venture has been eliminated from our balance sheet at December 31st, and the estimated 2.2 million of wind down costs are accrued as a current liability on our balance sheet.

Interest expense was reduced significantly in 2005 as we were able to eliminate all of our bank debt during the fourth quarter, and our effective tax rate for the fourth quarter was 39.9%, and for the year it was 39%.

And we would expect our effective tax rate to be slightly lower in 2006.

Now, let's turnover to the balance sheet.

Our accounts receivable decreased by about $12 million during the fourth quarter, and the decrease is due to lower sales volume in the seasonally slower month of December offset somewhat by some rising average sell prices during the quarter.

Our receivable DSOs remained very strong, and they continued to improve in 2005.

Our inventory increased during the fourth quarter by about $31 million as the steel mills caught up on their backlog and shipped very heavily in the final few weeks of the year.

Our inventory volumes and pricing both increased during the quarter, and we are currently turning our inventory at approximately six times per year, and we e believe that our inventory is appropriately positioned for current market conditions.

We already discussed the elimination of all of our bank debts during the fourth quarter, and capital spending for 2005 totaled about $2.2 million.

As we discussed, there were four new laser lines added in 2005; those were all leased, so those don't show up in the 2.2 million of capital expenditures.

And as Michael highlighted, we are adding a minimum of six new laser lines in 2006; each laser line costs approximately $1 million, and we will plan on leasing all six of those as well.

Lastly, we spent approximately $5.3 million in the first quarter of '06 on additional facility space in Pennsylvania.

Lastly, I would like to quantify our dividend declaration.

We have approximately 10 million shares outstanding, so our quarterly dividend of $0.03 per share equates to approximately 300,000 per quarter or about $1.2 million per year.

Now, I will turn the call over to David.

Thanks, Rick, and thank, Mike.

As Mike and Rick reported, we are very pleased with our performance over the past two years.

We have successfully navigated our way through 2005 in the wake of large price swings and market inventory adjustments.

Our inventory and debt management efforts throughout 2005 have well positioned us to execute our growth strategies for 2006 and beyond, as both Rick and Mike have commented on.

In addition to distributing cash back to our shareholders in the form of a dividend, we will use our strong balance sheet to aggressively invest in our future in a disciplined manner.

Our plans include significant capital spending for new equipment and processing space.

Upon completion of the laser investments in 2006 which both Mike and Rick commented on, we will have 21 lasers and plate processing capabilities in Georgia, Pennsylvania, Cleveland, Atlanta area, which is our winder plant, Chicago, Minneapolis, and our Iowa facilities.

This is a targeted growth market for us which is fed by our temper mills.

We are currently exploring additional locations to expand our tempering capabilities as our existing two temper mills in Cleveland and Iowa are currently running at robust levels.

As Michael discussed, our January facility acquisition in Chambersburg, Pennsylvania.

We are very excited about the possible of our downstream processing capabilities in this region of the country.

The additional 150,000 square feet of new space will operate in tandem with our existing facility there, allowing to us expand our machining and staging capabilities to supply our customers.

We will be shipping from the new location in the first quarter.

This is a clear indication of the support and solutions we are providing our customer base, and further, our plans also call for a disciplined approach to reviewing acquisitions and greenfields in targeted geographies where we already have significant sales presence without a physical presence.

We are intent on better servicing our customers by adding the processing and servicing capabilities they need closer to their facilities, which will also provide targeted distribution cost savings for Olympic Steel.

While our traditional service center activities continue to serve us well, we are focusing on the additional tempering and laser equipment I just mentioned.

We will also look to continue adding downstream capabilities such as machining, shop blasting, fabricating, and painting.

These investments will provide the growth and sustained imbedded margins that Michael discussed earlier.

Lastly, we are investing an infrastructure to support our growth plans.

We believe that the favorable outlook for continued strong operating earnings combined with one of the strongest balance sheets in the service center industry provide us with sufficient cash to fund these growth plans while delivering a regular cash dividend through our shareholders.

This concludes our formal comments and we will now open the call to your questions.

[OPERATOR INSTRUCTIONS].

Our first question comes from Nate Carruthers.

Please state your company name followed by your question.

Hi.

My name is Nate Carruthers with Michelle Appelbaum Research.

Great quarter, guys.

Thank you.

I was wondering if you guys could give us some color on the spreads you are seeing between imports and domestic steel prices?

And then could you also break down which markets are currently the strongest and the weakest?

And that's it.

Okay.

Dave, you want to comment?

I think the spreads -- first of all, foreign offerings have been narrow.

They picked up a little bit here in 2006, but the offerings in the tail end of 2005, which would have manifested in deliveries on or around this time frame, were pretty thin in terms of offerings.

The price differential was negligible.

Current offerings today as we look downstream, the world is busier.

Again, the offerings are not as robust as had been portrayed in publications.

The differential is certainly not significant enough, I think, to warrant the vagueries of foreign imports.

To put an exact number on it, we don't like to comment on exact pricing in the marketplace, but I will tell you that the marketplace, overall, has some very strong forward momentum, significantly more than was forecasted in the tail end of '05 as we look forward into '06.

The second part of your question, Nate, there's no question that things that are involving domestic automotive create the most risk, even though while there seems to be some okay demand there is a lot of credit concerns in that entire environment, so we would find that to be a weaker market for us.

And then on the stronger side, I mean, clearly, anything that's involved with infrastructure construction, road paving, road machinery, things that are involved in light and heavy construction we find to be very busy at the moment.

All right.

Thank you very much, guys.

Thank you.

Our next question comes from Bob Schenosky.

Please state your company name followed by your question.

Jeffries.

Good morning.

Hi, Bob.

A couple of questions, here, the first one for Rick.

What's the Capex number to use for '06?

I would say -- and again, those leases, or those lasers, will be lease leased, so they won't be in that Capex number.

Right.

So I would tell to you plan on 10- to $15 million, and then at least six lasers on top of it is another six.

Okay.

And that entire -- for the lasers, the entire mill will come out of cash in '06?

No.

The lasers will be structured under operating leases, so we typically like to lease those over about five years.

So typical to like a car lease, you would have residual value at the end, also.

You only have a couple hundred thousand dollars per year per laser on those.

Okay.

Great.

And then two more if I could.

The first one is in terms of the laser expansion, is there a target market that you are going after or is this going to be simply general economy?

Bob, the thing that we look at, we look for highly engineered discrete products, and we service, really, Fortune 1000s with that as a catalyst to drive the growth.

Okay.

So in other words, not a single market that you are targeting, but much broader.

It's a broad range of highly engineered products that are discrete to the manufacturer.

Okay.

Great.

And then finally, can you talk about the drivers behind the high gross margin in the fourth quarter?

Obviously, it was much better than the prior three.

Yes, exactly what we indicated to you, Bob.

I mean, as we are investing in these lasers and more downstream applications, clearly, that continues to add value into the imbedded gross margin.

We are doing more to the commodity, and there's more value to the labor and production side.

And then obviously, Bob, we talked about a second and third quarter.

There was a lot of margin pressure due to the significant drop in the pricing.

Okay.

So I fully comprehend the improvement in the mix.

Was there a portion of the fourth quarter then as well that was a function of its inventory.

Sure.

I mean as prices started to stabilize, as you know pricing fell during the second and third quarter, it stabilized in the fourth quarter, and so with the stabilization of the pricing, obviously, some materials bought at pricing prior to the mark up.

That's always the case.

Right.

Michael, can you offer out the level of improvement driven by the inventory versus mix?

Absolutely some, Bob.

Thanks, Michael.

Absolutely so.

All right.

Well that's all I have, thanks.

Thank you.

Our next question comes from Mark Parr.

Please state your company name followed by your question.

Hi, it's Mark Parr with KeyBanc.

Hi, Mark.

Hey, Rick, hey, Michael.

Hey, Dave, sorry.

I had a couple of questions.

First of all, would like to get some more color on the inventory situation.

You said that part of the build in the fourth quarter was due to mills making up shipments.

Could you give a little color on that?

Also, could you talk about the level of inventory build that you did in the fourth quarter that was discretionary, and what your outlook is for the first quarter on the inventory side?

Well, let me deal with the last part.

I mean, obviously, Mark, our objective is to remain well in excess of five turns a year.

As Rick indicated, we are still somewhere around closer to six than five.

Clearly, our inventory position moving into this quarter will keep us at those levels.

So the inventory, relative to sales, is always adjust adjusted relative to the objectives of the inventory turnover.

Even with the the build up, we still think that there is a discipline there that will be maintained.

Okay?

So the run up is really a question of -- it just was surged -- end users don't accept material for the last two weeks of the year.

Service centers traditionally get a heavy load of shipments on the last two days of the year, where mills load up the rail cars and ship them out to whoever they can.

So from that standpoint, that occurred, which is normal.

In addition to that, we saw some of our suppliers, who have been delinquent on their supply through the course of the year, catch up a little bit.

Okay.

So there really wasn't any discretionary inventory builds going on in the fourth quarter.

No.

Okay.

That's helpful.

Okay.

I have one other question.

I heard, I think it was Rick, talk about potential for greenfield operation, that you are examining that issue again.

Could you give a little more color on potential timing and what the cost might be that you are thinking about?

In terms of timing, we are just exploring, as we talked about, tempering capabilities.

So we've already started exploring geographies on that.

Obviously, where we locate new tempering facility we would also considered adding lasers in that facility.

It's a little early, Mark, in term of commenting on specific geographies or the costs, but that certainly is an area we are looking at.

And then as we talked about going further downstream and looking at some acquisitions or greenfields in terms of what would go downstream from laser processing and the machining and fabricating and painting side.

So a little bit early to the put out a quantification on it.

Just to follow up, if the facility was going to be a greenfield facility -- that's an if -- and if that was inclusive of a temper mill versus just a processing entity, Mark, the lead times on the temper mill today would not allow to us build a facility in 2006.

It would probably be tail end of 2007, regardless of the cost, because of the long lead times for the equipment.

All right.

I appreciate the color.

Congratulations on such an amazing financial turnaround.

You guys are doing a great job.

Just keep up the discipline, and let's hope that '06 is another good year.

Thank you.

Our next question comes from Deborah Fine.

Please state your company name.

Fine Capital.

Good morning, gentlemen.

Hi, Deborah.

Congratulations on the great quarter, Mike.

You are buying steel brilliantly.

Can I ask you a couple of questions?

When you look at the new machines you are buying, how do you look at the returns, the hurdle rates on those machines?

Sure, Deborah, this is Rick.

Basically what we do on any capital expenditure is we analyze the returns based upon our mix of existing returns.

So, for example, the things that we are talking about tend to be on the much higher end of our return equation today.

So the items like tempering and lasering, or laser processing, tend to be much higher than the average return you are seeing today.

Can you put a little -- can you put some numbers around that?

We prefer not to, Deborah, but let me just say that there's a traditional cutting of the steel, whether that's cut to length or splitting, whatever that return is, the laser processing is three to four times that, in terms of the returns.

Okay.

Three to four times the return?

Yes, but they are much less costly.

You mentioned acquisitions.

Are you targeting -- as you are looking through acquisitions or potential greenfield properties are those all domestic or are you also considering overseas acquisitions or greenfield properties?

The answer is yes, we are considering global scenarios.

Greenfield as well?

It's possible.

Okay.

And then if you could give us some color on -- you talked about your inventories, but your perception of what the inventories are at other service centers?

The data that come out, as you know, is skewed in terms of who is in it, who is out.

Deborah, this is David.

I would tell you that I think that the inventories at most service centers today are catching up.

Still catching up?

Are still catching up.

We saw, as you well know, a degradation in the inventory in September, October, November, and a slight build in December and January.

One of the things that fostered our performance in fourth quarter was we were a little bit ahead of that.

We started an inventory reduction program in February of '05, reached our goals in early July, and then began building again; contrary to where the balance of the service centers were and our numbers reflected the same, and that gave us the traction that we just declared here this morning.

As we look forward in the marketplace, we see inventories have reaccumulated at the service centers, our competitors.

The outlook, however, I would believe -- at least our outlook -- has been one for a stronger marketplace through the first half than many of our contemporaries, and only time will tell what sort of inventory they ultimately have as we get into late first quarter and second quarter.

Okay.

And just finally, Mike, I want to reconfirm what you said.

Outside of Detroit you are not seeing -- you are seeing continued, steady economic strength at your customers?

Yes.

That would be a true statement.

I won't say -- universally you have a customer in a sector who is not doing well, but overall, the sectors we supply most of the steel to seem to have robust outlooks for 2006.

Okay.

Great.

Thanks, guys.

Congratulations.

[OPERATOR INSTRUCTIONS].

Gentlemen, there are no further audio questions at this time.

Great.

Thank you.

As a reminder, it is our policy not to provide forward-looking earnings estimates for the upcoming quarter or year, and not to endorse any analyst sales or earning estimates.

We anticipate releasing our first quarter earnings on or around the final week of April.

This concludes our call and thank you, once again, for your interest in Olympic Steel.

Thank you.

Ladies and gentlemen, that does conclude the Olympic Steel Incorporated fourth quarter 2005 earnings release conference call.

You may now disconnect.

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