Olympic Steel Inc (ZEUS) 2006 Q1 法說會逐字稿

I would now like to turn the conference over to Michael Siegal, Chairman and Chief Executive Officer of Olympic Steel.

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. I want to thank all of you for your participation and for your interest in Olympic Steel.

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.

First, I am pleased to announce that Olympic Steel's Board of Directors yesterday approved a quarterly cash dividend of $0.03 per share that will be paid on June 15, 2006 to shareholders of record on June 1, 2006. As a reminder, Olympic paid its first-ever quarterly dividend earlier this year in March, and we expect to make regular quarterly cash dividends in the future, subject to the continuing determination by the Board.

Now let's turn to our earnings performance. As indicated in the release this morning, our first-quarter sales totaled 239 million and net income for the quarter totaled 7.98 million, or $0.76 per diluted share. In the first quarter of 2005, our sales totaled 285 million and net income was 9.6 million, or $0.92 per share.

Tons sold in the first quarter were down from the first quarter of 2005 by 6%, and challenging conditions for our automotive operations in Detroit contributed to the decline. Tons sold in the first quarter were higher than the previous three quarters on a sequential basis.

So, we have previously stated that our strategy is to deliver additional value-added services and supply solutions for our customers by migrating into downstream processing. We believe that this is a model for sustained embedded margin improvement and growth. We are now taking actions and spending money consistent with that strategy.

During the first quarter of 2006 we significantly increased our capital spending from that of the recent levels to 2.6 -- excuse me -- $6.2 million. The majority of this investment related to the acquisition and equipping of an additional 150,000 square foot facility in Chambersburg, Pennsylvania that fabricates steel plate. The facility became operational during the quarter and is now complementing our existing downstream value-added processing with new welding and shot blasting capabilities.

Additionally, we also installed two new laser processing lines in Georgia during the first quarter, and are installing three more, one in Cleveland and two in Minneapolis, that will become operational in the second quarter. Our strong balance sheet and continued focus on asset turnover has positioned us well to execute and fund our growth and our value-added strategies. David will discuss our investment initiatives and progress later in the call, and now I will turn it over to Rick to comment on some of the financial results in more detail.

Thanks and good morning, everyone. Our EBITDA in the first quarter of 2006 totaled $14.8 million. Michael talked about our investments in equipment in the new facility in Chambersburg. The startup costs associated with these investments, together with increased energy, transportation costs, and -- accounted for the increase in first-quarter operating expenses, (indiscernible) warehouse distribution and occupancy.

Interest expense was reduced significantly as our quarter-end borrowings were only $10 million, compared to $120 million at the end of first quarter of '05. Our effective tax rate for the quarter was 36.5%, and that was due to the realization of certain state tax benefits in the quarter. We would expect our tax rate for the upcoming quarter to be approximately 38 to 39%.

Now turning over to the balance sheet. Our accounts receivable increased by 19 million during the first quarter, and that increase was due to higher sales volumes in the quarter compared to the seasonally-slower fourth quarter and the month of December. Our DSOs remain very strong, and they're still under 40 days.

Inventory increased during the quarter by about $3 million. We continue to turn our inventory at almost six times per year. We do expect that our inventory will be higher and well-positioned in the second quarter, due to both volume and price increases. I already discussed our debt position of $10 million at quarter end, and Michael reviewed our capital spending for the quarter, which, again, totaled 6.2 million. And this is a substantial increase over the recent spending levels, and we are also exploring making future investments in a new IT system.

Lastly, I'll quantify our dividend declaration. We have about 10.4 million shares outstanding, so our quarterly dividend of $0.03 per share equates to about $312,000 per quarter.

Now I will turn the call over to David.

Thank you, Rick. Thanks, Mike. Last quarter we discussed our plans for a disciplined approach to reviewing acquisitions and Greenfields in targeted geographies where we have significant sales presence without a physical presence. We feel that we can grow our company by better servicing our existing and targeted customers with processing and servicing capabilities located within 150 miles of these facilities. This strategy will also provide targeted -- targeted and -- targeted savings, and address escalating distribution costs.

We are focusing our investment attention on additional tempering and lasering equipment, as Mike had outlined earlier, and downstream capabilities such as machining, welding, shot blasting, fabricating and painting. These investments will provide the growth and sustained embedded margins that Michael discussed earlier again.

Since last quarter we have made significant progress on our strategy. We smoothly integrated the new Chambersburg facility into our existing operation, and now perform robotic welding of component parts and shot blasting, and have painting to come at this operation in the near future.

We also quickly brought two new laser processing lines into operation in Winder, Georgia, and an additional one in Iowa. We are planning on bringing two more to Minneapolis this quarter and an additional laser to Cleveland. And that will bring us to 21 operational lasers by the end of this quarter.

We recently added a senior manager to address the increasing cost of transportation from our transportation -- transporting steel from our suppliers and to our customers. We are currently exploring additional locations to expand our tempering capabilities, as tempered sheet is the foundation for our downstream expansion plans. We also spent significant time during the first quarter investigating a new single system alternative to replace the three systems we are currently using, and we are well along that way.

The second quarter market -- the second quarter market outlook appears to be favorable for continued strong demand from our customer base, the industrial machinery and equipment manufacturers, and the fabricators. Supply is tightening and prices are rising for carbon flat-rolled steel.

In summary, we are excited by our ability to invest in growth opportunities while simultaneously rewarding our shareholders.

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

(OPERATOR INSTRUCTIONS). Aldo Mazzaferro, Goldman Sachs.

Can you help us quantify a little bit all these investments in value-added? I was wondering if you had a figure for what percentage of your product mix might be affected by these investments, and what might be the delta in the average selling price, just ballpark.

We won't tell you the second part, but I think today we would probably tell you that the overall sales are somewhere around 20% in the downstream, fully downstream application of our sales, post-tempering.

That's today?

Yes.

What do you think, say, 12 months from now?

Again, it probably won't be significantly different. As we do a lot of the downstream applications, it doesn't necessarily increase your tonnage. So, without a new temper mill, you're really just talking about more dollars for the margin expansion route as opposed to tonnage sales. So, it's a question of how busy are our customers. Certainly we're excited by the new Chambersburg opportunity. And lasers are really about -- what, David -- [3010] a year, that go through a laser? To.

Between three and five, depending on the (multiple speakers)

So, somewhere each laser increases the margin on 3000 (indiscernible) once they're fully operational.

That's great. A follow-up on -- David, your comment about getting closer to the customers -- are you guys looking to establish satellite operations, or how does that work into a real strategy?

That's exactly how it works into it. We have significant presence in various venues. Needless to say, we want to be closer to the customer, we want to cut our distribution cost, and we want to be able to provide service in a quicker fashion -- quicker on-time fashion, further downstream products. So the answer is yes; further penetration into existing markets.

So, I noticed the distribution expense in the quarter year-to-year was something like 15% higher. Was it -- I think. And the tons are actually down a little. So I'm wondering, is that a true indication of how much your distribution expense has gone up, ballpark, like a per ton basis?

There's no question that we're seeing, with the fuel costs and the difficulty in keeping drivers on the road, and the competition that's out there in an increased industrial marketplace for flatbed trailers, that there is a significant increase in the cost. And we're trying to figure out how to mitigate that with a much more aggressive effort in terms of drilling into that. But we're going further distances, as we have some of these value-added processes. It's augmented by our ability to continue to try and upstream our gross margins. But, yes; freight is a very significant component for us right now, both in and outbound.

I've got one more and then I will get back in queue, let someone else go. In terms of the pricing of steel today, Michael, can you confirm that the price of imports has had a fairly large increase in the last three or four weeks? And how does that price now compare with the domestic mills' pricing?

I would tell you that the first part of the question is yes; import pricing has risen significantly, certainly from its bottom. And I would tell you there's not a big delta. I would tell you that foreign and domestic pricing in the current environment is pretty close; in theory there's not a big GAAP between the two pricing on a net effective [landed] cost. So, it's very similar in pricing today.

John Tumazos, Prudential.

Could you talk about the presence of imported volumes in your Midwestern and other regional products by product class -- plate, hot-rolled, cold-rolled, galvanized, other products? Are the imports principally affecting the coastal markets and less so where you operate?

That's probably a true statement. We don't break out our product classifications, as you know. But clearly, imports in the Connecticut marketplace -- and, clearly, there's a lot more imports in terms of the Houston/New Orleans market that comes up the rivers at times. But through the Midwest, or Iowa and Minneapolis and Chicago, and even Cleveland, the lakes have opened up a little bit. But there's not a strong overall presence of imported steel in those markets compared to the coastal regions. That would be true.

At $700-plus A36-grade plate, are you guys going to build a plate mill?

No. That's not in our current plans.

Would it be at $1000 for A36-grade plate?

Who knows? (indiscernible). That's what I can tell you. So, we're still (indiscernible)

Bob Schenosky, Jeffries & Company.

Can you give us a little bit more color on the auto issues in the first quarter? And how do you see that impacting the second quarter?

As we all hesitate, we all look at each other seeing who is going to answer that one. For us, I can't speak -- for us it is a very challenging market. It has affected both our tonnage and our profitability. We expect to still be somewhat challenged and hopefully better in the second quarter than we were in the first, but it's still a very challenging market for us.

Is it one of the big three that's a bigger concern for you, or certain models that you're on? What's the biggest issue?

Let me address that. A couple of things. Number one, we're concerned from a receivables prospective, which narrows our appetite to sell in the region. That's number one. And obviously, the highly publicized -- the highly publicized competitiveness of that particular marketplace, we -- our other regions are far more robust, and the demand from those regions and the allocation that we are allowed at the domestic supply end compels us to move a lot of our product elsewhere, and really narrow our participation in that area because of the elevated concerns for receivables and the very highly competitive nature that exists in that marketplace.

So, it's as much a strategic decision as weakness with certain customers?

Correct. As David indicated, the [plate] situation is not one that we are comfortable with.

Mark Parr, KeyBanc Capital Markets.

I was wondering if you could give us some more color on the impact of margins from not just automotive, but from large buyers in the first quarter. I get a sense that moving into the year, there was this underlying perception of pricing weakness, which may have resulted in some -- in perhaps some lower pricing on the part of service centers, in terms of the pricing they were willing to give. And then there was -- I don't know, call it a supply head-fake on the price you had to pay for incoming steel. If you could give us some color on that and how much it affected you. And then on top of that, if you could talk a little bit about how long or how much of this is bypassed now, and when you might expect margins to return to the higher levels.

You're right on. The expectations from the overall marketplace is we moved from a weaker tail-end of fourth quarter into first quarter of '06 was an expectation that, as you well remarked, that imports from -- imports in the springtime would challenge the marketplace, and that expectations would be -- the general sentiment was that pricing would erode, based probably on the stable pricing that we all saw from domestic suppliers in fourth quarter -- in late fourth quarter and early first quarter. That of course evaporated as we got further into first quarter. Toward the tail-end of February the sentiment shifted. Imports have really not been the issue that they were purported to be. And of course, the domestic suppliers have accelerated pricing in April, May and June, as you well know, and of course, started elevating that to get (indiscernible) end of February, and the sentiment started changing in the marketplace. And we have seen a much more friendly environment as the first quarter tailed out, and as second quarter has -- as we are now involved in second quarter.

One other factor on the margin side, since you asked about when does it return. We had a pretty good increase in our toll incomes, almost 20% increase in our tolling operations, where we don't have the steel component. Tolling is a very variable operation for us, but certainly is a much lower margin. So, the more that that increases, the margin on the tolling is going to have a negative impact on the overall margins. But it's clearly a variable item on the utilized capacity. So, as that increases, if we are able to grow our overall net margins, it just shows you that we're really increasing (indiscernible) on the direct sales even that much more.

Is it fair to say that second-quarter margins should be higher than first quarter? The gross margin I'm talking about.

The answer is it's a reasonable assumption on a mathematical equation. Okay?

How about based on market dynamics?

The steel mills pricing is going up. So, embedded inventory issues are probably well priced.

Thank you. Wow. I don't know if I want to try to get another answer out of you.

We're not lawyers here. What can I tell you?

Thanks for the color and the heads up, and congratulations on the progress.

(OPERATOR INSTRUCTIONS). Mr. Siegal, I'm showing no further questions in the queue at this time. Please continue with any concluding remarks you may have.

Thank you very much. Again, we want to remind you that it is our policy, Mark and others, to not provide forward-looking earnings estimates for the upcoming quarter or the year, and not to endorse any analyst sales or earnings estimates. But we appreciate when you do it. We anticipate releasing our second-quarter earnings on or around the final week of July. This concludes our call. Again, we thank you for your interest in Olympic Steel.

This does conclude the Olympic Steel first quarter 2006 earnings results conference call.