Olympic Steel Inc (ZEUS) 2006 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Olympic Steel third quarter 2006 earnings release conference call. At this time, I'll 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 0.

I would now like to turn the conference over to Michael Siegal, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you, and good morning, and welcome to everyone. On the call with me this morning is David Wolfort, our President and COO, and Rick Marabito, our Chief Financial Officer. Again, I want to thank you for your participation and your interest in Olympic Steel, and I remind, that the forward, if we do any of those, looking statements on this call are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 . And please refer to our Olympic Steel's SEC's filing for further information.

I am pleased to report strong sales and earnings for our third quarter end September 30, 2006. Third quarter sales totaled $259.9 million, an increase of 24.7% compared to the third quarter of 2005. The sales increase was attributable to strong demand, and pricing for steel during the quarter. [indiscernible] sales for the quarter totaled 313,000 tons, which is a 2.6 percent increase over last year's third quarter. Demand was led by our industrial equipment customers that continue to forecast strength into 2007.

Turning to our earnings, we reported net income for the quart of $10.9 million, or $1.03 better diluted share. For comparison purposes our net income for the third quarter of 2006 was $2.2 million, or $0.21 per diluted share, and net earnings for the second quarter of 2006. So it was $8.4 million, or $0.79 per share. For the first 9 months of 2006 our net income total $27.3 million or $2.57 per diluted share, up from the 14.8 million, or $1.32 per share recorded last year. A year to date tons sold were up slightly at 1%, while sales increased 2.8%, to 755 million due to higher average selling prices in the first 9 months of 2006 compared to the previous year.

Inventories seemed to be getting a lot of attention lately, as was stated in our increase, North American service center inventories, including our own, rose pretty significantly in the third quarter as a result of late import deliveries, and the receipt of backlogged domestic mill products. Recently announced domestic mill capacity cutbacks and steady customer demand, aside from the typical fourth quarter seasonal issues, would suggest that the service center inventories should be lowered in the fourth quarter and in balance with demand as we begin 2007. Aside from the reduced domestic automotive Big 3, not the new, the Big 3 domestic automotive production, demand from our customer base appears to be encouraging as we go forward into the new year.

I'm also pleased to announce that Olympic Steel's board of directors, again approved a regularly quarterly cash dividend of $0.03 per share that will be paid on December 15th, 2006, to the shareholders of record on December 1, 2006,

So, Rick, comment on the financials if you would, please.

Thanks, Michael. And first, I just want to clarify a number that we just mentioned. Our earnings for the quarter were 10.9 million, or $1.03 per share, and then the comparisons for last year for the quarter, third quarter of '05 was 2.2 million, or $0.21 per share.

Let me turn over to our EBITDA. EBITDA in third quarter totaled $20.8 million, compared to last year's third quarter total of 6.8 million, for the 9 months, EBITDA was 53.8 million, compared to 33.6 million last year. The incremental costs associated with our 2006 capital investments, together with increased energy, transportation, and variable compensation costs, account for the majority of the increases in our operating expenses this year. These investments include leasing six new laser lines, our new facility in Chambersburg, and our acquisition of PS&W that occurred in June.

Interest expense for the third quarter of 2006 totaled $898,000, compared to $742,000 in the third quarter of 2005. For the 9 months of 2006, interest is significantly lower than last year, at $1.4 million, compared to 3.4 million last year, as our average borrowings are lower in 2006. Our effective tax rate for the third quarter was 38.7%, and 38.1% for the 9 months. We expect our fourth quarter tax rate to be comparable with that of the third quarter.

Now turning over to our balance sheet, our accounts receivable decreased by about $1.3 million during the third quarter, and our receivable day sales outstanding remain very strong at approximately 38 days in 2006. And that's an improvement of about 2 days from our 2005 DSO. We increased our inventory position by about $42 million during the third quarter, and we are turning our inventory just under 5 times per year in 2006, as compared to just under 6 times per year last year.

All of our debt outstanding is revolving borrowing, then it's tied to working capital. Our working capital levels increased substantially during 2006, and we spent $9 million for the acquisition of PS&W and another $9 million on capital spending. As a result, our debt total $72.6 million at September 30th. In terms of our capital spending, the $9 million spent so far this year includes about $6 million for the purchase and equipping of our second facility in Chambersburg, Pennsylvania, and about $1.4 million for IT and infrastructure spending.

Our capital structure remains strong with a debt to equity ratio of only 0.3 to 1 at September 30, and we ended September with about $50 million of availability under our credit agreement. Our shareholders equity per share has increased to $22.13. And 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 $300,000 per quarter, or about $1.2 million per year.

Now, I'll turn the call over to David.

Thanks, Rick. Appreciate that. We stated that our strategy is to grow our business while providing additional value added services and solutions to our customers by migrating towards more downstream processing such as tempering laser processing, welding, and fabrication of parts. We believe that executing on our strategy will the provide sustained imbedded margin improvement and growth.

As both Mike and Rick highlighted, we have significantly increased our spending in 2006 toward this downstream strategy and business plan. So far this year, we have purchased and equipped 150,000 square foot facility in Chambersburg, an additional facility, with complimentary robotics in steel fabrication initiatives. The facility became operational during the first quarter, and it quickly became a contributor to our 2006 earnings results. The new facility, again, compliments our existing downstream value added processing presence already in Chambersburg, while providing relief from space constraints, while delivering further efficiencies. We continue to invest in material handling and welding automation in our downstream processing plants.

As previously mentioned, we also installed 6 new laser processing lines in 2006, two each in Winder, Georgia, and our Minneapolis facilities, and one each in Cleveland, and Bettendorf, Iowa locations. This brings our total company account of lasers to 23. We envision that our laser processing capabilities will continue to grow in 2007 providing increased and predictive margin enhancement.

In June, we completed the acquisition of Precision Steel and Welding. or PS&W as Rick has mentioned, which is located in Siler City, North Carolina. PS&W is a full service fabricating company that performs burning, forming, machining and painting to produce fabrications for large, original equipment manufacturers of heavy construction equipment. PS&W is profitable and we continue the process of upgrading this facilities capabilities while bringing synergistic supply from our Cleveland, Winder and Philadelphia operations.

In summary, we're very pleased with our 2006 sales and earnings performance, and our position in the marketplace. Our strong balance sheet allows us to invest in and execute our strategies. We remain diligent in our evaluation of growth opportunities and focused on adding and continuing to add downstream capabilities such as machining, shop blasting, willing and painting. Our successful progress in executing our strategy plan has us exploring additional locations for more tempering and downstream initiatives. Tempering remains a foundation for Olympic Steel's growth as it represents our first stage process for further transformation of flat roll steel and to parts and subassemblies for our customers. We will continue to execute through acquisition in Greenfield Investment, whichever we deemed to be more appropriate, these business strategies and plans.

Lastly, our outlook for the market is favorable, despite some short-term market pressures that Michael commented on. We are experiencing higher carbon flat roll inventory levels at service centers in the fourth quarter, again, as a result of late import arrivals during the summer, together with domestic mills catching up on their backlog order in the third quarter, again, as Mike had previously mentioned. These conditions have led to some slight softness in pricing on a spot market in the fourth quarter. Fourth quarter demand is also being impacted by the decline of domestic automotive production, and the normal seasonal slow down by manufacturers.

However, having said all of that, we are encouraged by how quickly the domestic mills have reduced capacity by shutting down and scheduling maintenance to certain furnaces in the fourth quarter. We believe that the mill's decisive actions will result in decreasing service center inventories in the fourth quarter, and balance supply position by mid first quarter of 2007. The industry's consolidation and production discipline exhibited by field producers combined with an encouraging outlook for demand in nonresidential construction are favorable dynamics for a healthy steel market in 2007.

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

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Mark Parr with KeyBanc Capital Markets. Please go ahead.

Thanks, very much. Good morning, guys.

Good morning.

Congratulations.

Thank you.

Not bad to have a $4 run rate going for you, right?

That's, right. [LAUGHTER]

My one question, actually I had two questions. First of all, what is the condition of olympic's inventory momentum right now? Did inventories peak in September or will they peak in October? And can you tell me what's been going on the last month or so?

Mark, [inaudible] probably tell you that today as the announcement is probably the peak on the inventory. Inventories are lowered and would be expected to be lower. As we look, literally, I mean, last day of the quarter might have been the peak day of the inventory cycle.

So the last part of September, so you are seeing your inventories come down in October?

Yes. I expect that condition to occur through the fourth quarter.

That's terrific. Second, my other question related to your warehouse and processing expenses. And the number just seemed a little higher than what it's been running. Could you give us a little more color on the trend line? Does that have a lot to do with the increase in value add, and downstream or help me understand why that number is moving up so aggressively?

You are exactly right, Mark. There's really two main, three main factors to that. One is is you are right, PS&W in terms of the value-add, is a much higher cost structure than our other service center businesses. And by the way, we are working on a lot of integration in synergies which will drive that unit's cost structure down, but that's number one, so we acquired them in June, so you have the first full quarter impact. Number 2, as we mentioned in the beginning of the year, we did purchase and equip a second facility in Chambersburg. I tell you, Chambersburg, much like PS&W, is more value add, so it's sort of the same answer there. And then we have got about a million dollar annual run rate additional costs in terms of those 6 lasers that we mentioned. Those are all leased and the lease expense resides in warehouse. So, those are the primary factors.

Terrific. And congratulations to Dave on keeping selling expense down.

Thank you. [LAUGHTER]

Thank you. [OPERATOR INSTRUCTIONS] Next question comes from Michelle Appelbaum with Michelle Appelbaum Research.

First of all, congratulations on a great performance and A more challenging environment. I was really surprised, so that's terrific. Second, I was, I was, I wanted to get your view. You said that inventories were to peak at the end of the quarter. You are speaking specifically for Olympic, what about the sector, how long do you think this inventory cycle is going to play out?

Yes, David-- yes. It's somewhere in the first quarter, Michelle, whether it's by the end of December, that will depend on how December specifically looks . I think there's a consensus here at Olympic, somewhere through the middle of the first quarter. David said in his remarks, we will see balance. So that's how we see it.

All right. Okay. Last inventory cycle '04, '05, took 11 months, and I'm just wondering why would this one take less time?

Michelle, let me add a little bit more color to Michael's comments. We really see the confluence of a number of issues. As we've commented earlier, there was a delay there, receipt of foreign product and receipt of domestic production, which was lagging in the first 9 months, and all that caught up. So having giving you a little bit of color on the background, we really see the confluence of a number of issues, we see the mills quickly taking down capacity, unlike '05 where they jawbone more than they actually did initially and then ultimately did, so they were very quick to respond, including [Middles] announcement today in Europe, which will have an influence globally, needless to say.

So we see the quick reduction of capacity, we see strong discipline on the mills side of the equation in terms of pricing, we see the absence of foreign product coming in in the first quarter, and quite frankly, we see some additional discipline in the [MSCI] numbers and lack of bookings from the service centers as we go forward into, go forward into fourth quarter. So ultimately, when all of those things come together, as Michael well said, we are really projecting towards the tail end of February, the marketplace really getting on it's, getting back [inaudible].

Okay. That's great. I guess, the production cuts, you're right, are coming much earlier this time. And the I am not sure on the backlog information, what can you share with me about that? We don't see it.

Nothing.

Nothing? Okay. All right. Thank you. Thank you very much.

Thank you. Our next question comes from Debra Fine with fine Capital Partners.

Good morning. Congratulations on the strong results. I have a couple of questions. In a little more detail on the in inventory, did you buy opportunistically, is that why they got so large? Did you think demand was going to be stronger? If you could just give us a little bit of the origin of how they built [inaudible] level at the end of the quarter?

I just think it's timing. It's a snapshot, not a moving picture. I think, just as we indicated, Debra, we did not buy opportunistically to answer your question. But clearly, when there's inconsistent deliveries from our supply base, which was the case between, I would say, from January to June and July, you can factor in consistent inconsistencies. The problem is when the mills decide to catch up, which is generally in the slower periods of the summer, along with the late deliveries, I just think it's just a confluence of the moment in time, and there was no opportunistic buy. We still have, as Rick indicated, very high turnover on our inventories, still roughly five terms a year, so we're still out performing the bench marks against the industry. We will accept, obviously, [inaudible] [in the clear terms] as the quarters go forward.

And if you could give us a little more color on demand by the sectors that you serve, maybe small capital equipment, things related to housing, what is stronger, what's a little more cautious?

Well, clearly, as we said, Big 3 automotive is the biggest concern. There are some pauses, I would tell you in the light construction, we don't see anything that hasn't already been said or written about extensively, but there are sectors in on the earth moving side of the business that still looks very robust. Obviously, the [inaudible] markets because of the [nickel] markets, remain very robust. I'm not sure if it's food service or alternative [inaudible] issues like ethanol plants, but by and large, the contractual business is steady, so just, what everybody is saying in the market is probably true, does it really like construction softness, automotive softness, but we expect those to be at historical levels, very high in terms of their demand. And the-- the industry that's up right now is service centers. So we have a portion of our business that we sell to other service centers and that market, obviously in the [spot] market right now is a little bit softer, as would be expected, and that will recover.

And have you started negotiations on contract pricing?

Debra, that's ongoing. We have any number of-- we have any number of customers that are on either monthly, quarterly or up to annual, and those dates are scattered throughout the year, there's not any one particular negotiation that take place at any one grand moment in time.

So, I'm just asking, in the course of those ongoing negotiations, are they continuing to go at the same rates of increase as they have over the entire year, or are people getting more cautious about their outlook or more price sensitive?

I think the steel-- the domestic steel mills are really supporting the marketplace in a very strong fashion, and they have drawn a line in the sand, so they are not going to allow the marketplace to collapse as it did in previous years, that's why you have the capacity coming along. So the balance is supply with the demand and that puts some support levels much like you're reading in all the-- in all the pundits are writing there, so there's some real strength there, ultimately.

Okay. Good. Thank you.

Our next question comes from Mark Parr with KeyBanc Capital Markets.

Michael, David, I was wondering if you could give us an update on the potential M&A pipeline as it would relate to opportunities to consolidate the service center industry?

Well, Mark, there's no question that the financial markets are very loaded with money, and that there are any number of parties that are interested, anywhere from , what you see in the [inaudible] this and that kind of perspective. There's clearly high valuations, and there's lots of money. So when you take those two factors, there are clearly a number of service centers out there that are seeking to see whether or not they can get the value for the business they want, so there's no shortage of people looking to sell the businesses.

Is there, when you talked about your growth strategy, it was really more focused on moving downstream. I guess, is that really where we would expect Olympic to be predominantly focused as opposed to working to help consolidate the service center industry, in addition to moving downstream?

I think our responsibility, Mark, is to [inaudible] capital with the greatest returns. And, so, clearly, in terms of our focus, there are better returns in the more downstream applications than just the traditional cut to length. So, there are other avenues that say geographic penetration and product diversification mitigates risk as well, so I would think that you would see Olympic focusing on the best place to deploy it's capital for our shareholders interests.

Okay. Terrific. Thanks for the incremental color.

Thank you. At this time, we have no questions. I would like to turn the call back to management for closing remarks.

Thank you, as a reminder, even though we sometimes violate it, it's our policy not to provide forward-looking earnings estimates for the-- I know we don't do it for the up coming quarter or year. And not to endorse any analyst sales or earnings estimates. We anticipate releasing our fourth quarter and full year 2006 earnings on or around the second week of February, a little bit earlier than this one. So this concludes our call, and thank you again for your interest in Olympic Steel.

Thank you, ladies and gentlemen, this concludes the Olympic Steel third quarter 2006 earnings results conference, thank you for your participation, you may now disconnect.