Olympic Steel Inc (ZEUS) 2009 Q3 法說會逐字稿

Please stand by. We're about to begin.

Good day, and welcome to the Olympic Steel Third Quarter 2009 Results Conference Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Michael Siegal. Please go ahead.

Thank you, Operator.

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 again for your participation the interest in Olympic Steel.

And before we begin, I want to remind everyone that, during this call, we will provide forward-looking statements that we do not undertake to update or that may not reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. The important assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those set forth in the forward-looking statements can be found in our filings with the Securities & Exchange Commission, including our Annual Report on Form 10-K.

Earlier today, we reported our financial results for the third quarter and first nine months of 2009. We are pleased to return to profitability in the third quarter and to report in an exceptionally strong balance sheet. Let me review some of the details from our earnings release.

Our third quarter sales totaled $121.6 million, which is down 63.7% from the $335.2 million recorded in the third quarter of 2008. The sales decrease was due to significantly lower year-over-year customer demand and lower average selling prices.

Our third quarter sales volume totaled 181,000 tons compared to 268,000 tons shipped in the third quarter of 2008. This represents a 32.2% decrease in tons shipped. We continue to benefit from our expense reduction plan, reducing third quarter operating expenses year-over-year by $21.9 million, or 44%, which exceeds the 32% decline in shipments for the period.

Our third quarter net income totaled $671,000, or $0.06 per diluted share, compared to net income of $24.2 million, or $2.21 per diluted share, from the third quarter of 2008.

Our sales totaled $384.9 million for the first nine months of 2009, which is down 60.5% from the $973.6 million recorded in the first nine months of 2008. Our 2009 year-to-date sales volume declined 43.7% to 527,000 tons compared to 937,000 tons shipped in the first nine months of 2008. Our operating expenses in 2009 have totaled $87.9 million, which is 41.8% lower than the first months of 2008.

Our nine-month net loss totaled $58.6 million, or $5.39 per diluted share, compared to net income of $66.9 million, or $6.13 per diluted share, for the first nine months of 2008. Year-to-date 2009 results include pre-tax inventory, lower of cost or market adjustments, of $81.1 million recorded in the first and second quarters.

In the third quarter, we executed on our core disciplines of cash flow and balance sheet management, and we enter the fourth quarter with an exceptionally strong balance sheet. We ended the third quarter with only $1.4 million of debt and have since eliminated all outstanding borrowings and accumulated a cash balance in October. Our inventory is appropriately costed and is, again, turning at our preferred rate of above five turns per year. We have avoided any material bad debt losses thus far in 2009 and remain diligent in our credit and collection practices as liquidity remains constrained for all those but the best credits.

We have a strong balance sheet, a significantly lower expense base, and an experienced management team that provides Olympic Steel with the strong foundation for success in the recovering markets. We expect to grow our market share by serving our customers from positions of financial and performance strength. We maintain our view that it will be a long and slow economic recovery. While there remains little visibility related to near-term steel demand, shipments have improved in September and October. However, normal seasonal slowdowns will likely impact demand in the back half of the fourth quarter.

We have also reported this morning that we are continuing to pay a quarterly dividend. Olympic Steel's Board of Directors has approved a regular quarterly cash dividend of $0.02 per share to be paid on December 15th, 2009 to shareholders of record on December 1st, 2009.

Also this morning, we announced the filing of a shelf registration statement with the Securities & Exchange Commission. Once the registration statement is declared effective by the SEC, it provides Olympic with advanced approval to raise up to $200 million from the offering of common stock or debt securities during the next three years. Any securities are (inaudible) in the future. Olympic Steel may use the proceeds to fund acquisitions, capital expenditures, and working capital and for reducing or refinancing debt or general corporate purposes.

At present, we have no immediate plans to raise capital under the registration statement. However, we believe having a shelf registration in place is prudent in the current market environment. This filing provides Olympic Steel with future financial flexibility in the event that strategic opportunities arise that may require additional capital over the next three years.

We believe that there will be acquisition opportunities available during this economic cycle as under-capitalized companies will likely not have the financial wherewithal to continue independently.

I will now turn the call over to Rick to comment on some of our financial results in more detail.

Thanks, and good morning, everybody. Michael reviewed our debt position at quarter-end and our subsequent elimination of debt in October. Today, we have cash on hand, and we estimate that we will receive income tax refunds in excess of $30 million by mid-year 2010. We currently have approximately $71 million of availability under our credit agreement. So, we are in a unique position to use our strong balance sheet and our cash position to grow the Company during this depressed economic cycle.

For the third quarter of 2009, our operating expenses totaled $28.3 million. This is $21.9 million, or 44%, reduction from the third quarter of 2008. Expenses are down year-over-year by $63 million, or 42%. We have an annual expense base, which is now about $70 million, or 37% lower than in 2008. Further expense reductions will also be achieved in 2010 as we did not review our Philadelphia warehouse lease that expires at the end of 2009. We'll continue servicing our Philadelphia customers from our existing facilities in Pennsylvania, Ohio and Connecticut.

Third quarter capital spending was reduced to $1.2 million, bringing our year-to-date CapEx to $10.8 million. Our capital spending naturally declined throughout 2009 as we finished paying for projects that were initiated in 2008. The bulk of our ongoing capital spending is in the IT area, where we continue to successfully roll out our new IT system. We project that we will spend approximately $2 million in the fourth quarter, bringing our total estimated 2009 capital spend to about $13 million.

An income tax benefit of $36.6 million, or 38.5%, was recorded in the first nine months of 2009, the majority of which can be carried back to prior years, resulting in the cash refunds that I talked about earlier. The third quarter tax rate does look skewed at 48.1%. This is due to adjusting our year-to-date benefit rate from 38.6% to 38.5% during the third quarter.

Some other financial metrics and quarterly highlights include our 2009 year-to-date accounts receivable DSO remaining very strong at 37 (inaudible). Current inventory turnover rate is now at 5.3 times. Our 2009 year-to-date sales to the automotive industry did increase to 10.8% of sales. If you remember, that's up from about 8% after six months, and that's due to increased automotive production and shipments in the third quarter.

The EBITDA earned for us in the third quarter totaled $4.8 million, and shareholder's equity per share at the end of the third quarter was $24.15. And finally, during the third quarter, we ratified a new collective bargaining agreement covering our Detroit workers, which goes through August 31st of 2012.

And now, I will turn the call over to David.

Thank you, Rick, and good morning. Thank you, Mike.

During our third quarter, we realized some significant performance goals as a company. Our focus during the economic downturn has been to concentrate on what is within our control. This focus has led to some significant achievements during the third quarter - a return to profitability after surviving the market collapse and incurring some $81 million of inventory LCMs, which we've mentioned earlier. Those charges occurred in the first half. It was refreshing to return to profitability in the third quarter, even though industry shipments and Olympic shipments still remain down in excess of 40%.

Next, we remedied our inventory. We are back to turning our inventory greater than five times, as Rick indicated earlier, even though we remained longer than we'd like on our plate inventory due to continued hiatus of customers' demand in the value-add segment of our business. We also now have an appropriately costed inventory, with the LCM charges behind us after the second quarter.

To put the inventory right-sizing in perspective, by September of 2009, we have reduced our inventory dollars by a staggering $207 million, or 66%, in a 12-month period.

Next, from a credit and collection perspective, as Rick mentioned, we are pleased to have maintained our DSOs of 37.6 days in 2009 in what we consider the toughest credit and banking environment of our lifetimes. We've also avoided the big debt losses that have hurt many and, of course, would have continued to attack income, and we've avoided those. We remain diligent with our credit and have a full-time presence in the field analyzing customer viability and creditworthiness. We do remain very concerned about the state of liquidity and the lack of credit availability in the supply chain as banks remain very conservative.

We are now seeing deep liquidity crunch with undercapitalized companies who will likely not have the ability to fund their businesses after writing inventory liquidations to fund losses up to this point.

Previously, Rick elaborated on our elimination of debt and our cash position. As our cash position grows into 2010, we are excited about the opportunities to put our money to work on some growth initiatives. We believe that there will be many opportunities to acquire other service centers and fabricators as the economic recovery takes shape. We expect smaller service centers to struggle to keep pace with expanding working capital requirements, with customer credit constraints and limited banking availability and the continued weak economy. We believe this environment presents us with opportunities for market share growth and favorably priced acquisitions.

We are also thrilled with the progress of implementing our SteelMan software program throughout Olympic. We have successfully implemented the program in four locations in 2009, most recently in our Chicago facility.

We are garnering new business and greater market share as customers are looking for strong, financially stable and experienced steel suppliers like Olympic Steel. This is what we call a flight to quality by certain well-known OEMs, customers who are consolidating their supply and expense base to meet their service and cost reduction needs. And the flight to quality not only refers to the quality of the product but the quality of our balance sheet.

Olympic Steel fits the criteria well, and we are being awarded significant amounts of future business as a result. We are excited about these opportunities, which will allow us to grow market share once OEM demand rebounds from the current depressed levels.

In summary, our execution to right-size our inventory and expense base while eliminating debt positions Olympic Steel well for growth opportunities. We have built a company with a strong foundation and a tested and experienced management team. While it appears that economic recovery will be slower and take longer than we would all like, we are confident in our future and our ability to successfully perform for shareholders, for customers, and for the employees of Olympic Steel.

This concludes our formal comments, and we'll now open the call to your questions.

Thank you. (OPERATOR INSTRUCTIONS.)

Luke Folta, Longbow Research.

Hi, guys, this is actually Rob filling in for Luke right now.

Hi, Rob.

First question I guess is, can you give us any more color on what the shelf registration might be for, and any idea if it's going to be better equity?

Mike, you want me to--?

--Yeah. Go ahead, Rick.

I was going to say, really, there is not much more to it than what we've said, so we genuinely think that the market environment was right to do it. As we said, we have no immediate plans to do anything, so the answer on whether we do debt or equity really is sort of a moot point at this point. But, really, what it does is, over the next three years, really just give us some additional financial tools as we look to grow and expand our market share. So, no immediate plans there.

Okay. And then, I guess what were some of your thoughts on metal margins for the quarter and some of your expectations maybe for 4Q or 1Q '10?

The margins itself? Well, what we saw during the course of the third quarter was steadily improving margins. I don't know how much [materiality to] that is. We're seeing a relatively good October, as we indicated in the pronouncements. But, without any great vision, I mean, nobody can anticipate -- we have no great visibility in terms of what December's going to look like in terms of the plant shutdowns at this point. So, it certainly is better, at the present time, that we've seen in the second quarter, so the indices are all better for us, Rob.

All right. Thanks. That helps.

Richard Garchitorena with Credit Suisse.

Great. Hi, everybody.

Hi. Good morning.

Good morning. Just a couple of questions from me.

First question, you had mentioned in your comments that auto revenues went up on a percentage basis this quarter. Is that primarily from an increase in market share, or is that generally just an overall higher level of shipments from autos relative to the others?

It's a combination of both, Richard. It's a responsiveness in the third quarter to the "Cash For Clunkers" program, some of the shortfall in the marketplace, and our ability to respond to that marketplace that was short on some product, and obviously we had that product. Additionally, we have made some -- we have been awarded some significant new business, again principally because we've gone through an audit process, and again, the strength of our balance sheet has indicated that we're an ongoing sustained company. And as the auto manufacturers sort out their suppliers, we're being anointed with some additional business.

Great. Okay.

And in terms of the, I guess, other end markets, you had said that inventory turns on the plate side are still lower than you'd like. Is that a function of weaker demand, or is it specific to certain customers?

Well, the certain customers that we service have weaker demand, so our view is obviously the former, that it does relate to the weak demand for construction-related equipment. We were longer on the plate product from a year ago based on -- as we've explained in previous conference calls, based on predicted usages supplied by our customer base. Those, in some particular cases, have dwindled substantially. The recovery is significantly slower for some of those manufacturers. And in that segment, we are still a little bit longer on inventory than we'd like, although we balance the inventory in total.

Okay, thanks.

And just a final question. Just on the tax benefits for next year, is there any indication of what you think the tax rate might be for 2010?

For 2010, I don't really see our tax rate being much different than what it is today, Richard. So, that would be my best guess out of the chute right now.

Okay, great. Thanks.

Mark Parr, Keybanc Capital Markets.

Hey, good morning.

Good morning, Mark.

Congrats on moving into the black.

Thanks.

Thanks.

That's got to feel a little better.

It does.

I hope the -- do I detect a cold, Michael?

Yes, absolutely.

I hope that's feeling better soon. Those things are--.

--Yes, thank you--.

--That's a bad one that's been going around.

Yeah. Well, it's not the flu, so, good.

That's good. Okay, just checking.

I had three questions. First, I was wondering if you could talk about capacity utilization in your service center business versus your manufacturing businesses, or the value-add processing side of your business. I'm trying to get a sense here of which side of the organization is really ahead of the other one, or if there's one that's lagging the other. And I'm also trying to get a sense of how much more upside you could absorb before you need to start re-hiring people and rebuilding the expense side of the ledger.

Okay. Well, clearly, the value-added side, which is predominantly heavier [hand] plate side, is down significantly more than the flat roll side. But, if you have anybody who needs steel right now, Mark, we have plenty of capacity for just about anything.

Okay. Is there -- you've taken your costs out I think collectively, what, between 40% and 45%?

Yes.

Correct.

Yes, that's where it's been year-to-date.

Yes, year-to-date. I mean, are there any significant differences between the manufacturing side and the service center side?

Yes, Mark. The labor component on the manufacturing side is significantly down, as Mike indicated. Great question on your part. Those facilities are earmarked for specific large OEMs who have substantially more depressed schedules than the general service center business. So, general service center business, our hours -- we've been working longer hours than we did in the second quarter, and we've seen a nice increase of business in the service center end of the business.

And that's because of depressed inventories. That's because of the fact that we're stronger and we're seeing a lot of failings out there on some of the smaller service centers, and we're able to respond to customers' needs. So, on the general service center business, much stronger, and the labor force is working longer hours. And we've called back (inaudible).

Value-added side of the equation, it remains pretty much on a plateaued basis, although we have taken on a number of -- substantially new business, which has helped augment some of the losses of our traditional business.

Okay. And I guess just getting back to the strategy side of the equation, we've had discussions in the past about the smaller service center customer base. And at some point, there was an opportunity for Olympic to come in and kind of step over some of these smaller service centers that didn't have the credit relationships in place to fund the business. And I'm just wondering how that thought process is continuing in the context of your shelf registration, where you seem now to, once again, be talking about -- thinking more aggressively on the acquisition front.

I think you framed it well, Mark. Our strategy is the same, which is to get into more geographic penetrations with more downstream value on the steel that we serve to our customers. So, I think that where we saw pricing over the last number of years on multiples far beyond our hurdle rates, today we're seeing opportunities to perhaps acquire assets at discounted levels that we would find to be appropriate on our strategy.

Okay. All right. Okay, that's helpful.

Just two other real quick questions. I'm curious as far as the market, particularly on the sheet side of the business, the willingness from a mill perspective to provide year-end deals, and how would you handicap that in terms of normal. You think they're more aggressive, less aggressive? How's that looking?

Mark, I'll take a stab at that. I think the steel mills are fairly resolved to maintain the pricing that they've achieved since the beginning of June. So, the price increases that they currently achieved they're holding onto. There is really no dramatic inclination to discount product and offer deals as we exit October.

As for attaining the very last price increase that they announced, depending on who you're following, whether it's up 40 or up 60, that has not been achieved and, candidly, has been put aside. However, we have not seen a deep degradation in offering price from what has already been absorbed in the market.

Okay, good. It sounded like some of the other guys -- I know [Lorenzo] had really talked about his feeling that lower prices were not helpful, and nobody in your side of the supply chain likes to see prices come down because it impacts your inventory values. And so, I guess I'm just trying -- see, I think your feeling, at least from a public perspective, is perhaps a bit more constructive than what some of the other guys have indicated. I just wanted--.

--Well, yeah. Look, the mills do what they have to do to service their markets, and we would like to do the same. Obviously, inventory companies would rather see stable to modestly rising prices. The market -- as proven markets, it's the market itself is stronger than anybody, and we all do what we believe is necessary in the benefit of our shareholders. So, the comment, "Like other people have done" I think [does] not served us well.

Okay. All right. Well, that's certainly another way of thinking about it, and I appreciate that color.

Just last, is there any inventory mismatch left in your supply chain right now?

The only mismatch is we're a little bit longer on plate than the customers who have fallen off on the demand side, but not substantially longer, and it's not obsolete material. It's just a little bit longer. But, we've done a marvelous job in terms of winding that down, Mark--.

--Boy, no kidding--.

(--Inaudible.) One of the places where we were concentrated on that was on the East Coast. And as Rick outlined, we're closing that facility at the end of this year, and we've wound that down.

Yes. Congratulations on the tremendous working capital progress and on the progress with the internal controls. I really think you've set the stage for some much better performance next year, so look forward to that. Thank you very much.

Thanks, Mark.

Thanks, Mark.

Charles Bradford, Affiliated Research Group.

Good morning. What are you guys seeing in lead times from the mills? There's been a lot of stories about some of the mills, like US Steel and maybe ArcelorMittal, having operating problems and being delayed. Have they caught up at all?

Chuck, I'll take that. Dave Wolfort here.

The answer is they have caught up on their deliveries. They were delinquent mid-third quarter. And as we approached the end of the quarter, obviously September, there was a great deal of -- that delinquency was wiped out and they did catch up, and they are reasonably current today. Lead times stay stretched for value-added products beyond hot roll, so cold roll lead times are still out there, and coated product. They've come back a little bit, but not substantially. There have been some shorter lead time offerings on hot roll, but we're talking about a week to two weeks shorter, nothing substantial.

Most of the people in the trade are talking about prices softening a modest amount, but meaningfully. At the same time, the mills are all talking about increasing their production. Do you think maybe they've brought back too much capacity?

Well, again, Chuck, I can't comment on what their marketplace is, but I would characterize the market as plateauing more than receding. We've had, depending on which mill you're following, as you well follow them, four to six increases depending on which mill you're talking about. And all but the last increase has been absorbed in the marketplace.

And so, I would say that the market has plateaued, and there's a tendency, when it does plateau, to recede a slight amount. And it has a tick-back of very nominal amount, but nothing that's substantial. Of course, I can't speak for latter part of November, December. We'll wait to see what happens there.

Yes. The only comment I would add to that, Chuck, is the fact that this liquidity issue, in many respects, is really preventing and governing the ability to really build inventories both at the service center and the end user level. So, at some point next year when the liquidity issue is somewhat eased, there might be some kind of restocking at the chain. And at that point, the mill's capacity I think will be more than adequately served at these levels.

There seemed to be some pick-up in inventories at the service center levels in September. Would you characterize that as maybe accidental in the sense that the service centers had expected to ship more and had ordered in anticipation of the higher shipments and got caught, or are they beginning to get some money?

I think -- Chuck, again, I think that is really a reflection of the surge of business that came in in June and July to the steel mills and their inability to perform at that moment in time as they were ramping up some facilities. The culmination of bringing on the facilities and catching up on deliveries, I think that surge really caused service center inventory to move up for September. Purely on a speculative basis, we would expect those inventories again to reflect some modest growth in October, and then potentially turning down as the service centers absorb the catch-up on deliveries from the mills.

Well, thank you very much.

You're welcome.

Nat Kellogg, Next Generation Research.

Morning, guys. Just two quick questions.

First one is, I guess, just a little on mix. I mean, if I look, volumes were up sequentially, and my understanding is that the overall pricing environment was obviously moving up during the third quarter, and yet revenue was down a little bit. I'm just curious if that was just a mix of a little bit higher [tolling] and a little bit -- sounds like a little bit less of the value-added business, or if there's something else going on in there.

Well, I think -- Nat, it's Rick -- I think part of what you saw when you look at second to third quarter is, as you know, prices continue to cascade downward through second quarter and really hit their lowest point in June. And July really wasn't much better on the pricing side, and then, as we moved through third quarter, we started to see the rise in price.

So, I think the answer to your question is really just, if you were to graphically look at second quarter going down and third quarter going up, the average price of those two quarters ended up being lower in the third quarter, but you were certainly on the other side of the slope. Instead of continuing to fall, you were on the rise. And as Michael talked about, that rise really we saw in September and continuing into October.

Okay. Okay, that's helpful. So, obviously, you guys have said who knows what happens in November and December, but assuming prices plateau, this will be sort of the first quarter where you get that sequential uptick in pricing.

Hopefully, yes.

Okay. And then, just second question. I know some folks have said, and I think others have maybe been a little bit more skeptical, but the inventory levels are at a lean enough point now where folks are a little less focused on liquidating inventory for cash and maybe a little bit more focused on sort of profitability metrics and whatnot. And just curious if you guys are seeing that, and does that help sort of the competitive pricing environment, or are just -- demand so weak now that everyone's still scrambling for every piece of business, and that keeps pressure on the pricing side on a competitive basis?

There's enough people -- go ahead, Dave.

Nat, I would tell you, I think there's a combination here, and you're 100% correct. But, as we exit this year, there is going to continue to be some price -- a little bit of price pressure from people who have no liquidity and have exhausted their inventory draw-down to fund their losses, and they're in a position, for lack of a better expression, of desperation, and they're brokering and trading some tons. There's a little bit of that pressure left, we don't think substantially -- not a substantial amount of that pressure left. That's why we would clarify this and call this a plateauing.

Inventories have dropped substantially to where, if you have the product, I think you can retain the selling price and the margin that -- the restoration of the margin that we, once again, would call -- put in a [recoveries] mode.

Okay. All right, that's great. That's very helpful. Well, thanks very much, guys, and I'll hop back in queue.

Ken Hoffman, Bloomberg Equity Research.

Good morning, gentlemen.

Ken Hoffman. Hi.

It's good to be back.

Welcome back.

Thank you. Couple quick questions for you. One, if you could comment on imports? It seems as if -- that the Chinese are coming back into the market a little bit. And secondly, a bit of a longer view type of question. With all the dislocation in Detroit, do you think, over time, that maybe there will be a shifting of suppliers, and that will give you an opportunity to pick up some more market share?

Well, certainly in Detroit we think there's going to be a lot less players on the supply chain, and we would hope to pick up market share within the prudence that we've shown in automotive in the past. On the other side, David, you want to comment on imports?

Ken, we really don't see any substantial imports. The exports from the Chinese principally go to other continents, at least particularly into Europe and pressing into other parts of Asia. That does flush out some products from there as compensating measures. However, the dollar is so low here that we really have seen nothing of substance, and certainly nothing that's attractive in this marketplace. There's very few of us, I think, out there willing to speculate on any long-term basis and underwrite the vagaries of imports.

All right. Thanks a lot.

You're welcome.

Thank you.

(OPERATOR INSTRUCTIONS.)

Bob Richard, [Iron Edge] Research.

Good morning. Thanks for taking my call. Your comments on the credit environment were kind of interesting. Your shipments were actually a little less than what I had expected. Would you think -- and I know this is a hypothetical question, but would your shipments have been better in an improved credit environment, or was end demand actually still that tepid?

Well, I think -- Bob, this is Rick -- I think end demand is--as we've talked about, is down substantially. The piece of demand for us that's off the most, as Michael and David talked about, is that value-add piece. It's very hard for us to quantify what type of sales we may have lost due to the credit environment. What I will tell you is we're very diligent on credit. So, yes, there are some opportunities out there that we've passed on. But, the credit environment and us passing on sales is not the major reason for our sales drop-off. It's the market. It's still weak.

Okay, I appreciate that. And the discussion on the shelf registration, I appreciate all those comments. But, if I heard you right, your potential investments, it doesn't really matter if it's another service center business or downstream fabrication. It's kind of where the money is. Is that an accurate summation of that?

Yes.

Okay.

Yes, (inaudible).

I'm sorry?

Yes.

Okay. Thanks very much.

All right, Bob.

And at this time, there are no further questions in the queue. I'd like to turn it back over to our speakers for any additional or closing remarks.

Thank you, Operator.

As a reminder, it is our policy not to provide forward-looking earnings estimates for the upcoming quarter or year, nor to endorse any analyst [sales] or earnings estimates. We anticipate releasing our fourth quarter and 2009 annual earnings in February 2010.

This concludes our call, and thank you again, everyone, for your interest in Olympic Steel. Thank you. Bye-bye.

This concludes today's presentation. We appreciate your participation.