Olympic Steel Inc (ZEUS) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Olympic Steel First Quarter 2010 Results Conference Call.

(Operator Instructions.) At this time, I would now like to turn the conference over to your host, Chairman and CEO, Mr.

Michael Siegal.

Thank you.

Good morning, and welcome to our call.

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

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

Before we begin our discussion, 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.

Important assumptions, risks, uncertainties, and other factors that could cause actual results to differ materially from those set forth in forward-looking statements can be found in our filings with the Securities and Exchange Commission, including our 2009 Annual Report on Form 10-K and our 2010 First Quarter 10-Q, which we file--will be filed later today.

Earlier today, we reported our financial results for the first quarter of 2010.

We are pleased with the return to profitability and our sequential improvements from the fourth quarter of 2009.

First quarter 2010 net income totaled $1.7 million, or $0.16 per diluted share, compared to a net loss of $25.5 million, or $2.34 per diluted share, for last year's first quarter.

The 2009 results included a $30.6 million [lower] of cost or market pretax charge to write down the value of the inventory as of March 31, 2009.

Net sales for the first quarter of 2010 totaled $167.9 million, or a 19.2% increase from the $140.9 million from the first quarter of 2009.

Our shipments in the first quarter of 2010 increased by 50,000 tons or 29.2%, to 221,000 from 171,000 in the first quarter of 2009, outpacing the market increase in total steel shipments of 11.2% as reported in the Metal Service Institute's Market Activity Report.

Our shipments also improved sequentially over the fourth quarter of 2009 by 27,000 tons, or 14%.

We are benefiting from large OEM customers, awarding business to financially strong, quality suppliers like Olympic Steel, as well as improved overall customer demand as the economy recovers.

The recent investments that we have made in our specialty metals businesses are also producing growth in our stainless steel and aluminum sales and earnings.

Our quarterly sales volume has now been sequentially stronger for two consecutive quarters as our shipments and average sale prices as well as those in the broader steel market rose in each successive month of the first quarter, while total steel service inventories in the supply chain remain at historical lows.

We expect these month over month trends to continue and look for our second quarter 2010 sales and earnings to benefit from these accelerating factors.

Our balance sheet remains exceptionally strong as our inventory turnover exceeded five times in the first quarter.

In April, we also received a $38 million 2009 federal income tax refund.

We used the tax refund proceeds to eliminate all borrowings outstanding as of March 31, providing us with liquidity to advance our business as the economy continues to recover and steel pricing continues to accelerate.

We remain optimistic about Olympic Steel's strong operational and financial position in the improving and recovering steel markets.

We expect to continue to grow our market share by exploring new geographic locations in 2010, either by acquisition or greenfield investments and increasing our stainless steel and aluminum specialty businesses.

Today, we also reported that Olympic Steel Board of Directors approved a regular, quarterly cash dividend of $0.02 per share to be paid on June 15, 2010 to shareholders of record on June 1, 2010.

I'll now turn the call over to Rick to comment on our financial results in more detail.

Thanks, and good morning, everyone.

Let me cover some of our financial results in more detail.

As a result of our aggressive expense reduction actions taken in early 2009, we are now profitable at much lower shipping levels.

In the first quarter of 2010, our operating expenses totaled $32 million, compared to $30.7 million in the fourth quarter of 2009, and $31.9 million in the first quarter of 2009.

On a per ton basis, first quarter 2010 expenses were down to $145 per ton, compared to $186 a ton in the first quarter of '09 and $158 a ton in the fourth quarter.

Expenses continue to be managed aggressively and the small increase in the first quarter real dollar expense relates to variable cost increases associated with improving shipments and our return to profitability in 2010.

We also incurred a small increase in depreciation expense that was primarily associated with the capitalization of our information system implementations.

Effective April 2010, we did restore the wages that were cut in 2009 for all employees except the senior management team.

The senior management team's 2009 wage reductions remain intact today.

The impact of the wage restoration is about $250,000 per quarter commencing with the second quarter of 2010.

Capital spending in the first quarter totaled $2.3 million.

That's compared to depreciation expense of $3.2 million.

2010 CapEx includes our ongoing and successful IT system implementations.

In the first quarter of 2010, we capitalized $620,000 and we expensed $324,000 related to the system implementations.

We still expect capital spending for 2010 to be between $10 and $14 million before considering any potential acquisition or greenfield growth investments.

Our first quarter effective tax rate was 39.4%.

That was slightly higher than what we had talked about in terms of our expected annual rate, which we still anticipate to be in the range of 38% to 39%.

Some other financial metrics and highlights, as Michael indicated earlier, again, we have no debt outstanding.

We did use that $38 million 2009 federal income tax refund received here in late April to pay off all the borrowings that are outstanding on our revolver at March 31.

We now have about $100 million of combined formula availability under a line of credit combined with cash on hand.

We continue to aggressively manage our working capital, which increased by $20.6 million in the first quarter, due to increased inventory and accounts receivable associated with higher steel prices and increased shipping volumes.

Inventory is turning more than five times right now and we incurred minimal bad debt write offs in the first quarter.

Our accounts receivable DSO did total 43 days in the first quarter.

That was up from 38 days for the year in 2009.

The increase is due to some slowness in pay by customers, but the bigger reason is the mathematical impact that increasing monthly sales have on our DSO calculation.

Our first quarter sales to automotive industry totaled 12.6% of sales.

Auto has continued to be one of our strongest industry segments with increasing shipments since the second half of 2009.

At March 31, our shareholders' equity per share totaled $24.01, and as Michael said and we talked about on last quarter's call, we actually paid a dividend in the first quarter of $0.02 a share.

That totaled $218,000.

I'll now turn the call over to David.

Thank you, Rick, and good morning to everyone.

As Mike stated, we are pleased to be increasing our shipments and earning a profit in this year 2010.

We are now profitable at shipping levels that are much improved over 2009, but are still at only approximately 75% of the pre-recessionary levels.

We are looking forward to growing our market share through geographic expansion by using our strong liquidity position and healthy balance sheet.

Before highlighting some of our growth opportunities we are considering, I thought I would add some color to Michael's comments about the continuing trend of rising monthly prices in 2010 and how they have impacted our results.

Our average selling prices in the first quarter of 2010 totaled $758 per ton and were actually lower than the average pricing in the first quarter of 2009 of which that total was $822 a ton.

We are of course in a sharply--we were, of course, in a sharply declining price environment in 2009 and saw prices drop well in excess of $100 per ton during the first quarter of last year, 2009.

In 2010, we are now in an increasing price environment.

The first quarter 2010 average selling prices increased by 6.3%, or $45 a ton, over the average selling prices in the fourth quarter of 2009.

However, when looking at pricing trends within the two quarters, our total average selling prices have increased by about $100 a ton from a low point of $677 a ton in the middle of the fourth quarter to $777 by the end of the first quarter of 2010.

Like pricing, our gross margins also followed a similar trend.

After margins decreased in each month of the fourth quarter, they are--they have now rebounded and increased in each month of the first quarter of 2010.

First quarter 2010 gross margins totaled $160 per ton, or 21.1% of sales, compared to $138 per ton, or 19.3% of sales in the fourth quarter of 2009.

This trend combined with shipping volumes also increasing in each month of 2010 is why Michael stated that we expect to benefit from favorable first quarter trends continuing into the second quarter.

Our inventory is also positioned well and is appropriately costed.

We are currently turning our inventory more than five times, as Rick commented.

The March MSCI Market Activity Report indicated that service center inventories have remained relatively stable in an increasing shipment environment, resulting in historically low levels of inventory supply on hand of two months.

This low level of inventory combined with recovering demand and increased input cost for raw materials, such as iron ore, should support the increasing price levels expected in the second quarter.

Rick elaborated on our elimination of borrowing outstanding and our current cash position.

We look forward to putting our money to work on growth initiatives beyond the $10 to $14 million capital expenditure budget that is planned for this year.

In addition to the systems implementation, our first quarter capital spending included new machining equipment in Minneapolis and fabrication equipment in Iowa to enhance our growing value-added business in those plants.

We're also revising several opportunities to acquire small service centers as the year progresses.

During the fourth--during the first quarter we added Integrity Stainless to Olympic Steel's family.

Integrity Stainless is a profitable niche stainless steel sales organization in Cleveland, Ohio that was immediately accretive to our results and helped propel our specialty metals group.

We also have been working on plans for several greenfield initiatives that we would hope to announce later this year.

As Michael indicated, we are being awarded new business and gaining market share as customers turn to Olympic Steel for a strong, financially stable and experienced supplier.

This flight to quality by certain well known OEMs, combined with the recovery in customer demand, is resulting in our strong shipping growth.

We are capable and ready from both a financial and operating perspective to grow our business.

The recovery in demand is underway and we expect Olympic Steel to fully participate in the benefits of an improving economy.

We are confident in our future and our ability to successfully perform for our shareholders, for our customers, and the employees of Olympic Steel.

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

(Operator Instructions.) Our first question comes from Richard Garchitorena at Credit Suisse.

Good morning, everybody.

Good morning.

Hi.

Just a couple of questions.

I guess, number one, you mentioned that your stainless and aluminum business has picked up and the acquisition in Q4.

Can you sort of give us a guideline as to how much that makes up of total shipments now?

Total stainless shipments?

Yes, and aluminum as well I guess.

The combined specialty metals from a tonnage perspective is probably 1% of the overall sales and probably a little bit more than that in terms of the revenue itself.

Yes, it's about 7% of the revenue.

And Richard, just for clarification, that purchase was in the first quarter of 2010, not the fourth [this year].

Oh, okay.

Great, okay.

So we'll see that going forward this year?

Right.

Great.

And I also noticed on the inventories that they actually went up again this quarter.

Is that just a function of pricing or are we seeing any sort of planning ahead for a pick up in demand?

Well, it's both.

Obviously, with the 28% increase in volume and our comments about the second quarter volume, we have more tons in inventory.

However, we are turning our inventory consistently at five times.

So, yes, the volume went up, but the turnovers remained consistent.

And then, yes, the second part of the equation is pricing is obviously up.

So it's both.

Great, okay.

And then, my final question I guess, looking forward, the opportunities to expand.

[I know you have] a bunch of opportunities potentially on the acquisition side as well as greenfield.

The acquisitions, are you seeing more competition recently from the other major service centers, given that everyone is sort of looking at growing through that avenue or--?

--Well, again, there's two elements of acquisitions, right?

There's the auction process where somebody's trying to maximize the opportunity of the one-time sale, and that can either go to synergistic buyers or private equity.

You've seen that in the past.

Or there is the ones where on a very quiet basis somebody says you're the right partner in terms of your approach to the market and how you service a community and employees.

So there's quiet deals that don't always get to the public and there is obviously the public ones.

We don't participate or haven't been successful in the auctions for a number of years, so that would not necessarily be the route that we would look at.

But we are talking to a number of people on a quiet basis, and we really have a pretty proactive greenfield opportunity program in front of us.

Great.

Thanks for the color.

Our next question on the phones comes from Sal Tharani with Goldman Sachs.

Hey, guys.

Hi, Sal.

Hey, Sal.

Mike, you mentioned something about OEM orders.

Yes.

Which sector are you?

Is it auto or--besides auto you are also getting some penetration into?

Yes, obviously, again, we've been a high--a good performer in the automotive markets.

And as we've indicated in the past, it's not really where we choose to put a great deal of effort.

But we've gone from under 9% to almost 13% of our penetration, so we're seeing some good results in the automotive sector sales.

The other two sectors that really have picked up in a dynamic fashion are those that are more engaged in the mining and the agricultural market places.

And then, just sort of the rest of the activity is coming along on a better basis.

And then, the thing that really somewhat lags for us in this market, which is kind of surprising, is still we've had a pretty active penetration into the service center market.

That still for whatever particular reason hasn't recovered.

Service center--just service center market hasn't recovered as much for us.

But some of the other sectors that are consumer related, anything that somehow touches residential and non-residential construction, while they are improving now are lagging overall compared to some of the other markets we see.

Okay.

And on the demand side, Mike, there's been a lot of talk about the [plant] and final demand and so forth.

And we know that it's the inventories of the service centers that are driving.

But what are you seeing from your end customers in terms of is this any kind of rebuilding or is it the final demand you think is driving this whole uptick?

Well, I would tell you there's a strong desire to rebuild inventories at the end users.

It's just not happening.

So I would more reflect the fact, Sal, that my experience in talking with the customers is that the things that are driving the increase in demand is real sales to the marketplace and not a rebuild of the inventory at this point, although there is a desire from a number of our customers who do believe that their distributorships are way under inventoried.

Okay, and lastly on the acquisition front, I know you've made a lot of comments on that.

But what kind--what size is suitable for you?

Where do you think is your niche?

And what product or geography you would be more interested in?

Well, Sal, we've drawn the map out and we want to fill in the gaps from our logistics perspective.

We're looking for some expansions in Chicago where we already have a facility.

We're looking for some things down sort of where we are in Georgia.

We're looking more to move south and maybe a little bit west than where we're located, and then further into the Great Plains areas really are the ones that are most attractive to us.

And what products?

Is that more on specialty now you're looking at or you are indifferent to wherever your opportunity is?

We're indifferent, but again, I would tell you we have an increased desire to penetrate into our what we call the specialty metals and stainless aluminum.

But the bulk of our business is still sort of a plate and hot-rolled business and that's probably the thing that will drive a lot of our desire.

Great.

Thank you very much.

You're welcome.

(Operator Instructions.) Our next question comes from Mike Parr with KeyBanc Capital Markets.

Hi.

Good morning, guys.

It's actually [Jason Doches] in for Mark.

How are you?

Hey, Jason.

I was just wondering--you outlined the new business won at the large OEMs and you've spoken about that before for a while.

I was wondering if you could just give maybe a magnitude of that new business.

I don't know that we have a good quantification of it.

David, can you add anything?

Jason, it would be difficult for us to break that out.

But simply put, as we commented, we're running at about 75% of normal speed.

At this time last year, we saw a denigration of business of 50%, so we're halfway back to a normalized marketplace.

A good deal of that--a good deal of that growth has come from new business flowing into Olympic Steel as our routine customers, those that enabled us to grow our business all the way up through 2008, are still recovering from the--from last year's problems.

So we see a pretty strong influence of new business.

We really won't be able to quantify the full impact of that until literally the recovery is completed and we get into an expansion.

So we have--many of our customers are coming back and all at different speeds.

Okay.

And I know you guys have already spoken about acquisitions quite a bit in the call.

But I was wondering among service centers of comparable size to you, I mean, how much competition do you anticipate seeing for acquisitions?

So of course, the big--the Ryersons, the Metals USAs, Reliances, have all talked about growing, but obviously they're looking at different size acquisitions as you guys.

So among the service centers of your size, how much competition do you anticipate kind of encountering in looking at the Chicago, Great Plains, Southeast markets?

Depending on the circumstances, I would say that we never underestimate that there's not a lot of competition for everything that we do.

So specifically, I think that if it's an auction, everybody and their grandsons will be looking at the opportunity.

Okay.

All right.

Well, thanks a lot, guys.

Thank you.

Our next question is a follow up from Sal Tharani.

Hi, Mike.

You mentioned about the--I think (inaudible) mentioned that there is--the rate of growth--sorry--the rate of increasing in pricing and volume continue to exceed as you went through the quarter.

And I see that your operating margin per ton went from 138 to 160.

Is the intensity still the same, that growth intensity, as you're going through sort of March through April and you expect it to stay the same, or is it sort of starting to flatten out?

No.

The answer is, yes, we still continue to see the acceleration at this time.

Okay, great.

Thank you very much.

Our next question comes from Nat Kellogg with Hudson Securities.

Good morning, guys.

Just a question on the South Carolina facility that I know you guys had gotten going on and then put a little bit of a pause on just because of what had been going on in the broader economy.

And just curious with talking about greenfield opportunities, whether that's something that is likely to come back later this year, whether that's still up for review, or where that stands.

Well, the building itself might go up (inaudible) in South Carolina.

And we suspended that project in April of 2009.

There were a number of circumstances.

In all of our greenfield opportunities there is always an anchor tenant.

The anchor tenant in this particular case was showing some stronger fault lines than the recession, so the better part of judgment was to unplug that.

That building we own.

We did not erect it.

We still own it.

It's paid for.

We have every expectation to erect that somewhere in the south and give us another opportunity in a different venue.

Okay.

But so, probably not where it was originally planned to go.

Not where it was originally planned.

I mean, no probable, not.

Okay.

Yes, okay.

That's helpful.

And then, I know there's been sort of a lot of back and forth.

I'm just kind of like trying to get a sense of where scrap prices may go this summer and how that affects steel prices.

And I know in some sense it's just anyone's best guess.

But just curious if you guys sort of would be willing to venture a guess on what you're hearing and seeing and maybe how that affects your business over the next couple of quarters.

Well, we can tell you iron ore pricing is going up with a great deal of confidence.

It looks like met coal is going up.

As it relates to scrap, scrap is never a market that's easily predicted.

I can promise you that our forecast is it will probably go down and it will probably go up.

And you've got as much clarity as anybody else does on scrap pricing.

The momentum of the steel mill pricing, as you well know, coming off of sort of a March level, just using hot roll as a base of 600, and then propelling itself into this coming month at about 740, that's a lot of momentum going forward.

Additionally, there is a reluctance, as some have questioned, there's a reluctance to restock, a concern on this pricing.

That reluctance will allow this marketplace to propel even stronger because there'll be shallower inventories and we see real demand as Mike has commented earlier as strengthening.

So in that regard, we will see momentum continue.

Okay, that's helpful.

And then, just last question.

Just sort of on a competitive basis, I mean, have you guys seen sort of--I mean, I would assume in some sense it's improved since people's inventories are a lot leaner, although you guys are saying you're still only running at 75% of where you'd like to be.

So people, I would assume, are still fighting pretty hard for every order.

So I'm just curious on what you guys are seeing as far as discipline within pricing, within the service center space, maybe how it compares to three to six months ago and what you expect going forward.

Hand-to-hand combat.

Pricing discipline.

Let's see, that's kind of an oxymoron.

Okay?

Nothing has changed in the service center business in the 35 years that I've been in it.

We don't expect it to change now.

Okay, fair enough.

Well, thanks for the (inaudible), guys, and I'll hop back in the queue.

Thanks so much.

Thanks, Matt.

(Operator Instructions.) I'm showing no further questions in the queue.

Great.

Thank you, Joe.

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's sales or earnings estimates.

We anticipate releasing our second quarter 2010 earnings on or around August 5.

My birthday is August 6, if you want to send cards and letters, 2010.

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

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program and you may now disconnect.

Everyone have a great day.