Olympic Steel Inc (ZEUS) 2011 Q1 法說會逐字稿

Good days ladies and gentlemen, and welcome to the Olympic Steel, Inc. first quarter 2011 earnings results conference call. (Operator Instructions). I now would like to turn the conference over to your host, Mr. Michael Siegal, Chairman and CEO.

Thank you, Allie. Good morning and welcome to our call. On the call with 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 again, for your interest in Olympic Steel. Before we begin our discussion, I want to remind you 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 and 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 the forward-looking statements can be found in our filings with the Securities and Exchange Commission, including our 2011 first quarter Form 10-K, excuse me, 10-Q which will be filed later today.

Earlier today when we reported our financial results for the first quarter ended March 31, 2011, net sales for the first quarter of 2011 increased 75.3%. to $294.4 million from $167.9 million for the first quarter of 2010.

Our shipments in the first quarter of 2010 increased 43.3%. to $317,000 from $221,000 in the first quarter of 2010. First quarter 2011, net income totaled $10.3 million or $0.94 per diluted share compared to net income of $1.7 million, or $0.16 per diluted share for last year's first quarter.

We are pleased with our strong sales and earnings growth in 201. We have just completed our best quarter in terms of both sales and net income since the third quarter of 2008. For the past two years during the economic downturn, in addition to cost control, we have been strategically focused on growing our geographic and product footprint, increasing our value added processes and investing in personnel. These initiatives have resulted in significantly increased market share for Olympic Steel,and position us to accelerate our market share penetration and overall profitability in improving North American economy.

As previously reported, our 2010 annual shipments increased by 34% over 2009 which outpaced the total industry growth and steel shipments of 21%, as reported in the Metal Service Center Institute's 2010 market activity report. In the first quarter of 2011, we continued to gain market share as our shipments increased by 43.3%, almost doubling the pace of the market increase in total sales shipments of 23.5% as reported by the MSCI.

Our strong balance sheet, low debt levels and focus on asset turnover provide us with the access to funds for increased working capital need, and our capital investment growth programs. We believe our commitment to capital investment and geography, equipment and people separate Olympic Steel when customers choose long-term supply relationships.

Later in the call, David will review our 2011 success, and strategic initiatives. Including new locations startups in Gary, Indiana; Mount Sterling, Kentucky; Monterrey, Mexico and Kansas City, Missouri.

In addition to our internal expansion and CapEx program. We continue to actively explore growth via acquisition opportunities in 2011, and find this market more favorable in valuation than in the recent past. We are confident in our ability to provide tonnage and revenue growth, and real value creation for our shareholders in a recovering economic environment in North America.

Today we also reported that Olympic Steel's Board of Directors approved a regular quarterly cash dividend of $0.02 per share to be paid on June 15, 2011 to shareholders of record on June 1, 2011. Now I will turn the call over to Rick to comment on the financial results in detail.

Thank you, Michael, and good morning, everyone. Michael spent some time on our tonnage and sales growth, so I will start my comments related to gross margins. As a percentage of net sales gross margin totaled 21.5% in the first quarter of 2011, up from 21.1% in the first quarter last year, and up from 17.9% sequentially from the fourth quarter of 2010. Internally, we measure our gross margin results on a per ton basis, and our first quarter 2011 margins per ton increased to $200 from $160 in the first quarter of 2010. And again, on a sequential basis, margins per ton increased by $49 a ton from $151 in the fourth quarter of 2010.

Operating expenses in the first quarter of 2011 totaled $46.1 million, an increase of $14.1 million over the first quarter of the prior year. However, as a percentage of sales, our operating expenses actually declined to 15.7%, from 19.1% last year. And on a per ton basis, our operating expenses remained flat at $145 per ton for both periods.

First quarter of 2011 expenses include the impact of our 43% increase in shipments, and dramatically increased profitability in 2011. In order to meet increased customer demand, our headcount, the use of temporary labor, overtime and delivery costs to customers have all increased. Additionally, 2011 reflects a full period of expense for all compensation and benefits that were reduced in 2009, and then sequentially restored in a phased-in basis by January 1 of 2011.

EBITDA defined as our operating income before depreciation expense on the face of our income statement, totaled $20.8 million in the first quarter of 2011. Capital spending so far in 2011 has totaled $7.9 million, and as Michael indicated earlier, we continue to strategically invest in a recovering market with the majority of our spending related to IT and communications systems, processing equipment for the new facility in Mount Sterling, Kentucky and down payments for the new temper mill cut to length line to be located on our recently acquired facility on US Steels, Gary work site.

During the first quarter of 2011, we capitalized $357,000 and we expensed $197,000 related to the IT system implementation. We expect our capital spending in 2011 to be approximately $35 million to $40 million, and that would be inclusive of the payments on the new temper mill and cut to length line. The $4.3 million price in April that we paid for the building purchase in Gary and equipping our new Kentucky facility, as well as continuing our system roll out.

Our effective income tax rate for the first quarter of 2011 was 37.5%, compared to 39.4% in last year's first quarter. Last year's rates were higher than our normal and expected rate of 38% due to lost tax deductible items when operating income was at lower pretax income levels.

Some other financial metrics and highlights include our inventory turnover in the first quarter of 2011, which was 4.8 times. Our inventory was turning, however, in excess of 5 times by the end of the quarter asour inventory levels were lower at quarter end versus the start of the year. We expect to accelerate inventory turns in the second quarter as we operate with less tons on hand than in the first quarter.

Our 2011 first quarter receivable DSOs total 42 days which is down one day from the first quarter of 2010. And as we forecasted on our year-end call, our debt is higher at the end of the first quarter as we funded increased working capital needs associated with the higher sales and increased metals pricing, and continued our capital expenditure investment program.

Total debt increased by $26 million in the quarter to $81 million at March 31, 2011. Availability under our asset based loan credit facility was $42.5 million at quarter end. Our receivables alone increased $54 million in the first quarter, even though as I said earlier, we collected our money one day faster than last year.

And finally, shareholders equity per share was $24.95 at the end of the quarter and we paid a quarterly dividend of $0.02 per share in the first quarter. Now, I'll turn the call over to David.

Thank you, Rick, and good morning. As Rick and both Mike described, we are having a busy first quarter, and it also incorporates a lot of our activities from 2010. So I'm going to enumerate all of those activities, and we are pleased with our shipping strength, and our market share growth and our profitability achieved in the first quarter of 2011, as both Mike and Rick have just described.

Our timely and well planned steel purchases at the end of 2010 provided us with the inventory to meet our customer's growing need for product in the first quarter as we anticipated a quicker start to 2011. We believe our customer demand will continue to be strong throughout 201, even though we have seen a bit of a kink in somewhat of a nominal lull in April shipping activity as compared to March, and prices are now coming off their peek.

However, the March MSCI metal activity report provides some very encouraging support for our continued favorable business environment. The March MSCI market activity report indicated that service center inventories have remained low in an increasing shipment and pricing environment resulting in historically low levels of inventory supply on hand of 2.1 months. This favorable inventory position combined with accelerating end demand and expected high input costs such as iron ore, point to a favorable steel environment going forward.

As Michael indicated earlier, we embarked upon a strategy to invest heavily in our future during the market downturn. Our strong balance sheet and access to capital provided us with the advantage of spending money when facilities and equipment were less expensive, personnel were available, and the rewards of these investments would be reaped as the market returns to growth again.

We have been quite busy in 2011, and have successfully executed the following initiatives as we briefly discussed a moment ago. Equipment and startup of Mount Sterling, Kentucky facility, as we previously announced in the second half of 2010, we added a new Olympic facility in Mount Sterling, Kentucky which is about 30 miles east of Lexington. We purchased 14 acres of land and an existing 100,000-square foot building during the first quarter of 2011. We have been busy upgrading the building and the equipment. The facility to perform plate burning, machining, forming and shop blasting anchored by blue chip customers such as Link-Belt and Hoffman, a division of Pentair, and several other key accounts in the area, we became operational from this facility at the end of the first quarter of 2011. The Mount Sterling site reinforces our strategy of being closer to where our customers assemble their products.

Next, the new Butech shear in Cleveland. In January of 2011, we updated our Cleveland temper mill by successfully replacing the 15-year-old rocking shear with a new Butech rotary sheer which is operating at expected capacity. That project has been completed. The new temper mill equipment which both Mike and Rick referred to; in November of 2010 we announced a new location of Gary, Indiana to house a $20 million investment; this new temper mill cut to the length line.

Since then, construction of the line is progressed for an on time completion on or around the year-end 2011, so we expect that we will be, in fact, starting this up by year end. Our agreements with the temper mill and cut to length line manufacturers also provide us with an option to purchase a second lifetime piece of equipment at favorable terms consistent with the original purchase orders.

Once operational in 2012 the equipment will be capable of processing approximately 150,000 new tons of high quality tempered sheet capacity for Olympic Steel, and significantly reduce our inbound and outbound freight costs while better serving customers from our existing two tempers mills in Cleveland, Ohio and Bettendorf, Iowa. Our Cleveland and Iowa temper mills have been significant drivers of Olympic's growth to greater than 1.3 million tons and $1 billion in sales. We believe our temper mill investment will be the driver of Olympic Steel's next big growth spurt.

In line with that the Gary, Indiana facility as Rick noted, we also are pleased to announce that we have closed on the purchase of the Gary, Indiana building from US Steel in April. We are grateful to US Steel for allowing us the opportunity to locate on their Gary works site.

In Moses Lake, Washington in early 2010, we completed our move to Moses Lake, Washington to serve a customer in that region of the country. This marked our first physical location in the Western United States. In 2011, we have expanded our footprint there by adding 8,000-square feet of additional warehouse space to meet our customer's growing production needs.

First time outside of the US in Monterrey, Mexico. And during April of 2011, we entered into a lease agreement for approximately 15,000-square feet of warehouse space in Monterrey, Mexico to augment our long existing sales presence there with the ability to stock and distribute metals in Mexico for our customers there. We anticipate that we will begin stocking inventory there in the next few months.

Additionally in Kansas City, Missouri as Mike noted, last week we entered into a lease-to-buy agreement for approximately 43,000-square foot space in Kansas City. This new location is part of our temper mill expansion strategy as we plan to push our market penetration further west of Bettendorf, Iowa location. Initially we plan to stock sheet product in Kansas City, and anticipate that shipments will commence in the third quarter.

Again accentuating our growth plans, in Saint Paul, Minnesota in order to free up some space in our existing Minnesota facilities for expanding processing capabilities, we are planning to lease some additional warehouse storage space in the Saint Paul area. We have executed on that already. It's an additional 56,000-square feet. We plan to feed our two Minneapolis processing facilities with coil and plate stored in this new location to optimize our processing space, reduce logistics and handling costs, and increase our throughput in the region of the country. We are anticipating completing a lease for this space as we have just executed.

Let me just turn now to our own truck fleet. We continue to expand our own truck fleet which yields improved customer service at reduced total cost to Olympic Steel. During 2011 we expanded this fleet to tractor trailers to some 37 and plan to grow that fleet to approximately 60 in the next two years. In all, we are adding approximately 400,000-square feet of warehouse space to our footprints since acquiring the building in Mount Sterling, Kentucky in the second half of 2010.

We are excited about the growth opportunities that these investments will provide. We are competent in our strategy for growth, and we believe that our timely and well planned investments in people, facilities, equipment, and products provide a strong foundation for significant growth and value for our shareholders, 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 Tim Hayes of Davenport & Company, please go ahead.

Hi, good morning.

Good morning, Tim.

Two questions. One is on the M&A front, and the second will be market share. Are you finding the list of potential candidates increasing or decreasing here, over say the last six months or so? It seems that with the improving economy and maybe some marginal service centers are going to have a fighting chance, but at the same time the stress of working capital would maybe push them over the edge. I'm not sure which one is winning out. I'm curious what you are seeing.

We are seeing an increasing environment.

Okay, and then on the market share gains that you are achieving, is that coming from say the larger service centers,or is that coming from small mom and pops, or perhaps both?

Well, Tim, David here. It's come from OEMs. It is principally coming from our large OEMs. We have talked about that in previous calls where we quantify that as a flight-to-quality as the large OEMs recognize the strength of Olympic Steel's balance sheet and our willingness to locate facilities close to them. We have been able to garner significant market share growth.

From both, I would say large and small service centers.

Okay. Very good, thank you.

Our next question comes from Sandeep SM of Goldman Sachs. Please go ahead.

Good mornings, guys. Congratulations on the strong quarter.

Thank you, Sandeep.

One question for you. Can you give us a break down between your spot versus contract mix?

Yes, it's probably, Sandeep, it's probably two-thirds contract, one third spot. And didn't see a very big change in that mix per say the first quarter.

And the contracts are based on lagged pricing or how does it work?

All of the above. We do have some contracts that are back to back on indexes, like CRU. Some of them are quarterly, tri-annually, monthly. Some of them are not tied into indexes. There certainly is a lot more momentum towards more indexing than in previous times.

Okay, and how many months of inventory are you guiding right now?

Sorry, you said months of what?

Months of inventory.

Inventory, now?

We are turning our inventory right over slightly over five times right now in March.

2.1, 2.2

Right.

Okay. And how would you look at the order rates in April versus say March, is it better or is it falling or flat?

It was relatively consistent until we got to the Easter weekend, we saw an adjustment in the Easter weekend, Sandeep, and then ordering patterns came back up after the Easter weekend.

So like on the whole April was below March?

So far April is similar to March.

All right. That's it, thanks a lot.

Our next question comes from Mark Parr of KeyBanc. Please go ahead.

Oh, isn't leverage nice when it is working in the right direction.

Yes, it is.

Good to be the king. That's right.

Congratulations.

Thanks, Mark.

Hey, I'm interested, Michael, in your most recent thoughts about -- and, David, you may want to chip in here as well. Just about gross profit opportunities. It seems like you have been doing more value add -- adding more processing equipment. I think that's a bigger piece of your mix. I'm just wondering how to think about the cost of gaining market share from a margin perspective against the opportunity to enhance margins as the value propositions or the customers increased. And how I should be thinking about that perhaps in the near-term. I mean is there a big FIFO gain in 1Q that's not going to be repeated, or are we still on a ramp as far as profitability is concerned? And then looking out over the next couple of years, how we should think about Olympic's gross profit margin opportunity in the sense of more value, and call it maturation of market share gains.

Wow.

Nothing going on there.

Wow, Mark, what I would tell you is we are committed to growing our market share both in tons which are certainly lower margin. And we are certainly committed to growing the market share in the pieces-parts business; on the fabrication side of the business.

I think today we are somewhere around 14% of our dollars in terms of the value add processes. We will probably grow the percentage of the mix towards more pieces-parts until a new temper mill comes up, and when we add 150,000-ton of rectangle business we will probably see the mix go down a little bit in 2012. But we clearly have a metric of trying to get our fabrication processing up to close to 20% of the mix over time.

Okay. So in terms of the near-term have LIFO gains peeked out at this point, or would you expect that peek to be more in the second quarter? I mean not LIFO, I mean FIFO gains, excuse me.

Well, Mark, it's Rick. I think obviously, as David commented in his section, we are seeing prices come off the high. So on the spot segment of the business, still obviously be a little bit of pressure there. But as Michael talked about, we have got a lot of lag pricing, so we are still in the second quarter seeing our margins be quite strong.

Okay. Yes. So the two-thirds to Sandeep's question, there the two-thirds contract mix and -- Michael, is there a way you can describe about the average duration of that contract mix? I mean is it 90 days, is it 60 days?

Well, Mark, David here. I will tell you the preponderance of those contracts are three to four months.

Okay.

Most of them being a quarter, a few of them are what we call trimester; Mike referred to earlier. Also let me just give you a little color around some of the comments that we have just made. As we talk about facilities going forward, we have a number of different silos of business as you are well aware of. We take a look at Moses Lake, Washington, which I refer to; Monterrey, Kansas City and our efforts in Saint Paul adding some facilities there. All of that means that we are looking to compliment our value added stream, and continue to service the customer.

Customer has asked us to do more of their front end work which has more value to it, and as Michael said, it's measured on dollar sales as opposed to tons on that value added side of the equation.

Right.

It requires to us have more square footage as we add equipment, and get closer to that customer without having to challenge the customer in the same labor pool. So we love it when we are within 30 miles of the customer. So we have some strategies there, but all of those components of our business, including specialty metals, is also expanding.

Thanks very much. And congratulations.

Thanks.

Our next question comes from Richard Garchitorena of Credit Suisse. Please go ahead.

Good morning and congratulations, gentleman.

Thanks.

Thanks, Richard.

So the first question. You had a very strong quarter on the volume side. My first question is basically, can you quantify in terms of given the acquisitions you have done, the expansions, where your current capacity sits? How much more you can use from existing facilities, and I guess with a new facilities coming on-line, how that grows over the next 12 to 24-months?

Well, we have a wide open order book and we have all of your customers to keep the orders flowing. Clearly it is really East to West. There's no question that the things that are in the Midwest in terms of farming and the mining manufacturers; the earthmovers kinds of scenarios are very strong. Our facilities in Iowa and Minnesota are pushing the limits of their capacity, although again, we can continue to add more businesses in those locations.

As we move further east, the Southeast is probably a little bit weaker in terms of the demand, and therefore we have a lot of capacity in the Southeast. And certainly have some capacity availability in the New England markets as well, but that's the marketplace.

But I can tell you, Richard, we are not constrained on capacity to continue to take on new business. Part of the reason why we are anticipating more business is why we, as David indicated, we are adding the geographic footprints.

Great, and can you talk a little bit about the product mix. Has that changed at all this quarter over last quarter? Also the value added, obviously, component has that helped on the margins?

Well, we have had some significant growth on specialty metals, so we continue to increase our participation on aluminum and stainless, and we are very happy with that. We are actually proud of all of those accomplishments.

In terms of mix of carbon products a ratio is pretty much the same as just more tonnage. As Mike described earlier, Richard, we caught back about half of what we lost in 2010, we caught back about half of what we lost in 2009. We anticipated that 2011 would be off to a quick start, and indeed it was. And we caught back the balance of that in the first quarter.

So as we look at the first quarter we are at normalized run rates. The market responded. We had the inventory for it.

Additional to that is that not all of our customer base is back in total. But however, over the last few years we have continued to recruit new business. So in anticipation that our older customer base will eventually come back to its full participation and we will retain the new business, we recognize that we need a lot more square footage and that's why we have this additional business going on.

I think to be specific, Richard, we have seen all segments of our business increase proportionately, and therefore I don't think our product mix changed much. All segments of our business are growing.

Okay. Great. Thank you very much.

Our next question comes from Aldo Mazzaferro of Burke & Quick. Please go ahead.

Hi, Michael. How you doing?.

Good, Aldo. Thanks.

Aside from the pricing improvement, the volume was very impressive. I just wanted to ask about your comments about growth going forward. When you look at these new facilities that David listed, which ones would you say beyond the Gary plant, which ones would you say are the most significant in terms of your outlook?

Well, I would say all of the above. I tell you, Aldo, they are all significant in their own way. But obviously being in Mexico is something unique, that creates a -- you go back to Olympic in 1984, Aldo, when we started this ride. David philosophically indicates you go from regional representation to regional distribution. So the fact that we have been in Mexico for a long time without brick and mortar speaks well to the ability to penetrate a market from a long distance. Having the brick and mortar opportunity even though it is a small facility, half of a building with one of our customers, I would tell you out of the opportunity in Mexico is probably the most profound of the investments we are making in terms of real longer term opportunity growth.

Mike, did you say how big your footprint was down there? Are you thinking?

15,000-square feet.

Yes.

Aldo it is 15,000-square feet to start.

But we are taking with one of our customers half of a new facility that we are building. He is building it, we are taking half of the space.

Right. So Mike just to help us out, as you look around for your next location for the second temper mill, assuming you go through with that option, is 15,000 feet enough, or does it got to be more like 40,000 or 50,000?

For a temper mill? Temper mill, we need 150,000.

150,000?

150,000 for a temper mill, Aldo.

I see, so are any of these projects that you mentioned suitable candidates for that second temper mill?

No. We are looking into a new geographic area where we are not presently located.

I see. Great. And then how about your comment upfront, Mike, about the acquisition opportunities. I mean I'm trying to get a flavor for whether you are looking at volume expansion in commodity processing, or are you looking to continue your expansion into the higher value added products and components, things like that?

All of the above. I mean again, when you look at acquisition opportunity, Aldo, what we look for is two basic criteria. Or three basic criteria. One, we prefer good management as opposed to turn arounds. We have done both. I will tell you first criteria, is do they have good management in place.

The second, would be how do they look on a geographic penetration relative to where we are. We don't really need another service center in Cleveland, Ohio. So we look at do they add to the geographic footprint to better service our customers.

And then third, would they add to the product portfolio in terms of the products that we can sell. And so in no particular order, other than the fact that they should have good management in place, which is universal, whether it is product or geographic location are both of equal opportunity for us to look at.

And just finally, Mike. The [SVB] and some of the other indicators on price that you can look at are showing a hot rolled coil price in the USright now of 855 a short ton in the Midwest. Do you think that's $50 higher than it really is, or?

I prefer not to comment on pricing, Aldo.

Okay. Well, great. It's a really super quarter. It's almost like a religious experience seeing $0.94 come across.

Praise the Lord.

Thanks.

Thank you.

Thank you, Aldo.

(Operator Instructions). Our next question comes from Brad Evans of Heartland. Please go ahead.

Brad?

It looks like he took himself out of cue. I'm showing no further questions at this time, and I would like to turn the call back over to management for any closing remarks.

Well, thank you, Allie. As a reminder, it is our policy not to provide forward-looking earnings estimates for the upcoming quarter or year, and not to endorse any analyst sales or earnings estimate. We anticipate releasing our second quarter 2011 earnings on or around August 4 of the year, and this concludes our call, and again, thanks for everybody's participation and interest in Olympic Steel. Goodbye.

Ladies and gentlemen, this does conclude today's conference. You may now all disconnect, and have a wonderful day.