Olympic Steel Inc (ZEUS) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome be to the Olympic Steel, Inc. second quarter 2012 earnings results call. At this time all par participants are in a listen-only mode. Later we he will have a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder this call is being recorded for are replay purposes.

I would now like to turn the conference over to your host for today, Mr. Michael Siegal, Chairman and Chief Executive Officer. Sir, you may begin.

Good morning. And welcome to our call. Thank you, operator. On the call with me this morning is David Wolfort our President and Chief Operating Officer and Rick Marabito our Chief Financial Officer and Treasurer. I want to thank all of you for your participation and 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 nor that may not reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. Important assumptions, risks and 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 are 2011 Form 10-K and our 2012 second quarter Form 10-Q which we will file later today.

Earlier today we reported our financial results for the second quarter and first half ended June 30, 2012. Net sales for the second quarter of 2012 totaled $367.4 million which is a 22.9% increase from the $299 million in the second quarter of 2011. Our second quarter 2012 net income totaled $4.5 million or $0.41 per diluted share compared to net income of $7.9 million or $0.73 per diluted share in last year's second quarter.

Net sales for the first half of 2012 totaled $749.4 million a 26.3% increase from the $593.4 million for the first six months of 2011. First half 2012 net income totaled $10.8 million or $0.98 per diluted share compared to the net income of $18.3 million, $1.67 per diluted share for last year's first half.

Our 2012 financial statements include the results of Chicago Tube and Iron which was acquired by Olympic Steel on July 1, 2011. We are pleased with our sales and market share growth in the second quarter. In the second quarter our year-over-year flat roll tonnage increased by 6.0% compared to the market increase of 4.6% as recorded by the Metal Services Institute's, Metals Activity Report.

As indicated in our release our second quarter earnings were impacted by the degradation of pricing in both the carbon and nickel products, which affects stainless, and by startup costs associated with our new operations that are not fully operational. Our current focus is on executing at our new locations, increasing cash flows, and reducing our debt. This will be accomplished by reducing working capital levels, spending less in CapEx than our annual depreciation levels, starting in 2013, and garnering the future contributions of our startup locations that are in their capacity ramp up stages in 2012.

Our pipe and tube business continues to perform well and has one been accretive to our earnings since we acquired CTI on July 1, 2011 and we have been expanding investments in both pipe and tube facilities and equipment. Our balance sheet is strong supported by the liquidity and four years remaining on our bank credit agreement. We reported today that Olympic Steel's Board of Directors approved a regular quarterly cash dividend of $0.02 per share to be paid on September 18, 2012 to the shareholders of record on September 4, 2012. I will turn the call over to Rick.

Thank you, Michael. And good morning, everyone. I will review some additional financial highlights from the quarter and first half. First let me remind everybody, as Michael said we acquired Chicago Tube and Iron on July 1, 2011. As such the first half of 2011 does not include CTI results. In the business results after the acquisition are reported in two segments. A flat product segment and a tubular and pipe product segment.

For more information please refer to the segment information that we provide in our earnings release as well as in our Form 10-Q , MD&A and Footnote sections. Our volume in the flat roll business totaled 614,000 tons sold for the first half of 2012. And that compares to 603,000 tons last year. In the second quarter, our tons sold increased 6% to 302,000 from 285,000 in the second quarter of 2011. We do not report tons sold in the pipe and tube segment as it is not considered a meaningful measure for that segment.

As a percentage of net sales consolidated gross margin total ad 19.6% in the first half. Margins in the second quarter were 19.5% versus 19.7% in the first quarter and margins were down from the robust flat roll margins of 20.9% earned in the first half of 2011. The year-over-year decline is due to a more active spot market in the first half of 2011 than 2012. And the continued pressure on carbon and stainless prices in the current year.

Pipe and tube gross profit totaled 29.6% in the first half of 2012. As our pipe and tube product gross margins are higher than our traditional flat product margins. As a percentage of sales, first half 2012 operating expenses totaled 16.7% versus 15.6% last year.

Expenses are higher in 2012 due to the inclusion of CTI, which has higher operating expense about than the flat roll segment and due to the fixed costs associated with our startup operations. The new facilities incurred about $4.8 million of incremental expense in the first half of 2012. EBITDA which is defined as our operating income before depreciation and operating expense right off the face of our income statement totaled $32.1 million in the first half of 2012 compared to $38.2 million in the first half of 2011.

Capital spending in the first half of 2012 totaled $15.7 million. The flat roll segment spent about $10.7 million of that total, while the pipe and tube segment spent about $5 million. The majority of the spending related to payments for the completion of our temper mill project in Gary, Indiana, equipping facilities in Mount Sterling, Kentucky, Chambersburg, Pennsylvania, and our new stainless and aluminum startup facility in Streetboro, Ohio. We also purchased new laser equipment for CTI.

We expect our total capital spending in 2012 to be in the $30 million to $35 million range in total and that would depend on the timing and choices we make on lease financing. Commencing in 2013, we do anticipate that our capital spending will decrease to levels below our $20 million of annual depreciation expense. Our effective tax rate in the first half was 39.4% and we would expect the full year of 2012 to remain in that range. Our flat roll inventory turnover rate for the first half was 4.1 times. That is slower than our historical turnover rate of about 5 times.

We are reducing inventory in the second half of 2012. As a result of the CTI acquisition about 15% of our consolidated inventory is stated on LIFO. We have no book LIFO reserve at June 30, 2012, however, because our pipe and tube inventory on LIFO has a current and a 2012 year end projected quantity and pricing point below those, the July 1 acquisition date. In essence our CTI LIFO inventory is stated at FIFO at June 30, 2012.

Our flat rolled accounts receivable DSO totaled 41 days. Pipe and tube DSO's are well below those 40 days, so our receivable quality remains very good and it did improve slightly from the first quarter. Our debt at quarter end totaled $288.5 million. That is down slightly during the quarter. And our availability was $85 million at June 30.

We are focused on reducing our debt going forward. Both inventory and debt have declined since quarter end June 30. And finally, our shareholders equity per share increased to $27.31 at June 30. Now, I will call -- turn the call over to David.

Thank you, Rick. Good morning to all. First let me talk about some of our startups and growth initiatives and we have been highlighting our startup initiatives which are at various stages of capacity. Let me update you on our two most is significant investments. That of our new temper mill facility in Gary, Indiana and our new stainless and aluminum specialty metals facility in Streetboro, Ohio.

Our Gary, Indiana temper mill facility continues its ramp-up to capacity during its first six months of operation. The $27.2 million project provides over 150,000 tons of new capacity. The facility and equipment were successfully completed on time and under our targeted budget of $30 million, with the mill processing its first coil at the end of December 2011 as you will recall. Then in the first quarter of 2012 we successfully ramped up production from the first coil to ship at a run rate of approximately 190 tons per day or 30% of capacity by the end of March of this year. By July we achieved a shipping run rate of approximately 280 tons per day or about 47% of capacity. Gary has been a nominal operating cash flow negative in the first half, but we expect the location to generate positive operational cash flow in the second half of the year.

Now, to our specialty metals business which is currently adding processing equipment in its new facility in Streetsboro, Ohio which just opened in April of 2012. The addition of a physical location in Streetsboro with internal control of slitting, cutting, flattening capabilities in stainless and aluminum will provide continued growth in the food services and truck trailer market. Stainless and aluminum product sales now make up about 10% of our consolidated sales mix. We expect the equipment in Streetboro to become operational later this month. In total, we incurred about $1.8 million of pre-tax startup losses in the first half at our startup locations of Gary, Indiana, Streetsboro, Ohio, Kansas City, Missouri and Mexico.

We confidently look forward to the future contributions of these operations. Now, let me shift gears and turn toward our view of the market. Finally, let me briefly comment on the current market conditions. Our demand has been consistent and stronger towards the contract mix versus the spot market business when compared to last year. As highlighted earlier our shipping pace improved in the second quarter when compared to the market as, we out paced the industry's shipping growth in terms of our flat rolled tons sold.

The current year trend of supply side pressure continued through July. However, resulting in declining steel prices and lower margins especially in the carbon and stainless flat roll area. First half is usually the is seasonal time for price increases, but 2012 has been a non-traditional year. Third quarter started with the expected seasonal weak month of July, but the recently announced and well publicized scrap and steel price increases should bring some relief to the downward trend of pricing experienced since early in 2012. We are reducing our inventory levels in the second half, as Rick commented and completing our three year capital spending program and focusing on increasing cash flow and decreasing our debt going forward.

We are excited by the opportunities in front of us with our new startup locations, the continued strong performance from the pipe and tube segment and success of our existing businesses. This concludes our formal comments and we will now open the call to your questions. Thank you .

(Operator Instructions). Our first question comes from Ed Marshall from Sidoti & Company. Your line is open.

Good morning, Mike, Dave, Rick.

Hey there.

So the first, question you mentioned you are taking inventory off the balance sheet. Do you have an indication as to how much is going to be coming off?

Well, again, it is a relative ratio to sales but again as Rick indicated in his remarks, we are traditionally trying to look at five inventory turns and so as we would expect sales to maintain a relatively consistent level, we are going to get the inventory to a five inventory turn level.

And is that on the run rate by the end of the year? Do you anticipate maybe the third and fourth quarter to kind of look at that five times. I know you don't provide guidance but, you know.

We won't get -- Ed, it's Rick. I talked about being at 4.1 turns now. As Michael said we will get to five and that will happen pro-rat over the back half of the year.

Okay. Looking at the startup costs, I think I looked back to the first quarter, call it was about $1 million dollars in startup. Looking at $1.8 million but the utilization at Gary seems as though it was moving in the right direction. So where are the incremental costs coming from?

The Streetsboro facility. As David commented, we moved into that facility in April and had a whole quarter of getting the equipment installed. So that equipment should be up and running here in the third quarter so that would be the incremental piece.

I didn't catch if at 47% utilization is Gary profitable. Is it near break even?

Near break even.

Near break even. So the majority of that $1.8 million is then Streetsboro, I guess is what you are saying?

During the quarter, Ed, we obviously went from as David commented, we were at about at the end of March, we were at about a 30% run rate.

I see.

So is you walk through Gary and we were at zero at the beginning of the quarter. 30% at the end.

Yes.

Pro-rat, we're at 15%. We went from 30% at the end of March and now in June, this June we had a pickup in volume due to normal business trends in terms of quarterly contracts that started in the third quarter. We went from a 30% run rate at the end of March, to in July , 47%. You had a pro-rata ramp up. Actually more weighted towards July, in terms of that increase in volume.

That makes sense, Now if I look through the rest of the year do we expectthis kind of level a $1 million or so per quarter drag or does this become less? -- I know you guys continue to expand, but how should we look at these startup costs maybe throughout the rest of 2012 and I'm assuming they will fall off some what in 2013?

Ed, it is Rick again. In 2013 our full expectation is that the startup costs fall off and we are are profitable. I would tell you between now and the end of the year the expectation at Gary which is one of the bigger facilities, would be that we would continue to lessen the startup drag. I think in third quarter as we talked about the second biggest facility is in Streetsboro, we should have that thing up and running. So I would say in fourth quarter we should cut the startup costs at Streetsboro. In summary I think we would continue to see the rate go down in 2012 in terms of startup costs and 2013 we should be there for profitability.

I don't know that you will comment on this, but is there a utilization rate at Gary, say at the end of July or is that 47% at the end of July?

That is the July rate.

Okay. And then Mike, kind of bigger picture. You talk about pricing a little bit. You mentioned in the comments about the rate hikes that we have seen recently and a everyone is trying to dig their heels in. What is your take? Are you seeing there is sort of reluctance from your customers in taking price, or are they giving in to the market a little bit?

I'll let David comment on that one.

Okay.

Go ahead, David.

Ed, actually, we do see traction. There are three price increases on the table. The first has been absorbed and we would comment that a significant portion of the second has been absorbed. You are 100% correct the producers are digging their heels in. And I think they are seeing some success and, of course, we see that being fostered and supported by the increase in scrap in this month. So rebound from the decline of June, July in scrap here in August and that is supporting the price increases and there is a resolve to bring those prices up.

Excellent news. Okay, thanks, guys.

Thanks, Ed.

Thank you. Are our next question comes from Tim Hayes from Davenport & Company. Your line is open.

Hi, good morning, everyone.

Hi, Tim.

Just a couple of housekeeping items. Rick, did you give the gross profit by the segments?

Yes.

What were those again, please?

Sure. Let me get to it. Sorry. So we had consolidated was 19.6%in the first half. Consolidated was 19.5%in the second quarter versus consolidated 19.7% in the first quarter. Last year was 20.9% and last year obviously was all flat roll. And then 29.6% was the pipe and tube segment margins for this year.

And the 29.6%, that is a first half for CTI, right?

Yes, that is a first half number.

All right. And then the total volume in flat roll for Q2?

Q2 total volume was 22,000 tons versus about 18,000 last year. 18,000 or 19,000 last year.

And last question, just on the generating working capital from lowering the inventories in the second half. You, assuming, you mentioned you are going to get your turns up to five, I guess with the recent snap back in steel prices, what is your thought for generating cash from working capital, even if the turns improve.

Two things. Number one we will definitely be taking the volume down, so that will be a cash generator. In terms of the pricing on inventory and I think if you look and chart how it works, that will take some time in terms of the raising of the average cost of the inventory, so I'm still confident unless we see another couple rounds here as we move through the rest of the quarter and the rest of the back half, that we should still be in a position to reduce the inventory value in total.

Okay. One more. With that snap back in US prices is there a gap that is opening up with prices around the world that you might start looking offshore?

I don't think so, Tim. Again, inventory management is critical here. Outside of we have some continuous feed on the East Coast, when you look at both buy, it throws your disciplines of inventory management out of whack unless there is a big enough gap, so we don't see the big enough gap yet that would be inducing us to do that. And we are much more focused right now on the execution of our principles.

Thank you.

Thank you. (Operator Instructions). Our next question comes from Richard Garchitorena from Credit Suisse. Your line is open.

Thanks. Good morning, guys.

Hi, Richard.

Just wanted to touch on the gross margins follow-up. On CTI, 29.6% for the first half, if I recall first quarter was above 30% so anything you can point to for the sequential decline in the margin there?

Nothing more than the general market decline of all commodities. Again, guides at higher priced inventory, being able to replace it with lower priced. They are seeing the same conditions in their marketplace. it is a little bit more competitive in the marketplace as people are liquidating higher priced inventory. So I think it is on the sale side rather than the overall spread of the engineering value added that they bring.

OkayWith the price recovery in the last month or so would you expect that to reverse in the third quarter and moving forward?

Well, the -- Richard the trend is going in that direction. Obviously as flat roll pricing moves up, it a component in the pricing of tubing, and so we would expect tubing to move up and, of course, we have inventory embed.

And we added some equipment there as I indicated, that is helping propel some of the margins on the engineering side. So we are doing some things to help them as well.

Okay. Great. And then I just -- the other question just broadly speaking on the end market mix, and then you mentioned 10% of shipments now in aluminum. I guess where are you seeing the biggest demand, again, just wanted to revisit where we are across all of the end markets?

Again, that was stainless more than aluminum. Call it specialty metals. 10% is the specialty metals which is predominantly stainless more than aluminum. Our markets are strong where they have been. The heavy highly engineered products in mining and agriculture remain very, very strong. Food service applications for us remains a pretty robust market. Truck trailer is a pretty robust market for us or remains relatively robust. We haven't seen segment change pretty much at all, Richard.

Okay. Great. Thank you.

Our next question comes from Aldo Mazzaferro from Macquarie. Your line is open.

Yes, hi Michael, David, and Rick, how are you doing?I guess, my view on the market, I'm seeing this dichotomy or, difference between the trend in demand and trend in pricing, it seems especially since you and a number of your competitors are reducing inventory here which would be the opposite reaction you would expect if the prices are really tight and going up the market was tightening. I was wondering how do you see your inventory strategy? More lined up to the demand side of the market or would you -- I mean because it doesn't seem like you are going to chase these prices, if I'm reading you right. Just wondering?

Aldo, I think it is a combination of where the market is, to where it is going. Olympic has a certain kind of marketplace that segments itself between contract and spot.

Right.

What we would say is that our contractual inventory got a little bit too high, relative to some indications of what we thought pricing would be and the customer consumption with be. When we look at what we are going to reduce predominantly, is going to be the customer specific inventory as we hope that we increase the mix of our spot market, as we look at a rising price environment which would then indicate to us that the spot market would be stronger and we would need more inventory for spot and just change the mix a great deal. When you look at the reduction it is not relative to the factor that the price is going up as much as our mix of inventory for contract versus spot changed a little bit.

I see. Mike, could you comment on how you are seeing some of the big sectors that you sell into relative to last quarter in terms of demand?

I will let David answer that one.

We see it pretty consistent. If you take a look at this over a three year period, 2010 had a substantial recovery for us over 2009 and 2011, stronger, and 2012 our tonnages continues to grow. We see modest tonnage improvement remembering that we are bringing on new facilities and adjusting our inventory based on our experience with some of these new customers as we are bringing them onboard in Gary or in Kentucky, which was last year's theme and that is up and running and running well and we are adjusting the inventor to accommodate those customers. Overall demand continues to grow.

Great. And Rick, one final, could you give us the cash number at the end of the quarter?

Sure. The cash at end of the quarter was $2.8 million.

All right. Thank you.

Thank you. Are our next question is a follow-up from Tim Hayes from Davenport & Company. Your line is open.

Thanks. My follow-up has been asked and answered. Thank you.

Okay, thanks Tim.

Thank you. I show no further questions at this time. Actually, we have a question from Charles Bradford from Bradford Research. Your line is open.

Hi, good morning.

Hi, Chuck.

Did you get a buyer from Warren or from any of the RG facilities and what you think are the possibility of some of these getting restarted?

Well, the short answer is we didn't buy a lot but we did buy some. We always had an historical participatory rate with those facilities. It appears to us that there is probably a better chance that maybe Warran starts other than Sparrows Point, but that is speculation on our part, Chuck. As the financial problems obviously were pronounced, we throttled back on any participation because we couldn't count on their supply. We don't know anything more than you know and we know exactly what we read and I think that the chances of a recovery will be so small to the marketplace it won't even make a ripple.

Thank you.

Thank you.

I show no further questions at this time and would like to it turn the conference back to Mr. Michael Siegal for closing remarks.

Thank you.

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 analysts sales or earnings estimates. We anticipate releasing third quarter 2012 earnings on or around November 8 of 2012. This concludes our call and thank you for your participation and your interest in Olympic Steel. Thank you you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.