Olympic Steel Inc (ZEUS) 2012 Q3 法說會逐字稿

Good morning, and welcome to the Olympic Steel third-quarter 2012 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

Some statements made on today's call will be predictive and are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995 and may not reflect actual results. The Company does not undertake to update such statements, 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 are set forth in the Company's reports on Form 10-K and 10-Q, filed with the Securities and Exchange Commission, including its 2011 Form 10-K and 2012 third-quarter 10-Q, which will be filed later today. Today's live broadcast will be archived and available on Olympic Steel's website.

At this time, I'd like to introduce your host for today's call, Olympic Steel's Chairman and Chief Executive Officer, Michael Siegel. Please go ahead, Mr. Siegel.

Thank you, Ally. Good morning, and thank you for joining today's call to review our third-quarter and nine-month results. On the call with me this morning are David Wolfort, our President and Chief Operating Officer, and Rick Marabito, our Chief Financial Officer and Treasurer. We are hoping that Don McNeeley, our President and Chief Operating Officer of Chicago Tube and Iron, will be joining us later.

I'd like to thank all of you for your participation and for your interest in Olympic Steel. Earlier today, we reported financial results for the third quarter and first nine months ended September 30, 2012. Net sales for the quarter totaled $343 million, down 2% from the $349 million we reported in the third quarter of 2011 due to lower pricing for metals.

Net income totaled $1.6 million or $0.15 per diluted share compared with a net income of $6.1 million or $0.56 per diluted share in last year's third quarter.

Net sales for the nine-month period totaled $1.1 billion, up 16% versus $942 million in last year's comparable period. Net income totaled $12.4 million, or $1.13 per diluted share compared with the $24.4 million or $2.23 per diluted share generated last year.

Our current year-to-date results include three full quarters of contributions from Chicago Tube and Iron, which we acquired last year on July 1. We are encouraged by the operating results generated by the Pipe and Tube business since the acquisition and it continues to perform well.

Margin pressure persisted during the third quarter and nine months of 2012, reflecting lower steel and nickel pricing versus the comparable periods in 2011. In addition, higher operating expenses, primarily associated with ongoing expansion projects, were incurred during the current year.

Despite the difficult market conditions, third-quarter and nine-month tonnage volumes increased for both flat-rolled and tubular and pipe products, partially offset offsetting the impact of lower margins. Our 5.2% growth in flat-rolled tonnage volume resulted in an increase in Olympic Steel's market share during the third quarter and is indicative of our commitment to customer satisfaction and reliability providing higher-quality products.

As we look forward to the end of the current year and into 2013, we believe steel prices will remain volatile and look forward to focusing on things within our control, such as successfully concluding our capital projects, increasing cash flow and lowering our debt levels. We also reported today that the Olympic Steel Board of Directors approved a regular quarterly cash dividend of $0.02 per share to be paid on December 17, 2012 to shareholders of record at December 3, 2012. And I will now turn the call over to Rick.

Thank you, Michael and good morning, everyone. I will review additional financial highlights from the third quarter and first nine months, but first, let me break out the impact associated with the CTI acquisition that Michael just touched on.

Of the 16% increase in year-to-date sales, roughly 13.5% can be attributed to the acquisition, while the balance is from organic growth. Since we acquired CTI at the beginning of the third quarter last year, our comparative nine-month results in 2011 only include three months of contribution from CTI.

As a result of the acquisition, we have been reporting in two segments, a Flat Products segment and a Tubular and Pipe Products segment. For more information, please refer to the segment data provided in our earnings release and in our Form 10-Q, MD&A and footnotes.

Volume in the flat-rolled segment increased more than 5% during the third quarter to 280,000 tons, up from 266,000 tons last year. Volume increased 3% to 894,000 tons sold for the first nine months of 2012. That compares to 869,000 tons last year.

As a percentage of net sales, our consolidated gross margin contracted slightly during the third quarter to 19.3% versus 19.5% in the second quarter of this year and 19.4% in the third quarter last year.

For the nine-month period, gross margin was 19.5% compared with 20.3% in the comparable period of 2011. The year-over-year margin declines in both periods are due to less robust spot market and intense pricing pressures on carbon and stainless products versus last year.

Pipe and Tube gross margins expanded to 29.0% for the third quarter of 2012 compared with 26.8% in the third quarter of 2011. Last year's third-quarter Pipe and Tube margins were hindered by purchase price accounting requirements that affected cost of goods sold for one inventory turn. For the nine months of 2012, gross profit in the Pipe and Tube segment reached 29.4% of sales.

Operating expenses as a percentage of sales for the first nine months of 2012 totaled 17.1% versus 16.0% last year. The increase is primarily associated with the higher fixed costs related to our expansion efforts.

EBITDA, defined as our operating income on the face of the income statement before depreciation and amortization expense, totaled $42 million in 2012 nine months compared to $52 million in the first nine months of last year.

Capital spending thus far in 2012 has totaled $20.3 million. Year to date, we have invested $14.7 million in the Flat Product segment and $5.6 million in the Pipe and Tube segment. The majority of CapEx related to the completion of our Temper Mill project in Gary, Indiana, equipping facilities in Mount Sterling, Kentucky and Chambersburg, Pennsylvania, as well as our new Streetsboro, Ohio stainless and aluminum facility that just opened during the third quarter. In addition, we procured new laser equipment for CTI.

Total capital spending in 2012 is anticipated to be approximately $25 million for the full year, and will ultimately depend on timing of certain payments at year-end.

Commencing in 2013, our capital expenditures are expected to decrease below our depreciation expense, which is at an annual run rate of approximately $20 million.

Our effective income tax rate in the first nine months was 39.0%. We expect our full-year 2012 income tax provision to remain in this range. Last year's 33.3% effective tax rate was unusually low, and that was due to changes in unrecognized tax benefits that we recorded due to the lapsing of statute of limitations.

As expected, our inventory turnover rate is improving in our flat-rolled segment. By the end of the third quarter, our turnover rate had increased to 4.3 times compared to 4.0 times at the end of the second quarter. We still have some room to improve, as we are targeting a return to our historical turnover rate of closer to 5 times. We did reduce our inventory in the third quarter of 2012 by almost $24 million.

As a result of the CTI acquisition, about 16% of our consolidated inventory is stated on LIFO. Again, we had no book LIFO reserve at September 30, 2012, and that is because our Pipe and Tube inventory on LIFO has 2012 year-end projected quantities and pricing points that are below those of the July 1, 2011 acquisition date. So in essence, our CTI LIFO inventory is stated at FIFO at September 30, 2012.

Our flat-rolled receivable DSO totaled 41.5 days. Pipe and Tube DSOs totaled 31.8 days. So our collections and our receivable quality remain very good.

Our debt at quarter-end totaled $277.4 million. That is down $11.1 million during the third quarter. And our availability was $75 million at September 30. Going forward, we are focused on using excess cash flow to further reduce our debt. Both debt and inventory levels in fact have continued to decline since quarter-end. And finally, our shareholders' equity increased to $27.46 per share at September 30, 2012.

Now I will turn the call over to David.

Thank you, Rick, and good morning. I want to continue to brief all of you on our startup and growth initiatives. And we have been highlighting our six facility startups, which have added some 550,000 square feet of new flat-rolled plate and white-metal processing capabilities during the past 21 months. In total, we incurred about $2.7 million of pretax startup losses in the first nine months of 2012 related to these growth initiatives.

Our sixth and final project is the new stainless and aluminum specialty metals facility in Streetsboro, Ohio, which began operating during the third quarter amid plunging nickel surcharges in the market. The addition of a physical location in Streetsboro with internal control of slitting, flattening and cutting capabilities in stainless and aluminum provides for continued growth in the food services and transportation markets.

Our stainless and aluminum product sales are growing, and now make up about 10% of our consolidated sales mix. Our white-metal sales have grown 36% compared to last year, while industry shipments of these products were down, per the Metal Service Center Institute's September 2012 Metals Activity Report. We expect the Streetsboro facility to ramp up quickly and be profitable in 2013.

On to our Gary, Indiana Temper Mill facility, which has been the fastest startup of our three temper mills and continues its march toward full capacity. The $28 million project provides Olympic Steel with up to 150,000 tons of new tempered sheet capacity to expand our flat-rolled business and satisfy our growing value-added customer base.

Since the first coil was processed in December of last year, 2011, we have successfully increased throughput and shipments from that zero point to 330 tons per day so far through 2012, which has brought this facility up to a EBITDA-neutral status.

Going forward on a market outlook perspective, finally, let me briefly comment on current market conditions. The global oversupply of steel and negative market sentiment has challenged our financial performance this year. While our shipments improved in the third quarter and we gained market share, the supply side pressures continue, resulting in declining steel prices and lower margins, especially in the carbon and stainless flat-roll areas.

The fourth quarter will be impacted by the expected year-end seasonal weakness, few ship days and potential disruptions associated with Hurricane Sandy.

Heading into 2013, the steel price increases announced since mid-October should bring some relief from the continued climate of price declines experienced throughout this year, save a slight uptick in August of 2012. It appears that market pricing has reached a bottom in October and the seasonal price increase could be coming earlier than in the past, supported by higher November scrap prices and lower production rates.

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

(Operator Instructions) Luke Folta, Jefferies.

Good morning, guys. Can you hear me? A couple questions. David, you talked a bit about what the impact on startup costs were for the new facilities.

I was hoping to try to single out Gary, if we could, just for a minute, because it is operating-EBITDA-neutral, as you said. But when I look at your results for the quarter, the overall expense ratios were a little higher. And I guess I'm trying to get at if we remove Gary, can you give us a sense of what sort of cost impact that Gary had in the quarter?

I'll take that question, Luke. So first of all, we are not going to break out individual units' expenses and margins. So obviously, as David said, we started with zero, so we've ramped up. We are basically now running a full first shift, so we've got -- as we went from first to second to third quarter, we have added people. Third quarter, for one shift, we've basically now got a full staff there.

So in terms of labor, I would tell you as we bring new business on for next year, we will be looking at adding a second shift. But right now, third quarter, we would have the full complement of the expenses.

First quarter, obviously as we started out, we were EBITDA negative. Second-quarter. we cut into that EBITDA negative. By third quarter, we were EBITDA neutral.

Going forward in terms of expenses, as I said, looking at 2013, I'd tell you that the two areas of expense that will increase as we add a second shift out in the plant. And then on depreciation, the depreciation will tick up because we used a straight line half-year convention. So year one, you've got basically a half year of depreciation.

So while I didn't give you exact numbers, which we are not inclined to do, hopefully, that gives you directionally some input.

That helps. And looking on a percentage utilization basis, can you give us a sense of where Gary is utilized right now. And also the step-up in D&A, what will the all-in D&A be once the Streetsboro and Gary are up and -- fully up?

Luke, I'll comment on the temper mill -- David here -- I'll comment on the temper mill's capacity. As I said earlier, we are up about 330 tons. And then there is toll processing on top of that, and we don't even include that in on the daily run, although that is fairly substantial.

I would tell you we are at about 65% of the capacity right now. And it has been a continuous ramp-up, even through the slowdown in third quarter. So we are very satisfied with that.

Just from an additional perspective, as I commented, of our three temper mills, this has come up the fastest. This facility is also unencumbered by any other pieces of equipment. So it is just strictly a temper mill in this 177,000 square feet. And again, running at about 65% of capacity.

Rick, can you talk about depreciation?

In terms of the annual depreciation?

Yes, once we are fully -- the full depreciation associated with the (multiple speakers).

I don't have the numbers in front of me, but basically, it's a $28 million expenditure, Luke. Rough numbers, I would say probably, because you've got building and processing equipment, you've probably got about a 15- to 18-year total blended life on that stuff. So -- I don't have my calculator in front of me.

But basically, a total depreciation rate would probably be close to the $28 million investment divided by about 18 years.

Okay. Last question if I could. Is there any color you can give us at this point on the order book and how it is shaping up for 2013? Maybe just indications from your OEM customers on what they are seeing. And are we looking for up-buyings year-over-year with some of those big clients, or down?

I think it is a mixed bag, Luke. Quite frankly, we have any number of OEMs that are projecting a fairly strong 2013. We have some of the larger players who have been in the press that are indicating smaller participation. We are on a project-by-project or platforms -- certain platforms that may or may not be affected by the global turndown.

As it relates to domestic participation, we see continued uptick in our market share.

Great. Thanks.

Richard Garchitorena, Credit Suisse.

My first question is basically on -- you did a good job in terms of increasing the volume this quarter versus last quarter, especially versus the industry. And just wondering, was there a mix shift that was worth noting, quarter over quarter?

Only to the extent, Richard, that we brought on the volume of the temper mill. So within the mix of flat-rolled versus fabrication versus tubing, we've probably seen -- and then, of course, the white goods, as we talk about -- we've probably seen a little bit more increase in the flat-roll side of the business, just by the additional aspect of the tonnage coming off the temper mill.

Okay. And then given that, do you think margins should improve, given the fact that you are ramping up and on the temper mill, the startup costs should go away, and you have the Streetsboro, I guess, ramping up as well?

Yes, I would just say we would expect that the margins are going to be obviously indicative of the volatility of the pricing, is probably a bigger factor than almost anything else. We would think that the traditional flat-roll business is producing a lower gross margin than the other segment of our business, traditionally. Although the white goods have a little bit lower margin, but sort of net out pretty well.

So with the increase of flat-roll, without the increase of fabrication, we would probably see a small margin degradation historically. But we anticipate the growth in the fabrication side as well.

Okay, great. Then just touching on Chicago Tube and Iron, can you talk a little bit about what is driving the volume growth there and what do you see over the next couple of quarters?

Don, do you want to comment on that, please?

Yes, I would. Don McNeeley here, and thank you, Mr. Chairman. We are having a good year. We have seen some softening in the third quarter. But to color it up a little bit and just take two moments here, we've got this fiscal cliff and going to have the need to expand the debt ceiling once again at the end of the year. We saw a stock market reaction yesterday to the election results. We now have the question of whether or not we are going to see an extension of the Bush tax credits. We've got a Democratically-controlled Senate, Republican-controlled House, and that sets the stage for further acrimony.

And what is the takeaway for that for Tubing? The businessmen and women that run our customers, they are adopting somewhat of a wait-and-see attitude, a little bit of a stand on the sidelines. The fourth quarter is going to tell us much about what we think will unfold in 2013. There is a lot of uncertainty right now.

Dave mentioned earlier the MAR report, which is the benchmark by which we measure market share. At Chicago Tube and Iron, I am very pleased to tell you we've garnered market share increases every month since the Olympic acquisition. And we are very proud of being able to achieve that without market gross margin denigration. We are up to a 29% gross margin in the third quarter, over 26% in the second quarter.

And to drive this all home, our business is very distinct and different than Olympic's. We are in a niche market, and we offset volume limitations in a niche market with a highly value-added, highly engineered platform. And we expect very much to continue that in 2013.

So we've got a 100-year history of consecutive profitability. This is probably the deepest into a year that we have been without a good feel for the next year. So I follow the leading economic indicators of my colleague, Dave Wolfort. I've found his track record to be very accurate. And we will feed off that for our budgeting. So fourth quarter we are watching very closely. We are having a good year, but the degree of confidence in that year is still somewhat suspect.

Great. My last question, just touching on David's remarks that it looks like you do think we are past the bottom on pricing. Can you give us your view on the recent price hikes in terms of what -- are you getting any pushback from your customers? How much do you think those price hikes will stick going forward? I know you said prices will be volatile, but just some color on that would be great.

I think that they were needed, especially US Steel's lead on October 16. I thought it was a terrific leading move, well-needed. That was the trough in the marketplace. And then with the support of scrap pricing here in November and then AK's move of the other day, and Nucor along with that, quite frankly, Richard, I think that the first increase has been absorbed. And I think part of the second increase will be absorbed, and I see a marketplace moving up from a very sour bottom in the recent months. So we do see the uptick.

Part of that also, Richard, is the fact that inventories have declined quite a bit. We saw significantly less spot business in the third quarter. We are starting to see more spot business today because inventories are down. We had a tremendous amount of -- we had, as Don indicated, and others, we saw an increase in supply in the first nine months. Domestic supply was up dramatically; obviously, imports were up. Pricing in July from June was down about 8%. As we referenced, we saw a momentary uptick in August and then a slide down. We hit that trough, and now these increases are supporting an upward momentum that is colored around narrower inventories and more spot market participation.

Thank you.

Tim Hayes, Davenport.

Good morning, gentlemen. A couple questions. First, on the flat products, do you have the direct tonnage and then the gross profit for the segment?

Yes, Tim, let me find that for you. We will file our 10-Q here this afternoon.

He is looking at it up, Tim.

While you do that, my second question, for Mike. Listening to Senator Boehner's comments yesterday, he seemed to be reaching across the aisle quite a bit, maybe more than normal from --. If you heard what he said, anything that he said that maybe surprised you, encourages you, that the two parties could come together and start working more closely together to resolve some of our country's issues?

Well, it is hard for me to speculate on the reality of Washington. When Boehner is reaching across the aisle, it is usually with alligator arms. So when you see Harry Reid's sort of response to Congressman Boehner, I am not encouraged that, after spending $2.5 billion, that we wind up in the same place. When you look at what the government has to really try and deal with is the entitlements. It is not about taxation. It is about the entitlements. We're chewing up all of the revenue into entitlements.

And I don't see any kind of discussion in real substance that says that we are going to touch the thing that is driving the cost structures up in terms of attacking those entitlements. I think it is a good reflection on the change of the dynamics of America, and we all just have to adjust to the obvious same reality. It's not a new reality, it's the same reality. So no, I am not encouraged.

Tim, it's Rick. So you wanted the flat-rolled tonnage?

Yes, the direct. I got the 280; I just wanted to get the direct (multiple speakers).

It was 262, and about 19,000 of toll. So 262 direct, about 19,000 toll.

Do you have the gross profit for the segment handy?

Yes, it was 17.1%.

Okay, thank you.

(Operator Instructions) Mark Parr, KeyBanc.

Thanks very much. Good morning. Can you hear me all right? I'm just calling in from the road.

Yes, you're fine.

Okay, terrific. I was wondering -- and I may have missed this, but we had seen a significant upside in plate imports. And I just wonder, Dave or Michael, if we could just get your color on how problematic the carbon plate imports have been here for second-half profitability, and where you would see the import availability heading into the first part of next year.

David here. I'll comment. As you well know, we had an onslaught of imports this year. Plate was a big part of that. So in the as-is plate market, of which we do participate, but not as much as we did in years past because of the compression of margin, and we've gone downstream, as you well know, into value-added.

So while there is quite a bit of import plate in the marketplace, we participated very sparingly with that market -- with that product because of our need for consistency, the domestic production into our value-added operations. But there is no doubt that foreign plate has put a lot of pressure on plate pricing and that then the domestic producers have had to respond in order to maintain their market share.

You see that pressure easing up here as you move into the first part of next year?

I think, Mark -- the answer to that is I think it was pretty severe this year. And I do see it easing up, but I don't see a significant differential between domestic pricing and foreign pricing. And as long as that band is fairly narrow, along with some other issues, Chinese production, so forth, I don't think we will have the same pressures. But again, that band, that differential between foreign pricing and domestic pricing has narrowed.

Dave, you're one of the best market watchers and followers that I know of, and I really do appreciate your color. One thing that we've definitely noticed this year with the falloff in export pricing out of China is it seems like there is less upside support for domestic pricing because of that spot China price. Could you give some -- just give us an update on what the cost is to bring a coil into the Midwest out of Shanghai? What (multiple speakers) number?

We wouldn't see that. Mark, we wouldn't see that. What we would see is export out of China moving into other countries and product from those countries which are allowed to be exported into this country, that product moving here. But quite candidly, on the flat-roll side, we saw pricing degradation on all products from the third week of January forward, with a little respite, quite frankly, mid-March, and then rekindling of marketplace erosion from April 1 through June. And then it hit that trough in July, where it dropped another 8%, without hitting the actual numbers.

And then we had a little staccato move where pricing bubbled up with some hope in August, and then started to slide. And now we have the support of mid-October going forward. But all of that is exacerbated by just too much global production, inclusive of this country.

So we had too much production, and you and I and all of us have talked about the RG Steels that aren't anymore, those that just chose to continue to produce without curtailing the supply; and the demand, while it was growing and our numbers show that our participation grew, they didn't grow at the rate that supply grew, neither domestically nor from an overall perspective, from a global perspective. So it is too much supply and too little demand, and it is really not any more magical than that.

Appreciate the color, and good luck on the fourth quarter.

Thank you, Mark.

I am showing no further questions at this time and would like to turn the conference back over to Mr. Michael Siegel for any closing remarks.

Thank you. As a reminder, it is our policy not to provide or endorse any forward-looking earnings estimates for the upcoming quarter or year. We anticipate releasing our fourth-quarter and full-year 2012 earnings on or around February 21, 2013. So this concludes our call, and again, thanks for your participation and interest in Olympic Steel. Bye-bye.

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