Olympic Steel Inc (ZEUS) 2012 Q4 法說會逐字稿

Good morning, and welcome to the Olympic Steel fourth quarter and full year 2012 conference call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event 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, 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 and press releases filed with the Securities and Exchange Commission.

Today's live broadcast will be archived and available for replay on Olympic Steel's website. At this time I would like to introduce your host for today's call, Olympic Steel's Chairman and Chief Executive Officer, Michael Siegal. Please go ahead, Mr. Siegal.

Thank you, operator. Good morning, and thank you for your interest in Olympic Steel. On the call with me this morning to review our fourth quarter and full year 2012 results are David Wolfort -- is David Wolfort, our President and Chief Operating Officer, and Rick Marabito, our Chief Financial Officer. I will provide a brief overview of our results for the quarter and full year, Rick will provide additional color on the financials, and then David will provide an operational update. After that we will open up the call for questions.

We reported this morning that net sales for the fourth quarter of 2012 totaled $292 million, down 9% from $320 million in last year's comparable quarter. For the full year net sales increased 10% to a record $1.4 billion, owing to the inclusion of four quarters worth of contributions from Chicago Tube & Iron. 2011's financials only included CTI's results from the second half of the year, since we acquired it in July of 2011.

As disclosed in the press release, based on our annual goodwill impairment testing, we concluded that goodwill related to our flat products Southern region had become impaired. Consequently at the end of the year we wrote off $6.6 million in goodwill associated with the Southern region's 2006 North Carolina acquisition.

This combined with higher depreciation from capital investment projects and continued margin pressure during the quarter resulted in a reported net loss of $10.1 million or $0.92 per diluted share, compared with the net income of $600,000 or $0.05 per diluted share in the fourth quarter of 2011. For the full year net income totaled $2.3 million or $0.21 per per share, compared to $25 million or $2.28 per are diluted share last year. The goodwill write-off negatively impacted EPS by approximately $0.60.

Moreover the startup operating expenses, depreciation and interest associated with our six new locations adversely impacted EPS by about another $0.25. We believe the growing pains are now largely behind us and are pleased to report that collectively the new locations generated positive EBITDA for the year and are making meaningful contributions to net profitability in 2013.

Needless to say much of the progress made by Olympic Steel in 2012 is not readily apparent based on reported financial results. Other than previous -- perhaps higher operating expenses associated with our new equipment and facilities. That didn't make sense, but I'm sorry.

David will review these and our other growth initiatives in greater detail in a moment. However, one point I would like to make is that the vast majority of cash investments related to the multiyear capital expansion projects have now you been concluded. Now our focus turns to generating the anticipated increase earnings and cash flow in particular as we continue to ramp up these projects and improve fixed cost operating leverage.

The tubular and pipe products segment turned in an outstanding performance in 2012. In fact, that business has recently outgrown its existing distribution facility near St. Paul, Minnesota. To allow for continued growth we will be enlarging and enhancing that location. The expansion will provide more floor space, additional crane capacity and better throughput capabilities, increasing the facility's footprint from approximately 90,000 square feet to 130,000 square feet.

During the past year we also successfully grew you Olympic Steel's is specialty metals markets share in both stainless and aluminum arenas. We believe the niche sectors are ripe for opportunistic growth, and we will be able to leverage our strength and satisfy a growing roster of diversified customers. We have increased our activity in the stainless market and are encouraged by the healthy demand from the food service industry.

Earlier this week 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 March 15, 2013, to shareholders of record on March 1, 2013. And so I will now over the call to Rick for the financial highlights.

Thank you, Michael, and good morning, everyone. I will cover additional financial highlights for the quarter and the year, and then I will turn the call over to David for the operational review.

As most of you are well aware and as Michael just pointed out, we acquired Chicago Tube & Iron on July 1 of 2011. And this operation is reported as our tubular and pipe products segment. From the date it was acquired through the end of last year, CTI contributed $118 million to consolidated net sales in 2011's second half.

In 2012, the full year contribution to net sales from this segment was $246 million, which accounted for our consolidated sales growth. On a year-over-year pro forma basis, sales at CTI were up about 3% over the prior full year, and gross profit increased to 29.7%, compared with 28.3% last year.

During the fourth quarter volume in the flat roll segment decreased by 3.4% to 249,000 tons from 257,000 tons in last year's comparable period. For the year tonnage was up 1.4% compared with 2011, reaching 1.14 million tons.

Consolidated gross margin expanded modestly during the fourth quarter to 19.5%versus 19.3% in the third quarter of 2012 and 19.4% in the fourth quarter of 2011. The quarterly uptick resulted primarily from the increase in margins for tubular and pipe products. This more than offset margin contraction in the flat products is segment, which dropped 40 basis points during the quarter to 16.7% compared with 17.1% last year. We had been selling higher priced inventory purchased earlier in the year, and by the end of the quarter we began to turn lower cost raw materials.

For the full year consolidated gross margin was 19.5%, down from 20.1% last year. The year-over-year margin contraction was due to the less robust spot market, declining prices throughout the year, and more intense pricing pressure on carbon and stainless products versus 2011.

Operating expenses as a percentage of annual sales totaled 18.2% in 2012, compared with 16.6% last year. The increase resulted primarily from noncash items such as the goodwill impairment charge, which totaled 0.5% of sales, and higher dap depreciation and amortization. In addition, we incurred routine startup operating expenses associated with our expansion efforts.

As expected capital spending declined during the year to $23.4 million, down more than 40% from $39.5 million in 2011, as the majority of our multiyear capital expansion projects were completed in 2012. Starting with 2013, capitalized investments are projected to be less than depreciation expense, which is currently running at approximately $20 million per year.

We are planning for $15 million in capital spending in 2013. The only major project slated for this year is the expansion at our tubular and pipe products facility in St. Paul that Michael just mention. This location serves as a distribution hub for the upper Midwest, and as that business has outgrown the exist facility's capacity, this expansion will help us keep up with customer demand.

Our effective income tax rate for 2012 was 77.5%, compared with 33.4% last year. 2011's rate was slightly norm -- lower than normal, and that was owing to changes in unrecognized tax benefits in 2011. The rate in 2012 was unusually high due to the impact of the nondeductible $6.6 million goodwill impairment charge recorded in December.

This increased our effective tax rate by approximately 30.5%. The remainder of the tax rate reconciliation from our normal change of 38.5% to 39% is related to tax valuation reserves established in 2012 and then the impact of lower pretax income.

Our flat products inventory turnover rate was four times in 2012, less than our target of approximately five turns and lower than last year's 4.5 turns. Inventory at year end was $290 million, essentially flat with the $289 million at the end of the third quarter, but up $12 million when compared to the end of 2011.

In light of declining steel prices that persisted throughout the year, our inventory levels were higher than we would have liked. Longer contract purchases compounded by initially stocking the new startup locations contributed to the amplified inventory levels. We anticipate our inventory will decline during are the first half of the year, and our turnover rate is expected to improve in 2013.

The quality of our accounts receivables remains solid. Flat roll DSO totaled 41 days, and tubular and pipe DSOs were 31 days. Overall the financial health of our OEM customers appears to be robust.

We also made good progress in reducing our debt in the fourth quarter. Our debt at year end totaled $242 million, down $35 million from the $277 million at the end of the third quarter. We also had $63 million available under our asset-based loan at December 31.

Interest and other debt related expense increased to $8.4 million, compared with $6 million in 2011. Our effective borrowing rate, exclusive of deferred financing and commitment fees, was 2.7% in 2012, and that is down from 3.1% in 2011. The increased expense was the result of higher average debt balances resulting from the CTI acquisition, which did not fully offset the lower borrowing rates on our asset-based lending agreement. Going forward, we intend to allocate excess future cash flow to reducing debt and reinforcing the balance sheet.

And finally, shareholders' equity, after the $6.6 million goodwill impairment charge, stood at $26.54 per share at the end of 2012, and that is up from $26.28 at the end of last year.

Now I will turn the call over to David.

Thank you, Rick. Good morning to all.

In 2012 we began with some encouraging signs of market strength as hot roll prices crested above $700 a ton some 13 months ago, January 2012. However, are after peaking in the first quarter, prices declined steadily until the third quarter when a short lived recovery was quickly stalled out by the uncertainty that characterized our fourth quarter of 2012. Here prices declined approximately 23% by November when compared to the beginning of the year.

From an operating standpoint we made terrific progress on a wide variety of initiatives, including our new startup facilities that we believe will be duly reflected in future profitability. While our six new store fronts created a drag on financial performance in 2012, as Michael pointed out, they are now making a substantial positive contribution to net earns and cash flows in the current year.

Our largest capital growth project the new, temper mill in Gary, Indiana, is our most efficient operation and is now contributing significant tonnage and accretive earnings to our consolidated results. This operation continues to outperform the startup sequences of both of our previous temper mill installations. We are very encouraged by its initial performance and anticipate an increasing contribution to earnings as we transition from base loading the equipment to pursuing higher margin market opportunities.

From a market share perspective we also had good news to report. We increased volume of direct tons sold and significantly grew our total processing and value added tonnage. These increases were offset by lower sales volumes associated with trading sales activity during the full year of 2012.

Our stainless and aluminum product sales continued to grow faster than their respective markets, as we successfully penetrated our selected niches for these products. Our sales of white metals grew more than 22% in 2012, which is impressive given the industry wide sales have been flat at best according to market sources. This is a key element to our strategic objective to moving up the industry value chain. We see excellent opportunities in specialty metals, and expect this to be an area of growth in the future.

As we look forward into 2013, we have a number of reasons to be optimistic. January marked a rebound in order activity, likely the result of some pent up demand owing to the fourth quarter downturn of volume and pricing. We are encouraged by firmer pricing, which should help margins. Compounding the price effect is the fact that we have moved through much of our higher priced inventory, thus lowering the average per ton cost of current sales.

We believe the combined impact of our growth projects, coupled with better inventory management and pricing disciplines for small and niche orders, will result in improving financial performance in 2013 and beyond.

With that we will now open the call for your questions. I turn it over -- back to you, operator.

Thank you. (Operator Instructions). And the first question comes from Martin Englert from Jefferies & Company. Please go ahead.

Good morning, everyone.

Good morning.

I wanted to get an idea how much you thought the working through the higher cost flat rolled inventory may be negatively impact the fourth quarter there? Do you have any sense?

Well, I would just say, as David pointed out, the price decrease really perpetuated from January through November, and then the fourth quarter we saw the preponderance of that. And then the prices bottomed out there at the end of November. So I -- as you look at our flat roll margins you see that. And if you look at the fat roll margins in fourth quarter of 2013 versus 2012 -- I'm sorry, 2012 versus 2011, that delta in the flat roll margins is the impact as I'd quantify it.

Okay, so looking out into the first quarter now we would expect some improvement in that then?

Yes.

Okay. And then just looking at the end markets there, can you talk about some of the demand trends that you are seeing out there among the different end markets? And then also if you are seeing any continued, I guess, inventory destocking among any of the OEMs out there, and that if it's overshadowing real demand?

Martin, I will comment. David here. We saw in October a real stall from the OEMs' perspective. We attributed that to the national elections and some of the issues -- legislative issues particularly around the fiscal cliff.

And so from a month over month perspective for the first nine months of 2012 we really had increased sales with every month, with the exception of March where we had significant international sales in 2011. That trend reversed itself in October, November and December, as we saw the OEMs really stall. We have seen that come back in January to the same extent that we were looking at it in November.

Of course, we are early on in the first quarter. We saw pricing rebounded slightly, as Rick has clarified. And so we are on a better trend.

Okay thanks. That's helpful. And if I could, one last question there. For the -- do you have sales tons and [tolling] tons for the quarter?

Sure. Let me just turn to that. Give me one second. And you know we only -- in our 10-K we report our flat products tons only. So this we do not report volume for pipe and tube. So for 2012 I have the total is 1.142 million. The breakout direct is 1.062 million, and the toll is 81,000.

Excellent. Thank you.

You're welcome.

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

Good morning, gentlemen.

Hi, Mark.

A couple of quick questions. If you look at January activity, you have indicated it has picked up a bit. How does that compare with January of last year?

Rick, you probably have to comment. I'm on the calendar.

Could we get back to you? And you want --

We've got -- well, the reason we are hemming and hawing, Mark, is we have different ship days this January versus last January. The volume has been pretty flat comparably year-over-year, January to January on a per day basis, but we have got a different number of day in there.

But we have definitely seen an improvement from fourth quarter volumes on a per day basis. And I'm not talking about just the last two weeks of December when everyone shut down, but the trend was obviously decreasing in the fourth quarter as we moved through the fourth quarter, October through December, and then we have seen a rebound in volume. And pretty similar to last year.

Okay. The daily amount -- the daily numbers are more meaningful anyway than -- because if you have different days. I appreciate that color. Because looking at the MSCI numbers, I think the January comp was down -- it was down between 5% and 10%. I think it was down 7%.

And so you guys clearly outperformed. I'm just wondering if you could give some color on the end markets where you saw the most upside? I think -- Michael or David, I think you mentioned maybe, what, heavy equipment markets? Were there any other areas where you saw a noticeable pickup in momentum?

Mark, David here. We basically saw a significant pickup when you compare it to fourth quarter. I mean, there was a real dropoff in October, November and December, and as I mentioned earlier, on a month over month basis compared to 2011 those were our three short months. And as we talked about, we lost some tonnage there principally tied -- all tied to the fact that the OEMs had really slowed down with some significant concern about which way we were going legislatively and, again, based on national elections.

We have seen that all come back. That has all come back, as Rick said. It has all come back. There are surges in the marketplace. It is not an even flow. But the tonnage has repaired itself, and we look to 2013 for some nominal growth in terms of market share for us as we bring on our new facilities, and we see most of our OEMs at a pretty even pace throughout the year.

Okay. Terrific. And if I could just ask a follow-up on the -- you indicated you are seeing pricing look stronger. And at least in the last couple of weeks with the February scrap numbers coming down pretty meaningfully -- like yesterday Nucor cut prices on merchant bar quality and also on structurals. And those were base price cuts. Those weren't -- those were in addition to any scrap surcharge change. And we have kind of been seeing -- on the flat rolled side we've been seeing kind of like a gradual easing. I just -- and the plate markets haven't really seemed all that robust either. I'm just curious where you are seeing pricing stability or are pricing upside, if you could give some color.

Yes, I would be happy to. Nucor did reduce the price of that -- on those items, andfortunately we don't sell them. So that is the good news. They did raise the price on plate, as you know, by $30 a ton, and so did SSAB and went along with that.

Mark, I will just dial it back a little bit and tell you that, as you well know -- because you obviously analyze this anyhow -- but as you well know, October was the lowest pricing for the entire year. And so as we took a look at the marketplace, we traditionally expect July to be the low end of the market, and July was the low end of the market until October occurred. And then there was a $20 a ton deltabetween the low end -- at least from our perspective -- between the low end of July and the low end of October.

That has all come back. That has recovered, and we see flat pricing. Scrap moved sideways in December and January. You're right, it is down $9, $10 a ton for February. Expectations are that it is going to go up and probably -- up in March and probably equal to where it was in January.

So again, much like you have written early on in the fourth quarter, and quite frankly we think you are spot on, we see flat prices for the year. And we are just in that flat price mode right now. So we don't see much deflection on pricing in the first quarter.

Now, having said that just to be a little clarity the there, Mark, we are seeing movements in nickel pricing. Get off of the carbon side, the nickel pricing seemslike it has some momentum in the positive side.

Yes. No, that' s -- we've noticed that as well. I just appreciate the color, though, on the carbon side, and good luck on the first quarter.

Thank you.

Our next question comes from Aldo Mazzaferro of Macquarie. Please go ahead.

Hey, gentlemen, how are you.

Great.

Good. I have a couple little questions. Michael, when you mentioned that the opportunity is ripe for the exploitation of the stainless and aluminum markets, does anything of that have to do with the fact that the aluminum warehouses associated with the LME are essentially very slow in getting product to the market? Does that give you more opportunity do you think in the marketplace?

The answer is some what, Mark. I mean, obviously we have bigger penetration -- not Mark. Sorry, Aldo. We have a bigger penetration on the stainless side. We are such a small player in the aluminum overall that, again, from our perspective we have got some keen opportunities as it relates to penetrate specific markets on aluminum where we are getting great opportunities.

Again, but I don't know that specifically impacts our business so much, but clearly on the stainless side the rising tide looks good. We've got some great opportunities in the food service business, as I mentioned, as well as some of the transportation industries as well. So I think -- again, we are a smaller player than some of the other guys, but we are really growing obviously our penetration rapidly there. But,David, if you want to --

Yes, let me get a little granular for you Aldo. First of all, we really didn't sell any aluminum prior to 2009. We had a toe in the water 100 years before that with our first acquisition. But we entered the market in 2009. The President of our Specialty Metals group, Andy Greiff, has led us through that.

And quite frankly we find it as a terrific complementary product shipping alongside of some of our cold roll participation in the marketplace. We elevated the stainless, as Michael as well said, and I will bring your attention to the fact that one of the six new store fronts that we did open up is focused on specialty metals, stainless and aluminum distribution And we have seen some really terrific growth there.

And again, as we have stated, that is part of our specialty emphasis, and we are looking to grow that value-added participation. So I don't think we are impacted too much by what you suggested as we are more impacted by our traditional business customers using aluminum and we didn't participate, and we continue to grow that participation now.

Right. So your buying of aluminum is coming from the aluminum producers rather than from distributors -- other distributors, right? Or would you say it is a mixture?

I don't think we compete really with the producers.

No, he was asking where you are buying it --

No, buying, I mean. On the buy side.

Oh, buying. Sure, we're buying it from the mills.

From the mills. Right, okay.

Yes, absolutely.

And just on another track, I heard Rick mention that the turns on your cost of raw materials started to get better towards the end of the quarter?So would you say if I were to guess that the average for the quarter on metal spreads was lowest in the October and highest in December, would that be a good guess?

For the quarter?

Yes, for the fourth quarter.

Probably, sure.

Yes.

That's correct.

Okay. And the -- and I would bet the outlook going forward then, with flat prices, means you would probably be likely to maintain the end of year type spreads, right? In your business?

Yes.

Okay. And then I had just one little follow-up at the end. You mentioned there was $0.25 of startup costs. I missed whether that was a year or a quarter number?

That was for the year, Aldo.

For the year, okay. All right.

Thanks. Thanks very much.

Thank you, Aldo.

(Operator Instructions). Our next question comes from Charles Bradford of Bradford Research. Please go ahead.

Good morning.

Good morning, Chuck.

I don't want to overdo the stainless bit, but I'm very confused about how this thing is developing with a new million ton melt shop in Alabama owned by the Europeans,Allegheny spending $1 billion on a hot mill. This would all seem to be in our favor as a buyer of stainless, but could all this excess supply be disruptive? How do you look at it?

I think your first analysis is the best. I think it is beneficial to us. I think there is some terrific disciplines out there. But needless to say it is a -- as you well know, Chuck, all markets are somewhat limited, and if you have more supply than you have demand, obviously it is going to put some pressure on --

Our strength is really in our ability to distribute on time and give the customers the processes that they need, not so much in competing with lower volume pricing. So on the stainless business, as Michael well said, influence by nickel surcharges, we look for continued growth there. And we welcome the new capacity, and our 33 locations help us distribute more product.

I know this may be a some what unfair question, but do you hear anything about what is going on at ThyssenKrupp on the steel side? I understand people have signed confidentiality agreements, but do you have any --

We are not one of them. I can certainly tell you that, Chuck. No, I don't think we know anything more than what has been publicized in the newspapers to date. You heard of the bid, the combined bid, the next bid, andthen Thyssen says things are progressing well. SoI don't think we have any knowledge other than what has been in the public papers.

But these are all of the same players who supposedly were going to bid for RG, and none of them showed up at the auction.

Well, yes, what there has to be willing buyers and willing sellers at the table. There might be willing buyers, but there may not be at the seller's price. Who knows. We wait with great anticipation, as you do.

Thank you very much.

Okay.

This concludes our question and question and answer session. I would like to turn the conference back over to Mr. Siegalfor any closing remarks.

Thank you, operator. Once again, we want to thank all of you for your participation on this morning's conference call and for your interest in Olympic Steel. And we look forward to sharing first quarter results with you in May of this year. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.