Olympic Steel Inc (ZEUS) 2013 Q3 法說會逐字稿

Good morning. And welcome to the Olympic Steel third quarter 2013 conference call.

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 all for your interest in Olympic Steel.

On the call with me this morning are David Wolfort, the President and Chief Operating Officer; Rick Marabito, Chief Financial Officer; and Donald McNeeley, the President and Chief Operating Officer of Chicago Tube and Iron.

I'll start with an overview of our strategic process. Rick will provide details on the third quarter and year-to-date financials, and then David will conclude our prepared remarks with his operational update. After that, we will open up the call for questions.

During the third quarter, we continued to execute our plan to increase the value content in our products and services and reduce our sensitivity to metal prices. We wouldn't mind a little help from the market in terms of better demand, but we're not being complacent and waiting for that to happen. We are strengthening our operating teams by making several organizational realignments to support our growth.

David will elaborate on recent operating promotions and redeployments. But I would like to highlight the key addition of Mr. John Howard to our management team. Mr. Howard joined Olympic Steel in September after previously serving as a consultant to the Company. He has been instrumental in the implementation of our lean operating initiatives. We look forward to his full-time contributions as we shift from transformational capital investments of the past several years to optimizing returns from these new assets.

Mr. Howard will focus on further improving operational efficiencies at all facilities and advancing the integration of our consolidated operations. His actions will reduce costs, while enhancing customer service.

During the third quarter, our market share continued to increase in stainless and aluminum, and we are now operating a cut-to-length line in Latrobe, Pennsylvania, supporting the growth of our specialty metals businesses. Integration of pipe and tubular products in geographies already serviced by flat products continues in Cleveland, Kentucky, and Monterrey, Mexico.

The expansion at CTI's St. Paul facility is on-budget, and we just received our occupancy certificate. We're excited about the additional physical space and the enhanced branding that site provides us in the pipe and tube market.

On the flat product side, we are increasing integration with key accounts and partnering with customers on more complex programs such as kitted parts and heavy assemblies. This results in long-term benefits to both Olympic Steel and our customers by increasing the value and component of our capabilities while allowing customers to focus on their own capital returns, which typically are not in metal procurement and initial-stage processing. These activities parallel our long-term approach to the market and often result in expanding margin potential and reducing cyclicality for both Olympic Steel and our customers.

In the service center business, if you don't adapt and improve, you will not be successful. We have developed operating skills ideally suited to satisfy evolving industry trends. As more OEMs desire to outsource their multistage metal processing, Olympic Steel is quickly becoming the value-added supplier of choice.

Successful execution of our growth strategy has resulted in Olympic Steel becoming one of the top 10 largest service centers in North America. And that's according to the Metal Center News Annual Survey released last month, which ranks the largest service centers. This is a genuine testimony to where we are headed.

When we attained our first billion in sales, we immediately set our sights on reaching the second billion, while improving net profit margins in the process. Our six new facilities have all transitioned to profit contributors, and our management team is ideally aligned with the right people in the right positions to deliver profitable growth.

Despite plodding through less-than-ideal market conditions this year, we are increasing market share in the chosen areas of pipe and tube, stainless and aluminum, and fabricated parts and assemblies; while not forsaking our core carbon businesses. We are optimistic about the future. This is an exciting time at Olympic Steel, and we're all working very hard to achieve the next level of success. We also announced this morning that the Board of Directors has declared the regular cash dividend of $0.02 per share payable on December 16th, 2013 to holders of record on December 2nd.

On the financial management side of the business, we were not surprised, but delighted just the same, to learn that Rick Marabito was selected as the CFO of the year by Crain's Cleveland Business. This recognition simply reinforces what we have known for a very long time -- Rick is instrumental and has been instrumental in our growth over many years, and we congratulate him on this well-deserved recognition.

With that, I'll turn the call over to the award-winning Rick Marabito.

Thanks very much, Michael. And good morning to everyone. I will review the third quarter financial highlights and then turn the call over to David for the operational review.

Shipments of flat products decreased 5.6% in the third quarter. This resulted in year-to-date shipments declining 6.3%, to 837,000 tons; compared with 894,000 tons in last year's nine-month period. The lower volume is related to a weak spot market and generally softer year-over-year demand.

Lower prices, combined with less volume, resulted in consolidated net sales declining 11%, to $304 million in the quarter; compared with $343 million in the third quarter of last year. Year-to-date, net sales were $973 million, also down 11% from the $1.1 billion we recorded in the comparable period of 2012. The revenue decline can be attributed equally to the impact of both price and volume.

Consolidated gross margin percentages increased during both the quarterly and nine-month periods, despite the lower volume and the lower pricing environment. This was due to maintaining consistent per-unit profit on our flat products and reinforces our strategy of increasing the value content of our products and services.

LIFO positively impacted reporting gross margin by 0.1% in the third quarter and by 0.3% in the nine months. Excluding LIFO income, consolidated gross margin in the third quarter expanded to 20.6%, up from 19.3% in the third quarter of 2012, and expanded to 20.7% in the nine-month period versus 19.5% in last year's comparable period.

Consolidated operating expenses for the quarter declined by more than 4% or $2.6 million compared with last year. More than $1 million in quarterly savings can be directly traced to the cost-reduction initiatives announced last quarter.

Year-to-date operating expenses decreased $4.4 million in the flat products segment. This was partially offset by an increase of approximately $2 million in the tubular and pipe products segment, where our sales volume is up.

Due to our recent strategic capital investments, certain fixed costs, including occupancy and depreciation, were modestly higher in 2013 compared with last year. This resulted in quarterly operating income declining to $4.2 million, down from $4.6 million last year. For the nine months, operating income was $19.8 million, compared with $26.6 million last year.

As expected, year-over-year interest expense declined significantly for both the quarter and the nine-month periods. Third quarter interest expense declined to $1.7 million, down from $2.1 million last year, a decrease of more than 20%. Year-to-date interest has been approximately 21% lower so far this year, totaling $5.1 million versus $6.4 million in 2012's nine months.

Net income for the third quarter was $1.3 million, or $0.12 per diluted share. That compares with $1.6 million, or $0.15 per diluted share last year.

For 2013 year-to-date, we reported $9.0 million, or $0.82 per diluted share; compared with $12.4 million, or $1.13 per diluted share in 2012. The LIFO income had a positive net impact of $0.14 per share in 2013 year-to-date.

As a result of our lower CapEx, which is now running well under our depreciation; as well as our inventory management efforts and other working capital improvements, we generated substantial free cash flow. So far this year, we have generated approximately $49 million in cash from operating activities. This reversed the $50 million of cash used in operating activities last year, and it has allowed us to significantly de-lever our balance sheet. Approximately $23 million of this year's cash generation can be attributed to working capital management efforts.

Moving forward, we anticipate a greater proportion of our cash generation will be derived from earnings versus working capital activities. Further excess cash will still be used to further reduce our debt.

Inventory levels declined again in the third quarter, albeit at a slower pace than in the first half of the year. At the end of the quarter, we held $246 million of total inventory, compared with $290 million to start the year. We continued to improve inventory turnover in the quarter, which has been a primary objective for us this year.

Inventory turnover for flat products increased from 4.2 times in the first quarter to 4.6 times in the third quarter. We averaged less than four turns in 2012, as we on-boarded our six new facilities. And in the 2013 year-to-date period, our turnover has now improved to 4.4 times. We still have some room to compress our cash conversion cycle, and we believe we'll return to approximately five turns per year.

This year, a majority of our excess cash flow has been used to retire debt. At the end of the third quarter, we held $201 million in total debt. And that's down $41 million or 17% from the $242 million at the beginning of the year. This has lowered our debt-to-equity ratio from 83% at the end of 2012 to 67% at the end of September.

Finally, at quarter end, shareholders' equity stood at $300 million, or $27.36 per share. That's up from $290 million, or $26.54 per share at the end of 2012.

Now, I will turn the call over to David for the operating highlights.

Thank you, Rick.

As we indicated on our prior call in August, this year's third quarter began with steel prices advancing from the lows of late May and recovering into the mid-$600 range considering base product hot rolled band. Prices have fluctuated during the quarter, averaging below last year's levels. And volume has reflected uneven cycles within the first nine months of 2013.

That said, after the normal seasonal slowdown in July, the remainder of third quarter returned to the shipping levels of the second quarter. We are entering the final quarter of the year on better footing than we started the third quarter. Prices and volume have held up through October, and the mills have recently nudged list prices north of $650 on some supply-side tightness. Lead times have stretched out, reflecting low channel inventories and some maintenance outages. This hasn't resulted in the customary inventory build, as longer-term price forecasts remain weak.

However, sitting here today, the near-term outlook for the next quarter or two is slightly stronger than it has been all year, although we do recognize the uneven nature of this recovery.

I'm pleased to announce a number of critical milestones associated with our long-term growth strategies were successfully achieved during this third quarter. As both Michael and Rick touched on, we made excellent progress on the execution of our inventory reduction plan.

Since our last conference call, we have appointed Ray Walker to the new position of President and Chief Operating Officer of the flat rolled divisions. Ray has been with Olympic Steel for 27 years and most recently had been Senior Vice President of our Eastern region. Assuming Ray's former role, we promoted John Mooney, a 24-year Olympic Steel veteran, to Vice President of the Eastern region. Following that, Zachary Siegal is taking over leadership as General Manager of our Cleveland operation.

We also decided it was time to have committed management oversight to our two growing facilities in Mount Sterling, Kentucky. And in that new position, we appointed Jeremy Thiessen as General Manager. Jeremy has been with the Company since 1995.

All of these are exciting developments in each of these individuals' careers. And we applaud each of their promotions.

With Don McNeeley heading the CT&I team, Andrew Greiff heading our specialty metals product line; but now Ray Walker overseeing companywide flat products, we have the expertise, the proven leadership, as well as the assets and technology to harness the capital investments that we collectively made over the past few years. The corporate structure envisioned several years ago, when we embarked on our growth agenda, has been accomplished. Experienced leadership dedicated to profitable growth and operational excellence is in place.

Now, facilitating our individual responsibilities to maximize the return of the assets entrusted to them -- as Michael indicated, we welcome John Howard as our new Director of Operational Excellence. After working with us in a consulting role for more than a year, John assumed this important, newly created role. And he reports directly to me. Reducing costs and expanding operational margin is a top priority for us and a theme you will be hearing about regularly as we move forward.

We are pleased to have attracted someone with John's demonstrated experience and talents in joining us in this capacity. John is a Master Black Belt Six Sigma, and he will be helping each of our divisions to find and execute stronger disciplines which will reduce our overall operating costs. He's a valuable addition to our experienced senior management team.

Advancing and realigned organizational structures recently moved the executive management team to a separate office facility. Senior executives whose responsibilities span the entire Corporation have been relocated to an office suite in Highland Heights, Ohio, less than three miles away from our former corporate office at Bedford Heights.

It's been a very active year thus far. And despite the uneven markets, we are confidently moving the enterprise forward.

With that, we will now open the call to your questions. Operator?

(Operator Instructions) Martin Englert, Jefferies.

Wanted to see if you could talk a little bit more about what drove the revenue per ton lower quarter over quarter, when most of the carbon flat rolled prices were ticking up a little bit.

Martin, can you say that again? I'm not sure -- do you want to know the gross margin per ton?

Revenues per ton. Looks like that it ticked lower quarter over quarter, when flat-rolled pricing was ticking up.

So you're asking about the average selling prices on the flat rolled side. And a couple of things there.

Number one -- obviously, as we've talked about, we've had a weaker spot market environment. So the volume in the spot side, where you get more of the immediate increase in pass-through of the price, was really not very robust in the quarter. Secondly, and tied in with that in terms of pricing -- there is a bit of a lag in terms of contractual pricing and when that takes effect, versus when market prices are announced. So those would be the two major factors for that.

And as David commented in his section -- while we did see prices increase in the beginning part of the third quarter, we started to see those prices leaking through the back part of the third quarter.

Thanks. That's helpful.

And when I think about the cost-reduction efforts and the $4 million that was taken out on an annualized basis, was there much of an impact to SG&A on the third quarter from that? Or should we largely be expecting that on a go-forward basis, or roughly $1 million less assuming same run rates for sales in fourth quarter?

Yes. You can basically plan for the same run rates. So in other words, we initiated the $4 million annual plan, really, at the very, very tail end of second quarter. Third quarter pretty much saw a full quarter of effect. And most of that $1 million quarterly full effect hit the line items of warehouse and admin. Those would be the two line items where you see the bulk of these savings.

Yes. I would just tell you, Martin, we have other cost-saving initiatives that we're undertaking as well, but not to the direct impact that we can talk about at the $4 million level.

Okay.

And then, one last one there. It, if I understood correctly in the remarks, seemed like the SG&A in tubular stepped up some as a result of fixed cost. Is that correct?

Don?

Yes, this is Don McNeeley. Yes, we have suffered the same perils on the rest of the industry, in that our business is good. The tubular sector has grown year-to-date about 2.1%; we're up 3.6%. The takeaway from that is we're gaining market share. And there's certain costs affiliated with that. The flipside of that is, unfortunately, we had a steel price imputed in our budget that was 15% higher than the year has unfolded.

We too have undertaken some cost-reduction efforts in pursuit of the chairman's charge to pursue operational excellence. And I'm pleased to report that notwithstanding 3.5% greater tonship this year, we too have implemented some cost-reduction efforts in our pursuit of efficiency.

And beginning in the second half, we took $1.2 million out of our operating expenses, $700,000 of which we will be realizing this year -- the $1.2 reduction's an annualized number. So we're onboard with this effort.

And the broader cost reductions for the Company on a go-forward basis should be expected to be smaller in scope, rather than this $4 million that was taken out recently?

Martin, the idea is the $4 million, as we talked about, was phase one, if you will. And as we mentioned on last call, phase one really dealt with a lot of manpower reduction, some consolidation of shifts, that type of thing.

What we're talking about now is really more fundamental ongoing improvements and efficiencies. We spent a lot of time this morning talking about John Howard and some of the initiatives that we'll be embarking on. So the next phase -- the phase two, if you will -- is really getting a lot better and more efficient within our plants, and having sustainable operating reductions going forward. As Michael said, we're not quite in a position yet to quantify all of those. But we are very focused on going forward, making sure that we do that.

And so you will end up seeing, consequently, the bulk of those savings really hitting in the warehouse distribution, a little bit in the occupancy line, and some in the admin side. So it's not just going to be on the warehouse wall, so take a look at admin. But hopefully that helps.

It does. Thank you very much.

Ed Marshall, Sidoti.

I missed the volume numbers, Rick, if you have them. I apologize.

Sure. So Ed, you know we only report volume for the flat products segment?

Right.

So I'll just read off the numbers for you. Tons sold for the three months current year were 265,000; last year, they were 280,000. For the nine months this year, 837,000 tons; last year, 894,000 tons.

Okay.

Were there charges in the quarter for the rationalization, the employee reductions, et cetera --

No. No. Any costs that we had in terms of employee reductions are basically netted through the savings numbers. And there was nothing of significance that would warrant a call in or an unusual charge.

You mentioned that there are some signs that 2014 looks like it's starting to show signs of improvement. I'm curious -- are you buying inventory in front of that, maybe as the expectation that pricing goes up?

No, we're not essentially taking a risk management approach. Again, I think both Rick and David highlighted the fact that we're trying to maintain and continue to improve our inventory turnover. So while you might not see every month or every quarter being exactly on the improvement scale, but we're not speculating. We're building according to our customer demand. And clearly, we want to get the working capital turnover to the place that we want it to be.

I kind of wanted to ask more of a longer-term view type -- in past cycles, you've reached $5 better a share. But you've added Chicago Tube, you've added some additional equipment and some additional facilities. Maybe you could frame kind of what the potential for this business is over the cycle as the markets improve. And I guess that it's a function of volume and price, and that price is variable. But if you can help me out there?

Yes. I appreciate the question very much. I think, obviously, we're in much better position today than we were in those previous cycles. As you indicated, we made a number of investments in different businesses that would kind of solidify and/or smooth out some of the volatility, as we've done in pipe and tube. We've added equipment in pipe and tube, we've added the locations that we talked about, Ed, in Cleveland and Kentucky and Mexico. And we're going to add pipe and tube into other Olympic facilities.

What we're seeing is, in the specialty metals, two facilities today that we didn't have -- one in Latrobe, Pennsylvania; one in Streetsboro, Ohio. All of this is to build capacity as well as opportunity for earnings per share improvement.

So as we look, we see significant kinds of improvement capabilities. What we've done, though, is we've deployed a lot of capital to build capacity. Now, what we have to do is execute on that capacity along with the operational excellence that we've talked about to make sure that the costs don't outrun the opportunity. But we have enough capacity to exceed the $5 a share today without a lot of CapEx, although we continue to pursue opportunities both at the M&A side and other significant customer-driven locations that we may undertake. But we're already in position from a product diversification, from a geography and from a value-added componentry to do better than the previous cycles, by a long measure.

So now, you just need the market to come back.

No, we need to execute, regardless of market.

Thanks, guys. Good color, thank you.

Barry Haimes, Sage Asset Management.

Just wondering if you can give us a little color on some of the end markets. So if you kind of go through construction, ag, so on and so forth -- just a little feel for what's feeling better to you, what's feeling worse, and what's sort of steady-as-she-goes? Thanks.

Okay, sure. David, why don't you take that one?

Sure, Barry. Thanks for the question.

We're not immune to market circumstances and market conditions. And so what we've seen throughout the year is a very uneven, choppy environment. And of course, third quarter, the summer slowdown of July -- we quickly had a recovery in August, moderated in September; came back up in October. And we see that moving forward.

So we see ourselves on a trajectory of growth. We think the market continues to recover post the Great Recession. We see a number of our OEMs gaining traction. But again, it's uneven. There's a variety of which all -- you read about some of the large OEMs. And as Michael indicated, we do a lot of kitted parts and heavy assemblies for those particular customers.

But our long-term outlook, Barry, is robust, [and] the recovery evening out and getting away from the choppiness. And we think we'll ultimately have to endure some of that through 2014.

So Barry, if we go market-by-market -- automotive remains relatively strong from where it's at. We don't see any kind of pullback in automotive, where that is. Clearly, within the construction markets, they're improving slowly. Obviously, Caterpillar specifically has its mining divisions. They've spoken to their issues in the mining sectors. It doesn't mean we, Olympic Steel, won't improve our position with Cat in a variety of their locations and their divisions. But they've got those issues which have been certainly explored by them.

And then ultimately, when you look at the food and ag -- those markets remain pretty good -- as David indicated, not without individual vagaries to this company versus that company, or this specific product line versus that. But as you look at the outlook for the GDP growth on food and restaurant business, the service business as it relates to how the American economy is growing, however not robust -- we look at the food and ag business as one that is a pretty sustainable market.

Sounds good.

Just one quick follow-up -- if we just take ag, not the food side, but the gears and cases and so on of the world -- just roughly as a percent of sales for you guys, any ballpark how big ag is?

Go ahead, Rick.

Ag is about, I think, 5% or 6%. We'll give you an exact number. I'm going off the top of my head. I'm looking it up right now --

Yes. And then, it's bigger than that. Because when we look at the fabricators, which is a big part of our business, I would say that we have sort of what we call the agricultural breakdown. Then we got the construction breakdown, and then we have sort of -- a big part of our business is selling fabricators, which are pass-through. So I would say there's probably double that, but we sell it indirect through fabricators.

Right. So the way to think about -- I got the exact number -- we're about 8% of our business is specific to ag and farm. But as Michael said, if you look at Olympic Steel, almost 60% of our business goes to industrial machinery, equipment; which would include ag and farm equipment plus their fabricators and sub-tier suppliers.

Got it. Thanks very much. Appreciate the color.

You're welcome.

(Operator Instructions) Charles Bradford, Bradford Research.

As I'm sure you're aware, there's been a lot of speculation about what happens with the ThyssenKrupp plant in Alabama. The question isn't about that specifically. But there's been talk around the industry that some of the [arslaw] middle salesmen are going around claiming that they've got it. Other people -- these are people probably who don't have a clue --

(Laughter)

-- there are other people saying that maybe US Steel salesmen are going around. Have any of these salesmen broached you with that idea?

Not that I am aware of.

There's also been some talk -- I guess someone sent out a memo that if such a deal is announced, they're going to either withdraw or stop negotiating contract business until the dust settles. Have you seen any of that?

Chuck, who's "they?" Who are you referring to when you say "they?"

Well, Platts carried a story. They didn't give the name of which executive supposedly wrote this memo to his sales force.

It's not us, Chuck.

(Laughter)

Yes, Dave Wolfort did not do that.

Question really is -- are you the other side of that? Not that you're sending the memos out.

I don't know.

We're not aware of any such memo.

Because these things, as you know, have been going on for probably a year now, with rumors, and nothing happens.

Well, Chuck, without rumors, you obviously -- we've seen a lot of changes at a lot of the steel producers, both from the standpoint of their executive management and their sales management both. So I would just say, with all of this transition, I think there's a lot of speculation not based on facts about what the old guys did or did not do and what the news guys will either do or not do. I think it's all just rumors.

No, understood. And some of it doesn't tie in with other things that you have done. But that's a different issue.

Thank you very much.

Thank you.

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

Thank you, operator. And thank you all for joining us on this morning's call. And we look forward to communicating our continued progress when we report our fourth quarter/full year results in February.

Once again, we thank you for participating on this morning's conference call and the interest you have in Olympic Steel. Thank you.

The conference has now concluded. Thank you for attending today's presentation. Please disconnect your lines.