Olympic Steel Inc (ZEUS) 2015 Q1 法說會逐字稿

Good morning and welcome to the Olympic Steel, First Quarter 2015 Conference Call. All participants will be in listen-only mode. (Operator Instructions). Please note, this event is being recorded.

Some statements made on today's call will be predictive and are intended to be 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 forms 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'd 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 joining us to discuss our 2015 first quarter results. Dave Wolfort, President, Chief Operating Officer; Rick Marabito, Chief Financial Officer; and Don McNeeley, President of our Chicago Tube and Iron business are also with me on the call today. We will provide an overview of the first quarter and then open the call for questions.

Over the past several years Olympic Steel has strategically transformed from a distributor of carbon flat products to a metal service center with expanded processing capabilities and product diversity in specialty metals and pipe and tube.

In the first quarter specialty metals flat products combined with tubular and pipe products accounted for more than one third of net sales and counter balanced much of the concerns in the carbon flat products business. These results are reinforcing our ongoing growth, diversification and profitability strategies. According to the MSCI Metals Activity report, service center shipment contracted a little less than 2% from last year's first quarter.

The market share gains we achieved in 2014 were maintained as our year-over-year volume held up modestly better in the quarter than the industry average. Last year when we were focused on filling new capacity, our volume increased by 14%. This was more than three times the MSCI industry average of 4.2% and we did not relinquish any of this newly acquired market share in the first quarter.

Consolidated pricing was up slightly compared with last year's first quarter as a result of a product mix change that I mentioned and higher average pricing for those tubular and pipe and specialty metal products. This more than offset lower average pricing on flat carbon products.

We are now disclosing specialty metals flat products as a separate reporting segment. Our specialty metals segment includes flat stainless and aluminum products. This was done to provide more transparency into this growing and material side of our business. In the first quarter our sales of stainless steel flat products grew to 19,000 tons and we now comprise more than 5% of the domestic stainless steel sheet and coil market.

Overall net sales of specialty metals flat products increased approximately 14% from last year's first quarter and represented more than 15% of our consolidated sales in the 2015 first quarter and Rick will expand on the performance of each of these segments in his review.

As expected, in the initial phase of basically the profit improvement program we began in January, its positively impacting or financial results. Consolidated operating expenses were down $2.6 million in the quarter compared with the prior year. We anticipate additional progress will manifest itself in future financial results as we continue to execute on additional aspects of this profit improvement program.

Net income was $1.1 million or $0.10 per diluted share in the quarter. This was down from last year's first quarter, however considering the magnitude of a price decline. During this quarter, margins held off better than expected. License for hot rolled coil plunged $138 or 23% from around $600 a ton at the begging of the year to $460 by the end of March.

The US dollar while softening off late rose by 23% against the Euro, hurting our customers' ability to export their products and making them more vulnerable to imports of their products. In addition we are seeing the record imports of raw steel products in the first quarter of this year after a year of record imports in all of 2014 and in the fourth quarter. This material is in the marketplace now and continues to put pressure on pricing and margins.

We are pleased that despite the difficult market environment we made substantial headway on our inventory reduction plan. We reduced inventory by $31 million during the quarter and used a portion of the proceeds to pay down an additional $10 million of debt, and we would expect more debt reduction in the coming months.

Looking to the remainder of the year, metal prices are being challenged and margin pressure will persist. We continue to focus on generating cash flow, improving inventory management and working capital turnover and lowering operating expenses.

We have a healthy and diversified customer base with consistent demand in many of our end markets. In addition, our balance sheet is getting stronger and we have the financial ability to support future growth initiatives.

We are also encouraged by the recent articles that we've read of the possible trade actions, price increase announcements and perhaps as we said, the beginning of the lowering of the US dollar versus other currency and hope that these various issues will create some stability in the global metals pricing.

This morning we also announced that our Board of Directors declared a regular cash dividend of $0.02 per share, payable on June 15, 2015 to the holders of record on June 1, 2015.

So with that, I will turn the call over to Rick Marabito.

Thank you Michael and good morning everyone. Consolidated volume of flat products increased 3% sequentially from the fourth quarter and declined 1.7% compared with the first quarter of 2014.

Lower year-over-year volume of carbon flat products was partially offset by higher volume of specialty flat products, which as Michael indicated are now being reported separately.

In the first quarter of 2015, the volume of carbon flat products decreased 2.4% to 276,000 tons versus 282,000 tons last year and the volume of specialty metals increased 9.6% to 19,000 tons compared with 17,000 tons in 2014 first quarter.

Our average selling price for the carbon flat products declined 2.4% compared with the first quarter of last year. This, combined with the lower volume resulted in net sales declining 4.7% in our carbon flat products segment.

Average selling prices in our specialty metals segment increased 4.1%, which combined with the 9.6% volume increase resulted in net sales for this new reporting segment growing by 14.1% in the quarter. Volume is less relevant in our tube and pipe product segment, therefore we do not report shipping tonnage for this segment and that's consistent since the acquisition of CTI.

As we mentioned on our last call, our tubular and pipe products are used primarily in industrial applications, not related to the oil and gas drilling industries. Compared with last year the average selling price for our pipe and tube products was higher in the first quarter. This contributed to a 5.9% net sales increase for this segment compared to last year.

The strong sales performance from our specialty metals and pipe and tube segments during the quarter nearly offset the decline in the net sales of carbon flat products. This resulted in our first quarter consolidated net sales being virtually flat year-over-year at $346 million compared with $347 million in 2014.

Gross margins were lower in both flat products reporting segments and higher in the tubular and pipe products segment. Consolidated gross margin contracted to 19.1% of net sales in the first quarter of 2015 compared to 20.6% last year. This resulted from significant market pricing pressures during the current year quarter.

We currently estimate that our annual LIFO adjustment in 2015 will be income of $1 million, which led us to recording $250,000 of LIFO income in the first quarter. This did not change our consolidated gross margin and there was no LIFO impact in last year's first quarter. First quarter 2015 net income benefited by approximately $0.01 per share from the LIFO income.

Operating expenses decreased $2.6 million from $65.2 million in the first three months of last year, down to $62.6 million this year. As a percentage of sales operating expenses improved to 18.1% compared with 18.8% last year.

Higher warehouse and processing expenses were more than offset by lower expenses in all other operating expense categories. The higher warehouse expense was entirely related to our tubular and pipe product segment and primarily due to more capitalized labor and overhead charged from inventory to expense in the first quarter of 2015 versus the first quarter of 2014. The savings in all other expense items are related to the aggressive profit improvement program that we launched at the beginning of the year.

Operating income in the first quarter of 2015 was $3.3 million, that's down from $6.2 million in 2014's first quarter. This was due to the year-over-year gross margin contraction. Interest expense was down $200,000 year-over-year and that was due to lower average borrowing rates compared with the prior year.

Our effective income tax rate was 38.9% in this year's first quarter compared with 38% last year. This resulted in net income of $1.1 million or $0.10 per diluted share, down from $2.8 million or $0.25 per diluted share last year. And again, the lower net income this year resulted from price induced margin pressure, partially offset by our improved operating efficiency.

As we've indicated in our past two calls, we've been focused on working capital management and enhancing our balance sheet strength. Accounts receivable increased $28 million compared with year end. This is normal seasonality as receivables typically dip at the end of December and then build back up in the first quarter. The credit quality of our receivables remains very healthy. In the first quarter our day sales outstanding improved to 40 days compared with 41 days in the first three months of last year.

As expected, inventory was further reduced during the quarter. Inventory was reduced by 10% to $280 million at the end of March from $311 million at the beginning of the year. Our inventory turnover improved to 4.1 times in the first quarter, which is up slightly from our average last year. However in the month of March our turns reached 4.5 times and we continue to work for our goal of attaining five inventory turns per year and we believe that further inventory reduction, combined with growing our net sales is the formula to achieve that objective.

Cash flow was much stronger in this year's first quarter compared with 2014. In the first quarter of 2015 we generated $14.5 million in cash from operating activities versus using $28 million in the first quarter last year. The majority of the cash generated this year was from working capital management, which generated $11.6 million of positive cash flow, plus another $3 million was generated from operating activities.

Debt was lowered by another $10 million in the quarter following the $25 million reduction in debt achieved in the fourth quarter. At the end of March our outstanding debt stood at $238 million. In April we paid down another $14 million of debt. At the end of 2014 third quarter, our debt had peaked to $273 million. Since then we have paid down a total of $50 million, which is an 18% reduction. Our financial condition is very strong and we have more than $100 million of availability under our asset based revolver. Our average borrowing rate in the first quarter was 2.5%.

Capital spending was only $1.7 million in the first quarter and that's down from $2.3 million in the same quarter of last year and well below our quarterly depreciation of $4.6 million. For the full year our CapEx budget is approximately $12 million and this too is significantly below our budgeted depreciation for 2015, which should be in the range of $18 million to $19 million.

At March 31 our shareholders' equity increased to $282 million or $25.64 per share and then after removing the goodwill and intangible assets our tangible book value was more than $21 per share at the end of the first quarter.

And finally, we do intend to file our form 10-Q later today, which will provide additional details on our results, again including the new reporting of the third specialty metal segment and in that segment we will have first quarter year-over-year comparisons for specialty metals.

Thank you, and now I'll turn the call over to David for the operating review.

Thank you Rick, I appreciate it. As a result of the virtual free fall in metal pricing, we expected the start of 2015 to be challenging and indeed it was. During our year end conference call in late February, as you recall we reported US price premium that attracted a recorded wave of imported steals.

Hot rolled coil prices had retreated from just under $600 per ton by the end of December to $508 a ton by the time we hosted that call in February. It didn't stop there, falling another $50 a ton by the end of March and as Michael pointed out just earlier this morning, this was a decline of $138 a ton or 23% in that 90-day period.

Considering the quick $90 per ton decline that occurred in the second half of 2014, this additional price decline in the first quarter erased the US price premium and many of these imports are landing in our porch there already with prices above today's spot market. This has led to some distressed selling from undercapitalized importers, traders and service centers, which only further deteriorates the pricing environment.

Today many factors remain that lower the global cost curve and led to the drop in metal prices. These factors include the strength of the US dollar, historically low prices for steel making raw materials such as scrap, iron ore and coking coal and saw economic activity in many regions outside of North America. In April hot rolled coil prices slid even further and published prices currently stand at $440 a ton. This is the lowest pricing we've seen in nearly 10 years.

We are meeting the challenge of this market cycle by adhering to our business disciplines, reducing inventory and debt as Rick outlined in enhancing operating efficiencies. Our profit improvement program is beginning to yield our internal forecasted results as evidenced by the meaningful reduction and operating expenses in the quarter.

Several operating management roles were reassigned during the quarter and veteran operators are addressing specific performance issues identified at certain of our facilities. Overall, our operating teams excelled at executing our inventory reduction initiatives and lowering our cost of doing business and we continue to make progress.

Business activity remains steady. Our total processing tonnage increased by more than 30% in 2014 and this growth has continued in 2015. In the first quarter of this year total processing tonnage reached 28,000 tons, a 17% increase over the first quarter of last year. Spot sales as represented by sales to other service centers declined year-over-year, but we have seen an uptick in our sales in the construction and the transportation sectors.

As Michael mentioned at the top of the call, getting ahead of this pricing environment by quickly taking appropriate and decisive action has put Olympic Steel in a position of strength. The market remains challenging, however challenges create opportunity. In addition to having the ability to withstand difficulty market cycles, our financial strength allows us to pursue our organic growth initiatives and also consider strategic external growth opportunities that may present themselves.

With that operator, let's open the call for questions.

Thank you. (Operator Instructions) Our first question comes from Aldo Mazzaferro from Macquarie. Please go ahead.

Hey guys.

Hi, Aldo.

I guess everyone's going to say it, but it's a great quarter and it looks like you really blew away the expectations and the cost side is -- putting aside that for a moment, I'm wondering on the market Michael, do you think steel prices can rise here with the mills announcing prices after the way you described the market as being over supplied and the strong dollar hitting. I mean I was just wondering what...

Well, I think the biggest factor right now Aldo is currency. The beginning indications of a softer dollar would allow us to believe that getting dollars for your product while you pay in local currency, including the disparity and the wig [ph] between the two currencies maybe going away. We continue to see the trend in the softer dollars and yes, I think that from a supply and demand market on certain products the market can rise. We still may be challenged on some imports as the lakes haven't opened yet, some basic raw commodities, but yes we're encouraged by the signals that we're seeing today.

That's good. And with your balance sheet the way it is Mike and some opportunities I think in market among service centers, it could become distressed and might be willing sellers. Do you see yourself doing something significant this year in terms of growth?

We want to do things Aldo that enhance our ability to generate earnings and if it is accretive, then the answer is we will be willing to take a look at things, but clearly if these things are distressed, we don't have the work or the patience to be doing turnarounds.

Great. And then I wonder, could you just tell us roughly what your expectations are for the gross profits in the next couple of quarters? I mean is there still some downside on your cost that will flow through as prices may be bottoming and maybe turn up a little bit.

No, we don't give forward guidance Aldo, you know that. I don't know if that was really guidance or not, but I appreciate --

You know Aldo, we are turning our inventory quicker. We are turning our inventory quicker and as Rick outlined and we have internal goals that will allow us to take full advantage of the vagaries in the steel pricing, so we don't expect to fall behind.

Great. I'll turn it over and nice quarter. Thank you.

Thank you, Aldo.

And the next question comes from Martin Engler from Jefferies. Please go ahead.

Hi, good morning everyone.

Hi.

So I want to see if you can throw back some more detail about the cost reduction initiatives, maybe what inning you think you are in currently. How much more you think you can take out of the system?

I'll turn that to Rick.

Sure. So we kicked off the program in January. So you obviously saw the results for the first quarter. I would tell you if you want to use the analogy you suggested of the baseball game, a nine inning game, we're probably in the second or third inning, so you will see continued progress on that.

We have additional initiatives that will continue to be rolled out during this year and even into the beginning part of next year. So some of the initiatives are not even targeted to start until the end of the year and just to give a little color around, and we talked about this last time, while we're not going to quantify it, just to give you a little bit of an idea of what those initiatives are, they are in the transportation and distribution area. Its utilizing our trucks more efficiently, adding more of our trucks, looking at lanes of inbound and outbound, consolidating those, looking at outside carrier contracts, so that's on the distribution side.

On the sales side we really looked at our sales territories and we've realigned those sales territories to be what we believe more efficient at a lower cost. We have centralized some of our administrative functions and that's still in process. So when I say some of those savings will not happen until next year, that's why, because we need a little bit of time to complete the centralization, but to give you a flavor, those are the types of things we're doing.

And in the last quarter you detailed a closing of underperforming facility as well as one sales office. Do you anticipate anything else or you're pretty content with where your footprint is right now?

We are not anticipating the closing of any more facilities at this time.

Okay, and one last one if I could, any change you've seen in the lead times from those over the past couple of weeks or month or so?

Martin, David here. There's been some elongation of the lead times that are based on forecasted closure. So we really are in control of the steel producers full intentions of closing some production, so lead times are starting to leak out a little bit.

And has that been kind of similar across the board or is that more so that you're seeing that at the integrated nodes.

We're seeing that at the integrated side of the equation.

Okay, thank you very much.

Thank you.

And the next question comes from Nathan Littlewood from Credit Suisse. Please go ahead.

Thank you very much and congratulations again on a great quarter. I also wanted to thank you for the new disclosures as well on the specialty metal stuff. That's really, really - it's one that certainly looks like a very, very high grade part of the business.

Guys I just had a couple of questions on imports. Rick, the last time you and I spoke, I think you had indicated that imports were historically a little under sort of 10% of your in intake volume. I was just wondering if you could sort of confirm that number and maybe tell us what they were as a percentage of total volumes in the March quarter. Perhaps what your outlook is for that and how you may be starting to see some customers who previously moved away from you in favor of imports.

So your starting to see any of them come back in light of the closure of the spread. And if it's possible to split the answer and kind of thoughts on this into like a carbon answer and maybe a specialty metals answer, I'd be interested in that level of detail as well if at all possible.

Yes Nathan, David. I'm going to take a section of this. I'm not sure I can recall all of the questions, but...

It was only the short one.

No, that's okay. Just refresh us as we kind of answer this. First of all, we really did not have customers who moved away from us in favor of other suppliers who had imported product. If you recall last February and Rick detailed it to some degree, we have had a heavy reliance on our domestic supply partners and continue to have a heavy reliance on our domestic partners.

Mike and I have been doing this for 40 years and we have a saying here that on imported products, and it comes three ways, it comes early, it comes late and it comes just in time and it all comes on the same boat. And so the vagaries of dealing with imported steel, sort of our locations on the cost, really have an insignificant impact to our overall operations.

Yes, so let me just comment further Nathan, its Michael. We have certain geographies that lend itself to imports and we have certain specialty items that lend itself to imports because domestic guys just don't make the qualities. So our imports generally are fairly consistent irrespective of the pricing because of our strong domestic relationships and they basically fluctuate between 7% and 10% and that's been for a very long time and that's pretty much as it remains. As it relates to specialty metals, specifically again what do we consider it in Mexico and/or --

Do we have some?

We do have some small percentage of supply on specialty metals from overseas, but the preponderance again of our supply basis is really North American and its more specially US

Okay, I appreciate it. Thank you. The last question I had was just on I guess lag pricing benefit. It seems to be sort of a pretty common thing across both your service center peers and also the mills that have reported that they are sort of effective or realized pricing has been much, much better than what the drop in HRC pricing would have suggested and there is a whole bunch of reasons for that. But I was just wondering if you guys have had an attempt at all of trying to quantify that for the March quarter.

So you're right, there is a lag in pricing. And that is due to how a portion of our business as well as the service center business is done from the sales side on quarterly price reset. So going into the first quarter, the pricing was obviously set at the end of 2014 and then there's many different mechanisms for how that price resets. It could be negotiated, it could be tied into an index, etcetera, so I think that's what you are referring to Nathan on the lag and yes, we have some of that lag as we do have contract pricing in place.

Okay, as we look at the March quarter numbers, do you have a rough feel for how much of the sales realized were actually - had process set in 2014. In other words, would be on that lag?

The answers we have, a whole variety of different contracts, as well as spot markets, so the answer is we would have to break it down and the answer is no Martin, we actually don't have it. But we have contracts that we set quarterly, six months and annually. So we don't break it down to that kind of granule number.

Okay, no problems. Thanks very much guys. That was it and congrats again.

Thank you.

(Operator Instructions) And our next question comes from Philip Gibbs from KeyBanc Capital Markets. Please go ahead.

Good morning.

Good morning.

Just curious how inventory tonnage looked at the end of the March quarter versus the end of the December quarter; we obviously have the reduction of $31 million, but just wanted to know how the actually volume numbers looked. And maybe some color you could give on the carbon and plat inventories, just so how we could think about the positioning here.

Sure. Hi Phil, its Rick.

Hi Rick.

So I talked in my prepared remarks about our inventory turnover and so I talked about in March our turnover went to 4.5 times and it was 4.1 times for the quarter. So I think you could induce that a lot of our reduction in inventory occurred in March. That turnover number that we give you, we always base our turnover on tons, not inventory dollars and we do now though disclose inventory tonnage, so that's something that we don't do. But sufficed to say we took a good chunk of tonnage out in the first quarter and our expectation as we talked about is we'll continue to do that into the second quarter.

Okay. Any color you could give us on the gross profit per ton for the carbon business in Q1 or year-over-year, any comparison you could give us there. I know they are probably out later, but anything you have in hand?

Yes, the 10-Q will be filed later and it will have the per ton information in it. We were down about $20 a ton on carbon gross margins year-over-year.

Okay, terrific. And then if David could elaborate a bit on the toll processing business and where that is in terms of both the carbon side and maybe some of the specialty metal side and where you are seeing that.

Well Phil, there is not much on the specialty metal side. We really don't do a lot of toll processing on specially metals. That increase in sales which is led by Andrew Greiff, our President of our Specialty Metals division has had outstand growth, but there is very little toll and I can't even remember that there is any.

On the carbon side, it has been a strategy of ours, the toll processing since 2003, since one of the previous recessions. I can't remember which one it was, but it was 2003 and we continue to, we continue to increase our participation there and it's in a broad array, a broad array of applications.

So some of it is in temper mill processing and coil-to-coil processing for some of our domestic mills, and then a lot of it is into automotive on a fairly selective basis, a lot of configured blanking, and so that has worked very well for us. We've also in the growth of toll processing; we've also traded a lot of toll processing out of our operations that didn't make sense for us.

Okay, terrific. Thanks very much.

You're welcome.

And Phil, if you know anybody who wants toll processing in specialty metals, we are happy to take in.

I think I might, so we'll talk after this. Thanks.

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Siegal for any closing remarks.

Yes, thank you operator. Once again we want to thank all of you for joining us this morning and for all of you who will be listening later on the internet and for your interest and continued support of Olympic Steel. We look forward to sharing our progress with you as we report our second quarter results in earlier August. So let's have a great day and good draft day for the Cleveland Browns. Thank you operator.

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