Olympic Steel Inc (ZEUS) 2015 Q3 法說會逐字稿

Good morning and welcome to the Olympic Steel 2015 third-quarter and nine-months 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 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 third-quarter and year-to-date progress.

Joining us on the call are Dave Wolfort, President and Chief Operating Officer; Rick Marabito, Chief Financial Officer; and Don McNeeley, the President of our Chicago Tube and Iron business.

As discussed on our last conference call in August, we continued to advance the same initiatives in the third quarter that we have been focused on all year. We lowered operating expenses by more than $9 million in the quarter, bringing year-to-date operating expenses down by almost $20 million.

$24 million of debt was eliminated in the third quarter. So far this year we have reduced debt by a total of $60 million.

Inventory declined by more than $14 million in the quarter, which has reduced inventory on hand by $82 million since the beginning of the year. Our inventory turnover velocity has improved this year to 4.2 turns as compared to 4.1 at the end of the year of 2014.

And we have accelerated our collections on receivables to best-in-class 38.7 days versus last year's 39.1 days.

These achievements are principal components of our multi-pronged profit improvement plan launched last year when the economic down cycle in the metals industry began. Unfortunately, as we have continued with our disciplined approach, the challenging market environment has also persisted throughout the third quarter and into the fourth quarter, as I am sure everyone on this call is keenly aware of.

Pricing for the steel-making input, such as scrap metal, iron ore, coking coal and energy have all deteriorated further in the third quarter and now into the fourth quarter. There has been little reduction in the record high levels of steel imports, regardless of trade action, pouring into the United States, most of which which is being subsidized by foreign governments. The US dollar remains very strong in relation to other currencies. And to top it off, in the third quarter industry-wide demand weakened in a number of end markets, including industrial equipment, mining, energy, and agriculture.

None of these factors are within our control, and all have contributed to consistently deteriorating metal prices and decreasing demand for steel. For more than 60 years Olympic Steel has successfully managed numerous market cycles by sticking to our core values and this cycle will not be any different.

In prior peak markets we have been criticized for being too conservative and underlevered compared with other service centers. These assessments never influenced our long-term growth strategy, capital structure, or the level of debt we assumed. By adhering to the disciplined style of managing the business for long-term success, we have always rebounded from poor markets as a better and stronger company and expect to do so again.

Despite the current weak market conditions we've been able to strengthen our balance sheet, lower operating costs on a permanent basis, and improve internal efficiencies. The combined efforts of everyone throughout the Company have positioned us to not only survive but thrive when the market turns.

Given current valuations in the metal sector and our strong cash generation, last month the Board of Directors authorized a share repurchase program of 550,000 shares. Our shares have been trading at a substantial discount to tangible book value, and we believe a share repurchase program provides opportunities for a better return on shareholders' capital than other investment alternatives in the market.

In addition, this morning we announced that the Board also declared another regular cash dividend of $0.02 per share, which marks the 40th consecutive quarterly cash dividend paid to shareholders since we began paying dividends 10 years ago. Over that period we have returned more than $22 million of capital to the shareholders through cash dividends. This latest dividend is payable on December 15, 2015, to the holders of record on December 1, 2015.

And, with that, I'll turn it over to Rick for the financial review.

Thank you, Michael, and good morning, everyone.

Industrywide shipments declined in the third quarter compared to last year and our shipping volumes followed that same pattern.

Sales volume of plate products was down the most and accounted for the bulk of the decline in our carbon flat products segment. A number of our plate customers participate in the heavy equipment sectors, which have been under intense pressure lately, particularly customers selling into the heavy construction, mining, energy, and agricultural markets have experienced softness in their end markets.

Compared with last year, our 2015 third-quarter and year-to-date sales volume in all three of our operating segments was lower.

The largest volume decline was in the carbon flat products segment, where quarterly volume declined by 51,000 tons, or 16.7%, to 254,000 tons. This resulted in nine-month shipments being off by 9.9% in this segment compared with last year. We did generate a small year-over-year increase in tolling tons in the carbon flat products segment.

Sales volume of higher value-add specialty metals flat products declined 1,600 tons, or 8%, in the third quarter and was down 2.1% in the nine months versus the respective 2014 period.

We do not disclose shipping tonnage of pipe and tubular products because weight in this product category is not considered meaningful. However, shipments of pipe and tube were also down in line with the rest of the industry from a year ago.

Compounding the impact of lower sales volume, prices were sharply lower than last year in all product categories. Average prices declined by 13% on a consolidated basis during the quarter. Consequently, third quarter consolidated net sales decreased 26.5% to $277 million compared with last year.

For the nine months, consolidated pricing was off 7%, pushing net sales down 15.5% to $938 million versus $1.1 billion in the same period of 2014.

On a segment basis, average pricing in our carbon flat products segment was down the most, declining by 17% from last year in the quarter and by 10% in the nine months. In our higher value specialty metals product segment, nipple prices have continued to slide lower, which resulted in average price declines of 11% in the quarter and 3% for the year to date. Average pricing in our tubular and price product segment was also down from last year, decreasing 8% during the quarter and by 3% for the nine months.

Nevertheless, gross margin, which has been under pressure all year as a result of the perpetual market price decline, expanded to 21.2% of sales in the third quarter versus 19.0% of sales last year. Most of that margin improvement came from higher year-over-year pipe and tube margins and a larger mix of sales in the pipe and tube products segment as well.

We increased our LIFO income this year and recorded $1.1 million of LIFO income in the third quarter. This boosted third-quarter gross margins by approximately 40 basis points and had a positive impact of $0.06 per share in the quarter.

For the nine months gross margin was unchanged from last year, at 19.6%. Year-to-date LIFO income was $1.7 million, which increased gross margin by 18 basis points for the nine months. In 2014, when average metal prices were increasing, we recorded LIFO expense of $600,000 through the first nine months of 2014.

Operating expenses in the third quarter declined by more than $9 million, or 14%, to $58.3 million, down from $67.4 million last year. Excluding the second-quarter noncash impairment charge, 2015 year-to-date operating expenses were $19.9 million, or 10% lower compared to last year on a 9% volume decline.

Operating expenses declined in all categories for the quarter and nine months, with the majority of cash operating expenses declining by double-digit percentages compared with last year. This was due to our ongoing profit improvement initiatives and lower sales volume in the current year.

Operating income was $500,000 in the third quarter compared with operating income of $4.1 million in last year's third quarter. Year to date, our reported operating loss in 2015 was $20.6 million. However, this loss was due to the $24.5 million impairment charge recorded in the second quarter. Excluding that charge, operating income in the nine months was $3.9 million, down from $17.5 million last year.

Interest expense was $1.4 million in the quarter, which is 12% lower than last year. For the nine months interest expense was $4.4 million, or 14% below last year's level. The lower interest expense was due to lower debt balances and lower interest rates compared with last year. Our effective borrowing rate was just over 2% through the first three quarters of this year.

We reported a net loss of $600,000, or $0.05 per share, for the third quarter versus net income of $1.6 million, or $0.14 per diluted share, in the third quarter of last year. For the nine months the net loss was $21.8 million, or $1.95 per share, compared with net income of $7.8 million, or $0.70 per diluted share, in 2014's comparable period. The second-quarter impairment charge reduced this year's nine-month earnings by $1.91 per share.

Now, shifting to the balance sheet, accounts receivable at quarter end were down $23 million since the end of the June quarter. The quality of our receivables continues to be very good. Given the current market environment, we remain alert to any signs of credit issues that may arise in our customer base.

Our days sales outstanding so far this year have actually improved to 38.7 days, down from 39.1 during last year's nine months.

As Michael already touched on, our inventory declined again in the quarter. At September 30, inventory stood at $229 million, which is $14 million lower than the end of the June quarter, and we are now down $82 million, or 26%, from the $311 million at the beginning of the year.

Inventory turnover was 4 times in the third quarter and 4.2 times for the year to date. We are targeting faster inventory turns in the fourth quarter to keep pace with declining metal prices and demand.

As we stated during our last call, we further reduced debt by $24.2 million during the quarter. At the end of the quarter our total debt stood at $187.9 million. That's down $59.8 million from the start of the year. That equates to a reduction of more than 24%. We ended the third quarter with $87 million of availability and we are well within compliance of all of our debt covenants.

Subsequent to the quarter end, debt was reduced by another $10 million, bringing our total debt down to $178 million at October 31. And we anticipate further debt reductions by year end.

Working capital management has significantly contributed to higher cash flow this year. We generated $58.9 million in cash during the nine-month period, from lower working capital needs and another $10.4 million in cash was generated from our operation. This totals $69.3 million in total cash generated from operations in the first nine months of this year. That's compared with a $59 million use of cash from operations in the same period last year.

Our year-to-date capital spending in 2015 was $6 million, down from $7.2 million for the same period last year. This compares with $13.6 million of depreciation recorded through the nine-month period. Our full-year CapEx for 2015 spending is currently expected to be under $10 million, while total depreciation is expected to be between $18 million and $19 million for the year.

As of September 30, shareholders' equity stood at $260 million, or $23.63 per share, versus $281 million, or $25.55 per share, at the end of 2014. Our tangible book value at September 30 was $21.31.

Before I turn the call over to David, I'd like to add one comment on the repurchase authorization. Since the share repurchase was authorized by our Board in early October during the quiet period under our internal trading policy, we have been prohibited from purchasing any shares until our window opens tomorrow. We intend to update you quarterly on any repurchase activity in conjunction with our future results disclosures.

Finally, we plan to file our Form 10-Q later today, which will provide additional details on our operating results.

Now, with that, I would like to turn the call over to David for his operating review.

Thank you, Rick.

Let me start out my comments by noting the obvious: It was a tough quarter. Though I seldom look forward to third quarters, we usually find our expectations are elevated as we move out of the summer doldrums and into late August and September. Unfortunately, as you're all aware, the back half of the third quarter was anything but friendly to steel distribution.

Nevertheless, Olympic Steel's entire team galvanized its efforts in responding to these challenging market conditions. As Michael indicated at the outset of this call, we have lowered our operating expenses by almost $20 million this year. Mike also noted, and I want to echo, that we vacated $24 million in debt over 3Q 2015, continuing our pledge to rightsize our enterprise according to market conditions. Inventory has been reduced, as Rick noted, by $82 million year to date, and we've kept pace with the sharp pricing declines of the past quarter. We've seen a collective team effort from every department to execute on our well-defined objectives.

It's traditional in a service center business to say that the calendar third quarter has never saved anyone's year, and during the third quarter of this year not only were metal prices sharply lower and seeking a bottom, but demand was soft. Typically, the industry will experience some seasonal slowing related to summer plant shutdowns and vacations. Then, as we near the bottom of the quarter, business rebounds as activity starts to ramp up again.

With lead times for steel as short as one to two weeks, we did not experience a normal late-quarter rebound this year, as I noted a moment ago. Price declines did pause briefly in July, but as we got into August and September price degradation actually accelerated.

Average prices have slipped even lower as we entered the fourth quarter. Hot rolled coil prices have now tumbled by more than 40% since last year's third quarter, going from $675 a ton last August down to under $400 a ton in October. This is the most prolonged down cycle we have endured in a dozen years. In fact, these prices are reminiscent of early 2004.

The strong US dollar has also been a magnet attracting scrap as well as steel imports. Scrap price has fallen by more than 50% in this cycle, from approximately $380 a gross ton last summer down to $180 a gross ton currently, with more than $50 of that decline occurring in the last 30 days.

Needless to say, it's been an extremely tough business atmosphere. That said, this is certainly not the first down cycle we've navigated as a management team and our response to these circumstances has been strong and targeted and adjusted to the market conditions.

Now, we manage to today's conditions by reducing inventory, debt, and expense levels while continuing to move up the value chain with our processing capabilities. We continue to invest for long-term success, as evidenced by our new Butech stretcher leveler line in our Winder, Georgia facility that came online at the end of June. We continue to onboard parts and increase Olympic Steel's participation supplying the nearby Caterpillar Athens, Georgia manufacturing plant.

Financially, as Rick detailed, the elimination of debt and the fortification of our balance sheet, which positions Olympic Steel to be able to navigate these market challenges. Our customers appreciate that we have the experience and financial wherewithal to navigate this cycle. They know that we are going to be here for them over the long term.

As for our vendors, the domestic mills, they appreciate our loyalty and credit worthiness. Olympic Steel is able to consistently purchase our products without any credit anxiety, as we continue to discount pay for our purchases in a continuing effort to support our supply chain.

We have made terrific progress during the quarter on our efficiency efforts by improving our inbound and outbound transportation logistics. This demonstrates the kind of permanent productivity enhancements we are galvanizing, irrespective of external market conditions.

As they say: When the going gets tough, the tough get going. And that's precisely what we've done and what we will continue to do moving forward. Nobody expects prices to go to zero, and when they finally find a bottom and demand stabilizes, Olympic Steel is exceptionally well positioned to capitalize on all these initiatives and thrive, just as Michael indicated at the outset of this call.

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

(Operator Instructions) Aldo Mazzaferro; Macquarie Research.

I want to just say first of all I know how hard it is to reduce inventory in a down market, and it's good progress getting the turns down and improving the balance sheet at the same time.

And, Michael, on your comments about demand, you sound a little more worried on the demand side than I've heard you before. Could you elaborate a little bit on how significant a change you may have seen in the demand trends in the quarter?

Well, I think ultimately with short lead times, as David indicated, nobody's buying anything more than they need, again, typical three weeks, in some cases one to two days. Obviously you're seeing -- a lot of statistics are out in the energy sector and the mining sector and listening to our politicians talk about the elimination of fossil fuels and what that means to the energy sectors gives us pause.

We are listening to our customers. It's really a market share game, Aldo. We're very positive about our ability to improve our market share. But ultimately it is the market that we don't control. And so I think we have a government that's worked against basic industries. An activist EPA hurts the long-term interests of steel. And ultimately I think we have some national interest concerns.

But I don't think I'm any more concerned about the market than anybody else.

And, Mike, can I ask a follow-up, too? In terms of pricing I know it looks very weak right now. Are there any signs that you see right now that we could be close to a bottom? Or what kind of things would you look for to see signs of a bottom?

Well, every time the market goes down I hope we're closer to the bottom. I don't know if we're close to the bottom, but I know we're closer. I would say, Aldo, there's really no signs yet that as we head into, quote, the typical December scenario that there won't be a lower price coming down the road. We just don't know if it -- again, it's a factor or supply and demand.

And so, all of us would hope that in the typical scenario of the first quarter we would see increasing demand which would lead to the opportunity to have at least some price stability. But clearly we've got issues around imports that seem to be unfettered. And we see a strong dollar, which has the potential to go stronger. So, those are not factors that ultimately lead to essentially a marketplace where we're comfortable that we're at the bottom.

Right. So, do you expect much help from the coated tariffs and then the cold rolled and the hot rolled as they come down the pike? Do you think those will have any significant impact?

My mother used to tell me -- God helps those who help themselves. Okay? I'm going to stick with that, Aldo.

Thank you.

(Operator Instructions) Phil Gibbs; KeyBanc Capital Markets.

Going along the similar lines as Aldo's question on demand, what are your heavy equipment customers telling you right now, Mike, in terms of what they're expecting for next year? Or do you think their view of their production schedules right now is still very much in flux?

I'll let David answer that. He has probably a better accommodation to that question than I do.

Phil, I don't think that my commentary is any different than what you read in the paper, whether it's Caterpillar, or whether it's Deere, or Terex or whomever it might be. What we see is a little bit of a softening demand schedule from some of our customers who may have built a little bit more inventory than they're comfortable with. So we have a staccato approach as we get toward the end of a calendar year or their respective fiscal years.

I mean, overall, they're going to continue to make product and we're going to continue to earn greater share of their marketplace. But there's no question but that we see a little bit of a downturn, or continued downturn, from 3Q to 4Q.

Perfect. And, Don, regarding the tubular business, how have you been able to keep the margins as strong as they have been? I realize you had a little bit of LIFO help this quarter. But irregardless of that it still looked like the margins were pretty strong. And then maybe you can talk about the diversification there away from some of the original business you had when Olympic purchased the Company.

Well, I'm sure I've got some of my team on this call, so I thank you for acknowledging that, because it certainly didn't come easy. And it's probably the one area that we're most proud of.

And three things specifically contributed to that. So, somebody that we're selling a widget to this year that we were selling a widget to last year, we are not enhancing that margin. The marketplace does not allow that opportunity.

But what we are doing is going -- (inaudible) with our customers to do more enhanced value-added. So we're moving them up the value-added chain. We're doing laser. We're doing some six-axis laser, doing some engineering, and helping them reduce their total costs, so in that case further embedding ourself as a strategic partner with that customer.

The second thing that we're doing is we're moving towards more of the [light] metals. As the carbon prices are so compressed, when you pick a ton of metal or steel up it doesn't know the value per ton, so we are really looking at some of the more exotic alloys or white metals to enhance that value.

And the third thing, which I think is the greatest attribution to the success, has been a very critical look with our team at customers that aren't bringing value to the party. And there are customers and accounts that you will sell on a potential basis. And we've gone back and we've strategically looked at putting time limits on that potential.

So if that potential is not being materialized in a certain period of time, what we do is we will make a concerted effort to increase prices to where it is attractive to us. In those situations, a number of those accounts go away and, ironically, it enhances your profitability. And those that do stay are willing to pay the higher price.

So, again, we're very proud of that achievement. And those would be the three reasons for it.

Thanks for all of that color. Appreciate it. I think --

This concludes our question-and-answer session.

Operator, you cut off Mr. Gibbs. I don't know that he was done.

Sorry. Please go on.

Okay. Just a last question here on the margins. The gross margins on a FIFO basis, up pretty good quarter on quarter, maybe a portion of that a function of lower metals prices, some holding in of gross margin dollars. But what are you expecting for Q4? Should we expect margins to be improving? Or is the market maybe at this point not allowing that? Just trying to understand how you're thinking about that in the next year and Q4. Thanks.

Well, Phil, as I remarked, we've kept pace by adjusting our inventories, as Michael indicated early on, and Rick gave you some great detail. But we've kept pace with the pricing. And so, the degradation, as sharp as it is in terms of overall pricing on all products, we're in good shape. So we really don't see further compression in the margins.

Thanks, gentlemen.

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

Thank you. Once again, we'd like to thank you all for joining us this morning. We're going to continue to execute on our profit improvement initiatives and manage the Company for the long-term success according to the market conditions. And we like to say, every day in a down market is one day closer to the up market. So we're closing in on the up market.

Next month I will be presenting at the Goldman Sachs Metals and Mining Conference in New York on December 1 and hope to see you there.

In addition, Rick Marabito, Matt Dennis and I can always be reached to answer questions between our quarterly calls and conference appearances.

So, thank you, everyone, and have a joyous day.

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