Olympic Steel Inc (ZEUS) 2015 Q4 法說會逐字稿

Good morning.

And welcome to the Olympic Steel 2015 fourth quarter and full-year 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 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 the 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 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 joining us to discuss our 2015 fourth quarter and full-year results.

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

In the fourth quarter of 2015, Olympic continued to execute on our program to reduce inventory, pay down debt and control expenses, which we initiated in late 2014.

At the same time, we have also made notable progress on a number of long-term strategic growth initiatives.

Part of our vision to provide customers with more value-added content remains on a positive path, supported by new fabrication business awards in 2015 from large North American OEMs.

Our product diversification efforts continued to progress, as sales volume of aluminum grew in 2015, and our tubular and pipe products segment performed well, helping to offset the current industry headwinds facing carbon products, particularly in the carbon plate universe.

Externally, market conditions in the fourth quarter of 2015 were even more challenging than earlier in the year, and certainly far more than we could have predicted.

After the preceding 12-month decline, compression in pricing accelerated in October and November, with persistent weekly price declines experienced until mid-December, resulting in extreme margin pressure in the quarter.

And yet, we successfully increased our gross margin compared with last year's fourth quarter and full year, a strong outcome of our working capital management efforts.

In the last few days of December, prices finally stopped falling and turned higher, although modestly.

Internally, we successfully executed on sustainable operating improvements.

While reducing our operating expense by $25 million or 10% in 2015, we also performed well for our customers, with improved safety, product quality, and on-time delivery metrics.

I'm very pleased with our nimbleness in managing elements of our business and effectively responding to what has been and is transpiring in the market.

Accelerating inventory turnover and managing working capital to generate positive cash flow were critical to weathering the industry volatility.

We reduced inventory by more than $100 million, nearly 34%, in 2015, allowing us to reduce debt and further strengthen our balance sheet.

Also, inventory turnover ratios improved, which Rick will discuss and define later on the call.

Since the middle of December, metal prices have risen, and the forward curve indicates the market expects firmer prices as we move forward.

While plenty of external headwinds remain, particularly related to the large ongoing and devastating foreign dumping -- actually, illegal foreign dumping of steel product -- as well as weak commodity prices, currency exchange rates, and sluggish industrial economic activity -- the near-term outlook for metal price is better than it has been in months.

I believe that our actions on the controllable items have favorably positioned us to gain market share and increase our gross margins in 2016 for the year.

While disappointed in our 2015 financial results, I'm proud of our employees' performance and attitude this past year.

I wish to thank them publicly.

Finally, earlier this month, we announced that our Board of Directors declared the regular cash dividend of $0.02 per share payable on March 15th, 2016 to holders of record on March 1st, 2016.

And with that, I will turn the call over to Rick for his financial review.

Thank you, Michael.

And good morning, everyone.

According to the MSCI, industry shipments declined by more than 11% in the fourth quarter of 2015 compared with the prior year.

Our fourth quarter carbon flat product shipments declined by 15%, to 230,000 tons, resulting in our full-year volume declining by 11%, to 1.04 million tons from 1.17 million tons in 2014.

Volume was impacted by weak demand for plate products in the agriculture, mining, and heavy equipment end markets that we serve.

Sales volume in the specialty metals flat products segment held up much better.

Shipments of specialty metals increased 2%, to 17,000 tons in the fourth quarter.

This resulted in a full-year volume of 72,000 tons, which was down only 1% from the 73,000 tons shipped in 2014.

Prices were under pressure throughout the entire year and continued to tumble in the fourth quarter.

Average selling prices for our carbon flat products were down 22% in the quarter and down 13% for the year when compared with 2014.

Softness in nickel prices continued to pressure specialty metals pricing in the fourth quarter.

This resulted in our year-over-year average prices for these products declining 15% in the fourth quarter and 6% for the year.

Shipments and average sell prices in 2015 were also lower in our pipe and tube segment for both the fourth quarter and the full year compared to the prior-year period.

As a result of the depressed pricing and lower volume, consolidated net sales decreased 27.3%, to $238 million in the fourth quarter; compared with $327 million last year.

For the year, net sales declined 18.2%, to $1.2 billion in 2015; versus $1.4 billion in 2014.

As Michael indicated, our strong focus on inventory management resulted in year-over-year increased gross margin percentages in 2015.

Consolidated gross margin improved in the fourth quarter to 20.7%, up from 17.9% in last year's fourth quarter.

Full-year gross margin was higher, at 19.8%, compared with 19.2% in 2014.

Continued strong margins in our pipe and tube business and a greater proportion of 2015's total sales coming from the higher margin in pipe and tube improved our gross margins in 2015.

LIFO income increased in the fourth quarter as prices deteriorated more than previously expected.

We recorded $1.6 million of LIFO income in the fourth quarter, bringing our full-year 2015 LIFO income to $3.3 million.

Last year, we recorded $0.2 million of LIFO income in the fourth quarter and $0.4 million of LIFO expense for the year.

The net LIFO impact accounted for 30 basis points of our improved gross margin in 2015.

If you recall, in the fourth quarter of 2014, we recorded a goodwill impairment charge of $23.8 million.

In 2015, we recorded additional goodwill and intangible asset impairment charges totaling $25 million, of which $500,000 was booked in the fourth quarter.

We now have no remaining goodwill on our balance sheet, and intangible assets totaled $24.8 million at the end of 2015.

We successfully executed on 2015 cost-reduction initiatives, which contributed to a sharp decline in operating expenses.

Before considering the impairment charges, our operating expenses were reduced by $5.3 million or nearly 9% in the quarter, and $25.2 million or almost 10% for the year.

Excluding the impairment charges, the net operating loss in 2015 for the quarter was $6.7 million, compared with an operating loss of $2.8 million in last year's fourth quarter.

For 2015, excluding the charges, the operating loss was $2.8 million, compared with operating income of $14.6 million in 2014.

Interest expense continued to decline in 2015 compared with the prior year.

In the fourth quarter, interest expense decreased to $1.3 million from $1.6 million last year.

Full-year interest expense was $5.7 million, or 16% below last year's cost of $6.8 million.

The decreases were due to lower average debt in 2015.

And during the year, our effective borrowing rate remained just above 2%.

We posted a net loss of $5 million in the fourth quarter, or $0.45 per share; versus a loss of $26.9 million, or $2.42 per share in the fourth quarter of 2014.

For the year, net loss in 2015 was $26.8 million, or $2.39 per share; compared with a net loss of $19.1 million, or $1.71 per share last year.

After adjusting for the nondeductible goodwill impairment charge, our 2015 effective tax rate was just under 40%.

And we would expect our 2016 tax rate to be around 39%.

Now, let's move on to the balance sheet.

Unlike the external factors beyond our control, we actively managed our working capital during the year.

Working capital improvements contributed $95 million in positive cash flow during 2015, with an additional $12 million in cash generated from our operations.

Most of this $107 million in cash was then used to reduce debt.

The bulk of the cash generated from working capital was from disciplined inventory reduction.

In the fourth quarter, we reduced inventory by another $22 million.

This brought our full-year inventory reduction to $104 million in 2015.

We ended the year with $207 million of inventory, which was down 34% since the beginning of the year.

Our inventory focus resulted in inventory turnover increasing to almost 4.4 times in the fourth quarter of 2015, bringing our annual inventory rotation to 4.2 times in 2015 versus 4.1 turns in 2014.

For clarity, we calculate inventory turns based upon tons, not dollars.

Total tons shipped from our inventory are divided by the average inventory tonnage for the period.

If turnover was calculated using our year-end December 31st inventory tons on hand instead of the average inventory for the year, our turnover velocity increases to 5.4 times in 2015.

This demonstrates the speed with which we were able to right-size our inventory in alignment with the lower sales volume.

Accounts receivable declined $31 million, to end the year at $93 million.

Despite the difficult market environment, we have not experienced any significant credit issues within our customer base.

We remain vigilant on credit, and our average days sales outstanding were 38.4 days in 2015.

That's essentially even with 2014.

We reduced debt during 2015 by approximately $100 million, to $148 million at year end.

That's a reduction of more than 40% in the year.

Our low-cost flexible debt agreement is a real advantage in this market.

Our asset-based credit facility does not mature until July of 2019, and it contains no term repayments and minimal covenants, as long as availability exceeds $36.5 million.

We had $88 million of availability at the end of 2015, and that has grown to approximately $97 million here in the end of January.

We remain in compliance with all covenants, and we expect to maintain similar strong financing availability throughout 2016.

Capital spending remained below depreciation at $7.3 million in 2015.

Depreciation was $18.1 million for the year last year.

We expect this ratio to continue in 2016, with our CapEx estimated to be between $11 million and $14 million, while depreciation should be just under $18 million in 2016.

As of year end, shareholders' equity was $255 million or $23.25 per share, with our tangible net book value at $20.99 per share.

During the fourth quarter, we purchased 65,000 shares under our 550,000-share repurchase authorization program.

And this was done at an average cost of $10.71 per share.

And finally, we will file our Form 10-K later today, which will provide additional details on our operating financial results for the year.

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

Thank you, Rick.

Well, I'll state the obvious, and that is that it would be an understatement to say that 2015 was a difficult year in the steel industry.

After a challenging first nine months, the fourth quarter presented no relief, as prices declined at an even faster pace.

In addition, volume, which is typically seasonally weaker in the fourth quarter, was even softer than we normally see.

As the cost of steelmaking raw materials declined -- those such as scrap and iron ore and energy -- the market continued to deteriorate during the entire period of 2015.

Furthering import volumes of foreign subsidized steel poured into the United States and created a perfect storm of compounding factors that literally crushed steel prices.

Of course, this was exacerbated, as Mike noted, by the strong US dollar, a welcome mat for foreign steel.

As a result of these compounding factors, steel prices declined significantly during the year in all major products, from hot-rolled coil, which was down more than $240 per ton; to cold-roll and galvanized.

Plate prices fell even more, at $300 a ton.

In December, prices for hot-rolled coil touched a CRU index low of $354 a ton on December 9, which was down $243 per ton, or more than 40% since the beginning of the year.

These are prices we have not experienced since 2004, so 12 years ago.

Now, since then, cold-rolled and galvanized have recovered.

And currently, as we look into 2016, the spread of these downstream products has grown to plus $160 a ton over hot-rolled.

So we are starting to see a recovery, as we'll continue to talk about.

From a domestic perspective we are pleased with the trade actions taken so far.

Some action is certainly better than no action.

We anticipate that these efforts will continue, so that our domestic industry can compete on a level playing field, which has not been the case in recent years.

Again, we recognize the market shifts that were looming on the horizon five or six quarters ago, as both Mike and Rick outlined.

However, the severity of these downturns was more extreme than we anticipated.

We took decisive actions early in the down cycle to successfully navigate the challenges in the market.

In 2015, we continued to cycle through inventory to keep pace with falling prices.

And we believe we are prepared to recapture margins as the market stabilizes.

So as Rick noted, we reduced inventory by some $104 million in 2015, and we took another $20 million out of that the quarter earlier than that, fourth quarter of 2014.

But again, we did not anticipate this deep degradation throughout the year.

On the positive side, since the middle of December, the domestic mills have instituted two published price increases, which have boosted prices off of that 12-year low that I just remarked.

A $40-a-ton December price increase was followed by a $20-a-ton published increase in January of this year.

By the end of January, the CRU index as of yesterday was $398 per ton, which is $44 a ton improvement over the December low.

And we would conclude that the first price announcement of $40 has been absorbed.

Average lead times have also started to expand from the mills, and service center inventory levels are beginning to tighten.

All this has us feeling slightly better about the near-term pricing.

We also want to acknowledge the five-year infrastructure bill passed in December.

And we're encouraged by the strong industrial production reported for the month of January.

After five straight months of declines, it's nice to see the largest increase in industrial production in 14 months starting this year, 2016.

The industry prices remain stable through the next month.

In April, we will experience the first uptick in quarterly index-based pricing since the third quarter of 2014.

That being said, we intend to improve our financial performance regardless of what the market brings.

We have one new business that fits the strategic objectives, with the help of our new Butech Stretcher Leveler Line, commissioned in the middle of 2015 in our Georgia facility.

Several new fabrication awards with prime OEMs in the Southeast represent the type of higher-value business we are securing.

Our specialty metals group has also started selling fabricated stainless steel parts, and our aluminum sales continue to grow.

We believe these are attractive areas for profitable growth.

As Michael mentioned, we are benefitting from our strong financial condition and our ability to meet or exceed customer expectations.

Our inventory is well positioned, and our cost structure is now better aligned with current business conditions; all while preserving our flexibility to quickly respond to market volatility.

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

(Operator Instructions) Phil Gibbs, KeyBanc Capital Markets.

Just had a question in terms of what you're seeing from your customers as we come into the new year here, relative to maybe normal seasonality, or just on demand trends in terms of the outlook from them.

Phil, it's Dave Wolfort.

I'll take a crack at that.

And I will tell you that agriculture and mining isn't any better.

That's a certainty.

But the rest of our customer base is doing well.

Automotive is doing well, specialty metals are doing well.

Our tubing business, Chicago Tube & Iron, is doing well.

And our flat-rolled business is doing well, with the exception of those markets that I just nominated.

So we see a stable marketplace in 2016 right now.

Perfect.

And then, in terms of the gross profit margins of the business -- when should we think that those get -- start to see some meaningful lift?

Is that going to be more of a later Q1 event?

Do you feel like the inventories are in a good position now to see it?

Just help us think through that.

I think you'll see some marginal improvement in the first, Phil.

Recognize that a lot of our contract business is quarterly and/or annually.

A lot of that was set in December at the low prices.

And so that would reset somewhere in March.

And so we would see the impact of the real marketplace probably more in the second quarter.

But certainly, we're seeing some improvement in the spot market margins.

But it's going to be offset by sort of the year-end pricing leading into the first quarter contract.

So we'll see it second quarter.

Okay.

Thanks very much.

(Operator Instructions) Aldo Mazzaferro, Macquarie.

Rick, can you tell us how many shares you had outstanding at the end of the year?

Yes.

It was approximately 11 million, but let me get the exact number for you.

As he's looking it up, Aldo, you got another question?

(Laughter)

Yes, another question.

Actually, in response to your last question -- I was wondering why you won't see margins improving more quickly than waiting till the second quarter.

You think there's some hangover on pricing that's still working your way through on your specific products?

Well, Aldo, we've actually seen margin improvement.

As we've listed, the gross margins have increased in fourth quarter.

We've maintained the spread, and we've stayed even with the CRU all the way through December.

Now, we're a little bit ahead of the game.

But as Michael well said, half of our business is contractual.

And those contracts set -- some of those set in fourth quarter at the low number, and we'll look for them to reset for the second quarter.

The spot market -- we do see some strength there.

And Aldo, it's 11.1 million shares outstanding.

11.1 million.

Thanks.

Yes, again, Aldo, I don't want to be redundant, but we're seeing some margin improvement on the spot sales.

But the contract sales kind of is fixed.

Great.

But Mike, what do you think about your strategy on buying back shares?

I can remember you saying previously that you thought your float was too small, and therefore you were reluctant to make any moves on that.

And it seems like buying back shares, obviously, would be against that thinking.

But I understand the valuation.

I'm just wondering what you'd think about a long-term basis.

Is this a share repurchase program that could be extended and increased as you go forward, assuming the prices would continue to look attractive?

Well, the answer is -- our board determined to support our shareholders and the price of the stock, as we felt we are drastically underpriced.

So I think it's important.

We have faith and trust in our share price.

Whereas trading at 50% of book value, Aldo, is -- one, it's an opportunity; but, two, it really is -- we have a lot of faith in this company.

I think we need to tell our shareholders and current shareholders that we as Olympic Steel have faith in the price, and that as the price -- we just don't want it to fall down to a position that is so ludicrous it creates things which would create some concern of our employees, particularly, and [maybe] others that would look at us as too big a value.

So we just have authorization to do it.

As you saw, Aldo, we only took out 65,000 shares.

Again, we're not saying anything other than that.

We believe that the share price is too low, and we will support it as necessary.

Yes.

No, I think it's a great strategy.

And I'd point out that just by shrinking your [shares] doesn't necessarily mean that you shrink your market cap.

Absolutely, that's correct.

Great.

And then, one final question --

And Aldo, as Rick indicated, we had plenty of flexibility in our banking agreement and in our cash to do this.

Great.

And this is for Rick -- I saw a press release out from one of the wire services this morning saying that there was a non-GAAP $0.17-a-share report out of Olympic.

I'm wondering, do you have any idea what that $0.17 number referred to?

Or was that just totally in error?

I have no idea what that is.

Aldo, if you can give us the source of that, we'll track it down for you.

I think I saw it on FactSet, I think -- it said the $0.45 was GAAP, and then there was $0.17 loss non-GAAP.

And I don't know what they were adjusting for.

Anyway --

I mean, the only thing I could think they were adjusting for is the combination of LIFO and the impairment charges.

But I can't comment, because I don't know what they wrote.

Yes.

Okay.

Just wondering.

Thanks very much.

Thank you.

Thank you, Aldo.

And there are no further questions.

I would like to turn the conference back over to Mr. Siegal for any concluding remarks.

Yes, thank you, operator.

As a closing comment, I'll reiterate that I'm proud of the employees and our response to the industry's challenges, and their response to the challenges over the past 18 months.

Our efforts in 2015 have made us a stronger company.

We continue to provide best-in-class service to our customers and, at the same time, mange the Company for long-term profitable growth and enhanced shareholder value.

So once again, thank you for joining us this morning and for your interest in Olympic Steel.

Everybody have a great day.

That does conclude today's presentation.

We do thank everyone for your participation.