Olympic Steel Inc (ZEUS) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Olympic Steel 2017 Second Quarter Results Conference Call.

Today's conference is being recorded.

(Operator Instructions)

Some statements made on today's call will be predictive and are intended to be as forward-looking with 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, the 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, everyone, and thanks for joining us to discuss Olympic Steel's significantly improved financial performance in the second quarter and the first half of 2017.

On the call with me this morning are Olympic Steel's President, David Wolfort; Chief Financial Officer, Rick Marabito; President of our Chicago Tube & Iron business, Dr. Don McNeeley; and Executive Vice President and Chief Operating Officer, Andrew Greiff.

The first half of 2017 was the most profitable first half of our company in 5 years.

All 3 of our reporting segments, carbon flat, Specialty Metals and pipe and tube, generated substantial improvements in sales and operating income in the second quarter and the first half of the year.

We are pleased to report that once again, Olympic Steel's shipments outpaced the industry average.

According to the MSCI Metals Activity Report, industry-wide shipments increased 3.7% in the first half of 2017.

Our consolidated first half shipments were up 13% or more than 3x the market increase.

Performance in carbon flat products was especially strong as our shipments rose 13% in the quarter and increased by 14% in the first half.

Especially metals flat product segment continued to perform well as tons sold were up year-over-year by 10%, further increasing our share of the stainless sheet and coil markets.

And the tubular and pipe products segment also posted increases in sales and earnings, with record-high market share for our carbon pipe and tube business.

Our success in improving market share is a direct result of our strategy to position ourselves with customers who value superior customer service, quality, reliability and direct contact.

In addition, maintaining inventory at traditional levels allowed us to increase participation in the spot market.

During [on] the protracted negative cycle the past decade, we maintained our long-term growth profile and navigated the period by managing working capital and inventory to align with lower shipping volumes and improved operating efficiencies.

This was accomplished while continuing to invest for the future by adding product lines and enhancing our people, processing capabilities, facilities, equipment and technology capabilities.

And as a result, the future is now, and Olympic Steel is ideally positioned to benefit from a recovery in the U.S. manufacturing sector.

To support growing market demand, we have an exceptionally strong balance sheet and plenty of borrowing capacity, allowing us to quickly respond to changes in market conditions.

In addition, our strong financial position affords us the competitive advantage of low-cost financing to fund higher shipping activity and growth initiative simultaneously.

On the operating side, we have improved inventory management and accelerated inventory turnover to 4.8 turns on flat products while carrying higher levels of inventory and receivables to support growing demand and a larger share of the market that we are maintaining.

By and large, our customers are telling us that their respective end markets are continuing to recover, and they expect to remain busy in the second half of the year.

Metal prices are being supported by an improving macroeconomic environment around the world.

This has narrowed the U.S. price premium, which should reduce future imports.

There was a bump in import volume in the second quarter as traders brought in metal ahead of the expected results from the U.S. Department of Commerce's Section 232 investigation.

This 232 decision, which may or may not be forthcoming, has been a focus of much discussion in the industry and has created much of the recent volatility in steel pricing.

However, until something definitive is announced, it's all just noise to us.

The real story is the improvement in underlying fundamentals from recovering demand around the world.

Scrap prices are increasing and iron ore prices have also rebounded due to the demand in China, Europe and of course, the United States.

Looking ahead, our future is bright.

We are encouraged by the prospects of [a] year-over-year shipping volumes to remain strong in the second half.

The pricing support we are experiencing is real, and our operations are highly efficient, creating more capacity to take on new business.

This is setting the stage for continued year-over-year improvement in our financial results.

I am pleased to announce also this morning that the Board of Directors approved a regularly (sic) [regular] quarterly cash dividend of $0.02 per share payable on September 15 to shareholders of record on September 1.

And with that, I'll turn the call over to Rick to share the financial highlights for the quarter and half.

Thank you, Michael.

Good morning, everybody.

Consistent with our experience in the first quarter, we realized higher year-over-year shipping volume and higher average selling prices, which resulted in a 30% increase in second quarter sales and a 35% increase in net earnings compared to last year.

Each of our 3 reporting segments set all-time record highs in market share in 2017.

As Michael pointed out, our market share gains can be traced back to investments made during the down cycle to enhance our commercial position.

This included diversifying products, increasing processing capabilities and geographic reach and augmenting our sales force.

Simultaneously, we reduced cost by enhancing operating efficiencies and improving internal systems.

Now that the market is stabilized and is growing, we are reaping the rewards of our prior initiatives.

Second quarter consolidated net sales were $356 million.

That's up 6% from the first quarter and up 30% compared with last year's second quarter.

Net sales in the first half totaled $691 million, which is also up 30% from the first half of last year.

The improved sales were driven by increased shipments combined with the higher prices.

The largest sale increase came from our carbon flat products segment, where net sales increased 37% in the quarter, and they were up 36% for the first half.

Tonnage in this segment grew by 13% over last year in the second quarter and by 14% during the first half.

Sales tonnage of carbon flat products in the second quarter also sequentially improved approximately 2% from the first quarter.

Average selling prices for carbon flat products was up 21% in the second quarter compared with the same quarter last year.

Prices in the segment also sequentially improved 8% from the first quarter despite a 10-week market pricing dip that began in April and persisted through early June.

For the first half of 2017, selling prices increased 19.5% over last year.

Net sales in our Specialty Metals segment rose 18% in the quarter and by 22% for the first half.

Tons shipped grew 4% versus last year's second quarter and were up 10% in the first half of 2017 compared with last year.

Prices in the Specialty Metals segment increased 14% and 11%, respectively, over the second quarter and first half of last year.

Average prices in the segment were also up by about 4% over the first quarter, which was partially offset by a 3% decline in sequential shipping volume from the first quarter.

Our pipe and tube segment generated 19% higher sales in the second quarter, and sales grew 18% over -- in the first half.

That would be over the first half of last year.

Compared with the first quarter, pipe and tube sales improved 1% sequentially.

Consolidated gross profit dollars grew 7.7% in the second quarter and by 18.3% during the first half of 2017 compared with last year.

As a percentage of sales, gross margins were lower in the quarter at 20.5% compared with 24.8% last year as well as in the first half at 21.6% versus 23.8% in the first half of last year.

The higher margin dollars were earned on lower margin percentages as a result of holding our margins per ton relatively stable.

They were within 5% on a higher selling price and sales base.

We did record LIFO expense totaling $400,000 in the second quarter.

That brought our year-to-date 6-month LIFO expense to $775,000 this year.

For comparative purposes, we did not record any LIFO impacts in last year's first half.

Our lean initiatives and operational discipline kept operating expenses well under control for the quarter and the 6-month.

Operating expenses in the second quarter were 3% lower than in the first quarter of this year, and we increased our consolidated shipping volumes quarter-to-quarter.

Second quarter operating expenses grew just 7% last year on the more than 12% increase in the shipping volume.

This produced operating leverage that flowed to the bottom line results in earnings.

Consolidated operating income improved to $9.6 million in the second quarter.

That's up $8.3 million in the same quarter of 2016.

For the first half of 2017, operating income more than doubled to $20.7 million or 3% of net sales.

That's up from operating income in last year's first half of $8.4 million or 1.6% of sales.

Interest expense increased $500,000 in the second quarter, and it increased $900,000 in the first half compared with last year.

The increases were due to several market rate -- interest rate hikes and higher average debt balances used to fund rising working capital requirements related to the strong sales activity.

Pretax income of $7.8 million in the second quarter grew 12% versus last year's second quarter.

Year-to-date pretax income more than tripled over last year's first half, reaching $17.2 million.

Our effective income tax rate normalized in the quarter at 38.6%.

We recorded a lower-than-normal income tax provision of 27.4% for the first half.

You may recall in the first quarter of the year, our income tax was reduced by an adjustment totaling $1.9 million relating to one of our employee retirement plans.

Second quarter net income climbed 35% to $4.8 million or $0.42 per share.

That's compared with $3.6 million or $0.32 per diluted share last year.

Second quarter earnings were negatively impacted by approximately $0.05 per share.

$0.02 per share related to the LIFO expense, and $0.03 per share was for losses related to our Siler City, North Carolina operation that was closed here last month in July.

Net income in the first half of 2017 improved to $12.5 million or $1.10 per diluted share.

That compares with last year's first half net income of $2.8 million or $0.25 per diluted share.

The first quarter income tax adjustment increased this year's net income by about $0.17 per diluted share, and that was partially offset by the $0.04 of 6-month year-to-date LIFO expense.

Our balance sheet remains strong.

Working capital increased by $63.5 million in the first half of the year to support the higher demand and the higher pricing.

Most of this increase funded higher receivables, which expanded to $158 million at June 30 from $102 million at the end of December.

Our receivables remain in great shape, with average days sales outstanding less than 40 days.

Inventory was flat with the end of the first quarter, and it stood at $263 million at the end of June.

Our inventory turnover for the second quarter improved to 4.8x, that's up from 4.6 turns in the first quarter, on accelerated shipping volume that's fueling our earnings growth.

Total debt at the end of the second quarter was $212 million, and availability under our asset-based lending agreement grew to $120 million as of June 30.

The increase in borrowing availability is a result of excellent management of our accounts receivable and inventory.

We had strong operating cash flow of $21.4 million in the first half, which was deployed into working capital, as $59.5 million in cash was primarily used to fund higher accounts receivable and inventory.

Capital expenditures in the first half totaled $4.5 million.

Finally, shareholders' equity increased to $266 million or $24.28 per share at the end of the second quarter, and our tangible net -- our tangible book value increased to $22.14 per share.

We plan to file our 10-Q this afternoon, which will provide additional details on the second quarter results.

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

Thank you, Rick.

Needless to say, it feels great to reiterate what Mike Siegal said at the outset of our call.

We are pleased to report that once again, Olympic Steel shipments outpaced the industry average, resulting in record consolidated market share.

In fact, our second quarter, ultimately the first -- and ultimately the first half of 2017, confirmed a stronger economic performance in the U.S. as well as China and the euro zone.

The influence of stronger Chinese industrial production as well as significantly improved euro zone industrial production were welcome catalysts in enriching our domestic demand.

So the continued growth in both earnings and shipped tonnage can also be recognized in the larger picture of stronger economic demand that has translated to higher steel demand, especially for Olympic Steel.

Again, I'll echo Michael's words.

Our customers are telling us that their end markets are continuing to recover, and they expect to remain busy in the second half of the year.

We can absolutely confirm this positive sentiment, as at the quarter end each of our 3 reporting segments set all-time record highs in market share, as Rick noted a moment ago.

Here, the progress of the second quarter complemented our success of the first quarter as we punctuated June's end with a higher year-over-year shipping volume and higher selling prices.

We grew our markets in excess of 80,000 tons across every business segment, cementing our geographical expansion of the last 7 years.

Again, our actions post-recession and in conjunction with our 2011 acquisition of CT&I have elevated our service center platform, allowing Olympic Steel to earn record market share.

The market penetration allowed us to earn an additional 14% in overall carbon shipments as Specialty Metals continue to climb in both stainless steel and aluminum.

The commercial integration of our pipe and tube segment 6 years post-merger with CT&I allowed this segment to grow sales 18% in the first half of this year, as we now service these long products in 4 additional flat rolled locations as well as the expanded presence of the original Chicago Tube & Iron.

At the same time, our operating managers have been controlling costs through lean initiatives such as reducing scrap, optimizing facility throughput.

At a higher level, we are continually optimizing our geographic footprint to appropriately service local and regional market conditions.

On that front, in May, we announced the decision to transfer business and processing equipment from our Siler City, North Carolina facility to other locations.

Our nearby facilities in North Carolina and Georgia and Kentucky are appropriately equipped to service our customers.

By closing Siler City, we should improve our overall capacity utilization and further increase company-wide operating efficiencies.

As Michael stated, the future is now and the future is bright for us.

Our customers are indicating their respective market outlooks are stable and improving.

Notwithstanding the modest summer slowdown in the third quarter, our customers are telling us they anticipate business activity to remain elevated in the second half of the year.

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

(Operator Instructions) We'll go first to Seth Rosenfield of Jefferies.

It's Seth Rosenfeld at Jefferies.

Just a couple of quick questions today.

First, within your carbon flat business, we had seen a couple of quarters, especially in the last year or so, that we didn't think [from a] challenged performance within that one division as your other areas like Specialty Metals were much better.

This quarter, in Q2, was a much stronger performance than what we were forecasting.

Can you just talk us through some of the moving part that drove this stronger margin performance in carbon flat?

I remember that at the time of Q1 results you noted some favorable low-cost inventory holding gains there.

Was this the case for Q2 as well?

Seth, Dave Wolfort here.

We've seen a resurgence in agriculture -- in our agricultural marketplace and in our construction marketplace.

Both of those were flat last year, began to gain some momentum in the tail end of '16 -- the very end of '16.

And then we started to see a ramp-up on -- in both of those categories.

Most of our large OEMs have been significantly busier, and the second-tier support for that has been busier.

We saw automotive do fairly well for us, particularly in first quarter and again in second quarter, with the advent of us supplying some aluminum.

So across the board and in spot market, too, we've seen a tremendous surge in business.

And we've been capable of servicing that, needless to say, through the growth of some inventory and the facilities that we earmarked earlier.

On the inventory side, can you just talk a bit about your strategy?

I guess any willingness to take a bit more higher -- a bit higher inventory during a time of what you perceive to be higher prices -- rising prices and whether or not you think that, that could be a bit challenging given some of the unknown trade productions we have right now?

Yes.

Well, unknown is unknown.

I would say this.

Our business is about working capital turnover.

There's a level that we want to match our inventory turnover relative to the sales.

So somewhere -- we like to target 5 turns, Seth, and that would be the case in all markets regardless of the pricing.

So sticking to the discipline of managing our inventory levels to our sales is really how we manage the business every day.

(Operator Instructions) From KeyBanc Capital Markets, we'll go next to Phil Gibbs.

The question was on -- first question here is on the strong selling you saw to other service centers or competitors during the first quarter.

I was curious if that continued into the second quarter and whether or not you expect that to continue into the third.

Well, the answer is yes and yes.

I think when you look at the MSCI numbers, we see a combination of low inventories in the system.

And for people like us, who like to maintain a discipline of inventory -- obviously, a lot of our competitors seem to be very light.

And as the overall industrial demand picks up, they come to people like us.

And so we don't see that changing as we enter into the third quarter, so we've been the recipient of a real opportunity to service the overall market by having the inventory at normal levels.

We expect that the inventory levels will continue to be depressed in the overall market, and that will afford us that opportunity to take advantage of the holes in inventories from others.

Okay, appreciate that.

And outside of steel purchasing costs on the rise here, can you discuss anything else that you're seeing in terms of inflationary pressures in the market?

Well, obviously, interest rates are up a little bit.

I don't know.

Again, we don't -- we'll cross that -- as I said in my narrative, 232, for us, when it occurs, we'll deal it with then.

But the 232, certainly, there is an expectation that we'd have some modest inflationary pressure as it would impede imports, which have been a big part of the overall market for the last, pick the number of years, 5, 7 years.

So by cutting the supply in a rising demand market, one might presume that, that could be inflationary.

No, I was more curious, Michael, on the -- anything that you may be seeing on freight, labor or packaging as the economy has -- industrial side has certainly strengthened this year.

Well, again, employment levels today are low.

It's very difficult in certain parts of the country to get labor, particularly skilled labor like welders.

And so in that constructs, people who have been patient in terms of wages are probably going to expect -- across the board in all industries, they're going to expect some kind of catch-up.

But it's our job as management to temper what could be long term or what might be short term.

But clearly, health care costs are up, and I think the wages will probably be up as we look forward.

Okay.

And last question I have is on the M&A environment and whether or not you're seeing more private companies come to the marketplace following maybe a slower market in terms of willingness or wantingness late last year and very early this year.

It's about the same level.

I don't -- I haven't seen anything of appreciable difference.

There's a number

(technical difficulty)

[both] companies that are trying to sell.

It's not more or less robust.

It's kind of normal, but there's plenty of activity in the pipeline.

And it appears there are no further questions at this time.

Mr. Siegal, I'd like to turn the conference back over to you for additional or closing remarks.

Well, thank you.

So let me just state that Rick Marabito and myself will be in New York City next week, I'm sure that's exciting for all of you, attending the Jefferies Industrial Conference on Monday and Tuesday.

We will also be in Boston together at KeyBanc's Basic Material Conference on September 11 and 12.

So we hope to see you at one of those events.

And by the way, we're available for other events as well, just in case.

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

We look forward to the results from a successful third quarter on our next call and hope everybody has a wonderful day out there.

And this does conclude today's presentation.

Thank you all for your participation, and you may now disconnect.