Olympic Steel Inc (ZEUS) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Olympic Steel 2018 First Quarter Earnings Conference Call.

(Operator Instructions)

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 Olympic Steel's strong start to 2018.

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

As expected, after a normal seasonal start to 2018, both shipments and pricing accelerated throughout the first quarter, ending with a particularly outstanding March.

This trajectory has continued through April and into May.

We achieved substantial progress on our growth initiatives during the quarter.

All 3 operating segments generated double-digit top line growth and robust operating income.

Our specialty metals and tubular and pipe products segments both posted record high sales for the first quarter.

To facilitate additional growth this year, we installed a long bed tube laser at Chicago Tube, installed a slitter for our specialty metals in Streetsboro, Ohio and have broken ground on our facility expansion in Chicago to house a new cut-to-length line expected to be operational in early 2019.

Consolidated net sales rose to $376 million in the first quarter, up 12% over last year's same quarter and up 22% from the fourth quarter of 2017.

The strong sales also drove operating income up by 12% to $12.3 million, which was our best quarterly operating income since the second quarter of 2011.

In addition, just starting 2018 with an exceptional organic growth, on April 2, we acquired the net assets of Berlin Metals.

Berlin is a well-established, successful service center specializing in tin and stainless-steel strip products with approximately $50 million in annual sales.

This acquisition strengthens our growing stainless steel business and diversifies our product portfolio with the addition of prime tin mill products that also creates cross-selling opportunities to new and existing customers, which has been a highlight of our Chicago Tube & Iron acquisition.

Berlin Metals will be part of our Specialty Metals operating segment and will be reported as such in the future.

Berlin is expected to be immediately accretive.

We continue to evaluate additional acquisitions that meet our strategic objectives as the M&A and financing markets are aligned positively.

Let me say that again, positively.

I'm encouraged by our strong momentum, entering the second quarter with customer contract pricing, resetting at higher levels to start the second quarter, and the spot market remains active.

Our strong balance sheet and our ongoing investments in people and facilities have us perfectly positioned to thrive in this accelerating market.

Externally, economic indicators remain strong, reinforcing what we are seeing in the markets.

According to the latest manufacturing report from the Institute of Supply Management, March was the 11th straight month with the new orders indexed at 60 or more.

In addition, the backlog of orders indexed continued a 14-month expansion, with its highest reading since May of 2004.

This is a reassuring data as our preparation and capabilities are now meeting economic opportunity.

The Section 232 trade action does not affect neither supply nor demand.

However, as we see the court is being negotiated by the government, we believe this to be very positive and eagerly await additional outcomes by the administration.

This morning, we also announced the Board of Directors declared our 52nd consecutive quarterly cash dividend.

The regular cash dividend of $0.02 per share will paid on June 15, 2018, to holders of record on June 1. And finally, later this morning, we will be hosting our Annual Shareholders Meeting and would hope to see some of you there.

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

.

Thank you, Michael, and good morning, everyone.

As Michael indicated, we saw a normal seasonal start for the first quarter.

However, shipments and pricing strengthened substantially as we moved through the 3 months.

Our first quarter shipping volumes sequentially increased more than 16% from the fourth quarter of 2017.

Compared with the first quarter of last year, carbon flat product tonnage was up 2%, while specialty metals shipments increased by 7%.

Last summer, we closed our facility in Siler City, North Carolina.

The lost volume from the closure, together with lower first quarter 2018 international brokerage sales from our Miami sales office, accounted for the entire decline in year-over-year carbon flat shipment volume.

Consolidated same-store shipments grew by 3% compared with last year in the first quarter, which, according to the MSCI Metals Activity Report, match the industry's overall 2.6% growth rate.

Given the nature of our pipe and tube products, we do not report tonnage for this segment.

However, shipments were up significantly for both the first quarter and the fourth quarter of last year at CTI.

Our market share for stainless steel and coil products is currently approaching 6.5%, which is an all-time high for us, and that is before any contribution from the Berlin Metals acquisition.

Every selling prices increased in every product category we sell, both sequentially from the fourth quarter of '17 as well as from the first quarter of last year.

Our average selling price for carbon flat products grew to $809 per ton in the first quarter of 2018, and that was up 13% from the same quarter last year and up 5% over the fourth quarter.

Specialty metals pricing was 5% higher over both the fourth quarter and the first quarter of last year.

Consolidated net sales increased to $376 million in the first quarter of 2018.

That's up 12% from last year's first quarter and 22% higher than in the fourth quarter of 2017.

Driven by the higher prices, net sales in the first quarter of 2018 increased by 11% in carbon flat products and by 13% in specialty metals compared with last year.

Revenue was up 15% in the pipe and tube products segments due to the strong volume growth.

Gross margin in the quarter improved to 21.5% of net sales, that's up from 19.4% of net sales in the fourth quarter but down from 22.8% of net sales in the first quarter of last year.

However, gross profit dollars increased by 6% to $81 million in the quarter, up from $76 million in the first quarter of last year.

On a per ton basis, average gross profit increased by $15 per ton or 10% to $172 per ton in our carbon flat products segment, which more than offset a 9% decline in gross profit per ton in the specialty metals segment.

Last year, our specialty metals segment posted exceptionally high gross profit of [$417] a ton, which was due to a sharp spike in chrome surcharges early in 2017.

This year's first quarter gross profit per ton averaged a very healthy $378 in the specialty metals segment.

Most of our pipe and tube inventory is on LIFO, and we recorded LIFO expense of $500,000 in the first quarter, which was above the LIFO expense of $375,000 booked in last year's first quarter.

Operating expense control continues to be a priority.

During the first quarter, total operating expenses increased to 4.7% compared to last year.

The increase was largely driven by inflationary market pressures in freight.

We continue to execute on freight initiative, including growth of our internal truck fleet to mitigate these market pressures.

Operating income increased by 12% to $12.3 million in the first quarter of 2018, that's up from $11.1 million in the first quarter of last year.

As Michael stated, this was our highest operating income since the second quarter of 2011.

The pipe and tube product segment had exceptionally strong earnings and generated 72% higher operating income in the quarter compared with last year.

Don McNeeley and his team at CTI have done a superb job of controlling operating expenses, which declined by 3% in the first quarter versus last year's first quarter.

Interest expense increased $360,000 in the quarter to $2 million, that's compared with $1.6 million in the first quarter of 2017.

The increase was due to higher average borrowings to fund elevated working capital requirement combined with higher market interest rate.

Our average borrowing rate in the first quarter was 3.4%.

Our effective tax rate in the first quarter of 2008 (sic) [2018] was 26% of pretax income.

That reflects the benefits of December's tax reform legislation, and the 26% number is a good indicator of an approximate tax rate going forward for Olympic Steel.

In last year's first quarter, we recorded a onetime $1.9 million deferred tax benefit related to one of our retirement plans, which reduced our effective tax rate last year to 18.1% and added $0.16 per diluted share to net income in the first quarter of 2017.

Pretax earnings increased 10% in the first quarter of 2018 versus last year's first quarter.

Net income was $7.6 million or $0.67 per diluted share.

In last year's first quarter, we reported net income of $7.7 million or $0.68 per diluted share.

The pre-LIFO EPS comparison before the onetime tax adjustment last year was $0.70 per share this year versus $0.54 per share last year.

Turning to the March balance sheet.

Accounts receivable increased by $42 million and inventory increased by $44 million from year-end.

This $86 million increase reflects higher prices, higher inventory value -- volume and normal seasonality from amplified shipping activity.

The quality of our receivables remains excellent.

With the surge in pricing and business activity, we are diligently monitoring any customers that could be vulnerable to escalating market conditions.

Our day sales outstanding in the first quarter averaged less than 43 days.

Our annualized flat products inventory turnover rate based on ton was 4.3 turns in the first quarter, which is down slightly from 4.5 turns we averaged throughout 2017.

We intentionally increased inventory levels in the first quarter as lead times were extended and metal prices were rising.

As the year goes on, we expect to improve our inventory turnover rate.

At quarter end, total debt was $249 million or $52 million higher than at the end of last year.

This again was due to higher working capital, which increased by $58 million in the quarter.

As of March 31, we had a record $148 million of availability on our credit facility -- our revolver, which reflects amendments we made in December to increase the size of the facility to $400 million and extend the maturity to 2022.

Shareholders' equity increased to $281 million.

That's $25.55 per share at the end of the first quarter.

And our tangible book value stood at $23.48 per share.

Finally, capital expenditures in the first quarter of 2018 increased to $7.7 million, funding several internal growth initiatives that Michael noted and that David will highlight in a moment.

For the full year, we are forecasting total capital expenditures of approximately $25 million.

First quarter depreciation expense was $4 million.

We plan to file our 10-Q later today, which will provide additional details on our operating results for the first quarter.

With that, I will now turn the call over to David for the operating review.

Thank you, Rick, and good morning to everyone.

As we entered 2018, the positive momentum of 2017 after a slight pause in early fourth quarter has continued to propel the metal markets and Olympic Steel.

We started increasing our purchasing levels of last November based on customer growth sentiment and in the anticipation of the passage of the Tax Cuts and Jobs Act that we saw in December of 2017.

We accumulated additional first quarter inventory as the market tightened, lead times extended and narrowing allocations for certain products began.

At the same time, some buyers began -- became hesitant in January and through early February as GDP temporarily softened and the market was focused on uncertainty of the administration's resolve surrounding the U.S. Department of Commerce Section 232 investigation.

As we all know, Secretary of Commerce Wilbur Ross delivered his long-awaited findings on Section 232 investigation in mid-January.

Momentum began to build in metal prices which have been creeping up, surged in March when the President announced new tariffs on steel and aluminum imports.

Concerned buyers quickly returned to the markets to secure adequate material to meet growing end market demand.

This allowed us to immediately capture higher spot market prices on our inventory investment.

Our spot sales to other service centers increased to approximately 11% of consolidated sales of the first quarter compared to more traditional 8% to 10% of our sales mix.

Our advantaged position today is no accident.

For the past several years, we have been preparing ourselves to return -- for a return of stronger GDP growth and a recovery of manufacturing sector.

As Michael noted at the onset of this call, all 3 operating segments generated double-digit top line growth and strong operating income.

We continue to invest and expand our direct -- in our direct sales force with well-trained professionals who stay in close contact with metal consumers.

They have been observing our customers' hiring skilled laborers and increasing parts outsourcing as well as listening to buyers' expressed concern about securing sufficient material to satisfy their needs.

We believe our high-touch sales velocity provides Olympic Steel with a competitive advantage.

Not only does it put our fingers on the pulse of the market, it also provides us with market coverage to optimize performance in times of growth.

Our long-term growth bias has also led us to reenter the acquisition market.

And again, as both Mike and Rick indicated, the addition of the Berlin Metals acquisition, we have several internal projects underway to drive profitability growth.

As you may recall, we are constructing a 42,000 square foot building, expansion in our Schaumburg, Illinois facility just outside of Chicago to house our new Herr-Voss cut-to-length line dedicated to stainless steel.

Framing work is complete on the building expansion and the new processing equipment is expected to begin production in early 2019.

We have also installed a new long bed tube laser line at CTI to accommodate growing processing opportunities.

In addition to all of this, we refurbished a stainless steel slitter, our third slitter at our Streetsboro facility, just became operational in April.

Andy Markowitz and his specialty team are busy ramping up production to absorb additional processing volume.

Overall, we are pleased, I would say we're thrilled with where we stand, and the table is set for additional -- for an exceptional second quarter, excuse me.

We remain encouraged by the long-term demand trends, our end markets and our ability to leverage benefits from GDP growth.

The construction equipment market has been very strong for us, and we are experiencing more activity in agricultural and transportation of equipment markets.

Our pricing outlook contemplates the 1-month extension of the Section 232 tariff exemptions and the growing list of tariff exemption requests.

We are cognizant that the stated goal of the tariffs to strengthen the domestic steel industry and improved capacity utilization, and Olympic Steel has been investing capital in America for the last 34 years.

Our vision and commitment to domestic industrial growth and the continuing growth of our enterprise is magnified as domestic GDP expands.

New capacity will be coming online and spreads have widened between domestic and overseas prices.

We are planning on turning our inventory faster as 2018 progresses.

We have always been devout advocates of free market policies and believe U.S. manufacturers came compete and win on the global stage provided there is a level playing field.

We applaud the administration's recent Section 301 actions to address transshipping and routing goods to other countries to disguise their original point of origin.

Beyond supply side dynamics and pricing volatility, we remain optimistic that action will be taken to spur much-needed domestic infrastructure investment.

Metal pricing -- metal prices will always fluctuate, but there is no substitute for healthy markets and genuine demand.

This is what we've been seeing from our customers, and this is what makes us confident in the ability to realize future growth and profitability.

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

(Operator Instructions) We'll take our first question from Aldo Mazzaferro with Mazzaferro Research.

(Operator Instructions) There are no questions in the queue at this time.

Well, we are thrilled to answer all the questions at our presentation.

So thank you, operator.

And at the end of May, Rick, and I will be attending the KeyBanc Capital Markets Conference at Boston, and we look forward to presenting at that conference.

Thank you, Mr. Gibbs, and we look forward to meeting many of you there.

Again, we thank you all for joining us this morning and for your interest in Olympic Steel.

And we look forward really to our second quarter results and being able to share them all with you this summer.

Thank you, all.

Bye-bye.

That concludes today's conference.

We appreciate your participation.