Olympic Steel Inc (ZEUS) 2019 Q3 法說會逐字稿

Good morning and welcome to the Olympic Steel 2019 Third Quarter Financial Results 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 and 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 the press releases filed with the Securities and Exchange Commission.

During today's discussion, there may be references to adjusted net income per diluted share, which is a non-GAAP financial measure.

A reconciliation of this non-GAAP measure to the most directly comparable GAAP financial measure is provided in the press release that was issued this morning, which can be found on the company's website.

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 Chief Executive Officer, Rick Marabito.

Please go ahead, Mr. Marabito.

Thank you, operator.

Good morning, and thank you for joining us to discuss Olympic Steel's 2019 Third Quarter Results.

Joining me on the call this morning are Olympic Steel's President, David Wolfort; CFO, Rich Manson; Executive Vice President and Chief Operating Officer, Andrew Greiff; and President of our Chicago Tube and Iron Business, Don McNeeley.

This morning, we announced third quarter net income of $591,000 or $0.05 per diluted share.

Our specialty metals and pipe and tube segments continued to show resilience and solid profitability in the third quarter, which was a difficult market for carbon steel products.

Softer global demand, unsettled trade agreements, excess global steel capacity and overall market uncertainty resulted in sharp declines in carbon steel pricing and slowing customer demand.

We are beginning to see the positive results of diversifying our business.

We have grown our specialty metals and pipe and tube segments to constitute 44% of our sales in the third quarter.

Our specialty metals segment had strong profitability as we continue to grow our market share.

Andrew will detail our specialty metals accomplishments later in the call.

Our pipe and tube segment also continues to deliver strong sales and earnings.

We have continued to profitably grow market share, particularly in the Southeast where we repositioned our North Carolina operations for greater participation in pipe and tube distribution in that geography.

As evidenced by the MSCI statistics, our pipe and tube sales were down approximately 2% year-over-year, while the market was down 14%.

This year, we also acquired 2 manufacturers of metal-intensive branded products, McCullough Industries and EZ Dumper, which are included in the Carbon Flat Products segment.

These acquisitions have already started to pay off by providing a countercyclical benefit in times of falling steel prices.

We believe the execution of this strategy will truly differentiate Olympic Steel in the service center space, enabling us to deliver higher returns with less volatility.

Looking forward, we believe we are at the bottom of carbon steel pricing pressures, and we will continue to best position Olympic Steel for the future by incrementally reducing our operating expenses, strengthening our balance sheet and focusing on cash flow generation to pay down debt, all while providing exceptional service to our customers.

Our Board of Directors declared a regular cash dividend of $0.02 per share, which is payable on December 16 to holders of record on December 2. This marks our 58th consecutive quarter that we have paid a cash dividend.

We are also pleased to announce the appointment of Vanessa L. Whiting to the Olympic Steel Board of Directors.

Vanessa is the President of AES Management, a franchisee of Popeyes Louisiana Kitchen restaurants in Northeastern Ohio, and she is an attorney who has been named one of the top 100 lawyers in Northern Ohio.

She has extensive experience leading her own business and managing corporate finance, real estate and mergers and acquisitions to enhance the value for all shareholders.

She is a tremendous addition to our Board, and we look forward to working with her and her future contributions to Olympic Steel.

I will now turn the call over to David for his comments.

Thank you, Rick.

This market has been a challenge, but it is similar to markets we have experienced before.

Our seasoned team has navigated many different cycles throughout our history, and we have always emerged a stronger company.

We have successfully expanded our geographical footprint and strategically expanded our presence in all 3 of our business segments.

And now we're strategically focused on integrating all of our strengths across the organization through our downstream strategy to acquire manufacturers of metal-intensive products.

As we reflect on our diversification as an innovative service center, one thing is clear, our strategy is to grow and diversify is helping.

Olympic Steel delivers sustained and profitable growth and weather difficult markets that challenge, both metal pricing and end-user demand.

As Rick indicated, in 2019, we began to add downstream metal-intensive branded companies to our portfolio.

There is immense opportunity in these strategies for several reasons.

First, by nature of the product offered, these businesses have higher EBITDA margins and returns than our existing businesses and, therefore, provide an immediate impact on our profitability.

Second, we can apply our expertise in purchasing, metal processing and logistics to enhance efficiencies in these businesses with the goal of growing our income and further expanding EBITDA margins.

And finally, their performance is countercyclical to the steel distribution business and, therefore, these businesses help reduce volatility in our overall results.

This acquisition strategy is already showing promise as our recent additions have had an immediate positive impact on our profitability.

As we grow these businesses and evaluate our opportunities to add to our portfolio, we are confident they will continue to have a positive and compounding impact over time.

It is also important to note that we continue to actively search for companies to add to our portfolio of manufacturers, and we have the necessary capital to secure acquisitions as new targets are identified.

With that, I'd like to turn the call over to Andrew Greiff to add further color to our commercial efforts.

Thank you, David.

As Rick noted earlier in the call, our specialty metals and pipe and tube segments were resilient during the difficult market.

I'd like to take a few moments to specifically highlight our efforts to profitably grow our specialty metals business.

Over the past 2 years, our targeted acquisitions and capital expenditures have helped our specialty metals segment grow.

And under the leadership of the President of specialty metals, Andy Markowitz, resulted in strong third quarter earnings.

Last year, we acquired Berlin Metals, which allowed us to expand our offerings in light-gauge stainless steel as well as tin products.

In 2019, we opened our 42,000 square-foot addition to our Schaumburg, Illinois facility to house a new cut-to-length line dedicated to processing stainless steel in aluminum.

We also added a second specialty metal slitter in our Streetsboro, Ohio location.

During 2019, our specialty metals segment has experienced significant growth, most notably in stainless steel.

According to the MSCI Metals Activity Report, our stainless flat roll shipments were up 10.6%, while the overall market was down 2.7%.

Over the past decade, we have profitably grown our market share in stainless steel from just under 1% to almost 8%.

We believe this is a reflection of our ability to grow the business by focusing on exceptional customer service, increasing our processing and fabrication capabilities and expanding our geographic footprint.

Looking ahead, we expect our aluminum participation will grow in 2020 as we have continued to invest and add talent to this product.

Our focus on automotive aluminum in addition to our commodity-grade aluminum sales will allow us to profitably grow our market share in 2020 and beyond, specifically in our Detroit, Atlanta and Mexico locations.

Overall, we are very encouraged by the results we are seeing from our diversification strategy and believe we have a great opportunity to continue expanding EBITDA margins and reducing cyclicality through these efforts.

Now I will turn the call over to Rich to discuss the financial results for the quarter.

Thank you, and good morning, everyone.

Before I review our results, I want to remind everyone about a few things that impact our 2019 comparisons with 2018.

For the first 3 quarters of 2019, results include revenues and expenses from McCullough Industries, which we did not own in 2018.

2019 also includes the operations of Berlin Metals, which we did not own until April 2018.

And lastly, quarter-over-quarter comparisons were impacted by the Section 232 tariffs enacted in late March 2018, which led to rapidly increasing 2018 shipping volumes, prices, gross margins and profitability.

For the quarter, we reported net sales of $384 million, a decrease of 16% compared with 2018's third quarter.

Selling prices decreased by 7% in the third quarter versus the same period a year ago, while volume was down 10%.

The majority of these declines were due to market pressures on our carbon flat business.

specialty metals posted strong performance for the quarter with sales increasing 6% versus the third quarter of 2018, driven by volume, growth and improved pricing.

Our pipe and tube segment also provided strong results during the quarter with sales outpacing the market, as Rick noted earlier.

For the first 9 months, net sales were down $26 million, a 2% decrease compared with last year.

Our consolidated gross margin for the quarter was 19% compared to 20% in the third quarter of last year.

Industry-wide steel pricing dynamics continue to put pressure on our gross margins, particularly in carbon flat products.

Our carbon flat gross margins were negatively impacted during the early part of the third quarter by the sharp decline in the hot-rolled CRU that occurred in June 2018.

Compared to the third quarter of 2018, gross margins in the third quarter for specialty metals were relatively flat, and pipe and tube gross margins were up.

For the first 9 months, consolidated margins were 18% compared with 21% last year, and the results for the third quarter of 2019 included $1 million of LIFO income compared with $2.7 million of LIFO expense in the third quarter of 2018.

And the results for the first 9 months of 2019 included $1.25 million of LIFO income compared to $4.7 million of LIFO expense in the same period of 2018.

Operating expenses for the quarter were $69.5 million, down $3.5 million or 4.7% compared with the third quarter last year.

For the first 9 months of 2019, operating expenses were $215 million compared with $214 million last year.

We are pleased with our progress in reducing third quarter expenses, and we continue to aggressively look at opportunities for additional reductions during the remainder of 2019 as well as 2020.

Also, for comparison purposes, it's important to keep in mind that the 2018 results did not include any operating expenses for McCullough and only included 2 quarters of operating expenses for Berlin Metals.

For the third quarter of 2019, we reported net income of $591,000 or $0.05 per share compared with $11.6 million or $1.01 per share in the same quarter last year.

Excluding LIFO, earnings per share were breakeven in the third quarter of 2019 compared with $1.19 per share in the third quarter of 2018.

Year-to-date, our effective tax rate was 27.9%, and we expect our effective tax rate to be between 27% and 30% for the remainder of the year.

For the first 9 months of 2019, we recorded net income of $4.7 million compared with $35.1 million in 2018.

Earnings per share for the 9 months ended September 30, 2019, were $0.41 compared to $3.07 for the same period in 2018.

Moving to the balance sheet.

At September 30, 2019, we had total assets of $699 million, a $62 million decrease compared with December 31, 2018.

The decrease in assets was primarily attributable to our reduction in inventory, offset by the recognition of approximately $30 million of a right-to-use asset under the new lease accounting standard.

The quality of accounts receivable remained strong at $168 million, and we continue to focus on efficiently converting our accounts receivable and inventory into cash.

For the quarter, we reported DSOs of 40.6 days, and approximately 90% of our consolidated receivables are aged less than 60 days from the invoice date.

As Rick mentioned earlier, we remained focused on managing our inventory levels.

Inventory at September 30 totaled $283 million, which was down $86 million from year-end 2018.

Year-to-date, we have turned our flat products inventory at 4.7x and we achieved 5x turns in late second quarter and the first half of the third quarter.

Capital expenditures totaled $7.5 million for the first 9 months of 2019.

Given market conditions, we anticipate our capital expenditures to continue at this lower run rate for the fourth quarter.

Our total debt decreased by $42 million to $233 million in the third quarter and has decreased by $80 million since December 31, 2018.

The decreases are primarily attributable to lower steel prices and our ongoing efforts to lower inventory and lower operating expenses.

Today, we are at approximately $209 million of debt with approximately $123 million of availability under our asset-based loan.

We anticipate our debt level will be below $200 million by the end of 2019.

As Rick indicated earlier, during these difficult market conditions, we remained focused on cash flow generation by keeping inventory turning, reducing operating expenses and judiciously approving capital expenditures.

Later today, we plan to file our Form 10-Q, which will provide additional details on our operating results for the third quarter and the first 9 months of 2019.

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

(Operator Instructions) Our first question is from Martin Englert, Jefferies.

So over recent weeks, we have seen several flat roll price increases now, plus some on plate.

Maybe if you could first talk to how these are being received by the market, but also touch on your success raising prices to end users and recovering margins?

Martin, Dave Wolfort here.

So we saw the second price increase yesterday.

There is traction.

As we all know, it's a cyclical business.

Great to be on top of the -- on the high end of the cycles and not so good to be on the bottom end of the cycles.

So what we've seen is a lowering of inventory levels.

And in anticipation of this being close to the bottom of the marketplace, there was a huge surge in ordering to the mills, lead times went out, prices went up.

So I think we can clearly see that we're in a recovery phase, and that should extend into 2020, early 2020.

Okay.

And the second portion of that, your ability to increase prices and recover margins now?

Yes.

I think it goes hand-in-hand, particularly with the spot business.

We have any number of OEMs who would have liked to secure longer-term arrangements at low numbers.

We were resistant to that because it's artificially low and not sustainable.

And we should be in a pretty good shape with our inventory rotations at 5x.

Again, the cyclicality of the business.

So I'll turn to Andrew Greiff.

He can talk a little bit about stainless and aluminum.

Yes.

Thank you, David.

So similar to carbon, we see that fourth quarter will be consistent with previous fourth quarters.

And the anticipation that moving into 2020 in both segments, we expect to see an increase, primarily from our end users in the food equipment sales and automotive aluminum business.

So we expect we'll be pretty strong going into next year as well.

Okay.

And maybe to dig in a little bit more on some of the near-term expectations for sequential gross profit per ton across carbon flat and specialty 4Q as well as volume expectations and the seasonality impact there?

Yes.

Martin, it's Rick.

So we'll deal with the seasonality first.

I think we're looking at a normal quarter for seasonality.

I mean typically, third to fourth quarter, we see fourth quarter down probably 7% to 8% on shipments.

So I think that's pretty normal.

I think that, as David talked about, with the prices moving up, maybe we'll get a little bit of a bump in some spot sales here in the back half of the quarter.

But keep in mind, October -- with the ship price declines, October was a little bit weaker than you would have expected in terms of the spot marketplace.

So we'd count on that 7% to 8% sequential decline on the volume.

In terms of margins, as I said, October was -- there was a lot of pressure on margins due to the pricing going down.

And I think now we've got the opportunity, as David clearly outlined, to see some recovery.

And we'd expect to start seeing that specifically on the spot side.

Okay.

And the way to think about that is, so improvement on the spot business partially offsetting maybe gross profit per ton pressure on lagging contractual business and maybe a challenging October?

Yes.

I think you got it.

Okay.

That's helpful.

If I could, one last one here.

Volumes do remain under pressure versus a year ago, but I think a little bit ahead here.

What are your thoughts on 1Q volumes?

Would you expect to see some growth year-on-year possibly?

Or is this going to be a continuation of the contraction that we've seen?

And then also maybe touch on inventory dynamics, both your plans into year-end plus what's happening downstream at the customers?

Well, Martin, I'll tackle the commercial side.

David here.

First of all, as we've seen people take their raw materials, adjusting the raw material inventory down through third quarter with a lack of confidence, we've seen large OEMs adjusting their finished goods inventory through fourth quarter.

And with an expectation that they'll be right back up into the same production cycles, although not as robust as 2018 but certainly similar to 2019.

And the adjustment in their finished goods inventory is taking place now.

Okay.

So it sounds like if the destocking abates on the downstream finished goods and maybe elsewhere through the supply chain plus a little bit of tailwinds from pricing.

Probably some improvement here, maybe on the volume front as well as pricing and margins, yes?

Yes.

I think so, Martin.

Okay.

I appreciate all that.

And nice to see the benefits from the diversification and the efforts there.

(Operator Instructions) Our next question is from Phil Gibbs, KeyBanc Capital Markets.

I think some of the comments in the aluminum business, you're expecting some growth, some -- definitely some optimism in your commentary versus what I -- leases in terms of what I picked up.

You had spoken several quarters ago about being set specifically to take on more automotive aluminum business within your own infrastructure.

Is this that finally coming to fruition?

Is this that partially coming to fruition?

Is it a broader-based effort?

Just trying to understand how those 2 dynamics are playing versus each other and what the thoughts are?

Well, Phil, it's -- this is Andrew.

The answer is kind of yes to all of your thoughts.

There are a number of customers that certainly have come into fruition.

And we have seen the gains, as we talked about, not only in our Detroit and our Atlanta facility, but is, as we talked about in Mexico as well.

And those 3 areas, in particular, on the automotive aluminum we have been targeting and have started to really see the success in our efforts.

In terms of timing, have you started seeing some of that now, meaning in your current run rate of business?

Or is that something that you're expecting to pick up next year?

And I'm just trying to gauge a sense to the magnitude.

Well, we anticipate we'll see it more as we get into 2020.

We've seen some success, but we anticipate it's going to build and be stronger as we get into next year.

Okay.

And you've alluded to the fact that a lot of orders kind of took place in October in the sheet side, which we agree with.

And I think the lead times would certainly support relative to what we're seeing right now.

Should we expect Olympic Steel's own inventory reduction efforts to have largely come to a conclusion?

I mean I think your inventories came down a little bit sequentially but not much and prices to get pretty enticing in recent weeks.

So just any thoughts on that?

Sure, Phil, it's Rich.

And we do expect that our inventory here in the fourth quarter will be down a little bit from where we were at the end of the third quarter.

We do not really anticipate seeing inventory going up.

And I think as you alluded to in your writing this morning, you thought maybe the cash flow stuff had ended, but you saw that since quarter-end, we've gone from $233 million of debt.

We set down to $209 million, and we expect to be below $200 million here very soon.

And that's all part of our effort to reduce inventory and to keep turning it quicker.

Yes.

So Phil, we're going to stay pretty disciplined to that goal of turning the carbon flat inventory 5x.

So while we've got it pretty close to that number, you're not going to see huge movements in the inventory, but we're -- as Rich said, we're planning to have a little bit of a lower inventory at year-end than what you saw at the end of the third quarter.

But the impact in the fourth quarter is going to be more a pricing component, right, in terms of the pricing and the inventory falling versus the volume?

It sounds like this is making up a number right now.

Let's just say if inventory falls 8%, the price component of that far away is the sequential volume reduction.

Yes.

You got it.

The pricing impacts the bigger piece of it.

But I don't want to leave the wrong impression.

We do measure our turns on the volume piece of it.

So when we're talking about the turnover, we're not planning on building volume into the inventory.

But you're right, from the inventory balance, the preponderance of the decrease will still be price impacts.

We have reached the end of the question-and-answer session.

I will now turn the call back over to Mr. Marabito for closing remarks.

Thank you, operator.

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

We hope to speak with some of you at the upcoming metals and mining conferences being held in New York later this month.

And in the meantime, have a great day, and we look forward to talking with you again next quarter.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.