Olympic Steel Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 5, 2023

There are 7 speakers on the call.

Operator

Morning, and welcome to the Olympic Steel 2023 First Quarter Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. At this time, I would like to hand the conference over to Rich Manson, Chief Financial Officer at Olympic Steel.

Operator

Please go ahead,

Speaker 1

sir. Thank you, operator. Welcome to Olympic Steel's earnings call for the Q1 of 2023. Our call this morning will be hosted by our Chief Executive Officer, Rick Marabito and we will also be joined by our President and Chief Operating Officer, Andrew Greiff. Before we begin, I have a few reminders.

Speaker 1

Some statements made on today's call will be predictive and are intended to be made as forward looking within the Safe Harbor provisions 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 ks and 10 Q and the press releases filed with the Securities and Exchange Commission. During today's discussion, we may refer to adjusted net income per diluted share, EBITDA and adjusted EBITDA, which are all non GAAP financial measures. A reconciliation of these non GAAP measures to the most directly comparable GAAP financial measures is provided in the press release that was issued last night and can be found on our website.

Speaker 1

Today's live broadcast will be archived and available for replay on Olympic Steel's website. At this time, I'll turn the call over to Rick.

Speaker 2

Thank you, Rich, and good morning, everyone. Thank you for joining us on today's conference call to discuss Olympic Steel's 2023 First Quarter Results. I'll begin with an overview of another strong quarter for Olympic Steel, driven by our ongoing strategy to diversify and strengthen our company. Then Andrew will review highlights from each segment and provide some comments on market conditions. Following that, Rich will discuss our financial results in more detail.

Speaker 2

And then as always, we will open up the call for your questions. Our year is off to a strong start. For the Q1, Olympic Steel reported sales of $573,000,000 and adjusted EBITDA of $28,600,000 with balanced earnings from all 3 of our segments. Overall customer demand remains Steady with metal distribution shipments increasing 3% from a year ago and significantly increasing 15 And as we mentioned on our last call, after 6 months of declining steel prices, We began to see price increases in December of last year and these supply driven increases accelerated as we entered 2023. At the end of the Q1, hot rolled index pricing was up 74% from the beginning of the year.

Speaker 2

Our acquisition of Metal Fab in January was a highlight for the quarter. As the 2nd largest acquisition in our history In our 6th acquisition in the last 5 years, Metal Fab represents the latest success in our strategy to diversify and strengthen Olympic Steel. As you'll recall, Metal Fab broadens our product offerings, capabilities and geographic reach By producing venting and filtration products for residential, commercial and industrial applications. Products are manufactured primarily of coated carbon and stainless steel and aluminum in our 2 Wichita, Kansas facilities. Included in our Carbon segment, we're thrilled with a fast start in the performance of Metal Fab.

Speaker 2

As Rich will highlight later, The impacts of one time acquisition expenses and purchase accounting adjustments are now behind us in the Q1, We will see the benefit of Metal Fab's earnings in the Q2 of 2023 followed by meaningful synergies beginning in the second half of the year. While successfully integrating Metal Fab is a priority for our team, Olympic Steel remains extremely well positioned to identify and pursue additional acquisition opportunities that advance our strategy. Our balance sheet is incredibly strong And with the increase in our revolving credit line executed in conjunction with the Metal Fab deal, we now have record levels of capital And borrowing availability to invest in organic growth initiatives, automation and further acquisitions that align with our strategic priorities. We're excited about the future of Olympic Steel and the prospects to build our business model for sustainable long term success. We also recently issued our 2nd corporate responsibility report, which can be accessed on our website.

Speaker 2

The report highlights our progress in ESG, DEI, safety And our other core value initiatives at Olympic Steel. As we look ahead, we understand that the near term Macroeconomic picture is unsettled. However, demand from our industrial OEMs remains steady and we expect the 2nd quarter to look a lot like our Q1. We have demonstrated that our team's actions to diversify and grow Olympic Steel Have made us a stronger, more resilient and consistent performer while navigating the impacts of market cyclicality. So now with that, I will turn the call over to Andrew.

Speaker 2

Thank you, Rick, and good morning, everyone. As Rick noted,

Speaker 3

The Q1 was a strong start to the year with solid and steady performance from each of our segments. Now for a look at our performance by segment starting with carbon. The favorable combination of increased shipment volume and improving pricing environment and the addition of metal fab delivered a strong quarter. Although results were adversely affected by one time charges associated with the acquisition, Carbon contributed adjusted EBITDA of 11 point $6,000,000 for the quarter. Team's hard work and discipline around inventory management enabled the segment to positively impact our results As our shipments rose 6% from a year ago, which does not include metal fab as we do not report tons sold for this business.

Speaker 3

Congratulations to David Gia and the entire Carbon segment on their outstanding work and performance this quarter. Pipe and Tube led by Bill Zielinski had its 2nd most profitable quarter ever contributing EBITDA of $11,300,000 The team's focus on margin improvement and fabricated product growth is driving positive results. In particular, the investments to improve the segment's fabrication capabilities are leading to enhanced laser speeds, Reduce lead times and improve service to customers. We are also targeting a May groundbreaking for our 30,000 Square Des Moines, Iowa expansion with expectations to be operational by the end of the year. Specialty Metals, led by Andy Markowitz, faced industry wide stainless steel headwinds, leading to softer volumes and lower margins.

Speaker 3

The good news is we are still able to post another very profitable quarter, earning EBITDA of $10,200,000 We continue to organically grow in aluminum as our share of the market rose to a 2 year high following the divestiture of our Detroit operation In September of 2021, our new white metals fabrication facility in Bartlett, Illinois is near completion and we expect it will be fully operational in the Q2. Overall, we expect 2nd quarter demand to remain steady, similar to the Q1. Our industrial OEMs continued to show a solid backlog and are performing to forecast. We are seeing a pickup in our food equipment and appliance segments, Truck trailer customers and transplant automotive business in the Southeast. Thank you to our entire team for another outstanding quarter.

Speaker 3

Now I'll turn the call over to Rich.

Speaker 1

Thank you, Andrew, and good morning, everyone. It was an exciting quarter for Olympic Steel, Highlighted by strong performances in all of our segments, our successful acquisition of Metal Fab and the increase in our revolving credit line $475,000,000 to $625,000,000 resulting in record availability for continued investments in acquisitions Please keep in mind that the inclusion of Metal Fab in our Q1 2023 results We'll make year over year comparisons more difficult. Metal Fab, which is included in our Carbon segment, does not report tons sold and typically have higher returns than our distribution business. Additionally, there are several one time acquisition related adjustments That we highlighted in our adjusted EBITDA reconciliation. For the quarter, net income totaled $9,800,000 compared $37,300,000 in the Q1 of 2022.

Speaker 1

No LIFO adjustment was recorded for the 1st quarters of 2023 or 2022. Adjusted EBITDA was $28,600,000 for the Q1. Adjusted EBITDA excludes a one time $2,100,000 GAAP Fair market value adjustment to Metal Fab's inventory and $2,600,000 of acquisition related expenses. We expect that our reported financial results will begin reflecting the full strength of MetaFab's earning power in the Q2 of 2023 as the acquisition related charges will be behind us and we expect to begin realizing metal supply synergies in the second half of twenty twenty three. Our total debt at the end of the Q1 was $258,000,000 an increase of $93,000,000 since year end 2022, Which included the $131,000,000 acquisition of Metal Fab.

Speaker 1

During the quarter, we generated $52,000,000 of cash from operations, resulting in a $38,000,000 reduction in debt during the quarter. We expect additional debt reduction during 2023, primarily occurring in the second half of the year. At quarter end, our credit availability was a record $355,000,000 providing us with significant capital Consolidated operating expenses, including Metal Fab, totaled $102,700,000 in the 1st quarter, An increase of $14,600,000 or 16.6 percent from the prior year quarter. A higher expense level Reflects the addition of Metal Fab's operating expenses, the onetime acquisition related charges and the absence of a $2,100,000 gain on the sale of our Mylan, Iowa warehouse that occurred in the Q1 of 2022. Capital expenditures for the Q1 of 2023 Our effective tax rate for the Q1 of 2023 was 26.8% compared to 27.0 percent in the Q1 of 2022.

Speaker 1

Also, during the quarter, we paid the higher cash dividend of Our Board of Directors approved a $0.125 per share dividend payable on June 15 to holders as of June 1. Subject to Board approval, we expect to maintain the quarterly dividend of $0.125 on a regular basis. We have now paid dividends for 72 consecutive quarters. Looking forward, we are excited that our reported financial results in the Q2 and beyond will begin to reflect the full strength of Metal Fab's earning power. The impact from Metal Fab, along with the continued success for our strategic investments in diversification and organic growth, gives us great confidence in the future of Olympic Steel.

Speaker 1

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

Operator

Thank you. We'll now be conducting a question and answer session. One moment please while we poll for questions. Thank you. Thank you.

Operator

And our first question is from the line of Samuel McKinney with KeyBanc Capital Markets. Please proceed with your questions.

Speaker 4

Hi, good morning.

Speaker 2

Good morning, Sam. Good morning, Sam.

Speaker 4

Although HRC pricing has slowed in recent weeks, It had a significant run-in the recent months before that. I know you have a heavy contract book. It tends to lag spot price rise. So what are your expectations for pricing for carbon in the Q2 after it was basically flat sequentially in the Q1?

Speaker 3

Yes, it's a great question, Sam. So We expect as you've seen certainly in the past few weeks, you've seen index pricing come off a little bit. You've seen futures come off Certainly more than the index price. We think that we'll see a little softness as we come through the second quarter. But as you said, there is a lag.

Speaker 3

So we anticipate that margins will hold through the second quarter And then we'll see where pricing goes from there.

Speaker 4

Okay. Thank you. And then in Specialty Metals, volumes were up slightly and pricing was down slightly sequentially. You mentioned the stainless dynamic earlier in the call, but if you could walk us more through those specialty metals dynamics during the Q1 and Directionally what you're expecting from shipments and volumes in the Q2?

Speaker 3

Yes. Well, the expectation a couple of things, Sam. So first, Inventory levels at the service centers were relatively high coming into the Q1. We've Seeing a reduction as you take a look at the MSCI MAR report, you've seen inventory on hand come down from about 4 months Down to about 3 months. We anticipate that that will drop over the course of the next month, probably another month.

Speaker 3

Lead times From the stainless mills are pretty steady right now and imports are certainly going to play a bigger role as Come into the second half. Our major customers from the Food equipment side of it have started to pick up. So we think that volume will be a little bit better coming into the second quarter. Truck trailer, which is another big part of what we're doing, has improved. And our automotive business That we participate in has been very steady.

Speaker 3

We've seen a little bit of uptick there as well. So I would think that second quarter will Look, a little bit better than the Q1 and would anticipate certainly on the inventory levels that Everybody will be much more in line as we come through the Q2.

Speaker 4

Okay. Thank you. And then lastly for me, the release Last night, you mentioned that you expect to see the full effect of metal fab earnings in the 2nd quarter and synergies in the second half. Is there any way to frame up Sort of impact you expect that to have to your overall numbers? And should we just expect it to track the historical earnings that you provided in March?

Speaker 1

Sam, it's Rich. Yes, I think using the historical financials from the 8 ks that was filed in March is a good starting point. I think the 2 biggest things that you won't see in the Q2 are the 2 one time charges that we identified in the earnings release. So you want to have that $2,100,000 write up of the inventory that resulted in higher cost of goods sold and you want to have that 2 point $1,000,000 of deal related expenses. And just to be clear, the $2,100,000 affected the Carbon segment, The $2,600,000 affected the Zoos cost center.

Speaker 1

So I think as we said in the comments, 2nd quarter is going to look a lot like the Q1. Just not going to have those one time charges.

Speaker 2

And then I think, Sam, in the back half of the year, we commented a couple of times, We're pretty excited about some of the synergies we bring on the carbon supply side. And we think by beginning of Q3, we're going to start to see those. So That'll be a little power boost in the back half in terms of Metal Fab's performance.

Speaker 4

Okay. That's it for me. Thanks, guys. Good luck.

Speaker 2

Thanks, Sam. Thank you.

Operator

Our next question is from the line of Dave Storms with Stonegate Capital. Please proceed with your question. Good morning.

Speaker 1

Good morning, Dave.

Speaker 5

First one, quick one. Just with the Iowa groundbreaking in May, because that's an expansion, there won't be any downtime associated with that, correct?

Speaker 1

That's correct. That is just purely expansion, 30,000 additional square feet, and we expect to see that effect more in 2024. It should be operational by year end, but it would probably have more of an effect in 2024 than 2023.

Speaker 2

Right. But no, we don't anticipate any disruption in the back half while we construct and expand the building.

Speaker 5

Perfect. Okay. Thank you. And then just on kind of the per tonnage cost For warehousing and distribution, that number just kind of seems to keep on climbing. Is there any green shoes on a reprieve there?

Speaker 5

Or is this the new normal that we live in?

Speaker 1

Dave, it's Rich. So really that is kind of the effect of the businesses we've acquired In recent years, don't report tons sold. They're more on the manufacturing side. And so what happens if you're using the same denominator of tons, You're going to have a higher operating expense number that you're dividing those tons into. And so it looks like it's rising.

Speaker 1

So as we pointed out in Comments, we were up roughly, I can't remember the exact number, I think it was around $14,000,000 of expenses Q1 of 2023 versus Q1 of 2022, that's accounted for in metal fab, the $2,600,000 of deal related expenses, Then the absence of that $2,100,000 gain on the sale of the Mylan Iowa warehouse that occurred in 2022, which reduced operating expenses, Those are the 3 items that explain the entire increase in the operating expenses. And so, we're comfortable where the operating expenses are. We're Seeing inflation kind of come down quarter over quarter, as we've seen through the last 9 months or so. So I think that's the issue is that you're comparing Higher operating expenses that reflect manufacturing businesses that don't reflect tons sold.

Speaker 5

That's very helpful. Thank you. And then one more for me, if I could. You mentioned kind of industry wide industry levels coming down. Just curious as to how you think about Industry wide capacity going forward and how you see that changing through the rest of 2023 and maybe even into 2024?

Speaker 3

Well, if you take a look at it from two sides. So from a mill capacity, we see more product Seem to be in much better shape today. So we will anticipate that there'll be more product available in the second half of the year. On the stainless and aluminum side, domestic mills performing really well. You'll see certainly some imports And the same thing on the aluminum mills.

Speaker 3

Aluminum mills are producing very well and we'll see a little bit more on the import side of it. From the service centers And from the customers, you're going to see pretty much the way that it is now with the customers on the supply chain Issues that we've seen, it's probably more labor today than raw material, but labor is certainly an issue. And the industrial OEMs are having challenges trying to eat into their backlogs.

Speaker 5

That's very helpful. Thank you.

Operator

Thank you. The next question is from the line of Chris Sakai with Singular Research. Please proceed with your question.

Speaker 6

Hi, good morning.

Speaker 2

Good morning, Chris. Good morning, Chris.

Speaker 6

Just can you You shed some light on the margin expansion in Tube and Pipe and what drove that?

Speaker 2

Yes, Chris, great question. And our pipe and tube business, and we've been Commenting on this for several quarters, but the investment in more fabrication type value add assets Really starting to yield the results that you're seeing in the gross margin. So, it's really the result of a very intentional strategy over the last Several years to continue to expand the value add equipment. Also I might add our stainless Portion of the Pipe and Tube business is growing, and it tends to have a little bit of a higher return. So Those would be the 2 primary reasons.

Speaker 6

Okay, great. And Can you comment on your appetite for more acquisitions after the metal fab acquisition?

Speaker 2

Yes. Yes. Thanks, Chris. Certainly, we continue to look at acquisitions as one of the pillars of our growth strategy. I think as Rich mentioned in the prepared remarks and I did as well, The good news is even after the Metal Fab acquisition, we're now at record availability, have an exceptionally strong balance sheet.

Speaker 2

So we've got plenty of capacity to do that. We continue to look at strategic acquisitions. It's just part of what we do strategically and every day in our operations right now. So you should expect us to continue Much on the path that we've been over the last 5 years going forward on acquisitions. Obviously, metal fab was a big one.

Speaker 2

So we're very focused on the integration aspects of Metal Fab, which by the way is going tremendously. It's Really after 3 or 4 months, it's been a very, very smooth transition. But acquisitions are going to continue to be A growth driver for us together with organic growth as you've seen in some of the projects that Andrew highlighted earlier.

Speaker 6

Okay. Thanks for the answers.

Speaker 2

You're welcome.

Operator

Thank you. At this time, we've reached the end of our question and answer session. And I'll turn the floor back to Rick Morbido for closing remarks.

Speaker 2

Well, thank you very much and thanks for joining us on our call this morning. We certainly appreciate your continued interest in Olympic Steel. We will be participating in the Sidoti and Company MicroCap Virtual Conference and that's on May 11, the KeyBanc Industrials Conference in Boston on May 31st and the KeyBanc Steel Roundtable Series in New York City in late June. And to conclude, I just want to thank the Olympic team for a great start to 2023. We're really excited about our future and we look forward to

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Olympic Steel Q1 2023
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