Olympic Steel Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2024

There are 7 speakers on the call.

Operator

Welcome to Olympic Steel's earnings call for the Q3 of 2024. 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. 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.

Operator

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. Today's live broadcast will be archived and available for replay on Olympic Steel's website.

Operator

At this time, I'll turn the call over to Rick.

Speaker 1

Thank you, Rich, and good morning, everyone. Thank you for joining us today to discuss Olympic Steel's 2024 Q3 results. I'll begin by summarizing our results for the Q3 and then I'll review how our strategies for diversification and overall focus on investing in and expanding in our higher margin opportunities are helping to drive results in difficult markets. Andrew will then review our segment performance and highlight our CapEx growth initiatives and following that Rich will discuss our financial results in more detail. And then as always, we will open the call up for your questions.

Speaker 1

Challenging macroeconomic trends during the Q3 resulted in lower overall OEM demand, particularly in the heavy equipment sector, which is a significant end market for Olympic Steel. Reduced demand resulted in carbon pricing pressures that affected both our carbon flat rolled and pipe and tube segments. Additionally, stainless steel surcharges fell during the quarter, creating pricing pressure in our specialty metals segment. Despite these market headwinds, Olympic Steel has demonstrated continued resilience as all three segments were EBITDA positive for the Q3 of 2024 generating $15,000,000 of EBITDA and $470,000,000 of sales. The results reflect the success of our strategy to diversify into countercyclical steel intensive end products and invest in higher margin opportunities such as flat rolled coated products and the expansion of our fabrication capabilities.

Speaker 1

Given the ongoing uncertainty in the political and macroeconomic environment, our team is working diligently to manage costs and build efficiencies into our business. This includes investing in new equipment, automation and processing capabilities that will drive safety, efficiency, productivity and future growth. We are closely managing our operating expenses and aligning our labor costs with customer demand. We believe the success of our acquisitions and capital investments in key organic growth areas has created a stronger, more resilient Olympic Steel. We are well positioned to continue to invest in these initiatives.

Speaker 1

Andrew will review recent equipment investments in a moment and we remain active in our pursuit of acquisitions that meet our success criteria. During the Q3, we reduced our debt by approximately $12,000,000 to $197,000,000 and we entered the 4th quarter with approximately $304,000,000 of credit availability to fund these growth initiatives. Looking to the Q4 of 2024, we expect the macroeconomic headwinds to continue while we wait the outcome of the presidential election and the Fed's direction on future interest rate cuts. We remain optimistic for the long term outlook for Olympic Steel and our industry. We are confident that our strategy combined with our financial flexibility to continue investing in organic and acquisitive growth opportunities will make us even more resilient and create additional value for our shareholders.

Speaker 1

Now, I'll turn the call over to Andrew for his comments on our segment performance.

Speaker 2

Thank you, Rick, and good morning, everyone. As Rick discussed, all three business segments were EBITDA positive during the Q3, even as we continue to experience the significant industry wide headwinds. Our sustained profitability is a testament to the strategies we have in place for diversification, operational efficiency, enriched product mix and expansion of our fabrication capacity and capabilities. Now I'll provide some detail on each segment's results. In our Carbon segment, volumes fell more than the normal seasonal decline for 3rd quarter sales due to lower demand from our contractual OEM customers, especially in the heavy equipment sector.

Speaker 2

Even with this decline, the Carbon segment generated $4,500,000 in EBITDA in the 3rd quarter. We saw strength in our countercyclical end products companies with strong quarters for metal fab, our manufacturer of HVAC and venting products and McCullough Industries, our manufacturer of industrial hoppers. We continue to see gains for our fabrication business as OEMs continue to outsource more of their first stages of manufacturing. To serve this growing demand and improve the efficiency of our operations, we continue to invest in expanding our fabrication and processing capacity and capabilities. We have also aligned our fabrication intensive facilities in Chambersburg, Pennsylvania Mount Sterling, Kentucky and Beaufort, Georgia under the leadership of Max Fitzgerald, who has a strong growth oriented background in metal fabrication.

Speaker 2

Our Carbon segment continues to invest in automation installing new stacking and material handling equipment on our Cleveland, Ohio, Tempa Mill, which is expected to improve throughput by up to 30%. Our Pipe and Tube segment posted adjusted EBITDA of $6,700,000 in the Q3 of 2024. Gross margins remained stronger and higher than previous years due to our value added processing, which has been augmented by last year's acquisition of Central Tube and Bar. For our Specialty Metals segment, stainless surcharges fell to a 3.5 year low in September. Nonetheless, the segment had a solid 3rd quarter contributing $5,900,000 of EBITDA.

Speaker 2

We accomplished this by gaining market share in stainless and aluminum. We also installed a new automated packaging line in our Streetsboro, Ohio facility to improve throughput and efficiency. We remain committed to growing organically by investing in higher margin opportunities. During 2024, we have ordered significant new pieces of equipment that will be delivered in 20252026 to further enhance our growth strategies. In the Carbon segment, we ordered a new cut to length line for our Minneapolis coil facility, which will support our continued growth in cold roll and coated products.

Speaker 2

We have ordered 2 new lasers and 2 new plasma cutting machines along with an automated material handling system to expand our fabrication capabilities in Chambersburg, Pennsylvania. In the Specialty Metals segment, we have ordered a new cut to length line for our Schaumburg, Illinois facility to support our growing white metals distribution business and we also ordered a new high speed specialty slitter for our Berlin Metals operation outside of Gary, Indiana. As I reflect on the Q3 and look at the Q4, we think that macroeconomic headwinds are likely to continue. At the same time, we are benefiting from our strategy to expand into steel intensive end products that are countercyclical to metals pricing and invest in equipment that makes us safer, more efficient and helps us grow our higher margin fabrication and processing capabilities. We will continue to focus on what we can control and be mindful of and responsive to the things that we cannot control.

Speaker 2

That concludes my comments and I will turn the call over to Rich to go through the financials.

Operator

Thank you, Andrew. As you heard from both Rick and Andrew, all three segments contributed to our profitability during the quarter. Our 3rd quarter results reflect the impact of our diversification strategy and our team's continued execution of our operating disciplines. Before I discuss the results in more detail, I want to remind everyone that year over year comparisons are impacted by the October 2023 acquisition of Central Tube and Bar, whose results are included in our Pipe and Tube segment. For the Q3, net income totaled $2,700,000 compared with $12,200,000 in the Q3 of 2023.

Operator

EBITDA for the Q3 was $15,000,000 compared with $27,100,000 in the prior year period. Both the Q3 of 2024 and 2023 results include $2,000,000 of LIFO pre tax income. Consolidated operating expenses for the Q3 totaled $99,000,000 compared with $91,000,000 in the Q3 of 2023. Our 3rd quarter operating expenses reflect the addition of Central Tube and Bar, which does not report tons sold. Therefore, operating expenses per ton at the consolidated level and for the Pipe and Tube segment will appear higher year over year.

Operator

As a reminder, we do not report tons sold for McCullough Industries, EZ Dumper, Metal Fab, Shaw Stainless or the entire pipe and tube segment. Consolidated operating expenses for the Q3 included $3,300,000 of CTB operating expenses and $1,200,000 of lower incentive expenses when compared with the Q3 of 2023. Operating expenses for the Q3 of 2023 also reflect a $4,000,000 cost benefit due to the employee retention credit that did not recur in the Q3 of 2024. We ended the quarter with total debt of $197,000,000 a $12,000,000 decrease from the Q2 of 2024. We anticipate increased cash flow in the Q4 of 2024 due to lower working capital requirements.

Operator

We continue to have access to more than $300,000,000 of additional borrowing availability to support our investments and higher return opportunities. Our capital expenditures for the 1st 3 quarters of 2024 totaled $22,300,000 compared with depreciation of $17,600,000 We estimate that 2024 capital expenditures will be approximately $30,000,000 as we continue to invest in automation, our fabrication and processing capabilities and other higher return parts of our business. Our Q3 2024 effective income tax rate was 30% compared with 27.7% in the same period last year. We expect our 2024 tax rate to approximate 28% to 29%. In addition, we paid a quarterly dividend of $0.15 per share in the Q3 and our Board of Directors has approved our next regular quarterly cash dividend of $0.15 per share, which is payable on December 16, 2024 to shareholders of record on December 2, 2024.

Operator

The company has now paid regular quarterly dividends dating back to 2,006, increasing the dividend in each of the last 3 years. Our ability to remain resilient and profitable in difficult markets is a testament to the success of our strategic investments. We will continue to execute our diversification strategy for the long term, while continuing our near term focus on expense control and working capital management. We are well positioned to weather market challenges and deliver sustained results for our shareholders. Operator, we are now ready for questions.

Speaker 3

Thank you. We will now conduct a question and answer session. You. Our first question comes from Dave Stone with Stonegate. Please proceed.

Speaker 4

Good morning.

Operator

Good morning, Dave. Good morning, Dave.

Speaker 4

Good morning. So you mentioned in the prepared remarks that you're obviously doing a lot to bring new machinery into your operations. Just trying to get a sense of and I appreciate you laying out kind of the lead times for getting them getting those machines in house. Just trying to get a sense of maybe what step 2 would be there between implementing those machines, getting employees trained up on them. How should we be thinking about what it will take to get those machines up and running once they're in house?

Speaker 2

Dave, this is Andrew. I'll answer that. I would tell you that from the equipment manufacturers, the training will take place in some cases prior to the equipment coming in. They have some facilities that we can send our people to that have the equipment available that they could do some training. But almost immediately as the new equipment and the new automation comes in, we'll have people that will be ready almost immediately.

Speaker 2

So once the equipment is in and ready to get going, we would expect that in a very short time period, it will be up and operational and assuming the equipment performs the way we expect it to, we'll get it right into place.

Speaker 4

Understood. That's very helpful. So we could hopefully start seeing some of that in 2025. Okay, perfect. And then just one more for me.

Speaker 4

Great to see that you paid down some debt. I know you've obviously been acquisitive in the past. Are there any M and A targets that you're kind of keeping an eye on? Maybe just a sense of what the market looks like. And maybe as you're thinking about M and A targets, are you targeting would you be targeting more countercyclical type companies that have been so beneficial for you recently?

Speaker 1

Yes. Thanks for the question, Dave. It's Rick. Absolutely, we're very active continuing to look at acquisitions. You know that it's part of our strategic growth is to actually do both.

Speaker 1

So Andrew outlined a lot of the internal growth through new equipment, but don't sell a short. We're actively pursuing acquisitions. So if you look at our history over the last 5 years, we've made 6 acquisitions. So we're averaging around 1 to a little more than 1 a year. It's been about a year.

Speaker 1

And so my line internally always is if we don't find an acquisition in our strike zone each year, I'd be disappointed and I'd share that with you. So yes, very active. We've seen really good flow in terms of companies that would fit our strike zone. You are exactly right in terms of the strike zone. It's aside from being well run companies where we believe we can add synergy together with a management team that's strong and continues.

Speaker 1

You know that we're we've shown and we'll continue to seek out companies that are A, in the end market, countercyclical category and industry. So that's very much at the top of the list. B, those that do higher margin, higher return fabrication, that's very high on the list and service centers, right. We've you saw the last acquisition we did was CTB in the pipe and tube sector of the service center group. So we're looking at all three of those areas and really the keys are finding well run, high return, accretive, good companies.

Speaker 1

And so stay tuned, more to come. We're actively participating in that space.

Speaker 4

Understood. Thank you for taking my questions and good luck in the 4th quarter.

Operator

Thanks, Dave. Thank you.

Speaker 3

The next question comes from Samuel McKinney with KeyBanc Capital Markets. Please proceed.

Speaker 5

Hi, good morning, guys.

Operator

Hey, Sam. Hey, Sam.

Speaker 5

Hey, the continued demand weakness from industrial machinery and The continued demand weakness from industrial machinery and equipment

Operator

OEMs, some of your peers have already spoken to it

Speaker 5

and you talked about it today with the seasonally soft Q3 volumes. Any thoughts regarding the potential for a release of pent up demand after we can hopefully get past the election next week and gain some clarity on the next

Speaker 2

4 years? Yes, Sam, that's a great question. We do think that there is some pent up demand, certainly on the spot side of the business. With the industrial OEMs, I'm not sure that we're going to see any big releases in the Q4. I don't think we're going to see much of a trail off like we did in the Q3 versus the Q2.

Speaker 2

But I do think that there's opportunity certainly in the Q4 for a number of the spot players and those non contractual customers to be more active than certainly than they had been. And I think going into next year, while they're still in their forecasting phase, I don't anticipate that we're going to see greater reductions from the heavy duty equipment sector versus what we've seen at this point.

Speaker 1

Yes. And then Sam, it's Rick. The other thing I'd add is we've been really expanding our business. So, I think offsetting any kind of, as Andrew said, I'd call it kind of steadiness off of a kind of a down demand period in the last quarter. I think you'll see Olympic Steel actually onboarding new business.

Speaker 1

We've been very active on the fabrication side with some of the large OEMs. So going into next year, our view is even if we have kind of stable demand from some of these larger OEMs in the heavy equipment sector, I think we've got the opportunity to increase our business.

Speaker 5

Okay, thanks. That's helpful. I appreciate that. And then next, pipe and tube gross margin of 35% this quarter was the segment's best number of the year, but sales have fallen almost 10% sequentially in both the second and the third quarter. So a 2 part question here.

Speaker 5

Can you address how segment volumes behave during the Q3? And then of that $79,000,000 in sales in the Q3, any way to frame up how much of that's coming from the higher margin central tube and bar?

Operator

Hey, Sam, it's Rich. Let me address the gross margin first. So remember that gross margin includes $2,000,000 of LIFO income. Yes. So that 35% is a LIFO number.

Operator

I think when you take that out, you're pretty much back to to the traditional low 30s that we've seen most of this year. I'll let Andrew address the question in terms of the fall off is basically the same industrial customers that we just talked about.

Speaker 2

Well, that's exactly right, Rich. So a number of the customers that we talk about on the sheet and the fabrication side for carbon flat roll, very similar to what we see on the pipe and tube side. Regarding central tube, we've been very pleased with what we've seen. A big part of what central tube does is fabrication for the OEM. And so we are pleased to see the business there.

Speaker 2

There's a good focus on data centers. And so we really like that business and expect to see continued progress in Q4 and then certainly into next year.

Operator

And then Sam, with respect to the value added, I think our pipe and tube segment is north of 40% in terms of value added versus the distribution business.

Speaker 1

Yes. And then lastly, Sam, I think part of your question was on the CTB margins. And yes, you are correct. CTB's margins are north of our existing pipe and tube business, which as you know and commented on are very strong margins. So and we see that continuing.

Speaker 5

Okay. Thank you. And then one last one for me. If Nippon is able to close on its acquisition of U. S.

Speaker 5

Steel, what do you think changes both in the marketplace and for Olympics specifically? And remind me, do you have any co located facilities with U. S. Steel right now?

Speaker 1

Yes, Sam, we do. We are our Gary facility in Gary, Indiana is on-site at U. S. Steel. We have great relationships with all of the vendors including the 2 you mentioned.

Speaker 1

So I think for Olympic Steel, obviously whichever way this deal goes, we would anticipate continuing to be a really good supplier of whoever the future owner is, whether it continues to be U. S. Steel or it continues to be Nippon. A good customer. Good customer, sorry.

Operator

All

Speaker 5

right. Thanks guys. Good luck in the Q4.

Operator

Thanks Sam.

Speaker 3

Our Our next question comes from Chris Sakai with Singular Research. Please proceed.

Speaker 6

Yes. Hi, good morning.

Operator

Good morning, Chris.

Speaker 6

My question is that for carbon flat operating expenses, are a lot of these fixed expenses that can't you cannot change or what can be done to reduce operating expenses?

Operator

Yes, Chris. So a couple of things. So when you look at the face of the operating expenses year over year, it looked like an $8,000,000 increase, but there's really two items that make up almost the entire $8,000,000 One being that there was a $4,000,000 reduction in operating expenses in the Q3 of 2023 related to the employee retention credit that didn't occur in 2024. And then we had about $3,300,000 of CTV operating expenses in the Q3 of 2024 that were not there in 2023. So overall, we're kind of flattish in volume and those operating expenses when you adjust for the one time items are essentially flattish.

Operator

One of the things we have seen here in the Q3, as Andrew noted, we're a little bit slower with some of the industrial OEMs. And in some cases, we've reduced or taken out some second shifts that in those areas where the sales were down a little bit. Now most of that was not reflected in the Q3, but we do expect to see that reflected in the Q4 once you take out severance and all those kind of things for some of the people that where the headcount was reduced.

Speaker 1

Yes. And the other thing I'd add, Chris on the fixed versus variable, we talk about it a lot. We disclose it in our SEC documents. But we also have in terms of our incentives, they're highly variable and they do mirror profitability. So those things tend to on the compensation side also automatically adjust with the profitability up and down.

Speaker 1

So I'd add that as well.

Speaker 6

Okay, thanks. And then a lot it sounds like you're doing a lot of internal investments. Is the main goal here to really increase profitability? Is that the main understanding?

Speaker 1

Well, obviously, yes. We believe those investments in terms of the return is our smart moves. But in addition to the increased profitability, they also enhance our quality, safety, increased productivity. They expand our capacity on those pieces of equipment. So they open up those pieces of equipment to do new business.

Speaker 1

Some of the new business is in areas that we're growing like coated product in the carbon. So it's really all that. But I think from following us, we're also sticklers on the profitability side in terms of justification. So it's all of that. And yes, that obviously is going to lead to improved returns in those areas.

Speaker 6

Okay, great. Thanks for the answers.

Operator

Thanks, Chris.

Speaker 3

Thank you. There are no further questions in queue at this time. I would like to turn the floor back over to Richard Marabito for closing remarks.

Speaker 1

Thank you very much, operator. And thank you all for joining us on our call today. We genuinely appreciate your continued interest in Olympic Steel and we look forward to speaking with you again next quarter. Thank you. Have a great day everyone.

Speaker 3

Thank you. This does conclude today's teleconference. You may disconnect your lines

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Olympic Steel Q3 2024
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