Olympic Steel Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 3, 2024

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Olympic Steel 20 24 First Quarter Financial Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, I would like to hand the conference call over to Rich Mason, Chief Financial Officer at Olympic Steel.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Welcome to Olympic Steel's earnings call for the Q1 of 2024. Our call this morning will be hosted by 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.

Speaker 1

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 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.

Speaker 1

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 today to discuss Olympic Steel's 2024 Q1 results. I'll begin by talking about the solid results we delivered in the Q1 and how our strategy to diversify and expand into higher value added processing and manufactured metal products enables us to consistently deliver positive results regardless of market conditions. Then Andrew will review our segment performance and following that Rich will discuss our financial results in more detail. And then as always, we will open up the call for your questions.

Speaker 2

Olympic Steel delivered a strong start to 2024 despite challenging market conditions during the Q1. We reported 1st quarter sales of $527,000,000 and net income of $8,700,000 and all segments contributed to our adjusted EBITDA of $23,700,000 Our shipping volumes increased 9% sequentially from the Q4 of 2023 and we maintained our margins despite unusual declining pricing dynamics for the Q1. We typically start the New Year in a strengthening market with increasing pricing and that trend usually continues into the Q2. However, this year we saw index pricing for hot rolled steel fall more than 31% from January through mid March, while stainless steel surcharges also fell throughout the quarter. So the movement in pricing was the opposite of what we normally experience in the Q1.

Speaker 2

Despite these pricing challenges, we generated solid profitability, which reinforces that our strategy is working. Our efforts to diversify and expand our portfolio into higher value manufactured metal products provides a natural countercyclical benefit to falling metal prices and helps drive profitability regardless of market conditions. In addition, our fabrication and value added product capabilities drove new business wins and we outpaced market shipments during the quarter in every product we sell. We continue to see industrial manufacturers looking to outsource more long term fabrication work and we have made the strategic investments in people, technology and equipment to capitalize on what we believe is a long term trend. We hired industry veteran Max Fitzgerald to the newly created role of Vice President of Fabrication.

Speaker 2

Max is leading the execution of Olympic Steel's fabrication strategy, which is a key component to both our near term and long term growth. We are beginning to realize the benefits of the team's efforts to strengthen our fabrication capabilities and to integrate new more efficient equipment, automation and software into our operations. We are well positioned to accelerate our growth and we are excited for the opportunities to come. As the U. S.

Speaker 2

Rebuilds its infrastructure and our large OEM customers continue to outsource metal fabrication. As we near the midpoint of the second quarter, pricing on some products has recovered yet market conditions remain dynamic. While we monitor the evolving conditions, the entire Olympic Steel team remains focused on what we can control, our disciplines around working capital, operating expenses and cash flow. Our balance sheet remains strong and we have access to capital that will enable us to continue investing in organic growth and automation opportunities and a reinvigorated M and A market. And that all aligns with our strategic priorities for our long term success.

Speaker 2

As we look ahead, we are optimistic about our ability to deliver consistent profitable results and create value for our shareholders. I'll now turn the call over to Andrew.

Speaker 3

Thank you, Rick, and good morning, everyone. Our diversification strategy has made Olympic Steel a stronger, more resilient company. Our team's strategic execution and commitment to our operating disciplines delivered solid profitability this quarter despite pricing headwinds. The shipping volume for all segments was up sequentially from the Q4 of 2023 and the carbon and pipe and tube segments were up year over year versus the Q1 of 2023. Our Carbon segment faced softer market conditions moving into 2024.

Speaker 3

Our team remained focused on cost control disciplines and furthered our customer product and process diversification initiatives to help maximize profitability amid these shifting market dynamics. We continue to expand our coated offerings beyond metal fab and coated shipments are increasing. As Rick highlighted, we are actively leveraging our fabrication capabilities as a complement to our traditional distribution business. As a result of these efforts, our Carbon segment led our businesses in profitability with EBITDA of $12,700,000 At the start of the Q2, we have the tailwind of announced steel mills price increases on flat roll products. This is typically our strongest period of the year from a demand perspective and we expect to see stabilized demand throughout the Q2.

Speaker 3

However, we do expect to see some margin compression on carbon products in the second quarter. The Pipe and Tube segment performed well in the Q1 with adjusted EBITDA of $10,300,000 The integration of Central Tube and Bar has gone well. We continue to upgrade our laser equipment, including enhancing production capabilities at CTB with a new laser that is expected to be operational in July. Our legacy CTI business is also upgrading this year to a new jumbo laser that will replace 2 original tube lasers. These new lasers have an increased speed and efficiency rate of 30% as compared to the old equipment.

Speaker 3

Overall, our laser capabilities put Olympic Steel in a strong position to win new opportunities and support our strategic objectives. For the past year and a half, the Specialty Metals segment has faced challenging market conditions, namely falling commodity prices and softer demand as the industry worked through elevated inventory levels. During the Q1, we started to see signs of those headwinds waning. We ended the quarter with our best reported volume since the Q1 of 2023 and the segment contributed $4,900,000 of EBITDA. Looking ahead, we are optimistic as prices for both nickel, the primary driver of stainless surcharges and aluminum were up in April and we are anticipating another bump in the near term.

Speaker 3

Additionally, we are on boarding new business that we expect to ramp up in the Q2. We are pleased with the progress our segments are making to execute on our diversification strategy. We expect 2024 be another solid year for Olympic Steel and are confident in our ability to deliver profitable results in all market environments. Now I'll turn the call over to Rich.

Speaker 1

Thank you, Andrew. As you've heard from Rick and Andrew, our team did an excellent job in the Q1 to navigate pricing headwinds and shifting market dynamics to deliver solid performance to start the year. Before I discuss the results in more detail, I want to remind you 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 Q1, net income totaled $8,700,000 compared with $9,900,000 in the Q1 of 2023. EBITDA in the quarter was $23,200,000 compared with $23,900,000 in the prior year period.

Speaker 1

Q1 2024 results include $400,000 of LIFO expense compared with no LIFO adjustment in the Q1 of 2023. Consolidated operating expenses for the first quarter totaled $103,200,000 compared with $102,700,000 in the Q1 of 2023. Our Q1 operating expenses reflect the addition of CTB, 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. 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.

Speaker 1

Consolidated operating expenses for the 4th quarter include $4,000,000 of CTB operating expenses and $1,700,000 of lower incentive expenses when compared with the Q1 of 2023. Our effective borrowing rate in the Q1 of 2024 is also impacted by the expiration of our interest rate hedge. Our balance sheet remains strong. We ended the year with debt of $197,000,000 an increase of $7,000,000 since year end. The additional debt was used to fund the $16,000,000 increase in working capital during the quarter, which supported our 9% increase in sales sequentially from the 4th quarter.

Speaker 1

We ended the quarter with availability of approximately $366,000,000 keeping us very well positioned to continue investing in higher return opportunities. Our capital expenditures totaled $4,800,000 in the Q1 of 2024 compared with depreciation expense of $6,000,000 Equipment lead times remain long and we estimate that 2024 capital expenditures will be approximately $30,000,000 as we continue to make investments in automation, fabrication and equipment that results in higher gross margin opportunities and more consistent results. Our Q1 2024 effective income tax rate was 27% compared to 26.8% in the same period last year. We expect our 2024 tax rate to approximate 27.5% to 28.5%. In addition, we paid a quarterly dividend of $0.15 per share in the Q1.

Speaker 1

This was an increase of $0.025 per share or 20% from the company's previous quarterly dividend. Our Board of Directors approved our next regular quarterly cash dividend of $0.15 per share, which is payable on June 17, 2024 to shareholders of record as of June 3, 2024. The company has now paid regular quarterly dividends dating back to 2,006. Before we open the call for your questions, I would like to thank the entire Olympic Steel team for all their efforts in the Q1. It's because of the team's hard work and dedication that Olympic Steel remains in a strong operational and financial position and is equipped to invest in additional higher value growth opportunities and continue to advance our strategic plans.

Speaker 1

Operator, we are now ready for questions.

Operator

Thank you. The floor is now open for questions. Today's first question is coming from Dave Storms of Stonegate. Please go ahead.

Speaker 1

Good morning, Adam.

Speaker 3

Good morning, Dave. Good morning.

Speaker 4

Just hoping we could start with lead times. You mentioned in your remarks that they're still maybe a little longer than you'd like them to be. Is this a product of bringing in more value added services? And if it is, at what point does automation start bringing those lead times down? Kind of where is the tipping point there?

Speaker 2

So Dave, it's Rick. Is your question on our comment about lead longer lead times related to some of our CapEx equipment or is it on our business levels lead times with customers?

Speaker 4

My understanding was that was lead times for longer on business levels, if I have that wrong. Apologies.

Speaker 2

Yes. I mean, I think our lead times are, I call them pretty normal. Andrew, I don't know if we've been seeing any real difference over the quarter into Q2, but I think they're pretty stable.

Speaker 3

Yes, they are. I would tell you that on the carbon side lead times in hot roll is probably still in the 4 to 5 week, probably similar to a little bit longer tandem products or co roll galvanized more like 6 to 7 weeks on the specialty side. Stainless and aluminum about the same probably 4 to 5 weeks from us certainly to our customers. We have a lot of JIT programs established. So in some cases, it's same day deliveries just depending agreements that we have.

Speaker 4

Understood. Thank you for the clarification there. One more for me. How should we be thinking about pricing momentum going into Q2 and then beyond Q2, if you have any visibility there?

Speaker 3

Yes, I would say on the carbon side, we've seen some stability in the market index pricing is down a little bit, but we've seen some stability in the carbon. We're encouraged in stainless and aluminum, nickel and aluminum have both shown some strength in the past couple of weeks and anticipate that we'll see more stability as we head through the Q2. So we feel pretty good.

Operator

Thank you. Our next question is coming from Alan Weber of Vibativ Advisors. Please go ahead.

Speaker 5

Good morning. Can you talk about one is just maintenance capital spending? And then in terms of acquisitions, can you just talk about how you're thinking about things today and what's changed given where the economy is, etcetera?

Speaker 1

Sure. Good morning, Alan. It's Rich. With respect to CapEx, maintenance CapEx is between $7,000,000 $10,000,000 per year. And as we indicated in the prepared comments, we expect to spend about $30,000,000 this year.

Speaker 1

And I think we have POs out there for quite a bit. It's just that the prepared comments we indicated that it's a particular long lead time to get processing equipment. Now I'll let Rick answer the question on M and A.

Speaker 2

Yes. Thanks, Alan. Good question on the M and A. So we saw a bit of just in general, I think the M and A market really contracted towards the end part of last year and as we opened this year. And I think part of that was

Speaker 1

some of

Speaker 2

the impacts maybe of higher interest rates. As you know and we've talked a lot about it, we strategically will continue to aggressively look at growth both from internal CapEx growth and acquisitions. So we've remained very active in terms of looking. What I'd say is probably in the last month to 6 weeks, we've seen the M and A market in general start to open up more. The reasoning behind that, I think it may be people are settling in at what the federal funds rate is.

Speaker 2

And even if we're not going to go down here in the near term in the next couple of quarters, I think as always businesses adjust and valuations adjust and I think that's what's happened. So we're starting to really see a much larger inflow into the pipeline, which is really good. As I've said numerous times, we anticipate being continuing to be successful. We've made 6 acquisitions in the last 5 years and we would fully intend to stay on that trend. And we'll also stay disciplined though.

Speaker 2

We'll look for target companies that are similar to what you've seen in our recent track record that are high performing companies, good fits and immediately accretive to Olympics. So that's kind of a snapshot of what we're seeing.

Speaker 5

And just my last question. When you look out long term, has anything changed in your view in terms of the infrastructure spending and on shoring and like that?

Speaker 2

Yes. I think the only thing that's probably changed over the 3 years since the government announced a lot of funding is probably just the time that it's going to take to get all the money spent. And some of it isn't just releasing the money. It's really the labor situation and the ability to get these projects done. So I would say the good news spend and the cycle will maybe be a little bit longer than maybe what we had thought 3 years ago.

Speaker 2

And we're seeing that in certain pockets. We the build out of the data centers were a supplier into that and that looks pretty robust over the coming years. But there's in that cycle, there's some ebbs and flows in terms of how that happens. And a lot of it isn't just based on the money, it's based on the labor and the ability to get these projects done. But and then the second part, I mean, Andrew, I think you can talk about what we're seeing from

Speaker 3

Yes. So we've certainly seen the industrial OEMs has been doing more outsourcing as we've seen more on shoring taking place. As Rick talked about labor, I think is going to continue on the industrial side to be a little bit of a challenge. And I think for us, we're in a really good position with existing customers and new customers to take advantage of these fabrication opportunities. Rick also talked about data centers.

Speaker 3

We've been certainly a player in that part of it more on the tube side of it and think that's going to really continue to grow over the next certainly 2 to 5 years.

Speaker 5

Okay, great. Thank you very much.

Operator

Thank you. The next question is coming from Chris Sakai of Singular Research. Please go ahead.

Speaker 6

Hi, good morning.

Speaker 1

Good morning, Chris. I wanted

Speaker 6

to ask about inventory levels. How should we be thinking about them throughout the year?

Speaker 3

Well, we think we're in appropriate levels today really across the board. And I think as lead times continue to I would say, Chris, to be at normal levels. Again, we see hot roll in the 4 to 5 week, cold roll in the 6 week, stainless and aluminum in 4 to 5 week. I think we'll get back to traditional inventory turns. We target certainly 5 times turns and we think we'll certainly be there.

Speaker 3

And I think for the second half of the year, I we'll be in good shape inventory wise.

Speaker 6

Okay, thanks. Thanks for that. Can you comment on the quarterly cadence for capital expenditures for the next three quarters?

Speaker 1

Yes, sure, Chris. As I indicated in our comments, we think that the full year spend will be in the $30,000,000 range. We've just been we've ordered a lot of equipment. It's just taking a long time and the lead times are long to get it in. But I think that number is a solid number to use for the full year forecast.

Speaker 6

Okay, thanks.

Operator

We're showing no additional questions in queue at this time. I would like to turn the floor back over to Mr. Marabito for closing.

Speaker 2

Thank you, operator, and thank you all for joining us on our call this morning. We certainly appreciate your continued interest in Olympic Steel,

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Earnings Conference Call
Olympic Steel Q1 2024
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