Q1 2021 Olympic Steel Inc Earnings Call
Good morning, and welcome to Olympic Steel 2021 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.
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As a reminder, this conference is being recorded.
I would now like to hand, the conference over to Rich Manson Chief Financial Officer at Olympic Steel. Please go ahead Sir.
Thank you operator, welcome to Olympic Steel's earnings call for the first quarter of 2021.
Our call. This morning will be hosted by our Chief Executive Officer, Rick married Vito and we will also be joined by our President and Chief operating Officer, Andrew Greiff before.
Before we begin I have a few reminders and.
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 and assumptions or changes and 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 and the companys reports on forms 10-K, 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.
Filiation of these non-GAAP measures to the most directly comparable GAAP financial measures is provided in the press release that was issued this morning and can be found on our website. Today's live broadcast will be archived and available for replay on Olympic steels website at.
At this time I'll turn the call over to Rick.
Thank you rich good morning, everyone and thank you for joining us to discuss Olympic Steel's results for the first quarter of 2021, I'll begin with some comments about our record performance and the first quarter and the overall strength of our markets then Andrew will review our business segment performance and rich will provide more.
Detail about our financial results and then after that we would of course be glad to take your questions.
So as noted in this morning's release, our strong momentum continued in the first quarter, which was our most profitable first quarter ever and overall it was our third most profitable quarter and the Companys history.
Our performance resulted from the combination of several factors, but most importantly, I'd like to recognize and thank our employees, whose hard work talent and dedication to our internal disciplines around safety and expenses and inventory management and we're really critical to our success together there.
Our focus on safety and performing for our customers every day helped drive an outstanding start to the year.
Rapidly changing market conditions, which began to appear in the fourth quarter of 2020 also played a big role in shaping the first quarter of 2021.
During the pandemic mill production capacity was reduced.
And user demand has strongly returned and returned faster than forecasted, resulting and constrained metal supply and depleted inventories.
This supply demand dynamic has caused disruption and the supply chain.
And I don't became difficult to source lead times extended and prices have risen to unprecedented levels.
While long mill lead times, and disruptions and the metal supply chain kept inventory at service centers at historic lows, our longstanding relationships with domestic mills enabled us to support our customers with metal during the supply constrained environment.
We performed well and all of our end markets with record net sales of $463 million and the first quarter, and that's compared with $354 million and the first quarter of last year.
Net income totaled $22 million or $1 and 91 per diluted share that's compared with net income of zero point $6 million or <unk> <unk> per diluted share a year ago adjust.
Adjusted EBITDA was $37 $8 million compared with seven $5 million and the first quarter of 2020.
The strong first quarter has not changed our long term focus.
We understand that continuing to diversify our business is critical to the long term value creation for all of our shareholders. Since 2018 through our strategic M&A focus we have completed four acquisitions that enabled us to add higher margin carbon and specialty metals business.
We are especially pleased with the smooth integration and strong financial performance of Texas based action stainless and alloys, which we acquired in December 2020 to geographically expand our specialty metals product offerings.
We're actively pursuing additional strategic growth via acquisitions, and organic investments, which Andrew will discuss in a moment.
Turning to the outlook for our markets, we expect strong demand and supply chain constraints and high metal prices to continue and the near term.
We believe we are still and the early stages of a strong demand cycle and Olympic is an excellent position to continue to benefit from growing demand and all of our segments.
We expect strong profitability to continue and the second quarter.
Longer term legislation to rebuild the nation's infrastructure combined with the potential shifts and supply chains closer to our domestic manufacturing industry would extend the current demand cycle as infrastructure projects last multiple years Olympic steel is extremely well positioned to support.
<unk> and American rebuilding effort. So we're watching this legislation with significant interest and anticipation. So now I'll turn the call over to Andrew for some additional comments.
Thank you Rick and good morning.
The first quarter of 2021 was sensational and many ways as all three of our segments capitalized on the market recovery with strong EBITDA and pre tax results shipments for our higher margin products and specialty metals and pipe and tube outpaced the market and the first quarter. Meanwhile.
And our carbon segment was the most profitable of the three segments generating over $24 million of EBITDA and the first quarter, even though volumes were impacted by the supply chain disruption that Rick mentioned earlier.
Inventories throughout the supply chain have been at historic lows. We are fortunate to have strong longstanding mill relationships to support our customers. During this supply constrained environment the longer lead times have challenged our spot sales to put it simply demand is strong our.
Our specialty metals segment continues to perform extremely well and had a record quarter, resulting in a 43% increase in sales compared with the first quarter of 2020, while generating $8 9 million of EBITDA.
Painless steel is in short supply as the domestic mills have put customers on allocation, which has and will limit our ability to service the spot market recent government actions and aluminum will continue to reduce imports, but our strong domestic aluminum mill relationships will allow us to continued Rx.
Celebrated growth and this market.
Pipe and tube, which tends to be our most consistent segment had a spectacular first quarter with a 44% increase and sales for the quarter compared with a year ago, while generating $8 7 million of adjusted EBITDA, our newly commissioned L. T free machine five acts.
This laser cutting system has performed exceedingly well and has created new opportunities to service, our existing as well as new customers.
Our carbon segment produced the most EBITDA and all of our segments and the first quarter with a 22 million dollar improvement over the first quarter of 2020 carbon flat segment sales were up 21% compared with the first quarter of last year due to higher pricing as volume.
And we're market constrained, we recently added two new fiber optic lasers and Cleveland to further support our value added growth efforts as Rick mentioned earlier, we continue to make progress on our diversification strategy with our specialty metals and pipe and tube segments now accounted for approximately.
47% of net sales, we are especially pleased with our recent acquisition of action stainless which had an excellent first quarter. We are also excited about our initiatives to organically grow our aluminum distribution business, which significantly outpaced the market during the first quarter.
Turning now to our outlook for the coming months sustained levels of strong demand coupled with limited metal supply have caused metal prices to continue to increase and the second quarter. We believe that prices will remain elevated until more balanced and supply and demand is achieved as additional mill.
And is expected to come online later this year.
Our industrial Oems are reporting optimistic projections for the second quarter and the remainder of the year. However, we are concerned that supply chain disruptions will continue as shortages and metal micro chips freight containers ships building supplies and other areas may suppress per.
Reduction, even though and demand is strong and growing.
Markets for industrial equipment, agriculture, construction and truck trailer and recreational vehicles continued to be very strong and construction are sales of coated products has been especially strong.
And then the industrial appliance market consumer back orders remain at high levels, indicating that demand will remain robust and that market as we move through the second quarter and into the second half of the year as.
As well publicized the automotive market continues to experience shortages of parts and semiconductor chips, but demand remains strong our 2020 investments and the Buford and wind facilities and Georgia have enhanced our ability to service our growing auto market in the southeast we have excellent relationships with the <unk>.
Automakers and their sub tier suppliers and we are optimistic about our ability to further grow and that area as evidenced by our second South East automotive stamping line that will be commissioned in early 2022.
But the longer term infrastructure legislation could have a significant impact on growth next year and beyond we are well positioned with customers, who manufacture the construction and industrial equipment that will be needed for this rebuild effort. This would be a further long term boost to the current demand cycle now let me turn the key.
And all over to rich.
Thank you Andrew and good morning, everyone. As Rick noted, we delivered the most profitable first quarter and the history of Olympic steel and the third most profitable quarter overall as a result of strong market dynamics record high metals pricing and our continued focus on controlling working capital and operating expenses.
Saw dramatic increases and our profitability compared with the first quarter a year ago.
Net income was $22 million compared with $600000 and the first quarter of 2020, and adjusted EBITDA was $37 8 million compared with $7 $5 million a year ago.
Results include $1 million of LIFO pre tax expense and the first quarter of this year compared with $500000 of LIFO pretax income and the same period last year.
Net sales were also a record high $463 million compared with $354 million a year ago. However volumes were impacted by disruptions and the supply chain.
These supply chain concerns continue into the second quarter and while we are seeing strong end user demand second quarter sales volumes are expected to be similar to the first quarter.
We also continued to benefit from our disciplined approach to inventory management. Our team has made tremendous progress and our focus on efficiency drove record flat rolled inventory turns of six three times and record pipe and tube inventory turns of four two times.
We continue to maintain an intense focus on overall inventory management as we navigate and historically high metals pricing environment.
Total debt was $192 million at the end of the first quarter and increase of $31 million since year end 2020.
Resulting from the need to fund approximately $60 million and higher working capital levels associated with higher metals pricing.
While debt levels modestly increased it is important to note that our availability under our asset based loan actually increased to $162 million at the end of the quarter.
Given our healthy liquidity position and access to capital Olympic Steel is well positioned to finance additional investment and acquisition opportunities to further our growth strategy.
Capital expenditures totaled $2 3 million for the first quarter compared with depreciation of $4 $7 million.
We expect 2021 capital expenditures to be in the range of $75 to 100% of depreciation expense.
The effective income tax rate for the first quarter was 26, 5% compared with 25, 4% for the first quarter of 2020.
We expect our tax rate to approximate 26% to 28% and the upcoming quarters.
We also announced that the board of directors has approved a regular quarterly dividend of <unk> <unk> per share payable on June 15th 2021 to shareholders of record on June one 2021 and.
In conclusion, we are incredibly proud of the Olympic steel team for delivering record performance during the first quarter.
We believe that many of the factors that contributed to our success and the first quarter. We will continue leading to strong profitability again and the second quarter of 2021 now operator, let's open the call for questions.
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Yeah.
Our first question today is from Andreas spoke and Hauser of UBS. Please proceed with your question.
Well, thank you very much and good morning, congratulations on the good set of results just.
And just a question on and demand and there was a question I've asked you guys before and I think I did and the loss.
Cole as well, but.
Where are you seeing the strength kind of specifically in your end markets.
And is there any markets that are lagging a bit.
And maybe related to that I mean, obviously on a year on year basis, we're going to be looking at a very low base of last year and now due to COVID-19 and the first quarter of last year. So how are you kind of looking at demand versus 2019, which is something that I get the sense a lot of people looking at you know what well we go to <unk> 19, and we are we above 2019.
And in terms of kind of in demand for your primary products and end markets.
And in line with that or are we still kind of trailing at a bit I realized prices are up but that's probably also got a lot to do like you mentioned, but the supply constraints and steel so and a well with <unk>.
And demand and kind of versus 2019.
Your view.
Well good morning, Andreas This is Andrew so I'll try to attack both parts of your question. So firstly the strength that we're seeing and our markets from our industrial Oems.
Recreational vehicles.
Auto really right before the chip issue and construction really have driven our carbon business, what we're seeing on the specialty metal side of the business is that appliance or clamp business.
Kitchen restaurants, food equipment is really coming back very strong truck trailer and all.
Auto exhaust has been strong and so for US there really has not been a segment of the market that is underperforming.
At the moment I think the concern certainly as the supply chain disruption you've read it everybody has read it relative to auto.
And production that has been curtailed at a number of of the auto companies and so that's certainly impacting us.
As auto is certainly and.
Important part of our business.
And I would tell you is that.
Initially customers, we're looking from a demand to get back to 2019 levels.
Theyre not there.
They really are not there you've been at the pre pandemic levels at this time.
We'd expect as we're heading to the second half of the year that the demand will certainly be there. But then the question will be whether there'll be enough steel to be able to supply and if there are other supply chain disruptions that will impact.
Their ability to be able to make product.
Yeah, and this is Rick Andreas Thanks for the question and the only other thing I'd add is.
Where we really see still the biggest differential from 19 to 21 and.
And the transactional spot business and that's just a function of all the things that Andrew just commented on in terms of the supply and supply chain constraints.
Oh, that's really interesting and and you obviously mentioned that we should be.
You'll start to see more supply and that's more mills kind of get commissioned into the back and the back half of the year.
Have you had any conversations with your suppliers in terms of the ramp up there and when you see the market kind of balancing out in terms of additional supply I mean, obviously.
But the <unk> been talking about six months ramp up we've even heard 12 month ramp ups and some cases.
Is there like an inflection point, where you really see you're right that by this time, we should have more materially more volume from our suppliers to sell to customers.
Well Andreas I think the way we look at it is we think David is going to take the full second half of the year for us, but most of this capacity really to come on so the impact really wouldn't be until the beginning of 'twenty two.
Fair enough yeah, that's that's very much in line with what we're hearing as well.
That's very clear gentlemen, and thank you very much appreciate you taking my questions have a great weekend ahead.
Thank you so much you chip.
The next question is from Marco Rodriguez of Stonegate capital markets. Please proceed with your question.
Good morning, everyone. Thank you for taking my questions. Good morning, good morning.
I was wondering obviously.
And maybe shed a little bit more light with some ups and perhaps some data points just kind of obviously on the metal supply remained tight and mill times extended and can you kind of give us a sense as far as and where those numbers are versus now versus sort of eggs.
A more normalized environment, if you will.
Sure well hot roll if you go back.
Pre pandemic, probably and normalized times Hot roll is typically four weeks, maybe five weeks today, it's closer to eight weeks tandem products. So cold roll is typically six weeks today, it's closer to eight to 10 weeks and coated products about the same.
On the specialty metal side.
It's about the same as you were seeing 300 400 series stainless.
Four to five weeks and today, it's closer to seven to eight weeks so and.
And we have seen we've seen this really starting at the end of last year and it's really continued through now.
Understood and.
Obviously, you mentioned the automotive chip shortage and its obviously all over the place in terms of its impact on some of the supply chain.
But can you just talk a little bit about your thoughts there on on Europe Spectation.
If you have any what might be different or are you sort of in line with kind of a concern.
The consensus thinking as far as well and that might be alleviating on them.
And how that kind of sort of and Pops your overall business.
Well I think it depends who you are listening to if you listen to the chip manufacturers. They are telling you that this is going to be a problem that's going to continue on for.
For another year or two they have been.
Differences from the automakers themselves as to when this is going to alleviate itself as well, it's not just the automakers, but you're certainly seeing it with some of the recreation vehicle guys and other industrial Oems.
I would expect that we're going to see challenges through the balance of this year.
And you continue to see almost weekly production shutdowns extension of shutdowns I mean, <unk> talked about second quarter, a 50% reduction I don't think we've seen that as much from from some of the other domestic auto suppliers, but I think the news is it's really more.
Mixed so the way that we look at it is we have to prepare for these disruptions for the balance of the year.
Almost all of it and got it and.
I know, it's still pretty early but just in terms of the prior acquisition and our most recent acquisition ops and stainless and alloy can.
Can you, maybe just provide a little bit and update on the integration efforts there.
Sure. Thanks for the question Marco.
The integration is going very well.
As we commented earlier.
Been a great fit both from a product expansion and in terms of geography and some of the some.
Some of the product offerings and stainless that action has.
And then culturally I'll tell you, it's a it's a great company and.
So on both sides on both the business execution side and on the cultural side. It's been one of the smoothest integrations of an acquisition that we've done.
We are very excited about the strong results we've seen.
And from action and we're really optimistic about.
Growing that business as well as grow and the rest of our continuing to grow the rest of our specialty metals business.
Understood very helpful and last question from me just wondering if you could maybe update us on the M&A landscape I know, it's obviously an important component and the overall strategy. If you can kind of give me some sense as far as what the pipeline looks like today, and maybe where valuations are kind of shaking out.
Sure.
So the M&A market has rapidly recovered in terms of the activity level. So.
As we went through 2020 and COVID-19 a lot of things came to a screeching halt in terms of the the buy sell activity for companies.
I think that quickly as the recovery happened and fourth quarter and quickly companies Reengage and I use. Our example of action is a perfect example of that we were.
We're pretty far along and our conversations with action and and obviously and the heat of COVID-19, We took us a slight pause, but we were able to still get.
That transaction done in December.
First quarter, we have seen a lot of activity maybe rich you can comment on the other part of Marco's question and sort of what we're seeing in terms of.
Pricing and multiples and value and that type of yes, I think thanks for the question Michael I think the best way to look at it is with the with the with all of this heating up as that and is going to push pushing multiples up a little bit and thats certainly what were seeing.
Hard part is when you're in a hot market like this is not really the multiple but what are you basing the multiple lot and certainly 2021 versus 2020 produce some very unique results and so you have to kind of temper that and our viewpoint and when we look at M&A as we look at EBITDA streams over and over a cycle not just and in particular period of.
Time and so.
The multiple is really going to depend on what the base you are using to look at that multiple force. So is it one year is it three years right and and the way I'd and that question is and we talked about it and are prepared comments earlier, but we are actively continuing to look at acquisitions.
And we intend to continue to supplement our growth.
Through acquisitions, we have.
Made four acquisitions over the last couple of years, and we're looking forward to and fully expecting to continue.
To execute on ACA.
Acquisitions that are of very well run high return companies like action.
Excellent. Thank you guys very much appreciate it.
And I can't Thank you Marco.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is from Chris Sakai of singular research. Please proceed with your question.
Hi, good morning.
A lot of my questions were asked already but.
And just I guess, one maybe you could help me understand.
I've heard about the supply chain constraints.
And you know.
Put a damper on volume.
Wanted to know.
Why could you help me understand why inventory and flat.
Uh huh.
And flat assets are up.
Sure sure, Chris and really what Youre looking at there and there'll be more detail and the 10-Q that will come out later today is that where youre seeing even though inventory our inventory volume is actually down a little bit from the previous quarter and it's been relatively flat from the last six months, but what youre seeing is the effect of the average cost increasing so the CRE.
<unk> has been on a steady March upward since August of last year at this point, having tripled that right and so what youre seeing is a higher cost per ton and the inventory and Youre also seeing higher selling prices. So we had record sales and the first quarter of this year, which leads to much higher balances and accounts receivable, so where youre seeing it is really and accounts receivable and inventory.
Those balances are up higher offset a little bit by higher payables, but as we commented earlier, it's about a $60 million increase and working capital on a consolidated basis for the year and a lot of that did fall and the carbon flat segment.
Okay.
Alright, great Thanks and.
Yes.
Route all the way from.
And what I heard before and.
And it sounds like until 2022.
Supply chain constraints rule.
We will get better.
Well, we think Chris certainly as we look out and the near term.
Certainly the next three to six months, we believe that the the environment and we're in is going to continue.
Andrew talked about a lot of the.
Areas. Besides just model.
Different supply chains that are feeding a lot of our customers.
Really our tight constrained.
Global supply chains, and even just the transportation to get at here.
Is an issue and we do see that continuing.
Like everything I think.
Businesses economies.
And we will get back into a better equilibrium.
But certainly here in the second quarter I think it's going to continue to be really tight and we didnt really talk much about it but labor is really tight too so.
I think all of those things.
And we're pretty bullish that.
Demand, while some of it may be disrupted by some of these supply chain constraints, we think the overall demand environment is going to be.
Pretty good and we're pretty excited about the rest of the year. We're certainly excited about where we sit as the Olympic.
And the supply chain the things that we've done the last year or so.
And certainly.
We are exceptionally well positioned if this country does and infrastructure spend so that's how we're looking at it.
Okay, great well thanks.
Thank you thanks, Chris.
There are no additional questions at this time I would like to turn the call back to Rick Mirabito for closing remarks.
Thank you operator, and thank all of you for joining us on our call. This morning, we greatly appreciate your continued interest and Olympic steel and we look forward to speaking with you again next quarter. Thank you very much bye bye.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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