Q2 2021 Olympic Steel Inc Earnings Call
[music].
Hello, and welcome to the Olympic Steel 2021 second quarter financial results conference call and webcast.
At this time all participants are in listen only mode. It's on.
And what should require operator assistance. Please press star zero on your telephone keypad.
And answer session will follow the formal presentation.
As a reminder, this conference is being recorded.
And it's not my pleasure to turn the call over to rich Manson.
<unk> financial Officer and Olympic Steel. Please go ahead, sir thank.
Thank you operator, welcome to Olympic Steel's earnings call for the second quarter of 2021, our call. This morning will be hosted by our Chief Executive Officer, Rick Mirabito 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 <unk>.
May not reflect actual results.
Company does not undertake to update such statements changes and assumptions or changes and other factors affecting such forward looking statements and <unk>.
And assumptions risks uncertainties and other factors that could cause actual results to differ materially are set forth and the companys reports on form 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 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 steels website and.
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 second quarter of 2021 and.
I'll begin with some comments about our record quarterly performance and the progress on our long term strategy to position our business to deliver consistent profitability.
And then Andrew will review, our business segment performance and our market outlook.
Rich will conclude with a more detailed review of our second quarter financial results. After that we'll be happy to take your questions.
This is truly an exceptional time for Olympic steel and <unk>.
Second quarter was the most profitable quarter and the company's history, and we reported record sales for the second consecutive quarter from a market perspective demand continues to be good.
Metal prices continue to escalate to record highs and our shipping volumes are at pre COVID-19 levels and from an operational perspective, our strategic execution key investments and ongoing disciplines around working capital turnover and controlling expenses have propelled our success.
Our historic performance would not be possible without the efforts and talents of the entire Olympic steel team we.
We are proud of how our team has worked together to provide superior service to our customers, while driving our operational initiatives and sustaining our culture of safety <unk> collectively these efforts resulted in record setting quarter are.
Our second quarter sales of $556 million were up more than $90 million from a record setting first quarter net income totaled $29.6 million for the second quarter and adjusted EBITDA was a record $51.7 million to put this in perspective adjusted.
EBITDA for the second quarter alone was more than double the adjusted EBITDA for all of fiscal year 2020.
Market dynamics for the steel industry remains strong and pricing continues at record levels into the third quarter.
Index pricing for carbon hot rolled steel rose from $1300 per ton to $1723 per ton during the second quarter and as of today. It is $1863 per ton, marking the 50 <unk> consecutive week that the index is increase.
This compares to the 400 to $500 per ton range that we experienced last summer.
The robust market brings challenges however, and we continue to serve our customers by delivering model, while they navigate component shortages and supply chain disruptions and labor constraints.
We expect these challenges to continue and the near term.
We also continue to execute our long term strategy to further diversify our business and deliver consistent profitability.
Our investments and the specialty metals business, our expansion and the southeast region of the United States and the successful integration of our recent acquisitions have helped us diversify our portfolio and improve our returns.
We'll continue to focus on operational efficiencies, while deploying capital into investments with higher EBITDA returns to drive consistency and our earnings.
Looking ahead on.
Our already strong balance sheet was bolstered recently by our amended and extended $475 million credit facility. The continued access to low cost capital and additional borrowing capacity gives us the financial flexibility to pursue additional acquisitions and capital expenditures and organic growth.
And we have a strong pipeline of high return on investment opportunities that we are actively pursuing for future growth.
We expect the demand environment remains strong as positive industry dynamics continue and a strengthening economy for.
For the long term, we're hopeful that the U S infrastructure legislation will be passed this year and.
And we are and in excellent position to be a key supplier to customers will play a critical role and the rebuilding of our nation's roads bridges and other infrastructure projects that really could extend the higher metal demand for many years to come for these reasons, we are optimistic about the future and anticipate a similarly.
<unk> third quarter.
Now I'll turn the call over to Andrew for some additional comments.
Thank you Rick and good morning, everybody as Rick mentioned, our record performance for the second quarter and first half of 2021 was more than just the result of strong market momentum. It was a testament to the extraordinary collaborative efforts of everyone on our team focusing on customers.
Keeping metals shipping and controlling operating expenses and an environment of rising labor material and freight costs, all while maintaining safe operations throughout our organization.
It's also worth noting that shipments for our higher margin products and specialty metals and pipe and tube once again outpaced the market and the second quarter, our record EBITDA and pre tax results were supported by excellent performances and all 3 of our reporting segments.
Specialty metals led by Andy Mark, which had an exceptional quarter second quarter sales were up more than 150% from a year ago, and EBITDA was $14.6 million, while stainless and aluminum supply remained constrained our shipments still outpaced the industry and we grew our mark.
Get share, our Oems, including truck trailer industrial appliance and restaurant equipment manufacturers remain very strong.
Tight supply drove price increases throughout the quarter, which helped us deliver record profitability and this segment.
We expect stainless steel allocations to remain through the fourth quarter of 2021 and likely into the first half of 2022 actions stainless which we acquired in December 2020 has performed extremely well and the first half of 2021.
Our pipe and tube segment led by Bill Zielinski continues to perform extremely well sales for the segment increased 75% from a year ago and adjusted EBITDA was $8.4 million, bringing the segments adjusted EBITDA for the first half to a record 17 point to led.
By an outstanding team, our pipe and tube segment continues to support our long term growth strategy and deliver consistent profitability.
As we look ahead, we believe the segments value added services will be a key differentiator as customer supply chain issues will create more need for our outsourced services.
Our carbon segment and <unk>.
Extraordinary quarter sales for the segment increased 131% from a year ago, and EBITDA was $33 million, we saw significant year over year improvement and all of our facilities. We are focused on controlling expenses and right sizing inventory to create sustainable operating models.
That can generate consistent profitability. Our strong performance was also driven by the success of our automotive stamping line, and Winder, Georgia and investments and our Buford, Georgia facility.
Both of which support our growing presence in the southeast region.
Our second automotive stamping and automated packaging line for wider is being built and expect it to be operational and the second quarter of 2022.
As we started the third quarter volumes have remained steady and margins continued to be strong our industrial OEM customers are busy but they're also dealing with continuing supply chain challenges, while we've experienced many of the same supply chain challenges as our customers, particularly with respect to labor we expect.
To continue to invest and automated equipment at a number of our facilities to help us meet the demand from value added products from our large industrial customers.
Signals point to continued healthy demand and tight supply as we head into the second half of this year. We believe these favorable market conditions. We will continue to be conducive for strong earnings we will stay vigilant when it comes to safety performing for our customers expenses and inventory turnover focused.
And on what we can control I am proud of our leadership support staff and all of our team members for their resiliency and impactful sustainable changes that we have made and look forward to build and on the successes as we move forward now I will turn the call over to rich.
Thank you Andrew and good morning, everyone. As Rick noted our continued focus on working capital and operating expenses, coupled with strong markets and increases in metal prices contributed to the most profitable quarter and Olympic steel history.
Net income for the quarter totaled $29.6 million.
Compared with a net loss of $6.5 million and the second quarter of 2020, and adjusted EBITDA was $51.7 million compared with $500000 for the second quarter of last year.
These results include $4 million of LIFO pretax expense and the second quarter of 2021, compared with $500000 of LIFO pretax income from the same period a year ago.
Sales for the quarter totaled $556 million.
Compared with $248 million a year ago.
Volumes were up slightly from the first quarter of this year as our customers deal with constraints on the supply chain, which Andrew mentioned earlier.
We expect third quarter shipping volumes to approximate second quarter shipping volumes.
As a result of the focus on inventory management, our inventories are lean and continued to turn at historically high levels.
Our flat rolled inventory turns and 6.1 times year to date, and our pipe and tube inventory turns and 4.2 times year to date.
In June we announced that we amended and extended the maturity of our existing $475 million asset based revolving credit facility through June 16th 2026, with an accordion feature of up to $200 million.
You also have the flexibility and discretion to include our unencumbered real estate portfolio and borrowing base collateral, which provides greater borrowing base capacity if it's needed.
The updated facility provides us with an excellent source of low cost capital to sustain our ongoing operations as well as additional funds to fund acquisitions and organic growth.
At the end of the second quarter. The company had total debt of $269 million and increase of $108 million from year end as.
As we discussed last quarter higher metal prices result, and the need to fund working capital requirements. The.
The increase on our debt and has been caused by the funding of approximately $162 million and higher working capital levels associated with higher metal prices and higher year over year shipping volumes.
And the need to fund higher working capital levels will continue into the third quarter as metal pricing continues to increase.
Consolidated operating expenses for the second quarter were $84.9 million and increase of $25.4 million compared with the second quarter a year ago.
Included in the increase is $3.3 million of expenses associated with action stainless which was purchased in December 2020, and approximately $10 million and incremental incentive expense associated with our increased profitability as well as processing and distribution expenses, which are associated with an approximate 36% increase and our <unk>.
<unk> levels.
As a percentage of sales operating expenses dropped to 15, 3% and the second quarter compared with 24% last year.
Capital expenditures totaled $4.6 million for the first half of 2021 compared with depreciation of $9.3 million.
Our effective income tax rate for the second quarter was 26, 6% compared with 31, 4% for the second quarter of last year.
We expect the effective income tax rate for the second half of 2021 to be similar to the first half of the year.
We also announced that the board of directors approved a regular quarterly cash dividend of <unk> <unk> per share, which is payable on September 15th 2021 to shareholders of record on September 1.2021.
In conclusion, our ongoing success has been the result of many factors, including our disciplined focus on working capital and expense control, our strategic positioning of our company for consistent long term profitability and strong markets.
We are proud of our and our entire team and our accomplishments, thus far and 2021 and we're looking forward to a strong third quarter.
And now operator, let's open the call for questions.
Thank you and ill be conducting a question answer session, if you'd like to be placed and the question queue. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May press star 2 if he would like to move your question from the queue for participants using speaker equipment and may be necessary to pick up your handset.
Before pressing star 1.1 moment, please while we poll for questions.
Our first question today is coming from Michael Rodriguez from Stonegate capital markets. Your line is now live.
Good morning, everyone and thank you for taking my questions.
Good morning, Mark good morning.
And I was wondering if we can start on your on the carbon flat segment sequentially, you had some pretty nice increases in volumes as well as pricing but.
But the gross margin was pretty similar to Q1 can you maybe talk a little bit about the drivers there.
Yes, sure Mark I think 1 of the things we've always talked about is that we're not as focused on gross margin percentage as we are as we're focused on gross margin dollars per ton and so what you saw on the first quarter was that the selling price dramatically increased and.
And you saw a commensurate increase and the gross margin dollars per ton right. So the percentage may be relatively similar to the first quarter, we generated far more gross margin dollars per ton and the second quarter and Thats really what propelled the quarter to be a record quarter.
Got it.
And then in terms of the specialty metals segment, you mentioned in the prepared remarks debt.
Youre still expecting the industry to just sort of be on allocation through.
Through fiscal 'twenty, 2 and was wondering if you can maybe kind of update us on what youre sort of seeing thereby and markets. And then also if you can update us on what lead times might look like.
Martin This is Andrew so the expectation on stainless in particular is that the allocation will go through at least mid.
Next year, we're already seeing it and discussions that we have with with the mills the domestic mills.
And.
We would.
Expect that.
And that's just going to continue as we go into next year. The sectors that we continued to see stronger truck trailer and appliance or a really strong right now and the food equipment sector is also very strong and so from our perspective it is to support the growth of our existing customers.
And making sure that there's enough metals for them as we go into next year to be able to support what they're looking for before we look to take on additional business.
And any update on what the lead times look like.
Our lead times are fairly steady I mean, right now they're probably in the.
4 to 6 week range.
Some of the lighter gauges or will extend out much much further than that.
Got it helpful and then switching gears to tubular.
And a pretty substantial revenue growth from the quarter again here versus Q1 and year over year, obviously and then.
And I annualize your year to day performance in that segment and you're up about 25% over fiscal 19 revenue to kind of on the pre pandemic on if you will.
Bill.
And I believe last quarter, you had sort of a large order from a customer and there wasn't expected to.
Repeat so can you perhaps talk about what sort of drivers you saw on the revenue side and the tubular area and if anything's, maybe accelerated into the quarter and you are sort of onetime events.
No I think we're back to the more traditional business that segment is very strong on the transactional side of the business.
And for the quarter, it really reverted back to more traditional business and certainly had picked up we have a number of sectors that were stronger and the second quarter than the first and I expect that we're going to see that continue for the balance of the year.
Understood.
On the working capital movements and the.
And the quarter.
Charlie significant movements and the usage and receivables inventory and some some help from payables can you talk a little bit about those moving to and what you might be expecting for the remainder of the year.
Sure Marco its rich and as we look at it obviously and prices at times of escalating prices. There is a drawing working capital so you've seen a substantial increase and our receivables a substantial increase and our inventory and youre right its offset a little bit by the payables. So while we've had a record first half year for every dollar we expense.
$3, we've earned and EBITDA, we spent about $2 and working capital.
And that's traditionally what we see and these types of markets. The good news is is that the way. Our ABL works is that it provides plenty of capital for us to continue to to work off of at the end of the second quarter, we were at $202 million of availability, so even though debt and working capital were up substantially and the second quarter.
We grew our availability by another $40 million and so.
With the amend and extend that we did there and June we've got access to plenty of low cost capital that will help us sustain us.
This working capital draw as prices continue and I think I did allude to my car and my prepared comments that we do expect.
The drain to continue a little bit and the third quarter and it's just going to be tied to pricing. So as index pricing continues to increase during the third quarter Youll see a commensurate increase in accounts receivable and inventory that that will flow through the through the line, yes, Marco It's Rick the other thing I'd, just reiterate and rich mentioned and.
And as.
Prepared comments, even though the working capital pools and pretty substantial we're we're really locked in on inventory turnover. So.
About.
Talked about both the.
<unk> flat and the pipe and tube being at record turn level. So we're going to stay focused on that and the thing we didnt talk about but our turnover on receivables has been rock solid as well.
So so we feel pretty good about how we're managing the working capital and as Rich said, it's really a function of.
The price and continuing to escalate it each month.
Got it and last question from me kind of a higher level question, just assuming that the infrastructure Bill is passed and sort of given the constraints that you see now and what you might be expecting can you maybe talk about how you see this sort of unfolding as it relates to the industry's ability to meet that potential coming demand.
Sure really good question.
First I guess the way we're looking at this as we look at timing.
And we're hopeful that by the end of this year, we have some legislation in place I think that would put our industry and Olympic and a spot probably in 2023 to start to see.
On the metal actually flowing to the infrastructure projects. So.
First thing is I look at boy that would be a great bridge 2.
2022 were pretty optimistic about without and infrastructure spend that I think.
Sort of the trends we've been experiencing here as the rest of the world kind of catches up on and on.
Economic activity to the U S and maybe China and 2022 that we continue to have a pretty strong steel dynamic and steel.
Industry economy, and then you bridge that and get to 'twenty, 3 and beyond with several years of infrastructure supply I think we're set up for potentially a really nice cycle here in terms of demand in terms of the industry and Olympics ability to.
I think meet the needs of the infrastructure I don't think that'll be a problem at all.
Certainly.
I would say given the timing I outlined I think we will.
And hopefully have a lot of the supply chain disruptions behind us and certainly from our perspective, I think our long and deep relationships that we've built.
With our domestic North American partners on the mill mill side, I feel really comfortable that we will fully participate in and increasing demand environment by the infrastructure spend. So we're we're optimistic about it I think it would be great for America, I think we need it I think it will be great for our.
Our entire economy, and certainly Olympic steel will.
We will be a great participator and that.
Excellent. Thank you guys I really appreciate your time.
Thanks, Mark Thanks, Mark.
The next question is coming from Michael <unk> from Keybanc capital markets. Your line is now live.
Hey, guys good morning.
Good morning, Mike.
So firstly I just wanted to ask do you expect incremental opex increases and the third quarter just given some of the further inflationary pressures that we're seeing and and then what are the costs, primarily driving that whether it be labor freight or otherwise.
Yes, Mike, It's Richard and I think you hit on the 2 biggies labor and freight are pretty much the things we talk about the most.
I think when you look at it kind of Q3 on Q2, we do think Q3 looks a lot like Q2 and so.
As you look at Q2 of 'twenty, 1 versus Q2 of 'twenty, it's kind of weird because youre comparing a COVID-19 quarter at the worst time versus our greatest quarter that we've ever had and the company history right and so as we noted and the comments while op expense was up $25 million year over year, there's $3.3 million and that which was action stainless.
Which wasn't there in 2020, and you had about $10 million and incremental incentive expense that wasn't there in 2020 and so when you look at how we handle expenses, we're very cognizant of trying to keep everything tied to volume and so all things being equal if volumes maintained kind of Q3.
Q2, we would expect operating expenses to kind of be and the same ballpark. We would also expect debt with a higher profitability that you would see that variable incentive expense be up as well so.
All things being said I do think Q3 looks a lot like Q2, yes, and I think Mike.
There may be a little bit more inflationary pressure I think we continue to see.
Prices for the areas that you talked about increased during the second quarter, but I don't think the.
Sort of the quarter on quarter or certainly the year over year rate increases that are really due to inflation are going to continue at the same level. So it seems like it's starting to level off a little bit, but there could be a little more inflationary pressure and the third quarter, but Richard is right. The big the big chunk of it I think for the reasons.
He explained third quarter expenses will probably look a lot like second quarter.
Got it that's helpful. And then what are you seeing and the important market given how tight domestic capacity has been.
Are you seeing some of these domestic players incentivize to pivot to imports.
Well, we're certainly seeing imports.
The statistics have shown that month over month, we're seeing certainly a great.
A greater amount of imports coming in and I would tell you depending on which part of the country certainly for US it's much more impactful I think we'll see imports as we get into the second half of the year certainly on the carbon side of the business. What I will tell you is that on the stainless side of the business. It's much more active the last.
I'd say 3 to 4 years has has not been as active as what we have seen certainly coming in now and going into the balance of the year. There is a.
Great need for more stainless supply.
Certainly on on the East coast, and and the South and I think we will see more of that again carbon hot rolled probably less and the east coast, a little bit more on the south and certainly in the west plate, we're going to see a little bit more important as well.
And then lastly from me just what did you see in terms of daily demand and July versus the second quarter as a whole.
And I'm, just trying to get a feel.
For the cadence and momentum that you saw as you exited the quarter and and then begin the third quarter.
Yes, I would say pretty steady I mean, we really have not seen.
Any.
Huge increases I think customers were.
Expecting and they certainly had forecasted greater growth, but I think with the supply chain disruptions rich talked about certainly the freight and the labor on the automotive side chips as well as issues that we're seeing and the industrials who are having issues with everything from also chips 2 engines.
And so I think there was great expectation that we were going to see some growth based on their forecast.
But it's been relatively steady and we think thats going to continue through Q3 and.
And I would just add Mike debt with the timing of the July 4th Holiday you lost a couple of effective shipping days, there and the beginning of the month, but right. After the holiday and pick right back up as Andy said to steady state, Yeah, and I'd say for normally for a July I'd characterize your July is really good.
And we're really good based on historically as you know Mike July is 1 of the seasonally slower months and I think rich said it well.
The day business day before and the business day after the fourth other than that it was right back at it at levels like Andrew said pretty consistent with what we saw in Q2, So thats a good July and my book.
Got it that's helpful. Thanks, guys.
Thank you. Thanks, Michael Thank you as a reminder, its star 1 to be placed and the question queue. Our next question is coming from Chris Sakai from singular research. Your line is now live.
Yeah.
Okay.
Hello.
Can you hear me.
Yes, Hi, Chris.
Oh, sorry about that.
I couldn't hear you guys for a second.
Great.
I just had a question I guess.
How do you guys feel about the price of steel.
And do you think it will level off or come down and how are you preparing for a decline.
Well, it's great question, Chris I would tell you that.
I think we're surprised to see carbon.
Index numbers, where they are at today.
So do we think that they're going to come down and the answer is eventually they will but there is great momentum. There is certainly disappointed at the mills from.
US it's focusing on inventory, it's focusing on our inventory turns it's focusing on making sure that we have the right inventory and.
And staying with those disciplines and we really do focus on the things that we can control, we can't control where prices are going but we certainly can control.
What we're bringing in and how we're moving out of our inventory.
Okay.
Okay.
Alright, thanks for that and I mean.
And a price decline would you say that specialty metals would actually.
Wouldn't see as much of a decline.
Yes.
I would tell you Chris I mean, you take a look nickel is nickel is strong right now aluminum is really strong including with the day.
And the Midwest spot Reckitt.
Record levels of over $600, a ton and again I think on the stainless side in particular because of the allocation.
Youre going to just see consistency I think through this year going into at least the first half of next year.
Okay.
And then I guess on a general.
Kind of question General economy question.
Or are you seeing any effect of the.
Delta variant.
On on your business.
And on on demand.
So far.
Well I'll tell you Chris the areas certainly has been the growth and so the growth of our customer has been awarded I think not just from the Delta variant, but kind of as you think about.
Concerns about that as well as supply chain disruption I think a combination of the 2 has prevented forecasted growth from our customers.
Certainly we are disappointed that theyre not able to grow at the levels that they had forecasted.
And quite honestly I don't see that changing much as we go into the second half of this year certainly the cases.
<unk> of the Delta variant are increasing.
Certainly concern about going back to a time of.
A more mask wearing and certainly vigilance in terms of.
Less.
Spending less time with larger crowds and certainly the ability for the workforces to continue to work and safe environments and to ensure that people are safe, where they are working and certainly what we're focused on and so that certainly can.
Thats certainly is not going to be helpful going forward and conjunction with supply chain disruptions. So I think we're expecting as we've talked about pretty steady going through the second half of the year, but but certainly what you are seeing with delta could could add a little more of a twist.
Okay, great, Thanks, and congrats on the quarter.
Thanks, Chris Thank you.
We reached end of our question and answer session and I'd like to turn the floor back over to management for any further or closing comments.
Thank you so much and thank all of you for joining us on our call. This morning. We appreciate your continued interest and Olympic steel and look forward to speaking with you again next quarter, if not sooner. Thank you and have a good day.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.