Q3 2022 Olympic Steel Inc Earnings Call
Good morning, and welcome to the Olympic Steel 2022 third quarter financial results Conference call.
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Brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
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I would now like to hand, the call. Her celebrate you reach medicine, Chief Financial Officer Adeel Olympic Steel. Please go ahead Sir.
Thank you operator, welcome to Olympic Steel's earnings call for the third quarter of 2022.
Our call. This morning will be hosted by our Chief Executive Officer, Rick <unk> and we will also be joined by our President and Chief operating Officer, Andrew Greiff.
Before we begin I have a few reminders.
<unk> made on today's call will be predictive and are intended to be made as forward looking within the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 and May not reflect actual results.
The company does not undertake to update such statements changes in assumptions or changes in other factors affecting such forward looking statements.
Important assumptions risks uncertainties and other factors that could cause actual results to differ materially are set forth in the 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 of these non-GAAP measures to the most directly comparable GAAP financial measures is provided in the press release that was issued yesterday and can be found on our website.
Today's live broadcast will be archived and available for replay on Olympic steels website.
At this time I'll turn the call over to Rick.
Thank you rich and good morning, everyone. Thank you for joining us today to discuss Olympic Steel's results for the third quarter of 2022, I'll begin with some overall comments on our business and our third quarter performance and then I'll turn the call over to Andrew who will review highlights for each of our segments and provide some comments on our mark.
Outlook following that rich will discuss our financial results in more detail and then as always we'll take your questions.
Market dynamics in the steel industry has certainly shifted dramatically since this time last year.
We have seen metals pricing significantly decline across the board hot rolled pricing has fallen by more than 50% since its peak in April .
While overall market demand has been consistent it remains impacted by macroeconomic concerns such as inflation rising interest rates. The overall speculation of a recession and persistent non steel related supply chain and labor issues.
Despite this remarkable shift Olympic steel continues to perform well.
We delivered sales of $634 million and adjusted EBITDA of $25 3 million for the third quarter of 2022, while simultaneously strengthening our balance sheet.
Strong cash flows have resulted in an $84 million or 26% reduction in our outstanding debt. So far this year.
Our performance in the face of tough market conditions is further evidence that our diversification strategy is better positioned to Olympic to succeed in all market cycles.
We are a stronger and less cyclical organization today as compared to past declining price markets are.
Our growth in higher return value add products and services, coupled with our sustained operational disciplines around inventory costs and advice and investment criteria has allowed our business to thrive despite historic price declines and market challenges.
Our team has worked diligently to execute on the strategy and strengthen our business. We have completed five successful acquisitions and made targeted organic investments in all three of our business segments to increase our capacity and enhance our efficiency at the same time, we evaluated our.
Portfolio and identified areas that no longer aligned with our vision for the company, including the decision to divest of our Detroit Division in September 2021.
We also took a hard look at our operations and implemented measures to improve inventory turnover and permanently right size, our cost profile and we would not have made this progress without the right team and leadership in place.
And our work is not done we anticipate continued strong cash flows and further debt reduction in the fourth quarter with significant liquidity and continue to actively pursue acquisitions and invest in new equipment and efficiencies through automation, which Andrew will highlight in a moment.
While we expect the macroeconomic challenges and declining metal pricing will remain a short term headwind, we are well positioned as a company and we are confident in the future of Olympic steel to deliver value to our shareholders.
Finally, our board of directors approved a regular quarterly dividend of <unk> <unk> per share that is payable on December 15, 2022 to shareholders of record on December one 2022.
Olympic has now paid a regular quarterly dividend for 17 consecutive years and as a reminder, we increased our dividend from <unk> <unk> per share to <unk> <unk> per share. This past March with that I'll turn the call over to Andrew to provide an overview of our segments and what we're seeing in the market is.
We approach year end.
Thank you Rick and good morning, everybody.
Each of our business segments reported solid third quarter results. This was due in large part to the hard work of our people and the continued follow through on our strategy and operational initiatives the.
Our specialty metals segment led by Andy Markowitz remained very profitable with EBITDA of $16 1 million for the quarter the.
Our specialty metals team achieved these results, while navigating challenges from stainless flat roll imports and falling surcharges, which led to lower spot sales and compressed margins. The team's outstanding efforts to manage inventory levels, while maintaining solid profitability with the.
Mary driver of this segment's strong performance, our pipe and tube segment led by Bill Zielinski continue to deliver exceptional results third quarter EBITDA was $9 7 million for the segment and year to date EBITDA was $34 1 million.
Equating equaling the full year record set in 2021.
The pipe and tube team continues to focus on controlling inventories and expanding its business to offer additional value added products and services to meet customer demand.
The performance of our carbon segment led by David <unk> may be the most gratifying evolve considering the dramatic fluctuation of the hot roll C are you index, which as discussed earlier climbed from $935 per ton in March of 2022 to a peak of 14 92 six weeks later.
And then dropped to $791 per ton by the end of September .
Carbon team was able to navigate the extremely challenging market conditions to contribute quarterly EBITDA of $4 3 million as Rick mentioned, we are continuing to invest in our business and we are excited about the opportunities. This is creating for us.
Most notably we made significant progress on expanding our capabilities in the south we are pleased to share that our latest expansion in this region is officially up and running with our second automotive stamping press, including an automated packaging line now fully operational in Winder, Georgia.
And in Buford, Georgia, two new Mitsubishi 10-K, lasers, plus two new robotic welders have been installed this will begin our entry into welded parts for several key customers and the investment in automation will help alleviate the need for additional labor. We are also seeing strong interest from other.
Real Oems to have fabrication work outsource to our Buford facility.
As we mentioned last quarter based on the success of this model of Buford and Winder, we are taking a similar approach to the Chicago area, where our Schaumburg distribution facility had no room for expansion.
We are making good progress on our build out of a new white metals facility in Bartlett, Illinois to how schomburg current fabrication work to serve the growing needs of our customers. We expect this new facility to be fully operational in early 2023.
Looking at the balance of the year, we expect current market dynamics to continue contract customers will likely continue to be challenged by labor and supply chain issues and have prevented most of our Oems from increasing their production to reduce backlogs.
In addition, we expect margins will remain under pressure due to declines in carbon stainless and aluminum pricing and while demand from our large industrial customers has remained steady we expect some further impact on volumes as spot sales remained challenging in this environment.
As always we will continue to focus on what we can control mainly disciplined management of inventory and expenses. We are confident that these changes we have made to the business in the past few years, along with our continued initiatives put the company in a strong position to weather any potential market downturn.
And now I'll turn the call over to rich thank.
Thank you Andrew and good morning, everyone.
Before I discuss our third quarter results. Please keep in mind that we completed the disposition of our Detroit operations. During the third quarter of 2021, and we acquired Shaw stainless and alloy in the fourth quarter of 2021.
Those transactions impact our year over year comparisons.
As Rick and Andrew have noted our third quarter performance reflects the actions we have taken over the past three plus years to better position the company for success in all market cycles.
Net income totaled $12 million compared with $44 $5 million in the third quarter of 2021.
Adjusted EBITDA was $25 3 million compared with $70 5 million a year ago.
Our third quarter 2022 results include $1 $5 million of LIFO pretax expense.
Our total debt decreased in 2022 by $84 to $244 million at September 30, including a $44 million reduction in debt during the third quarter.
We expect additional debt reduction in the fourth quarter.
At quarter end credit availability was approximately $227 million.
Additionally at quarter end, we had an additional $153 million of collateral above our $475 million asset based revolver.
As well as an untapped 75 billion credit line on our unencumbered real estate portfolio.
We have significant capital to deploy for both additional acquisitions and organic growth opportunities.
Consolidated operating expenses totaled $87 9 million, an increase of $2 4 million or two 9% compared with $85 $4 million in the third quarter of last year.
Consolidated operating expenses for the third quarter. This year included $2 1 million of operating expenses and $6 $3 million of lower performance based incentive expenses when compared to the third quarter of last year.
Also third quarter 2021, operating expenses were shown net of a $3 $5 million gain on the sale of our Detroit operation.
Capital expenditures totaled $14 million compared with depreciation of $13 6 million we.
We anticipate cash utilization for approximately $20 million for capital expenditures for the full year of 2022.
As we have shared on previous calls we have approved over $36 million of capital expenditures. Thus far in 2022, the long lead times are slowing the utilization of cash.
Our effective tax rate for the third quarter was 25% compared to 26% in the third quarter of 2021.
We expect our effective tax rate to approximate 27% to 28% for the full year.
Also during the quarter, we paid a dividend of <unk> <unk> per share and we've now paid dividends for 72 consecutive quarters.
In closing I want to reiterate the significance of the results we achieved in the face of some very challenging market conditions.
We performed well despite declining levels prices macroeconomic headwinds and supply chain issues.
We believe we have built a stronger more resilient Olympic steel that positions us for success in all market cycles.
Now operator, let's open the call for questions.
Thank you.
And I will be conducting a question and answer session.
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Quick question.
The first question comes from Pamela <unk> with <unk>.
<unk> Bank. Please go ahead.
Good morning, guys good.
Good morning, Sam.
Hi, when we look in the third quarter. It was continued inflation in operating expenses versus sales ended the fourth quarter. What's your outlook for this and if you could tell us what the profit sharing was year to date versus 2021. So we can distill the magnitude of increases in the other line items.
Yes, Sam so when we look at operating expenses, what we have been seeing for the first and second quarter was between 5% and five 4% inflation. We saw about five 2% inflation in the third quarter. When you adjust out for kind of to be on a same store basis I think the one big difference we saw in the.
Third quarter, and we had highlighted in the second quarter was there was about a $3 million increase in transportation expense in the second quarter. Following the Ukraine invasion that was about $1 million effect in the third quarter.
In general I don't see inflation going up on all items other than transportation in the fourth quarter as we've all read there is a national diesel shortage and that remains a wildcard kind of going into the fourth quarter.
Okay. Thanks.
And then the third quarter was another really strong quarter of reducing debt for you guys over $20 million is the goal for the fourth quarter to be another period of that magnitude.
Yes, Sam it's rich again, and so yes, I do anticipate that the debt reduction will be at least as good as it was in the third quarter I think a decent chance that we end up sub $200 million by year end.
Okay, Yes, that's great.
And then Andrew touched on it earlier.
The fourth quarter outlook for demand, but there was a sequential step down obviously in volumes in both carbon flat and specialty in the third quarter from a demand perspective, if you could just get into a little more detail on what youre seeing from your major industrial Oems as we're through October now.
Yes, Sam I'd be happy to do that so.
I think from a <unk>.
Macro picture, we see fourth quarter down probably 6% to 9% and an overall volume the.
The industrial Oems have remained pretty steady into the fourth quarter and are cautiously optimistic as we take a look.
Going into the first quarter and the carbon side of it certainly where you have the large industrials again pretty steady not able really to progress because of some of the supply chain issues predominantly.
Labor is not a metal issue now you may have some components coming in from offshore that are still an issue, but but but doing very well challenge is there going to be more on the transactional side of the business as we've seen index pricing fall off.
Since the end of the third quarter on the specialty metal side again our.
A couple of the key areas, we do some automotive still that are done outside of the Detroit obviously is.
We diversified and got out of Detroit.
But we're still doing some automotive and some of our other areas.
Trailer, we think is going to continue to be strong and the food equipment industry, we're starting to see.
A pickup in that side of it and so we're pretty optimistic that there'll be a little bit of an increase heading into next year, and then our pipe and tube division, where pricing lags a little bit but the volume has been very steady and we think thats. The continue heading into first.
First quarter, probably first half of next year.
Okay. Thanks, Andrew and then lastly for me as you continue this diversification strategy that you cited in the release could you talk us through your appetite for any more incremental acquisitions any more areas or geographies, where you might like to grow.
Yes sure.
Tim This is Rick.
And I think you hit it it's.
Really looking at acquisitions to continue our growth both geographically so like action steel you saw us action stainless you saw us.
<unk> great into some geographies like the south and southwest where we werent. So that's certainly very interesting to us.
In terms of.
Some of the products.
We've talked on prior calls about aluminum being an area that we'd like to grow in.
And the white metals segment, so that would certainly be of interest.
And then really across all three segments.
Continuing to look for great fits.
Where there is a high value add high return component to our business. So that's certainly high on the list and I guess I'd to end with we're still actively pursuing several opportunities. So.
We certainly see acquisitions being.
And Avenue for continued growth in the near term.
Okay. Thank you that's it for me.
Thank you.
Next question comes from Deane.
Norm.
<unk> gained.
Please go ahead.
Morning, and thank you for taking my question.
Just touching on the Capex and the slowdown that you're seeing in 2022, how much of that is expected to.
We head into 2023.
For next year.
Dave I think what we alluded to is $36 million of total.
Issued so far this year, and we think theres about $20 million of actual cash utilization. So I would expect $10 million to $15 million of that bleeding over into next year.
I think we have a robust capex budget.
Budget for next year, we're kind of finalizing that right now, but similarly, what we're seeing is that lead times are going to bleed out past 2023 for the things we order in 2023, so I think that.
$20 million is still good cash utilization number for this year and by the time, we do this call in February we will have some better guidance for the cash utilization in 2023.
Thank you and then just looking at your strong cash position your strong cash position, obviously, you are able to bring on.
Georgia plants, while still growing your cash should we expect <unk> behind us.
While you make that expansion into Chicago area or now that you've kind of had a roadmap on how to break these speeds.
Is that going to start eating into your cash cash position.
Yes, so Dave.
Our net borrower and everything is reflected on our asset base loan and when we talk about the Chicago expansion.
That's just taking the existing facility, we havent schaumburg and basically splitting it between distribution and fabrication.
The new facility in Bartlett, which I believe Andrew is 80000 square feet Thats right.
That is a rented facility and essentially we're moving existing equipment from the Schaumburg facility into that although we will be adding some lasers and some automation equipment to it but I do not expect it to be a significant draw on that to get any of that up and running.
Yes.
That's perfect thanks very much.
Okay. Thank you next question.
Adam Lambert.
Nobody advisors. Please go ahead.
Good morning.
Good morning, good morning.
I may have missed what was cash flow in the third quarter.
I didn't I missed the cash flow statement, yes.
Yes.
Cash flow statement will be and I don't think its in the earnings release, but it will be in the form.
<unk> 10-Q, which will be issued.
Later today or.
What you'll have there.
Alan is that we paid down debt $44 million during the third quarter total debt reduction in the in the first half or the for the full year has been $88 million and based on the call you heard earlier from Sam we expect that to be sub $200 million by year end.
And actually the cash flow statement as in the earnings release.
Okay, and then when you look out over the next few years can you just talk about some of the macro trends.
That youre seeing whether anything has changed.
Infrastructure et cetera.
Pricing.
Well Alan this is Andrew Here's here's what I would tell you I think what we've learned in the last couple of years.
Is that the large industrial Oems.
While some of the supply chain issues are going to resolve themselves over the course of the next six to 12 months.
Our issues are still going to be a challenge and so.
What we hear most from our customer is how can we help them get to market faster.
It's going to be a big part of as we look to.
Increased our fabrication to be able to help them be able to get to market faster and the discussions that we've had certainly over the last 12 to 18 months have been different than probably what we what we saw before because there is a real partnership taking place today in real back and forth conversation about areas that.
We should be investing in to help these large customers do a better job in mitigating their costs.
And again, how do they get to market faster.
Yeah.
Alan It's Rick I think some of the other dynamics as we look forward that quite frankly, we get excited about for Olympic.
You mentioned.
Infrastructure. So certainly we've talked a lot about that and while we are not a large direct.
Construction.
Long product company, we do sell a lot of metal and steel that goes into construction equipment and all the things you'd see at a construction site. So so that's one thing that's I think very positive the other thing that I get excited about is.
I do believe that we will see a.
A.
Resurgence of manufacturing in the United States based upon.
All of these supply chain shortages.
We saw during Covid I think specifically.
Things that were globally sourced and not sourced here you can go through the long laundry list of Oems, who had trouble sourcing individual parts, so and we've already seen a lot of that with chips and other items. So I think as we move forward, we'll see more of that I think.
Also probably a little bit more inventory held in the supply chain. So.
The whole just in time concept will continue but actually a friend in the business told me a great lines instead, it's going to be.
Instead of just in time it is going to be just in case.
And I think that says it well.
A little bit a little bit extra.
And the supply chain to make sure that we don't experience what we've gone through so those are a couple of other dynamics in the industry over the coming quarters.
At least we get excited about on the demand side.
And.
Hopefully we see.
U S metal consumption increased based upon some of those factors.
Okay, and any thoughts about long term pricing.
Okay.
Well, that's a great question.
I think there is.
Certainly challenges today as new capacity is coming online the expectation is that demand will in the long term certainly catch up to where the capacity is in the U S.
On a short term basis, you know you've got a strong dollar so youll, probably see imports a little bit stronger.
If you listened to the Prognosticators the the dollar will weaken over time.
But I think what Youll see is demand start to catch up Rick talked about the infrastructure Bill certainly going to bode well for the industrial Oems.
And I think where youre seeing some more re shoring will lend itself very well to manufacturing.
These mills are looking far out otherwise, they're not going to be adding capacity and building new facilities.
And Alan.
Alan just just from the price standpoint, the other thing that.
I think as you look at history, and then looking forward.
Certainly with the inflation, we've seen there is a couple of areas that.
Probably you will not see costs go back down to where they were certainly labor.
Labour never goes in reverse.
And I think energy and transportation costs going forward are going to remain elevated so I think.
Some of the input costs in terms of.
Metal pricing are going to be permanently higher and that may.
As you really look long term.
It may point to.
Higher metal pricing than what traditionally we've seen prior to the last cycle over the last couple of years.
Okay, great. Thank you very much.
Thank you. Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Next question comes from Chris Sakai with singular research. Please go ahead.
Hi, good morning.
Good morning.
Just wanted to talk about.
Our inventory levels.
About them.
Currently in the pricing environment today.
Yes, great question Chris.
Worked hard.
To maintain appropriate inventory levels.
And I think as we come through the fourth quarter, we're going to be right, where we want to bake.
We've spent a lot of time on inventory turns and doing my job in all of our reporting segments and I'm really pleased with the with the effort that our individual divisions have done and so I think we'll be we'll be appropriate by the end of the fourth quarter.
Okay. Thanks for that and then.
Hi.
Next quarter and beyond.
And your plan for debt reduction is that still going to be consistent.
Yes, Chris I think because we've answered on a couple of calls that we do expect to be sub 200 by the end of the year I think that what you typically see in most cycles is that first quarter is generally a rebuild of the working capital kind of coming off year end lows and so I don't know that you'd see.
A lot of debt reduction in the first quarter beyond that but we certainly will see it here in the fourth quarter.
Yes, and I think if you just look broad broad based.
Probably have a little bit more pricing impact that will continue into the first quarter as.
There is a lag on inventory and receivables.
But I think rich is right I think the bulk of the.
The bulk of the debt paydown and cash flow.
We'll continue to see in the fourth quarter and that it will probably level off.
Okay, Thanks for that and lastly.
What are the conditions, what would it be for a dividend increase.
So we look at so great question and I, obviously commented that.
We increased our dividend from <unk> <unk>.
At the beginning of this year, so our March dividend that certainly a topic that our board looks at we want to ensure that we've got a competitive dividend.
In terms of the yield.
And I think from a availability standpoint on cash we.
A very strong position with a strong balance sheet and plenty of liquidity. So I certainly think that it'll be.
Something that the board looks at for 2023 to make sure that our <unk>.
Dividend is <unk>.
Competitive from a yield standpoint.
Okay. Thanks for the answers.
Thank you Craig Chris Thanks, Chris.
Okay.
There are no further questions at this time I would like to turn to floor when way back to Richard <unk>.
A closing comment.
Thank you operator, and thank all of you for joining us on our call today. We certainly appreciate your continued interest in Olympic Steel and we look forward to speaking with you again next quarter. Thank you and have a good day.
This concludes today's conference call you may disconnect your lines and have a great day.
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