Q2 2023 Olympic Steel Inc Earnings Call

Good morning, and welcome to the Olympic Steel 2023 second 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.

He wants should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.

At this time I would 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 second quarter of 2023, 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 $19 95.

Not reflect actual results the.

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 release 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.

At this time I will turn the call over to Rick.

Thank you rich and good morning, everyone. Thank you for joining us on today's conference call to discuss Olympic Steel's 2023 second quarter results.

I'll begin with an overview of another strong quarter for Olympic Steel then Andrew will review our segment performance and provide some comments on market conditions. Following that rich will discuss our financial results in more detail and then as always we'll open up the call for your questions.

Olympic Steel delivered another quarter of strong and steady performance as we continued to benefit from our diversification strategy and our investments in enhanced processing capabilities.

We reported second quarter sales of $569 million with net income of $15 million and adjusted EBITDA of $31 2 million. These results are indicative of the success of our strategic actions, which strengthen our ability to deliver consistent.

Profitability, even in the face of market challenges after benefiting from rising prices at the beginning of the year. This quarter, we faced headwinds in carbon steel is hot rolled index pricing fell 24%.

We also continued to navigate the industry wide reduction in stainless steel shipments while at the same time absorbing a 10% reduction in grade three or four surcharges <unk>.

Despite these challenges our adjusted EBITDA was up $2 $6 million from the first quarter.

Our second quarter results include the full earnings effect of metal Fab, which we acquired in January 2023. It was the second largest acquisition in our history.

Metal fab was a strong contributor to our second quarter earnings and we will begin to see the benefit of Olympics supply synergies in the second half of 2023.

In addition, several of our capital expansion projects came online during the quarter and we continued to move equipment into our new fabrication facility in Bartlett, Illinois.

We expect Bartlett will be fully operational by the end of the third quarter, Andrew will provide some additional details on our capital projects in his remarks.

With a strong balance sheet and borrowing availability of more than $340 million. We continue to evaluate additional investments and actively seek acquisition opportunities that will further our strategy to expand into higher return value added products, we have a proven M&A.

<unk> record and we're confident in our ability to identify the right deals and execute seamless integrations to foster additional profitable growth for Olympic steel and our stakeholders.

While we continue to invest in our business. We are balancing these investments with our commitment to debt repayment and rewarding our shareholders, we reduced debt by $21 million during the second quarter and we expect further reductions in the second half of the year.

We also continue to pay our higher quarterly dividend rate of 12, five cents per share, which allows our shareholders to directly benefit from our consistent performance and strong financial results.

Now I'd like to take a moment to provide some color on how we are thinking about market conditions and our outlook for the rest of the year, while the near term economic environment plays out we do expect demand from our Oems to remain steady in the third quarter subject to normal seasonal trends longer term.

We remain optimistic about the future of the domestic steel market.

We expect that the solid outlook for manufacturers increased government spending to support infrastructure and other projects as well as bipartisan support for steel tariffs and quotas will continue to demand to benefit domestic steel producers and metal service centers.

In addition, our value added processing capabilities put us in an excellent position to continue capitalizing on growing demand for fabrication as more customers look to outsource this work.

I am confident that regardless of what market environment, we face we have strategically positioned to Olympic steel to deliver more consistent results and higher returns than in the past.

We are stronger than ever and we will continue to execute on our strategy to further reduce the impact of market cyclicality on our business and deliver profitable growth now.

Now I'll turn the call over to Andrew to provide more detail.

Thank you Rick and good morning, everyone Olympic Steel continued to build on the strong start to the year in the second quarter as Rick noted, we earned $31 2 million of adjusted EBITDA, despite facing carbon pricing headwinds and industry wide pressure on stainless.

Steel demand and surcharge reductions.

This performance reflects the great progress achieved to reduce the impact of market cyclicality on our business. The deliberate steps we have taken to strengthen the Olympic steels have made us more resilient and we are proving that we can deliver more consistent performance in any market environment.

Now turning to our performance by segment, our carbon segment accounted for $18 4 million of adjusted EBITDA for the quarter the carbon team's ability to maintain its discipline and focus on the fundamentals of inventory and expense management was critical to our success this quarter.

Additionally, the ongoing successful integration of our metal Fab acquisition bolstered. This segment's results to date metal fab is performing extremely well and the integration has been smooth congratulations to David and the entire carbon segment on their outstanding.

Work in performance this quarter.

Our pipe and tube segment led by Bill Zielinski also delivered very strong results with adjusted EBITDA totaling $10 1 million for the quarter.

This is pipe and tubes for strongest quarter of profitability ever.

<unk> accomplishment achieved by focusing on margin improvement and capitalizing on growing demand for our value added processing capabilities.

We believe we are particularly well positioned in this segment due to our capacity to handle outsourced fabrication work, which is increasingly in demand among our customers and we expect this trend to continue.

As expected specialty metals led by Andy Markowitz continued to experience soft market conditions during the quarter. Despite these market challenges specialty metals earned $7 7 million of adjusted EBITDA, We continued to make progress on our new fabrication facility in Bartlett.

The noise, which will provide additional capacity as we look to continue capitalizing on the strong demand in this area.

To support the growth opportunity in both carbon and white metals fabrication, we welcome Max Fitzgerald to the Olympic team in the newly created position of Vice President fabrication.

In this role Max will lead the execution of our fabrication strategy with a focus on strengthening the organizations fabrication related commercial presence.

<unk> operational standardization and implementing new technologies.

Supporting Max is Matt <unk>, who has been promoted to director of sales fabrication.

Matt will report directly to Max and focus on developing and implementing strategies to grow the company's fabrication business. We are excited to execute on our growth strategy and fabrication and look forward to helping them succeed in their new roles.

We're pleased to report that a number of our capital projects came online this quarter at our Winder, Georgia facility, our second automotive stamping press, which includes a fully automated packaging line is now fully operational and performing extremely well.

At our Buford, Georgia operation, we installed two new 10-K lasers to new robotic welders as well as a new 20, K laser which provides high speed precision cutting a thicker gauge material.

We are operating very well these investments support our strategy to prioritize automation and safety and are instrumental in driving increased efficiencies and growing our business as Rick mentioned, while we work through the near term market dynamics, we remain confident in the actions we have taken.

And we are optimistic about our performance and the future prospects of the domestic metals industry. Thank you to our entire team for another quarter of steady performance now I will turn the call over to rich.

Thank you Andrew It was another strong quarter for Olympic steel and one that reflects our ongoing investment in the business and our capacity to meet customer demands.

As we review our second quarter 2020 results keep in mind that year over year comparisons will be more difficult due to the January 2023 acquisition the metal fab, who is results rollout through our carbon segment.

For the quarter net income totaled $15 million compared to $37 $6 million in the second quarter of 2022.

Adjusted EBITDA in the quarter was $31 2 million compared to $58 $8 million in the prior year period.

During the second quarter of 2023, we recorded $1 million of LIFO pretax income compared to no LIFO adjustment in the second quarter of 2022.

Consolidated operating expenses for the quarter totaled $101 6 million compared to $94 $8 million in the second quarter of 2022.

Our operating expenses for the second quarter of 2023 totaled 17, 9% of sales and $365 per ton versus 13, 4% of sales and $346 per ton for the same period in the prior year.

Our second quarter and year to date operating expenses reflect the addition of metal fab, which does not report tons sold.

Therefore operating expenses per ton at the consolidated level and for the carbon segment will appear higher year over year.

Consolidated operating expenses for the second quarter include $10 $5 million of metal fab operating expenses and $6 6 million of lower variable incentive expenses when compared to the second quarter of 2022.

Inflationary pressure on operating expenses has been declining over the past two quarters sequentially. We estimate the impact of second quarter 2023 inflation at just under 2%.

We reduced debt by another $21 million in the quarter, bringing our total debt at the end of the second quarter of 2000 $23 million to $238 million.

Cumulatively since the $131 million metal Fab acquisition in January 2023, we have reduced debt by $59 million and we expect additional debt reduction in the second half of the year.

At quarter end, our credit availability was a near record $343 million, we remain in an excellent position to continue our acquisition efforts as well as investing inorganic growth opportunities to further strengthen Olympic steel.

Capital expenditures totaled $15 1 million for the second quarter of 2023 compared to depreciation of $10 $3 million.

We continue to estimate 2023 capital expenditures in the $30 million range.

Additionally, our second quarter 2023 effective income tax rate was 33% compared to 27, 1% in the second quarter of 2022.

This increase in our effective tax rate is primarily attributable to increased Mexican transactional sales and profits, which carry a higher effective tax rate than our U S operations.

We expect our effective tax rate for the balance of 2023 to approximate 28% to 29%.

Also during the quarter, we paid our quarterly dividend of $12 five per share.

Our board of directors approved a $12 five per share dividend payable on September 15th to holders as of September <unk>.

We have now paid dividends to our shareholders for 73 consecutive quarters.

Our efforts to diversify our product offerings and invest capital in higher return opportunities helped drive our strong performance in the second quarter, even in the face of some challenging and uncertain market conditions.

Looking forward, we remain optimistic and we will continue to seek opportunities to further diversify and strengthen our business now.

And now operator, please open up the call for questions.

Thank you we will now be conducting a question and answer session.

I would like to ask a question. Please press star one on your telephone keypad.

Formation total will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Your first question comes from Samuel Mckinney with Keybanc capital markets. Please go ahead.

Hi, good morning.

Good morning, Good morning, Sam.

First I wanted to start in pipe and tube gross margin was great in the first quarter typically your strongest quarter, but those strong margins held firm in the second quarter, even though the second quarter typically doesn't see the rebate income. The first quarter does do you attribute all of that margin strength to the value added lasers and outsourced work and how sticky are those 30% margins moving.

Forward.

So Sam it's Andrew.

Great question, we do see those margins continuing.

As we take a look at value added today that probably represents somewhere in the 34% to 35% of sales. We think by the end of the year, that's going to get closer to 40.

Ben it's been the objective of CGI to really get that number approaching 50%. So we've we've spent good money in value added equipment and really do expect that that's going to continue to grow elongated in the margin.

Okay. Thanks, Andrew that's helpful and then HRC pricing overall declined sharply during the second quarter and has continued to fall in recent weeks no. Your order books weighted more towards contract versus spot, but can you talk us through how youre thinking about carbon flat segment pricing ended the third quarter, especially given the seasonal.

Volume effects Youre expecting.

Yes, another great question I would say we're seeing.

As we take a look today lead times on hot roll is still running four to five weeks.

We still see the market being very steady, but there is more capacity coming on stream. So we do think that prices will be a little challenge but.

But relatively steady I think to where we're seeing it today.

And then would expect we'll see whatever seasonality there will be as we as we get into the fourth quarter, but I think the mills are running well and I think at the moment.

Unless lead time really.

Greater than four to five weeks, we're going to see consistency as we're seeing it today.

Okay. Thank you and then lastly for me turning to specialty metals inventory levels at service centers are continuing to fall.

Lowest level in the last couple of years can you talk specifically about the impact of those falling inventory levels and if you're feeling any import pressure.

Yes, so I would say that for us our inventory is probably a little bit higher than where we would like it to be.

<unk>.

Imports certainly.

Is a big factor, we're seeing probably similar to what we have seen over the last three to four months not like we saw last year last year around this time, we were seeing stainless imports in the $45 to 50000 tonnes a month, we're not seeing it is high right now.

But there is certainly is pressured demand is demand is relatively flat and I think.

I think inventories still need to come down a little bit.

For the service centers to start feeling comfortable you're right. They are down according to the metals activity report, but I think youll see over the next month or two I think you're going to see them come down a little bit more.

Alright. Thank you that's it for me.

Thanks, Tim next.

Next question, Dave storms with Stonegate capital markets. Please go ahead.

Good morning.

Good morning, hoping you could just touch on a lot.

A lot of the work you've done to diversify our offerings.

It looks like it might have changed a little bit last quarter with carbon flat products.

Taken about 55% or more of your revenues is that just from the metal fab acquisition or is there more to that story.

David I think I think it's two points I mean, I think in general it's up a little bit because of the metal fab, but I think the bigger story. There has been on the stainless side. So industry wide, it's been slower stainless sales and we're not immune to that.

As well as the average prices stainless has come down so yes, I think we popped I think it was about 50 used to be about 53% on carbon flat I think it was 55% for this quarter.

That's very helpful. Thank you and then just looking into.

Second half of 'twenty three.

Should we just expect typical seasonal factors or is there any unusual planned downtime say anything like that that we should have on our radar.

Yes, I think Dave what we typically see Q3 sequentially. After Q2, historically, 3% to 5% down just because of less effective shipping days due to the holidays in July and then what I would tell you that 2023 has been very typical of our seasonal steel year. So I would kind of expect those trends to continue.

That's perfect. Thank you and one more from me.

Unemployment is still right around the three 5%.

Is that having any impact on your ability to get labor and maintain it.

This is Rick.

We've seen a little bit of.

Relief on the labor side, so, it's a little bit easier to.

To higher compared to last year, and certainly two years ago.

But at low unemployment levels and the demographics that we're looking at I mean.

I just think this is kind of where we are is kind of is it going to be the new reality in terms of.

Manufacturing in the United States, but the.

The real pressure from the.

Covid impacts.

We've seen a little relief from that.

That's very helpful. I appreciate the time.

Thanks, Dave.

Next question, Chris Sakai with singular research. Please go ahead.

Hi, good morning.

Just had a question on specialty metals flat wanted to get your sense of demand there.

And also the cost of the materials. So that's specialty metals flat what are you guys seeing for the rest of the year.

Well I would tell you Chris that nickel plays as you know an important role in and stainless nickel has been in that $9 $59 60 range.

Prognosticators think it's going to it's going to come up a little bit.

Aluminum again is probably pretty steady so just talking to the analysts. They think this is about where you're going to see it maybe now the balance of the year, maybe maybe up a little bit.

And what I would tell you is it imports stay the way that they are in the domestic mills, who are running pretty well pricing is going to stay right around where it is I mean, we've seen a real falloff on the nickel surcharge. These past three months I think we're going to see a little bit of steadiness is as we come into.

September and then it's hard to really say for the balance of the year, but.

Most.

Most are predicting that it's going to stay relatively steady, which will mean, our prices are going to stay about steady.

Okay sounds good for that.

Can you talk more about fabrication and what are your what are your opportunities there.

Yes, it's a great question, so I would say.

It's really a driving part of what we're looking at so as we take a look at the industrial Oems, Chris what we have seen is that the need.

For value added fabricated parts has grown and it's really taken off since COVID-19.

The.

The manufacturer today, we really think about that theyre looking in three key areas and Thats R&D.

Assembly and marketing and they're real need for welded fabricated parts has grown.

We have been fortunate to participate in that we're continuing to invest heavily in downstream value added equipment.

Why we brought Max Fitzgerald in to be our new Vice president of fabrication.

Promoted Matt bruising too to be his number one guy in this it's going to be a big growth area for us and we will invest we'll invest big in downstream equipment there.

Okay, great. Thanks for your answers.

Thank you thanks, Chris.

Thank you I would now like to turn the floor over to Rick <unk> for closing remark.

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 great day.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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