Q3 2023 Olympic Steel Inc Earnings Call
Good morning, and welcome to the Olympic Steel 2023 third quarter financial results Conference call. At this time, all participants are in a listen only mode.
A brief question answer session will follow the formal presentation, if annualized should require operator assistance voting to Congress.
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 least get to please go ahead Sir.
Thank you operator, welcome to Olympic Steel's earnings call for the third quarter of 2023, our call. This morning will be hosted by our Chief Executive Officer, Rick never be though and we will also be joined by our President and Chief operating Officer, Andrew Greiff.
Before we begin I have a few reminders.
Some statements made on today's call will be predictive and are intended to be made as forward looking within the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 and May not reflect actual results. The company does not undertake to update such statements changes in assumptions or changes in other factors affect.
Such forward looking statements.
Important assumptions risks uncertainties and other factors that could cause actual results to differ materially are set forth in the company's reports on forms 10-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 it 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 2023 third quarter results I'll.
I'll begin with an overview of the quarter then Andrew will review our segment performance and provide additional insight on market conditions and our latest acquisition 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's performance in a challenging third quarter demonstrates the benefits of our actions to deliver more consistent results in all environments. All three of our segments were profitable led by our pipe and tube business, which recorded one of its most profitable quarters ever.
Strong results from our carbon segment.
We accomplished this while navigating several significant challenges during the quarter.
Pressure on metal pricing continued with the declines accelerating in the back half of the quarter. These.
These pressures were caused by added macroeconomic uncertainty the UAW strike and the threat of further interest rate hikes, leading to softer than anticipated volumes across the industry.
Despite these headwinds we reported third quarter sales of $526 million with net income of $12 $2 million and EBITDA of $27 $1 million.
The integration of our metal fab business, which was acquired at the beginning of the year continues and we're excited about the impact. This addition is having on our results we.
We are beginning to see benefits from our supply chain synergies and expect full integration of the metal fab supply chain into our operations by the start of 2024.
Since completing the acquisition of metal Fab in January of this year, we have had strong cash flow and continued to reduce our debt, which rich will detail later.
Our strong balance sheet provides us with capital to pursue higher return investment opportunities, including additional attractive acquisitions.
We capitalized on this with the acquisition of Central tube and bar, who we referred to as CTV on October <unk> 2023, and that marked our seventh acquisition in the past six years.
CTV is exactly the type of company, we want to acquire <unk>.
<unk> is well run it as a growing organization delivering high returns and consistent performance and it's an excellent cultural fit we believe theyre high value contract manufacturing capabilities and geographic coverage in the south Central U S complement our offerings and expand our reach.
We're excited to welcome the CTV team to the Olympic Steel family and look forward to their contributions to our pipe and tube segment.
In addition to strategic investments.
We continue to bolster to the Olympic steel team in October we welcome George Frost as our director of National sales aluminum in this role George will support the growth of Olympic Steel's specialty metals business segment with a focus on aluminum products and processing a key element of our strategic growth.
Plan.
We also announced the promotion of layered Kylie to the role of general manager for Olympic Steels, Minneapolis play processing facility.
He has been with Olympic since 2012 and different roles of growing responsibility and she has been instrumental in the commercial success and continued growth of our Minnesota and Iowa operations.
As we grow and invest in our business, we remain committed to rewarding our shareholders. We continue to pay our quarterly dividend rate of 12, five cents per share, which allows our shareholders to directly benefit from our consistent financial performance.
Before I turn the call over to Andrew I would like to share a few thoughts on our outlook as.
As we close out another solid year, we remain optimistic about the long term outlook for the U S steel market and our business. We are seeing a rebound in pricing along with continued industrial backlogs OEM outsourcing of fabrication work and anticipated infrastructure spending these.
Dynamics together with our ongoing efforts to invest in higher return opportunities will enable us to drive additional profitable growth in 2024, including the active pursuit of acquisitions.
Our full confidence that Olympic steel is strategically positioned to deliver consistently improving results and stronger profitability, regardless of the markets challenges Andrew.
Thank you Rick and good morning, everyone.
Olympic Steel continue to build on the strong first half of the year in the third quarter as Rick noted, we earned EBITDA of $27 $1 million despite market challenges.
This performance was driven by the dedication of the entire Olympic steel team to deliver on our operating disciplines as well as the significant progress we have made to diversify our business by investing in higher return growth opportunities are.
Our pipe and tube business delivered EBITDA of $11 $8 million, which included $2 million of LIFO income. This represents the segment's fifth most profitable quarter in its history.
The pipe and tube teams focus on margin improvement and fabricated growth is driving positive results and we expect this performance to continue as we close out 2023.
Additionally, as Rick mentioned, we acquired CTV at the start of the fourth quarter, which will be included in our pipe and tube segment results going forward.
We are excited to integrate this business and begin fully realizing the benefits of the growth opportunities.
CTV is expected to be immediately accretive and drive additional margin expansion.
To provide additional context ctv's historical financial performance has consistently exceeded our tubular and pipe product returns, which is typically yielded the highest EBITDA to sales margins of our segments are.
Our pipe and tube business is positioned as an innovative industry leader.
We have excellent product breadth and high end fabrication capabilities, including tube laser processing equipment, which we believe is among the best and largest capacity in the entire industry.
CTV acquisition, which includes locations in Arkansas, and Oklahoma will allow us to grow in the south and South Central U S.
Now turning to our carbon segment.
Carbon delivered $13 5 million of EBITDA for the quarter. Despite facing numerous market challenges hot rolled pricing continued to fall declining further 24% during the quarter and bringing the total decline to nearly 45% since pricing peaked back in may.
Oral.
These declines accelerated during the quarter due to increased market uncertainty stemming from the looming UAW strike.
Is pricing environment drove changes in customer buying patterns and led to lower volume shift, especially spot transactions sales.
Navigating these challenges to ultimately deliver stronger profitability than the same quarter last year is a true testament to the hard work and dedication of the entire carbon team.
Through disciplined inventory management, the expansion of our value added product offerings and the streamlining of our fabrication business. The carbon business has been able to achieve more consistent profitability. In addition metal fab has had a positive impact on our results as the business is performing well.
The integration of this business has been seamless and we expect to realize additional supply chain synergies in the coming quarters.
Specialty metals posted a profitable quarter with EBITDA of $5 $5 million as this segment continue to face industry wide headwinds from falling stainless and aluminum pricing. The team continues to focus on what they can control and worked hard this quarter to reduce inventory levels are.
Steady growth in aluminum was a bright spot in the segment and the addition of George Frost will further accelerate our assets the resiliency of our team in the face of ongoing market challenges continues to make a difference the actions we have taken to deliver more consistent results are reflected in our performance across the company while.
Headwinds remain we are seeing a rebound in pricing and we remain optimistic about the long term outlook for the U S steel market and Olympic Steel now I'll turn the call over to rich. Thank.
Thank you, Andrew who was another profitable quarter for Olympic steel and one that reflects our ongoing investment in our company and strong operational disciplines.
As we review our third quarter 2023 results keep in mind that year over year comparisons will be more difficult due to the January 2023 acquisition, the metal fab, whose results roll up through our carbon segment.
For the quarter net income totaled $12 2 million compared to $12 million in the third quarter of 2022.
EBITDA in the quarter was $27 1 million compared with $23 $8 million in the prior year period.
Third quarter 2023 results include $2 million of LIFO pretax income and $4 million of pre tax income from the employee retention credit under the cares act compared with $1 $5 million of LIFO pretax expense in the same period a year ago.
Consolidated operating expenses for the third quarter totaled $91 million.
Baird to $87 9 million in the third quarter of 2022.
Our operating expenses for the third quarter of 2023 totaled 17, 3% of sales and $352 per ton versus 13, 9% of sales and $336 per ton for the same period in the prior year.
Our third quarter and year to date operating expenses reflects the additional 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 third quarter included $10 $6 million of metal fab operating expenses $2 2 million of lower variable incentive expense and $4 million of employee retention credit when compared to the third quarter of 2022.
Inflationary pressures on operating expenses during the third quarter of 2023 were negligible.
So as Rick mentioned earlier, we acquired <unk> on October 2nd for $37 8 million, which is approximately a five times multiple of trailing 12 month EBITDA.
We have previously disclosed trailing 12 month sales of approximately $40 million, which represents an EBITDA to sales margin of approximately 19, 5%.
CTV results will be included in our pipe and tube segment for the fourth quarter of 2023 and will include approximately $700000 of expense deal costs and $150000 of inventory fair market value write up amortization.
We expect to see the full earnings power CTV and our first quarter 2024 results.
Prior to the CTV acquisition, we have reduced debt by $41 million during the third quarter of 2023, bringing our total debt at the end of the quarter to $197 million.
Cumulatively since the $131 million metal Fab acquisition in January 2023, we have reduced debt by $100 million.
Immediately following the acquisition of CTV on October 2nd our total debt under the revolving credit facility was approximately $234 million with availability of approximately $359 million.
This financial flexibility puts us in an excellent position to continue to invest in our business and pursue additional strategic acquisition opportunities that align with our strategy to strengthen and diversify Olympic steel.
Capital expenditures totaled $19 $6 million through the third quarter of 2023 compared to depreciation of $15 $3 million.
Large 2023 capital projects include our Bartlett, Illinois fabrication expansion.
The addition of new pipe and tube lasers. The addition of high speed flat product lasers, and welding automation equipment.
We estimate the 2023 capital expenditures will be approximately $25 million to $30 million.
Our third quarter 2023 effective income tax rate was 27, 7% compared to 25% in the third quarter of 2022.
We expect our effective tax rate for the full year of 2023 to be approximately 28% to 29%.
Also during the quarter, we paid our quarterly dividend of $12.05 per share.
Our board of directors approved a $12 five per share dividend, which is payable on December 15th to shareholders as of December one.
We have now paid dividends to our shareholders for 74 consecutive quarters.
As we demonstrated in the third quarter, even when we face economic and market headwinds, we are able to deliver consistent results and invest in our business both through organic growth and acquisition.
Looking forward, we are committed to continue growing our business and rewarding our shareholders now operator, please open the call for questions.
Thank you we will now conduct a question and answer session.
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And our first question comes from Tim on the kidney with Keybanc capital markets. Please go ahead.
Hi, good morning, guys.
Good morning, Sam.
Hi, I'll just start with a quick housekeeping question on that $4 million in cares Act money, how does that adjustment flow through on a segment level basis.
Sure Samad threat, so on a rough basis, you can put it its about a $5 million on the Zeus cost center, a $5 million on specialty and then $3 million on carbon it did not impact the pipe and tube segment.
Yeah.
Okay, great. Thank you and then moving to the pipe and tube segment, I mean, another quarter with gross margin above 30%. The first quarter. It used to be the strong quarter with the rebates, but now you guys are just posting 30% every quarter.
Much of that margin profile is attributed to the fabrication outsourcing work you continue to add from customers and how much more runway do you see for that business with the additional laser capabilities you've added at CEB.
So thanks, Sam this is Andrew.
We continue the we continue to see the rise with.
With the pipe and tube division they are doing an incredible job. Their focus has been to continue to grow the value added part of the business. That's going to continue and you will see with with CTV Youre certainly going to see that continue to rise.
And it's their objective and so I expect that on a quarter over quarter basis, Youre going to continue to see for the foreseeable future.
A margin percentage is going to continue to grow because of that.
Okay.
And then hot rolled pricing it fell pretty steadily over the course of the third quarter. It's recovered some since the start of October you're more weighted the contract versus spot, but how are you thinking about the carbon flat segment pricing as we head through the end of the year given the seasonal volume effect the business will probably experience.
Well.
Questions. So I would tell you that we saw a little bit of a change kind of go from last year to this year. So we saw a 50% drop second half last year.
Based off of the index price. This year that really started in April we saw in April through October drop equaling about the same not quite 50%, but put right around there.
As you saw the mills domestic mills had a number of announcements over the last four weeks. They are now into the market.
And while we will see seasonally adjusted volume down Q3 versus Q4 opposite.
We think that the pricing is going to start to come up with.
See that.
A number of our customers, especially on the transactional side.
<unk> thought that the market was going to continue to stay lower and now starting to jump in.
And even though our contract business.
You're right, it's more of on a on a fixed basis.
We will still see a little bit of a of an increase as we come through the through the fourth quarter and I would think that the pricing is going to continue to rise certainly into the first quarter and probably going into going into Q1.
Okay, and then lastly for me with more than $350 million still left on the revolver can you just talk through what you'd like to see in a potential next M&A opportunity. It sounds like you are really focused on that still looking to target maybe the southern United States.
Yes, Sam it's Rick.
We're excited to continue to grow through a balanced approach of internal investments and acquisitions.
I think if you look at our track record.
In terms of the types of companies that we've purchased.
I think it's a good indicator of what we're going to do going forward.
So yes, we like the geographic.
Expansion into some of the areas, where we don't have our higher density. So certainly the mid south southwester are areas for growth and most importantly, I think it's it's continuing to find those right companies for Olympics strategy.
Those are well run companies with high returns, where hopefully we have some synergistic benefits from Olympic steel that we can add to those entities, so whether they're companies like CTV or metal fab I think those are great. Examples.
And.
The pipeline is.
It is good it's strong and so we.
We continue to look to grow in 2024 through through acquisition.
Okay. Thanks, guys. That's it for me.
Thanks, Ken.
Our next question comes from David Palmer with Carnival.
Go ahead.
Good morning.
Morning, David.
Good morning, just hoping we could start with the <unk> acquisition.
Any sense of what kind of synergies you could see that maybe.
Boost their run rate boost your operations internally, just any complementary aspects of that acquisition that you could lay out for us.
Yes, there is definitely synergies there is theres like equipments and tube lasers.
Areas that we want to continue to grow and so some pretty good sophisticated equipment.
Love the area in Oklahoma and in Arkansas Terrific places for us to be.
There is some <unk> already have customers that we're doing business with right now.
And Phil will be able to certainly have greater offerings to new customers and existing customers. So.
The combination I think is going to be terrific for us.
Understood very helpful and then just.
Around specialty metal.
Any sense of where pricing kind of goes from here any sooner.
Finger in the wind thoughts on how that market changes from a demand or pricing standpoint.
Yes, it's a great question I would tell you there was.
There was a lot of heavy inventory as we came into the first half of the year did a better job and I think it's an industry wide issue.
That I think the inventory levels have started to come down so more in line with what we want to see.
<unk>.
As I look at the Prognosticators relative to nickel and aluminum, it's really a mixed bag going into next year nickel prices. There is some indication it's going to start coming up a little bit aluminum kind of steady and obviously thats.
That's important for us, but what we're really focused on is inventory control and so we've done a great job in reducing some of the overhang and now in a much balanced much more balanced situation today.
Understood. That's very helpful. And then just one more from me if I could.
Just around all of the UAW impact.
Impacts are you seeing any ripple effects into the Olympic Steel Labor Force.
Outside of obviously everything thats going on with the U S.
W.
Okay.
No not really I mean.
I think you know that we did have a pretty large presence in Detroit.
Up until September of 2021, so we sold that Detroit operation So in terms of.
Our labor.
Our labor force and kind of the intersection with the auto unions, where we're really not in that market. So we really haven't seen any impact on that.
That's perfect. Thank you very much and good luck in the fourth quarter. Thank.
Thank you very much.
Our next question.
Paul.
Please go ahead.
Hi, good morning.
Good morning, Chris.
Just wanted to question on CTV.
When do you expect it to be fully integrated.
Yes, so Chris its Rick.
<unk>.
Typically in terms of the integration this was really an easy one.
CTV is really a.
A tremendous fit for our CPI pipe and tube operation So.
We really think the integration.
It was very quickly.
From a pure accounting standpoint.
We'll have some of the acquisition costs and purchase accounting costs that we normally have in the fourth quarter.
So if you're really looking for the true run rate of CTV to in our earnings I would say thats first quarter.
They're off to it they are off to a great start in their first month.
With us from an operating standpoint.
And I think as always we'll likely in the fourth quarter.
And our EBITDA reconciliation will highlight for everybody.
What the purchase accounting costs.
Allocations are.
Okay. Thanks for that.
Can you talk about I know you previously.
Previously mentioned inventory level.
Do you plan to reduce them even more than that.
Same with the debt.
So Chris it's rich and so what we're seeing here with the bottoming of pricing kind of happening in October September October was that.
Contract season kind of moved up for us about a month earlier than normal and so what I actually think youll see is youll see actually inventories rise as we bring inventory entering the fourth first quarter fourth quarter to support first quarter and second quarter sales and so my anticipation is that youll see inventory levels up from a debt standpoint.
I think what you see as working capital tends to drain toward the end of the year and Thats certainly true for accounts receivable, but I think that with the increase in inventory I think it's going to be a pretty negligible amount one way or the other for that in the fourth quarter.
And then one other question.
It looks like there was a there was an increase in intangible assets what is that.
It was probably I am not sure what periods Youre looking at but rich I would assume it's for the metal. The last increase you should have seen was in the first quarter, Chris and that was that was the metal fab acquisition. So you had a substantial amount of intangibles and goodwill brought on the books in the first quarter.
Okay, great. Thanks.
Ladies and gentlemen, if you would like to pose a question.
Our one.
Okay I think.
I think.
Cleared all the questions. So.
Thank you operator, and I want to thank everybody for joining us on our call. This morning.
We certainly appreciate your continued interest in Olympic steel and we look forward to speaking with you again next quarter have a good day everybody. Thank you.
This concludes today's conference call you may do.
Your line is open.
Thank you for your participation and have a great day.
[music].
Okay.