Olympic Steel [ZEUS] Conference call transcript for 2022 q2
2022-08-05 16:34:06
Fiscal: 2022 q2
Operator: Greetings, and welcome to the Olympic Steel 2022 Second Quarter Financial Results. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rich Manson, Chief Financial Officer at Olympic Steel. Thank you. You may begin.
Rich Manson: Thank you, operator. Welcome to Olympic Steelâs earnings call for the second quarter of 2022. Our call this morning will be hosted by our Chief Executive Officer, Rick Marabito; 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 todayâs 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 companyâs reports on Forms 10-K and 10-Q and in the press releases filed with the Securities and Exchange Commission. During todayâs 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. Todayâs live broadcast will be archived and available for replay on the Olympic Steelâs website. At this time, Iâll turn the call over to Rick.
Rick Marabito: Well, thank you, Rich, and good morning, everyone. Thank you for joining us on todayâs conference call to discuss Olympic Steelâs results for the second quarter of 2022. Iâll begin with some comments about the overall quarter, which was exceptional. Then Iâll turn it over to Andrew, and heâll review highlights for each of our business segments. And he will also provide some comments on market outlook and some of the investments that weâre making to grow our business. Following that, Rich will discuss our second quarter financial results in more detail. And then as always, weâll take your questions. It was another record breaking quarter for Olympic Steel. We grew net sales to $709 million, an all-time quarterly sales record for the company, surpassing our previous record of $696 million, which just happened to be in the first quarter of this year. This incredibly strong sales performance helped us to deliver our second most profitable quarter ever with EBITDA of $58.8 million. All three of our business segments performed exceptionally well. Specialty Metals set new quarterly sales and earnings records. Pipe and Tube continued its run of strong results, and our Carbon segment delivered strong EBITDA of $18.3 million while navigating unprecedented pricing headwinds, which weâll discuss later in the call. It was another phenomenal quarter for Olympic Steel. And I would like to commend our team for their focus on executing on our strategy. Our success is rooted in the expansion of our business to higher return, value-added products and processing, combined with our disciplined approach to working capital, expense management and capital deployment. Our strategic actions have strengthened the Olympic Steelâs product portfolio, resulting in increasing and more consistent profitability in all market cycles. We continue to make focused organic investments in all three business segments to expand our capacity to serve our growing customer base and enhance our returns. We are also investing in automation to continue to accelerate efficiencies, enhance safety and reduce our costs throughout the organization. Andrew will talk about some of these investments and what they mean to us in our business in just a few minutes. In addition to these targeted growth of investments, weâre actively seeking additional acquisitions. Our teamâs track record in M&A has been really good. Weâve identified the right targets and navigated seamless integrations, completing five successful and accretive deals in the past four years. We intend to keep on this pace by targeting profitable, well-run companies that align with the Olympic Steelâs culture and core values, and also align with our strategy to build a higher return value-added portfolio. And finally, Iâd like to note that we published our first Corporate Responsibility Report in May. Corporate responsibility, while itâs always been a priority at Olympic Steel, this report highlights our commitment to environmental stewardship, social engagement, strong governance, ethical conduct and safety throughout our organization. And regarding safety, Iâm also excited to share that 18 of our divisions were recognized by the Fabricators & Manufacturers Association, thatâs the FMA, for outstanding safety performance. We congratulate every one of those divisions for their unrelenting commitment to our safety culture. Now, Iâll turn the call over to Andrew and heâll provide more details on our segments. Andrew?
Andrew Greiff: Thank you, Rick, and good morning to everybody on this call. As Rick noted, all three business segments continued to perform at exceptionally high levels in the second quarter. Our overall sales volume in the second quarter of 2022 was comparable to the second quarter of 2021 after adjusting for the disposition of our Detroit division last September. Our adjusted EBITDA in the second quarter of 2022 was $58.8 million compared to $51.7 million in last year second quarter and $56 million in the first quarter of this year. Sales were up in all of our business segments, compared with the second quarter of last year. Specialty Metals set new sales and EBITDA records for the quarter as sales increased by 64% from a year ago to $227 million and EBITDA improved to $37.5 million. In fact, Specialty Metalsâ first half EBITDA of $72.6 million nearly surpassed the segmentâs full-year 2021 EBITDA. Pipe and Tube continue to deliver excellent results as demand from our customer base remains strong. Sales for the segment was $112 million for the quarter, up 21% from a year ago, generating $8.5 million of EBITDA. It was another strong quarter for the Carbon segment, with sales up 14% to $371 million and EBITDA of $18.3 million. Our team has done an excellent job managing through waves of hot-rolled pricing fluctuations during the last few quarters. Importantly, when you look at our overall segment results, you see our mix is changing as a result of our capital deployment strategy. As a percentage of sales, our Carbon segment is close to becoming approximately 50% of the business. Our mix within carbon has also shifted towards value-added products. We believe this diversification will help us weather pricing headwinds and allow us to deliver consistent profitability in all market cycles. As Rick mentioned, we are actively deploying capital right now to accelerate profitable growth. As noted on last quarterâs call, much of the equipment we have ordered is subject to long lead times and has delayed the implementation of some of our projects. Despite these delays, we are successfully moving along several key projects. We expect our second auto stamping press in Winder will be online next week, adding 50,000 tons of annual capacity to this operation to support our growing transplant automotive business in the Southeast. In addition, we expect our two new 10K lasers and two new robotic welders will be fully operational at our Buford, Georgia, facility later in August. This will expand our value-added fabrication capabilities for key customers and help alleviate the need for additional labor through automation. We have also leased a new 80,000-square-foot white metals fabrication facility in Bartlett, Illinois, near our Schaumburg distribution center, to serve the growing fabrication needs of our customers. Similar to the successful approach we took with Winder and Buford, all current fabrication in Schaumburg will be moved to this location. This facility is expected to be fully operational in early 2023. And in Des Moines, Iowa, we have begun a 30,000 square foot expansion of our Pipe and Tube facility to support growth opportunities in this segment. We expect the expansion to be completed in early 2023. We are excited about the progress we are making with these investments, and we look forward to updating you as we continue to move forward. Turning now to our market outlook. While all metal products are experiencing downward pressures on pricing, we remain optimistic about the underlying demand. We have not experienced significant pullbacks in any market, and several of our OEM customers have strong backlogs as they continue to be challenged by labor and supply chain issues. With that said, customers are sharing concerns about the potential impact of a recession, and we are monitoring macroeconomic trends and customer activity closely. Several signs point to the stabilization of metal pricing. Looking further ahead, we should start to see infrastructure activity pick up as states reset their budgets to match an expected inflow of federal funds in late 2022 and early 2023. In addition, high energy prices are also driving new investment in energy production, which could bolster future demand. Despite the expected near-term pricing headwinds, we are confident that our company is well positioned to withstand the effects of market cyclicality, and we expect to navigate those headwinds successfully in the second half of 2022. In summary, we will continue to focus on what we can control, how and where we deploy capital, turning our inventory and managing operating expenses. Weâll continue to pursue our strategy to grow the business and further diversify and reduce the impact of market cyclicality. Now, Iâll turn the call over to Rich.
Rich Manson: Thank you, Andrew, and good morning, everyone. As Rick and Andrew have shared, we delivered another quarter of record-breaking results, surpassing records we just set a quarter ago with strong performance across all of our segments. As I discuss our results in more detail, please keep in mind that we completed the disposition of our Detroit operations during the third quarter of 2021, and we acquired Shaw Stainless & Alloy in the fourth quarter of 2021. Both of those transactions had an impact on our quarter-over-quarter and year-over-year comparisons. For the second quarter of 2022, net income totaled $37.6 million compared with $29.6 million in the second quarter of 2021. Adjusted EBITDA was $58.8 million for the current quarter compared with $51.7 million a year ago. We had no LIFO adjustment in the second quarter of 2022 compared to LIFO expense of $4 million in the second quarter of last year. Total debt decreased by $40 million since year-end, bringing our outstanding debt down to $288 million. We expect additional debt reduction throughout 2022. At the end of the second quarter, our credit line availability was approximately $183 million. We have additional accounts receivable and inventory to support another $188 million of ABL availability, as well as a $75 million real estate line that can be activated at our discretion. Those sources provide a stockpile of capital for our capital deployment strategy. Consolidated operating expenses totaled $94.8 million for the quarter, an increase of $9.8 million or 11.6% compared with $84.9 million a year ago. Second quarter 2022 consolidated operating expenses include $2 million of Shaw operating expenses and $5.2 million of higher incentive expenses when compared to a year ago in the second quarter. Additionally, we experienced significant inflationary pressure and distribution expense during the second quarter of 2022. When adjusted for the sale of our former Detroit division, outbound freight costs were up $3.1 million year-over-year. This results from the Ukraine invasion as we saw diesel prices approaching $6 per gallon in the second quarter of 2022 compared to under $3 per gallon in the second quarter of 2021. Capital expenditures totaled $10.1 million for the second quarter of 2022 compared with depreciation of $8.7 million. As Andrew discussed, long lead times are slowing the utilization of cash to fund our organic growth projects. During the first half of 2022, we approved $31 million of organic growth capital deployment, but long lead times will push the need to fund these projects into 2023. For full-year 2022, we anticipate cash utilization of $20 million of capital expenditures. Our effective income tax rate for the second quarter was 27.1% compared with 26.6% for the second quarter of 2021. We expect our 2022 effective tax rate to remain within the 27% to 28% range. And for the third consecutive quarter, the Board of Directors approved a quarterly cash dividend at the higher rate of $0.09 per share. The company has now paid dividends for 69 consecutive quarters. In closing, I would like to congratulate our entire team at Olympic Steel for delivering another historic quarter performance. As we move into the second half of the year, we are facing pricing headwinds and recessionary fears. Despite these challenges, we remain confident that Olympic Steel is positioned to endure macroeconomic pressures and market cyclicality and to more consistently grow profitability. Now, operator, letâs open up the call for questions.
Operator: Our first question comes from the line of Marco Rodriguez with Stonegate Capital Markets.
Marco Rodriguez: I was wondering maybe we could start on the carbon side. Just kind of looking through and thinking about your volume expectations there, the tons sold, I know thereâs some moving parts that youâve obviously mentioned in the past with the Detroit divestiture, the Shaw acquisition. But looking here at the last 3 quarters or so, youâre shipping about or selling about 200,000 tons or so per quarter. And I know that there also might be some headwinds from supply constraints. So maybe you can kind of dissect that a little bit, kind of give us a sense, if at all, what is being pressured? Or what can you not ship because of the supply constraints and what is sort of like your thinking through the second half in terms of volumes for carbon?
Andrew Greiff: Yes. So Marco, this is Andrew. Thank you for the question. So, we would expect that third quarter is going to be for us a traditional quarter. So, we saw in July that carbon sales were off a little bit as we expect traditionally in July. And we think August and September are going to be relatively steady, maybe even -- certainly better than what we think from July. The backlog from the OEMs, they have not been able to get into and specifically on the industrial OEMs. Theyâve been very steady. And while theyâve been trying to eat into the backlog because of the supply chain issues, just have not been able to -- and therefore, our shipments to some of the larger industrial customers have been relatively steady. Their forecasts donât show great movement over the next 30 days to 60 days. And so we anticipate that the tonnage being shipped is going to be -- should be relatively steady.
Marco Rodriguez: Got it. Very helpful. And if you can maybe also discuss the Specialty Metals side as well. I know that you guys run allocation there for a while. Can you just kind of update us there and what your thoughts are regarding volume?
Andrew Greiff: Yes. Sure. So, youâre still seeing pressure on the domestic mills, so allocation of the domestic mills. But Imports have certainly picked up the last 3 months or 4 months, and that certainly put pressure on pricing. Itâs added some availability into the marketplace. So again, the volume from our contract customers will be pretty steady, I would say, on the spot side of it. Itâs been more challenged. Customers are buying more frequently as opposed to before where they may have bought full truckloads. Theyâre buying half loads and maybe even quarter loads as the market has come down from a pricing perspective. But I would tell you that the contract customers, in particular for us, the food equipment and truck trailer customers are still very busy, but we expect with some additional imports and some pricing pressure that weâll certainly see it on the margin side.
Marco Rodriguez: Got it. And in your prepared remarks, you discussed some of the conversations youâre having with end customers. Thereâs, I guess, some growing concern obviously due to the macroeconomic picture and potential recession. If maybe you could expand on that comment to just maybe discuss whether you have any sense as far as what their base cases might be in terms of shallow recessions, deeper recession? Just any kind of thoughts there would be helpful.
Andrew Greiff: Yes. What I would tell you, Marco, is I think itâs a lot of conjecture and not so much specifics as their forecasts really have not changed. I think itâs more of a, hey, weâre reading this, what are you hearing, weâre getting concerned, where do you see third and fourth quarter going as opposed to, hey, you should really take a look at our forecast and see where the cutbacks are going to be. I would say the customers are still pretty optimistic that their levels are going to remain where theyâre at, taking into consideration the seasonality. And I think just a general concern when theyâre seeing the Fed talking about increase of rates and recessionary concerns, inflationary concerns. But at the moment, we really havenât seen that relative to their forecasts.
Marco Rodriguez: Got it. Helpful. And last quick question for me. Maybe you can talk a little bit, update us on what youâre seeing on the M&A landscape opportunities, what pricing might look like?
Rick Marabito: Yes. Good question, Marco. This is Rick. As we said in prepared comments, I can speak first about Olympic and what our desires are. So, weâre actively continuing to see growth via acquisition. As Iâve said in prior quarters, I feel confident weâre going to continue to make acquisitions. We would hope to make one yet this year. In terms of the landscape for M&A, Iâd tell you, the last quarter, probably seen more activity than weâve seen in a long, long time. I think the shift in the marketplace in terms of what weâre seeing on pricing and some of the forward indicators on pricing are leading to maybe some even more difficult assertations in terms of value from a meeting of the minds from buyers and sellers. So typically, as you look at the valuation and you look at performance, at least the way we do over a steel cycle, weâve had some really unique and challenging markets here over the last 2 years to 3 years with the downturn with COVID, the rapid rise in price and recovery. So, I think the trick right now is really ascertaining what that value really is, if itâs a profitability or an EBITDA type of multiple. But Olympic is sticking to our strategies. We want to buy well-run companies that fit in with our desire to get more consistent earnings, higher returns, some new geographies and thatâs kind of what weâre focused on. And I do believe weâre going to be able to execute on that, and thereâll be a meeting of the minds in terms of the sellers and the buyers. But a lot of activity, Iâd tell you, probably in terms of the inflow from bankers, weâve probably seen more books and more offers than weâve seen in several years.
Operator: Our next question comes from the line of Chris Sakai with Singular Research.
Chris Sakai: Can you comment on your shipping and transportation costs in the third quarter? How are they? Are they somewhat similar to the second quarter?
Rich Manson: Sure, Chris. Itâs Rich. And I think what youâre going to see is, yes, I think third quarter distribution expense will look a lot like second quarter distribution expense adjusted for the seasonal shipping rates. What I said in the prepared comments was that in the second quarter after the Ukraine invasion, essentially, we saw $6 per gallon diesel fuel compared with less than $3 in the second quarter of 2021. And I even went back and looked at the first quarter, first quarter diesel prices prior to the Ukraine invasion were in the low 3s. And so I think you can almost see this doubling of diesel price per gallon. So yes, Q3 is going to look a lot like Q2 in terms of the distribution expense.
Chris Sakai: Okay. And then for these investments that youâve made, when -- to what magnitude will we see it increase top line revenue and when?
Rick Marabito: Yes. So, I think we commented in Andrewâs section. So the first thing is weâll be phasing in these in the back half of this year. So, weâre excited to get the equipment up and running in terms of down in Winder. The building in Des Moines, we probably arenât going to be ready to see any type of expansion there in 2023. But weâre looking at these expansions to be a $10 million plus power boost to EBITDA starting in 2023.
Rich Manson: Yes. I would just add to what Rick said, I think the full boost comes in 2024 as the expansions get phased in. Obviously, the stuff down South, the automotive stuff will have the most impact in 2022. I think the Bartlett comes into 2023 and Des Moines as well as 2023, but fully ramped up in 2024.
Rick Marabito: Yes. And I think Andrew spoke in his comments, the press is the big volume piece of equipment that weâre adding. And once thatâs ramped up, I mean thatâs 50,000 tons of annual capacity.
Rich Manson: Well, thatâs right. Thatâs right. And Chris, so we have the first automotive stamping press is full. The second one should be operational starting next week. Everything is in. Weâre about 2 months behind, 3 months behind with delivery on that. But that is -- thatâs close to being full, and weâll see really the benefits of that as we start coming into next year. But on the automotive side, for those presses, weâre seeing actually an increase from the customers for the parts down South. So, weâre pretty excited by that.
Operator: Thank you. Ladies and gentlemen, that concludes our question-and-answer session. Iâll turn the floor back to Mr. Marabito for any final comments.
Rick Marabito: Thank you, operator, and thank all of you for joining us on our call today. We greatly appreciate your continued interest in Olympic Steel and certainly look forward to speaking with you again next quarter, if not sooner. Have a great day.
Operator: Thank you. This concludes todayâs conference. You may disconnect your lines at this time. Thank you for your participation.
