Olympic Steel, Inc. (NASDAQ:ZEUS) Q1 2016 Earnings Conference Call April 29, 2016 9:00 AM ET
Michael Siegal - Chairman and CEO
David Wolfort - President and COO
Rick Marabito - CFO
Andrew Greiff - President of Specialty Metals
Phil Gibbs - KeyBanc Capital Markets
Good morning and welcome to the Olympic Steel 2016 First Quarter Conference Call. This conference is being recorded.
Some statements made on today's call will be predictive and are intended to be made as forward-looking within the Safe Harbor protections 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 company's reports on Forms 10-K and 10-Q and press releases filed with the Securities and Exchange Commission. Today's live broadcast will be archived and available for replay on Olympic Steel's website.
At this time, I'd like to introduce our host for today's call, Olympic Steel's Chairman and Chief Executive Officer, Michael Siegal. Please go ahead, Mr. Siegal.
Thank you, operator. Good morning and thank you all for joining us to discuss Olympic Steel’s 2016 first quarter results. On the call with me this morning are President and Chief Operating Officer, David Wolfort; Chief Financial Officer, Rick Marabito; President of our Chicago Tube & Iron business, Don McNeeley; and President of Specialty Metals business segment, Andrew Greiff.
During the past year and a half, our focus on managing the controllable elements of our business, lowering operating cost, accelerating inventory turnover, managing working capital and reducing debt enabled us to make sustainable operating improvements in a very challenging steel marketplace.
As a result of our actions, Olympic Steel is well positioned to capitalize on improved pricing in our markets and increase our market share. Metal prices rebounded off of the mid-December lows and are steadily increasing in 2016. Prices of raw materials used to make steel such as iron ore and scrap are all correcting from depressed levels.
In addition, US steelmaking capacity has been reduced and we expect domestic producers will remain disciplined in production and inter-credit extension [ph]. We support the recent trade cases filed to address the tide of illegally dumped steel imported into the United States, particularly from China. The resulting anti-dumping tariffs appeared to be having their intended effect by slowing the pace of the legal imports. We anticipate some foreign producers may attempt to circumvent these tariffs. However, import volumes into the United States are slowing. Rebalancing the supply side of the global steel marketplace has resulted in higher prices and domestic mills have started to allocate supply. This is an indication that prices may continue to strengthen as we move further into 2016.
Quarterly prices for our index-based contracts reset [ph] higher in the second quarter of 2016 and I anticipate it to do so again in the third quarter. However some of our first quarter agreements were at pricing levels lower than the fourth quarter of 2015 impacting our financial performance in the first quarter. The bottom of the market may well be behind us. However, ongoing challenge remain due to weak demand in a number of sectors. Production of heavy equipments serving the mining, agricultural, and oil and gas industries remains depressed.
While overall end demand has not fully recovered, it is steadily increasing in residential and non-residential construction and auto demand remains at historically high levels. Additionally, we are seeing accelerating improvement in our stainless and aluminum segment, and I would ask Andrew Greiff, our Specialty Metals President to add color to this later on in the call.
The Chicago Tube & Iron business unit turned in another solid quarter with improving margins due to enhanced engineering and value-added services, which have become their hallmark. Our initiatives have positioned us for sequentially improved performance. As demand improves, we anticipate improved financial results.
This morning we also announced our Board of Directors declared the regular quarterly cash dividend of $0.02 per share available on June 15, 2016 to the holders on record of June 1, 2016.
And with that I'll turn the call over to Rick Marabito for his first quarter financial review.
Thank you, Michael and good morning everyone. According to the MSCI Metals Activity Report, industry wide shipments in 2016’s first quarter declined 9% compared with the first quarter of last year. On a consolidated basis, our shipments were off less than 3% as we increased our market share in the quarter. In the first quarter of 2016, we set an all-time high for our consolidated market share.
First quarter shipments increased 16% sequentially from the fourth quarter of 2015. Consolidated net sales were $258 million in the first quarter. That compares with $346 million in the same quarter last year, primarily as a result of lower prices and to a lesser degree lower volume.
Gross margin expanded to 22.7% compared with 19.1% in last year's first quarter. Gross margin improved in all three of our reporting segments with the greatest improvement in our specialty metals flat products segment. We also had higher relative proportion of tubular and pipe product sales in the quarter versus last year, which had a positive impact on consolidated gross margin. And as Michael highlighted, our pipe and tube segment margins were strong increasing to 33.3% in the first quarter of 2016 compared with 31.8% last year. Sales of carbon flat products represented 62.5% of first quarter sales down from 66.1% of sales in last year's first quarter.
There was no LIFO impact in the pipe and tube segment this quarter. In last year's first quarter, we recorded $250,000 of LIFO income. First quarter 2016 operating expenses were lower in all expense categories compared with the first quarter of last year. Operating expenses totaled $58.5 million in the quarter, down from $62.6 million in 2015's first quarter. This was a decrease of 6.5% exceeding 3% reduction in our shipping volume. Operating income in the quarter totaled $35,000 which is up from the fourth-quarter operating loss of $7.2 million. Last year’s first quarter operating income was $3.3 million. Year-over-year interest expense declined 18% to $1.3 million versus $1.6 million in last year's opening quarter. This was due to lower debt levels in the current year. We reported a net loss of $800,000 in the first quarter or $0.07 per share compared with net income of $1.1 million or $.10 per diluted share in the first quarter of last year.
Now let's shift to the balance sheet. Accounts receivable increased $22 million from year-end 2015 as a result of higher shipments and higher prices, which improved steadily throughout the quarter. The quality of our receivables remains excellent. Days sales outstanding was exactly 40 days in the first quarter that’s essentially flat with the 39.9 days in last year's comparable quarter. Our inventory continues to be managed well and down in the first quarter. At the end of March, inventory totaled $190 million; this is $17 million lower than the end of December. Improving inventory turnover has been one of our initiative and our inventory turns which we measure in tons not dollars surpassed five turns in the first quarter of 2016. Total debt was $148 million at quarter-end that’s unchanged from the end of 2015. It is unlikely we will generate more free cash flow from changes in working capital in 2016. Given the recent price increases for metal, working capital requirements will likely increase during the remainder of the year. Therefore future reductions in debt will be driven by operating cash flow. We had $93 million of availability on our low cost asset-based lending agreement at the end of the quarter. Our average interest rate was 2.5% in the first quarter.
Our capital expenditures totaled $1.4 million that's down from $1.2 million from last year's first quarter and those expenditures were primarily associated with equipment and facility maintenance. This compares with depreciation of $4.5 million in the quarter. Our full-year capital spending budget for 2016 approximates $12 million. At the end of March, shareholders equity stood at $255 million which was unchanged from the end of 2015. Book value per share at quarter end was $23.23 per share and our tangible book value was $20.99 per share. During the first quarter we did not make any share repurchases under our previously announced share purchase program. And finally, we do plan to file our Form 10-Q later today which provides additional details on our operating and segment financial results for the quarter.
With that I will now turn the call over to David for his operating review.
Thank you, Rick and let me just say it's a pleasure to be here at the end of first quarter of 2016 as supposed to end of first quarter of 2015. We've seen quite a difference as both Mike and Rick have commented, if you remember a year ago we had 17 successive weeks where the market fell in pricing as measured by the CRU and we stand here quite the opposite position and we like the trend lines as we are well into second quarter, we see lead times almost exhausting the second quarter we like the trend line, we like the success and the trade cases and the steel market experienced as I said moment ago some severe adversities for several quarters, primarily stemming from the surplus of global capacity.
The damage to the US-based industry was exacerbated mostly by we think state-owned enterprises primarily influenced by China. Chinese steel production has increased rapidly in recent years as Michael commented and is now at approximately 1.2 billion tons per year, far exceeding their diminished consumption. The estimates of excess annual capacity in China are now at 450 million tons which is clearly not - cannot be observed and therefore has resulted in an overabundance of steel that is being dumped on the US shores and we know that the Chinese are exporting in excess of 100 million tons. The trade cases filed by US industry participants have successfully proven these practices are illegal and have subsequently led to remedies intended to level the playing field. Excess global steelmaking capacity remains however at the very least; we are now - remains - very least we are now realizing some welcome relief from these price practices. Back to the home front and the success in the latter part of the first-quarter and trending into the second quarter, we see US steel mills publicly announcing five separate price increases in the past five months beginning in December of 2015. This was the first price increase in more than a year and since December, published prices for hot-roll coil have risen from that low benchmark of $354 a ton to recent highs of $514 a ton by the end of April. This is a $160 per ton increase. That represents the absorption of all of five of these published increases and we have now recovered about two-thirds of the price degradation our industry endured during calendar 2015. Hence I much rather would be here today than I was a year ago.
Our inventory level has been right-sized as Rick commented for the current demand environment and our cost basis on the inventory has us well positioned to benefit from the rising prices and again we really look forward to the trend line all the way through second quarter. This was reflected in consistent improvements in our month by month performance during the first quarter of 2016. In March, we were profitable and the contract pricing resets in April. That positioned us well for improving financial results entering the second quarter.
Now, before I turn the call over to Andrew Greiff for his review of our specialty metals operation, I'd like to remind everyone that Olympic Steel never deviated from our long-term growth strategies or core values. We continue our leadership in corporate citizenship initiatives and we are proud of how our team in the field has performed under extremely challenging conditions.
Having noted that since the Great Recession and a protracted recovery folks, the whole of our business is now comprised with specialty metals of 17.7% of our business, CT&I has 19.8% of our business and so Olympic Steel as we've said - both Michael and I have commented and Rick also, that we’ve stayed true to our convictions of reorienting our business to today's environment.
We consistently satisfy our customers’ needs with integrity by safely supplying high quality product regardless of what external market forces may bring. Achieving record market share in the first quarter of 2016 is a direct consequence of the genuine commitment we have to our customers, employees and suppliers. As custodians of tremendous assets, we believe that doing business the right way ultimately enhances shareholder value.
And with that, I will turn the call over to Andrew Greiff for his comments on our growing specialty metals flat products business segment.
Thank you, David. Good morning. It is a pleasure to be on today's call to provide an update on Olympic Steel’s specialty metals business. In the first quarter of 2016, sales volume of our specialty metals flat products which includes stainless steel and aluminum products increased to nearly 20,000 tons. Shipping volume was 20% higher than in the fourth quarter of last year and was also up 6% over the first quarter of 2015.
Strong volume was in part driven by increased penetration into the automotive sector. By successfully capitalizing on the long standing relationships, our carbon business teams have earned with customers in the automotive sector, we were able to cross sell specialty metals products to these manufacturers with significant growth in aluminum as they evolve towards lighter-weight solutions. In addition, we grew our stainless steel volume with truck trailer, food service equipment and appliance manufacturers.
Olympic Steel’s share of stainless steel sheet and coil market has now increased to more than 5.5% of the domestic market in 2016’s first quarter, up from 5% in last year's first quarter. Our market share has also increased in aluminum sheet and coil reaching 1.9% of the US market in the first quarter versus 1.3% in the first quarter of 2015 according to the MSCI.
Net sales in the specialty metals flat products segment were $45.8 million in the first quarter of 2016, up 13% sequentially from the fourth quarter of last year due to the higher sales volume. On a year-over-year basis, despite the volume increase, net sales declined 13% compared to the same quarter last year as a result of sharply lower prices.
First quarter operating income improved significantly in this segment close to tripling at $1.8 million up from $600,000 in the same quarter last year. This was due to gross margin expansion combined with profit improvement initiatives. We expect these improvements will be sustained as we move into the balance of the year.
Looking ahead, we are beginning to realize much better pricing in our specialty metals products consistent with the carbon side of the business. There were three announced price increases in the flat rolled stainless steel products between December 2015 and April 2016. Lead times have stretched out from the typical four to six weeks to 10 to 12 weeks or even longer lead times required for lighter gauge material.
On top of this, during the first quarter, domestic stainless steel producers filed anti-dumping suits against China for flat rolled stainless steel and coil. This is having the same effect as the carbon trade cases in mitigating the excessive volume of stainless steel imports from China.
Overall, it was as a successful quarter for the specialty metals flat products segment. Our business has continued to increase as a percentage of consolidated sales and accounted for more than 17% of company-wide sales in the first quarter. Our operating divisions and commercial teams have continued to execute of providing a highest standard of service and value to our key customers which has allowed us to maintain and expand our participation with them.
In addition, we continue to see the positive impact of new business from the efforts of our well cross trained experienced sales professionals. With firmer prices and additional cross selling and commercial opportunities ahead of us, we're optimistic regarding the outlook for our specialty metals business.
Now operator, let's open the call for questions.
[Operator Instructions] We'll take our first question from Phil Gibbs with KeyBanc Capital Markets.
Good morning. Can you discuss the automotive penetration a bit more in the specialty segment? How much of that may have been incremental or new wins this year relative to last year?
Well, I think what we've seen in particular on the aluminum side of the business is the automotive companies have gotten more into the product and it's become an important part of what they're doing. It has certainly become an important part of what we're doing and in particular our Detroit division, which has got great relationships with the various tiered companies has done a terrific job in getting us those opportunities and we continue to be an important player in that.
Go ahead. I'm sorry.
We would expect that part of our business to grow incrementally. Obviously, there is more aluminum being used in cars. We've got penetration, we have more opportunities, but it will be incremental growth and won't be a substantive part of our growth overall, but it will be -- we're looking forward to continue the growth as we get more opportunities.
Okay terrific. And Rick, did you say the carbon piece of the business was up 15% quarter-on-quarter or something close to that in terms of volume?
That's our total volume increase I gave you at 16%, but as I look and I think that was sequentially, Phil, the number I gave, and but if I look at the carbon products, that's about the same. The carbon products sequentially were up about 16% as well.
Okay. And was that going after any new markets that you haven't been in in the past?
Phil. I'll respond to that. David here. You have to remember that in 2014, we had some significant growth on the carbon side of the equation, close to 14% on an annual basis. Last year, we gave back about 10% of that severe decline in the marketplace and what we're seeing now is our ability to reclaim that market share from 14%, bring back that growth although agriculture is still down and we see mining is still down and some aspects of our business are depressed, but regardless, we continue to gain market share in what appears to be just a smaller buy.
Yeah. Let me just comment also. I think that in the sequence of the quarter, what we're seeing is Olympic maintaining pretty good levels of inventory and what you've seen from the MSCI data is a lot of service centers inventories are particularly low and I think with our disciplines on inventory management, we're picking up market share because we have steel, where others may not.
Do you think some of the sequential upside or the year-on-year upside, however you want to look at it is due to the recent dwindling of import momentum?
I think we'll see a little bit more of that in the second quarter than we saw in the first quarter. I think the market was slow to adapt to it, particularly in January and somewhere at least, we'll just split February. So we'll say the first half of -- the first half of the first quarter, we're slower adapters, a lot of concern with the marketplace and our reluctance to believe that pricing was going to go up. We're early adapters as they say and we're fostering an increase in the marketplace, recognizing the severe effects of 2015 and we've started to see that with the total absorption of the five published increases, we would expect scrap to go up in May, that's been well publicized and we'd expect pricing to gain a little bit more momentum, especially with the trade revenues that are on it.
[Operator Instructions] And it appears we have no further questions at this time. I’ll turn back over to Mr. Siegal for closing or additional remarks.
Yeah. Thank you operator and to all of you that are on the call, we thank you for joining us this morning and your interest in Olympic Steel and Phil particularly to you, but we'll talk to you again next quarter. Thanks guys.
That does conclude today's conference. Thank you for your participation. You may now disconnect.
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