Olympic Steel Inc

NASDAQ:ZEUS

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to the Olympic Steel 2024 Second Quarter Financial Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. At this time, I would like to hand the conference call over to Rich Manson, Chief Financial Officer at Olympic Steel. Please go ahead, sir.

[Richard Manson, executive]

Thank you, operator. Welcome to Olympic Steel's earnings call for the second quarter of 2024. 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 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 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 can be found on our website. Today's live broadcast will be archived and available for replay on the Olympic Steel's website. At this time, I'll turn the call over to Rick.

[Richard Marabito, executive]

Thank you, Rich, and good morning, everyone. Thank you for joining us today to discuss Olympic Steel's 2024 second quarter results. I'll begin by summarizing our results for the second quarter, how all 3 of our segments delivered profitable results despite a challenging pricing environment. And I'll talk about how our diversified offerings and end products, a richer higher-margin mix of flat rolled products and additional fabrication capabilities are all helping to drive that profitability.

Andrew will then review our segment performance. And 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 ability to deliver solid results at a time when the steel industry is facing significant pricing pressure is a true testament to the success of our diversification strategy.

For perspective, the hot-rolled index pricing fell 22% during the second quarter alone and 39% since the beginning of the year. Despite this challenging pricing environment, we increased our shipping volume and reported sales of $526 million with net income of $15 million and $22 million of EBITDA. Our teams continue to drive profitability across all 3 of our business segments.

Our efforts to grow and expand in manufactured products, higher-margin flat-rolled products, including coated carbon and additional fabrication capabilities have strengthened our business and make us more resilient to market downturns and pricing pressures. We continue to proactively identify and evaluate additional opportunities for growth, especially in higher return product lines that further our diversification strategy. We're in an excellent financial position to make these investments with more than $340 million in borrowing availability under our existing credit facility.

Later in the call, Rich will highlight how we're investing in new equipment and CapEx. Additionally, our team has an impressive track record of acquiring well-run businesses that are the right fit for Olympic Steel as well as successfully integrating these companies post acquisition. We hope to continue to build on this success as we've seen M&A opportunities increasing as the year progresses.

Looking ahead to the second half of 2024, we remain focused on profitability and delivering on our disciplines around working capital and operating efficiencies. While we expect market conditions to remain challenging in the near term, we are optimistic about the future of the domestic metals industry and remain confident that Olympic Steel is positioned to navigate short-term pressures to deliver consistent results for our shareholders.

Before I turn the call over to Andrew, I'd like to mention that we published our latest corporate responsibility report in June, and that can be found on our website. We are indeed proud of our progress and commitments in areas such as safety, team and culture and environmental responsibility. I also want to take a moment to celebrate our incredible team and another milestone. 2024 marks the 70th anniversary of Olympic Steel's Formation in Cleveland, Ohio. I'm so proud of the company and the culture we've built together. We're stronger than ever because our team and their dedication to our organization, to our customers and business partners and to our shareholders. I'll now turn the call over to Andrew.

[Andrew Greiff, executive]

Thank you, Rick, and good morning, everyone. As Rick mentioned, we had a profitable quarter with all 3 segments contributing to our solid results. We continue to see that our diversification strategy has made Olympic Steel a stronger and more resilient company. Our addition of value-added end product manufacturing companies provides a countercyclical benefit during falling metals pricing markets. Now I'll provide some detail on each segment's results.

First, in our Carbon segment, we continued to face challenging market conditions in the second quarter because of the pricing pressures we have noted as well as softer-than-anticipated demand from some larger OEM customers. The good news is that the team was able to grow the business despite this pressure on pricing and demand. Carbon shipping volumes improved 1.2% year-over-year and 4.3% sequentially from the first quarter of 2024. The Carbon segment also led the way in profitability, generating $9.5 million in EBITDA in the second quarter of 2024.

Our end product manufacturing companies had a strong quarter, increasing their EBITDA margins as their cost of goods sold fell as metal pricing declined, again, highlighting the countercyclical benefit to profitability of our end product manufacturing capabilities. Also critical to our success is the continued expansion of our coated business, which has a higher gross margin profile than base hot-rolled carbon steel. In the first half of 2024, our coated shipments increased 32% versus a 3% increase for the industry.

Coated products now represents 12% of our overall product mix. We are continuing to win new fabrication business, led by Max Fitzgerald, our new fabrication team structure and consistency of process are accelerating growth that provides margin stability during periods of falling metals pricing. Our expanded fabrication capabilities also add market growth potential and the outsourcing of labor and supply chain dynamics in this post-COVID economy. The pipe and tube segment posted solid results in the second quarter of 2024 with adjusted EBITDA of $7.7 million, including an 8.5% increase in shipping volume year-over-year.

Our strategy to expand our value-added services has increased our margins and allowed us to maintain profitability in declining hot-rolled steel markets. The integration of Central Tube & Bar continues to go well, and that business will continue to help drive our pipe and tube margins going forward. Our legacy pipe and tube business and the central tube and bar facility continued to enhance their production capabilities, which services the value-added portion of our business.

During the first half of 2024, our CTI operation in Romeoville, Illinois added a new 6-axis tube laser and CTB is slated to add a new tube laser in the third quarter of 2024. Our ability to provide quick turnaround of quality fabricated parts has enabled us to win more of this business, furthering our growth and higher return strategy. The specialty metals segment experienced its best quarter for both volume and profitability since the first quarter of 2023. Shipping volumes during the second quarter of 2024 increased 10.4% year-over-year and 6% sequentially from the first quarter of 2024. The segment contributed $8.8 million of EBITDA during the quarter.

Overall, we are pleased with the team's ability to win new business and deliver profitable results in a challenging environment. As we navigate an uncertain market in the second half of 2024, we will continue to focus on the things we can control. Operating expense and inventory discipline, along with superior customer service will remain at the forefront. Now I'll turn the call over to Rich.

[Richard Manson, executive]

Thank you, Andrew. As you heard from Rick and Andrew, all 3 segments contributed to our profitability despite the challenging market conditions. Our second quarter results reflect the impact of our diversification strategy and our team's continued execution of our operating disciplines.

Before I discuss the results in more detail, I want to remind everyone that year-over-year comparisons are impacted by the October 2023 acquisition of Central Tube & Bar, whose results are included in our pipe and tube segment. For the second quarter, net income totaled $7.7 million compared with $15 million in the second quarter of 2023. EBITDA in the quarter was $22.3 million (sic) [ $21.3 million ] compared with $32.2 million (sic) [ $31.2 million ] in the prior year period. Both the second quarter of 2024 and 2023 include $1 million of LIFO pretax income. Consolidated operating expenses for the second quarter totaled $104.6 million compared with $101.6 million in the second quarter of 2023.

Our second quarter operating expenses reflect the addition of Central Tube & Bar, which does not report tons sold. Therefore, operating expenses per ton at the consolidated level and for the pipe and tube segment will appear higher year-over-year. As a reminder, we do not report tons sold for McCullough Industries, EZ-Dumper, EZ-Dumper, Shaw Stainless or the entire pipe and tube segment. Consolidated operating expenses for the second quarter included $4 million of CTB operating expenses and $1.8 million of lower incentive expenses when compared with the second quarter of 2023.

Our effective borrowing rate in the second quarter of 2024 is also higher due to the expiration of our interest rate hedge. We ended the quarter with total debt of $209 million, an increase from $190 million at year-end. This increase was driven by our need to fund higher levels of working capital during the first half of 2024. We continue to have access to more than $340 million in additional borrowing availability to support investments in higher return opportunities. Our capital expenditures for the first half of 2024 totaled $13.2 million compared with depreciation of $11.8 million.

Equipment lead times remain long and we've estimated that 2024 capital expenditures will be approximately $30 million as we continue to make investments in automation, fabrication and equipment that results in higher gross margin opportunities and more consistent results. As noted in our earnings release last night, we recently ordered 2 new cut-to-length lines in 1 high-speed splitter to further expand our efforts in our coded and specialty metals product lines. The majority of the cash flow associated with those expenditures will occur in 2025 and early 2026.

During the first half of 2024, we added additional leased flat-rolled laser capacity in our Cleveland operation and leased to laser capacity in our Romeoville location. We will add additional leased tube laser capacity at CTB during the third quarter of 2024. The leasing of these value-added laser lines is not reflected in our CapEx numbers, but are included in our operating expenses. Our second quarter 2024 effective income tax rate was 28.4% compared to 30.3% in the same period last year.

We expect our 2024 tax rate to approximate 28% to 29%. In addition, we paid a quarterly dividend of $0.15 per share in the second quarter. Our Board of Directors approved our next regular quarterly cash dividend of $0.15 per share, which is payable on September 16, 2024, to shareholders on record as of September 2, 2024. The company has now paid regular quarterly dividends dating back to 2006, increasing the dividend in each of the last 3 years. As we look ahead, we continue to be optimistic about our ability to deliver consistent profitable results at the segment and enterprise levels. We have expanded into higher margin, higher value-added opportunities.

And as a result, we've been able to grow the business with existing customers and win new customers. We also remain in a strong operational and financial position to continue to invest in our future. We are proud of our team that is focused on controlling what we can control and delivering value for our customers and our shareholders. Operator, we are now ready for questions.

[Operator]

[Operator Instructions] Our first question comes from Samuel McKinney with KeyBanc.

[Samuel McKinney, analyst]

Starting in pipe and tube great gross margins this quarter around 34%, despite the lower sales. They've now been above 30% for 6 quarters in a row. What drove the uptick in second quarter gross margins despite those lower sales? And do you think margins can hang in that 33%, 34% range as you continue to glean more benefits from fabrication, automation and customer outsourcing?

[Andrew Greiff, executive]

Sam, this is Andrew. So the answer is yes. It's been a strategy for our CTI Group to continue to grow in the fabrication part of the business. We are investing in more fabrication equipment. We do expect that those margins will be there and probably grow and it's really part of our downstream strategy to do more value added. We are still very interested in the distribution of the pipe and tube, but certainly, the growth part of it is coming on the fabrication side.

[Richard Marabito, executive]

Yes. And I think the other piece is the acquisition of CTB last year. They've certainly got a strong margin profile. So that would be the other piece of it, right?

[Samuel McKinney, analyst]

Okay. And then moving to the balance sheet, inventory value on the balance sheet stayed pretty similar despite the steep pricing declines during the second quarter that you called out in the release. Assuming that, that sequential steadiness is more of a function of volume, how do you view your current inventory levels against lead times headed into the back half of the year?

[Richard Manson, executive]

Sam, it's Rich. I'll take the value first. And so I think what you saw in the second quarter, really, it's not an increase in quantity. What it was, was a flip really between stainless surcharges on up 15% during the quarter. So you saw a higher value of stainless inventory while carbon inventory values went down. I'll turn it over to Andrew for the other part of the question.

[Andrew Greiff, executive]

Yes, Sam. So I think the inventory level is at an appropriate level. I think that there's a little bit more work that we certainly can do as we get through the third quarter into the fourth quarter, but I think the inventory level is appropriate.

[Operator]

The next question comes from Dave Storms with Stonegate.

[David Joseph Storms, analyst]

Just volumes are up real nicely, it looks like. Just hoping -- I wonder if you have any thoughts around any pricing outlook. Is there any kind of green shoots that you're starting to see maybe inventory levels industry-wide change in bid in environment, any momentum in the stock spot market, anything like that.

[Richard Manson, executive]

Dave, it's Rich. And so what we would tell you is that as we pointed out in the release in our comments, that second quarter hot-rolled pricing declined about 20%. We've seen that decline a little further here into July. That's really on the pricing side. But what we've continued to see from a demand side is that we're performing better year-over-year.

I think what you saw in the second quarter as well as the first half is that we were up about 2% year-over-year. We expect that to continue -- that trend to continue into the third quarter. But that's what we're seeing on the volume, and we saw a nice jump up Q2 versus Q1 sequentially.

[David Joseph Storms, analyst]

Understood. And then just on coded for Carbon. What's the outlook for this going forward through the back half of 2024. Is there an optimal call percent of carbon that you would like this to take up by the end of 2024. Just any outlook you have there would be helpful.

[Andrew Greiff, executive]

Yes. So what I would say, David, is we've seen terrific growth. Mike Tookey runs our coated for Olympic, he's doing a great job. I would say that growth has been about 34% over last year. We expect to continue to see that through the balance of the year and actually see that accelerate as we get into '25 as we continue to make head roads into construction in the HVAC markets.

[Operator]

The next question comes from Chris Sakai with Singular Research.

[Joichi Sakai, analyst]

I wanted to talk about, I guess, the pricing is facing some headwinds, how is that affecting M&A valuations? Is it decreasing then?

[Richard Marabito, executive]

Chris, it's Rick. Really good question. I think valuations remain pretty steady in our industry. I think the real trick to valuations is looking over a performance cycle, the ups and downs in pricing and trying to look at a company's value over that cycle. That's how we tend to look at it.

So certainly, in the short term, with some pricing pressure as you've seen in the steel industry in the last couple of quarters. The earnings have been a little bit compressed. But what I'd tell you is at least our approach on M&A, we're looking for really good, well-run companies that are consistently profitable that have consistently high return models and looking at those companies and considering where pricing in the market is, is certainly part of the valuation, but it's really more important to look at how they perform over the cycle.

So I think on M&A, we're active. You know we've been active the last 5 years. We've seen the activity in the flow pick up in the second quarter and certainly continue to have that part, as we mentioned in our comments, certainly consider M&A to be part of our growth strategy.

[Joichi Sakai, analyst]

Okay. And then in this type of environment, is there any specific part of the business that you're focusing on more or that's performing better than the others? And what should that be and why?

[Andrew Greiff, executive]

Well, so Chris, this is Andrew. What I would say is fabrication has become a big growth strategy for us. We have seen post-COVID the opportunities really explode in particular, from the industrial OEMs, the opportunities to be able to supply as they are looking for a finished product that can go right into assembly. And we've seen an acceleration of not only opportunities but picking up some fairly significant business. But I would also tell you that in all 3 of our segments, there is -- there are pockets of business that are starting to improve.

On the specialty side, we're seeing a nice improvement in the food equipment of the truck trailer or the appliance side of the business. And our pipe and tube, where we're making some nice inroads with data centers. And then our carbon business, again, from a fabrication perspective, that's been pretty big, and we've seen some of the other industrials coming back a little bit. So we're pleased for all 3 segments with what we're seeing.

[Richard Manson, executive]

And Chris, it's Rich. I would add that in periods of time where pricing may compress the distribution margins, you're seeing us expand the margins on our and manufactured products as their cost of goods sold come down in these periods. And that was a nice balance in the second quarter.

[Richard Marabito, executive]

Yes, exactly. I think, Chris, what you've seen is -- and the evidence was there, and we talked about it a little bit, really a nice balance in all 3 of our business segments. And that's really the fruition of very strategic initiatives that we've taken over the years. Andrew has talked about the fabrication. Rich just talked about the end products and the offset and the counter cyclicality of that.

Certainly, we just talked about the mix within our Carbon division of moving to more of the coated products. So we talked about acquisitions like in the pipe and tube, we had a question about the margins and the CTB acquisition. So that's really what we've been laser-focused on together with controlling the things we can control that we say every quarter and keeping our expenses really in line and turning our inventory. So that's it, and that's what we're focused on, and we're going to continue to focus on that.

[Operator]

Thank you. At this time, I would like to turn the floor back over to Mr. Rick Marabito for closing comments.

[Richard Marabito, executive]

Thank you so much, and thank you, everybody, for joining us on the call this morning. We appreciate your continued interest in Olympic Steel. And we look forward to speaking with you again next quarter, if not sooner. Thank you. Have a great day.

[Operator]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.