Olympic Steel Inc

NASDAQ:ZEUS

Earnings Call Analysis

Leadership and Forward-Looking Statements

The earnings call was led by CEO Rick Marabito and President/COO Andrew Greiff. It is important to note that some statements from the call are forward-looking and should be taken with the consideration that actual results might differ.

Financial Overview of Q4

In the fourth quarter, the company reported $489 million in sales, with net income of $7.4 million, a notable increase from $4 million in the same quarter the previous year. This suggests improved profitability. EBITDA for the quarter was $16.7 million, and the full-year adjusted EBITDA reached $97.6 million. All three business segments contributed positively to the results, showcasing a well-rounded performance. The carbon business dealt well with pricing pressures, and despite headwinds, specialty metals provided stable EBITDA.

Acquisitions and Dividends

The company has shown strategic growth by investing $170 million in the Metal-Fab and Central Tube and Bar acquisitions, which have immediately yielded strong EBITDA returns. This has only marginally increased debt by $25 million to $190 million, preserving financial flexibility for future investments. Reflecting confidence in the company's financial health, the quarterly dividend was raised by 20%, reaching $0.15 per share, up from $0.02 since 2022.

Shareholder Returns and Executive Moves

Olympic Steel investors saw a total shareholder return of over 100% for 2023, with a staggering over 400% for the three-year post-COVID period. These impressive returns highlight the company's successful execution of its growth strategies. Additionally, Zach Siegal's promotion to President of Manufactured Metal Products signals an emphasis on growth in this area.

Operating Expenses and Tax Rate

Operating expenses in Q4 were up to $100.4 million, influenced by the new acquisitions and driven by a 5% volume increase year-over-year. The effective tax rate was 23.3%, with an anticipation of a rise to between 27.5% and 28.5% for 2024. These figures indicate the company is managing expenses and tax impacts effectively, including planning for future tax increases.

Market Dynamics and Future Expectations

Despite facing significant pricing headwinds in 2023, the company has maintained a focus on consistent results and shareholder rewards, expressing excitement for future prospects. The company forecasts around 10% to 12% growth in Q1 2024 due to new business gains, especially in fabrication. The LIFO method, which impacts the pipe and tube segment inventories, could lead to some expense in the first half of the year. Lead times from carbon mills have shortened slightly, indicating consistent delivery expectations. This proactive approach in managing market conditions and growth areas bolsters the positive outlook for 2024.

M&A Activity and Market Strategy

A key part of Olympic Steel's strategy involves acquisitions that fit well with the company's current portfolio and can yield high returns. Even as the M&A market experienced a slowdown due to economic and interest rate environments, Olympic Steel stays committed to its acquisition strategy for continued growth.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings. Good morning, and welcome to the Olympic Steel 2023 Fourth Quarter Financial Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. At this time, I'd like to hand the conference 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 Fourth Quarter of 2023. 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 Olympic Steel's website.

At this time, I'll turn the call over to Rick.

[Richard Marabito, executive]

Thanks, Rich, and good morning, everyone. Thank you for joining us today to discuss Olympic Steel's 2023 fourth quarter and full year results. I'll begin by talking about our 2023 performance and the strategic progress we've made over the last 5 years. Then Andrew will review our segment performance. And following that, Rich will discuss our financial results in more detail. And of course, then as always, we'll open up the call for your questions. It was another highly successful year for Olympic Steel. We believe our 2023 performance is a defining statement about our company's strength and resilience. For the second year in a row, we withstood a hot-rolled carbon steel index pricing decline of more than 45% during the year as well as specialty metal surcharges that fell throughout the year. Yet despite these significant pricing fluctuations, we delivered on our strategy and commitment to generate consistent profitable results.

We reported fourth quarter sales of $489 million, with net income of $7.4 million, and EBITDA of $20.9 million. All 3 of our business segments positively contributed to our results for both the fourth quarter and the full year.

Our pipe and tube business delivered its second most profitable year ever. Our carbon business showed its resiliency in navigating the pricing pressures of 2023 with improvements in sales and gross margins. And although specialty metals faced industry-wide stainless steel headwinds, this segment contributed consistent positive EBITDA. We are now 5 years into our strategy to build a more diversified company that delivers results and create shareholder value even under challenging market conditions.

During that time, we've successfully integrated 6 acquisitions, each of which has added a unique value-added offering to our portfolio. We are recently named Corporate Dealmaker of the Year by the [indiscernible] Association for Corporate Growth for a metal-fab acquisition in January 2023. We have also strategically divested assets to further tighten our focus on higher return, higher value-add products. And throughout our transformation, we've stayed true to our operating discipline. Our success is a result of all these actions.

Our inventory management and strong cash flow have fortified our balance sheet and position Olympic Steel for future growth. In 2023, we invested $170 million in the highly accretive Metal-Fab and Central Tube and Bar acquisitions, and both investments have produced immediate strong EBITDA returns. However, our total debt increased by only $25 million to $190 million at year-end, with availability of approximately $339 million. As a result, we remain in excellent position to continue to invest in higher return opportunities in the future.

The recent decision by our Board of Directors to increase our quarterly dividend by 20% also reflects our company's strong financial position and the success of our strategy. Cumulatively, we've raised our quarterly dividend from $0.02 per share to $0.15 per share since 2022, reinforcing our commitment to deliver value to our shareholders. Our total shareholder return for 2023 was just over 100%. And for the 3-year post-COVID period, our return was over 400%.

I'm proud of the entire Olympic Steel team for their commitment to our strategy and the progress we've made in the past 5 years, and we continue to enhance our team with new hires and promotions.

In January 2024, we announced the promotion of Zach Siegal to the new role of President, Manufactured Metal Products. Zach has been with the company since 2007, and for the past 6 years, he's played an instrumental role in our acquisition strategy. In his new role, Zach will lead our newly created manufactured metals products group, one of the growth areas of our company, while he remains involved company's mergers and acquisition activity.

As we head into 2024, Olympic Steel is stronger than ever. We remain committed to our discipline of managing working capital, operating expenses cash flow and debt while we continue looking for opportunities to further expand our portfolio of higher return, higher value-add products through both organic growth and acquisitions. We're confident in our ability to build on our success in 2024, driving profitable growth and creating value for our shareholders.

So now I'll turn the call over to Andrew.

[Andrew Greiff, executive]

Thank you, Rick, and good morning, everyone. Olympic Steel finished the year strong, capping off another year of solid performance despite challenging and dynamic market conditions. As Rick noted, this performance reflects the success of our strategy and our ongoing commitment to our operating disciplines. Our adjusted EBITDA was $16.7 million for the fourth quarter and $97.6 million for the year. Our pipe and tube segment had another exceptional quarter as this segment completed its second best full year in its [ 109-year ] history with adjusted EBITDA of $40.3 million.

Our strategy to increase the amount of value-added mix and upgrades and additions to our laser fleet resulted in gross margins remaining above 30% throughout 2023, resulting from the team's focus on margin improvement through fabricated product growth. We expect margins will continue to strengthen with the addition of Central Tube and Bar. We completed the acquisition of CTB in October of 2023, and the integration has gone smoothly. The business fits seamlessly into our growth plans, which will further enhance the performance of the pipe and tube segment.

Turning to our carbon segment. Along with the contributions from Metal-Fab acquisition, carbon delivered another solid performance while navigating some unusual market dynamics. In a typical year, fourth quarter carbon pricing falls during the seasonally slowest quarter. But in 2023, we saw index pricing fall 45% from April through September, and then it began rebounding in October in anticipation of the UAW strike settlement. During the fourth quarter, the index pricing increased 65%, which caused some customers to buy in advance of index pricing increases on contractual business for the first quarter of 2024 as well as the early settlement of many first quarter and first half 2024 contracts. As a result, fourth quarter sales were down less than 3% sequentially from the third quarter rather than the traditional 6% to 8% decline.

Despite all those market challenges and unusual circumstances, the carbon segment earned adjusted EBITDA of $7.9 million in the fourth quarter. Carbon shipments were up 8% in the fourth quarter from a year earlier, and up 6% for the full year. In particular, we saw growth in 2023 in higher-margin [ poll roll ] and coated products as well as through increased fabrication business.

Specialty metals has remained a meaningful contributor in the fourth quarter and recorded its third most profitable full year, even as this segment continued to face industry-wide stainless steel headwinds and falling nickel prices. We are very proud of the accomplishments of our specialty metals team and our performance under challenging market conditions.

Turning to end markets. In early 2024, we are seeing our industrial OEMs buying as forecasted. The same is true for food equipment, truck trailer, storage tank, HVAC and appliance customers. We are seeing very strong demand for industrial fabrication, especially for data centers. Our newest fabrication facilities in Buford, Georgia and Bartlett, Illinois, are performing extremely well.

We thank all of our employees for a successful 2023 and we expect 2024 to be another solid year.

Now I'll turn the call over to Rich.

[Richard Manson, executive]

Thank you, Andrew. 2023 was an important year for Olympic Steel as we demonstrated our ability to deliver consistent profitable results in all markets. Before I discuss the results, I want to remind you that year-over-year comparisons will be more difficult due to the 2023 acquisitions of Metal-Fab and Central Tube and Bar.

For the quarter, net income totaled $7.4 million compared to $4 million in the fourth quarter of 2022. Adjusted EBITDA in the quarter was $16.7 million compared to $11.9 million in the prior year period. Fourth quarter 2023 results include $5.3 million of LIFO pretax income compared with $900,000 of LIFO pretax income in the same period a year ago. The fourth quarter 2023 results also include $1.1 million of acquisition-related charges.

Consolidated operating expenses for the fourth quarter totaled $100.4 million compared to $81.6 million in the fourth quarter of 2022. Our fourth quarter operating expenses reflect the addition of Metal-Fab and CTB, which do 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 fourth quarter include $10.1 million of Metal-Fab operating expenses, $5 million of CTB operating expenses, higher warehouse and distribution expenses associated with 5% higher year-over-year volume and $600,000 of lower incentive expenses compared to the fourth quarter of 2022. Inflationary pressures during the fourth quarter and the second half of 2023 were negligible. As a reminder, the CTB results for the fourth quarter included $1.1 million of deal costs and acquisition-related inventory fair market write-up amortization.

As Rick mentioned earlier, our inventory management and strong cash flow have helped us to continue to fortify our balance sheet. We ended the year with debt of $190 million and availability of approximately $339 million, keeping us in an [excellent] position to continue investing in higher return opportunities.

Our capital expenditures totaled $21.3 million through the fourth quarter of 2023 compared to depreciation of $21.5 million. Equipment lead times remain long and we estimate that 2024 capital expenditures will be approximately $35 million as we continue to make investments in automation, fabrication and investments that result in higher gross margin opportunities and more consistent results.

Our fourth quarter 2023 effective tax rate was 23.3% compared to 18.6% in the fourth quarter of 2022. We expect our 2024 tax rate to approximate 27.5% to 28.5%. Also during the fourth quarter, we paid our quarterly dividend of $0.125 per share. As outlined in yesterday's earnings release, our Board of Directors approved a $0.15 per share dividend, which is an increase of $0.025 per share from the company's previous quarterly dividend. The dividend is payable on March 15, 2024 to shareholders as of March 4, 2024. We have now paid dividends to our shareholders for 75 consecutive quarters.

Although we faced significant pricing headwinds and other market challenges throughout 2023, the success of our strategy and the strength of our company enabled us to deliver consistent results and reward our shareholders. We are excited about the future and look forward to what we can achieve in 2024 and beyond.

Now operator, please open up the call for questions.

[Operator]

[Operator Instructions] And our first question this morning is from the line of Gibbs with KeyBanc Capital Markets.

[Philip Gibbs, analyst]

Just a question on your recent new acquisition of Central, and I know you've talked about it a little bit, but maybe just [ opine ] on how it fits within the existing bandwidth of the pipe and tube franchise? And then how you may look at that as a future platform to expand your offerings elsewhere?

[Andrew Greiff, executive]

So Phil, this is Andrew. So Central Tube fits beautifully under our Chicago Tube and Iron segment. It -- the bulk, as you know, of the business that they're doing is fabricated tubes. It's a growth part of what we're looking for under Chicago Tube. And it also allowed us to get into 2 areas that we were not [done] in Little Rock as well as in Tulsa. And so the facilities there, when you go into our fabrication facilities, they have very similar equipment to what Chicago Tube has. And so it was a very natural fit to tuck them under that segment.

[Richard Marabito, executive]

And I'd say -- and Dustin Ward, who was the previous owner of CTB is a fantastic leader. He stayed on with us and we've got really big plans to continue to use that CTI/CTB platform to do more value-add processing. And a big chunk of the CTB business is data centers. So we're excited about the growth there.

[Philip Gibbs, analyst]

How are you guys looking at the -- just the value-add component of the business overall, either as a percentage of revenue or as a percentage of volume? I know from a volume standpoint, it's probably not massive. But from a revenue standpoint, it certainly can move -- can move the dial. Do you have a percentage of revenue maybe where you are, where you were, and where you want to go?

[Richard Manson, executive]

Well, Phil, it's Rich. I think what we've talked about is the focus is not generally on revenue. The focus is on gross margin. And I think what we've said in our pipe and tube segment is that they want 50% of their gross margin being generated by value-added work, and they're well on their way to that. And I think they're pretty close right now with the acquisition of CTB.

[Richard Marabito, executive]

And then overall, maybe Andrew, you can talk about -- yes, fabrication and really the growth we're seeing, especially not only in the pipe and tube, but also in the stainless and really in the carbon side.

[Andrew Greiff, executive]

Well, that's right. And so Phil, as you know, we dedicated 2 facilities, 1 down in Buford, Georgia, the other in Bartlett, Illinois, they are strictly fabrication facilities. But if you go through a number of our other large facilities, you will also see value-added equipment in conjunction with maybe some of our more traditional equipment as well. It is a part of our business, Phil, that we see growing very rapidly. We brought on this year and hired a new Vice President of Fabrication. So Max Fitzgerald had an Industrial OEM background to join us and help us accelerate these processes.

And it is -- the demand coming today, in particular, from the industrial OEM, has really put us in a terrific position to convert what was originally rectangles going to the customer to now value-added parts, in a lot of cases, welded finished goods that go directly into the assemblies of these industrial OEMs.

On the specialty metals side, we're seeing that equally in the food equipment, and truck trailer, in particular, has been has been a really growth area for that.

[Philip Gibbs, analyst]

And then just on the overall demand environment, what are your customers telling you to expect in the new year here?

[Andrew Greiff, executive]

Yes. So I'd say the industrial OEM, when we -- towards the end of last year, the forecast were that they would have seen a down year, and their forecasts are accurate. We've seen certainly at the beginning of the year that the volumes are down, not horribly, but they're certainly down, but they had anticipated that they were going to be down.

On the specialty metals side, truck trailer, again, that's down a little bit, but not off significantly. Food equipment is actually starting to come back. So we're seeing some resurgence for our traditional customers. The [ appliance ] business has been pretty steady.

So as we think about growth, we think that first quarter growth is going to be pretty good compared to fourth quarter, probably up [ tonnage ] wise in the 10% to 12% range versus a pretty strong fourth quarter, relatively speaking, from what has been traditional. So we're seeing the start of the year be pretty good, and this is how we kind of see the year.

[Richard Marabito, executive]

And I think the item to really note, as Andrew talked about, a couple of the end industries where our customers have forecasted slightly softer volume, we're more than offsetting that with the new business. And a lot of that new business is what Andrew talked about a few minutes ago on the fabrication side.

So that's how we get to the -- around the 10%, 11%, 12% growth in the first quarter sequentially. We're onboarding a lot of new business.

[Andrew Greiff, executive]

A new product. I mean, our galvanized business really has taken off. And so we've done a focus on our tandem product. So cold-rolled and galvanized certainly have -- will accelerate this year.

[Philip Gibbs, analyst]

And then last question for me. So just thinking about the puts and takes, the, call it, the carbon sheet contract business, it seems like it should be lagging up. The spot piece feels like, obviously, it's been moving down. So you've got some pluses and minuses there. The LIFO, I would imagine, kind of neutralizes in Q1. Stainless feels like it's sort of stabilizing from a pricing standpoint. You got the volume growth. I don't think inflation at the margin is accelerating too much from here.

So how do we think about just the growth, I guess, LIFO or ex LIFO gross margins in the first quarter versus the fourth quarter?

[Richard Manson, executive]

Yes. Phil, it's Rich. And I think you kind of hit it spot on. You've kind of got things going in different directions with the contract and the spot business. I think what you'll see is, with the reset of index pricing higher on January 1, you typically come out of the gates a little stronger with gross margin, and you kind of see it fade as you go through the rest of the quarter.. I would add on the LIFO, keep in mind that LIFO is only on our pipe and tube segment, and we had a pretty substantial amount of LIFO income in the fourth quarter. They tend to lag index pricing by 3 to 6 months. And so we probably will see higher priced inventory coming in for pipe and tube in the first half of the year, which could actually lead to a little bit of LIFO expense over the first half.

[Operator]

Our next question is from the line of Dave Storms with Stonegate.

[David Joseph Storms, analyst]

Just to kind of follow up on one of Phil's earlier questions about CTB and your M&A outlook. Olympics is continuing to try to build the diversified business. Are there any segments of your business that you would like to see more diversified? And are there any thoughts of addressing that in the M&A market?

[Richard Marabito, executive]

Yes, Dave, this is Rick. So first, generally, our overall strategy through M&A as well as CapEx, we like all 3 of our business segments. So our intent is to grow all 3 of them. We've had -- probably until CTB, we had a little bit of a greater focused success rate in terms of specialty metals and carbon on the acquisition side, that's why we were thrilled really to add CTB to the mix. But strategically, we're looking to grow all 3 of them through a balanced approach on CapEx and acquisitions. I think, on the acquisition front, obviously, if you look at some of the recent acquisitions we've done, we really are gravitating towards those types of companies that really have a consistent return, high return companies that we can add a good amount of synergy to through our existing operations.

So I'd say we're taking a really balanced approach. And we'd like to grow all 3 segments through acquisition. And while we're doing that, we're going to continue to do what you saw us do, which is add stand-alone fabricating facilities adjacent to some of our metal fabricating facility. So we like that model as well.

[David Joseph Storms, analyst]

Very helpful. And then just more on an industry-wide level. What are you seeing in terms of inventory levels at the mills? And how do you factored this in when considering demand going into 2024?

[Andrew Greiff, executive]

This is Andrew. We've seen lead times from the mills, the -- from the carbon mills in particular, we've seen lead times come in a little bit. Hot-rolled today is, call it, in the 4 to 6-week time period. That's down, if you go back about 4 to 6 weeks ago, it was probably more in the 6-week period.

Same thing for tandem products. Stainless and aluminum has been very steady. So we're seeing the mills pretty consistent today with deliveries, probably on the shorter side.

[Operator]

[Operator Instructions] The next question is from the line of Chris Sakai with Singular Research.

[Joichi Sakai, analyst]

Just had a question on specialty metals and the stainless steel headwinds. Are we expecting to see those in 2024? Or are they going to be reduced?

[Andrew Greiff, executive]

Well, I think, Chris, what you've seen is nickel prices have hovered right in that [ 750 ] range. And so they -- historically, at least what we've seen in the last 2, 3 years are a little bit lower. But again, we're -- our inventory is appropriate. Our mill lead times are pretty good. The imports are certainly going to continue. And so I would say that we expect that '24 is going to be a really good -- will be a good growth year for specialty metals.

[Joichi Sakai, analyst]

Okay. And then can you comment on tube and pipe? What were the main drivers for the good quarter? And is that sustainable going forward?

[Richard Manson, executive]

Sure, Chris, it's Rich. And I think as we've talked throughout the year, that pipe and tubes continued focus on value-added work and the continuing of OEMs to outsource more work to us has been a huge factor in driving their gross margins above 30% consistently for the year. Additionally, the fourth quarter, you see an additional bump up from having CTB included in those results.

[Richard Marabito, executive]

We're really excited about. Keep in mind, as Rich said, and you saw in the earnings release, we acquired CTB in the fourth quarter. So our results actually had some acquisition-related costs. So we're excited for '24 to have the full year impact of CTB in the pipe and tube segment. So that's certainly a positive.

[Joichi Sakai, analyst]

Okay. Sounds good. And last one for me. For 2024, what sort of -- what can we generally expect as far as acquisitions are concerned or divestitures? Will it be a blend of that?

[Richard Marabito, executive]

Yes, Chris, this is Rick. Right now, we have really nothing that we're looking at on the divestiture side. Certainly, on the acquisition side, as we've commented, we've made 6 acquisitions in the last 5 years. That is definitely a piece of our strategy going forward. We're active in terms of marketplace, the entire M&A marketplace for metals really broadly due to the economic environment, the interest rate environment, the back half of last year seemed to slow a little. It seems like it's picking up a little bit, but that is a key piece of our strategy going forward. And we'll remain active, looking for the good fits that we've outlined.

[Operator]

Thank you. At this time, we have reached the end of our question-and-answer session. I'll turn the floor back to Rick Marabito for closing remarks.

[Richard Marabito, executive]

Thank you, operator, and thank you all for joining us on our call this morning. We appreciate your continued interest in Olympic Steel, and we look forward to speaking with you again next quarter. Thanks. Have a great day, everybody.

[Operator]

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.