Tree Island Steel Ltd

TSX:TSL

Earnings Call Transcript 2018-Q1

[Operator]

Good day, and welcome to the Tree Island Steel First Quarter 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to [ Fran Babineaux ]. Please go ahead.

[Unknown Executive]

Thanks, Melissa. Good afternoon, everyone, and thanks for joining us for Tree Island's full year and first quarter 2018 conference call. Joining us -- sorry, it's the first quarter 2018 conference call. Joining us this afternoon are Tree Island's President and CEO, Dale MacLean; and CFO, Nancy Davies.If you have not seen the news release which was issued earlier today, it is available on the company's website at www.treeisland.com as well as on SEDAR along with our MD&A and interim financial statements. I would also like to remind you that a replay of this call will be accessible until midnight on May 17, 2018. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to join the queue for question.Before we begin, we are required to provide the following statements regarding forward-looking information, which is made on behalf of Tree Island Steel Ltd. and all of its representatives on this call. Remarks and questions to your -- answers to your questions today may contain forward-looking information about future events or the company's future performance. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. Any information regarding forward-looking statements that is made as of the date of this call and the company does not undertake to update any forward-looking statement. Please read the forward-looking statements and risk factors in the management's discussion and analysis as these outline the material factors, which could cause or would cause actual results to differ.The company will not provide guidance regarding future earnings during today's call, and management does not anticipate providing guidance in future quarterly or interim communication with investors.I'll now turn the call over to Dale MacLean.

[Dale R. MacLean, President, CEO & Non]

Thanks, [ Fran ], and good afternoon, everyone. Thank you for joining us on today's call. This afternoon, I will review and discuss our performance during the first quarter of 2018 as well as what we are seeing in the markets, and then turn the call over to our CFO, Nancy Davies, for a review of the financials. And we will then open the call to your questions.Let me begin with the cautiously positive tone on the heels of what proved to be a challenging 2017. As you will recall, last year was a tough year for our industry as we weathered the macroeconomic pressures bestowed upon us, driven by the consistent escalation of raw material costs throughout the year and the resulting lag to pass these costs through proportionately and steadily into our end markets. As communicated during our fourth quarter and year-end reporting, we were very clear that we were more encouraged that this trend would moderately correct itself as we enter 2018 and steadily improve as we roll forward.Despite Q1 being one of our seasonally softer quarters, as anticipated, we saw being less impacted by external factors, which have been placing pressure on what results during the past number of quarters.While our overall financial results in Q1 2018 do not track as strong as Q1 2017, the welcome news is that we experienced a reversal of the margin compression trends that we consistently faced throughout 2017, realizing improving margins on a month-over-month basis for January, February and March 2018. In short, this trend is now moving in a positive direction. In other words, in our favor, as can be evidenced by our comparative gross profit per ton metrics, where we essentially equaled last year results in Q1 2018 at $145 a ton versus Q1 2017 at $146 a ton.As a result, and as reported earlier today, in Q1, we remained focused and resolved in areas of price leadership, maintaining and enhancing customer relationships and continue to look for areas where we can grow sales, while leveraging our brand quality and service to maximize profitability.During the quarter, a series of market price increases were introduced to offset the increase of raw material prices experienced by the industry. Revenues earned in the first quarter of 2018 amounted to $66.5 million, an increase of 5.5% over the same period last year, which was a direct result of the price increases introduced.In the quarter, the volumes were lower than in Q1 2017 on account of strategic actions to improve the product mix and reduce sales of low-margin items as well as experience some adverse weather conditions that impacted our key end construction markets.As noted earlier, the ability to improve pricing gained momentum as the quarter progressed, with gross profit margin steadily improving month-over-month in the quarter. The combined results of these actions coupled with continued pressure from rising steel costs, our aggregate gross profit for the 3 months was lower than the prior period, amounting to $6.7 million versus $7.5 million.Gross profit margin in the quarter was 10.1% compared to 11.9% in the same period last year.EBITDA for the quarter amounted to $3.5 million compared to $4.2 million during the same period in 2017.As we look forward in 2018, we anticipate a continuation of rising steel cost, which we will counteract with equivalent price increases to maintain profitability margins.On a year-over-year basis, all of our key end markets contributed to the 5.5% revenue growth. Our focus continues to be on the big picture and the long-term sustainable growth and profitability.During the quarter, we continued to make and execute on decisions towards this goal, but also to position ourselves in a market that requires participants to quickly adapt to changing market conditions.The end users of markets we serve are always price sensitive, but they also value service, product quality and reliability.We continue to work harder in meeting the expectations of our customers. The customer-centric approach is ingrained throughout our company from our sales force to our customer service representatives to our operations staff.Our performance during the past number of quarters has validated the fundamental strength of our business model, which has been able to weather and withstand an industry-wide challenging environment.This is the direct result of our ongoing efforts to continuously strengthen our business to withstand short-term pressures with the ability to protect margins to a certain extent, which, in turn, has us extremely well positioned for more robust market activity.We are hopeful that we could be entering a better economic cycle in 2018, which will highlight the strength and levers in the business model once again.With the first quarter behind us, we are encouraged by the recent improving market trends for our products and pricing, as this momentum continues into our second quarter. We will continue to take queues from the market and adapt our strategy as appropriate to remain in the forefront of the market. While we constantly monitor and see macroeconomic challenges which may impact the various end markets we are involved in, we also see many counterbalancing opportunities resulting from the consistent execution of our strategies.Although we cannot control potential macro challenges, we will continue to work hard in ensuring that we manage those within our scope to control diligently and appropriately.We continue to see demand in overall customer activity improving as we work through the year, based on what we have seen so far. We will continue to aggressively pursue new business development initiatives in existing and new end markets with a focus on product mix to generate the maximum return on our operations, again with profitable growth and margin expansion as the cornerstones of these initiatives.In summary, as always, we remain confident in our future, and we look forward to continuing to build on our success and delivering value to all of our stakeholders.With that, I would like to ask Nancy Davies, our CFO, to take over and provide the review of the company's first quarter financials in greater detail. And then we will open up the call for questions. Nancy?

[Nancy Davies, CFO & VP of Finance]

Thank you, Dale. Tree Island's first quarter 2018 results were issued earlier today. Our results are presented in accordance with International Financial Reporting Standards and presented in Canadian dollars unless otherwise noted. Please note, our operations are impacted by the seasonal nature of the various industries we serve, and accordingly, our operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.Revenues for the quarter were $66.5 million, an increase of $3.5 million, resulting from price increases implemented to offset the increase in raw material input costs, offset by lower volumes from a combination of targeted actions to improve product mix and the impact of adverse weather condition.As mentioned by Dale, our gross profit margins have improved but the lower volumes resulted in lower overall gross profit in total.SG&A for the quarter was in line with prior year. The result being an EBITDA of $3.5 million in the quarter and net income of $1.1 million for the quarter or $0.04 per share.With regards to our financial position year-over-year, our working capital account balances decreased by $9 million, primarily on account of improving the turnover of inventory, resulting in decreasing quantities of inventories on hand.Our cash flow from operations improved $2.3 million on account of improving turnover of inventories. The cash flow from operations was used in part for maintenance capital.Given the seasonal nature of our business, the accounts receivable balances in the quarter increased from the fourth quarter of 2017 by $10 million on account of seasonal customer demand, particularly in agricultural and construction markets.In the quarter, the company repurchased 115,800 shares at an average price of $2.40 per share.This now concludes our formal commentary. We'd be happy to respond to any questions that you may have. Thank you.

[Operator]

[Operator Instructions] And our first question will come from Devin Schilling with PI Financial.

[Devin Schilling, Industrials Analyst]

Nice margin improvement this quarter. Should we expect to see lower volumes for the remainder of the year here, kind of in an attempt to optimize the product mix in order to sustain these margin improvements?

[Dale R. MacLean, President, CEO & Non]

I think that's a, Devin, fair question. I think what clearly we are signaling is we are prepared to offset and counterbalance volume against going after market share. We are steadily focusing only on profitable business and those customers that are going to work with us to pay for the value of the quality and the quality of our services and the goods that we're taking to the market. I really can't give you any significant color in terms of really how the volumes are going to shake out going into Q2, 3 and 4, other than, again, what we are seeing is confidence that still remains in the marketplace. And when you reflect back even to 2017 -- 2016, I mean, this whole story really has never been about the volume, it's really been about the margin compression in the last 18 months. And we're really pleased. And I'd say, early indications of encouragement that we are starting to see the reversal of those trends and that they can be sustainable and that trend continue to be sustainable going into the future.

[Devin Schilling, Industrials Analyst]

Okay. Great. Just second question here. Kind of looking at it as just SG&A here this quarter, it was up a little bit from Q3 and Q4. Should we kind of look at this as a run rate for the rest of the year here? Or how should we kind of look at this going forward?

[Dale R. MacLean, President, CEO & Non]

I understand. I know we've talked about this coming into the meeting, and I would say that's a reasonable expectation.

[Operator]

That does conclude our question-and-answer session for this time. I will now turn the conference back over to [ Fran Babineaux ] for closing remarks.

[Unknown Executive]

Thank you. On behalf of the Tree Island team, I would like to once again thank you for joining us this afternoon. We look forward to speaking with you again when we report our second quarter 2018 results. This concludes today's call.

[Operator]

And once again, that does conclude our conference for today. Thank you for your participation.