Tree Island Steel Ltd

TSX:TSL

Earnings Call Transcript 2019-Q1

[Operator]

Good day, and welcome to the Tree Island Steel's First Quarter 2019 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Mr. Ali Mahdavi, Investor Relations. Please go ahead, sir.

[Ali Mahdavi, Head of Investor Relations]

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Tree Island's First Quarter 2019 Financial Results Conference Call. Joining me 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 at the close of markets today, it is available on the company's website at treeisland.com as well as on SEDAR along with our MD&A and financial statements. I would also like to remind you that a replay of this call will be accessible until May 16. Following the call, we will conduct the Q&A session. Instructions will be provided at that time for you to join the queue for questions.Before we begin, we are required to provide the following statements regarding forward-looking information, which is made on behalf of Tree Island Steel Limited and all of its representatives on this call. Remarks and 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 is made as of the date of this call, and the company does not undertake to update any forward-looking statements. Please read the forward-looking statements and risk factors in the MD&A 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 communications with investors.I would like to turn the call over to Dale MacLean. Dale?

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

Thanks, Ali, and good afternoon, everyone. Thank you for joining us on today's call. Our agenda this afternoon will be straightforward. I'll review and discuss our performance in Q1 and then focus on what we're seeing in the markets, especially from a competitive and pricing perspective. I'll then turn the call over to Nancy Davies, our CFO, for a review of the financials. And then we'll open up the call to your questions.As you may recall, while 2018 in many respects was a rebound year, it was also challenging in a number of ways, where we faced with trade matters beyond our control and ongoing competitive pricing pressures from low-cost products by foreign manufacturers.Looking at our Q1 results, it is clear that these pressures were further highlighted in the early innings of the current year with the continued negative impact of the U.S. Section 232 tariffs, which came into effect in the back half of last year. And perhaps more unique in 2019, the inclement winter weather conditions that were experienced across North America, which both adversely impacted our performance in both Canada and United States. Despite these headwinds, based on the strong foundation we have built over the years and our disciplined approach towards pricing and cost controls, now we've remained profitable.In summary, due to the factors I just mentioned, revenues were lower in Q1, generating $52.9 million compared to $66.5 million in the same period last year and is mostly attributable to lower sales volume to our U.S.-based customers. The increase in cost to our U.S. customers resulting from the aforementioned steel imported tariffs continue to limit demand for industrial product offerings and has also added some further stress to our residential business.In addition, strategic actions taken to improve the product mix by way of reduction in sales of low-margin items combined with unseasonably adverse weather conditions across North America also dampened the sales in the residential construction business. Despite the higher average selling prices and the lower sales demand and lower production volumes, this resulted in $4.7 million in gross profit for the quarter compared to $6.7 million in the same period in 2018.The resulting gross profit margin for the quarter was 9% compared to 10.1% in the same period last year. EBITDA in Q1 2019 amounted to $1.8 million compared to $3.5 million in the previous year. Our focus on products, pricing, profitable product mix and emphasis on maintaining tight cost control contributed to Tree Island's profitability in the quarter, albeit at levels below where we wanted and expected them to be. However, in the realities of this market, we remain steadfast to our commitments to improve operational efficiencies, rationalize low-margin products, maintain pricing discipline and continue to leverage our competitive advantages.In certain periods, market conditions are more favorable and cooperative, thus providing a robust foundation for continued growth while other periods such as Q1 demonstrated an environment of volatility based on the factors I have already discussed. Given that such circumstances are cyclical in nature, a return to a more normalized business environment is expected as pricing to end markets continues to remain strengthened, thereby setting Tree Island up for a returns to sustainable and attractive margins when measured over the longer term.We will continue to take all measures to protect and further strengthen our business to withstand market pressures and the cyclicality with the ability to optimize margins as best as possible, which in turn has us well-positioned for improving market conditions and growth.Overall, given the macro backdrop, I'm pleased with our ability to manage these challenges and remain EBITDA positive in a tough quarter, which speaks to the resilience of our business model. We remain encouraged about the prospects for Tree Island with demand in our key end markets showing promise as we enter our seasonally busier periods Q2 and Q3.As always, we remain confident in our future and the fundamentals of our business. And we look forward to continuing to build on our success in delivering value to all of our stakeholders. In 2019, we'll push hard against the macro industry-wide pressures, and we'll remain committed to long-term growth and profitability.With that, I'd like to ask Nancy Davies, our CFO, to take over and provide a review of the company's first quarter financials in greater detail. And then we'll open up to your questions. Nancy?

[Nancy Davies, CFO & VP of Finance]

Thank you, Dale. Tree Island's first quarter 2019 results were released 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 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.As noted, revenues for the quarter were $52.9 million, 20% lower than last year and, as Dale mentioned, on account of a combination of Section 232 tariffs impact and adverse weather conditions, both impacting sales volumes. As a result, gross profit for the 3 months amounted to $4.7 million versus $6.7 million during the same period. The decrease is a result of lower sales volumes, as noted earlier.SG&A expenses were 2.5% lower than in the prior year on account of reductions in costs, the results being an EBITDA of $1.8 million in the quarter and a net loss of $1 million for the quarter or $0.04 a share.During the quarter, we adopted the new lease accounting standards, which is discussed in more details in Note 3 of the financial statements. The change in accounting for leases resulted in recognizing a right-of-use assets of $32 million and a lease liability of $33.5 million.With regards to our financial position, year-over-year our inventory value increased by $11 million on account of higher unit cost of our raw materials. Since the fourth quarter though in 2018, we have decreased our inventories by over $14 million to better align the inventories with our current sales volumes. As a result, the amount of senior credit facility is higher year-over-year but is quarter-on-quarter the amount drawn on the facility is in line. The existing inventories will be consumed in production and sales throughout the coming months.Finally, in the quarter, the company has purchased 44,895 shares at an average price of $2.14 per share under our NCIB.We would now be happy to respond to any questions that you may have. Thank you, operator, if you could hand it over to for questions?

[Operator]

[Operator Instructions] And we'll take a question for Mr. David Quezada with Raymond James.

[David Quezada, Equity Analyst]

My first question here just on the Section 232 tariff. Could you give any more color on kind of how it affected your business in the U.S.? And if possible, remind us what the hit to volumes was -- or sorry, what proportion of your volumes are exposed to it?

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

Yes. Thanks, David. Appreciate the call. I won't get into the details of exact volumes, but when you take a look at our report, you'll see pretty clearly. We do provide the split out of the business in revenue Canada and United States. And you'll see that the numbers that are down there, Q1 2019 versus Q1 2018, I'll just say overall, the country is almost $14 million. So that'll give you a sense on that particular file. The other area -- because we talked about the industrial business. You look at some of the residential where there are some raw materials that we're bringing in from offshore or actually where we're vertically integrated and bringing them down to the U.S. on the galvanized wire side where the tariffs would apply. So not all that business is lost by the way or at risk. The other thing to keep in mind is the 232 tariffs apply proportionally to a certain amount of the business moving out of Canada to the U.S., not finished goods, although there is no question that we share the level of disappointment where these tariffs have actually carried over into 2019. I think in terms of the counterbalance what's important for us to communicate as well when we were first faced with, in particular the 232 tariffs, in the second half of last year, I know you'll recall that we took pretty immediate action. And that's for us in terms of managing our costs to bring the costs more in line with the -- what I will share with you is we've again taken more action coming at the end of Q1. We've already taken these actions to rebalance our direct, indirect costs and SG&A that you're going to see going into Q2, Q3 and beyond for the rest of 2019.

[David Quezada, Equity Analyst]

Okay. Great. That's helpful color. And then maybe just a follow-up on the issue overall. I understand that the Canadian Minister of Foreign Affairs is trying to remove the Section 232 tariffs prior to ratifying NAFTA, which I understand could happen in June or if not in June potentially later in the year. Is that kind of how you see the situation playing out?

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

You're asking a $1 million question. I think there's certainly -- he has a very strong impetus that the Government of Canada -- Mr. Freeland (sic) [ Ms. Freeland ] -- as you know, we participated in the steel consultation process where she was a guest, and we were her guest, and it was held at the Tree Island last year. She has been a very strong advocate and leader to see the removal of these 232 tariffs and, I would say, as quickly as possible. I don't have though that crystal ball to provide anything definitive as to when. I do share the opinion though that there will be a point in time where a responsible solution will be found and put into place. I mean I think the trading partners, the United States and Canada and Mexico, are just far too important.

[David Quezada, Equity Analyst]

That's fair enough. That makes sense. Just one more question here. Just to confirm, your capacity in Etiwanda. I think that's where the new mesh machine went. Is that still 117,000 tons? Or would that be higher now with the commissioning of that machine?

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

With some of the things that we've taken out and put in, keep in mind that, that capacity is actually measured on the wire-draw capacity. What I will share with you though is by putting in the brand-new equipment, which has now just been commissioned, is that provides us with 22,000 incremental tons of available capacity in the mesh business to allow us to grow very much in alignment with the strategy that we are employing, import-resistant products, agricultural and higher-margin products.

[Operator]

And there are no further questions in the queue. I'll turn it back over to Mr. Mahdavi.

[Ali Mahdavi, Head of Investor Relations]

Thank you, operator. On behalf of the Tree Island team, I would like to, once again, thank you for joining us this afternoon. And we look forward to speaking with you again during our second quarter 2019 results conference call. Have a great day. This concludes today's call. Operator?

[Operator]

And that concludes today's conference call. We do thank you for joining.