Tree Island Steel Ltd

TSX:TSL

Earnings Call Transcript 2018-Q2

[Operator]

Good day, and welcome to the Tree Island Steel Second Quarter 2018 Financial Results Conference Call. Today's conference is being recorded.At this time, I'd like to turn the conference over to Mr. Ali Mahdavi, Investor Relations, Tree Island Steel Unlimited (sic) [ Tree Island Steel Ltd. ]. Please go ahead, sir.

[Ali Mahdavi]

Thank you. Good afternoon, everyone, and thanks for joining us for Tree Island's Second Quarter 2018 Financial Results Conference Call. Joining me this afternoon are Tree Island's President and Chief Executive Officer, Dale MacLean; and Chief Financial Officer, Nancy Davies. If you have not seen the news release, which was issued earlier 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 midnight on August 16. 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 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 Ltd. 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 day 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'll now turn the call over to Dale.

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

Thanks, Ali, and good afternoon, everyone. Thank you for joining us on today's call. The theme during the first quarter was about our visibility on the industry and pricing levels stabilizing and returning to a more historical margin environment. With continued focus in managing costs, the second quarter shaped up to be what we consider a balanced quarter with regards to margins with relatively solid performance when compared to recent quarters when the industry was under constant pricing pressures on a macro scale.Our commitment to cost management, increases in average selling prices, actions taken to date to mitigate the effects of the tariffs imposed and improved product mix were key factors to improve the profitability during the second quarter. Furthermore, and what is encouraging is our ability to maintain our profit margin momentum with margin growth outpacing our top line growth.In summary, the second quarter revenues amounted to $68.1 million, an increase of 10.8% over the same period last year, which was a direct result of the month-over-month increase in average selling prices. In the quarter, the volumes were lower when compared to last year on account of lower volumes and products impacted by the import tariffs as well as strategic actions taken to improve the products mix both of which resulted in reduction in sales of low-margin items.The ability to improve pricing during the period resulted with gross profit margins improving on a year-to-year basis. The combined result of these actions amounted to gross profit in the quarter to be higher than the prior period amounting to $8.5 million versus $5.9 million. Gross profit margin in the quarter was 12.5% compared to 9.7% in the same period last year.Our continued commitment to cost management resulted in lower SG&A expense and improved EBITDA for the quarter to $5.4 million compared to $2.4 million during the same period in 2017. In short, this was another respectable quarter for us. And while we are pleased with the results, we remain focused and cautiously optimistic. On a year-to-date basis, revenues increased to $134.6 million compared to $124.5 million during the same period in 2017. While gross profit totaled $15.2 million compared to $13.4 million, and EBITDA also increased by 35% to $8.9 million from $6.6 million during the 6-month period in 2017.Overall, during the second quarter as well as the first half of the year, despite certain challenges in the business environment, we were able to realize a higher gross profit than in the prior year by maintaining price discipline to pass on the rising inflationary raw material costs, to proactively manage our costs and the impacts of the tariffs with improved product mix to deliver higher profitability. Our pricing discipline remains a cornerstone of our strategy to optimize our gross margin while maintaining our wavering -- unwavering focus on quality and service excellence, all of which addresses the needs of our customer base.In the phase of the steel tariffs, we will continue to adapt to changes in our business environment to address the challenges imposed by the tariffs and rising steel costs for those products that are affected. With regards to the recent U.S. tariffs on steel wire and rod, the imposition of these tariffs are being charged through the end customers. Going forward, the implemented and potential trade actions on steel and other products will continue to create a moderate level of uncertainty and business challenges. We are monitoring the events closely and will continue to adapt to any necessary changes to help mitigate any negative impacts.With consistent product and service quality levels coupled with our economies of scale, we expect to continue to realize a profitable operating platform. With the first half of the year behind us, we are building on our year-over-year margin comparables. While we constantly monitor and see macroeconomic challenges, which may impact the various end markets we're 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 we manage those within our scope of control diligently and appropriately.We continue to see the majority of overall customer activity maintaining pace in the back half of the year, and 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 in our operations. As such, we are cautiously optimistic with the manner in which the year is shaping up for us. In summary, our future remains very exciting, and we look forward to continuing to build on our success in delivering value to all of our stakeholders.With that, I would like to ask Nancy Davies, our CFO, to take over and provide a review of the company's second quarter financials in greater detail. And we will then open the call for questions. Nancy?

[Nancy Davies, CFO & VP of Finance]

Thank you, Dale. Tree Island's second 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 various industries we serve, and accordingly, our operating results for interim periods are not necessarily indicative of the results that may be expected for the fiscal year.As noted, revenues for the second quarter were $68.1 million, an increase of $6.6 million, resulting from price increases implemented to offset the increase in raw material input costs. Volumes were lower in the quarter on account of our continued actions to improve product mix as well as the marginal decline in the demand in some product groups affected by the recently imposed Section 232 tariffs on certain Canadian steel products. As a result, our gross profit margin and gross profit realized in the quarter have improved despite the lower volumes. SG&A in the quarter was in line with prior year, the result being an EBITDA of $5.4 million in the quarter, and net income of $2.8 million for the quarter or $0.09 a share.With regards to the 6-month year-to-date, the combination of rising prices and actions to improve product mix and profitability resulted in revenue increasing by 8.1% and gross profit increasing by $1.8 million to $15.2 million. SG&A at cost again for the 6 months were in line with prior year. The result being an EBITDA of $8.9 million for the first half compared to $6.6 million last year, and net income of $3.9 million or $0.13 a share.With regards to our financial position year-over-year, our working capital assets remained consistent with a reduction in inventories offset by an increase in accounts receivables. Inventory decreased primarily on account of improving turnover of our inventory resulting in decreasing quantities of inventories on hand. Our cash flow from operations improved to $2 million on account of improved earnings. In the quarter, we incurred additional capital expenditures related to the payment of a deposit for a new mesh machine, which we are installing in our U.S. operations in the third quarter and commissioning in the fourth quarter.In this quarter, the company renewed its senior credit facility for another 5 years on more favorable terms. The renewed credit facility has been increased to $80 million, comprised of a $60 million revolving loan and $20 million of term loan financing for existing machinery and equipment and future capital expenditures. The existing term debt of $10 million was rolled into a new term debt facility with another $10 million available to finance future capital expenditures. The facility is secured by a first charge over Tree Island's assets supported by guarantees and pledges and requires that certain covenants be met by Tree Island. In the quarter as well, the company repurchased 278,300 shares under its NCIB program at an average price of $2.70 per share. This now concludes our formal commentary, and we would be happy to respond to any questions that you may have.

[Operator]

[Operator Instructions] And we'll take our first question from David Quezada from Raymond James.

[David Quezada, Equity Analyst]

My first question here is just on the dynamics with pricing as you pass through the tariff costs. I'm wondering how customers -- if you can provide any color on how the market is reacting to that, and whether or not your competitors seem to be doing a similar thing.

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

Thanks, David. I mean, in general, I have a couple of things that I would comment on the whole Q3, 2 trade matter. One, we certainly understood that the imposition of import tariffs by the United States on June 1 was a possible scenario, and we took all reasonable steps to plan for this contingency. Well, there still remains a lot of variables out there. We don't think this is fully played out yet. We certainly expected a moderate level of uncertainty for the products affected. What I can tell you is, I'm saying those products affected, so I can make it clear that not all products for Tree Island are affected. So let's start in the U.S., for those imports that we have moved into the import from international countries that were affected, there has been 100% transfer and acceptance of the 25% tariffs that were put in place on June 1 of this year. A little bit more mixed reaction for the products that we're moving out of the Canadian domestic market into the United States. And again, that's really applied to all bright, galvanized wire imported into the U.S. from Tree Island Canadian facilities and does not apply to finished goods. Why I say there's variables involved there, there's going to be some trade-offs. Right now, we've seen the majority of our customers have accepted the tariffs. There are those customers that are going to draw down inventories. Some will look for alternative supply that, that is a reality that we are faced with. We're also seeing a change in behavior, where our customers are looking at smaller, more frequent order sizes. And the fact is really that we are still learning but your specific question on the competition, yes, the competition is passing it through as well. So -- I mean, we're keeping very close to the situation. We did expect that we would see some attrition in our tonnage, which we have, going into the U.S., and we continue to, also at the same time, balance our workforce to any change in production demands.

[David Quezada, Equity Analyst]

And then just on the volume and product mix, to the extent you're able to, could you just comment on how you expect those things to continue to trend into 2Q? Is it reasonable to assume the vector will [Audio Gap] volumes but also continued improvement in product mix?

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

So on the product mix side, we've been executing this strategy, commencing right at the start of the year. And essentially, it primarily was targeted at our residential business unit, most specifically in our faster business in the United States. And it's proven to be very successful from a profitability standpoint. Again, there were certain SKUs that we had and look to rationalizing due to low margins. So while we have reduced our production, we've significantly improved the overall profitability of the residential business, as I call it, in the U.S. operation. And we expect that to continue along the strategic path that we've set forward. So we may not have the same strength in volumes that we experienced in the past couple of years, but we're certainly going to see improved profitability overall and that's on a per ton and on an overall business unit perspective.

[David Quezada, Equity Analyst]

Okay, great. That's helpful. Just my last question, the new mesh machine that you have on the way, can you just remind us what kind of volume does that machine is expected to produce?

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

So we've got a -- it's a new ATT machine, it's produced by EVG. It's coming into the ports actually next week. So it should be landed by August 6. We're going to commence the commissioning of that equipment in October of this year and all the prework has already been established. So when you're looking at the pits that have been created for it, for optimizing the handling of the equipment, that's all in place. All the structural improvements have already been put in place. All the electrical improvements have already been put in place. So we're excited about bringing this on. This will give us pretty much an incremental capacity of 30,000 tons of mesh in our U.S. operation in Etiwanda, California.

[Operator]

And there are no further questions. I'd like to turn it back over to Ali Mahdavi.

[Ali Mahdavi]

Thanks, operator. Again, on behalf of the Tree Island team, we'd like to thank you for joining us this afternoon. We look forward to speaking with you again when we report our third quarter results in the fall. And this concludes today's call. Have a great afternoon.

[Operator]

Thank you for your participation. You may now disconnect.