Tree Island Steel Ltd

TSX:TSL

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the Tree Island Steel Third Quarter 2018 Financial Results Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Ali Mahdavi, Investor Relations. Please go ahead.

[Ali Mahdavi]

Thank you. Good afternoon, everyone, and thanks for joining us for Tree Island's Third Quarter 2018 Financial Results Conference Call. Joining us this afternoon are Tree Island's President and CEO, Dale MacLean; and CFO, Nancy Davies. If you've 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 November 16, 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 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 participants 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 and the management's discussion and analysis as these outline 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'd like to now 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 during the third quarter of 2018 as well as what we are seeing in the markets and then turn the call over to Nancy Davies for a review of the financials, and we will then open the call to your questions.The third quarter and year-to-date financial results strengthened despite ongoing challenges resulting from the U.S. imposition of tariffs on imported steel wire products. Improved average product selling prices and our strategic shift to higher margin products, which are less susceptible to trade impacts and market competition, were key factors in our ability to respond successfully. We also took the necessary steps to realign our production levels to be in line with softer demand in the third quarter, impacting certain Canadian staffing levels in our production facilities, primarily in Richmond, British Columbia. The imposition of Section 232 tariffs by the United States government resulted in a change in customer purchasing behavior, which primarily impacted our industrial product sales. The decline in revenues in this market segment was offset though by higher average selling prices and improved sales in other segments. Q3 2018 revenue amounted to $55.8 million, which was in line with the same period last year.Gross profit earned during the quarter was $6.9 million compared to $2.3 million in the same period last year, an increase of 201%. The company's continued focus on cost management coupled with improved average selling prices and adjustments made to production levels along with the improved product mix were key factors.Gross profit margin in the quarter was 12.4% compared to 4.1% in the same period in 2017. EBITDA for the quarter was $3.4 million compared to a loss of $1.5 million during the same period last year. On a year-to-date basis, total revenues of $190.4 million was 5.7% higher in the same period last year on account of improved average selling prices in relation to cost of raw materials. In combination with our commitment on cost management, gross profit earned for 2018 year-to-date amounted to $22.1 million, and the gross profit margin was 11.6% compared to the gross profit earned in the corresponding period last year of $15.7 million, with a gross profit margin of 8.7%.EBITDA during the 9-month period of 2018 amounted to $12.3 million, which was 142% more in the same period last year. Overall, during the third quarter as well as year-to-date, 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 cost to proactively manage our costs and impacts of the tariffs and also improve product mix to deliver higher profitability.Despite the industry-wide pricing environment of late, our pricing discipline remains the cornerstone of our strategy to optimize our gross margin, while maintaining our unwavering focus on quality and service excellence, all of which addresses the needs of our growing customer base. Other than a portion of certain sales into the U.S., overall demand in Tree Island's end markets remained stable in the face of the steel tariffs, and we will continue to adapt to changes in our business environment to address the challenges imposed by those tariffs and rising costs as necessary.Certain products produced in Canada and sold to U.S. customers are impacted by the Section 232 tariffs, principally bright and galvanized wire in our industrial market segment. Tree Island is passing through the Section 232 tariff on sales of impacted products to U.S. customers. The resulting demand levels from some of these U.S. customers for these items have been impacted. Tree Island has taken operational actions to adjust our production levels to align with current demands. These actions counterbalanced the decrease in sales volume, allowing Tree Island to maintain a sustained 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. Our end users of the markets we serve are price sensitive, but they also value service, product quality and reliability. We work hard on meeting the expectations of our customers, and that is the reason for our company-wide focus and emphasis on customer satisfaction. This is embedded into Tree Island's culture.While we constantly monitor and see macro-economic 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 and geopolitical challenges, we will continue to work hard and ensure we manage those within our scope of control, diligently and appropriately.In summary, our future continues to remain very exciting, 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 a review of the company's third quarter financials in a little greater detail, and we'll then open it up for questions. Nancy?

[Nancy Davies, CFO & VP of Finance]

Thank you, Dale. Tree Island's third quarter 2018 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 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. Revenues for the second -- for the quarter were 58 -- $55.8 million, in line with prior year as a result of higher average selling prices over the prior year, offset by lower volumes, primarily in the residential market on account of actions taken to improve product mix and lower demand from U.S. customers and industrial markets due to the steel import tariffs. As a result, gross profit for the 3 months amounted to $6.9 million versus $2.3 million during the same period in 2017. The increase in gross profit is primarily the result of that improved profitability and product mix. SG&A expenses are higher than the prior year on account of higher consultation and legal expenses incurred relating to trade actions and higher compensation expenses. The result being an EBITDA of $3.4 million in the quarter and net income of $1 million for -- on the quarter or $0.03 a share. The increase in EBITDA is primarily the results of improved product mix and the improved profitability on price increases.With regards to the 9-month year-to-date, the combination of rising prices and actions to improve product mix and profitability resulted in revenue increasing by 5.7% to $190 million and gross profit increasing by $6.4 million to $22.1 million. SG&A costs are in line with the prior year. The result being an EBITDA of $12.3 million compared to $5.1 million last year and net income of $4.9 million or $0.17 a share.With regards to our financial position, year-over-year our inventory values have increased on account of the rising steel cost and comparably higher levels of raw materials inventories than in the comparable period. As a result, our cash flow from operations declined on account of increasing raw materials. Raw material inventories will be consumed in the production throughout the coming months. Also in the quarter, we advanced $3.9 million under our CapEx term debt facility to finance capital expenditures incurred. In the quarter, the company renewed its normal course issuer bid, and in the coming year can repurchase up to 1.46 million shares. In fiscal 2018 to date, the company has repurchased 382,769 shares at an average price of $2.74 per share.This now concludes our formal commentary, and we'd be happy to respond to any questions that you may have.

[Operator]

[Operator Instructions] And our first question comes from David Quezada with Raymond James.

[David Quezada, Equity Analyst]

My first question is just on the topic of the steel tariffs and the trend in your sales volumes. I know last quarter it was a little bit too soon to tell what the ultimate impact would be. Do you think you've seen kind of a new normal reflecting that issue during this quarter? Or is it still kind of up in the air as it relates to where your customers will shake out on this?

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

Yes, I would say our -- thanks, David. I would say that as we came a little bit further through the third quarter we're starting to see what that experience would be and not expecting anything to be greater than what it's been so far.

[David Quezada, Equity Analyst]

Okay. Okay, great. And then, I think when we spoke last quarter you were getting ready to take delivery of a new steel mesh machine. Just wondering where we are with that and if that's -- what the timing is for installation there?

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

Great question. We're actually down here in California right now. We were just looking at some of the commissioning of the operation of the new equipment. So yes, it's pretty exciting for us.

[David Quezada, Equity Analyst]

And I believe that was 30,000 tons annually, the shipments for that machinery? Are you able to provide any commentary on what the ramp-up for a machine like that would typically be?

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

No, right now, depending again on the gauge that goes through it, approximately a 30,000-ton incremental capacity we'll bring to the market down here in the U.S. But I wouldn't want to project any run rate for the equipment at this time.

[David Quezada, Equity Analyst]

Okay. Okay, no problem. And then, I guess, maybe just last question for me on the improved sales prices that you saw in the quarter. Are you able to just maybe provide some qualitative commentary on what proportion of that would have been price hikes that you were passing through in response to higher raw material cost and what proportion was more related to improved product mix?

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

No, I wouldn't break it out necessarily into the detail only other than to say, when you look at what we had put into the market right from Q1 of this year, we came out with price increases. We were very clear in what we were going to do with our residential market, which we have done, to ensure that the products are all going to be profitable. So we'll continue and move forward with price discipline across the board, so not just residential but across all product lines. Our ability to pass through any of the impact from the 232 tariffs, everything that we are moving that is impacted, that we're getting sales from going into the U.S. today, whether it's a product coming from offshore or from Canada into the U.S., we're passing through the 25% tariff.

[Operator]

And that concludes today's question-and-answer session. Ali Mahdavi, at this time, I will turn the conference back over to you for any additional or closing remarks.

[Ali Mahdavi]

Thank you. On behalf of the Tree Island team, thank you again for participating on today's call, and we look forward to speaking to you again in the new year when we report our full year 2018 financial results. This concludes today's call. Have a great weekend.

[Operator]

This concludes today's call. Thanks for your participation. You may now disconnect.