Tree Island Steel Ltd

TSX:TSL

Earnings Call Transcript 2017-Q4

[Operator]

Good day, and welcome to the Tree Island Steel Fourth Quarter and Full Year 2017 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call to [ Fran Babineaux ]. Please go ahead.

[Unknown Executive]

Thank you. Good afternoon, everyone, and thank you for joining us for Tree Island's Full Year and Fourth Quarter 2017 Financial Results 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 financial statements.I would also like to remind you that a replay of this call will be accessible until midnight, March 8, 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 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 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 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 communications with investors.I'll now turn the call over to Dale MacLean.

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

Thanks, [ Fran ], and good afternoon, everyone, and thank you for joining us on today's call. Our agenda this afternoon will be straightforward. I'll review and discuss our performance in 2017 and then focus on the fourth quarter and what we are 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 we will then open the call to your questions.As most of you are aware, the 2017 year was very challenging for the wire and wire products industry due to continued competitive pricing and rising input cost, resulting in margin pressure impacting key profitability metrics. These market pressures, which are typically cyclical in nature, are tough to withstand if one is not prepared for them.Over the past number of years, while our focus was on profitable growth, we also relentlessly committed ourselves to building a fundamentally strong and sound business model, which can withstand macro and other external market pressures. With the market pressures bestowed upon us and the overall industry, I'm pleased with our ability to navigate through these challenging times while showing modest growth in volumes and revenues on a full year-over-year basis.As a reminder, with raw materials making up approximately 70% of our cost of goods sold, any material change in the price of raw materials has the potential to have significant influence on our financial performance. 2017 was a year in which the price of rod increased constantly while during the same period, the price of zinc experienced rapid price increases in the latter part of the year. In the downstream end of the market, the change in price levels was atypical of the change in raw material prices.A significant focus for us in 2017 was to proactively manage our prices to align them with the increases in raw material costs. Our ability to optimize margins also stems from the continued efforts across our operations to be as efficient as possible while keeping a close eye on cost containment at all times.However, despite all of efforts, price adjustments in the end markets we served constantly lagged in the increase in raw material prices in 2017, which negatively impacted margins and overall profitability. Despite our size, scale and market leadership position, at times, our ability to influence the upstream and downstream markets is somewhat limited.In certain years, market conditions are more favorable and cooperative, thus providing a robust foundation for continued growth. While other periods, such as 2017, proved to be particularly challenging within an environment of continuous margin compression across the industry.Given that such circumstances are cyclical in nature, return to more normalized margins is expected as input costs moderate and pricing to end markets continues, thereby reversing the margin compression trends experienced last year. As a company, even when faced with unfavorable market conditions, we constantly strive to further strengthen our operations and efficiency levels in order to optimize our performance and maximize on growth and profits.In 2017, using the strong relationships we've established with our customers over the years, along with our reputation for providing high-quality products and excellent customer service, operational excellence, we increased the volume of our sales resulting in a 3% increase in volumes to 180,485 tons. 1.5 increase in revenues to $243.7 million and our key profitability metrics, being gross margin and EBITDA, being negatively impacted due to the aforementioned comments around pricing, our gross margin and EBITDA declined to $18.2 million and to $7 million, respectively.Turning your attention to the more recent fourth quarter results. On a normalized basis, we continue to see this trend of lower gross profits and EBITDA carry itself into the fourth quarter. However, with stronger sales volume resulting in our volume increasing by 13.5% to 40,642 tons, revenues increasing almost 19% to $54.6 million. And as a result, gross profit was lower by 53% at $2.4 million while EBITDA increased by 87.5% to $1.9 million.While I continue to be cautious in our view relating to events that we can't control, through the disciplined pricing resolve that we have demonstrated, we're encouraged with the early signs in 2018. The dial is now moving in the right direction on price increases as we shift to a trend of moderately improving margins versus the rapid margin compression we experienced a year ago.As a company, we continue to demonstrate our ability to change and adapt to both robust and challenging market and competitive conditions. And we will always be actively pursuing strategies to improve our business model and create shareholder value. In fact, it is important to note that over the past quarters, we have continued to take all measures to further strengthen our business to withstand market pressures with the ability to protect 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 through the challenges in 2017. We remain encouraged about the prospects for Tree Island with demand in our key end markets showing resilience as we continue to experience more growth opportunities. 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 2018, we will remain committed to long-term growth and profitability, being the supplier of choice to our customers and a company which we can collectively be proud of on an ongoing basis. These objectives can only be achieved through the continued support of our customers, suppliers, shareholders and the hard work and dedication of our valued employees.With that, I would like to ask Nancy Davies, our CFO, to take over and provide a review of the company's full year and fourth quarter financials in greater detail. We'll then open up the call for questions. Nancy?

[Nancy Davies, VP of Finance & CFO]

Thank you, Dale. Tree Island's fourth quarter and full year 2017 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.Revenues for fourth quarter 2017 were $54.6 million, an increase of $8.6 million, resulting from the combination of higher volumes and price increases implemented to offset increases in raw material input costs. For the full year, our revenues were $234.7 million versus $231.2 million in 2016.Excluding from the comparison the Stainless product lines that were disposed of in the third quarter of 2016, our revenues for the year were higher by $17.5 million or 8% on account of price increases implemented to counteract the rise in raw material costs and also higher volumes. As well, excluding the Stainless product lines, revenue from the year improved across all of our geographies and all of our market segments.As mentioned by Dale, our gross profit margins have been impacted all year by rising raw material input costs, compressing the spread between our selling prices and raw material input costs. The compression was most acutely felt in the third quarter of 2017.In this fourth quarter, we've seen the trend begin to reverse with the gross profit margin improving quarter-over-quarter despite that the fourth quarter tends to be our weakest quarter by volume and product mix.SG&A in the fourth quarter and for the full year was lower than the corresponding prior period on account of cost management actions and reversals of accruals related to compensated-related items. Result being an EBITDA of $1.9 million in the quarter and $7 million for the full year, which for the full year includes a foreign exchange loss of $0.6 million.Fourth quarter EBITDA is higher than the prior year by $0.9 million. But for the full year, EBITDA is lower by $14 million. Net income for the year is a loss of $1.6 million on account of the deferred tax liabilities increasing, on account of tax accelerated depreciation taken in the past, reduction in deferred tax assets on account of U.S. tax rate changes and an increase to deferred tax liabilities in Canada on account of increased provincial tax rate.With regards to our financial position, year-over-year, our working capital account balances decreased by $12 million from a combination of decreasing quantities of inventories on hand of $7 million and an increase in the amount of drawn -- amount drawn on our senior revolving credit facility of $5 million to support higher raw material costs throughout the year.Our cash flow from operations was consistent year-over-year, increasing slightly from $13.5 million to $14.4 million. The cash flow from operations was used in part for capital investments for equipment and maintenance capital, and the company's share buyback, which increased from 0.1 million in 2016 to 4.4 million in 2017. The capital expenditure plans continue to be evaluated prudently and deliberately to ensure our capital is deployed towards long-term sustainable value to the business. This concludes our formal commentary, and we would now be happy today to respond to any questions that you may have. Thank you, operator.

[Operator]

[Operator Instructions] Our first question comes from Chris Keefe with Canaccord Genuity.

[Christopher Keefe, Associate]

My first question is just as you guys pointed out, volumes are typically lower in the fourth quarter, and it looks like, for the first 3 quarters, you guys are pretty much on par with last year. So this is -- most of your volumes increased this year came from the fourth quarter. So can you just give a bit of color about what drove the volumes increase in the fourth quarter, and if it was a onetime thing in any parts or if it's something we can expect going forward?

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

Thanks, Chris. Typically, in the fourth, history, really, over the course of time, it's actually been one of our lighter quarters due to weather. But in this particular case, we had seen some pretty strong market activity, particularly in the residential construction arena. We've seen the residential business for Tree Island, overall, was up almost 3,000 tons over the same period last year. But I would say that going across all of our market segments, our industrial OEM, commercial construction, agriculture, actually, every segment in the fourth quarter had shown positive results overall.

[Christopher Keefe, Associate]

Okay, that's helpful. And then just my second one would be the SG&A. You guys had quite a bit of leverage achieved in this quarter on the SG&A. So I'm just wondering how -- where's the floor sort of on SG&A and if you can give any background on how you got that leverage?

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

Yes, I think that some of this is going to be some onetime events. First of all, I know that the market and certainly, our shareholders recognize that we are a company that takes action. And when we experienced the compression in certain markets, there were certain SG&A expenses from an organizational perspective that we did take out in the fourth quarter. So that will continue into 2018 and beyond. So we had to actually reduce certain management positions and downside certain functions. The other keynote, though, on SG&A would be around the area given the impact that the margin compression had on our financial results in 2017. Certain incentive-based compensation awards were reversed in the period as certain thresholds were not achieved.

[Operator]

[Operator Instructions] Next will be Devin Schilling with PI Financial.

[Devin Schilling, Industrials Analyst]

Just a question on your guys' gross margins. It looks like they're holding up quite a bit better in Canada versus in the U.S. right now. Can you guys kind of elaborate on your strategy for how you guys are going to manage this disparity going forward?

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

We're expecting, at least right now, what were experienced across the board, and I don't want to get too ahead of myself on any forward color in the market. The efforts, though, that we've been putting into the market have been both in Canada and the U.S. market. Your observation is correct, by the way, in terms of we've had more margin compression because of certain competitive factors in the U.S. It lagged in certain areas where we were not seeing competition, moving price increases into the market with the resolve that Tree Island has had. I can tell you that some of the very reputable names down in the U.S. have all been putting in price increases with tremendous amount of resolve, I'll say, in the latter parts of the fourth quarter and coming into Q1 in 2018. So I noted a little -- I gave a little bit of a colored hint there that we are seeing that dial now shift across all of our segments in both Canada and the U.S. where the margin compression has now turned and reversed. And we're starting to experience moderate margin expansion. And that's what we did expect as long as -- that the rod material input cost, we're going to start to moderate and not be climbing consistently on a month-to-month basis that we would eventually catch up with it with a series of price increases that we've put in place, that we've already announced and planned for in 2018 as well. So we're expecting that to start to reverse itself on a more consistent basis coming into the 2018 year.

[Operator]

And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional remarks.

[Unknown Executive]

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 first quarter 2018 results. This now concludes today's call.

[Operator]

Well, thank you. That does conclude today's conference call. We do thank you for your participation today.