Tree Island Steel Ltd

TSX:TSL

Earnings Call Transcript 2018-Q4

[Operator]

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

[Ali Mahdavi]

Thank you. Good afternoon, everyone, and thank you for joining us for Tree Island's Full Year and Fourth Quarter 2018 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 earlier this afternoon, 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 everyone that a replay of this call will be accessible until midnight on March 6. Following the presentation, we will conduct a Q&A session. Instructions will be provided at that time [Audio Gap] 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 and 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 would like to turn the call over to Dale now. Dale?

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

Thanks, Ali, and good afternoon, everyone. Thank you for joining us on today's call. Today, I will review and discuss our performance in 2018, 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 for a review of the financials, and we will then open the call to your questions. As most of you are aware, 2018 was a challenging year in many ways, led by the escalating prices for our primary raw material and ongoing competitive pricing pressures from low-cost products by foreign manufacturers. The imposition of U.S. Section 232 tariffs on steel imported into the U.S. during the second half of the year further eroded shipments from the industrial segment as some of these products were now subject to a 25% import tariff. As a reminder, our operations are impacted by the seasonal nature of various industries we serve, primarily the construction and agriculture industries. Accordingly, revenues, sales volumes and operating results for the interim quarters are not necessarily indicative of the results that may be expected for the full fiscal year. And fourth quarter results are traditionally lower than other quarters due to the onset of winter and the corresponding reduction in construction and agricultural activities.For the fourth quarter of 2018, revenues were $44.9 million, a decrease of 17.7% from the same period last year on account of the combined impact of the Section 232 tariffs and the seasonality of the construction market. Improved product pricing over the prior year, combined with a more profitable product mix and emphasis on maintaining tight cost control, improved Tree Island's overall profitability in the fourth quarter. We remained steadfast to our commitments to improve operational efficiencies, rationalize low-margin products, maintain price discipline and continue to leverage our competitive advantages. As a result, gross profit for the quarter improved to $3.7 million and gross margin to $8.2 million compared to $2.5 million and $4.5 million in 2017.For the year ended December 31, 2018, total revenues of $235.3 million were marginally better than the same period last year on lower volumes, again, resulting from imposed average selling prices in relation to the cost of raw materials. Despite the impact of the U.S. Section 232 tariffs on the overall volumes, gross profit earned for 2018 improved to $25.8 million and the gross profit margin was 11%, compared to the gross profit earned in the corresponding period last year of $18.2 million with a gross profit margin of 7.8%.Once again, the improved gross profit for the year is reflective of Tree Island's focus on pricing discipline and efforts to improve on operational efficiencies. And as a result, EBITDA for 2018 amounted to $13.4 million compared to $7 million in 2017. In 2018, we diligently invested in new capital equipment during the year, which is being commissioned for operation in 2019. This will support our long-term objectives and strengthen our market and cost leadership positions in mesh and concrete-reinforcing products.In certain years, market conditions are more favorable and cooperative, thus providing a robust foundation for continued growth, while other periods, such as 2018, continue to be an environment of continuous volatility. 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 be -- remain robust and strengthened, thereby, setting Tree Island up for return to sustainable and attractive margins. Turning your attention to the more recent fourth quarter results. As a reminder, Q4 and Q1 are typically Tree Island's seasonally slowest periods due to the winter months and the impact on certain end market activities. Revenues increased a nominal amount to $235.3 million when compared to 2017. Despite the impact of the U.S. 232 tariffs on the overall volumes, gross profit increased to $25.8 million from $18.2 million. The gross margin was higher at 11% as compared to 7.8% in 2017. Once again, the improved gross profit for the year is reflective of Tree Island's focus on price discipline and efforts to improve the operational efficiencies.Higher gross margins also resulted in EBITDA of $13.4 million compared to $7 million realized during the same period in 2017. While we continue to be cautious in our view relating to events that we can't control through our disciplined operating and sales model, we are encouraged by these efforts and with the early signs of the dial now moving in the right direction on price increases and cost management as we ship to a trend of moderately improving margins versus the rapid margin compression we experienced a year ago.We will continue to take all measures to further strengthen our business to withstand market pressures and cyclicality 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 am pleased with our ability to manage through the challenges of 2018. Strong year-over-year numbers when looking at the full year results. 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. We look forward to continuing to build on our success and delivering value to our stakeholders.2019: we will remain committed to long-term growth and profitability, being a supplier of choice to our customers, and a company which we can collectively be proud of on an on-going basis. These objectives can only be through the continued support of our customers, suppliers, shareholders and the hard work and dedication of our employees.With that, I'd like to ask Nancy Davies, our CFO, to take over, provide a few -- and review of the company's full year and fourth quarter financials in greater detail and then we'll then open up the call for questions. Nancy?

[Nancy Davies, CFO & VP of Finance]

Thank you, Dale. Just as a reminder, our results are presented in accordance with International Financial Reporting Standards and presented in Canadian dollars unless otherwise noted. Please note that our operations are impacted by the seasonal nature of various industries that 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. Regards to the full year results, the combination of rising prices and actions to improve product mix and profitability resulted in revenue increasing in line with last year of $235.3 million, despite the lower volumes in the year. Gross profit increased to $25.8 million from $18.2 million, an increase of $7.6 million or a 42% improvement.SG&A costs are higher than last year on account of a reversal of an accrual in 2017 in the fourth quarter; ultimately, the result being a net income of $2.6 million in the year or $0.09 a share versus a loss of $0.05 a share last year.With regard to our financial position. Year-over-year, our inventory value increased on account of rising steel cost and comparably higher levels of raw material inventories than in the comparable period. As a result, our cash flow from operations declined on account of the increase in raw materials. And those inventories will be consumed in production throughout the coming months.Also in the year, we refinanced our senior revolving credit facility and also provided us with a $10 million facility for capital expenditures. In 2018, we advanced $3.9 million under this new CapEx term debt facility to finance the capital expenditures incurred that Dale had mentioned earlier. Also, in September 2018, the company renewed its normal course issuer bid to repurchase up to 1.46 million shares. In fiscal 2018, the company repurchased 466,149 shares at an average price of $2.71 a share. And that's it for my comments. Thank you, operator. I'll return turn it back to you.

[Operator]

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

[David Quezada, Equity Analyst]

My first question just on the Section 232 tariff. Could you just remind us, which products are most exposed there? And if there's any comments you can wrap around the order of magnitude of in terms of the proportion of your overall shipments are going from Canada into the U.S.?

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

The 232 came into effect for us in June of 2018. We've viewed it, and we continue to view it as not being material, or having a material impact on our business overall. Your question, though, is a good one. We're seeing more of the impact on the products that we're shipping out of Canada into the U.S. in the industrial sector.

[David Quezada, Equity Analyst]

Okay. Great. And then just in terms on the broader topic of your ability to pass on higher steel price to customers. Just wondering if you can provide any commentary on the -- on how your competitors have been acting? And if you're seeing general support for pricing pieces that you're trying to implement?

[Nancy Davies, CFO & VP of Finance]

Yes. I would characterize it that we have been experiencing general support across the industry. There is -- I think as always when there's competition in certain segments or geographic areas, that sometimes can be a little bit more difficult. You -- we -- and as you know, we've had discussions that we have deliberately made conscious choices particularly in our residential business section where we have changed some of the product mix, and we're not going to be chasing price and a combination of all of those factors together, you've seen where we've actually been able to post the improvement in our gross profit margins to just around 11 -- or over 11%.

[David Quezada, Equity Analyst]

Great. That's helpful. And just my last question here. The new capital equipment, I guess the mesh machine that you took delivery of. Can you just give a sense of how ramped up that piece of machinery is? And when you think it'll get to full -- I guess, full usage?

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

Our -- yes, we've already had -- the equipment was installed on time. We expected to have it in place by the end of the year. It is. We're currently going through the steps now of commissioning it with the target of having it fully operational -- we've got our people trained -- and online at the end of Q1.

[Operator]

That does conclude our question-and-answer session at this time, everyone. I'll turn it back over to Ali Mahdavi for any final or additional remarks.

[Ali Mahdavi]

Thank you, operator. Once again, on behalf of the Tree Island team, thank you for joining us for this afternoon's call. We'll look forward to reporting again on our Q1 results in a couple of months time. So you have any other questions, further inquiries, please feel free to call me or e-mail me. That concludes today's call. I'll hand it over to the operator to close the call.

[Operator]

Thank you very much. That does conclude our conference call for today everyone. We do thank you all for your participation. You may now disconnect your lines.