Olympic Steel, Inc.
Q1 2021 Earnings Call Transcript

Published: 7 May 2021

[Operator:]

Good morning. And welcome to Olympic Steel 2021 First Quarter Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to hand the conference over to Rich Manson, Chief Financial Officer at Olympic Steel. Please go ahead, sir.

[Rich Manson:]

Thank you, operator. Welcome to Olympic Steel's earnings call for the first quarter of 2021. Our call this morning will be hosted by our Chief Executive Officer, Rick Marabito; and we will also be joined by our President and Chief Operating Officer, Andrew Greiff.

[Rick Marabito:]

Thank you, Rich. Good morning, everyone. And thank you for joining us to discuss Olympic Steel's results for the first quarter of 2021. I'll begin with some comments about our record performance in the first quarter, and the overall strength of our markets. Then Andrew will review our business segment performance and Rich provide more detail about our financial results. And then after that, we would of course be glad to take your questions. So as noted in this morning's release, our strong momentum continued in the first quarter, which was our most profitable first quarter ever, and overall, it was our third most profitable quarter in the company's history. Our performance resulted from the combination of several factors. But most importantly, I'd like to recognize and thank our employees whose hard work, talent and dedication to our internal disciplines around safety, expenses and inventory management were really critical to our success. Together their focus on safety and performing for our customers every day helped to drive an outstanding start to the year. Rapidly changing market conditions, which began to appear in the fourth quarter of 2020, also played a big role in shaping the first quarter of 2021. During the pandemic mill production capacity was reduced end user demand has strongly returned and returned faster than forecasted, resulting in constraint metal supply and depleted inventories. The supply demand dynamic has caused a disruption in the supply chain. Metal became difficult to source, lead times extended and prices have risen to unprecedented levels. While long mill lead times and disruptions in the metal supply chain kept inventory and service centers at historic lows, our long-standing relationships with domestic mills enabled us to support our customers with metal during this supply constrained environment.

[Andrew Greiff:]

Thank you, Rick. And good morning. The first quarter of 2021 was sensational in many ways, as all three of our segments capitalized on the market recovery with strong EBITDA and pre-tax results. Shipments for our higher margin products, and specialty metals and pipe and tube outpaced the market in the first quarter. Meanwhile, our carbon segment was the most profitable of the three segments generating over $24 million of EBITDA in the first quarter, even though volumes were impacted by the supply chain disruptions that Rick mentioned earlier.

[Rich Manson:]

Thank you, Andrew. And good morning, everyone. As Rick noted, we delivered the most profitable first quarter in the history of Olympic Steel and the third most profitable quarter overall as a result of strong market dynamics, record high metals pricing, and our continued focus on controlling working capital and operating expenses. We saw dramatic increases in our profitability compared with the first quarter a year ago. Net income was $22 million compared with $600,000 in the first quarter of 2020, and adjusted EBITDA was $37.8 million compared with $7.5 million a year ago. Results include $1 million of LIFO pre-tax expense in the first quarter of this year, compared with $500,000 of LIFO pre-tax income in the same period last year. Net sales were also a record high $463 million, compared with $354 million a year ago. However, volumes were impacted by disruptions in the supply chain. The supply chain concerns continue into the second quarter and while we are seeing strong end user demand, second quarter sales volumes are expected to be similar to the first quarter. We also continue to benefit from our disciplined approach to inventory management. Our team has made tremendous progress and our focus on efficiency drove record flat rolled inventory turns of 6.3 times and record pipe and tube inventory turns of 4.2 times. We continue to maintain an intense focus on overall inventory management as we navigate a historically high metals pricing environment. Total debt was $192 million at the end of the first quarter, an increase of $31 million since year end 2020, resulting from the need to fund approximately $60 million in higher working capital levels associated with higher metals pricing. While debt levels modestly increased is important to note that our availability under our asset-based loan actually increased to $162 million at the end of the quarter.

[Operator:]

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question today is from Andreas Bokkenheuser of UBS. Please proceed with your question.

[Andreas Bokkenheuser:]

Thank you very much. And good morning. Congratulations on the good set of results. Just a question on end demand, and it was a question I've asked you guys before, and I think I did on the last call as well. But where are you seeing the strengths kind of specifically in your end markets? And is there any markets that are lacking a bit and maybe related to that, I mean, obviously on a year-on-year basis, we're going to be looking at a very low base of last year now due to COVID in the first quarter of last year. So, how you kind of looking at demand versus 2019, which is something that I get the sense a lot of people looking at, where are we going to 2019? Are we above 2019 in terms of kind of end demand for your primary products in the end markets? Are we in line with that or are we still kind of trailing it a bit? I realize prices are up, but that's probably also got a lot to do, like you mentioned with the supply constraints in steel. So, in a way – on end demand and kind of versus 2019 in your view?

[Andrew Greiff:]

Well, good morning, Andreas. This is Andrew. So, I'll try to attack both parts of your questions. So, first the strength that we're seeing in our markets from our industrial OEMs, recreational vehicles, auto really right before the chip issue and construction really have driven our carbon business. What we're seeing on the specialty metal side of the business is that appliance our clamp business, kitchen restaurant food equipment is really coming back very strong. Truck trailer and auto exhaust has been strong.

[Rick Marabito:]

Yes. This is Rick, Andreas. Thanks for the question. And the only other thing I'd add is where we really see still the biggest differential from 2019 to 2021 is in the transactional spot business. And that's just the function of all the things that Andrew just commented on in terms of the supply chain constraints.

[Andreas Bokkenheuser:]

Okay. That's really interesting. And you obviously mentioned that we should be – we should start to see more suppliers as more mills kind of get commissioned into the back half of the year. Have you had any conversations with your suppliers in terms of the ramp up there and when you see the market kind of like balancing out in terms of additional supply, I mean, obviously, a number of the new EAs have been talking about six months ramp up? We've even heard 12-month ramp ups in some cases. But there's like an inflection point where you really see right at by this time. We should have more – materially more volumes from our suppliers to sell to customers?

[Rick Marabito:]

Well, Andreas, I think the way we look at it is we think that it's going to take the full second half of the year for the most of this capacity really to come on. So, the impact really wouldn't be until the beginning of 2022.

[Andreas Bokkenheuser:]

Fair enough. Yes, that's very much in line with what we're hearing as well. That's very clear, gentlemen. Thank you very much. Appreciate your taking my questions. Have a great weekend ahead.

[Rick Marabito:]

Thank you so much. You to.

[Andrew Greiff:]

Thank you.

[Operator:]

The next question is from Marco Rodriguez of Stonegate Capital Markets. Please proceed with your question.

[Marco Rodriguez:]

Good morning, everyone. Thank you for taking my questions.

[Rick Marabito:]

Good morning.

[Andrew Greiff:]

Good morning.

[Marco Rodriguez:]

I was wondering, obviously, if you're going to be shed a little bit more like with some – perhaps some data points, just kind of obviously on the metal supply remain pretty tight mill times extended. Can you kind of give us a sense as far as where those numbers are versus now versus sort of a more normalized environment, if you will?

[Rick Marabito:]

Sure. Well, hot roll, if you go back pre-pandemic probably normalized times hot roll is typically four weeks, maybe five weeks. Today, it's closer to eight weeks tandem products. So cold roll is typically six weeks, today it's closer to eight to 10 weeks and coated product about the same. On the specialty metal side about the same as you were seeing 300, 400 series stainless four to five weeks, and today it's closer to seven to eight weeks. So – and we have seen – we've seen this really starting at the end of last year, and it's really continued through now.

[Marco Rodriguez:]

Understood. And you obviously mentioned that the automotive chip shortage and it's obviously all over the place in terms of its impact on some of the supply chains. But can you just talk a little bit about your thoughts there on your expectations? If you have any of that might be different or are you sort of in line with kind of the consensus thinking as far as when that might be alleviating and then how that kind of sort of impacts your overall business?

[Rick Marabito:]

Well, I think it depends, you know who you are listening to. If you listen to the chip manufacturers, they are telling you that this is going to be a problem that's going to continue on for another year or two. There have been differences from the automakers themselves as to when this is going to alleviate itself, as well as not just the automakers, but you're certainly seeing it with some of the recreation vehicle guys and other industrial OEMs. I would expect that we're going to see challenges through the balance of this year. You continue to see almost weekly production shutdowns, extension of shutdown, so the Board talked about, second quarter a 50% reduction. I don't think we've seen that as much from some of the other domestic auto suppliers. But I think the news is, it's really mixed. So, the way that we look at it is we have to prepare for these disruptions for the balance of the year.

[Marco Rodriguez:]

Understood, got it. And I know it's still pretty early, but just in terms of the prior acquisition, our most recent acquisition, Action Stainless & Alloys, can you maybe just provide a little bit of an update on the integration efforts there?

[Rick Marabito:]

Sure. Thanks for the question, Marco. The integration is going very well. As we commented earlier, it's been a great fit both from a product expansion in terms of geography and some of the product offerings and stainless that Action has. And then culturally, I'll tell you, it's a great company. And so, on both the business execution side, and on the cultural side, it's been one of the smoothest integrations of an acquisition that we've done. We are very excited about the strong results we've seen from Action. And we're really optimistic about growing that business as well as growing the rest of our – continuing to grow the rest of our specialty metals business.

[Marco Rodriguez:]

Understood, very helpful. And the last question for me just wondering if you could maybe update us on the M&A landscape? I know it's obviously an important component of the overall strategy if you can kind of give us a sense as far as what the pipeline looks like today and maybe where valuations are kind of shaking out?

[Rick Marabito:]

Sure. So, the M&A market has rapidly recovered in terms of the activity level. So obviously, as we went through 2020 and COVID, a lot of things came to a screeching halt in terms of the buy-sell activity for companies. I think that quickly as the recovery happened in fourth quarter, quickly, companies re-engaged. I use our example of action is a perfect example of that. We are pretty far along in our conversations with Action. And obviously, in the heat of COVID, we took a slight pause, but we were able to still get that transaction done in December. First quarter we have seen a lot of activity. Maybe Rich, you can comment on the other part of Marco’s question on sort of what we're seeing in terms of pricing, and multiples, and value in that type of.

[Rich Manson:]

Yes, thanks for the question Marc. Well, I think the best way to look at it is with all of this heating up is that it is going to push multiples up a little bit. And that's certainly what we're seeing. The hard part is when you're in a hot market, like this it’s not really the multiple, but what are you basing the multiple on? And certainly, 2021 and 2020, produce some very unique results. So, you have to kind of temper that. Our viewpoint is when we look at M&A, as we look at EBITDA streams over a cycle, not just in a particular period of time, and so, the multiples really going to depend on what the base you are using to look at that multiple for. So, is it one year, or is it three years?

[Rick Marabito:]

Right. And the way I’d end that question is – and we talked about it in our prepared comments earlier, but we are actively continuing to look at acquisitions. And we intend to continue to supplement our growth through acquisitions. We've made four acquisitions over the last couple of years and we're looking forward to and fully expecting to continue to execute on acquisitions that are of very well-run, high return companies like Action.

[Marco Rodriguez:]

Excellent. Thank you, guys very much. Appreciate the time.

[Rick Marabito:]

Thank you, Marco.

[Operator:]

Our next question is from Chris Sakai with Singular Research. Please proceed with your question.

[Chris Sakai:]

Hi, good morning. Well, my questions were asked already, but just I guess I've got one, maybe you could help me understand. I've heard about the supply chain constraints, which has put a damper on the volume. But I want to know – could you help me understand why inventory and flat assets are up?

[Rick Marabito:]

Sure, Chris. And really what you are looking at there, and there'll be more detail on the 10-Q that'll come out later today is that that where you're seeing even though inventory – our inventory volume is actually down a little bit from the previous quarter. And it's been relatively flat from the last six months. But what you are seeing is the effect of the average cost increasing. So, the CRU has been on a steady march upward since August of last year, at this point, having tripled that rate. And so, what you're seeing is a higher cost per-ton in the inventory. And you are also seeing higher selling prices. So, we had record sales in the first quarter this year, which leads to much higher balances in accounts receivable. So, what you are seeing is, is really an accounts receivable and inventory. Those balances are up higher offset a little bit by higher payables. But as we commented earlier, it's about a $60 million increase in working capital on a consolidated basis for the year and a lot of that did fall in the carbon flat segment.

[Chris Sakai:]

Okay. All right. Great, thanks. And I guess await from what I heard before, and it sounds like until 2022, the supply chain constraints will get better.

[Rick Marabito:]

Well, we think Chris, certainly as we look out in the near term, certainly the next three to six months, we believe that environment we're in is going to continue. Andrew talked about a lot of the areas besides just metal, different supply chains that are feeding a lot of our customers really are tight, constrained, global supply chains, and even just the transportation to get it here is an issue. And we do see that continuing. Like everything, I think, businesses, economies adjust, and we will get back into a better equilibrium. But certainly, here in the second quarter, I think, it's going to continue to be really tight. And we didn't really talk much about it. But labor is really tight too. So, I think, all of those things were pretty bullish that demand while some of it may be disrupted by some of the supply chain constraints, we think the overall demand environment is going to be pretty good. And we're pretty excited about the rest of the year. We're certainly excited about where we sit as Olympic in the supply chain, the things that we've done the last year or so. And certainly, we are exceptionally well positioned if this country does an infrastructure spend. So that's how we're looking at it.

[Chris Sakai:]

Okay, great. Well, thanks.

[Andrew Greiff:]

Thank you.

[Rich Manson:]

Thanks, Chris.

[Operator:]

There are no additional questions. At this time, I would like to turn a call back to Rick Marabito for closing remarks.

[Rick Marabito:]

Thank you, operator. And thank all of you for joining us on our call this morning. We greatly appreciate your continued interest in Olympic Steel. And we look forward to speaking with you again next quarter. Thank you very much. Bye-bye.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.