Q1 2024 Olympic Steel Inc Earnings Call

Participants

Richard Manson; Chief Financial Officer; Olympic Steel Inc

Richard Marabito; Chief Executive Officer, Director; Olympic Steel Inc

Andrew Greiff; President, Chief Operating Officer; Olympic Steel Inc

Dave Storms; Analyst; Stonegate Capital Markets Inc.

Chris Sakai; Analyst; Singular Research

Presentation

Operator

Good morning, and welcome to the Olympic Steel 2024 first quarter financial results conference call. (Operator Instructions) As a reminder, this conference is being recorded. At this time, I would like to hand the conference call over to Rich Mason, Chief Financial Officer at Olympic Steel. Please go ahead.

Richard Manson

Thank you, operator. Welcome to Olympic Steel's earnings call for the first quarter of 2024. 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.
Before we begin, I have a few reminders. Some statements made on today's call will be predictive and are intended to be made as forward-looking within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and may not reflect actual results. The company does not undertake to update such statements, changes in assumptions or changes in other factors affecting such forward-looking statements, important assumptions, risks, uncertainties, and other factors that could cause actual results to differ materially are set forth in the company's reports on Forms 10-K and 10-Q and the press releases filed with the Securities and Exchange Commission during today's discussion, we may refer to adjusted net income per diluted share, EBITDA and adjusted EBITDA, which are all non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is provided in the press release that was issued last night and can be found on our website. Today's live broadcast will be archived and available for replay on Olympic Steel's website.
At this time, I'll turn the call over to Rick.

Richard Marabito

Thank you, Rich, and good morning, everyone. Thank you for joining us today to discuss Olympic Steel's 2024 first quarter results. I'll begin by talking about the solid results we delivered in the first quarter and how our strategy to diversify and expand into higher value added processing and manufactured metal products enables us to consistently deliver positive results regardless of market conditions. Then Andrew will review our segment performance and following that, Rich will discuss our financial results in more detail and then as always, we will open up the call for your questions.
Olympic Steel delivered a strong start to 2024 despite challenging market conditions. During the first quarter, we reported first quarter sales of $527 million and net income of $8.7 million, and all segments contributed to our adjusted EBITDA of $23.7 million. Our shipping volumes increased 9% sequentially from the fourth quarter of 2023, and we maintained our margins despite unusual declining pricing dynamics for the first quarter we typically start the new year in a strengthening market with increasing pricing, and that trend usually continues into the second quarter. However, this year we saw index pricing for hot-rolled steel fall more than 31% from January through mid-March, while stainless steel surcharges also fell throughout the quarter.
So the movement in pricing was the opposite of what we normally experience in the first quarter. Despite these pricing challenges, we generated solid profitability, which reinforces that our strategy is working and our efforts to diversify and expand our portfolio into higher value manufactured metal products provides a natural countercyclical benefit to falling metal prices and helps drive profitability regardless of market conditions. In addition, our fabrication and value-added product capabilities drove new business wins and we outpaced market shipments during the quarter in every product we sell. We continue to see industrial manufacturers looking to outsource more long-term fabrication work, and we have made the strategic investments in people, technology and equipment to capitalize on what we believe is a long-term trend.
We hired industry veteran, Matt Fitzgerald to the newly created role of Vice President of fabrication, Matt is leading the execution of Olympic Steel's fabrication strategy, which is a key component to both our near term and long-term growth. We are beginning to realize the benefits of our team's efforts to strengthen our fabrication capabilities and to integrate new, more efficient equipment automation and software into our operations. We are well positioned to accelerate our growth, and we are excited for the opportunities to come as the US rebuilds, its infrastructure and our large OEM customers continue to outsource metal fabrication as we near the midpoint of the second quarter pricing on some products has recovered yet market conditions remain dynamic.
While we monitor the evolving conditions, the entire Olympic Steel team remains focused on what we can control our disciplines around working capital operating expenses and cash flow. Our balance sheet remains strong, and we have access to capital that will enable us to continue investing in organic growth and automation opportunities and a reinvigorated M&A market and that all aligns with our strategic priorities for our long-term success. As we look ahead, we are optimistic about our ability to deliver consistent profitable results and create value for our shareholders.
I'll now turn the call over to Andrew.

Andrew Greiff

Thank you, Rick, and good morning, everyone. Our diversification strategy has made Olympic Steel, a stronger, more resilient company. Our team's strategic execution and commitment to our operating disciplines delivered solid profitability this quarter. Despite pricing headwinds, the shipping volume for all segments was up sequentially from the fourth quarter of 2023 and the carbon and pipe and tube segments were up year over year versus the first quarter of 2023. Our Carbon segment faced softer market conditions moving into 2024, our team remained focused on cost control disciplines and furthered our customer product and process diversification initiatives to help maximize profitability.
Amid these shifting market dynamics, we continue to expand our coated offerings beyond metal fab and coated shipments are increasing. As Rick highlighted, we are actively leveraging our fabrication capabilities as a complement to our traditional distribution business. As a result of these efforts, our Carbon segment led our businesses in profitability with EBITDA of $12.7 million. At the start of the second quarter, we have the tailwind of announced steel mills price increases on flat rolled products. This is typically our strongest period of the year from a demand perspective, and we expect to see stabilized demand throughout the second quarter. However, we do expect to see some margin compression on carbon products in the second quarter.
The pipe and tube segment performed well in the first quarter with adjusted EBITDA of $10.3 million. The integration of central tube and bar has gone well. We continue to upgrade our laser equipment, including enhancing production capabilities at CTB with the new laser that is expected to be operational in July. Our legacy CTID business is also upgrading this year to a new jumbo laser that will replace two original two blazers. These new lasers have an increased speed inefficiency rate of 30% as compared to the old equipment.
Overall future capabilities put Olympic Steel in a strong position to win new opportunities and support our strategic objectives for the past year-and-a-half, the specialty metals segment has faced challenging market conditions, namely falling commodity prices and softer demand as the industry worked through elevated inventory levels during the first quarter, we started to see signs of those headwinds waning. We ended the quarter with our best reported volume since the first quarter of 2023 and the segment contributed $4.9 million of EBITDA.
Looking ahead, we are optimistic as prices for both nickel, the primary driver of stainless surcharges and aluminum were up in April, and we are anticipating another bump in the near term. Additionally, we are onboarding new business that we expect to ramp up in the second quarter. We are pleased with the progress our segments are making to execute on our diversification strategy. We expect 2024 to be another solid year for Olympic Steel and are confident in our ability to deliver profitable results in all market environments.
Now, I'll turn the call over to Rich.

Richard Manson

Thank you, Andrew. As you've heard from Rick and Andrew, our team did an excellent job in the first quarter to navigate pricing headwinds and shifting market dynamics to deliver solid performance to start the year. Before I discuss the results in more detail, I want to remind you that year-over-year comparisons are impacted by the October 2023 acquisition of Central Tubing Bar whose results are included in our pipe and tube segment.
For the first quarter, net income totaled $8.7 million compared with $9.9 million in the first quarter of 2023. EBITDA in the quarter was $23.2 million compared to $23.9 million in the prior year period. First quarter 2024 results include $400,000 of LIFO expense compared with no LIFO adjustment in the first quarter of 2023. Consolidated operating expenses for the first quarter totaled $103.2 million compared with $102.7 million in the first quarter of 2023. Our first quarter operating expenses reflect the addition of CTB, which does not report tons sold, therefore operating expenses per ton at the consolidated level and for the pipe and tube segment will appear higher year-over-year.
As a reminder, we do not report tons sold from a color industries, easy dumper, metal fab, Shaw stainless, or the entire pipe and tube segment. Consolidated operating expenses for the fourth quarter include $4 million of CTB operating expenses and $1.7 million of lower incentive expenses when compared with the first quarter of 2023. Our effective borrowing rate in the first quarter of 2024 is also impacted by the expiration of our interest rate hedge.
Our balance sheet remains strong. We ended the year with debt of $197 million, an increase of $7 million since year end. The additional debt was used to fund the $16 million increase in working capital during the quarter, which supported our 9% increase in sales sequentially from the fourth quarter. We ended the quarter with availability of approximately $366 million, keeping us very well positioned to continue investing in higher return opportunities.
Our capital expenditures totaled $4.8 million in the first quarter of 2024 compared with depreciation expense of $6 million. Equipment lead times remain long, and we estimate that 2024 capital expenditures will be approximately $30 million as we continue to make investments in automation, fabrication and equipment that results in higher gross margin opportunities and more consistent results.
Our first quarter 2024 effective income tax rate was 27% compared to 26.8% in the same period last year. We expect our 2024 tax rate to approximate 27.5% to 28.5%. In addition, we paid a quarterly dividend of $0.15 per share in the first quarter, this was an increase of $0.025 per share or 20% from the company's previous quarterly dividend. Our Board of Directors approved our next regular quarterly cash dividend of $0.15 per share, which is payable on June 17, 2024, to shareholders of record as of June 4, 2024. The company has now paid regular quarterly dividends dating back to 2006.
Before we open the call for your questions, I would like to thank the entire Olympic Steel team for all their efforts in the first quarter because of the team's hard work and dedication that Olympic Steel remains in a strong operational and financial position and is equipped to invest in additional higher value growth opportunities and continue to advance our strategic plans.
Operator, we are now ready for questions.

Question and Answer Session

Operator

(Operator Instructions)
Dave Storms, Stonegate.

Dave Storms

Good morning. I'm just hoping we could start with the times you mentioned in your remarks that there's still maybe a little longer than you'd like them to be is this a product of bringing in more value-added services and is at what point does automation start? So again, there's lead times down kind of where's the tipping point there?

Richard Marabito

So David, it's Rick. Is your question on our comment about lead longer lead times related to some of our CapEx equipment or is it or is it on our business levels lead times with customers.

Dave Storms

My understanding was that was lead times longer on business levels. If I have that wrong, apologies.

Richard Marabito

Yes. I mean, I think I think our lead times are I call it pretty normal, Andrew, I don't know if we've been seeing any real difference and over the quarter into second quarter, but I think they're pretty stable.

Andrew Greiff

Yeah, they are I would tell you that on the carbon side, lead times in hot roll is probably still in the four to five weeks, probably similar and a little bit longer tandem products of cold-rolled galvanized more like six to seven weeks on the specialty side on stainless and aluminum, but the same probably four to five weeks from us, certainly to our customers. We have a lot of JIT programs established. So in some cases, it's same day deliveries just depending on the customer and the agreements that we have.

Dave Storms

Understood. Thank you for the clarification there. One more for me, how should we we'd be thinking about price momentum, it goes into Q2 and then beyond Q2, if you have any visibility there?

Richard Marabito

Yes, I would say on the carbon side, we've seen some stability in the market index. Pricing is down a little bit, but we've seen some stability in the carbon. We're encouraged in stainless and aluminum nickel and aluminum have both shown some strength in the past couple of weeks and anticipate that we'll see more stability as we head through the second quarter. So we feel pretty good.

Operator

Thank you. Our next question is coming from Alan Weber of Robotti Advisors. Please go ahead up.
Good morning. Can you talk about one is just maintenance capital spending and then in terms of acquisitions. Can you just talk about how you're thinking about things today and what's changed given with the economies, et cetera?
Good morning, Alan. It's Rich. With respect to CapEx. Maintenance CapEx is between seven and $10 million per year. And as we indicated in the prepared comments, we expect to spend about $30 million this year. And I think we have POs out there for quite a bit. It's just that in the prepared comments, we indicated that it's a particularly long lead time to get processing equipment. Now I'll let Rick answer the question on M&A.
Yes.
Thanks, Alan. Good question on the M&A on. So we saw a bit of just in general, I think the M&A market and really contracted towards the end part of last year. And as we open this year. And I think part of that was some of the impacts may be of higher interest rates. And as you know, and we've talked a lot about it. We on strategically, we'll continue to aggressively look at growth both from internal CapEx growth and acquisitions. So we remain very active in terms of looking and what I'd say is probably in the last month to six weeks, we've seen the M&A market in general start to open up more on the reasoning behind that, you know, I think it may be some people are settling in at what the federal funds rate is. And even if we're not going to go down here in the near term in the next couple of quarters. I think as always, businesses adjust and valuations adjust. And I think that's what's happened. So we're starting to really see on a much larger inflow into the pipeline, which is really good. As I've said numerous times, we anticipate on being continuing to be successful. You know, we've made six acquisitions in the last five years. And we would we would fully intend to stay on that trend. And we'll also stay disciplined and we'll look for target companies that are similar to what you've seen in our recent track record on that are high performing companies, good fits and immediately accretive to Olympic. So that's kind of a decent snapshot of what we're seeing.
And just my last question. When you look out long term, has anything changed in your view in terms of the quote-unquote infrastructure spending and onshoring and like that?
Yes, I think the only thing that's probably changed over the three years since the government announced a lot of funding, probably just the time that it's going to take to get all the money spent and some of it isn't just releasing the money. It's really the the labor situation and the ability to get these projects done. So I would say the good news coming out of that is I think the spend in the cycle will maybe be a little bit longer than maybe what we had thought three years ago. And we're seeing that in certain pockets pockets. We know that the build-out of the data centers where a supplier into that and and that looks pretty robust over the coming years. But there's there's investment and in that cycle, there's some ebbs and flows in terms of, you know how that happens. And a lot of it isn't just based on the money. It's based on the labor and the ability to get these projects done but done.
And then the second part, I mean, Andrew, I think you can talk about what we're seeing from our customers and certainly the tie into our strategy on outsourcing and bringing more work to us in terms of our capabilities, yes, we've certainly seen the industrial OEMs has been doing more outsourcing as we've seen more onshoring taking place, as Rick talked about labor, I think is going to continue on the industrial side to be a little bit of a challenge. And I think for us, we're in a really good position with existing customers and new customers and to take advantage of these fabrication opportunities.
Rick also talked about data centers. We've been a certainly a player in that part of it more on the on the tube side of it and think that's going to really continue to grow over the next. It's certainly two to five years.
Okay, great. Thank you very much.
Thank you.
The next question is coming from Chris Sakai of Singular Research. Please go ahead.

Chris Sakai

Hi, good morning.
Airline credit.
I wanted to ask I wanted to ask about inventory levels on how should we be thinking about them throughout the year?
Well, we think we're in NAM were at appropriate levels today, really across the board. And I think as lead times continue to, I would say, Chris, to be at normal levels. Again, we see hot roll in the four to five week cold roll in the six week stainless and aluminum in four to five week. I think we'll get back to a traditional inventory turns. We target certainly five times turns, and we think we'll certainly be there. And I think for the second half of the year, I think we'll be and we'll be in good shape inventory-wise.
Okay, thanks. Thanks for that. Can you comment on the quarterly cadence for capital furniture's for the next three quarters?
Yes, sure, Chris. As I indicated in our comments, we think that the full year spend will be in the $30 million range. We've just been we've ordered a lot of equipment. It's just taking a long time and the lead times are long to get to them. But I think that number's a solid number to use for the full year forecast.
Okay, thanks.
Once again, ladies and gentlemen, if you do have a question, please press star one on your telephone keypad. At this time. We'll pause a moment for any additional questions.
I'm showing no additional questions in queue at this time. I would like to turn the floor back over to Mr. Marabito for closing.
Thank you, operator, and thank you all for joining us on our call this morning. We certainly appreciate your continued interest in Olympic Steel, and we look forward to speaking with you again next quarter and have a nice day. Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.