Olympic Steel, Inc. (NASDAQ:ZEUS) Q1 2024 Earnings Call Transcript May 3, 2024
Olympic Steel, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Olympic Steel 2024 First Quarter Financial Results Conference Call. All this time all participants are in a listen-only, a brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I’d like to hand the conference call over to Rich Manson, Chief Financial Officer at Olympic Steel. Please go ahead.
Richard A. 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 do 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 T. 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 experienced in the first quarter. Despite these pricing challenges, we generated solid profitability, which reinforces that our strategy is working. 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, Max Fitzgerald to the newly created role of Vice President of Fabrication. Max 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’re beginning to realize the benefits of the 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 remains 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 will 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 the shifting market dynamics.
We continue to expand our coated offerings beyond Metal-Fab and coated shipments are increasing. As Rick highlighted, we’re 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 had 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 & Bar has gone well. We continue to upgrade our laser equipment including enhancing production capabilities at CTB, with a new laser that is expected to be operational in July. Our legacy CTI business is also upgrading this year to a new jumbo laser that will replace two original tube lasers. These new lasers have an increased speed and efficiency rate of 30% as compared to the old equipment. Overall, our laser capabilities put Olympic Steel in a strong position to win new opportunities and support our strategic objectives. For the past 1.5 years, 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’re 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 A. 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 Tube & 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 with $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 for McCullough Industries, EZ-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 3, 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. It’s 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.
Operator: Thank you. The floor is now open for questions. [Operator Instructions] Today’s first question is coming from Dave Storms of Stonegate. Please go ahead.
See also Anchor Capital Management’s Top 9 Stock Picks and Former Holdings in 2024 and 35 Most Dangerous Cities in the World.
To continue reading the Q&A session, please click here.