Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Olympic Steel Inc (ZEUS, Financial) delivered profitable results across all three segments despite a challenging pricing environment.
- The company reported increased shipping volume and sales of $526 million with a net income of $15 million and $22 million of EBITDA.
- Efforts to grow in higher-margin flat-rolled products and additional fabrication capabilities have strengthened the business.
- Olympic Steel Inc (ZEUS) has more than $340 million in borrowing availability under its existing credit facility, positioning it well for future investments.
- The specialty metals segment experienced its best quarter for both volume and profitability since Q1 2023, with shipping volumes increasing 10.4% year-over-year.
Negative Points
- The hot-rolled index pricing fell 22% during the second quarter and 39% since the beginning of the year, impacting overall profitability.
- Net income for the second quarter was $7.7 million, down from $15 million in the same period last year.
- EBITDA in the quarter was $22.3 million, a decrease from $32.2 million in the prior year period.
- Consolidated operating expenses increased to $104.6 million from $101.6 million in the second quarter of 2023.
- The effective borrowing rate in the second quarter of 2024 was higher due to the expiration of the interest rate hedge, increasing financial costs.
Q & A Highlights
Q: Starting in pipe and tube great gross margins this quarter around 34%, despite the lower sales. They've now been above 30% for six quarters in a row. What drove the uptick in second quarter gross margins despite those lower sales? And do you think margins can hang in that 33%, 34% range as you continue to glean more benefits from fabrication, automation and customer outsourcing?
A: (Andrew Greiff, President, Chief Operating Officer) Yes. It's been a strategy for our CTI Group to continue to grow in the fabrication part of the business. We are investing in more fabrication equipment. We do expect that those margins will be there and probably grow and it's really part of our downstream strategy to do more value added. We are still very interested in the distribution of the pipe and tube, but certainly, the growth part of it is coming on the fabrication side. (Richard Marabito, Chief Executive Officer, Director) Yes. And I think the other piece is the acquisition of CTB last year. They've certainly got a strong margin profile. So that would be the other piece of it, right?
Q: Moving to the balance sheet, inventory value on the balance sheet stayed pretty similar despite the steep pricing declines during the second quarter that you called out in the release. Assuming that, that sequential steadiness is more of a function of volume, how do you view your current inventory levels against lead times headed into the back half of the year?
A: (Richard Manson, Chief Financial Officer) It's not an increase in quantity. What it was, was a flip really between stainless surcharges on up 15% during the quarter. So you saw a higher value of stainless inventory while carbon inventory values went down. (Andrew Greiff, President, Chief Operating Officer) I think the inventory level is at an appropriate level. I think that there's a little bit more work that we certainly can do as we get through the third quarter into the fourth quarter, but I think the inventory level is appropriate.
Q: Just volumes are up real nicely, it looks like. Just hoping -- I wonder if you have any thoughts around any pricing outlook. Is there any kind of green shoots that you're starting to see maybe inventory levels industry-wide change in bid in environment, any momentum in the stock spot market, anything like that.
A: (Richard Manson, Chief Financial Officer) What we would tell you is that as we pointed out in the release in our comments, that second quarter hot-rolled pricing declined about 20%. We've seen that decline a little further here into July. That's really on the pricing side. But what we've continued to see from a demand side is that we're performing better year-over-year. I think what you saw in the second quarter as well as the first half is that we were up about 2% year-over-year. We expect that to continue -- that trend to continue into the third quarter. But that's what we're seeing on the volume, and we saw a nice jump up Q2 versus Q1 sequentially.
Q: On coded for Carbon. What's the outlook for this going forward through the back half of 2024. Is there an optimal call percent of carbon that you would like this to take up by the end of 2024. Just any outlook you have there would be helpful.
A: (Andrew Greiff, President, Chief Operating Officer) We've seen terrific growth. Mike Tookey runs our coated for Olympic, he's doing a great job. I would say that growth has been about 34% over last year. We expect to continue to see that through the balance of the year and actually see that accelerate as we get into '25 as we continue to make head roads into construction in the HVAC markets.
Q: I wanted to talk about, I guess, the pricing is facing some headwinds, how is that affecting M&A valuations? Is it decreasing then?
A: (Richard Marabito, Chief Executive Officer, Director) Valuations remain pretty steady in our industry. I think the real trick to valuations is looking over a performance cycle, the ups and downs in pricing and trying to look at a company's value over that cycle. That's how we tend to look at it. So certainly, in the short term, with some pricing pressure as you've seen in the steel industry in the last couple of quarters. The earnings have been a little bit compressed. But what I'd tell you is at least our approach on M&A, we're looking for really good, well-run companies that are consistently profitable that have consistently high return models and looking at those companies and considering where pricing in the market is, is certainly part of the valuation, but it's really more important to look at how they perform over the cycle. So I think on M&A, we're active. You know we've been active the last five years. We've seen the activity in the flow pick up in the second quarter and certainly continue to have that part, as we mentioned in our comments, certainly consider M&A to be part of our growth strategy.
Q: In this type of environment, is there any specific part of the business that you're focusing on more or that's performing better than the others? And what should that be and why?
A: (Andrew Greiff, President, Chief Operating Officer) Fabrication has become a big growth strategy for us. We have seen post-COVID the opportunities really explode in particular, from the industrial OEMs, the opportunities to be able to supply as they are looking for a finished product that can go right into assembly. And we've seen an acceleration of not only opportunities but picking up some fairly significant business. But I would also tell you that in all three of our segments, there is -- there are pockets of business that are starting to improve. On the specialty side, we're seeing a nice improvement in the food equipment of the truck trailer or the appliance side of the business. And our pipe and tube, where we're making some nice inroads with data centers. And then our carbon business, again, from a fabrication perspective, that's been pretty big, and we've seen some of the other industrials coming back a little bit. So we're pleased for all three segments with what we're seeing. (Richard Manson, Chief Financial Officer) I would add that in periods of time where pricing may compress the distribution margins, you're seeing us expand the margins on our and manufactured products as their cost of goods sold come down in these periods. And that was a nice balance in the second quarter. (Richard Marabito, Chief Executive Officer, Director) Yes, exactly. I think, Chris, what you've seen is -- and the evidence was there, and we talked about it a little bit, really a nice balance in all three of our business segments. And that's really the fruition of very strategic initiatives that we've taken over the years. Andrew has talked about the fabrication. Rich just talked about the end products and the offset and the counter cyclicality of that. Certainly, we
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
