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Edited Transcript of TSL.TO earnings conference call or presentation 31-Jul-19 8:30pm GMT

Q2 2019 Tree Island Steel Ltd Earnings Call

RICHMOND Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Tree Island Steel Ltd earnings conference call or presentation Wednesday, July 31, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ali Mahdavi

Tree Island Steel Ltd. - Head of IR

* Dale R. MacLean

Tree Island Steel Ltd. - President, CEO & Non-Independent Director

* Nancy Davies

Tree Island Steel Ltd. - CFO & VP of Finance

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Presentation

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Operator [1]

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Good day, and welcome to the Tree Island Steel Second Quarter 2019 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ali Mahdavi. Please go ahead.

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Ali Mahdavi, Tree Island Steel Ltd. - Head of IR [2]

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Thank you, operator. Good afternoon, everyone, and thank you for joining us this afternoon to review the second quarter 2019 financial results. Joining me this afternoon are our Tree Island Steel's President and CEO, Dale MacLean; and CFO, Nancy Davies.

If you have not seen the news release, which was issued earlier today, it is available in the company's website at treeisland.com as well as on SEDAR, along with our MD&A and financial statements. I would also like to remind you that a replay of this call will be accessible until midnight on August 14.

Following the presentation, we will conduct a Q&A session. (Operator Instructions) Before we begin, we are required to provide the following statements regarding forward-looking information, which is made on behalf of Tree Island Steel Ltd. 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 in the MD&A 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'd like to now turn the call over to Dale. Dale?

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Dale R. MacLean, Tree Island Steel Ltd. - President, CEO & Non-Independent Director [3]

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Thanks, Ali, and good afternoon, everyone. Thank you for joining us on today's call.

Our agenda this afternoon will be straightforward. I'll review and discuss our performance in Q2, then focus on what we are seeing in the markets, especially from a competitive and pricing perspective. I'll also briefly comment on the developments, which occurred subsequent to quarter end, and then turn the call over to Nancy Davies for a review of the financials, and then we'll open up the call to your questions.

Following our Q1 results and the continued negative pressures imposed on us due to the impact of U.S. Section 232 tariffs, the most notable and promising development occurred on May 19 when Canada and the U.S. reached an agreement to eliminate all tariffs the U.S. imposed under Section 232 on imports of steel from Canada and eliminate all tariffs Canada imposed in relation to this Section 232 action taken by the U.S. government.

Since the announcement of the agreement, interest for our product reintroduction into historical markets have continued to improve, in particular our industrial products, which were the most impacted by these tariffs.

Subsequent to the announcement, we are seeing an improving number of customers returning to our portfolio. We also cautiously are expecting an extended transitional period before customer purchase behavior returns to normalized levels of that prior to the imposition of the Section 232.

To caution, however, the lag associated with this favorable policy change has and will take some time to translate into our interim results. As such, in Q2, revenues amounted to $52.6 million, a decrease of 22.7% over the same period last year.

In the quarter, revenues were lower than in Q2 2018 on account of lower volumes on products impacted by the import tariffs as well as lower-than-expected demand for certain residential products.

The relatively stable pricing throughout this quarter and the rebalancing of resources to match lower volumes as part of our ongoing commitment to cost management were not enough to mitigate the lower volume resulting from Section 232 tariffs. The resulting gross profit margin for the quarter was $4.9 million versus $8.5 million in the prior year. Gross profit in the quarter was 9.3% compared to 12.5% in the same period last year. EBITDA during the 3-month period ended June 30, 2019 amounted to $2.6 million, approximately 52.3% lower than the same period last year.

Our focus on product pricing, profitable product mix and emphasis on maintaining tight cost controls contributed to Tree Island's profitability in the quarter, albeit at levels below where we really want them to be. We remain steadfast to our commitments to improve operational efficiencies, maintaining pricing discipline and continue to leverage our competitive advantages.

In certain periods, market conditions are more favorable and cooperative, thus, providing a robust foundation for continued growth. While other periods, such as Q2, continued to be an environment of continuous volatility based on the factors that I have already discussed.

Given that such circumstances are cyclical in nature, a return to more normalized business environment is expected over time, thereby setting Tree Island up for a return to more sustainable and attractive margins when measured over longer periods.

We will continue to take all measures to protect and further strengthen our business to withstand market pressures and the cyclicality with the ability to optimize 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 these challenges and remain EBITDA-positive in a tough quarter, which speaks volumes to the resilience of our business model and our people. We remain encouraged about the prospects for Tree Island with demand in our key end markets showing promise as we work through our seasonally business periods. As always, we remain confident in our future and the fundamentals of our business, and we look forward to continuing to build on our success and delivering value to all stakeholders.

In 2019, we will push hard against the macro industry-wide pressures, and we'll remain committed to long-term growth and profitability.

Before I hand the call over to Nancy, I would like to address the recent announcement concerning the unsolicited nonbinding proposal made by Futura Corporation and our Arbutus Distributors to acquire all of Tree Island's shares at a price of $2.25 per common share in cash, subject to a number of terms and conditions.

As a result, the Board of Directors of Tree Island immediately met and appointed a special committee of the Board, made up entirely of directors, who are independent of both management and the offerors. Subsequently, the special committee engaged PricewaterhouseCoopers LLP to prepare a formal valuation of the company in compliance with the Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions to assist the special committee into valuation of the nonbinding proposal made by The Futura Corporation and Arbutus Distributors.

As you can appreciate, this is an ongoing process, and we are limited on any other commentary until the special committee has an update from the market.

With that, I would like to ask Nancy Davies, our CFO, to take over and provide a review of the company's second quarter financials in greater detail, and we will then open up the call for questions. Nancy?

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Nancy Davies, Tree Island Steel Ltd. - CFO & VP of Finance [4]

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Thank you, Dale. Tree Island's second quarter 2019 results were released earlier today. Our results are presented in accordance with International Financial Reporting Standards and presented in Canadian dollars, unless otherwise noted. Please note, our operations are impacted by the seasonal nature of various industries we serve and, accordingly, our operating results for interim periods are not necessarily indicative of the results that may be expected for a whole fiscal year.

As Dale mentioned, revenues for the quarter were $52.6 million, 22.7% lower than last year on account of a combination of lower volume shipped to the U.S. from our industrial segment and also lower demand in our residential construction projects. As a result, gross profit for the 3 months amounted to $4.9 million versus $8.5 million during the same period in 2018. The decrease is a result of lower sales volumes, as noted earlier.

SG&A expenses are 9.7% lower than the prior year on account of cost-cutting measures implemented, a result being an EBITDA of $2.6 million in the quarter and a net loss of $0.5 million for the quarter or $0.02 per share.

In the first quarter, we adopted the new lease accounting standard, which is discussed in more detail in Note 3 of the financial statements. The change in accounting for leases resulted in recognizing a right-of-use asset of $32 million and a lease liability of $33.5 million.

With regards to our financial position, year-over-year, our inventory value was $1 million higher on account of higher quantities of raw material in the same time last year. Since the fourth quarter of 2018, we have decreased our inventories by over $15 million to better align the inventories with the current sales volumes.

The amount of our senior credit facility is higher year-over-year, primarily on the reduction of accounts payables, but quarter-on-quarter, the amount drawn on the facility is lower by $1.7 million. The existing inventories will be consumed in production and sales throughout the coming months.

Finally, in the year-to-date, the company has repurchased 337,153 shares at an average price of $2.5 per share.

With that, we'd be happy now to respond to any questions you may have. Thank you. Thank you, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Ali Mahdavi, Tree Island Steel Ltd. - Head of IR [2]

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Operator, I think we can wrap the call up.

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Operator [3]

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All right. That concludes our question-and-answer session, and I'd like to turn call back over to Ali.

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Ali Mahdavi, Tree Island Steel Ltd. - Head of IR [4]

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Thank you. On behalf of the Tree Island team, I would like to thank everyone for taking the time this afternoon to join us for the call. Should you have any questions or inquiries, please feel free to contact me directly. That concludes today's call. Enjoy the rest of your day. Thank you.