Olympic Steel, Inc. (NASDAQ:ZEUS) Q4 2023 Earnings Call Transcript
Olympic Steel, Inc. (NASDAQ:ZEUS) Q4 2023 Earnings Call Transcript February 23, 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: Greetings. Good morning, and welcome to the Olympic Steel 2023 Fourth Quarter Financial Results Conference Call. This time all participants will be in a listen-only mode. [Operator Instructions] Please note that this conference is being recorded. At this time, I'd 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 fourth quarter of 2023. 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 financial 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.
Rick Marabito: Thanks, Rich, and good morning, everyone. Thank you for joining us today to discuss Olympic Steel's 2023 fourth quarter and full year results. I'll begin by talking about our 2023 performance and the strategic progress we've made over the last five years, then Andrew will review our segment performance. And following that, Rich will discuss our financial results in more detail. And of course, then as always, we'll open up the call for your questions. It was another highly successful year for Olympic Steel. We believe our 2023 performance is a defining statement about our company's strength and resilience. For the second year in a row, we withstood a hot-rolled carbon steel index pricing decline of more than 45% during the year, as well as specialty metal surcharges that fell throughout the year.
Yet, despite these significant pricing fluctuations, we delivered on our strategy and commitment to generate consistent profitable results. We reported fourth quarter sales of $489 million, with net income of $7.4 million and EBITDA of $20.9 million. All three of our business segments positively contributed to our results for both the fourth quarter and the full year. Our pipe and tube business delivered its second most profitable year ever. Our carbon business showed its resiliency in navigating the pricing pressures of 2023 with improvements in sales and gross margin. And although, specialty metals faced industry-wide stainless steel headwinds, this segment contributed consistent positive EBITDA. We are now five years into our strategy to build a more diversified company that delivers results and creates shareholder value even under challenging market conditions.
During that time, we've successfully integrated six acquisitions, each of which has added a unique value-added offering to our portfolio. We were recently named Corporate Dealmaker of the Year by the Cleveland Association for Corporate Growth for a Metal-Fab acquisition in January 2023. We have also strategically divested assets to further tighten our focus on higher-return, higher-value-add products. And throughout our transformation, we've stayed true to our operating disciplines. Our success is a result of all these actions. Our inventory management and strong cash flow have fortified our balance sheet and positioned Olympic Steel for future growth. In 2023, we invested $170 million in the highly accretive Metal-Fab and Central Tube & Bar acquisitions, and both investments have produced immediate, strong EBITDA returns.
However, our total debt increased by only $25 million to $190 million at year-end, with availability of approximately $339 million. As a result, we remain in excellent position to continue to invest in higher-return opportunities in the future. The recent decision by our Board of Directors to increase our quarterly dividend by 20% also reflects our company's strong financial position and the success of our strategy. Cumulatively, we've raised our quarterly dividend from $0.02 per share to $0.15 per share since 2022, reinforcing our commitment to deliver value to our shareholders. Our total shareholder return for 2023 was just over 100%, and for the three-year post-COVID period, our return was over 400%. I'm proud of the entire Olympic Steel team for their commitment to our strategy and the progress we've made the past five years, and we continue to enhance our team with new hires and promotions.
In January 2024, we announced the promotion of Zach Siegal to the new role of President, Manufactured Metal Products. Zach has been with the company since 2007, and for the past six years, he's played an instrumental role in our acquisition strategy. In his new role, Zach will lead our newly created Manufactured Metals Products Group, one of the growth areas of our company, while he remains involved in the company's mergers and acquisition activity. As we head into 2024, Olympic Steel is stronger than ever. We remain committed to our disciplines of managing working capital, operating expenses, cash flow and debt, while we continue looking for opportunities to further expand our portfolio of higher return, higher value-add products through both organic growth and acquisitions.
We're confident in our ability to build on our success in 2024, driving profitable growth and creating value for our shareholders. So now I'll turn the call over to Andrew.
Andrew Greiff: Thank you, Rick, and good morning, everyone. Olympic Steel finished the year strong, capping off another year of solid performance, despite challenging and dynamic market conditions. As Rick noted, this performance reflects the success of our strategy and our ongoing commitment to our operating disciplines. Our adjusted EBITDA was $16.7 million for the fourth quarter and $97.6 million for the year. Our pipe and tube segment had another exceptional quarter as this segment completed its second best full year in its 109-year history, with adjusted EBITDA of $40.3 million. Our strategy to increase the amount of value-added mix and upgrades and additions to our laser fleet resulted in gross margins remaining above 30% throughout 2023, resulting from the team's focus on margin improvement through fabricated product growth.
We expect margins will continue to strengthen with the addition of central tube and bar. We completed the acquisition of CTB in October of 2023, and the integration has gone smoothly. The business fits seamlessly into our growth plans, which will further enhance the performance of the pipe and tube segment. Turning to our Carbon segment, along with the contributions from Metal-Fab acquisition, Carbon delivered another solid performance while navigating some unusual market dynamics. In a typical year, fourth quarter carbon pricing falls during the seasonally slowest quarter. But in 2023, we saw index pricing fall 45% from April through September, and then it began rebounding in October in anticipation of the UAW strike settlement. During the fourth quarter, the index pricing increased 65%, which caused some customers to buy in advance of index pricing increases on contractual business for the first quarter of 2024 as well as the early settlement of many first quarter and first half 2024 contracts.
As a result, fourth quarter sales were down less than 3% sequentially from the third quarter rather than the traditional 6% to 8% decline. Despite all those market challenges and unusual circumstances, the Carbon segment earned adjusted EBITDA of $7.9 million in the fourth quarter. Carbon shipments were up 8% in the fourth quarter from a year earlier and up 6% for the full year. In particular, we saw growth in 2023 in higher-margin poll roll in coated products as well as through increased fabrication business. Specialty Metals has remained a meaningful contributor in the fourth quarter and recorded its third most profitable full year even as this segment continued to face industry-wide stainless steel headwinds and falling nickel prices. We are very proud of the accomplishments of our Specialty metals team and our performance under challenging market conditions.
Turning to end markets. In early 2024, we are seeing our industrial OEMs buying as forecasted. The same is true for food equipment, truck trailer, storage tank, HVAC and appliance customers. We are seeing very strong demand for industrial fabrication, especially for data centers. Our newest fabrication facilities in Buford, Georgia and Bartlett, Illinois, are performing extremely well. We thank all of our employees for a successful 2023, and we expect 2024 to be another solid year. Now I'll turn the call over to Rich.
Rich Manson: Thank you, Andrew. 2023 an important year for Olympic Steel as we demonstrated our ability to deliver consistent profitable results in all markets. Before I discuss the results, I want to remind you that year-over-year comparisons will be more difficult due to the 2023 acquisitions of Metal-Fab, and Central Tube & Bar. For the quarter, net income totaled $7.4 million compared to $4 million in the fourth quarter of 2022. Adjusted EBITDA in the quarter was $16.7 million compared to $11.9 million in the prior year period. Fourth quarter 2023 results include $5.3 million of LIFO pre-tax income compared with $900,000 of LIFO pre-tax income in the same period a year ago. The fourth quarter 2023 results also include $1.1 million of acquisition-related charges.
Consolidated operating expenses for the fourth quarter totaled $100.4 million compared to $81.6 million in the fourth quarter of 2022. Our fourth quarter operating expenses reflect the addition of Metal-Fab and CTB, which do not report tons sold. Therefore, operating expenses per ton at the consolidated level and for the carbon segment will appear higher year-over-year. Consolidated operating expenses for the fourth quarter include $10.1 million of Metal-Fab operating expenses, $5 million of CTB operating expenses higher warehouse and distribution expenses associated with 5% higher year-over-year volume and $600,000 of lower incentive expenses compared to the fourth quarter of 2022. Inflationary pressures during the fourth quarter and the second half of 2023 were negligible.
As a reminder, the CTB results for the fourth quarter included $1.1 million of deal costs and acquisition-related inventory fair market write-up amortization. As Rick mentioned earlier, our inventory management and strong cash flow have helped us to continue to fortify our balance sheet. We ended the year with debt of $190 million and availability of approximately $339 million, keeping us in an actual position to continue investing in higher return opportunities. Our capital expenditures totaled $21.3 million through the fourth quarter of 2023 compared to depreciation of $21.5 million. Equipment lead times remain long and we estimate that 2024 capital expenditures will be approximately $35 million as we continue to make investments in automation, fabrication and investments that result in higher gross margin opportunities and more consistent results.
Our fourth quarter 2023 effective tax rate was 23.3% and compared to 18.6% in the fourth quarter of 2022. We expect our 2024 tax rate to approximate 27.5% to 28.5%. Also during the fourth quarter, we paid our quarterly dividend of $0.125 per share. As outlined in yesterday's earnings release, our Board of Directors approved a $0.15 per share dividend, which is an increase of $0.025 per share from the company's previous quarterly dividend. The dividend is payable on March 15, 2024, to shareholders as of March 1, 2024. We have now paid dividends to our shareholders for 75 consecutive quarters. Although, we faced significant pricing headwinds and other market challenges throughout 2023, the success of our strategy and the strength of our company enabled us to deliver consistent results and reward our shareholders.
We are excited about the future and look forward to what we can achieve in 2024 and beyond. Now operator, please open up the call for questions.
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