Olympic Steel, Inc. (NASDAQ:ZEUS) Q1 2023 Earnings Call Transcript
Olympic Steel, Inc. (NASDAQ:ZEUS) Q1 2023 Earnings Call Transcript May 5, 2023
Operator: Good morning, and welcome to the Olympic Steel 2023 First Quarter Financial Results Conference Call. Please note that this conference is being recorded. At this time, I would like to hand the conference over to Rich Manson, Chief Financial Officer at Olympic Steel. Please go ahead.
Rich Manson: Thank you, operator. Welcome to Olympic Steel's earnings call for the first 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: Thank you, Rich, and good morning, everyone. Thank you for joining us on today's conference call to discuss Olympic Steel's 2023 first quarter results. I'll begin with an overview of another strong quarter for Olympic Steel driven by our ongoing strategy to diversify and strengthen our company. Then Andrew will review highlights from each segment and provide some comments on market conditions. Following that, Rich will discuss our financial results in more detail. And then as always, we will open up the call for your questions. Our year is off to a strong start. For the first quarter, Olympic Steel reported sales of $573 million and adjusted EBITDA of $28.6 million with balanced earnings from all three of our segments.
Overall customer demand remained steady with metal distribution shipments increasing 3% from a year ago and significantly increasing 15% from the seasonally slower fourth quarter. And as we mentioned on our last call, after six months of declining steel prices, we began to see price increases in December of last year, and these supply-driven increases accelerated as we enter 2023. At the end of the first quarter, hot rolled index pricing was up 74% from the beginning of the year. Our acquisition of Metal Fab in January was a highlight for the quarter as the second largest acquisition in our history and our sixth acquisition in the last 5 years, Metal Fab represents the latest success in our strategy to diversify and strengthen Olympic Steel.
As you'll recall, Metal Fab broadens our product offerings, capabilities and geographic reach by producing venting and filtration products for residential, commercial and industrial applications. Products are manufactured primarily of coated carbon and stainless steel and aluminum in our two Wichita, Kansas facilities. Included in our Carbon segment, we're thrilled with the fast start in the performance of Metal Fab. As Rich will highlight later, the impacts of onetime acquisition expenses and purchase accounting adjustments are now behind us in the first quarter, and we will see the benefit of Metal Fabs earnings in the second quarter of 2023, followed by meaningful synergies beginning in the second half of the year. While successfully integrating Metal Fab is a priority for our team, Olympic Steel remains extremely well positioned to identify and pursue additional acquisition opportunities that advance our strategy.
Our balance sheet is incredibly strong. And with the increase in our revolving credit line executed in conjunction with the Metal Fab deal, we now have record levels of capital and borrowing availability to invest in organic growth initiatives, automation and further acquisitions that align with our strategic priorities. We're excited about the future of Olympic Steel and the prospects to build our business model for sustainable long-term success. We also recently issued our second corporate responsibility report, which can be accessed on our website. The report highlights our progress in ESG, DEI, safety and our other core value initiatives at Olympic Steel. As we look ahead, we understand that the near-term macroeconomic picture is unsettled.
Photo by ant rozetsky on Unsplash
However, demand from our industrial OEMs remain steady, and we expect the second quarter to look a lot like our first quarter. We have demonstrated that our team's actions to diversify and grow Olympic Steel have made us a stronger, more resilient and consistent performer while navigating the impacts of market cyclicality. So now with that, I will turn the call over to Andrew.
Andrew Greiff: Thank you, Rick, and good morning, everyone. As Rick noted, the first quarter was a strong start to the year with solid and steady performance from each of our segments. Now for a look at our performance by segment, starting with carbon, the favorable combination of increased shipment volume and improving pricing environment and the addition of Metal Fab delivered a strong quarter. Although results were adversely affected by onetime charges associated with the acquisition, carbon contributed adjusted EBITDA of $11.6 million for the quarter. Team's hard work and discipline around inventory management enabled the segment to positively impact our results as our shipments rose 6% from a year ago, which does not include Metal Fab as we do not report tons sold for this business.
Congratulations to David Gia and the entire carbon segment on their outstanding work and performance this quarter. Pipe and Tube led by Bill Zielinski had its second most profitable quarter ever, contributing EBITDA of $11.3 million. The team's focus on margin improvement and fabricated product growth is driving positive results. In particular, the investments to improve the segment's fabrication capabilities are leading to enhanced laser speeds, reduce lead times and improve service to customers. We are also targeting a May groundbreaking for our 30,000 square foot Des Moines, Iowa expansion with expectations to be operational by the end of the year. Specialty Metals, led by Andy Markowitz faced industry-wide stainless steel headwinds leading to softer volumes and lower margins.
The good news is we were still able to post another very profitable quarter, earning EBITDA of $10.2 million. We continue to organically grow in aluminum as our share of the market rose to a 2-year high following the divestiture of our Detroit operation in September of 2021.Our new white metals fabrication facility in Bartlett, Illinois is near completion, and we expect it will be fully operational in the second quarter. Overall, we expect second quarter demand to remain steady, similar to the first quarter. Our industrial OEMs continued to show a solid backlog and are performing to forecast. We are seeing a pickup in our Food Equipment and Appliance segments, truck trailer customers and transplant automotive business in the Southeast. Thank you to our entire team for another outstanding quarter.
Now I'll turn the call over to Rich.
Rich Manson: Thank you, Andrew, and good morning, everyone. It was an exciting quarter for Olympic Steel, highlighted by strong performances in all of our segments, our successful acquisition of Metal Fab and the increase in our revolving credit line from $475 million to $625 million, resulting in record availability for continued investments in acquisitions and organic growth opportunities. Please keep in mind that the inclusion of Metal Fab in our first quarter 2023 results will make year-over-year comparisons more difficult. Metal fab, which is included in our Carbon segment, does not report tonsold and typically has higher returns than our distribution business. Additionally, there are several onetime acquisition-related adjustments that we highlighted in our adjusted EBITDA reconciliation.
For the quarter, net income totaled $9.8 million compared with $37.3 million in the first quarter of 2022. No LIFO adjustment was recorded for the first quarter of 2023 or 2022. Adjusted EBITDA was $28.6 million for the first quarter. Adjusted EBITDA excludes a onetime $2.1 million GAAP fair market value adjustment to Metal Fab's inventory and $2.6 million of acquisition-related expenses. We expect that our reported financial results will begin reflecting the full strength of Metal Fab's earning power in the second quarter of 2023 as the acquisition-related charges will be behind us, and we expect to begin realizing metal supply synergies in the second half of 2023. Our total debt at the end of the first quarter was $258 million, an increase of $93 million since year-end 2022 and which included the $131 million acquisition of Metal Fab.
During the quarter, we generated $52 million of cash from operations, resulting in a $38 million reduction in debt during the quarter. We expect additional debt reduction during 2023, primarily occurring in the second half of the year. At quarter end, our credit availability was a record $355 million, providing us with significant capital to continue our strategic investments in acquisitions, new capacity and automation to drive increased efficiency. Consolidated operating expenses, including Metal Fab, totaled $102.7 million in the first quarter, an increase of $14.6 million or 16.6% from the prior year quarter. The higher expense level reflects the addition of Metal Fab's operating expenses the onetime acquisition-related charges and the absence of a $2.1 million gain on the sale of our Mylan Iowa warehouse that occurred in the first quarter of 2022.
Capital expenditures for the first quarter of 2023 totaled $7.4 million compared with depreciation of $5.1 million. We expect 2023 capital expenditures to total $30 million. Our effective tax rate for the first quarter of 2023 was 26.8% compared to 27.0% in the first quarter of 2022. Also, during the quarter, we paid the higher cash dividend of $0.125 per share, a 39% increase from our previous quarterly dividend of $0.09 per share. Our Board of Directors approved a $0.125 per share dividend payable on June 15 to holders as of June 1. Subject to board approval, we expect to maintain the quarterly dividend of $0.125 on a regular basis. We have now paid dividends for 72 consecutive quarters. Looking forward, we are excited that our reported financial results in the second quarter and beyond will begin to reflect the full strength of Metal Fab's earning power.
The impact from Metal Fab, along with the continued success of our strategic investments and diversification and organic growth gives us great confidence in the future of Olympic Steel. Now operator, let's open the call for questions.
See also 20 Biggest Holding Companies in USA and 20 Most Desirable Companies To Work For In USA.
To continue reading the Q&A session, please click here.
