Q4 2023 Olympic Steel Inc Earnings Call
Participants
Rich Manson; CFO; Olympic Steel, Inc.
Rick Marabito; CEO, Director; Olympic Steel, Inc.
Andrew Greiff; President, COO; Olympic Steel, Inc.
Phil Gibbs; Analyst; KeyBanc Capital Markets Inc.
Dave Storms; Analyst; Stonegate Capital Markets Inc.
Chris Sakai; Analyst; Singular Research
Presentation
Operator
Good morning, and welcome to the Olympic Steel 2023 first Fourth Quarter Financial Results Conference Call. (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, and I want to steal. Please go ahead, sir.
Rich Manson
Thank you, operator, and 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 drive.
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 and 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 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 can be found on our website. Today's live broadcast will be archived and available for replay on Olympic Steel's website.
Rick Marabito
Thanks, Rich, and good morning, everyone. Thank you for joining us today to discuss Olympic Steel 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 strength and resilience. For the 2nd year in a row, we withstood a hot roll 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 margins and all those specialty metals space 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 create 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 deal maker of the Year by the Cleveland association for corporate growth for a metal fab acquisition in January, 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. As a result of all these actions, our inventory management and strong cash flow have fortified our balance sheet and position Olympic Steel for future growth.
In 2023, we invested $170 million in the highly accretive metal fab and central tubing by our acquisitions and investments have produced immediate strong EBITDA returns. However, our total debt increased by only $25 million to $190 million a 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 in 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 Siegel to the new role of President manufactured metal products. Zach has been with the Company since 2007 and for the past six years. These played an instrumental role in our acquisition strategy in his new role that will lead our newly created manufactured Metals Products Group. one of the growth areas of our company. While he remains involved companies, mergers and acquisition activity as we head into 2020 for Olympic Steel is stronger than ever.
We remain committed to our discipline around 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 growth and acquisitions, we're confident in our ability to build on our success in 2020 for 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's 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. This segment completed its second best full year, and it's 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 were 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 tubing bar. We completed the acquisition of CTB. in October of 2023, and the integration has gone smoothly. The business fit 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 description 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 year 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, cold rolled and 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 EBITDA as this segment continued to face it 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 OEM.s 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. 2020 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 tubing 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 Weibo pretax income compared with $900,000 of life of pretax income in the same period a year ago.
The fourth quarter 2020 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 additional 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 expense 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 of 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 excellent position to continue investing in higher return opportunities. Our capital expenditures totaled $21.3 million 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% 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 4, 2024.
We have now paid dividends for 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.
Question and Answer Session
Operator
(Operator Instructions) And our first question this morning is from the line of Phil Gibbs with KeyBanc Capital Markets. Please proceed with your questions.
Phil Gibbs
Gentlemen. Good morning. We're in Evansville. A question on your recent acquisition of Central. And I know you just building on on how it fits within the existing from a bandwidth of the pipeline to franchise and and then how you may may look at that as a result of future platform to due to maybe expand your offerings elsewhere?
Andrew Greiff
So Phil, this is Andrew. So on central to fits beautifully under our Chicago Tube and Iron segment is the bulk, as you know, of the business that they're doing is fabricated tubes. It's a growth part of what we're looking for under some ships, private tube. And um, it also allowed us to get into two areas that we were not done in Little Rock as well as in Tulsa. And so the facilities up there when you go into our fabrication facilities have a very similar equipment to what you guided to has in. So it was a very natural fit to talk to them under that segment.
Rick Marabito
I'd say and Justin Ward, who use was the previous owner of CTB. is a fantastic leader who stayed on with us. In term, we've got a really big plans to continue to use the NCTI.s slash CTB. platform to do more value-added processing in a in a big chunk for the CTBCDTB. business is datacenters. Yes. So we're excited about the growth there.
Phil Gibbs
How are you guys looking at the just the value add component of the business overall in there as a percentage of revenue as a percentage of volume? I know on the volume standpoint, it's probably not massive, but from a revenue standpoint, it certainly can can move and move the dial. Have a percentage of revenue, maybe more where you are where you were and why do you want to go
Rich Manson
Philips reg? I think what we've talked about is the focus is not generally on revenue that focuses on gross margin. And I think what we've said in our pipe and tube segment is that they want 50% of their gross margin being generated by voting close right now with the acquisition of CTD.
Rick Marabito
And then overall, maybe, Andrew, you talked a lot of. Yes, fabrication and really the growth we're seeing, especially on not only in the pipe into but also within the stainless and really in the carbon side or.
Andrew Greiff
That's right. And so Phil, as you know, we dedicated two facilities, one down in and do for Georgia, the other end Bartlett, Illinois, that they are strictly fabrication facilities. But if you go through a number of our other large facilities, you will also see some value added equipment from in conjunction with maybe some of our more traditional have quit Mint as well. It is a part of our business feel that we see growing very rapidly.
We brought on this year and hired a new Vice President of a fabrication, some exits. Gerald had a industrial OEM background to join us and help us accelerate this of these processes. And it is the demand coming today, in particular from the industrial OEM has really put us in a terrific position to convert what was originally rectangles going to the customer to now value added parts in a lot of cases of welded finished goods that go directly into the assemblies of these industrial OEMs. On the specialty metals side, we're seeing that equally in food and food equipment and in truck trailer in particular has been a has been really growth area for that.
Phil Gibbs
Thank you. And then just on the overall demand environment for what are your customers telling you to expect and not in the new year here?
Andrew Greiff
Yes, I'd say the the industrial OEM, when we towards the end of last year, the forecasts were that they would have seen a a down year in their forecasts from our accurate. We've seen certainly at the beginning of the year that the volumes are down, not horribly, but there's certainly downtown come on the specialty metals side.
Truck Trailer, again, it's down a little bit, but not off significantly. Food Equipment is actually starting to come back on. So we're seeing we're seeing some some resurgence from our traditional customers. The finance business has been pretty steady.
So we as we think about growth, we think that the first quarter growth is going to be pretty good compared to fourth quarter, probably up tonnage wise in the 10% to 12% range versus a of a pretty strong fourth quarter, relatively speaking from what has been traditional.
So we're seeing them. We're seeing started the year be pretty good. And this is how we kind of see the year.
Rick Marabito
And I think the end of the item to really note, as Andrew talked about a couple of the end industries where our customers have forecasted slightly softer volume. Some were more than offsetting that with the new business and a lot of that new businesses, what Andrew talked about a few minutes ago on the fabrication side.
So that's how we get to the around the tender 10%, 11%, 12% growth in the first quarter sequentially on we're onboarding a lot of new business.
Andrew Greiff
It's a new product. I mean, our galvanized business, some really as has taken off. And so we've done a lot of focus on our tandem products and cold-rolled and galvanized certainly have some will accelerate this year.
Phil Gibbs
Thanks, guys. And then last question for me. So just thinking about the puts and takes of the call it, the carbon sheet contract business seems like it should be lagging the spot these fields, like obviously it's been moving down. So you've got some pluses and minuses there.
The Lobo, I would imagine kind of neutralizes in Q1, stainless feels like it's sort of stabilizing from a pricing standpoint. You got the volume growth on final, think inflation at the margin is accelerating too much from here. So how do we think about the just the just the growth, I guess, despite though some ForEx low versus the fourth quarter?
Rich Manson
Yes. Phil, it's Rich. And I think you kind of hit it spot on. You've kind of got things going in different directions with the contract and the spot business. I think what you'll see is with the reset of index pricing higher on January first, you typically come out of the gates a little stronger with gross margin and you kind of see it fade as you go through rest of the quarter. I would add on the life. oh, keep in mind that life is only on our pipe and tube segment, and we had a pretty substantial amount of life of income in the fourth quarter.
They tend to lag I index pricing by three to six months. And so we probably will see higher priced inventory coming in for pipe and tube in the first half of the year. You could actually lead to a little bit of life expense over the first half.
Operator
Thank you. Our next question's from the line of Dave strong Stonegate. Please save your questions.
Dave Storms
Good morning. Good morning to written on. Just to kind of follow-up on Michael's earlier question about CTP. and your M&A outlook in OpEx is continuing to build a diversified business, or are there any segments of your business that you would like to see more diversified? And are there any thoughts of addressing that in the M&A market?
Rick Marabito
Yes, Dave, this is Rick. So first, generally, our overall strategy and through M&A as well as CapEx, we like all three of our business segments. So our intent is to grow all three of them on, you know, we've had probably until CTB., we had a little bit of a greater focus success rate in in terms of specialty metals and carbon in on the acquisition side.
That's why we were thrilled really on to add CTB. to the mix. But strategically, we're looking to grow all three of them through a balanced approach on CapEx and acquisitions from. Obviously, if you look at some of that recent acquisitions we've done, we really are gravitating towards those types of companies that really have a consistent return, high return on companies that we can add a good amount of synergy to through our our existing operations. So I'd say we're taking a really balanced approach, and we'd like to grow all three segments through and through acquisition. And while we're doing that, we're going to continue to do what you saw us do, which is add fab standalone fabricating facilities adjacent to some of our metal fabricating facilities. So we like that model as well.
Dave Storms
Okay, helpful. Thank you. And then just more in an industry wide level, what are you seeing in terms of inventory levels at the mills? And how do you factor this? And when considering demand going into 2024,
Andrew Greiff
this is Andrew. We've seen lead times from the mills, the, um, from the carbon males in particular, which we've seen lead times come in a little bit hot rolled today is call it in the four to six week time period. That's down. If you go back about a four to six weeks ago was probably more in the six to six week period. Same thing for Tandem products, stainless and aluminum has been very steady. So we're seeing the mills are pretty consistent today with a with deliveries from probably on the on the on the shorter side.
Dave Storms
That's very helpful. Thank you.
Operator
Thank you. As a reminder, to ask a question today, you may press star one for the next question is from the line of Chris Sakai with Singular Research. Cedar questions.
Chris Sakai
Hi, good morning. Morning, Rob, since all the question on on specialty metals than the stainless steel headwinds always, but expecting to see those regions.
Andrew Greiff
Well, I think, Chris, what you've seen is nickel prices have hovered right in that 750 range on and so that they've historically at least what we've seen in the last, you know, two, three years, some are a little bit lower, but again, where our inventory is appropriate, our mill lead times are known are pretty a pretty good.
The imports are certainly going to continue on. And so I would say that we excel expected 24 is going to be a really good debt will be a good growth year for specialty metals.
Chris Sakai
Okay, thanks. And then can you comment on the tube and pipe? What were the main driver for the good quarter this as sustainable going forward?
Rich Manson
Sure, Chris, it's Rich. And I think as we've talked throughout the year, that's a pipe and tube, continued focus on value added work and the continuing of OEMs to outsource more work to us has been a huge factor in driving their gross margins above 30% consistently for the year. Additionally, the fourth quarter, you see an additional bump from having CT. be included in those results.
Rick Marabito
We're really excited about Keep in mind, as Rich said, and you saw on the earnings release, we acquired CTB. in the fourth quarter. So our results actually had some acquisition related costs. So we're excited for '24 to have the full year impact of CTB. in the pipe and tube segment. So that's certainly a positive.
Chris Sakai
Okay. Sounds great. And last one from me on the for 2020, for what sort of what can we generally expect as far as acquisitions are concerned, our divestiture of will it be a blend of up?
Rick Marabito
Yes, Chris, this is correct. Right now, we have really nothing that we're looking at on the divestiture side, certainly on the acquisition side, as we commented, we've made six acquisitions in the last five years. That is definitely piece of our strategy going forward or active on the entire M&A marketplace for models really broadly due to the economic environment, the interest rate environment, the back half of last year seemed to slow a little seems like it's picking up a little bit.
But then that is a and a key piece of our strategy going forward. And will remain and will remain active. Looking for the good fits that we've outlined.
Chris Sakai
Okay. Thanks for that.
Operator
Thank you. At this time, we've reached the end there, a question and answer session, and I'll turn the floor back to Rick Marabito for closing remarks.
Rick Marabito
Thank you, operator, and thank you all for joining us on our call this morning. We appreciate your continued interest in Olympic Steel, and we look forward to speaking with you again next quarter. Thanks. Have a great day, everybody.
Operator
Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
