Good morning. And welcome to the Olympic Steel 2018 Full Year and Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. [Operator Instructions] And as a reminder, this conference is being recorded.

Some statements made on today’s call will be predictive and are intended to be made as forward-looking within the Safe Harbor protections 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 press releases filed with the Securities and Exchange Commission.

During today’s discussion, we will reference adjusted net income per diluted share which is a non-GAAP financial measure. A reconciliation of this non-GAAP measure to the most direct comparable GAAP financial measure is provided in the press release that was issued this morning which 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’d like to introduce your host for today’s call, Olympic Steel’s Chief Executive Officer, Rick Marabito. Thank you, sir. Please go ahead..

Thank you, Operator, and good morning, everyone. Thank you for joining us to discuss Olympic Steel’s 2018 fourth quarter and full year results.

Joining me on the call this morning are Olympic Steel’s President, Dave Wolfort; CFO, Rich Manson; Executive Vice President and Chief Operating Officer, Andrew Greiff; and the President of our Chicago Tube & Iron Business, Don McNeeley.

Before we begin, I want to take a moment to thank Michael Siegal for his tremendous leadership of the company as our CEO for the past 34 years. We are glad to have the opportunity to continue to work with him in his new role as our Executive Chair of the Board of Directors.

We will remain intensely focused on continuing the successful legacy of growth and diversification that we have established under Michael’s tenure as CEO. In addition, this is Rich Manson’s first earnings call as our CFO. Rich is a 23-year veteran of Olympic Steel and you will hear from him later on the call this morning.

2018 with a landmark year for our company in many ways, in addition to the seamless executive management transition that took place at the end of the year, we delivered record revenue and strong profitability making this the third consecutive year of improved financial results.

Our market share in carbon, pipe and tube, stainless steel sheet and coil and aluminum sheet and coil all increased year-over-year. The higher volume combined with higher prices pushed consolidated net sales to a record $1.7 billion in 2018.

For the year, sales increased significantly in all three of our product segments, Carbon Flat, especially in Metals Flat and Pipe and Tube. In addition, both Specialty Metals and Pipe and Tube achieved record annual profitability. As a result 2018 consolidated operating income more than doubled to $57 million.

That’s the third most profitable year in the company’s 64-year history. We achieved these record results, despite the market softening in the last quarter. For the fourth quarter of 2018, we have reported a net loss of $0.11 per share, which included $3.7 million of LIFO expense.

Excluding the LIFO expense, we earned adjusted net income of $0.14 per share during the fourth quarter of 2018, which compares favorably to the fourth quarter of 2017 and Rich will provide more detail later in the call.

In 2018, we continue to invest in our strategy to grow our core business in areas with higher returns and less volatility, as well as improve our operating efficiencies. We reinvested across all three of our businesses, with approximately $26 million of capital expenditures.

In addition, we executed on our strategy of growing and diversifying our business through M&A activity, including the acquisitions of Berlin Metals in April of 2018 and most recently the McCullough Industries acquisition that closed in January 2019.

McCullough Industries is a manufacturer of branded self-dumping hoppers use in a variety of industrial applications. We are actively exploring acquisitions of other manufacturers of metal-intensive branded products. David will provide more detail about both on our capital expenditures and acquisitions in his remarks.

Lastly on February 8th, the Board of Directors declared a regular cash dividend of $0.02 per share, which is payable on March 15, 2019 to holders of record on March 1st. This marks 55th consecutive quarter we paid a cash dividend. I will now turn the call over to David for his comments..

Thank you, Rick. We accomplished a great deal in 2018, punctuated by the seamless transitions of Rick Marabito into his new role as CEO and Rich Manson into his new role as Chief Financial Officer. We have also had several other successful senior leadership changes, which further strengthens the team’s ability to execute on our long-term vision.

So before I get right into the business of fourth quarter and our accomplishments of last year, I like Rick Marabito want to acknowledge Mike Siegal’s leadership over the past 35 years we have had the mutual pleasure of working together on a daily basis. Michael successfully engineered a generational buyout of the founding generation in 1984.

Then in 1994 Michael Siegal quarterbacked our public offering now 25 years old. Michael Siegal has spent 45 years working at our enterprise, which by itself is a significant accomplishment. I along with the entire company offer my profound appreciation and admiration of his many years of dedicated service. Thank you, Michel.

Now let me get into 2018 and the fourth quarter. And as Rick noted, we invested $26 million during 2018 back into our business. Capital expenditures included expanding our Schaumburg, Illinois building by 42,000 square feet and adding a new Herr Voss cut-to-length line to exclusively process light metals. This became operational in January 2019.

We are adding a new tube laser in Romeoville, Illinois to Chicago Tube & Iron Arsenal and fiber optic lasers in Chicago, Iowa, and Cleveland. The new lasers increase our value-added margins and improve productivity.

We are adding a second slitter at Integrity Stainless, a Specialty Metals division in Streetsboro, Ohio to support our growing stainless steel business and installing a new rotary shear to our temper mill in Iowa facility -- in our Iowa facility over the summer, which improves productivity and reduces cost.

In addition to the $26 million of capital expenditures acquisitions were also a bit part of our success during the year.

The acquisition of Berlin Metals expanded our product line with prime 10 more offerings, accelerates the growth of our stainless steel business and further supports our growth strategy by adding new customers and markets with additional cross-selling opportunities.

The acquisition of McCullough Industries, which we announced on January 2, 2019, marks our entry into the metal-intensive branded product manufacturing business. This transaction allows us to take advantage of our expertise in purchasing, processing and logistics to enhance profitability and reduce volatility.

We see further opportunity for tuck-in acquisitions and metal-intensive branded product manufacturers, and our strong balance sheet and revolving credit facility provide us with ample resources to pursue such transactions.

I want to emphasize that this effort to diversify our business is complementary to continuing to invest smartly in growing our three core businesses, as our new manufactured metals downstream strategy is fed by our synergistic core. It’s all part of an overall strategy.

And while 2018 had a number of notable accomplishments, it wasn’t without challenges. During the fourth quarter, we experienced an acceleration of negative pricing headwinds that began in late third quarter, as Hot Roll CRU eroded by $100 a ton during the fourth quarter.

The pricing headwinds impacted our gross margins in the fourth quarter and have continued into early first quarter 2019. We also face challenges from trade disputes and counter tariffs authored by the European Union, Canada and countries, whose steel trade has been disrupted by the implementation of Section 232.

To counteract these headwinds, we are improving inventory turnover focusing on reducing operating expenses and planning for lower capital expenditures in 2019.

In conclusion, I want to emphasize that we are well aware of the global challenges we face in 2019 and we are being co-active by continuing to focus on responsible and profitable growth through additional variable low cost stocking locations that are close to our customers and provide advantage for local distribution and we will continue to evaluate ways to diversify our product mix and reduce volatility in our business such as our recent move into metal-intensive branded product manufacturing with the McCullough acquisition.

With that, I will turn the call over to Rich for the financial review..

Thank you, David, and good morning to everyone. I am excited to be stepping into my new role as CFO and I look forward to building on our strong foundation. Earlier Rick began the call by noting we had achieved record sales and profitability during 2018, so allow me to expand upon those comments.

We reported record revenue of $430 million during the fourth quarter of 2018. Our revenue was up $73 million or 20% from the fourth quarter of 2017. For the full year 2018, we reported record revenue of $1.7 billion, which was up $231 million or 16% from 2017.

All three of our operating segments reported record revenue in 2018, and for the year, our sales mix was 63% Carbon Flat, 20% Specialty Metals and 17% Pipe and Tube. The sales mix reflects our strategy to diversify our product offerings to improve margins and reduce volatility in our results.

And the record sales resulted in record annual earnings in our Specialty Metals and Pipe and Tube segments. The company in total in our Carbon Flat-Rolled segment report is their third best profitability year. For the fourth quarter of 2018, we reported a net loss of $1.3 million or a $0.11 per share.

However, as we indicated in our earnings release earlier this morning, our fourth quarter results include a $3.7 million LIFO charge, excluding that the LIFO charge, we are in $0.14 per share on a FIFO or a non-GAAP basis. During the fourth quarter of 2017, we reported a $4.2 million net income or $0.37 per share.

However, those results included a one-time tax adjustment of $6.2 million of income related to the adoption of the Tax Cuts and Job Act of 2017. If we exclude that one-time adjustment, as well as the LIFO and other items described in our earnings release, we lost $0.04 per share on a non-GAAP basis in the fourth quarter of 2017.

So our fourth quarter 2018 results on a non-GAAP basis were $0.18 per share stronger year-over-year and for the full year of 2018, we are in $3.51 per share on a non-GAAP basis or 3 times our 2017 earnings. Please see the earnings reconciliation on page two of the earnings release that was issued earlier this morning.

Our strong 2018 earnings further bolstered our already robust balance sheet. At December 31, 2018, we had total assets of $761 million or $157 million increase over December 31, 2017. The increase in assets was primarily attributable to higher working capital needs, to fund our growth and the year-over-year higher prices for metal.

We remain focused on efficiently converting our accounts receivable and inventory into cash. And for 2018 we reported DSOs of 41.2 days and we turned our Flat world inventory 4.3 times. Over the past few months, we made a few changes to our asset base credit facility to allow us to take advantage of low cost borrowings.

This allows us to invest in both capital expenditures and strategic acquisitions. So in November, we increased the size of a revolving credit facility from $400 million to $475 million to fully take advantage of utilizing our working capital as lending assets. We finished the year with $303 million of borrowings and $139 million of availability.

The $139 million of availability is an all-time high for the company and our availability currently sits at approximately $160 million after completing the McCullough acquisition.

Additionally, in January 2019, we took advantage of the current interest rate environment and entered into a five-year interest rate swap of 2.57% and $75 million of our LIBOR borrowings. We are currently borrowing at LIBOR plus 1.25%, so the effective interest rate on that $75 million interest rate swap is 3.82%.

We believe that this low interest rate borrowing provides us a strategic advantage in deploying our capital toward organic growth and acquisition activities. At year end, our debt-to-equity ratio was 0.9921 and our FIFO EBITDA rate, debt-to-FIFO EBITDA rate was 3.621.

So looking forward to 2019, we expect to generate cash flow by reducing working capital, increasing immaturity turnover and keeping our capital expenditures below our annual depreciation expense. The free cash flow will be used to pay down our revolving credit facility and we expect our 2019 tax rate to approximate26.5% to 27.5 %.

Finally, we plan to file our Form 10-K later today, which will provide additional details on our operating results for 2018. Now, Operator, with that, let’s open the call for questions..

Thank you. [Operator Instructions] Our first question is from the line of Martin Englert with Jefferies..

Hi. Good morning, everyone..

Good morning, Martin..

Good morning..

You would call out the gross margin pressure 4Q and then also carrying over in 1Q, our margins quarter-to-date in 1Q incrementally lower than what you were seeing in 4Q?.

Martin, its Rick. Obviously through the fourth quarter as the prices dropped, we saw the margin pressure accelerate from October to November to December. I think as we started January, we are pretty similar to where we had ended in December and our expectation is, is that the margins are going to start turning and improving.

So, I’d say if you kind of had a look at it graphically, the margins were continuing to drop through fourth quarter kind of get into the bottom of that here in early February and then we would expect them to start improving now..

Okay.

So, that you haven’t seen a positive inflection yet though as of mid-month area?.

No..

Okay. Thank you. And then with the McCullough acquisition, can you provide more detail on that regarding purchase price, sales for the last year, EBITDA contribution 2018, and then, how you are thinking….

Sure..

… about allocating that amongst the segments there?.

Yeah. So we made a press release in early January, and obviously, absent from that press release where some of the numbers you are asking me about. What I can tell you is, it’s a pretty small acquisition, but we think a very impactful acquisition. As we described, they make self-dumping hoppers.

We have got incredible synergies that we can bring to that type of a manufacturing process. I think we will have some disclosures probably in our first quarter 10-Q on the purchase price, but the purchase price was up -- it was $11 million, so it wasn’t -- you will see that in the first quarter.

We talked a lot today on our call and we included in our earnings release the concept of as we invest in these types of acquisitions and/or future CapEx that we are really driven by having much higher returns that some of the generic base service center would bring and certainly McCullough is a perfect example of that.

And then, on top of that, when you add the synergies that we will be able to bring through supply from our Cleveland warehouse in terms of purchasing and supply logistical advantages, advantages in terms of being able to do first stage processing for them out of the existing inventory, we really already carry.

We are pretty excited about it and we also think that there’s a lot of opportunity for us to continue down the path of making similar type acquisitions of different businesses in the McCullough model.

So that’s what it’s about, obviously, given the size of it, we are not disclosing all the other financial parameters around it, but thanks for the question, Martin..

I appreciate it..

So one thing to add Rich is that, going forward the McCullough results were all up in the Carbon Flat ….

Oh! Yeah..

… and I think that was the last part of Martin’s question..

Yeah. Thank you, Rich. Yeah. So it will roll up into the Carbon Flat segment..

Got it.

And then just circling back there, you touched on the liquidity there you have done a number of things to change on, the revolver there and did I hear you call it you had $160 million of liquidity currently post the acquisition?.

Yeah. Martin, it’s Rich. Correct. We are about -- seeing about $160 million, $165 million currently..

Okay. Thanks for that.

And then if I could add one other one there, what are you seeing with the demand environment right now so far year-to-date regarding volumes and purchasing activities from the various end users, maybe if you could give a little bit of color amongst your various end markets?.

Sure, Martin. David, how about if you take that one from Martin..

Sure, Martin. Thank you very much for the question. Quite frankly, our large OEM customers are signaling high single-digit growth for 2019 to low double-digit growth. So continuation of 2018’s growth compounded from late 2017. Across the Board, the only tweaked that is automotive, which is juggling production.

We see that more in a neutral environment going into 2019 and start business was sluggish at the tail end of all of Q4 and January, and it’s beginning to raise its head with the CRU incline of this week. But in general, we are bullish 2019 and our large OEM customers in construction, agriculture, industrial production are all signaling growth..

Okay. Thanks for all that detail folks..

Our next questions are from the line of Phil Gibbs with KeyBanc..

Hey. Good morning..

Good morning..

Martin was very thorough. He took almost of my questions and here we are.

But just elaborating a little bit more on the demand side of the equation, high level it sounds like year, a year got off to a slow start with maybe some end user destocking and some destocking efforts of your own and that seems like it’s somewhat transitory if you have got the likes of cat and deer and others having decent outlook.

So I am hearing kind of a Tale of Two Cities here from you all this morning.

So I just wanted to see if we were reading that correctly?.

Yeah. So, Phil, I think as David described, we are really optimistic about our OEM demand I think the spot market has been soft as David elaborated on. I think spot market will pick up as we move through the normal cyclicality of the down market and the spot buying normally tapers off and that happens.

So we would expect to start to see the spot business pick up here. And as we are looking at demand and we are looking at what our customers are telling us, we are optimistic that we are going to see some good demand growth year-over-year, as David described. So, I think, you alluded to kind of the tale of the two cities.

Obviously, as the prices were moving down in fourth quarter combined with the normal cyclicality of end of year plus the start of a New Year, I think that was pretty typical. And then you lay around that the dropping price and maybe that got accentuated a little bit.

But, overall, the good news is we are seeing good demand, our customers are optimistic and we are planning for year-over-year growth..

Okay. I think I might have had another one, but it wasn’t as important, the quarter following up. Thanks..

Thank you, Phil..

Thank you. [Operator Instructions] Our next question is from the lines of Chris Sakai with Singular Research..

Hi. Good morning..

Good morning, Chris..

Most of my most of my questions have been asked already.

But going back to gross margins for the exit 2019, where do you see it going from here, do you have to give some sort of idea as far as where the how that’s -- how that will be this year?.

Sure. So, I think we talked a little bit about the margins in the first quarter and we saw the margins really hit their low point into the fourth quarter and to start the first quarter. I think we are optimistic that we will see margins come off the lows of fourth quarter and start first quarter in the back half of the first quarter.

And then, we would expect ourselves to get back into a more normalized margin environment and for us, I think, looking at the $180 to $200 a ton gross margins is what we would anticipate seeing as we move into the back half of first quarter and into the rest of the year.

We think that we will have a more stable pricing environment, obviously we have come off from the highs of some of the Section 232 driven price spikes that we saw last year and we are settling in now at a pricing environment that will be a little more consistent and normalized and I think our margins will be more consistent and normalized as we move forward.

So I think the synopsis would be a slower start on margins in the beginning of the first quarter pretty similar to fourth quarter, and then, we will see them rising to the more normalized levels, I told you about..

Okay. Thanks a lot..

You are welcome..

Our next question is from the line of Martin Englert with Jefferies..

Sure. Thanks for the follow-up. On the LIFO that was a notable accounting headwind for this quarter..

Yeah..

Any guidance, you can provide on what you are kind of expecting in 1Q here?.

Yeah. Martin, it’s Rich. I think that, we are hoping that as the market changes here, we would expect to probably see a little bit of LIFO income in the quarters ahead. The one thing to note is that, when we do our LIFO we kind of estimate it for the full year.

So as we look at not just the first order effect, we are kind of forecasting as to what December 31, 2019 is going to look like. But I wouldn’t anticipate a $3.7 million LIFO charge in the first quarter. I am always a little more benign..

Okay. Thanks for that. And then, really quickly, there, inventory plans looks like dollar value inventory, I think, stepped up Q-on-Q.

What are you thinking with volumes, are you going to be destocking here and there’s some working capital targeting improvements there?.

Yeah. We have got some target improvements on inventory. So Rich talked about our inventory turnover for ‘18, which I believe was 4.3 times. We will target and I feel pretty comfortable we will turn our inventory faster in 2019. I think we have the opportunity to pick up about a half a turn on inventory.

Of a note, Martin we actually did take our inventory volume down in the fourth quarter. The pricing impact much like you saw on the Pipe and Tube with the LIFO impact.

The pricing impact on the inventory actually caused the inventory to tick up slightly in terms of dollars, but the volumes actually decreased in fourth quarter and my expectation is as we move through the first half of the year we will continue to see some reductions in volume and see our inventory turn pick up about a half a turn..

Okay. Thanks for that.

And then quickly just touching on the budgeted CapEx you kind of noted around, did you say below D&A or around D&A for the year?.

Yeah. Martin, we are forecasting somewhere between probably 70% to 80% of depreciation for the year, which I think is going to be somewhere in the $16 million to $17 million range of depreciation, so we would expect the cap to be less than that..

Probably, $15 million is a good round number to think about it..

Okay. Thanks for the other detail there folks..

And our next question comes from the line of Michael Leshock with KeyBanc..

Hey. Good morning. Just wondering about operating expense reductions, how should we be thinking about that and where are the buckets in terms of savings if you could break that out.

And then kind of in the same vein, are you seeing the freight pressures subside in this quarter?.

So, freight, we really saw the impact of the inflation hit in the middle part of last year. We have seen it relatively stable starting in the third quarter into the fourth quarter and planning a relatively stable distribution market for -- and freight market for 2019.

So what I tell you is as probably pretty similar in terms of freight rates back half of the year going into 2019, much the same. We saw some inflationary pressures on labor. So going into the middle part of the year, in the summer that too peaked, I think that also has sort of settled in.

So I think going forward, our labor rates will be pretty consistent to what you have seen more recent run rates in the third quarter and fourth quarter are.

In terms of other operating expenses, we have got some opportunities that we are working on, where I believe we will start to yield some operating savings in admin and warehouse, as we move through 2019. And I also think we are at the spot where I think we can gain some efficiencies, as we continue to grow our topline and grow the business.

I think we are at a point of equilibrium here unlike in 2018 where we saw some surges in volume, and we had to meet those surges during the high point of trying to access labor. I think that labor smoothing into this year will allow us as we grow to really leverage some of the operating expenses..

Okay. Great. Thank you..

Thank you. We have no further questions at this time. I’d like to turn the floor back over to management for any closing comments..

Well, thank you, everyone. Thank you, Operator. Once again we appreciate you joining us on our call this morning and for your interest in Olympic Steel and we look forward to sharing our first quarter results with you this spring. Have a great day. Thank you..

This concludes today’s teleconference. You may disconnect your lines this time and thank you for your participation..