Good morning and welcome to the Olympic Steel 2022 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to hand the conference over to Rich Manson, Chief Financial Officer at Olympic Steel. Please go ahead, sir..

Thank you, Operator. Welcome to Olympic Steel's earnings call for the first quarter of 2022. 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 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 Form 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 broadcast will be archived and available for replay on Olympic Steel’s website. At this time, I'll turn the call over to Rick..

Thank you, Rich. Good morning, everyone and thank you for joining us to discuss Olympic Steel's results for the first quarter of 2022. I'll begin with some comments about our exceptional performance for the quarter and how we've achieved these results.

After my comments, Andrew will review our business segments and provide some additional insights into the current market dynamics and then Rich will discuss the first quarter financial results in more detail. And, of course, as always then we'll take your questions. It was another quarter of historic performance for Olympic Steel.

In the first quarter, we reported record sales of $696 million and the second strongest quarter of profitability in our company's history with $58.1 million of EBITDA.

Our specialty metals and pipe and tube segments both delivered record quarterly sales and earnings while our carbon segment posted its second highest quarterly sales along with strong profits. These results are a testament to the strategic actions we have taken to strengthen Olympic Steel and better position us to succeed in all market cycles.

We've worked hard to diversify our business, reduce our exposure to cyclical risk and drive operational efficiencies. And as we saw in the first quarter, our ability to deliver near-record profitability in a challenging carbon pricing environment shows that these efforts are working.

The resiliency of our carbon segment is especially tolling, which Andrew will detail later in this call. Moving forward we're excited to advance our business through our capital deployment strategy.

We've built an outstanding M&A track record with strong first quarter contributions from our recent acquisitions including Berlin Metals and Action Stainless, as well as our other growth initiatives. We continue to actively evaluate potential acquisition targets and growth opportunities and I believe we're well-positioned to execute in 2022.

We have plenty of capital to deploy in new opportunities with strong returns that align with our strategy to further diversify our business. Our capital deployment approach is balanced with our commitment to reward shareholders as well.

In our earnings release, we announced our regular quarterly dividend of $0.09 per share and that's for the second consecutive quarter. And if you remember this was increased from our previous quarterly rate of $0.02 per share. We're also committed to communicating more about our ESG efforts.

Later this month, we will publish our first corporate responsibility report, which details our priorities, progress and goals for our ESG program. And you'll be able to find that report on our website and we encourage you to check it out.

I'm also proud to share that we have joined the PwC CEO Action for Diversity & Inclusion initiative, which is helping us to mobilize corporate America and CEOs in particular, to advance diversity and inclusion in the workplace.

Before I turn the call over to Andrew, I'd like to take a moment to just thank the entire Olympic Steel for their outstanding efforts and dedication to our strategy. Together, we are building a company that achieves sustained success and has a positive impact on our world.

Andrew?.

Thank you, Rick, and good morning. It is my pleasure to share additional detail about our historic performance during the quarter. All three of our businesses are executing at a very high level, due to our collective company-wide efforts in a market that continues to exhibit steady demand.

As Rick noted, our Specialty Metals and Pipe and Tube segments, each delivered record sales and profitability for the quarter and our Carbon segment posted its second strongest quarter of sales ever along with strong profits.

Looking at the market, after hot-rolled carbon index pricing peaked in September 2021, it began an unprecedented drop until early March 2022. In the face of this strong headwind, our Carbon segment was still able to post strong results for the quarter.

This is a direct result of the changes we have made to our business to create a sustainable model for consistent long-term earnings in our carbon business and throughout our company.

Following the unprovoked Russian invasion of Ukraine, pricing for most metal-based commodities, including pig iron, nickel, aluminum and scrap -- carbon scrap, increased significantly. While we now see hot-rolled carbon sheet pricing leveling off based on hot-rolled futures, the price for carbon plate stainless and aluminum products remain elevated.

For the quarter, we reported record sales and I want to note that our segment sales mix continues to become more diverse, the result of a very intentional effort over the last several years. For the quarter carbon, flat roll accounted for 54% of sales; Specialty Metals was 29%; and Pipe and Tube was 17%.

Our shipping levels were roughly flat year-over-year, excluding our former Detroit operations that we divested in September 2021. Jumping to our segment results. In Specialty Metals, market momentum and stellar execution enabled us to deliver a phenomenal first quarter.

Sales were up 58% from a year ago and the segment contributed $35.1 million of EBITDA, shattering its previous EBITDA record by nearly $10 million. We are encouraged to see our traditional end markets -- end user markets, appliance truck trailer, food equipment, industrial tanks, all performing well in light of continued supply chain issues.

Investments in our white metals facilities are performing well and will continue to grow in our best -- in our value-added business. Pipe and Tube also delivered another record quarter with sales up by 30% in EBITDA at an all-time high of $15.9 million.

Our traditional end-user markets have been remarkably steady and expect to see consistent volume through the second quarter. Turning now to our carbon business. Our focus has been to be profitable in all market cycles.

The performance of our Carbon segment, even as hot-rolled pricing continued its descent into early March 2022, demonstrated that our commitment toward this goal is paying off.

We weathered the headwinds of carbon index pricing, decreasing by over $1,000 per ton and maintain high volume levels to record a $380 million in sales, our second strongest quarter of Carbon segment sales ever. And we did this while earning $12.5 million of EBITDA, with all carbon distribution divisions profitable.

Our carbon team has focused on business that is profitable for us, being diligent on operating expenses and improving inventory turns. And these efforts are duly reflected in our results. Our industrial OEMs have been very consistent.

And as we have been discussing on these calls, have good backlogs, but are not able to get ahead due to the continued supply chain issues. Looking ahead, while metal prices increased at the beginning of March due to the war in Ukraine, it did not have a significant impact for our results for the first quarter.

We do expect current pricing dynamics and continued demand across our end markets will help support strong second quarter performance. Regardless of external pressures, we'll continue to focus on what we can control. We'll stay vigilant on safety, expenses and managing inventory levels and believe our business is well positioned for sustained success.

Now I'll turn the call over to Rich for more details on the financials..

Thank you, Andrew and good morning, everyone. As Rick and Andrew have noted, our team delivered an incredibly strong start to the year.

In addition to the $696 million in record sales for the company as a whole, our $58.1 million of consolidated EBITDA was a record for the first quarter and the second best EBITDA for any quarter in our company's history. This is an outstanding accomplishment following our all-time record performance in 2021.

As we get into our results, I want to remind you that we completed the disposition of our Detroit operations during the third quarter of 2021 and we acquired Shaw Stainless & Alloy in the fourth quarter of 2021. Those transactions impact our year-over-year comparisons.

Net income for the first quarter totaled $37.3 million or $3.23 per share, up from $22 million or $1.91 per share in the first quarter of 2021. Adjusted EBITDA was $56 million compared with $37.8 million a year ago. This year's results include no LIFO adjustment compared with $1 million of LIFO pre-tax expense in the first quarter of last year.

Consolidated operating expenses totaled $88.1 million for the first quarter, an increase of $11.2 million or 14.6% compared with the $76.9 million for the first quarter of last year. Operating expenses for the quarter were 12.7% of sales versus 16.6% of sales a year ago.

The current quarter included $1.6 million of Shaw operating expenses and $6.1 million of incremental incentive expenses, which are tied to profitability, when compared to the first quarter of 2021. Like all companies, we have experienced inflationary pressure on labor distribution, expense and supplies.

After adjusting for the items that were not present in the first quarter of 2022, we estimate the impact of inflation at 5% to 6%. Total debt decreased by $17 million since year-end 2021 to $311 million. We expect additional debt reduction during the second quarter.

However, as metal pricing remains elevated, we expect the majority of our debt reduction to occur in the second half of 2022. At quarter end, our credit line availability was approximately $160 million. Capital expenditures totaled $2.1 million compared with depreciation of $4.4 million.

Many capital expenditure projects including some of our automation projects were approved in the first quarter but long lead times are slowing the required utilization of cash. Our effective tax rate for the first quarter was 27% compared with 26.5% for the first quarter of 2021.

We expect our 2022 effective tax rate to remain within the 27% to 28% range. For the second consecutive quarter, the Board of Directors approved a cash dividend of $0.09 per share, a historically high level of dividend that is expected to be maintained in the future subject to Board approval. We have now paid dividends for 68 consecutive quarters.

Before we move to Q&A, I'd like to add my congratulations to our team for their efforts this quarter. We weathered the headwinds of the decline in hot-rolled pricing from September through early March. We expect these metal price increases to positively influence our second quarter results but are mindful of the risks of declining prices.

Regardless of pricing dynamics, we remain confident that the actions we've taken to diversify our business and expand into higher value-added product categories, position Olympic Steel to withstand market challenges and continue to deliver consistent profitability over the long term. Operator, let's open up the call for questions. .

Thank you. At this time we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from Marco Rodriguez with Stonegate Capital Markets. Please proceed with your question..

Yeah. Good morning, everybody. Thank you for taking my questions..

Good morning, Marco..

Good morning.

I was wondering, if maybe you could talk a little bit more in your prepared remarks you discussed the fact that even though you had the increase in pricing in Q1 due to the Ukraine-Russian war you didn't necessarily – your profitability didn't necessarily reflect that, if I understood that correctly and your expectation is you'll see more of a benefit here in Q2.

Can you maybe talk a little bit about the dynamics behind that?.

Well, Marco, this is Andrew. So we saw index pricing continue to drop. It really started September 2021, and went through, the end of February really first week of March. And after the unprovoked invasion we did see a immediate shift in pricing that we saw over probably a four to five-week period index pricing increased about $500 a ton.

So for us January and February were very good months, which certainly included the declining price. March was a little bit better. But again, the overall quarter even without the increase in pricing we still would have had a very good quarter..

Understood. And so is that partially, I mean, if I'm looking at your gross profits per ton on the Carbon side, it's a bit off year-over-year, but a decent sequential decline.

Is that factored into that movement there as well?.

It is. .

Understood. Okay. Got it. And then in terms of the specialty business ASPs went up pretty significantly sequentially. Can you talk a little bit more about the dynamics there? I understand that, obviously, the aluminum market and stainless are still kind of tight.

But if you can just kind of give us a little bit of an update in terms of what your thinking is and what your expectations are there for the ASP sequentially?.

Sure. What we saw from the beginning of the year we had seen an increase certainly in nickel and aluminum pricing hit historic highs as we came through the quarter into March. But you had a nice run up during that time period. It's leveled off a little bit since then.

And again, our white metals or Specialty Metals division has been doing incredibly well. And so the anticipation that, the selling prices will remain at the elevated prices, and a lot of that really is pegged towards those LME prices.

So as we've seen nickel come off a little bit same thing with aluminum, we may see a little bit of a decrease, but the volume has been very consistent very strong. .

Got it. Understood.

And just kind of curious here, are you seeing or are you able to kind of peel back the layer on whether or not you're seeing any increase in demand due to the Infrastructure Bill kind of working its way through the country?.

Yeah, Marco, it's Rick. It's a great question. I'd tell you, we're not seeing that yet. Obviously, as we've talked a lot on prior calls, we're really well positioned as a company in terms of who we sell to as the infrastructure spend kicks in. So we're really looking more towards that as a 2023, little boost to demand.

But to specifically answer your question, no, we're not really seeing the impact of any spending yet on demand..

Understood. And if I could sneak one more in here, just kind of talking about the M&A landscape in the pipeline. Obviously, there's been some increases in macro volatility Shanghai lockdown Ukraine-Russian war.

Have you seen that sort of impact the landscape of opportunities for you positively or negatively? And can you also kind of maybe discuss what you're seeing in terms of valuation levels right now?.

Yeah. So yeah, I'll kind of go in reverse order. Valuation levels certainly given the dynamics of the last two to three years and looking at what historical and cyclical earnings would be in terms of targets for M&A, you've got a lot of volatility.

So, I think this year, in terms of M&A activity that's going to be one of the factors that get really a lot of attention and thought in terms of coming through a pandemic and most companies have lower earnings than would be cyclically normal. And then we've obviously been in a really strong earnings environment here for the last year or so.

So that's certainly the valuation and the multiples on the valuation is certainly going to be I think an area that gets a lot of attention in the M&A market. We're seeing a good amount of activity in terms of the M&A market. I'm not exactly sure it's really driven off of the China and the war concerns.

But I think it's just more there's some pent-up demand from sellers who coming through COVID in the two years of shutdown maybe had been thinking about them and had been poised and ready to sell their companies potentially in 2020 and 2021 and it probably didn't happen.

So the short story is towards the back half of first quarter we're starting to see a lot of activity. We talked about -- we're certainly active and aggressively looking.

We strategically would certainly like to execute on acquisitions and keep our sort of pace and record that you've seen from us the last several years going and I feel optimistic and confident that we're going to be able to do that this year. Got it. .

Got it. Great. I appreciate you guys. Thank you..

Thanks, Marco..

Thank you, Marco..

Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question..

Good morning..

Good morning, Phil..

Can you update us on your CapEx plans this year just in terms of size? And then also what you're targeting with that spend?.

Yes Phil it's Rich. I'll talk about the dollar amount and then I'll kick it over to Andy to talk more about the specific expenditures. I think when we had done the last call we had predicted something in the low-30s in terms of cash flow.

I do believe that we will put POs out that equal that amount, but quite honestly I don't think we've seen a piece of equipment that hasn't had a lead time that's less than six months on a lot of the stuff.

And so I think the cash flow will probably tend to be more in the low 20s as opposed to below 30s and some of it just gets pushed into 2023 from a cash flow standpoint. .

Well, Rich that's 100% correct. We'll continue to invest certainly in the fabrication side of the business Phil. We have our second auto stamping press that's a little bit behind. We had expected sometime the beginning of the second quarter maybe even mid-second quarter would have been up in operational.

We're looking probably now third quarter for that to happen. Some of the high-speed fiber optic lasers that we had expected to be in are running a little bit behind. Same with some of the robotic welders and other automation equipment that we had expected to start about now and we're running in some cases two to four months behind.

But that hasn't stopped us and we have more that we're continuing to order. .

Thank you. And what are your big customers in the earthmoving equipment side telling you guys or indicating? I know as we were coming out of some of the periods in the last several months there was intermittent ups and downs and it was hard to plan at times for you and for others.

So what are you seeing there? What are they indicating to you?.

So that's a great question. They're remarkably steady. The supply chain issues may have shifted in some ways that it's not a steel issue anymore. It may be a harness issue or maybe a chip issue. A customer who's making seven units it has backlogs for 10 or 11 is making seven. They can't really seem to move ahead for a variety of issues.

And certainly what you're seeing out of China right now is adding to the problem. And the expectation is they're going to be very steady certainly through the second quarter and they're really indicating through the second half. .

And your auto business has gotten smaller post sale of some of your Detroit operations, but you still have some exposure there.

What are your auto guys indicating?.

It's about the same Phil. So the business now is focused to our southern location. And we've seen again steadiness. We really maybe slight uptick over the last month or two but really nothing dramatic. And the expectation is, that it's going to be the same again through the second quarter.

And unless the chip situation resolves itself, which we don't expect it's going to this year we expect it's going to be fairly steady certainly through the first half and probably into the second half as well..

And Phil, it's Rich. We'll have our updated investor deck out next week that has the breakdown by industry but you'll see where we used to be 8% to 10% in auto; first quarter this year we're about 2%..

Okay. And then last question with the unprovoked war in the Black Sea, are you guys seeing anything in the long term that you feel will change? I mean obviously, the prices in the short run have gone up but anything long term from a planning perspective or conversation perspective with your customers? Thank you..

Yes. I think and Andy certainly chime in. I think for us in terms of our customers and our supply we're not really dependent on that area of the world and haven't been for several years.

From my perspective however, we're going through a monumental global economic shift that may have some permanent impacts as we move forward in terms of demand supply dynamics into Europe.

And I think some of the things that we've talked about through the pandemic in terms of, supply chains, readjusting supply chains, realignments of economics and partnerships I think all those things are likely going to be lasting effects from this war and certainly have impacts on metal.

I think the short and the near-term impact of this even if the war were to get resolved quickly, which doesn't look like it is but hopefully it does I think it just creates supply chains that are going to be closer to home. And I think that's a very good thing for Olympic Steel and for US manufacturing.

But Andy, any other thoughts on that?.

Well the only thing I would add Rick, and I think you nailed it. I think the only thing is, you'll see the reduction of pig iron certainly coming from that region. The mills have talked about the stopping of buying pig iron coming out of Russia.

And I think what that will do, is you'll see a steadiness in scrap in the US and that I think bodes well for hot-rolled pricing at least keeping it steady in the long term..

Thank you, guys. Happy weekend..

Thank you, Phil..

Thank you, Phil.

[Operator Instructions] Our next question comes from Chris Sakai with Singular Research. .

Good morning..

Good morning, Chris.

You might have explained it up but can you walk me through the what were the main drivers for the higher cost of materials sold for carbon flat?.

Sure Phil, it's Rich. And so one of the things we've talked about is how index pricing especially on the carbon flat rolled side had increased steadily through September of 2021 and then we started to see the decrease fall after that.

So if you're trying to compare the first quarter of 2022 to the first quarter of 2021, there's a dramatic higher price level for carbon flat rolled in 2022 versus 2021 while it's down -- it started trending down versus fourth quarter when you're comparing to 12 months ago it's a substantial difference and that's where you're going to see the difference in the cost of goods sold.

.

Yes we were speaking more sequentially. We were speaking more sequentially about the pricing impacts than year-over-year in terms of cost of goods sold earlier. So that's exactly, right..

Okay.

Can you share your thoughts on where you see the average selling price per ton for carbon flat for the remainder of the year?.

Well, I think we've had a lot of volatility in carbon. We talked about carbon pricing here recently, elevating by about $500 a ton. If you look at the futures on carbon metals, they're pointing a little bit down from where they are today.

Specifically as we see a little bit of a decline here in the coming months and then it starts really flattening out for the year. So I think we're going to be in a relatively -- hopefully we're going to be in a relatively good pricing environment. I think it's going to -- prices are going to remain elevated.

I think hot rolled prices are going to be higher than people had predicted last year for the fall. I think that's a good thing. That's a good thing for certainly service centers in the steel industry as a whole domestically. So that's what I'd say.

I think we're in a period where it's just trying to find its footing and they settle a little lower than where we saw it recently peak up and then hopefully stabilizes..

Okay, great.

Can you talk about your inventory levels? And how do you feel about them? Are you comfortable where they are?.

I think we've done a good job in terms of reducing our overall inventory level Chris. I think it's -- I think we could expect in the next quarter, it will come down a little bit. And then we'll steady out through the balance of the year.

But I think we're in relatively good shape today, but I think we can -- we have some work to do to just bring it down a little bit..

Okay, great. Thanks for the answers..

You're welcome..

Thanks Chris..

We've reached the end of the question-and-answer session. I would now like to turn the call back over to Rick Marabito..

Thank you very much and thank you all for joining us today on the call. We really appreciate your continued interest and support of Olympic Steel and we look forward to speaking with you again next quarter. Thank you and have a good day. Bye-bye..

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation..