Olympic Steel's Q3 2025: Contradictions Emerge on Synergy Costs, M&A Strategy, and Tariff Impacts

Date of Call: None provided

Financials Results

• Revenue: $1.16 billion, down $7.8M (less than 1%) vs prior quarter; ASPs +2.6%, tons shipped -3.2%
• EPS: Net loss $14.8M, $(0.46) per diluted share, compared to net income $1.9M / $0.06 diluted in prior quarter
• Gross Margin: 17.2% (gross margin), down 70 bps QoQ; gross margin ex-LIFO 18.3%, down 70 bps QoQ

Guidance:

• Volumes for Q4 2025 expected to soften 5%–7%.
• Revenue for Q4 2025 expected $1.07B–$1.11B (ASPs flat to +2%).
• Gross margins expected to remain under pressure due to elevated input prices and weak demand.
• Q4 adjusted EBITDA (ex LIFO) expected $33M–$37M; LIFO expense expected $10M–$14M.
• Net loss per diluted share for Q4 expected in range $(0.28) to $(0.22).
• Net CapEx to finish the year within target ~$50M; expect cash flow to continue improving leverage toward 0.5–2.0x.

Business Commentary:

• Market Challenges and Performance:
• Olympic Steel's Q3 net sales reportedly decreased by $7.8 million, or less than 1% compared to the prior quarter, with average selling prices up 2.6% and tons shipped down 3.2%.

• The decline in sales was attributed to a continuing industry recession with falling industry shipments and notable carbon steel margin compression.

• Financial Outlook and Guidance:

• For Q4, Olympic Steel expects volumes to soften by 5% to 7%, with revenues projected in the range of $1.07 billion to $1.11 billion.

• Gross margins are expected to remain under pressure due to elevated input prices and a challenging demand environment.

• Merger Impact and Synergies:

• The announced merger with Olympic Steel is expected to create over $120 million in synergies, to be phased in over two years.

• The combination is projected to enhance the new company's presence as the second-largest metal service center in North America, with over $6.5 billion in revenue.

• Capital Structure and Liquidity:

• Olympic Steel ended Q3 with $500 million in total debt and $470 million in net debt, showing a decrease of $10 million and $9 million respectively compared to the prior quarter.
• This improvement reflects a leverage ratio of 3.7 times, moving closer to the target range of 0.5 to 2.0 times.

Sentiment Analysis:

Overall Tone: Positive

• Management described a difficult market but emphasized strategic upside from the announced merger: expected $120M of synergies phased over two years, a stronger pro forma company with $6.5B revenue, and statements like "we’re engaged, we’re energized" and "I truly believe the best is yet to come" to support a constructive outlook.

Q&A:

• Question from Samuel McKinney (KeyBanc Capital Markets): Fourth quarter, typically a strong cash flow quarter for you guys. Given the urgent guidance and the normal year-end working capital release, fair for us to expect some more solid cash generation again to close the year?
  Response: Expect a meaningful Q4 working-capital release (typically ~$70M–$80M) driving solid cash generation.

• Question from Samuel McKinney (KeyBanc Capital Markets): Where is it that you see the greatest opportunities to win incremental pro forma market share as a combined company?
  Response: Primary opportunities are cross-selling/upselling and geographic expansion (Olympic's eastern footprint + Ryerson's western footprint and Mexico), enabled by a broader one-stop-shop product and processing offering.

• Question from Samuel McKinney (KeyBanc Capital Markets): Currently, Ryerson generally reports as a whole company... Are you planning for this merger to be a complete roll-up with no segments, or are you going to provide some segments to the business?
  Response: Undecided — management will map out the post-close reporting structure during the signing-to-close period to best serve shareholders.

• Question from Alan Webber (Robotti & Company): Can you talk first about whether there are cash costs to get the synergies? I just want to make sure that the synergies you’re talking about are under current market conditions, not based upon improved business cycles, etc.?
  Response: Synergies are grounded in current market conditions; one-time implementation costs are expected (management cited up to ~$40M).

• Question from Alan Webber (Robotti & Company): When and if the markets do improve, how do you think about incremental EBITDA margins starting from your pro forma EBITDA?
  Response: Pro forma EBITDA targeted around ~6% today; with normalized market tailwinds management foresees margins rising toward ~6%–8% (top-quartile scenarios 8%–10%).

• Question from Alan Webber (Robotti & Company): Assuming market conditions are flattish next year, can you talk about working capital for the combined company for next year? Whether that would be a source of cash? And have you gotten any customer comments, good or bad, or concerns?
  Response: Material working-capital upside expected via inventory sharing and improved turns that will free cash; early customer feedback has been overwhelmingly positive.

Contradiction Point 1

Synergy Costs and Implementation

It highlights differing perspectives on the costs associated with achieving synergies from the merger, which is crucial for understanding financial expectations and operational efficiency.

Are there cash costs associated with achieving the synergies, and are they based on improved business cycles? - Alan Webber (Robotti & Company)

2025Q3: Any upturn will show operating leverage, but synergies are grounded in the current environment. Costs incurred will include up to $40 million to realize synergies. - Eddie Merritt(CEO, Ryerson) and Rick Marabito(CEO, Olympic Steel)

What are the key drivers of flat-rolled margin improvements? - David Joseph Storms (Stonegate Investment Group)

2025Q2: We are actively pursuing projects in several areas to reduce costs and improve productivity. We have a very robust capital project portfolio, and we are investing in our business, specifically in technology. The expected capital expenditure this year is approximately $50 million, which is about 1% of our annual sales. - Richard A. Manson(CFO)

Contradiction Point 2

M&A Strategy and Appetite

It involves changes in the company's stated approach to mergers and acquisitions, which can impact growth strategies and financial outcomes.

Will you fully consolidate into one segment post-merger, or retain some segments? - Samuel McKinney (KeyBanc Capital Markets)

2025Q3: We're going to figure that out between signing and close. We'll consider what's best for shareholders and potential shareholders to understand the company and its direction. - Eddie Merritt(CEO)

With the five-year ABL extension in place, what is your current appetite for M&A, which areas are you targeting to strengthen, and how does the current market compare to recent periods? - Samuel McKinney (KeyBanc Capital Markets)

2025Q1: M&A continues to be a key piece of our strategic growth. We've done eight in seven years and are active looking. Initially, there was a slowdown in the pipeline, but in April, we started seeing a return of potential sellers and candidates. We plan to continue at the pace we've been, anticipating at least one deal a year. - Rick Marabito(CEO)

Contradiction Point 3

Working Capital and Cash Flow Expectations

It involves differing expectations regarding working capital and cash flow, which are critical for financial management and investor confidence.

Given strong Q4 cash flow, is solid cash generation expected this year? - Samuel McKinney (KeyBanc Capital Markets)

2025Q3: We expect a decent working capital release in this fourth quarter. Typically, we see between $70 million and $80 million in working capital release relative to volumes and natural release. So, we expect good cash flow from operations. - Jim Claussen(CFO)

Can you discuss your strategies for working capital and inventory management to offset the 10% non-domestic metal supply? - David Storms (Stonegate)

2025Q1: Our inventories are at appropriate levels, and we expect supply to be stable as we head into the balance of the year. We're well positioned because of our domestic supply base. - Andrew Greiff(COO)

Contradiction Point 4

Pro Forma Market Share Opportunities Post-Merger

It highlights differing perspectives on the strategic opportunities and potential market share gains following a merger, which could impact investor expectations and strategic direction.

What are the key opportunities to gain incremental pro forma market share as a combined company? - Samuel McKinney (KeyBanc Capital Markets)

2025Q3: Eddie Merritt: Cross-selling and upselling opportunities are key, with a focus on shorter distances to customers, enhancing selection and value-add capabilities. Rick Marabito: There are great opportunities for new geographies and product combinations, improving customer solutions, and increased ability for one-stop shopping. - Eddie Merritt(CEO, Ryerson) and Rick Marabito(CEO, Olympic Steel)

Have you revised the roadmap and when to expect the next acquisition? - Alan Webber (Robotti & Company)

2024Q4: Alan Webber (Robotti & Company): Have you changed your mind on the roadmap, and when do you expect the next acquisition? Rick Marabito (CEO, Olympic Steel): As we've said, we don't comment on specific acquisitions, but we are very disciplined about when and where we make acquisitions. As we have said, we expect to maintain our capital allocation strategy of $100 million to $150 million per year. - Rick Marabito(CEO, Olympic Steel)

Contradiction Point 5

Tariffs and Pricing Impact

It involves differing views on the impact of tariffs on pricing and profitability, which are critical factors for investors to consider.

Have you received any customer comments, positive or negative, related to the merger? - Alan Webber (Robotti & Company)

2025Q3: The tariffs are really just an additional premium on top of the Midwest transaction premium. We continue to maintain a strong customer base with long-term relationships. - Eddie Merritt(CEO, Ryerson)

Are you seeing early signs of the upcoming tariffs? - David Storms (Stonegate)

2024Q4: Since the tariff announcements, there has been an immediate impact on pricing, with hot-rolled futures prices and CREW indexes showing significant increases. We anticipate continued price escalations until further notice. - Andrew Greiff(COO, Olympic Steel)