Executive Summary / Key Takeaways

• Olympic Steel (NASDAQ: ZEUS) has strategically transformed into a more resilient metals service center by diversifying into countercyclical end-use products and expanding higher-margin fabrication capabilities, positioning it to perform across volatile market cycles.
• Despite challenging macroeconomic conditions and metals price volatility, ZEUS has maintained profitability across all segments, demonstrating the effectiveness of its strategy and operational discipline, including strong Q1 2025 operating cash flow of $49.4 million and a $37 million debt reduction.
• Targeted organic investments in automation and processing equipment, such as new lasers, slitters, and cut-to-length lines, are expected to enhance efficiency and expand capacity by up to 30% or more in key areas, contributing to future margin expansion, particularly in 2026.
• The company remains committed to acquisitive growth, successfully integrating eight companies in seven years, including the immediately accretive MetalWorks acquisition, and maintains significant financial flexibility with over $269 million in ABL availability to pursue further strategic M&A.
• While facing risks from fluctuating metals prices, OEM demand softness, and competition from larger, more cost-efficient producers, ZEUS differentiates itself through value-added services, niche market focus, and a domestic supply chain emphasis, supported by a strong balance sheet and consistent shareholder returns via dividends.

Olympic Steel, Inc. stands today as a testament to strategic evolution within the cyclical metals industry. Founded 70 years ago in Cleveland, Ohio, the company has grown far beyond its origins as a traditional service center. Through a deliberate and sustained strategy of diversification and investment in value-added capabilities, ZEUS has aimed to build a business model capable of delivering profitable results across varying market conditions, a crucial objective in an industry inherently tied to volatile commodity prices and fluctuating industrial demand.

At its core, Olympic Steel operates through three distinct, yet increasingly integrated, segments: Specialty Metals Flat Products, Carbon Flat Products, and Tubular and Pipe Products. This structure allows ZEUS to serve a wide array of customers across diverse end markets, from food service and commercial appliances to heavy equipment, transportation, and increasingly, metal-intensive end-use products like dump inserts, hoppers, and solar components.

The company's strategic journey has been significantly shaped by a series of targeted acquisitions over the past decade, notably accelerating in recent years with eight deals closed in the last seven. These acquisitions, including Chicago Tube and Iron, Berlin Metals, Action Stainless, Shaw Stainless, Metal-Fab, Central Tube and Bar (CTB), and most recently MetalWorks in late 2024, were not merely about increasing scale. They were fundamentally about transforming the business mix – expanding into higher-margin product lines, enhancing fabrication capabilities, and adding countercyclical end-use manufacturing businesses that can provide stability when traditional metals distribution faces headwinds. This strategic pivot is central to understanding the modern Olympic Steel.

In the competitive landscape, Olympic Steel operates alongside larger, integrated steel producers like Nucor (NUE) and U.S. Steel (X), as well as other scrap-based producers and service centers such as Steel Dynamics (STLD) and Commercial Metals Company (CMC). While these larger players often benefit from economies of scale in raw steel production, offering potentially lower per-unit costs, ZEUS competes by focusing on agility, customer-specific value-added processing, and a broader range of fabricated solutions. ZEUS leverages its strategically located network of 54 facilities to offer faster delivery times and more customized products, differentiating itself from the bulk supply focus of some larger mills. Its investment in specialized processing equipment, such as high-speed tube lasers and precision cutting lines, allows for reduced material waste and higher precision compared to more generalized operations. However, ZEUS's smaller scale relative to giants like NUE and STLD can result in higher operating costs per unit, impacting overall profitability metrics compared to their often higher margins. Despite this, ZEUS has demonstrated an ability to gain market share in key areas like coated carbon steel, where its shipment growth significantly outpaced the industry average in the first half of 2024.

A key component of Olympic Steel's strategy and competitive positioning lies in its operational capabilities and investment in technology. While not developing proprietary breakthrough material science, the company is heavily focused on deploying advanced processing and automation technology within its facilities. Investments in equipment like new cut-to-length lines, high-speed slitters, and sophisticated tube and plate lasers are designed to enhance throughput, improve safety, and drive efficiency. For instance, automation projects at facilities like the Cleveland temper mill and the Chambersburg fabrication operation are expected to improve throughput and expand capacity by up to 30% or more. The company currently operates 20 high-speed sophisticated tube lasers, supporting its growing fabrication business. These investments are critical to providing the value-added services that differentiate ZEUS, enabling quicker turnaround times and the ability to provide complex, fabricated parts that OEMs are increasingly looking to outsource. This focus on operational technology directly supports the shift towards higher-margin fabrication and value-added processing, which now constitutes over 40% of the Pipe & Tube segment's business, with an objective to reach a 50/50 distribution/fabrication mix. The strategic intent behind these R&D and capital deployment initiatives is clear: to build a more efficient, higher-margin operational core that can better withstand the cyclical pressures of the underlying commodity market.

Recent financial performance underscores the impact of this strategy amidst challenging conditions. In the first quarter of 2025, Olympic Steel reported net sales of $492.9 million, a 6.4% decrease year-over-year, primarily driven by a 10.2% decline in average selling prices, although sales volume saw a 4.3% increase. Despite the top-line pressure from falling prices, the company's gross profit margin expanded to 24.0% in Q1 2025 from 22.6% in Q1 2024. This margin improvement reflects the dynamic relationship between falling metal prices and inventory costs, where the average cost of inventory decreased faster than average selling prices. Operating expenses increased by 7.3% to $110.7 million, influenced by the inclusion of the MetalWorks acquisition and higher variable costs associated with increased volume. However, all three segments remained EBITDA positive in Q1 2025, with the Carbon segment delivering $10.9 million, Tubular & Pipe $6.4 million, and Specialty Metals $3.6 million, demonstrating the resilience of the diversified model.

The company's financial health and liquidity remain robust, providing a solid foundation for continued execution of its strategy. Olympic Steel generated strong operating cash flow of $49.4 million in the first quarter of 2025, a significant increase from the $2.6 million used in the prior year period. This was largely driven by effective working capital management, including a notable decrease in inventory and an increase in accounts payable. The strong cash generation enabled a $37 million reduction in total debt since year-end, bringing the total debt level to $235 million as of March 31, 2025.

Further bolstering its financial flexibility, the company successfully amended and extended its $625 million asset-based revolving credit facility in April 2025, pushing the maturity out to April 17, 2030, and increasing immediate availability to $269 million. This low-cost capital source is critical for funding planned capital expenditures and potential future acquisitions. The company also continues its commitment to shareholder returns, having paid regular quarterly dividends since 2006 and recently increasing the quarterly dividend to $0.16 per share.

Looking ahead, management's outlook reflects a cautious optimism tempered by the expectation of continued macroeconomic headwinds in the near term. They anticipate capital expenditures of approximately $35 million in 2025, focused on the strategic automation and capacity expansion projects previously mentioned, with the full benefits to margins expected to materialize in late 2025 and early 2026. The effective tax rate is projected to be around 28% for 2025. While the Pipe & Tube segment may continue to see slower OEM demand in the near term, lagging the carbon market, management sees significant opportunity in onshoring trends for both flat-rolled and tubular products through 2025 and beyond, leveraging their expanded fabrication capabilities. They expect further debt reduction in the back half of 2025, aiming to bring borrowing levels back down to the low $200 millions by year-end.

However, the investment thesis is not without risks. The inherent volatility of metals prices remains a primary concern, capable of significantly impacting revenue, margins, and inventory values. Softness in demand from key end markets, particularly heavy equipment OEMs, can pressure volumes and pricing. While the company has diversified, a significant portion of its sales remains tied to industrial machinery and equipment manufacturers. Inflationary pressures on labor, transportation, and energy costs could impact operating expenses. Furthermore, compliance with ABL credit facility covenants could be challenged by sharp declines in metals prices or sales volumes, although the company currently maintains ample availability and compliance. The reliance on domestic mills for over 90% of its supply, while beneficial in the current tariff environment, still exposes the company to potential supply disruptions.

Conclusion

Olympic Steel has proactively addressed the cyclical nature of the metals service center business through a deliberate and successful strategy of diversification into value-added processing, fabrication, and countercyclical end-use products. This transformation, fueled by strategic acquisitions and targeted organic investments in operational technology, has built a more resilient company capable of generating profitability even during periods of significant market volatility and pricing pressure, as evidenced by its recent performance.

With a strong balance sheet, ample liquidity provided by its extended ABL facility, and a clear pipeline of strategic investments aimed at enhancing efficiency and expanding capacity in higher-margin areas, Olympic Steel is well-positioned to continue executing its growth strategy. While external macroeconomic headwinds and metals price fluctuations present ongoing risks, the company's focus on operational discipline, value-added differentiation, and capitalizing on opportunities like onshoring trends supports a compelling investment narrative centered on resilience and long-term profitable growth. Investors should monitor the execution of planned capital projects and the company's ability to continue leveraging its diversified model to navigate market cycles and capture higher-margin business.