Olympic Steel, Inc. Q2 2010 Earnings Call Transcript

Aug. 6.10 | About: Olympic Steel, (ZEUS)

Olympic Steel, Inc. (NASDAQ:ZEUS)

Q2 2010 Earnings Call

August 5, 2010 10:00 AM EST

Executives

Michael Siegal – Chairman and CEO

Rick Marabito – CFO

David Wolfort – President and COO

Analysts

Tim Hayes – Davenport & Company

Richard Garchitorena – Credit Suisse

Yvonne Varano – Jefferies & Company

Mark Parr – KeyBanc Capital Markets

Charles Bradford – Affiliated Research

Martin Englert – Longbow Research

William Florida – Advisory Research

Operator

Good day, ladies and gentlemen, and welcome to Olympic Steel second quarter earnings results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to introduce your host for today’s conference, Mr. Michael Siegal, Chairman and CEO. You may begin.

Michael Siegal

Thank you, operator. Good morning and welcome to everyone.

On the call with me this morning is David Wolfort, our President and Chief Operating Officer; and Rick Marabito, our Chief Financial Officer.

Again, I want to thank you all for your participation and continued interest or new interest in Olympic Steel.

Before we begin our discussion, I want to remind everyone that during this call, we will provide forward-looking statements that we do not undertake to update, or that may not reflect actual results.

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 from those set forth in the forward-looking statements can be found in our filings with the SEC, including our 2009 annual report on Form 10-K, and our 2010 second quarter Form 10-Q, which will be filed later today.

As you may have noted earlier today, we reported our financial results for the second quarter and the first half of 2010. We are pleased with our results and the sequential improvements in sales and earnings over the first quarter.

Second quarter 2010 net income totaled $3.3 million, or $0.30 per diluted share, compared to a net loss of $33.8 million, or $3.11 per diluted share for last year's second quarter. The 2009 results included a $50.5 million lower of costs or market pre-tax charge to write down the value of the inventory as of June 30th, 2009.

Net sales for the second quarter of 2010 totaled $212.8 million, a 73.8% increase from the $122.4 million from the second quarter of 2009. Our shipments in the second quarter of 2010 increased by 78,000 tons or 45.2% to 252,000 from 174,000 in the second quarter of 2009. Our shipments also improved sequentially over the first quarter of 2010 by 31,000 tons or 14%. Our sales volume has been sequentially stronger for three consecutive quarters and shipments in each successive months of the first half.

First half 2010 net income totaled $5 million or $0.45 per diluted share, compared to a net loss of $59.3 million or $5.45 per diluted share for the first six months of last year. The first half 2009 results included an $81.1 million of inventory lower of costs or market pre-tax charge.

Net sales for the first half of 2010 totaled $380.7 million, or a 44.6% increase from the $263.3 million from the first half of the previous year. Our shipments in the first half 2010 increased by 129,000 tons to 474,000 tons from 345,000 tons in 2009. A 37.2% increase in shipments nearly doubled the 19.1% market increase in total shipments for the first half as reported by the Metal Service Center Institute Metals Activity Report.

We are being awarded new business by large OEM customers seeking financially strong, quality suppliers like ourselves, as well as benefiting from improved customer demand, as the economy has slowly recovered. Our recent investments in our specialty metals businesses are also producing growth in our stainless steel and aluminum products.

Our balance sheet remains exceptionally strong. In April, we received our $38 million 2009 Federal income tax refund. And on June 30th, we closed on a new $125 million five-year asset base loan facility with Bank of America as the agent bank.

The new facility, together with our $200 million three-year self registration filed with the SEC in 2009, provides us with a favorable capital structure to grow our business through new geographic locations and acquisition opportunities. We expect to announce on some of these opportunities in the second half of 2010. Despite the normal summer seasonal market softness and the accompanying price pressure that has been well documented by others, we remain confident in our growth and profit initiative.

Today, we also reported that Olympic Board of Directors approved a regular quarterly cash dividend of $0.02 per share to be paid on September 15th, 2010 to shareholders of record on September 1st, 2010. And, yesterday, we announced that our Board elected the Honorable Dirk A. Kempthorne as a Director of the company.

Governor Kempthorne has served as the Mayor of Boise, Idaho and as a United States Senator from Idaho. He was also a two-term Governor of Idaho, and most recently served as the 49th Secretary of the US Department of Interior from 2006 to January of 2009.

We are extremely pleased that Dirk has joined our Board of Directors. His commitment to public service and recognized national leadership will enable Dirk to provide unique wisdom contributions and insights for Olympic Steel and its shareholders. We look forward to Dirk’s guidance as a Director.

I will now turn the call over to Rick, to comment on our financials in more detail.

Rick Marabito

Thank you, and good morning, everyone. First I’d like to cover the new banking agreement in a little more detail. So, on June 30th, we did enter into new five-year $125 million asset based revolving loan facility with Bank of America as Michael said.

The $125 million facility may be increased by $50 million to a $175 million, subject to exercising the terms of the agreement’s accordion feature. The new agreement also provides us with greater formula availability, more business flexibility and a lower cost than our previous facility.

Total borrowings outstanding on that new line that we closed on June 30th were $13 million at quarter-end, and we had a $110 million of formula ability under the new facility at quarter-end.

Taking a look at operating expenses, they increased by $10.3 million or 17.3% in the first half of 2010, as compared to the first half of ’09. As a result of our aggressive expense reductions in 2009, we’re now profitable at much lower shipping levels. The expenses continue to be managed aggressively and the 17% increase in first half expenses relates to variable cost increases associated with a 37% increase in shipments and our return to profitability in 2010.

In order to meet our increased customer demand, our headcount, the use of temporary labor, and overtime have all increased in the first half. Additionally, at the end of the first and second quarters of 2010, we phased in pay restorations for our employees’ compensation that was originally reduced in 2009. Going forward, the pay restorations will result in a quarterly expense increase of about $373,000. We also expensed in the second quarter a $130,000 in amortized bank fees to administrative expense in June related to the old credit facility.

Looking at capital spending in the first half, it totaled $6.3 million, and that compares to depreciation expense in the first half of $6.5 million. Our CapEx includes our ongoing and successful IT system implementation. In the first half of 2010, we capitalized $2.1 million and we expense $613,000 related to the system implementations. And, in July, we successfully implemented the new system in our Detroit operation and we decommissioned our first legacy system, after going live in Detroit.

We still expect our capital spending for 2010 to total between $10 million and $14 million, but that would be before considering any of the potential acquisition or Greenfield growth opportunities and investments that Michael mentioned earlier.

Our first half effective income tax rate was 37% of pre-tax and that’s slightly lower than the expected annual rate of 38%. And the lower first half rate was primarily due to the impact of certain tax deductions phasing in at lower pre-tax income levels.

And then, finally, some other financial metrics and highlights include: our inventory turnover in the first half, it stayed very strong, it was 5.2 times. Our accounts receivable DSO totaled 43 days in the first half that was pretty consistent with what it was in the first quarter. It’s up from 38 days in 2009 and that increase is due to a combination of some slowdown in payments from customers, but as well as the impact increasing month we sailed on the DSO calculation.

For the first half, our automotive sales were strong. They totaled 12.5% of our total sales. Typically, if you remember, we’ve been under 10%, so auto has continued to be one of our strongest industry segments, and we’ve seen increase in shipments there since the second half of 2009.

Our shareholders’ equity per share at June 30th was $24.30, and we’ve paid two quarterly dividends in the first half of $0.02 a share. So dividends in the first half totaled $0.04 a share or $435,000.

Now, I’ll turn the call over to David.

David Wolfort

Thank you, Rick, and good morning. As both Michael and Rick commented, we are pleased with our increasing shipping volumes and gains in the market share so far this year in the first half and the second quarter.

As we highlighted earlier, we saw a continued strength in demand in the first half and our shipments per day increasing sequentially in every month of 2010, through June. During the first six months of 2010, we are most proud of the fact that we recaptured a 129,000 tons from the lows of the first half of 2009. We are now about halfway back on volume from the depths of the recession, a decline of 2009, and expect to see continued shipping improvements in the second half of the year.

We have experienced increased demand from our automotive customer base and from our large industrial equipment customers. We are also successfully recruiting new business as Michael indicated earlier, often times providing customers with outsourcing solutions for their increasing internal steel processing and fabrication needs as the economy recovers.

The seasonal summer slowdown which was anticipated did affect our market in June and trickled into July. And our string of sequential shipping improvements did will end in July. However, our July shipping volumes are still running about 20% stronger than the prior year, so we’ve captured additional market share even through July.

We believe we’ve now reached the bottom of the market’s short-term correction, again which was anticipated to occur in the back half of June and move through July, and that started about eight weeks ago. This week’s price increase announcements of $30 to $40 a ton for carbon flat roll steel is evidence that the market is once again rebounding in August and provides a boost to the market’s negative sentiment over the past two months.

The June MSCI Metals Activity Report also is encouraging, as it shows the steel inventories are still in balance with shipments with 2.3 months of inventory on hand. This is up slightly from the historical lows of two months on hand at the end of the first quarter. Reasonable levels of inventory combined with steady demand and expected increases in input costs of raw material such as iron ore and scrap should support the recently announced the price increases as we continue to digest the recovery.

I also want to comment on the strategic benefits of our strong balance sheet and the access to capital as Rick commented on. We are capable and ready from both a financial and operating perspective to grow our business and we are in fact doing that. We look forward to putting our money to work on growth initiatives beyond the $10 million to $14 million capital expenditures which were depicted a moment ago and our budget plan for this coming year.

During the first half of the year, we have spent significant effort analyzing and planning growth initiatives, and we are ready to make investments. We anticipate that we will add at least two new locations in the second half of the year as Michael commented on the opening statement and order substantial service center and fab equipment for these locations. In addition, we are also actively reviewing several acquisition opportunities.

So far, in 2010, we made on small acquisition in the first quarter by adding Integrity Stainless to Olympic Steel’s family. Integrity is a profitable niche stainless steel sales organization located here in Cleveland, Ohio, that was immediately accretive to our results and is part of our growth strategy to make our specialty metals business a larger component of overall Olympic Steel.

We have defined specialty metals internally as our stainless and aluminum product categories. As I highlighted on a previous call, we recently added aluminum as a new product category in midyear 2009. During the past year, we’ve added stainless steel and aluminum commercial talent to the organization and that's fostering our growth.

We are confident in the future and our ability to successfully grow our business and perform for our shareholders, our customers, and employees of Olympic Steel.

This concludes our formal comments and we will now open the call to your questions. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Tim Hayes of Davenport & Company. Your line is open.

Tim Hayes – Davenport & Company

Hi, good morning.

Michael Siegal

Tim, good morning.

Tim Hayes – Davenport & Company

Two questions, first on the operating expense, you mentioned the pay restoration; did that actually come in Q2 or was that Q1? I missed that.

Rick Marabito

Tim, we phased them in two pieces. The first restoration happened at the very end of first half, so the financial impact was in the second quarter. And then the second piece of the phase and the final piece was done at the very end of – or beginning of third quarter. So that’s why I gave you the go-forward increase in operating expenses is about $373 million from second quarter.

Tim Hayes – Davenport & Company

Okay. And, on the amount, the increase in the operating expense Q1 to Q2, which was about $5 million, I know some of that is because of the higher volumes. Can you quantify what the dollar impact was Q1 to Q2 from the restoration – the pay restoration?

Rick Marabito

It was probably – I don’t have that right in front of me, but it was probably pretty similar to the amount that we’re going up in the third quarter. It was about half and half. So it was probably around $400,000 grand maybe.

Tim Hayes – Davenport & Company

That's close enough, that's helpful. Just as a reminder – to refresh, in terms of your business and how much you're selling on the spot market versus how much you're selling that where you'd have prices reset on a quarterly basis, what is that mix these days?

David Wolfort

Okay. And this is David. That varies by region, but pretty close to an even mix of contract and spot business. In our out west, we’re more contractually obligated and out east which would be sort of Cleveland and east there is a heavier percentage of spot business or merchant mentality. But when we bake it all together, we’re almost looking at 50-50.

Tim Hayes – Davenport & Company

Okay, thank you.

Operator

Thank you. Our next question comes from Mark Parr of KeyBanc Capital. Your line is open.

Michael Siegal

Hi Mark.

Operator

Pardon me Mr. Parr, your line is on mute, could you please unmute it? Okay. We’ll go the next question. Our next question comes from Richard Garchitorena from Credit Suisse. Your line is open.

Richard Garchitorena – Credit Suisse

Thanks. Good morning, guys.

Michael Siegal

Hi, Richard.

Richard Garchitorena – Credit Suisse

A couple of questions. First, I was wondering if you can give us a little color in terms of the breakdown on shipments during the quarter between plate and hot roll and also pricing, how that trended?

David Wolfort

Well, it all trended upward as you saw in the transaction prices that that rig depicted, Rich and that Michael talked about. So both product lines in the second quarter moved up pretty firmly. Actually we saw some great sequential progress for the full six months. And as anticipated, we believe second quarter would be stronger than first quarter, and in fact, it was stronger than first half and pricing was stronger than first quarter.

We started to see pricing in both categories ebb as we got to the latter part of May and into June with the last mill increase having been announced on flat roll, particularly hot roll, not being absorbed than our expectations were that we would see some correction in the end of June and into early July and we did see that. Plate being a little bit firmer. Plate was a little firmer, all the way through and has been resistant to significant corrections. Flat roll has corrected a little bit more on the downside and is now recovering as I mentioned earlier with the recent price announcements of this week.

Richard Garchitorena – Credit Suisse

Great, thanks for that. And, I mean, I guess looking out to the back half of Q3 and to Q4 obviously, it sounds like you're more optimistic, given the fact that you're looking at adding capacity and looking at more acquisitions or some acquisitions. What's your view on Q4? Do you think we could even see the price increases holding and then demand continuing to firm up?

David Wolfort

Our view –

Michael Siegal

Go ahead.

David Wolfort

Our view is in fact that pricing will recover. We think they had. And, again, it’s only – it’s only some speculation on our part as we take a look at the momentum that we see going forward. But, Rich, we do believe that these pricing announcements were a little bit overdue, not significantly overdue, but a little bit overdue a week or two.

We were confident that scrap would start to move up this month and we think that we will see additional increases as we move into the latter part of third quarter and fourth quarter. And I would tell you, we would expect to see hot roll price again restore itself to early second quarter pricing. And then – and we have some pretty high expectations as we move through ’11 and we continue to as we say absorb the recovery.

Richard Garchitorena – Credit Suisse

Thanks. And then, finally, just on the long-term, basically on the acquisition front, it sounds like you're getting more positive on the specialty metals side. Is that – is it fair to say that that's one area where you want to continue to focus or you’re really basically just looking at all opportunities at this point?

Michael Siegal

Yes, the answer is, we look at all opportunities. Again, as we look at the three ways that we can grow share, and you can sell more tons, you can increase gross margin, or you can increase your product portfolio. We know from history that within the products that we specialize in and mostly the flat roll universe, hot roll sheet and plate, Coro-coated.

Without more geographical locations is going to be hard to increase the tonnage there. So within the family of locations that we have, the increase of participation in stainless aluminum is our opportunity of our sales force and our equipment to really penetrate the market far deeper as we've brought more talented individuals to focus on that and we think that’s an immediate opportunity for growth. And, it obviously is.

Richard Garchitorena – Credit Suisse

Thank you.

Operator

Thank you. Our next comes from Yvonne Varano of Jefferies & Company. Your line is open.

Yvonne Varano – Jefferies & Company

Thanks. I just want to clarify, so am I hearing your comments right that you are suggesting that EPS in 3Q should be better than 2Q because we should have some more volumes and some pricing? I know there's added cost going in as well, but the former two factors are more of an offset?

Michael Siegal

No, I don’t think that’s correct, Yvonne. I think what we said is is that we would anticipate Q3 to be better than Q3 of the previous year in the comments, but not necessary better than Q2.

Yvonne Varano – Jefferies & Company

Okay. On the margin side, if you're getting a little pricing that you think the gross – you'll get a little gross margin expansion in 3Q?

Michael Siegal

We certainly don't see it falling. There’s a lot of – lot of factors have indicated, we’re comfortable with where we at right now with a more positive vent towards it, but really not anticipating a great deal of movement, given the very competitive nature of the marketplace that’s out there today.

Yvonne Varano – Jefferies & Company

Okay, so maybe 3Q from an EPS standpoint looks more similar to 2Q?

Michael Siegal

That’s why you have a job and we get to keep ours.

Yvonne Varano – Jefferies & Company

Just going into Q4, pricing obviously going up but is your feeling that that can offset volume declines that we typically see from a seasonal perspective or does Q4 sort of show a more typical seasonal trend?

David Wolfort

I think the year is turning out to be very typically and we’ve seen – and typical and traditional, where there is a first quarter ramp up and a strong second quarter, there is an adjustment in the early part of third quarter, which makes our predictions very easy, because we’ve experienced them for almost 40 years, and so it makes it easy for us to look at that with the exception of the anomaly in ’09 and maybe ’08 too.

But we do see – we do see a short-term correction in the latter part of June specifically it’s trickled into the first couple weeks of July and then right back at it where people – where our customers are – their demands are pretty consistent. Their inventories are low, their demands are pretty consistent, and we look to garner more business. And, again, third quarter has really never saved anybody in the service center business, July has never saved anybody, but we’re seeing some pretty good momentum on the recovery side and we would expect – we would expect Q4 to finish up the same as it traditionally finishes up with a slower holiday season in December.

Michael Siegal

And it would not surprise me, Yvonne, to see another stimulus bill before November elections.

Yvonne Varano – Jefferies & Company

That should help probably more so in 2011, right?

Michael Siegal

It’s – a lot of this is attitude. The marketplace for – at least our marketplace has improved pretty substantially year-over-year. While it's not where we would like it to be in total, but we’re seeing pretty good market improvements and market share improvements.

David Wolfort

And, I think, when you – when we get to the end of November here, we’re going to see some pretty – pretty strong improvement year-over-year. So as we take a look at November of ’09 versus November of ’10, from a mill perspective, from a mill pricing perspective, I think you’re going to see some pretty significant strengthening over that period of 12 months whether we were a little bit stronger in the first half and adjusted early in third quarter, and then came back out of that trough and that sort of traditional – the traditional view have. And, as we take a look forward, we think there will be pretty significant changes when you measure it year-over-year.

Yvonne Varano – Jefferies & Company

Okay. Any comments from an end market on Ag or construction?

Michael Siegal

Construction – well construction – I mean the mining industry still remain relatively strong. Construction remains improving but slow ramp-ups relative to the lack of money flow for municipal participation in the bond markets for their share of government projects. So the Federal Government has money that state governments do not. And so that’s been a slower ramp-up.

And then as it relates to the Ag markets, you know if you look at what John Deere said, and they said, they have a pretty strong year for the rest of this year. There is some issues around commodity pricing and droughts they’re affecting the long-term food pricing. And so there’s no reason to believe that this year’s in jeopardy at all from the strength that they’ve shown there. And their outlook was sort of questionable for their next year, whether or not, that’s going to be sustainable because of some of the circumstances of weather.

And this is the way the commodity prices for food has gone. So, I would tell you that we’re not seeing any degradation. And, again, as we indicated in our comments, Yvonne, the strength of our balance sheet and outlook for Olympic’s future is garner us more market share with those kinds of customers. So even if their business is down, our participation will be up.

Yvonne Varano – Jefferies & Company

Great. Very helpful. Thanks for your comments.

Operator

Thank you. I’m showing a question from Mark Parr of KeyBanc Capital Markets. Your line is open.

Mark Parr – KeyBanc Capital Markets

Hi, thanks. I think I'll make my phone work this time.

Michael Siegal

Good.

Mark Parr – KeyBanc Capital Markets

Sorry about that guys.

Michael Siegal

It’s no problem.

Mark Parr – KeyBanc Capital Markets

One of the things if you look at, and I think it's probably an industry thing because you weren't the only public company or public metal service center we saw this happen to. But seems like there was an erosion in pricing power as evidenced in the gross profit margin in the second quarter relative to the first quarter. And, I guess, is there any color you could give us on that in terms of what changed? Was it just pricing rolling over or was there something else that happened? Was there perhaps improving credit availability? Were the mills all of the sudden trying to get rid of steel? Any color you could provide there I think would be really helpful.

Michael Siegal

Mark, our gross margin in the second quarter was a $172 a ton. And I think in the first quarter it was somewhere below $160. So we had margin expansion, so I’m not sure where you get that.

Rick Marabito

You may be looking – are you looking at the percent mark?

Mark Parr – KeyBanc Capital Markets

Yes, I was looking at percentage.

Rick Marabito

Yes, he is looking at the percentage, which went down a little bit, yes, yes.

Michael Siegal

I would tell you in the back half of the second quarter, Mark, not every service center is Olympic Steel. And what we find out there is a lot of guys looking to sustain the certain percentage of volume we’re very aggressive in pricing. And about half of our business which is not contractual. We like to move steel too and you have to match the pricing and it’s been very competitive since middle of June or actually from the beginning of June, very competitive out there.

David Wolfort

Mark, our charge as we entered ’10, certainly in the back half of ’09 was to concentrate on the income statement. We obviously always focus on the income statement, a little difficult to create demand in 2009. You can't create demand. So we had a tremendous focus on the balance sheet.

So as we moved into – as we moved into ’10, our focus was to repair that income, repair that income statement and we wanted to repair it simply by drive – by not only driving the top line, but obviously by turning the bottom-line black, and we accomplish both of those. And, as Michael well said, as we turn in the second quarter, it did get a little bit more competitive, because this whole recovery is very tactical.

And, so, while we may have half of our business on the contractual side, on the merchant side of the business the spot side, as Michael indicated, we – it is a tactical battle out there and everybody has different concerns and different motivations. Our motivation was to recapture market share as we depicted and gained a 129,000 additional tons through the first half of which we’re happy with. And our margins, I think we’re still over 20%, our gross margins 20%. We saw a very small degradation in the second half I think with 20.4% versus 20.7% something in that neighborhood.

So, again, as Michael declared, a little bit tactical out there, we can’t answer for everybody. But our goal is to recapture market share or a little better than halfway to what we would consider normal which is back to where we were in the ’05 through ’08 tonnage. And we think that will make even more progress as the year continues and we will make further progress in ’11.

And then we’re positioning ourselves Mark, even more so than that, because not only are we garnering additional business which you didn’t ask about, but we are garnering additional business and we are seeing the recovery from our long-term customers and we’re positioning ourselves to not only be able to serve that additional business that we’re recruiting today, but be in a position to once again absorb the business of our long-term customers who got us to where we are today, excluding ’09, it didn’t help us there. But –

Michael Siegal

We have a lot of participation in our fab shops in industrial, equipment manufacturing. And what I can tell you is that general – when you see us going up to 12% in automotive, those parts of our business – the general spot market has picked up from a volume perspective better than the pieces parts business has, Mark. And so while we’re seeing the increase in sort of the generic rectangle business, for a lack of a better term, while we are improving our volumes in the pieces parts fab side of our business which elongates the margin, it’s recovering slower than what the general market is.

Mark Parr – KeyBanc Capital Markets

Okay. Q2 you said the gross profit per ton was higher than the first quarter. Was that a – in the face of increasing spot business relative to the fabrication business, does that suggest a shift in mix toward aluminum and stainless away from carbon?

Michael Siegal

It was certainly helpful on a gross margin per ton basis.

David Wolfort

We’re not shifting away. We view that silo of business as additional. We have – it’s hard to –

Mark Parr – KeyBanc Capital Markets

I wasn't trying to suggest that you would be deemphasizing the carbon business.

Michael Siegal

You obviously don't want to passively condone any of it Mark. But what you're seeing here is growth in product, growth in geography, and growth in personnel. Well, the margin I am saying is higher per ton margin than carbon no question.

Mark Parr – KeyBanc Capital Markets

Yes, with a higher selling price too.

Michael Siegal

Yes.

Mark Parr – KeyBanc Capital Markets

Okay, terrific. Thanks for the color.

Michael Siegal

You’re welcome.

Operator

Thank you. Our next question comes from Charles Bradford of Affiliated Research. Your line is open.

Charles Bradford – Affiliated Research

Hi, good morning.

Michael Siegal

Hi Chuck.

Charles Bradford – Affiliated Research

I’ve got a couple of questions. Can you get a little bit more specific on the fab business? What has that reached as a percent of your revenues?

Michael Siegal

Last year, it was about 14. It’s probably down a little bit below that this year so far. I don’t have the –

Rick Marabito

I don’t have the exact number, but that’s –

Michael Siegal

We can get back to you on that. We don’t have it in handy.

Charles Bradford – Affiliated Research

Okay, that's fine. Since the Nucor announcement on Tuesday, I know that's only a couple of days ago, have you seen any lead times lengthening at some of your mill suppliers as people try to get their orders in before the normal lags and effective dates and that kind of thing?

David Wolfort

Well, Chuck, what we have seen is a – it’s a moratorium on the old pricing. And from what we understand from the producer side of the equation is that orders or pledges prior to this week’s announcements have pretty much been terminated or will be terminated by the end of business tomorrow and then the new pricing going.

And we’ve seen lead times move out slightly, not dramatically, but slightly. The mills have caught up on delivery at the end of second quarter. There was a trough in the business. We had really very short lead times here which led to a degradation in pricing. We see, we consider this stake in the ground, cathartic and necessary and we see lead times moving out. But they’re just moving out nominally, because this is so fresh.

Charles Bradford – Affiliated Research

We had gotten some lead time data, pretty specific stuff, on Monday and by Tuesday we were getting corrections for that and the corrections were out a week.

David Wolfort

So that's nominal, out a week, I'd buy into that, I think that’s expected.

Charles Bradford – Affiliated Research

Without putting words in your mouth, would it be fair to say that you think these increases will stick and then how long do you think it will take for them to really stick?

David Wolfort

I do believe that these increases will be absorbed. I do think that they will stick. I do think they will – they will be absorbed. I think it’s necessary again to put that stake in the ground. We were looking for that sort of leadership from the producers to stop the deterioration, which had really already troughed anyhow.

And I think it’s – I think it’s immediate. I think it’s immediate with orders that are obviously going to be produced and delivered in September and I would expect subsequent increases. We know that spot iron ore prices are up, we know that shredded scrap is up, we know that SBQ pricing is up $40 a ton across the board. So we think the right sentiment is out there for not only absorption of this, but once again recapturing some pricing.

Michael Siegal

And the other side of the equation, Chuck, I mean, there's no question not every service center sells on replacement costs, so given the low levels of service center inventory, the impact of this is going to be relatively quick, but it won’t be tomorrow.

Charles Bradford – Affiliated Research

Terrific. Thank you very much.

Operator

Thank you. Our next question comes from Martin Englert of Longbow Research. Your line is open.

Martin Englert – Longbow Research

Good morning.

Michael Siegal

Good morning.

Martin Englert – Longbow Research

I wanted to get an idea of how much percentage of sales in tons was the stainless steel and aluminum products in the quarter?

Rick Marabito

We don’t break that out. We generally do not break out product, the two from here.

Martin Englert – Longbow Research

And kind of looking at your exposure to automotive now, which has stepped up quite a bit from second half of last year, do you expect to maintain that going forward in the second half?

David Wolfort

Automotive is doing better. It’s doing better.

Michael Siegal

We don’t have an answer so as to make automotive a bigger part of our business. It just happens to be that that market recovery is quicker than some of our other markets and we’ve been favored with our good performance in the automotive market with more business, but it really isn't the place that we're saying, “Hey, let's get automotive up.” It’s up because it’s recovered first and faster.

Martin Englert – Longbow Research

Thanks for your time.

Michael Siegal

Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from William Florida of Advisory Research. Your line is open.

William Florida – Advisory Research

My question was answered. Thank you.

Michael Siegal

Thanks Bill.

Operator

Thank you. I’m showing no further questions at this time.

Michael Siegal

Great, thank you. As a reminder, it’s our policy not to provide forward-looking earnings estimates for the upcoming quarter or year, not to endorse any analytic sales or earnings estimates. We anticipate releasing our third quarter 2010 earnings on or around November 4th, 2010. And this concludes our call and thanks again for your participation and interest in our company.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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