Olympic Steel's CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: Olympic Steel, (ZEUS)

Olympic Steel, Inc. (NASDAQ:ZEUS)

Q2 2011 Earnings Call

August 4, 2011 10:00 am ET

Executives

Michael Siegal - Chairman & CEO

David Wolfort - President & COO

Rick Marabito - CFO

Don McNeeley - President, Chicago Tube & Iron

Analysts

Edward Marshall - Sidoti & Company

Luke Folta - Jefferies

Mark Parr – KeyBanc

Sal Tharani - Goldman Sachs

Tim Hayes - Davenport & Company

Charles Bradford - Bradford Research

Operator

Good day, ladies and gentlemen, and welcome to the Olympic Steel’s Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today’s conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Michael Siegal, Chairman and Chief Executive Officer. Please go ahead.

Michael Siegal

Thank you, Elle. Good morning and welcome to our call. On the call with me this morning is David Wolfort, our President and Chief Operating Officer; Rick Marabito, our Chief Financial Officer; and I have asked Don McNeeley, the President of our recently acquired Chicago Tube & Iron subsidiary to be on the call with us. I want to thank everyone for your participation and for your continued interest in Olympic Steel.

Before we begin our discussion, I want to remind you 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 Securities and Exchange Commission including our 2011 second quarter Form 10-Q, which will be filed later today.

Earlier today, we reported our financial results for the second quarter and the first half ended June 30, 2011. We are pleased to announce strong 2011 sales and earnings performance. We have completed our third most profitable first half in the history of Olympic Steel behind 2004 and 2008.

Net sales for the second quarter of 2011 increased 41% to $299 million, we couldn’t find $1 million more to make $300 million, from $212.8 million for the second quarter of 2010. Our shipments in the second quarter of 2011 increased 13% to $285,000 from $252,000 in the second quarter of 2010, but were about 10% less than our very strong first quarter volume of 317,000 tons.

Second quarter 2011 net income increased 144% to $7.9 million or $0.73 per diluted share compared to net income of $3.3 million or $0.30 per diluted share for last year’s second quarter. Our second quarter results include $941,000 of non-recurring pre-tax transaction expenses related to the company’s acquisition of Chicago Tube & Iron which closed in the third quarter on July 1 and this equals to $0.05 of earnings per share.

Net sales in the first half of 2011 increased 56% to $593.4 million from $380.7 million for the first six months of 2010. Tons sold in the first half of 2011 increased 27% to 603,000 from 474,000 in 2010. First half 2011 net income more than tripled to $18.3 million or a $1.67 per diluted share compared to net income of $5 million or $0.45 per diluted share for the last year’s first half.

We have realized consistent gains in market share over the past 18 months. Our first half 2011 shipments increased year-over-year by 27% exceeding the pace of the market increase in total steel shipments of 19% reported by the Metal Service Center Institute in June 2011 Metals Activity Report. Our market demand strength has been seen in the heavy equipment, agricultural equipment and automotive sectors.

Our strong balance sheet and new five-year $335 million credit facility provide us with the strong foundation from continued growth and value creation. We have been making investments during the economic downturn in new products geographies, equipment and people to service our growing customer demands.

We continued to successfully start up new locations in Gary, Indiana; Monterrey, Mexico; and Kansas City, Missouri. We most recently added two locations in Roseville, Minnesota and Streetsboro, Ohio, which are expected to propel market share penetration in the future as these locations become fully operational and add to the top line growth and bottom line profitability.

In the first half of 2011, we estimate the cost of these new locations start ups had a total negative impact on earnings of above $500,000, and David will review our progress in more detail later in the call.

In addition to meeting forward internal expansion and CapEx programs over the past several years we have stated that our growth strategy also includes actively exploring strategic acquisition opportunities. Our patience in the acquisition area paid off with our July 1, 2011, acquisition of Chicago Tube & Iron. CTI accelerates our market share growth as expected to be immediately accretive to our earnings.

Our financial results will include results of CTI beginning in the third quarter. Olympic Steel’s current profile including CTI now approximates $1.4 billion in annualized sales, 1,600 employees, 4 million sq ft of facilities in 30 locations throughout the United States and Mexico.

As part of the acquisition it was important that CTI’s management team including Don McNeeley remain in place. Don continues in his role as President of CTI subsidiary, and was recently reported as an additional board member to Olympic Steel. He is 35 years field industry and CTI veteran with vast knowledge, networks and visibility in the steel market. Don is the former Chairman of the Metal Service Center Institute and he is an Adjunct Professor at Northwestern University where he teaches in the graduate engineering program. We are thrilled to have Don and his team with Olympic Steel.

Now, I will turn the call over to Don, who will share more details about CTI. Don?

Don McNeeley

Thank you, Michael, and good morning to everyone. It is my honor to be a member of the OSI family and further it’s my pleasure this morning to provide you with a brief overview of who we are and what we do. CTI, Chicago Tube & Iron was found at founded in 1914 and has a 97 year history of consecutive profitability.

CTI is one of the largest service centers in the United States with nine locations throughout the Midwest and North Carolina. Our 2011 annual revenues are projected to be approximately $225 million and our sales peak in 2008 was $261 million. Thus, we are clearly moving forward to recover the revenue attrition that affected our industry and our economy in 2009.

Chicago Tube & Iron is a leading distributor of steel tubing, pipe, bar, valves and fittings. We also fabricate and provide engineering services and pressure products for the utility industries. The primary industries that we serve include construction equipment, agricultural equipment, power generation, transportation, food processing and defense along with others. We process, fabricate and distribute over 30,000 items of inventory from over 1 million sq ft of facility space.

Our metal products include carbon, stainless steel and aluminum and services include bending, sign, laser cutting, beveling, welding and fabricating. Above 15% of our business would be considered high value added where engineering and CAD services are also provided to customers.

We are indeed very excited about CTI’s strategic fit with Olympic Steel. Given our complementary product lines we are confident that when combined, we have new capabilities and opportunities to better serve our customers and also grown our market share.

We embraced the industry trend of customer seeking purchasing efficiencies to a more one-stop shopping opportunities and believe the expanded product operating a flat rolled plate, tubing bar, pipe will provide a compelling value for opposition for our customers.

OSI and CT&I have successfully partnered in the past on several major accounts and we also look going forward we will be able to better serve our customers together. Chicago Tube & Iron and Olympic Steel’s products and services offer an ideal compliment as well there is no product or value added overlap whatsoever. There is a beneficial overlap of key customers and prospects. This in turn translate into synergistic sales opportunities.

Rick Marabito, I now turn the call back to you.

Rick Marabito

Thank you, Don, and good morning everybody. Before I get into some of the financial details I would like to review some of the upcoming dates and some of the details surrounding the CTI acquisition. As Michael already indicated, the acquisition closed on July 1st, which is obviously the first day of the third quarter, so none of the results from our second quarter or our first half include CT&I.

The only exception is the call out that Michael made of acquisition related fees and costs that were expensed in the second quarter which had the $0.05 impact on lowering second quarter and first half EPS. As a reminder, the base purchase price for CT&I was $150 million plus a $2.8 million closing cash payment that was made.

We also assume $6 million of CTI’s existing IRB debt and we have a working capital purchase price adjustment yet to go which we do not anticipate will be significant. We also received about $12 million of CTI's cash on hand at the closing. So historically, over the steel cycle CT&I has earned normalized EBITDA margins of approximately 10% of their sales.

We planned to file a Form 8-K/A no later than mid September and that will include CT&I’s historical 2010 annual and first quarter 2011 historical financial statements. The 8-K/A will also include pro forma financial statements which are required by the SEC.

Since the transaction just closed a month ago, we do not yet have purchase accounting completed. So such information will not be included in the 10 Q for the second quarter which will be filed later today. In accordance with our police we will not provide any additional forward-looking earnings estimates or any separate financial information about CT&I at this time.

Next, I would like to cover some of the key aspects of our amended loan agreement that was put in place to help fund the acquisition. So on July 1, concurrent with the closing of the CT&I acquisition, we amended and restated our existing $125 million asset based loan agreement with Bank of America as our agent.

So the new agreement, again agented by Bank of America, is a five-year $335 million package. It includes a $265 million revolving credit facility and a $70 million term loan facility. The new loan agreement contains an accordion feature also which allows us to upsize the agreement by $75 million.

The term loan is repayable in monthly installments of $729,000 which commenced August 1, 2011. The new facility actually contains more favorable interest rates than the former agreement by about 50 basis points on the revolver, and we are currently running at about $100 million of availability under the new facility.

Finally, let me highlight some additional financial items from our second quarter and our first half. As a percentage of net sales gross margin totaled 20.2% in the second quarter, compared with 21.5% in the first quarter of 2011 and 20.4% in the second quarter of 2010.

Internally, we measure our gross margins on a per ton basis and our second quarter margins increased to $212 per ton compared to first quarter 2011 margins of $200 a ton and $172 a ton in Q2 of 2010. Second quarter margins did decrease sequentially as prices fell throughout the quarter.

Operating expenses in the second quarter of 2011 totaled $46.5 million compared to $46.1 million in the first quarter and $37.8 million in the second quarter of 2010. As a percentage of sales, operating expenses actually declined to 15.5% from 15.7% in the first quarter and 17.7% last year. Again, operating expenses in the G&A line included the $941,000 of expenses for the transaction we previously highlighted.

EBITDA, which is defined as our operating income before depreciation expense right up the face of our income statement, totaled $17.4 million in the second quarter and $38.2 million for the first half of 2011.

Capital spending so far in 2011 has totaled $16.4 million. As Michael indicated earlier, we continue to strategically invest in a recovering market with the majority of our spending related to our temper mill project in Gary, Indiana, and processing equipment to outfit our new facility in Mount Sterling, Kentucky.

During the first half of 2011, we also capitalized $429,000 and expensed $273,000 related to our IT system implementations. We do expect our capital spending in 2011 to stay within our previous guidance range of approximately $35 million to $40 million and that will depend on the timing of the payments to complete the new temper mill and cut-to-length equipment. And that the capital spending expectation would also be inclusive of CTI’s capital spending in the second half.

Our effective income tax rate for the second quarter was 39.2% bringing the year-to-date rate to 38.2% compared to last year’s rate of 37%. The second quarter rate increase was primarily related to changes in certain state tax laws that recently took place that now disallows reduction for prior year state tax losses.

Looking at our inventory turnover, at the end of the second quarter of 2011 it was strong at 5.3 times. We expect our inventory turns in the second half to be under 5 turns as CTI strategically turns the inventory slower in the power generation business and in valve sales.

Our 2011 first quarter receivable DSO, Day Sales Outstanding totaled 42 days which is comparable with the first quarter of 2010. CTI’s DSOs are typically under 40 days so we may be able to reduce our consolidated DSO slightly going forward.

Our debt at the end of second quarter totaled $91 million. This was before borrowing for the CT&I acquisition. At the end of July our debt totaled $224 million and our availability was $104 million.

Shareholders' equity to close the quarter with $25.68 a share and we paid a quarterly dividends of $0.02 per share in both the first and second quarters each. Today, we also reported that Olympic Steel’s board of directors approved a regular quarterly cash dividend of $0.02 per share to be paid on September 15th to shareholders of record on September 1, 2011.

And now, I will turn the call over to David.

David Wolfort

Thank you, and welcome Don. Thank you, Rick, and good morning to all. We are pleased with our market share growth and the profitability achieved in the first half of 2011 as both Michael and Rick have commented. We have accomplished a great deal in 2011 including the transformational acquisition of CT&I, and we look forward to successfully concluding our new location start ups, some of which are making contributions, profitable contributions already and the others will be incremental contributors to our results in 2012 and beyond.

Our market outlook remains favorable. Even though we experienced a low in second quarter shifting activity as we work through the normal summer seasonal slowdown. Market prices peaked in April and have been sliding throughout the second quarter. We believe we are now at or close to the bottom of the market.

While the bias of most steel makers has been negative about the third quarter, we believe the market has reached its bottom. Service Center inventories continue to drop as MSCI Metal Activity Report for June showed a sequential inventory retreat of 4.2% and is at historically low levels. Second half demand is expected to rise from auto sales. June’s total steel imports declined 10% sequentially, and we suspect the total imports are likely to post another decline in June as it been noted in some of the publications as latest today.

Adding to reduced imports and reduced inventory, producers are pulling ahead maintenance shut downs earlier than originally planned. Catalysts for an improving steel market are aligning nicely. Inventory is low and imports are shrinking. Raw material costs are moving up and scrap is holding steady. We see a resolve to the US political wrestling and improvement in the GDP. These market dynamics should create the proper climate for producers to elevate pricing as they approached their breakeven point. We may start to see producers looking to move transaction prices up as early as next month as frail inventory levels will cause the spot market to rise.

We are also bullish on the longer term view for steel and believe we will have a strong market over the next five year cycle. We feel that we are well-positioned to take advantage of the expected global market acceleration related to infrastructure and mining equipment bills.

The rewards of our recent investments will be realized as the market returns to its accelerated growth again. As we have previously stated, our strategy has been to invest heavily during the market downturn when facilities, equipment and people are available and at lower asset valuations aside from our acquisition of CT&I.

As Mike, Don and Rick have commented, we view the CT&I acquisition as the economics of excellence. To that point, we had been quite busy in 2011, an addition to the transformational acquisition of CT&I, we have successfully executed the following initiatives. Mount Sterling, Kentucky facility, in the second half of 2010 we added a new Olympic facility in Mount Sterling, Kentucky which is about 30 miles east of Lexington, Kentucky. We purchased 14 acres of land, an existing 100,000 sq ft building. Since then we have been busy upgrading the building and equipping the facility to perform plate burning, machining, forming and shot blasting.

We became operational at the end of first quarter; we already reached profitability in the second quarter of 2011. The Mount Sterling site reinforces our strategy of being closer to where our customers assemble their products and we will be looking to expand our footprint in this area as we have quickly filled our existing space.

Now, turning to our Gary Temper Mill. In November 2010, we announced 177,000 sq ft location in Gary, Indiana to house our new Butech cut-to-length line and four high Temper Mill supplied by I2S and multiple pieces of plate burning equipment to augment our existing flat rolled and plate offerings.

Since then, construction of equipment and upgrading of the building has progressed on-time and on budget for completion around the year-end 2011, and we are pouring foundations in Gary and mill housing have been received at I2S this past week. Once operational in 2012, the equipment will be capable of processing approximately 150,000 new tons of high quality tempered sheet for Olympic Steel and significantly reduced our inbound and outbound freight cost while better servicing customers from existing two temper mills in Cleveland, Ohio and Bettendorf, Iowa.

Our Cleveland and Iowa temper mills have been significant drivers in Olympic’s historical and we believe our new Gary Temper Mill investment will be the catalyst for Olympic Steel’s next big growth spur. We also have an option to purchase a second light time piece of equipment at favorable terms and intend to make that decision sometime in 2012.

Let me turn to our international presence in Monterrey, Mexico. During April 2011, we entered into a lease agreement for approximately 15,000 sq ft of warehouse space in Monterrey, Mexico, to augment our sales presence there with the ability to stock and distribute now metals for our Mexican customers. We are almost set to begin shipping in Monterrey.

Turning back to the US in Kansas City, Missouri, in April of this year, we entered into at least to by agreement for approximately 43,000 sq ft space in Kansas City. This new location is part of our temper mill expansion strategy as we plan to push our market penetration further west of Bettendorf, Iowa, location. We are now shipping product at our Kansas City location in this third quarter.

In Roseville, Minnesota, in July, just this past month we leased 56,000 sq ft of additional warehouse storage space in Roseville, Minnesota, and we now have plate on the floor there in this quarter. We will feed our two Minneapolis processing facilities with coil and plate stored to location to optimize our processing space, reduce logistics and handling costs and increase our profile of value added equipment in Minneapolis. The logistic savings are expected to fully offset the cost of the facility once it is fully utilized by the end of this year.

And just this past week in Streetsboro, Ohio, we concluded at least five transactions for 66,000 sq ft of space in northeastern Ohio. This new facility will be Integrity Stainless’ first owned physical facility and we will also house the officers of our leadership team of our Specialty Metals Group.

As we have remarked our purchase of CTI has been transformational, we recently at the top of this week announced the management promotions, let me allow me to go through that. Earlier this week, we made the announcements regarding management promotions at Olympic Steel. We recognized the need to expand individual responsibilities and streamline our reporting while acknowledging the strength of our leadership team that will be instrumental in the next step of our transformation and help define the future of Olympic Steel.

We are pleased to announce that Andrew Greiff has been promoted to the newly formed position of President of Specialty Metals. Andy oversees the sales and distribution of our stainless and aluminum products and will now be responsible for managing our Chicago and new Streetsboro facility. Andy has been with Olympics Steel since 2009, previously serving as Vice President of Specialty Metals. Prior to joining us, he owned and operated International Metals Group.

Ray Walker has been promoted to the newly formed position of Senior Vice President of Eastern Region. Ray has been employed with Olympic Steel for 25 years, most recently serving as the company’s Vice President of Eastern Region. Ray is overseeing our largest expansion project, the temper mill start-up in Gary. He is experienced in this regard and was instrumental in leading the start-up of our existing two temper mills in Cleveland and Iowa during the 1990s.

Michael Siegal has been promoted to the newly formed position of Vice President of Automotive. Mike has been employed with company since 2003 most recently serving as General Manager of the Company's Detroit division. And Terry Rohde, who has served as our General Manager in our Chicago division since 2008, has been promoted to General Manager of our new Gary, Indiana facility and will now focus 100% of his efforts on the successful start-up and management of this facility.

Sean Heenan, who has served as the Regional Sales Manager for us since 2007 will succeed Terry Rohde as General Manager of the Chicago division and will now report to Andy Greiff of Specialty Metals.

We have many initiatives in various stages of completion and look forward to their favorable impact on our sales and earnings results in 2012 and beyond. We are confident in our strategies and in our people and leadership to provide revenue growth and real value creation for our shareholders in a recovering economic environment in North America.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Edward Marshall of Sidoti & Company. Please go ahead.

Edward Marshall - Sidoti & Company

Good morning, guys. Thanks for the details on CTI as far as the margins are concerned. I missed it, the 10% EBITDA margins that you gave, was that at the peak or is that currently?

Rick Marabito

We talked about that being over the steel cycle, so if you look over the last five years, that would be the average.

Edward Marshall - Sidoti & Company

That would be the average, okay. And then you mentioned also about $225 million for the full year of 2011. Can you give us an indication as to what they did in the first six months?

Rick Marabito

No, we are not -- we are really not going to give much more than the 225 other than the results, yes, you will see the first quarter information when we file. But suffice to say, Chicago Tube & Iron is performing very strong as does Olympic.

Edward Marshall - Sidoti & Company

Yes. And you mentioned it was accretive in the first -- accretive. Did you mean the first full year or for 2011?

Rick Marabito

We expect it to be immediately accretive out of the chute starting in the third quarter.

Edward Marshall - Sidoti & Company

Okay. And then you suppose commentary regarding expected volumes coming forward as well as pricing. Do you have any comment for July? I mean, we're through July now; can you talk about what kind of trends you saw in July and is it supporting or is more of the same? Is it summer seasonality? What can you help us with there?

David Wolfort

Ed, we saw a very slow start to July around the July 4 holiday and then we saw momentum picked up in second, third and fourth week of July. So we saw a renewed strength and slightly more strength than we would normally anticipate for that period.

Michael Siegal

From a volume perspective, from a volume perspective.

Edward Marshall - Sidoti & Company

Right. When I look June of '11 versus June of '10 and I back into pricing, it looks like pricing was up slightly year-over-year. But what happened with the margin? I mean you got squeezed just slightly from first quarter as well as year-over-year. What would be the impact there? What are we dealing with?

Michael Siegal

Well, I would just say you are dealing with an environment where the psychology is worse than the reality, and you got lots of guys that believe in a falling price environment. We should liquidate inventory as fast as possible, which put some pressure on the margin as people start to lower their inventory levels on the belief that they can replace with at a lower price level. So, there is sort of a competition out there in the spot market and that’s squeezing some of the margins.

Operator

Our next question comes from Luke Folta of Jefferies. Please go ahead.

Luke Folta - Jefferies

Hey, congratulations on the acquisition and the results so far, on the progress on the expansion so far. You guys have certainly been busy.

Michael Siegal

Yeah.

Luke Folta - Jefferies

Two questions, Just regarding CTI and how their performance is expected to be in 2011, I know you don't want to give up much more than revenues, but can you give us a sense of where EBITDA margins are currently versus the 10% mid-cycle level?

Rick Marabito

Hey, Luke, it’s Rick. We’re really not going to comment any more on the CTI’s earnings or performance until mid-September when we got some historical info in the performance.

Michael Siegal

But they are performing well according to historical basis and very consistent and a little less cyclical than we are historically and are performing according to historical basis, relatively good performance.

Luke Folta - Jefferies

Okay. And with all these expansion projects you have along with the CTI acquisition, when I think about shipments in the next cycle I think you did roughly an annualized peak of around 1.2 million tons excluding tolling in the last cycle. Can you give us a sense of where you think that might reach when we get into a more normalized demand environment?

David Wolfort

Well, Luke, we have exhausted our capacity and that’s why we are brining on Gary, Indiana. So with that in mind, we have recovered from 2009 and 2010 even quicker than we anticipated. We had a very strong first quarter, as Rick remarked, second quarter tonnage was down slightly, revenues were up, and we see some consistency, as I remarked earlier. And so, we take some of these larger production facilities and that’s what we brought on additional facilities to complement our growth and also position ourselves for the reentry of our traditional customers. So, we have remarked quarter over quarter and we have been the beneficiaries of what we call flight-to-quality, a number of large OEMs coming to us as some of our traditional business had suffered. That traditional business is rebounding and we want to make sure we are in a position to observe all of that and so we see ourselves going beyond those higher levels.

Michael Siegal

Really for us, Luke, the only market that we've seen softness is the other service centers. They are liquidating inventories. So the spot market service center business is coming down a little bit, but almost every other market we serve has been relatively strong.

Luke Folta - Jefferies

I guess I was trying to get at over the next few years, once all these new projects come online, what sort of shipment level can we expect once demand starts to fully normalize?

David Wolfort

While you are going to hear the Gary mill will give you 150,000 to 180,000 additional tons, that’s pretty easy. Some of these other facilities that we mentioned which are already online, Mount Sterling profitable and forward we are looking to expand but that’s value added. That you will see them in the revenue side, that’s not -- that doesn’t add significantly to the tonnage as temper mills do.

And then as I concluded my remarks about temper mills, the temper mill expansion in Gary, Indiana, we have a decision to make in 2012 whether to bring on the fourth temper mill which would bring another 150,000 to 180,000 tons. If you looked the way we have operated, we had that same opportunity in 1995 when we put on the first temper mill in Cleveland; we had an option on a second temper mill, we executed that. Our advent is to try and be successful enough to add that fourth temper mill.

Michael Siegal

We are looking at a million and a half tons relatively quick without CT&I. And then obviously as David said, the objective is to drive this to over $2 million tons book.

Luke Folta - Jefferies

Okay, that's great. Okay, and also can you talk about your current inventory position? I know you had said the other service centers are de-stocking and you guys are probably taking advantage of some of that trend or will be shortly. Can you give us a sense of how you're positioned in the second half?

David Wolfort

That’s our job to take advantage of all these opportunities, Luke.

Michael Siegal

The (inaudible) inventory turns give you good indication; both our inventories are in very good shape. Again, depending on our bent where we see the cycle starting to move up, we will probably as you saw at year end, the higher inventory level on the snapshot of December 31. You are seeing a relatively strong inventory position relative to the sales of the end of June 30. My guess is we will be in a position to start increasing our inventory as we start to see the recovery on the sales side.

Luke Folta - Jefferies & Co

Okay. Are you relatively happy with the average cost of that inventory at this point?

Michael Siegal

Never, the bar is too high. At 5.3 turns we are doing pretty well on the cycle, Luke.

Luke Folta - Jefferies

Okay. And just lastly, housekeeping questions. I think I heard you give a debt number, but can you talk about where your cash and debt position is currently or at the end of the second quarter, and also give us a sense of where you think interest expense could be in the second half on a run rate basis?

Rick Marabito

Sure. So the debt at the end of the second quarter, which is a bit irrelevant, because before the acquisition was $91 million, but as you look at where we rounded out I gave our July month end number, it was $224 million. In terms of a cash position, we had a $100 of availability there. And then in terms of interest rates, Luke, we are about 50 basis points lower on the revolver. So our revolver borrowings are LIBOR plus 2 to 2.50 is the range. The term loan is 50 basis points higher, the term loan $70 million of that 224.

Operator

Our next question comes from the Mark Parr, KeyBanc. Please go ahead.

Mark Parr – KeyBanc

Dave, I had a question for you. You had some really nice color in terms of how you were seeing the potential inflection on carbon pricing. And, Michael, you and Dave I think had both made some comments about how call it the non-transactional business, more of the in-demand related business levels were pretty strong. Just wondering if you thought how you would handicap HRC pricing in the fourth quarter relative to the third quarter, if you can look at 90-day versus 90-day opportunities?

David Wolfort

Mark, I think it’s up. As we commented earlier, and thank you for the question, obviously the cycles are coming faster. That is the obvious. We saw the market peak around April. We saw a slow progression, but we had steady progression downward through June into July. Our belief is this is the bottom, we are very close to the bottom, and we believe that that bottom is breakeven for production or close to breakeven for production. And that’s not probable for the producers. Hence, you see some maintenance being pulled ahead and so forth. And so, the answer to the question is that we see fourth quarter pricing being higher than third quarter pricing, and we see the mills coming out here shortly. I would suspect and encourage them to come out with some upward pricing movement.

Michael Siegal

Yeah, I mean -- we’ve heard few little rumors and tidbits here I guess there is furnace down in Cleveland right now and that - there is the more some -- some other things in the work. So I imagine you are talking about the same thing that we’re hearing.

Mark Parr – KeyBanc

Yeah.

David Wolfort

Yeah, it’s been publicized that that Middle's furnace maintenance has pulled ahead. You have some maintenance issues with the old IPSCO SS and beyond plate, US steel had some blast furnaces down of course, (inaudible) struggling. So, we see production being responsibly managed in a marketplace where the pricing has declined. And again our expectations to your earlier question is that fourth quarter will be up over third quarter.

Mark Parr – KeyBanc

Okay, that's terrific. If I could ask just a couple of housekeeping questions for Rick. In terms of the transaction costs associated with the Chicago Tube & Iron, is there anything incremental for the third quarter we should be looking for?

Rick Marabito

Yeah, there will be some incremental costs that did in the third quarter, Mark. We are not sure, that will be of the size of the second quarter. And then of course not hitting expense but all the closing fees under new bank deal will be hit the balance sheet and then amortized over five years, and that will happen in third quarter. But in terms of sort of the non-recurring things that hit the income statement, yes, there will be more in the third quarter.

Mark Parr – KeyBanc

Okay, and then that was -- my next question was on the interest expense. I mean, can you give us some color on second-half tax rate and expected interest expense?

Rick Marabito

Well, the interest expense, I mean I gave you guys sort of the numbers of the borrowings. So, you got our total borrowing and you got our rate. So I think you guys can do the math on that one.

And then in terms of the tax rate, obviously, we got little more tax work to do in terms of the integration with CT&I, but I am not expecting the tax rate to vary much differently than what you see here in the first half.

Michael Siegal

That’s been 37 to 39, yeah.

Mark Parr – KeyBanc

Okay, all right, terrific. And congratulations on the acquisition and good luck in the third quarter.

Michael Siegal

Thanks.

David Wolfort

Thanks, Mark.

Operator

Our next question comes from Sal Tharani of Goldman Sachs. Please go ahead.

Sal Tharani - Goldman Sachs

Hey, Mike, I was doing some math here, I mean I look at your historical margin average since the '90s, it looks like about 5% EBITDA for you. And according to my math, you bought a company, which is twice the EBITDA margin at the same multiple as you are trading now. So I think it looks like a good acquisition and certainly, as you said, it should be accretive from the very beginning.

Michael Siegal

Yes, that is true. We couldn’t agree more.

Sal Tharani - Goldman Sachs

I want to understand this comment on the pricing which obviously looks like it's a bottom because the prices are reaching the cost of even the lowest cost producers. But do you think there's enough discipline out there? We have a more fragmented industry now, there are more players on the flat rolled side. And some of these guys own just one or two furnaces, so I'm not sure if they will be -- it looks like a deja vu which was before 2004, that smaller companies with one or two furnaces were reluctant to shut down the furnaces because that means they've got to shut down half of the company or the full company. Do you think that that will prevail, that consolidation impacts us still?

Michael Siegal

I think the price will go up, Sal. I don’t think that whether you are running two furnaces and you are a small producer or whether you are a global producer. I think the anticipation is you are going to make money. And at these particular levels our belief is, as you stated earlier, I don’t think there is significant money to be earned and, therefore, the price has to go up. So, I do think that that is the governor that will drive the price of steel.

Sal Tharani - Goldman Sachs

And in anticipation of or your anticipation of the price going up, are you building some inventory at the moment?

Michael Siegal

We are buying everyday absolutely.

Operator

Our next question comes from Tim Hayes - Davenport & Company. Please go ahead.

Tim Hayes - Davenport & Company

On the volume decline sequentially from Q1 to Q2, was that all due to service center customers or was there more to it, like say the fab customers or a certain end market that contributed to the decline?

Rick Marabito

Well, a lot of that was service center. We did see automotive start to taper off, as the second quarter progressed, Tim. And then I think as Michael and David both commented, as the prices started falling, the psyche in the market was this, the price is going to go lower on the next buy. So, you see the end result which is very low inventories in the entire cycle change. So, I think it’s a combination of all those things.

Operator

(Operator Instructions) Our next question comes from Charles Bradford of Bradford Research. Please go ahead.

Charles Bradford - Bradford Research

Could you talk a bit about the restarts and the new capacity that's coming on and what impact you're seeing from those players?

David Wolfort

Well, Chuck, it’s David. Obviously, you have Severstal on and it is in RG really from our perspective, there is not much ripple on the water here with the issues down at Sparrows Point. There are some challenges out there because, as Rick and Mike and both commented, we saw volume go down as these producers are bringing out more capacity. I am sure that it helped influence some of the pricing going down. But regardless of all of that, it has reached a point of inflection and owing from our perspective it is at its lowest rate. And whether you brought on capacity or not, you need to move the numbers up. And so, there has been some decay, as some of those new producers came on but I think they are rectifying that as we speak.

Charles Bradford - Bradford Research

You had talked about Chicago Tube not competing in products and not competing or -- but having overlap as far as customers. What about suppliers? Do you get enough larger, some of the suppliers that you'll be better off from a customer basis?

David Wolfort

Chuck, at our level, as the level of million plus I think that we are as an efficient buyer as anyone in the marketplace, including those that supply our new acquisition Chicago Tube & Iron. Certainly, as we look at some of the some of the products that's moved through CT&I we view that as, some of the product I say, we view that as flat rolled that has been transformed to tubes, so that elongate that marketplace and we certainly think that with their depth of experience CT&I led by Don McNeeley, we certainly think that our expertise can only complement their supply side.

Charles Bradford - Bradford Research

Yes, because they certainly have a pretty first-rate reputation in the industry.

David Wolfort

They are, they deserve it, terrific.

Operator

Our next question comes from Aldo Mazzaferro of Mazzaferro Research. Please go ahead.

Aldo Mazzaferro - Mazzaferro Research

I think Chuck just asked my question, Mike. I was really wondering whether your experience on flat roll and your position on flat roll would help the supply chain of say something like tubing made from flat roll? I think you just answered, yes.

Michael Siegal

Well let me turn that, Don, if you are on the call, would you like to comment, Don, about what you think it means to you?

Don McNeeley

To clarify something that Charles said earlier then get to all those question, there is an overlap of customers. We do see potential series with of overlap of customers.

In terms of supply historically, our reading the economic indicator was HRC. We track the cost of a HRC coming through the channel. And we are learning some insights of the flat roll industry that I think will benefit our ability to leverage our purchases. We have already had a couple of opportunities in steel mills that we sell that we have been able to leverage the relationship that Olympic already has established. So, simplifying of the new intelligence that we are gathering from our new mother company is certainly going to position us better to leverage our purchases in a more economical fashion going forward.

Michael Siegal

Okay did that answer your question, Aldo?

Aldo Mazzaferro - Mazzaferro Research

It absolutely does, thanks. And can I ask one more for Rick? I don't know if you want to tell us, Rick, what the depreciation is on CTI?

Rick Marabito

Well, Aldo, we are in a midst of doing specific purchase accounting right now. So, one of the exercise is to revalue at market value all the fixed assets. So, I don’t have that information yet.

Aldo Mazzaferro - Mazzaferro Research

But in your comment that the EBITDA margin might be around 10% on a normalized basis, can you say how much the DA portion of the EBITDA was?

Rick Marabito

You know what? I don’t not have that right in front of me. I don’t want to put Don on this, Don, do you know approximately what your annually depreciation has been running, and if not, we’ll follow up with Aldo. But I don’t know, Don, if you have an idea roughly what your annual depreciation is?

Don McNeeley

Off the top of my head, I am going to put in that $3 million to $4 million range. I know that’s a big spread but somewhere in that sweet spot, Rick, is where we would be.

Michael Siegal

Aldo, we will get offline , we will get it for you.

Aldo Mazzaferro - Mazzaferro Research

All right, great. Congratulations on the deal, I think it looks fantastic.

Michael Siegal

Thank you.

Operator

I’m showing no further questions at this time. I’d like to turn the conference back over to management for any closing remarks.

Michael Siegal

Thank you, Elle. Let me just, let me also before I conclude just welcome the entire family of CTI. As David called the transformational, I would just call it it’s a thrill and a privilege to have the opportunity to look at a 97-year-old well managed company in CTI. So, we welcome the entire family of CTI. So, as a reminder, it is our policy not to provide forward-looking earnings estimates for the upcoming quarter or year, and not to endorse any analyst sales or earnings estimates. We anticipate releasing our third quarter 2011 earnings on or around November 4, 2011. And this concludes the call, and we thank you for your continued interest in Olympic Steel.

Operator

Ladies and gentlemen, this does conclude today's conference. You may now disconnect and have a wonderful day.

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