Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Olympic Steel, Inc. (NASDAQ:ZEUS)

Q3 2011 Earnings Call

November 4, 2011 10:00 AM ET

Executives

Michael Siegal – Chairman and CEO

Richard Marabito – CFO

David Wolfort – President and COO

Analysts

Luke Folta – Jefferies

Sal Tharani – Goldman Sachs

Edward Marshall – Sidoti and Company

Richard Garchitorena – Credit Suisse

Timothy Hayes – Davenport & Company

Mark Parr – KeyBanc

Aldo Mazzaferro – Macquarie

Operator

Good day, ladies and gentlemen, and welcome to the Olympic Steel Inc. Third 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’d now like to turn the conference over to your host, Mr. Michael Siegal, Chairman and CEO. Please go ahead.

Michael Siegal

Good morning and welcome to our call. On the call with me this morning is David Wolfort, President and Chief Operating Officer; and Rick Marabito, our Chief Financial Officer. I want to thank everyone for your participation and for your interest in Olympic Steel.

Before we begin our discussion, I again 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 2011 third quarter Form 10-Q, which will be filed early next week.

Earlier today, we reported our financial results for the third quarter and the nine months ended September 30, 2011. We are pleased to announce strong overall 2011 sales and earnings performance. We recorded our highest ever sales level for a third quarter and our second highest sales level for the first nine months in 2011.

Net sales for the third quarter of 2011 totaled $348.5 million and increased by 67% from $209.2 million for the third quarter of 2010. Sales also increased by $49.5 million or 17% over the second quarter of 2011.

Third quarter 2011 net income totaled $6.1 million or $0.56 per diluted share compared to a net loss of $1.2 million or $0.11 per diluted share in last year’s third quarter. Our 2011 financial results include the results of CTI, Chicago Tube and Iron, for a full quarter as we acquired the company on July 1st, 2011. CTI’s third quarter sales totaled $61.4 million. Our third quarter 2011 results also include the impact of two items worth highlighting.

Cost of goods sold include a cost of $1 million related to a Chicago Tube and Iron purchase price accounting adjustments to write up the value of certain inventory to fair value at July 1, 2011. The inventory adjustment had a negative impact of $0.06 on the third quarter 2011 EPS.

Additionally, our third quarter 2011 consolidated effective tax rate was 12.2% as a result of changes in unrecognized tax benefits during the quarter. The income tax benefit had a positive impact of $0.17 on the third quarter. The combined net EPS impact of the cost of goods sold and income tax items was a positive $0.11 per share. Rick will provide more details on those two items later in the call, so save your questions for later.

Net sales for the first nine months of 2011 totaled $941.9 million, our second highest ever nine month revenue total. Net sales increased 60% from $589.8 million for the first nine months of 2010. For the first nine months of 2011, net income increased by $20.7 million or 555% to $24.4 million or $2.23 per diluted share compared to net income of $3.7 million or $0.34 per diluted share for last year’s first nine months.

Our 2011 year-to-date results include $919,000 of operating expense incurred during the second quarter related to the CTI acquisition which equates to about $0.05 a share of earnings. We are thrilled with our CTI acquisition as it accelerates our market share growth and was immediately accretive to our third quarter earnings. We also continue to successfully execute and are previously announced strategic investments in new products, geographies, and equipment to service our growing customer demands.

Through the first nine months of 2011, our capital spending has totaled $25 million including new equipment successful information system infrastructure rollouts and facility start-ups in Gary, Indiana, Mount Sterling, Kentucky, Monterrey, Mexico, Kansas City, Missouri, Roseville, Minnesota, and Streetsboro, Ohio. We confidently look forward to our new Gary Temper Mill facility opening on time and on budget actually at the end of 2011, but ramping up in early 2012 with $150,000 incremental tons of capacity once at full operational capacity. It’s on redundant but, we are already planning for another expansion in Mount Sterling, Kentucky as our one year old facility there is now operating at full capacity.

In the first nine months of 2011, we estimate these new locations startups had a drag on earnings of about $600,000, as we get each one up and running to its capacities. Our strong balance sheet remains in excellent shape with our new five-year $335 million credit facility, providing the foundation for continued growth and value creation.

Today, we also reported that Olympics Steel’s Board of Directors approved our regularly, quarterly cash dividend of $0.02 per share to be paid on December 15, 2011 to shareholders’ of record on December 1, 2011.

And so, I’ll turn the call now over to Rick.

Richard Marabito

Thank you, Michael. Good morning, everyone. And before I get into the normal financial highlights, I want to take a few minutes to just talk about some of the detail surrounding the CTI acquisition.

So, as Michael already indicated, the acquisition closed on July 1, so our third quarter results include a full period of CTI’s results.

The total purchase price for CTI inclusive of a post-closing working capital adjustment was $159.9 million. We also assumed $5.9 million of existing CTI IRB debt, and that was offset by $11.1 million of CTI cash that we received in closing. And as a reminder, the acquisition was financed through our upsized and amended $335 million credit facility, which I did outline in detail on the last call, so I’m not going to do that again today. We incurred, as Michael said, $919,000 or about $0.05 earnings per share on deal-related expenses, those had already flown through the income statement in the second quarter.

During the third quarter, we completed the preliminary allocation of CTI’s purchase price, and that resulted in goodwill of $39 million and other intangible assets of $37 million.

Next looking at CTI’s inventory, CTI values the majority of its inventory on LIFO. In accordance with Accounting Standards, the book LIFO reserve was eliminated and reset to zero on the July 1st purchase date. We did not record any LIFO adjustment in our third quarter of 2011 because our second half LIFO estimate anticipates the prices and quantities will be below the July1, 2011 levels. So as a result, we have no LIFO reserve at September 30th. In essence, CTI LIFO inventory is stated at FIFO at September 30, 2011. And just to give you an idea, about 13% of our consolidated Olympic Steel inventory would now be stated on LIFO.

As part of purchase price accounting, Accounting Standards also required us to write up certain portions of CTI inventory to its fair market value or at sell price, and then subsequently expand their write-up to cost of goods sold over one turn of inventory. So as a result, our third quarter gross margins were negatively impacted by the $1 million that Michael just spoke of, which equates the $0.06 of EPS. Fourth quarter margins will be impacted by only $136,000 that was predominantly a one-time flow-through in the third quarter.

Turning to segment reporting, starting with our third quarter Form 10-Q which I think will be filed by Monday, so you’ll be able to see it Monday, our business results will be reported in two segments – a flat product segment, and a tubular and pipe product segment.

CTI’s net sales for the quarter were $61.4 million or 17.6% of consolidated Olympic net sales for the quarter. CTI’s third quarter operating income was $3.6 million, and CTI’s EBITDA number was $4.9 million for the third quarter; and that $3.6 million of operating income and $4.9 million both consider the $1 million inventory cost of goods sold adjustments that I just described. So we’re very pleased with CTI’s accretive contribution to our third quarter results. And as I said, please refer to the 10-Q footnotes and MD&A for more information, and I’ll be happy to answer any questions after your review it.

Next, let me highlight some additional financial items for our third quarter and first nine months. As a percentage of net sales, consolidated gross margin totaled 19.4% in the third quarter compared to 20.2% in the second quarter of 2011, and 17.9% in the third quarter of 2010. CTI’s gross profit percentage was 16 – I’m sorry, 26.8% for the quarter, as tubular and pipe product gross margins are higher than our traditional flat product gross margins. And as I mentioned earlier, GAAP purchase price accounting rules resulted in the $1 million cost of goods charge that rolled through cost of goods sold in gross margin, that had an unfavorable impact on our total consolidated gross margins of about three-tenths of 1 percentage point.

Operating expenses in the third quarter of 2011 totaled $58.2 million, compared to $46.5 million in the second quarter and $38.7 million in the third quarter of 2010. As a percentage of sales, operating expenses in the third quarter actually declined 16.7%, and that 16.7% includes that 2.3% for distribution cost, so we declined a 16.7% versus 18.5% last year.

EBITDA defined as operating income before depreciation and amortization expenses right off the face of our income statement totaled $14.0 million in the third quarter and $52.2 million for the nine months of 2011.

Capital spending through nine months of 2011 is totaled $24.6 million. Again, the majority of that spending related to our temper mill project in Gary, Indiana and processing equipment from Mount Sterling, Kentucky operation. We still expect our capital spending in 2011 be about $35 million, a lot of that will depend on the final timing of payments to complete the new temper mill project.

Our effective tax rate for the third quarter was 12.2%, and that broader year-to-date to 33.3% compared to last year’s rate of 37.9%. So the lower third quarter rate was due to some favorable changes in unrecognized tax benefits during the third quarter that are required to be recognized under accounting standard, ASC 740, the non-recurring benefit had a favorable impact of about $0.17 per share, as Mike already commented. We would expect our full-year 2011 income tax provision to be about 34%, and we would also expect in 2011 our tax rates to return to our historical 38% to 39% range.

Inventory turnover at the end of the third quarter of 2011 was slightly above four times for us. We did intentionally add inventory prior to third quarter price increases, we do expect our turn to be more in our normal range of 5 turns by year end. CTI strategically turns inventory slower in the power generation business and valve sales business resulting in normal turnover rate of about 3.5 to 4 times on CTI inventory. Our 2011 third quarter receivable DSOs totaled 42 days that is comparable with the second quarter. CTI DSOs are typically under, slightly under 40 days, so we may be able to shave a little bit of our consolidated DSO going forward.

Out debt at the end of the third quarter totaled $248.2 million and our availability stood at $82.7 million and obviously the debt balance is up because it includes the $160 million we borrowed to effectuate the CTI purchase. And then finally, shareholders’ equity per share increased to $26.23 at the end of the third quarter.

Now, I will turn the call over to David.

David Wolfort

Thank you, Rick, and good morning to all. Again echoing what both Mike and Rick just talked about, we are pleased with our market share growth and the profitability we have achieved in the first nine months of 2011.

We’ve accomplished a great deal so far this year 2011 and we had a busy third quarter. We completed the transformational acquisition of Chicago Tube and Iron on day one of the third quarter and we welcomed a 97-year old company of excellence into the Olympic Steel family.

We also continue to invest in our future spending over $8 million during the quarter on our strategic capital initiatives. As Rick indicated, most of our capital spend this year has been on the new temper mill cut-to-length line in Gary, Indiana, and our continued growth in Kentucky.

We also have other meaningful expansion projects at various stages of completion. And before commenting on these, let me review the market first.

I characterize the third quarter as a normal service center quarter with a typical summer seasonal slowdown. Our tons sold, excluding Chicago Tube and Iron, were 266,000 tons in the third quarter compared to 285,000 tons in the second quarter. So our sequential volume was down by less than 7%, and for the nine months our tons sold totaled 869,000, or again a 22% over 2010. The tons sold metric is not really relevant for pipe and tubing sales, so we’re not including Chicago Tube and Iron’s volume in our tons-sold report.

Demand has remained sound through October and we continue to see strength in our customers in the automotive, heavy industrial and agricultural equipment segments. We are optimistic about demand. Even though we expect the fourth quarter to follow normal seasonal patterns with a slowdown in business occurring around Thanksgiving holiday and again during the last two weeks of December.

Market prices have peaked in April and then slipped through mid of August when mill price increase announcements were made. The necessity of the August price increase was short-lived as prices came under pressure again by mid-September, and prices have been revisiting the lows of August.

While pricing is again approaching the steel mill’s breakeven point, buyers remained very cautious and are only buying what they need. With steel mill lead time short and concerns revolving around pricing, there is no need for service centers or other large buyers to build inventory. Indeed, we expect our inventory will be lower year end, then where we are or where we ended our third quarter.

We do remain on the bullish on the longer term view of steel and believe we will be a strong and a strong market over the next five-year cycle. We also believe that Olympic Steel is well positioned to take advantage of the expected market acceleration related to global infrastructure and related equipment builds.

Our strategy has been to invest in Greenfield initiatives during the market downturn of the past few years when facilities, equipment and people were available at favorable pricing. I want to now spend a moment of time to talk about some of the exciting developments around our bigger initiatives.

We mentioned Kentucky a couple of time, our Mount Sterling, Kentucky facility, as I previously highlighted, we bought this facility in Mount Sterling, Kentucky in the second half of last year and have been outfitting with the equipment over the past 12 months.

The operation has been extremely successful and profitable. In fact we already need to expand the footprints there as our existing space is filled. In order to meet our customers growing needs, we expect to purchase another building by year end in the same industrial park.

Let me talk a little bit about our Gary Temper Mill project. Needless to say we were very excited about our new Temper Mill operation in Gary, Indiana. We’ve already moved our management team there and the final equipment installation has been completed this month, November.

We anxiously await running our first coil over the new mill and projected operations by year end as Michael indicated earlier. We’re already shipping plate product from this facility and at full capacity that Temper Mill equipment will be capable of processing approximately 150,000 tons of new business, high-quality tempered sheets and we’ll significantly reduce our inbound and outbound freight costs while better servicing customers from our existing two temper mills in Cleveland, Ohio and Bettendorf, Iowa.

We also look forward to early 2012 when we will complete our marketing studies and justification in order to make our next big decision on our option to purchase another like-kind piece of equipment at favorable terms. If we exercise that option we will also deciding on our location of what would be Olympic Steel’s fourth temper mill cut-to-length line facility.

Let me talk a little bit about Olympic Steel and Chicago Tube and Iron and the commercial integration that we’ve experienced so far. In addition to all the new facility growth, during the third quarter we kicked off a significant commercial integration effort to grow our tubing and flat product sales to existing and new customers utilizing the combined strengths, relationships, and product offerings of Olympic and Chico Tube and Iron. For example, the new Kentucky facility that I just talked about will also allow us to begin stocking tube and pipe products from Chicago and Tube and Iron for servicing existing and new customers in that region.

We have similar initiatives underway in Roseville, Minnesota; Fond du Lac, Wisconsin; and Dover, Ohio. We think this will be a great opportunity to leverage organic growth in the next few years through our existing facilities and relationships without the need for additional capital investment. 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.

If we move forward with our option to order another temper mill, it would be the Capstone of what would be a total of a three year spend of $75 million in strategic capital expenditure programs, that adds multiple Olympic facilities in new geography, adds value-added processing equipment and adds in excess of 300,000 tons of new tempered sheet capacity to provide the foundation for growth and value creation for years to come. This concludes our formal comments and we will now open the call to your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, (Operator Instructions). Our first question comes from Luke Folta of Jefferies. Please go ahead.

Luke Folta – Jefferies

Hey, good morning, guys.

Michael Siegal

Hi, Luke.

Luke Folta – Jefferies

First question on the new Temper Mill for Gary, you’re talking about being able to start ramping shipments from that mill in the first quarter of next year? Can you give us a sense of when you think – how long do you think it will take for you to have positive contributions for an earning standpoint there?

Michael Siegal

Well, Luke. We’re going to start the mill up before the end of the year as both Mike and I commented. We are shipping plate out of that facility right now and we would expect by probably March to be at pretty good order of production.

David Wolfort

So, second quarter Luke.

Luke Folta – Jefferies

Okay.

Michael Siegal

Maybe – may again depends on the startup.

Luke Folta – Jefferies

Okay. In the second potential Temper Mill project, I think we’d spoken in the past about the various regions and which that might end up in it. Is it safe to assume somewhere in the Southeast like is kind of where the focus might be on that project?

Michael Siegal

That’s where the focus is.

Luke Folta – Jefferies

Okay. And then also on just given I mean – you may have answered my question in your comments already on this, but some – I mean, do you guys see any reason outside of the effected mills, metal spreads are compressed and this is typically the timing when the mills start to go for pricing for the first half of next year, do you see any other reasons, fundamental reasons why prices should be increasing here along with these announcements we’ve seen just over past couple of days?

Michael Siegal

Luke, is the question do – can we – do we understand why prices are going up, is that what your question is?

Luke Folta – Jefferies

I guess the question is have you seen any change in your business. Whether it be demand picking up or lead times getting a little tighter, or longer, or availability getting a little tighter that would suggest that the need for – or that the rationale for increasing prices at the mill level?

Michael Siegal

I think the confluence of all of those issues are in play here. Quite frankly, we’ve seen a continued and steady growth as we commented. We see our OEMs are busy. We do see lead times moving out. That’s a combination of facilities shortening their production, and – I’ll provide you a different issues that go around that. But of course, as we remarked, service centers are playing the game hand and mouth as one would expect, concerned about the price of scrap. And then of course the play that we saw in mid-September and beyond was really the strengthening of the dollar, and now again revisiting the dollars ratio to the euro, it’s going back to where it was pre mid-September. So again, that starts to lose some things up a little bit.

David Wolfort

That’s well of the fact – Luke, if you remember it from last year, prices bottomed somewhere in October. And when you look at the forecast for steel consumption in 2012, it clearly is up by almost every indication by at least 5%, so when you’re looking at an overall consumption moving into next year at an increase level from this year we’re much more optimistic about the outlook for ‘12 sitting here today in ‘11 than we were sitting here at ‘10 looking at ‘11. So the steel mills are looking at this year 2011 sort of as a same indication with even a greater consumption of next year and there is, no reason for them to abdicate tonnage and pricing for December when in fact they think it’s going to recover regardless of what they do.

Luke Folta – Jefferies

Okay. All right thanks for the color guys. And just lastly, regarding what you’re hearing from some of your OEM customers for the first quarter ‘12 and for the first half have they kind of given you any specific indications of what their needs might be and can you just comment on how do you think about those trends?

David Wolfort

Luke again I think Michael gave you a accurate answer but I will tell you that our OEMs are busy and they are busier than they were in the first quarter but they are busy as they were in the second quarter it’s probably a fractional differential but they’re all busier substantially busier than they were in 2010 and there will be busier again in ‘11 than they were busier in ‘12 and they were in ‘11.

Luke Folta – Jefferies

All right thanks a lot guys.

Operator

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

Sal Tharani – Goldman Sachs

Thank you how are you guys.

Michael Siegal

Hi Sal.

Sal Tharani – Goldman Sachs

Couple of quick questions, first Rick on 10-Q would you also provide the gross margin for each of these divisions?

Richard Marabito

The 10-Q what you’ll see in your segments but note is you’ll have – for the Olympic you’ll have ton sold sales average pricing, gross profit, operating expenses and operating income and you will have for consolidated you won’t have ton sold for the reasons that David highlighted and that is when you blend in CTI we don’t think it’s meaningful. So you will have a consolidated gross margin and then you will have gross margin by segment.

Sal Tharani – Goldman Sachs

Okay. So we can back it out CTI if we want to.

David Wolfort

Yeah.

Sal Tharani – Goldman Sachs

Thanks. And also any further acquisition related expectations for the next quarter, are you all set for that?

David Wolfort

For the right price, we’re ready to do any deal so.

Sal Tharani – Goldman Sachs

Okay. When I mean the CTI, do you have any more expenses in the fourth quarter or you all done with the charges you were supposed to take.

David Wolfort

Yeah. We should be pretty clean in the fourth quarter.

Sal Tharani – Goldman Sachs

Okay. Now there are a couple of questions. One is the Gary Temper Mill 150,000 ton. Mike, is this all new or is there some of that you are already supplying from your existing temper mill and it will be not be 150,000 tons once it is fully ramped up – fully ramped?

Michael Siegal

No, no because whatever we take off of Cleveland and Iowa, we expect to back fill in those two locations. So while it will be not specifically 150,000 new tons at Gary, Indiana it will be 150,00 new tons in total.

Sal Tharani – Goldman Sachs

Okay, great.

Michael Siegal

We will go further east and further west of the other two mills.

Sal Tharani – Goldman Sachs

Okay. And there is no pulling in this, just you buying and selling as in your normal operations, is that correct?

Michael Siegal

That’s our expectation.

Sal Tharani – Goldman Sachs

Okay. And I was looking at the calculation on CTI numbers which you had provided. Looks like without CTI, the operating margin was 2%. At CTI, the operating part is 7.5%. I understand on the steel or the flat roll business is very volatile with prices going up and down. How should we look at CTI, sort of, is it a seasonal business?. Aside from the growth you’re going to expect but in just – in the normal same store sales, is the margin and the revenue of $60 million plus, is that the run-rate we should expect going forward on a quarterly basis?

Richard Marabito

Well I – go ahead Michael.

Michael Siegal

I was going to say two things, number one, about your seasonality question. Type into business specifically CTI is less cyclical. Then what you might be normally seeing from Olympic. Second of all the sales rate of $61.4 million, I mean we’ve had a very strong third quarter and we had previously said that there would be at least at a $225 million run rate. So I would be comfortable using the third quarter as a proxy going forward.

Sal Tharani – Goldman Sachs

And how about the margins, is that a fluctuation based on steel prices or margin up pretty consistently same?

Michael Siegal

Their margins are pretty consistent.

Sal Tharani – Goldman Sachs

Okay, great. Thank you very much. I appreciate that.

Michael Siegal

Thanks.

Operator

Our next question comes from Edward Marshall with Sidoti and Company. Please go ahead.

Edward Marshall – Sidoti and Company

Hey, guys.

Michael Siegal

Hi.

Edward Marshall – Sidoti and Company

Traditionally, I see you guys as opportunistic on the inventory purchases and as pricing sitting at the August lows and you common saying that you are more optimistic on ‘12 than will say about ‘11 in 2010. And here you are saying you are bringing inventories going down into 4Q. Kind of how do I think about – how that maybe you correct yourself as you slide into 2012 assuming how pretty optimistic views for 2012? Do you expect pricing is going to come down a little bit more or what are you seeing there?

David Wolfort

Well I think that the Ed, David here, I think that the August lows has been revisited as I commented earlier. So in last conference call in August we championed call for pricing increases because at breakeven we didn’t think that was sustainable for the steel moves and in fact well they didn’t back into our call, they certainly had a pricing increase on August 10th and that pricing increase did stick until actually the dollar strengthened in mid September and then it started to weaken and as I said earlier we revisited that low of August. That same dynamic still exists here today and we are at that low of August and we – our expectations are that prices at some junction in time here in the near future will start to move up.

Edward Marshall – Sidoti and Company

Okay. And you’re not building inventory in front of that?

Michael Siegal

We’re not building inventory in front of that, Ed, because the lead times are short as we remarked and we also are in a position of needing to restock a couple of new facilities and so we want to make sure that we get that inventory correct in those new facilities.

Edward Marshall – Sidoti and Company

I see. Did you give year-over-year sales volume – sales and volume growth for CTI and if not is it possible that you can provide that?

Michael Siegal

We have not provided that what’s available for CTI is and first I’ll tell you they are up significantly. But if you go to the 8-K that was filed in September that will be the extent of the historical financial statements information that we provide for CTI.

Edward Marshall – Sidoti and Company

Okay. And as I look at the margin statistics and I think sale and over them – and if you strip out the additional million I think that income line is even higher. But Mike, I guess my question is there is also – I’m assuming amortization of the assets there – what is that running on a quarterly basis for the write up of assets?

Michael Siegal

Yeah. The amortization is $222,000 a quarter.

Edward Marshall – Sidoti and Company

Okay. And then finally the debt burden in the quarter, the interest rate I expect is slightly higher. Did you have a full quarter of that burden or is there timing with that?

Michael Siegal

No, it was all – the purchase price took effect on July 1st that’s when we borrowed and acquired CTI so there is a full quarter.

Edward Marshall – Sidoti and Company

Okay, so it was a little high there. Okay, good. Thanks guys.

Michael Siegal

You’re welcome.

David Wolfort

Thank you.

Operator

Our next question comes from Richard Garchitorena of Credit Suisse. Please go ahead.

Richard Garchitorena – Credit Suisse

Thanks. Good morning guys.

Michael Siegal

Hi.

Richard Garchitorena – Credit Suisse

First question I was wondering if you can give us some color on what you’re seeing at the various products now you have basically played fine rolled and pipe and tube from CTI. Any differences in terms of near term demand and then what do you expect going forward?

Michael Siegal

By product or by...

Richard Garchitorena – Credit Suisse

Yeah, just generally because obviously there has been different end markets tied to the various products.

Michael Siegal

Well, Richard, as we’ve outlined before other than the seasonal slowdown that we saw in the summer which we remarked on, we also see that same traditional seasonal slowdown at Thanksgiving and the last two weeks of December. What we’ve seen is – it’s good slow growth, it’s not the aspirational growth that everybody is looking for but we’re seeing good slow growth. There is some real high spots and some of the larger OEMs that we have significant market share with in all the products the demand is stronger. Michael remarked on that earlier I think when we answered Luke Folta’s question in greater detail, but our expectations of ‘12 are more steel consumed than in ‘11, ‘11 is revised upwards – was revised upward from April by the AISI and we expect even greater steel consumption in ‘12. Our OEMs are all signaling as we’ve answered earlier questions that they are busier.

Richard Garchitorena – Credit Suisse

Okay, great.

Michael Siegal

So all products look like they’re going to have a relatively stronger year, and like everybody who probably answers this question, Richard, all of us expect our unfair share of market growth. So, we as Olympic would expect an unfair share as well.

Richard Garchitorena – Credit Suisse

Great. Thanks. And my another question is that in terms of imports, do you see additional imports coming in the next couple of months? Are you buying imports today than say two months or...?

Michael Siegal

No. No and no. No and no. No.

Richard Garchitorena – Credit Suisse

Great. Okay, thanks.

Operator

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

Timothy Hayes – Davenport & Company

Good morning.

Richard Marabito

Good morning.

Timothy Hayes – Davenport & Company

One housekeeping item, the sales or the shipments in Q3, how much of the 266,000 was direct?

Richard Marabito

In terms of the tonnage? -because we never break the sales dollars out.

Timothy Hayes – Davenport & Company

Yeah, just the tonnage. Yes.

Richard Marabito

Yeah. So of the 266,000 tons, 249,000 were direct and 17,000 were tolled.

Timothy Hayes – Davenport & Company

And then looking at ‘12, was that a couple other service centers that at least spent in expectations for sales growth in 2012? Maybe if you could provide the same thing for on the flat-rolled, now you’re newly formed flat-rolled segment, do you have a feel for some thoughts on what volume growth would be in ‘12? And if so, what would be organic versus – I should say underlying versus all the expansions that you’re doing? You could separate – I mean you’re doing so much expansion versus what would be sort of an underlying from the general economy, that split would be helpful.

Richard Marabito

All right.

Michael Siegal

Yeah, that’s going to be tough question to answer. Let me just do the best I can. Obviously, the geographic penetration should give us more than the normal opportunity for growth. We look at the 5% overall consumption, we look over Olympic Steel’s last few years of market share growth relative to MSCI data, so we would expect to continue to outpace the growth of the overall consumption by taking more market share via the new locations and the new opportunities. In addition to that we see some growth opportunities as David indicated on the synergistic commercial opportunity of using our products at CTI customers and vice versa. So I would tell you that we certainly are looking at more than 5% and I can’t tell you how much for it, but certainly more than the 5% of the overall consumption.

Timothy Hayes – Davenport & Company

Okay. And then just to clarify on getting to historical data piecing together the CTI part, I guess we’ll just piece together the quarters as the Qs comes out or will there be a separate filing that would give us quarterly detail on CTI, say, from July 1 of 2010?

Richard Marabito

No, you won’t get information from July 10. So basically as I said the historical stuff you can look in the 8-K and then going forward you will have segment information likely what we’ll do going forward on segment information is published some of that in the actual earnings release table, so you will have more information and then the segment information that’s contained in the 10-Q, so that will be the extent of the information.

Timothy Hayes – Davenport & Company

Okay, thank you. Look forward to that detail.

Michael Siegal

Thank you.

Operator

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

Mark Parr – KeyBanc

Hey, thanks, good morning.

Michael Siegal

Hi, Mark.

Mark Parr – KeyBanc

Hey congrats, good quarter.

Michael Siegal

Yeah, thanks. Can feel good but it was.

Mark Parr – KeyBanc

Couple of questions. Are you talking – you’ve had some pretty I would say consistent across the board commentary as far as demand recovery momentum. I don’t know if there – if you think about specific end markets, is there any differentiation that you can share with us in term of which areas maybe growing more rapidly than others and which areas you feel better as far as the growth outlook in 2012?

David Wolfort

Mark, David we’re really focused on obviously the markets that we cadre to and the market that we cadre to are pretty upbeat including automotive which is has a tendency to be little bit more cyclical. The OEM side of the equation, Mark, highly engineered discrete products all the colors that you come to appreciate overtime yellow and green and red and so forth. They’re all doing very well. Even construction related products as they pertain to area lifts and work platforms reinvigorating rental pools have been robust and they continue – we continue to earn more of that share of markets so we have a very upbeat look really across the board.

Mark Parr – KeyBanc

Okay, that’s helpful. One thing on the CTI integration process, Michael, I don’t know if you shared much on that or Dave what’s your thoughts or may will there be – is there going to be a process here where you’d be able to capture some synergies over the next 12 months or so?

David Wolfort

And the answer to that is, Mark, yes, we have a commercial integration team that we put in place in conjunction with the leadership of Chicago Tube & Iron, that’s Dr. Don McNeeley. The only change that we made there are those 400 employees is that we asked Don McNeeley to report to Mike Siegal as opposed to reporting to Bob Haigh and then from a synergistic standpoint, as we commented earlier, we have a lot of businesses that we have some common participation with, as Michael noted earlier. We will take our product in and then vice versa they will take their product in. Beyond that, I commented on a number of our locations where we’ll be adding tube and pipe in support of current customers that we’re doing flat roll business with that Chicago Tube & Iron has not participated with and so we have a pretty good head start on that, Mark, and we are very enthusiastic about it.

Michael Siegal

Yeah, Mark and so real synergy is the opportunity on the growth side of the businesses. We do not anticipate significant expense synergy. Other than sort of future projects that might have been on the table like a new building that CTI was contemplating of spending $10 million to $20 million on a number of facilities for their growth initiatives may get tabled as we look at our mutual locations and so – you know what- you don’t have to build a new building. We are already there, just put the inventory into our facilities and vice versa. So I think some of the future capital projects that may have been on the table may get eliminated and/or determined. We don’t think their synergy per se and we’re going to close any of either of our facilities, but they are all is going to be on the top line.

Mark Parr – KeyBanc

Okay. Is CTI is going to be transferred over to your Oracle system.

Michael Siegal

We have no plans to do that in the near term.

Mark Parr – KeyBanc

All right. Just last one question if I could and I appreciate the color on the end markets and on the synergies, in the later part of September we saw a pretty material down draft in some of the steel alloy materials, nickel in particular which is major component in stainless. And I was wondering if you could perhaps comment on how that may or may not have affected stainless volumes in the later part of the third quarter and how you would see the stainless market unfolding here for Q4.

Michael Siegal

Well, I think you hit a hot pot, Mark, no question about it. When the dollar strengthened obviously the commodities weakened and then it affected those elements particularly nickels and chrome and so forth and we saw degradation of pricing in stainless steel. We were already tuned into that. Our specialty metals people were already busy in months prior to that leaning out inventory because they didn’t like the tenure of where commodity pricing was going and the volatility as it moved into the tail end of the year.

So I think that marketplace is going to be stressed until the commodity market stabilizes. There also has been some changes in the way that they calculate nickel surcharges and so forth and there is some deeper discounting as you get to the base price of stainless. All of that is added to the turmoil for that product. There is no less demand for that product, but there certainly is a lot of concern relative to dynamics of the pricing of that product and we’re in touch with that, we’ve lowered our inventory dramatically. Yet, our specialty metals business has increased significantly and we have some very high expectations for next year. We’re bringing on our Streetsboro operation, which is in conjunction with Integrity Stainless, which we bought in February of 2010. That business, under Olympic Steel, this year has grown fivefold and will have its first facility with slitters and so forth and we’re redeploying some assets. But the specifics of the pricing of stainless, Mark, you’ve hit it right on the head and it’s going to be volatile.

Mark Parr – KeyBanc

Okay. Anyway, I appreciate that. Good luck with the fourth quarter.

Michael Siegal

Thanks.

David Wolfort

Thanks.

Operator

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

Aldo Mazzaferro – Macquarie

Hey, good morning gentlemen.

Michael Siegal

Hi Aldo.

Aldo Mazzaferro – Macquarie

Say, Mike and Dave, do you really think that prices in the U.S. can hold here if iron ore doesn’t recover and if scrap drops 30 or 40 bucks?

Michael Siegal

I do. Why not? I mean they don’t have to give it away if the dynamics of the market are such, Aldo that the determination is as we saw some of the indication from some of our suppliers if they are not anticipating a strong fourth quarter. They may just win the game against the volume buyer, and hold on, I mean the answer is it’s possible. They just need the price to recover and they need their cost structure to go down and they may not give it away. Yes.

Aldo Mazzaferro – Macquarie

Okay. So you think we’ll see more shutdowns for the fourth quarter?

Michael Siegal

I don’t know about shutdowns, but we certainly see more maintenance and the slowdown.

Aldo Mazzaferro – Macquarie

Yeah. Okay. And just to clarify – I mean you commented early you thought that 5% growth in consumption, is that final demand consumption you talked about, or is that the apparent demand that would be impacted by inventory change or by imports?

David Wolfort

No, I think that’s real consumption now without inventory, dynamic. As we look at some of the econometric stuff that we get, the answer is we would anticipate real steel consumption going up 5% next year.

Aldo Mazzaferro – Macquarie

That’s a big number compared to what the GDP forecast is. I mean, I’m not saying that I disagree with it, I’m just saying that the – it could imply that the GDP forecasts are very well.

David Wolfort

Well.

Michael Siegal

GDP is impacted by consumer spending. Capital still not flowing through the system for the general consumer. Housing is still under a great deal of pressure. So – and factors around – an election, and currency, and so the industrial sector I think although is stronger than the GDP.

Aldo Mazzaferro – Macquarie

Yeah. That’s very, very helpful. And then, hey, just a quick question for Rick. Why did you decide to take the volume statement off the press release?

Richard Marabito

Yeah, because as we were commenting when you look at volume from the tube and pipe sector obviously – because it’s hallow, it’s got a lot less weight to it, and we thought by consolidating the tonnage sold through CTI and Olympic, you would get very skewed information as you compared it to history. So, as I said, you’ll get the information, although it’ll be in the segment footnotes. And going forward, we’re going to – we’ll break out that information in the tables in the earnings release. But consolidated, it doesn’t really make sense.

Aldo Mazzaferro – Macquarie

Yeah.

Michael Siegal

Okay.

Aldo Mazzaferro – Macquarie

Well, thanks. Next quarter, given the economic situation, I think the numbers are speaking for themselves right now. Looking good.

David Wolfort

Thanks you.

Aldo Mazzaferro – Macquarie

Thanks

Operator

(Operator Instructions). Our next question is a follow up from Sal Tharani of Goldman Sachs. Please go ahead

Sal Tharani – Goldman Sachs

Thanks. Hi, Rick. What would be the number of employees by the end of this year once you are fully running the Gary plant? Or what is it right now?

Michael Siegal

We’re 1,400 plus. I don’t have the exact number.

Sal Tharani – Goldman Sachs

Okay. And there’ll some more addition for the Gary plant, is that correct?

Michael Siegal

1,600

David Wolfort

They were close to 1,700 on the combined Olympic CTI. We will probably be adding another 50 employees during the first quarter, as we ramp up these facilities.

Sal Tharani – Goldman Sachs

Okay, great. Mike, the demand you mentioned 5% up next year seems reasonable because we are at such a low level 1990 level, could that happen?

Michael Siegal

Yeah.

Sal Tharani – Goldman Sachs

But also capacity is also rising by about 5% next year. If you look at year-over-year, some of it has already started ramp up, and if you average it out. I was wondering if you think we can get that kind of pricing momentum, I’m sure pricing will go up, it always happens in the earliest part of the year, but would that be that kind of acceleration of sort of going to all the way to $900, obviously we don’t have to raw material support also at the moment, do you – are you planning such kind of pricing pressures next in your base case scenario?

Michael Siegal

No, not really. Again, as we have always focused – we focus on the margin regardless of what the price is, but I would anticipate that the economy in the United States is not going to terribly strong as although indicated on the GDP numbers, I do think that we’re going to see a low currency valuation on the U.S. dollar. And I think currency as a bigger factor on anything else or at this particular moment so, so – everybody is a China expert and so is China expert going to be 8%, 12%, 15% so China still drives a great deal of the pricing momentum the currency issues are significant. So I would tell you that on the supply demand, a question that you’re asking yeah I don’t see the fact that there is going to be a lot there is going to be more demand. That supply isn’t going to be a relative neutral and there full pricing still going to be competitive but it’s going to be driven other factors on the basic supply demand.

Sal Tharani – Goldman Sachs

Okay. The other thing is that last year you mentioned about last year’s dynamics that prices bottomed in October, it appears that prices are bottoming here but we also saw last year towards the end of the year the vertical lead time started to lighten very significantly sort of sometime in late November, December particularly. And I was wondering if that starts to happen would you change your policy of not buying an inventory and still having a low inventory at the end of the year.

Michael Siegal

We’re very flexible, Sal. Getting kind of time buddy I mean.

Sal Tharani – Goldman Sachs

Okay.

Michael Siegal

This is dynamic shipping will ship.

Sal Tharani – Goldman Sachs

That’s what I suspected. Thank you very much.

Michael Siegal

You are right.

Operator

I’m showing no further questions at this time. And now I would like to turn the conference back over to Mr. Michael Siegal for any closing remarks.

Michael Siegal

Thank you. Let me just make a comments here before I thank everybody. At Olympic Steel, we speak for ourselves and we really speak for anyone else, but we’ve all listened to our contemporaries. We had a relatively strong third quarter and a relatively robust year. We are offended at Olympic Steel, when we hear the media and our government continually talk about how no one is investing capital and growth, how no one is hiring employees, we are very proud of the fact that we continue to invest in North America and specifically the United Sates. We are proud of the fact that we are continuing to add employment in this country with good pay and good benefits and we remain offended all right, that nobody seems to recognize the fact that this industry in total and the service center sector on itself is a very dynamic and growing universe irrespective of the GDP. So I wanted to say that we are proud of the fact that we create jobs in the United States and that we hope that others would start to take notice, our elected officials and the people in the media specifically and we really thank all of our support that we get from the people who cover Olympic Steel.

So having said that it is our policy not to provide forward-looking earnings estimates for the upcoming quarter or year, and not to endorse any of your earnings estimates, but we anticipate releasing our fourth quarter 2011 earnings on or around February 23rd of 2012, and this concludes our call and thank you for your interest in Olympic Steel.

Operator

Ladies and gentlemen that does conclude today’s conference. You may all disconnect and have a wonderful day.

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.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Olympic Steel's CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts