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Olympic Steel, Inc. (NASDAQ:ZEUS)

Q1 2012 Earnings Call

May 3, 2012 10:00 AM ET

Executives

Michael Siegal – Chairman and CEO

Rick Marabito – CFO and Treasurer

David Wolfort – President and COO

Don McNeeley – President, Chicago Tube & Iron Division

Analysts

Luke Folta – Jefferies & Company

Edward Marshall – Sidoti & Company

Mark Parr – KeyBanc

Richard Garchitorena – Credit Suisse

Sal Tharani – Goldman Sachs

Lloyd O’Carroll – Davenport Company

Aldo Mazzaferro – Macquarie

Charles Bradford – Bradford Research

Operator

Good day, ladies and gentlemen, and welcome to the Olympic Steel First Quarter 2012 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions on how to participate will be given at that time. (Operator Instructions) And as a reminder, today’s conference call is being recorded.

Now I would like to turn the program over to your host, the Chairman and CEO, Mr. Michael Siegal.

Michael Siegal

Good morning and welcome to our call. On the call with me this morning is David Wolfort, our President and Chief Operating Officer; and Rick Marabito, our Chief Financial Officer and Treasurer; and Dr. Don McNeeley, President of the Chicago Tube & Iron Division.

Before we begin our discussion, I want to remind everyone that during this call, we will provide forward-looking statements that we do not undertake to update or that may not reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. Important assumptions, risks, uncertainties and other factors that could cause actual results could differ materially from those set forth in the forward-looking statements, can be found in our filings with the SEC, including our 2011 Form 10-K and our 2012 first quarter Form 10-Q which we did file earlier this day and anticipate filing later.

So earlier today, we reported our financial results for the first quarter ended March 31, 2012. Net sales for the first quarter of 2012 totaled $382.1 million, which is a record high quarterly revenues total. First quarter sales increased 29.8% from 294.4 million that was in the first quarter of 2011, our first quarter 2012 net income totaled $6.2 million of $0.57 per diluted share compared to net income of $10.3 million or $0.94 per diluted share the last year’s first quarter.

Capitalizing our first quarter highlights: number one, we achieved record quarterly sales; number two, our Chicago Tube and Iron acquisition is performing well; number three, we are ahead of our internal production and financial plans related to our temper mill facility investment in Gary, Indiana; and four, we completed a $50 million amendment to our existing credit agreement to increase our revolver size from $265 million to $315 million.

Our first quarter results in record sales benefited from sequentially-improved flat roll performance from the fourth quarter of 2011 and from outstanding performance in the Pipe and Tube segments. Our Pipe and Tube business has been immediately accretive to our earnings since we acquired Chicago Tube and Iron on July 1, 2011.

Our balance sheet remains strong and a large revolver culminates our larger working capital needs while lowering our borrowing rates. We also reported today that (inaudible) as Board of Directors approved the regulator – a regular quarterly cash dividend of $0.02 per share to be paid on June 15, 2012 to the shareholders on record on June 1, 2012.

I’ll now turn the call over to Rick Marabito.

Rick Marabito

Thank you, Michael, and good morning, everyone. I’ll review some additional financial highlights from the first quarter. But first, I’d like to remind everyone that we acquired Chicago Tube and Iron on July 1, 2011. At such our first quarter of 2011 does not include (inaudible) and our visits results are now reported in two segments: so flat products segment and the tubular and pipe product segment. For more information, please refer to our segment information provided in the earnings release and in our Form 10-Q, MD&A, and footnotes.

Some other financial highlights. As a percentage of net sales, consolidated gross margin totaled 19.7% in the first quarter, up from 19.4% recorded in the fourth quarter, and down from the robust flat-rolled margins of 21.5% earned in the first quarter of 2011.

Pipe and tube gross profit totaled 31.4% for the first quarter of 2012 as our pipe and tube products gross margins are higher than our traditional flat products margins. As a percentage of sales, first quarter 2012 operating expenses totaled 16.5% versus 18.2% in the fourth quarter and 15.7% in the first quarter of 2011.

EBITDA, defined as our operating income before depreciation and amortization expense on the face of our income statement, totaled $17.3 million, up from $8.4 million earned in the fourth quarter and $20.8 million in the first quarter of 2011.

Capital spending in the first three months of 2012 totaled $8 million that is similar in amount to what we spent in the first quarter of 2011. The majority of the spending related to the completion of our temper mill project in Gary, Indiana, equipping facilities in Mount Sterling, Kentucky, and Chambersburg, Pennsylvania, and installation of a new jumbo laser at CTI in Chicago. We expect our total capital spending in 2012 to be in the $30 million to $37 million range, depending on the timing and the choices we make on lease financing. Our effective income tax rate in the first quarter was 38.9% and we expect our full year 2012 income tax provision to remain in this range. Our flat-rolled inventory turnover rate for the first quarter was 4.1 times, slower than our historical turnover rate of 5 times.

Commencing with the TGI acquisition, about 14% of our consolidated inventory is stated on LIFO. We have no LIFO reserve at March 31, 2012, however, because our pipe and tube inventory on LIFO has current and 2012 yearend projected quantity and pricing points below those as of July 1, 2011 acquisition date. So in essence, our LIFO inventory is stated at FIFO at March 31, 2012. Our 2011 flat-roll accounts receivable DSO totaled 41 days. Pipe and tube DSOs are well under 40 days so our receivable quality remains very good.

Our debt at quarter end total $290 million and our availability was $89 million. The $46 million increase in debt during the first quarter is primarily due to increased working capital levels at March 2012, versus the C point of December 1. We expect to improve our inventory turnover rate resulting in lower working capital needs and less debt by the end of the second quarter.

And finally, shareholders equity per share increased to $26.95 at March 31, 2012. Now I’ll turn the call over to David.

David Wolfort

Thank you, Rick and good morning. Today I thought I would address we have made on some of our specific – some of your specific questions asked on our last call in February. Specifically, we were asked about the status of our CPI acquisition as Rick just mentioned, our mix of business and the status and startup cost associated with our new locations and our view on market dynamics.

Let’s start with Chicago Tube and Iron. As Michael indicated earlier, Chicago Tube and Iron continues to perform well and has been highly accretive to Olympic Steel’s financial results and the three quarters since the acquisition. The recently completed quarter for Chicago Tube and Iron’s best ever first quarter in its 98-year history. We are now a major player in pipe and tube, with product sales totaling $65.4 million in the first quarter comprising about 17% of our consolidated sales.

Last summer, we assembled commercial integration teams that had been working successfully and our cross selling efforts have accomplished a significant and growing success record in 10 short months. As Rick highlighted, we just installed a new dish jumbo laser in our Chicago facility and we expect our pipe and tube segment to continue its strong performance in second quarter.

We have been highlighting our many startup initiatives that are at various stages of progress. Over the four-year period of 2009 through today, 2012, we estimate spending approximately $100 million on our strategic capital expenditure program that adds multiple Olympic facilities in new geographies, adds value, add processing equipment, and a 150,000 tons of new tampered steel capacity. This strategic investment program provides a foundation for growth and value creation for years to come.

Our most significant initiative is our new Gary, Indiana temper mill facility which is performing well in its first quarter of operation. The $30 million project provides over 150,000 tons of new capacity. The facility and equipment were successfully completed under budget, and on time, for the mill processing its first coil at the end of December 2011. Then, in the first quarter of 2012, we successfully ramped up production from the first coil to ship at a run rate of approximately 190 tons per day by the end of March. This marks a very quick and successful startup, we are now at 30% of full capacity, Gary recorded a nominal start up was in his first quarter of operation and is ahead of our internal budget.

Now to our Specialty Metals business which is currently adding processing equipment in its new facility in Streetsboro, Ohio, which just opened last month in April. The addition of a physical location in Streetsboro, with internal control on slitting, flattening, cutting capabilities in stainless and aluminum, will propel our continued growth in the food and the food service markets going forward. Specialty Metals sales now make up almost 10% of our consolidated sales mix.

In addition to Streetsboro and Gary which I just nominated, we now – with start-up facilities were also added in Kansas City, Roseville, Minnesota, and second facilities existing locations were added in Moses Lake, Washington, and Mount Sterling, Kentucky. The six previously-shuttered facilities were brought back to life and are now ready to contribute to our financial results. In total, we incurred about $1 million of free cash startup losses in the first quarter, we expect these startup costs to phase out ratably by year end.

Turning to the market outlook, finally – let me briefly comment on current market conditions. First quarter could be characterized as uneven with most of our quarter under supply side pricing pressure. This resulted in the choppy steel prices and pressured margins especially in carbon and stainless flat-rolled areas.

First half is usually the seasonal time for price increases, but 2012 has started as a non-traditional year. The second quarter looks to have similar market conditions to the first quarter. Our demand has been consistent and stronger towards the contract mix versus spot business when compared to last year. Our first quarter flat rolled tons sold a total of 311,000 tons, sequentially up 54,000 tons or 21% from the fourth quarter. But it was down 1.9% from the first quarter of 2011. The year-over-year decline is due to a robust spot market in Q1 of 2011 that did not repeat this past quarter.

As we noted on last quarter’s call, we purposely increased our inventory to higher levels than normal to start the current year as we favorably purchase material in advance of riding year-end steel price environment. We expect to reduce inventory levels in the second quarter. We’re excited by the opportunities in front of us with new startup locations, the pipe and tube segment and the continued success of our existing businesses.

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 Luke Folta with Jefferies & Co. Your line is open.

Luke Folta – Jefferies & Company

Hi, good morning guys.

Michael Siegal

Hi. How are you doing, Luke?

Luke Folta – Jefferies & Company

Good. Nice performance in the CTI business this quarter, did I hear you correctly that the margins there were what, 31.4% gross margin?

Michael Siegal

Yes.

Rick Marabito

Yes.

Luke Folta – Jefferies & Company

And you’ve said that you’re kind of expecting a similar performance in the second quarter. Can you talk, I mean given that this is the best quarter that they’ve ever had, can you talk about what’s driving that? Is that something that has to do with higher operating, maybe some cross-selling or cost efficiencies or has there been price increases there? Can you give us some sense of what’s the driver is?

Don McNeeley

This is Don McNeeley from (inaudible) Chicago Tube and subsidiary. We have filed a number of synergies in our new relationship with Olympic. They embrace our philosophy of continuing to invest in value-added equipment. I think being a 100-year-old private company, we were known within our niche, I think now being part of a much larger public company, it has absolutely enhanced our visibility throughout the market.

And referring to Mr. Wolfort’s comments earlier about the cross-selling team, we are now having doors opened for us in not only new areas of incumbent accounts, but also new geographies and new areas. So, we are optimizing every one of those opportunities. So, to conclude, one similarity of philosophy enhances the capital that allows us to invest in value-added equipment which carries on higher gross margin with it, along with an expansion of our geographic footprint. So those would be the two contributing factors.

Luke Folta – Jefferies & Company

But there wasn’t anything that was one-time in nature or anything that – I mean did this kind of 31%-ish sort of number seems consistent going forward. I mean is this something for like – is that a – you think that might be able to be done for the full year?

Michael Siegal

We’re comfortable that we will be in there with minimal divergence from that. The concern of a macroeconomic basis is notwithstanding that reports to the contrary, there’s still a (inaudible) recessionary environment out there, and to some extent, you can only put off the replacement equipment so long before maintenance cost with some of our customers start to grow as a percent of the replacement cost of a piece of equipment. So I think the economic environment has some pent-up demand in the OEMs and I think we’re enjoying the manifestation of that pent-up demand. Whether or not that will be continued in the second half of an election year, something that will need to stay very closely.

Luke Folta – Jefferies & Company

Okay. Thanks for that. And just regarding the (inaudible) side of the market, I mean, you had a slightly lower inventory turns this quarter and you talked about building some inventory in the – at the end of the fourth quarter or moving into this pricing environment. Can you talk about – was that decision to build some inventory, did that have a positive impact on the quarter because we saw flat-rolled prices kind of start to reverse earlier than expected? And I guess, what I’m trying to get at is I’m trying to understand what we can expect if market conditions are the same in the second quarter, what should your margin performance look like in flat-rolled?

Rick Marabito

I think, Luke, as Michael – it’s probably going to be comparable. I think what we bought ahead on contracts in December, because we thought it will signal the price again or has increased environment as we said during the call. But we really didn’t take advantage of some positions of making sure that we had sufficient inventory for contractual obligations in the first half. So that’s being eaten through on a monthly basis. And as David indicated, we didn’t buy long on the stock market because we were not as confident that the market would be sustainable versus prior year so I think the margins that we’re seeing in the first quarter are going to be comparable.

Luke Folta – Jefferies & Company

Okay. And then just lastly for the model can you give us what the ton sold were for the flat-rolled segment?

Michael Siegal

Rick?

Rick Marabito

Sure, Luke, they were – in the first quarter they were 20,300.

Luke Folta – Jefferies & Company

Okay, thanks, Mike. I’m going back in line.

Michael Siegal

Thanks, Luke.

Operator

Thank you (Operator Instructions) The next question comes from Edward Marshall with Sidoti & Co. Your line is open.

Edward Marshall – Sidoti & Company

Good morning, everyone.

Michael Siegal

Good morning.

Rick Marabito

Good morning.

Edward Marshall – Sidoti & Company

The performance that you’ve seen from the acquisition of Toupus Play – I mean sorry CTI. Can you talk about what you’ve learned so far I guess as the third quarter of what you’ve had them sales and cost synergies maybe that you didn’t realize that you would have, you’re unlocking anything to that extent?

David Wolfort

Edward, this is Dave Wolfort. Let me remark on what we’ve consistently said. We believe that Chicago Tube and Iron was a purchased of economies of excellence. We have the highest of expectations, Edward. And we have – we are – we’re really surprised at how synergistic and how quickly this union has taken us into the market while it’s allowing us to grow our business, as Dr. McNeeley commented earlier. So we’re seeing some real strength going forward. We think it’s for a company that was extremely well run, continues to be well run. The only change that we’ve made in this was Dr. McNeeley reports to our CEO Mike Siegal leading the call as the only change we made there. And the synergies we see on a go-forward basis are all accretive. They’re additive in terms of market penetration or complimentary in terms of businesses that we reciprocally supplied in the past and we’re now supplying in total.

Edward Marshall – Sidoti & Company

Was there any integration or acquisition cost that weren’t broken out in the quarter? Any kind of inventory adjustments? I think they’re probably gone now. But anything that you might want to highlight for us?

Rick Marabito

Ed. This is Rick. No. We highlighted those the last two quarters. Those are all behind us. So this quarter had no unusual or tail-related cost related to the acquisition.

Edward Marshall – Sidoti & Company

And regarding the temper mill startup, you talked about capacity utilization being at 30%, where do you expect that to go in the second half of the year assuming demand is there?

Rick Marabito

Well, we first want to complete the second quarter before we got to the second half. But we’re seeing month-over-month growth. Needless to say, it’s in Gary, Indiana as we’ve noted. It’s our third temper mill. It’s the quickest startup. The most successful startup that we’ve had. As again, Mike Siegal commented in his Chairman’s letter how the attribution goes to Ray Walker, Executive Vice President and Terry Rohde and the members of their staff, for bringing that up from the time that we purchased the temper mill in November of 2010 to where we were cutting coils in December. We’ve seen sequential progress in each of the first three months of the first quarter and that continues on through April.

Michael Siegal

Yeah. Ed, to give you a little bit more color. I would just say that, by the end of the year, we’re hoping to be at least at 80% of capacity.

Edward Marshall – Sidoti & Company

You said 80% right?

Rick Marabito

Yeah. And the way- to the way things are progressing, it’s tested through the machine now and we’re pretty much all of it. Business has been great, so we’re pretty confident of what we are capable of running on that machine, and so barring any change in market conditions, either more favorable or less favorable, which would change our outlook, if you start everything with a sort of corporate setting in the marketplace, as David indicated, we should be running a full, two-shift operation, and then some. So it’s progressing, as David indicated in his remarks, ahead of our schedule.

Edward Marshall – Sidoti & Company

Excellent. What’s the plan for debt? I heard better working capital adjustments in the back half of the year as you work down some inventory, but what’s the plan for debt? I did highlight that you said that debt would be coming down, but is it – what are the plans there?

Michael Siegal

Well, they’re...

Edward Marshall – Sidoti & Company

Is there an optimal level, or...

Rick Marabito

Yeah, we’ve got some targeted working capital levels for the end of the second quarter that I would feel comfortable by June or July, because there is a little bit of a lag on working capital increase or decrease versus the debt. But I would be comfortable saying that we should take down the $40 billion to $50 million that we took up here in the first quarter. So that would be the first step, and then I certainly feel that as we get to the tail end of the capital expenditure program that we talked about, and move into the second half with the profitability, then we will start chunking down the debt through the cash flow from the business. So those would be the two steps.

Edward Marshall – Sidoti & Company

Excellent. Thanks, guys.

Operator

Okay, thank you. Our next question comes from Mark Parr with KeyBanc. Your line is open.

Mark Parr – KeyBanc

Hey, thanks. Hey, good morning, guys.

Michael Siegal

Good morning, Mark.

Mark Parr – KeyBanc

Yeah, I was wondering, can you give us any color on your contract business in the first quarter, and how much it grew on a year-over-year basis?

David Wolfort

We can’t. It’s (inaudible) each other here, Mark. It certainly grew from a percentage of the business. As you know, the robustness of the first quarter of 2011 allowed us a really strong stock market. We had some trading tons that were unique, not unusual but unique that occurred in the first quarter last year that did not occur this year, so I would say our contract business still operates somewhere between 60% and 70%, it’s probably closer to the high side and the low side to this quarter.

We’d like that two-thirds, one-third mix that spot market is obviously favorable, takes (inaudible) over the market, inconsistencies are – this market has been – as David indicated, volatile in terms of its pricing, first in caution in terms of spot market which is traditionally a lot of other service centers, and what we’re seeing I think that’s unique, the mill delivery rate in 2012 in terms of their anticipated delivery has been much better than historical performance. So I think mills are performing better for their end use customers, and that seeing averages at the customers like we have historically, and we’re obviously seeing a lot of the service center business other than what they immediately need.

And so it’s a little bit higher than normal but it’s not really the direction we’re comfortable at our targets and only because the spot market fell that we see probably higher than normal.

Edward Marshall – Sidoti & Company

Okay, the – if I can follow up on that, the pricing momentum, David, that you had indicated – and you characterized it as a supply-driven event and certainly that would coincide with everything that we’re seeing and hearing. Could you give us some color on what you’re seeing as far as import offerings and is there adequate quality to address your spot needs or some of your quality or some of your contract needs? And how long do you expect that to persist based on what the traders have been telling you?

David Wolfort

Well, Mark, that’s a lot of questions, and I’ll try and answer them. One, there has been more foreign offerings. As you all know, the U.S. market is the highest priced market. So it’s going to attract more tonnage. We would tell you that demand, as we remarked, has been consistent. Last year was very good for us in terms of recovery and it’s been consistent as we went into 2012.

Our direct tons were very good in the first quarter, and as Michael indicated earlier, on a tonnage basis, we had, in the first quarter of2011, we had some substantial shipments that were one-time opportunities. We took advantage of those. Obviously, we didn’t expect those to repeat on a regular basis and they did not.

So we do see the foreign offerings. There is more capacity in the marketplace. If you asked on the earlier question and Michael responded in terms of our percentage of contract, we thought approving to increase the contractual participation because of the additional capacity in the marketplace and unknown marketing by some of the less-capitalized new startup companies that contaminate the marketplace and we were correct on that side of the equation.

I don’t think that has changed Mark. So adding all those together, there are normal foreign offerings. The price increases of late last year of which there was three, as you well know, they all stuck and as we got into the latter part of January. We saw some erosion and those increases started to fade away one after another. Finally, restarted in middle of March by some of the more disciplined mills we have great faith in and our key suppliers to us. And as we look at second quarter, particularly as we now get into where scrap has been in April and May, again we see some stability and demand is there but still there’s over capacity and still there is foreign offerings.

Edward Marshall – Sidoti & Company

Okay. I appreciate the color. Thanks and good luck on the second quarter.

Michael Siegal

Thank you.

Operator

Thank you. Our next question comes from Richard Garchitorena with Credit Suisse. Your line is open.

Richard Garchitorena – Credit Suisse

Thanks. Good morning, guys.

Michael Siegal

Hi, Richard.

Richard Garchitorena – Credit Suisse

My first question is just to touch a little bit more on demand. Are you seeing any change in terms of your customer interest on the energy side given we’re not gas where it is and obviously, oil is holding up well. But any change on that front?

Rick Marabito

Well, Richard we’re not into OCPG so that’s not through Chicago tube and iron is so we don’t participate there. And in our flat-roll business, we see the same strength that we’ve seen. We have slightly more direct ton growth in the first quarter. We see that stability, but were not affected by that marketplace. We’re not operating in that market.

Michael Siegal

If you’re asking about fracking, it’s predominantly LCGG. So we’re not seeing a lot from a steel perspective, other than more supply overall will be good for the market and more demand overall will be better for the market.

Richard Garchitorena – Credit Suisse

Okay, understood. And then just on the balance sheet. Can you tell us how much cash out there in the quarter? And also, in terms of how much have you had drawn on the new revolver amount?

Rick Marabito

Well, the – sure. So, let’s go over cash, and basically, what we do is we take all our cash every day, and we pay down the revolver with any excess cash. So the cash that sitting in our balance sheet, at any balance sheet date, is typically just one day of cash in transit, so Richard, the amount at quarter and was about $4.3 million of cash. Secondly, you asked about the revolver, the revolver at quarter end of the total debt of 219 million, the revolver was 218 million.

Richard Garchitorena – Credit Suisse

Okay, great. And then my last question is in terms of the CapEx, as you have 30 million to 37 million, how much of that is maintenance and how much is growth? And going forward, what can we expect in terms of your views on M&A versus additional organic growth opportunities?

Rick Marabito

Want me to take the CapEx one first?

Michael Siegal

You take the first part, yeah.

Rick Marabito

So the 30 million to 37 million of CapEx, I would tell you that between 5 million, and 8 million to $10 million would be what we would call maintenance CapEx to keep our 33 facilities up and running, and equipment. So the rest of that CapEx is, they are growth initiatives. There are still things like David and Dawn, and Michael talked about, new lasers, new equipment and chambers for finishing up the opportunity in Gary, Indiana. So the bulk of our CapEx is, and has been for the last three years, investment and growth opportunities.

Michael Siegal

Yeah, going forward, I would say that we have invested heavily, and I think, a very appropriate times relative to value, in terms of the six new facilities and things we’ve got before the six and 12 since it was last year. I think you’ll see that program come to its conclusion from a strategic perspective. We expect to bring a lot of those investments to improve asset profitability, taking us out of the organic growth scenario for a while. And that’s to say that we wouldn’t fulfill a customer’s desire to use capital to support the customer. But I think we would be more actively looking at M&A than we would be at organic growth in the future – in the near future.

Richard Garchitorena – Credit Suisse

Okay. Thanks.

Operator

Okay. Thank you. Our next question comes from Sal Tharani with Goldman Sachs. Your line is open.

Sal Tharani – Goldman Sachs

Thank you very much. How are you guys?

Don McNeeley

Hi, Sal.

Sal Tharani – Goldman Sachs

Hey, Don. You mentioned about the – some pent-up demand from your OEM customers. I was just wondering if the margins you did this quarter, is that something we can expect as sustainable or some of this coming from pen- up demand and it shows it might fade away to sort of somewhere (inaudible).

Don McNeeley

Well, margins are somewhat volatile but I think once again solved with the value-added equipment in a model that Olympic is wholeheartedly embraced and embraced not only from a philosophical standpoint but also with their checkbook, we are making those investments in order to maintain those margins. That is a record high margin for us. There may be some deterioration in them but we’re never going to be down in the teens or single digits as you had mentioned. One of the things we do track is we sell construction, we sell OEMs who manufacture equipment for construction. So we really look at some of the global trends. For example, Caterpillar tractor is one of the larger steel users in the Midwest and we look at what percent of their sales are going offshore.

There’s a significant infrastructure build in Asia and throughout India. So right now that high demand in a rural stage results in their production up and gives us some opportunity to manufacture or fabricate components as opposed to simply selling for us fuel to them. So as we move up the value change of performing some type of process to the Steel to the next generation of some type of self-assembly those type of activities will traditionally and in the future carry and enhance margin.

So that would be very consistent with the game plan that both Olympic and our company has going forward. They’ve certainly funded the equipment and the inventory that I need to optimize those opportunities for the shareholders. So we’re confident that the margins in our particular product line will understandably trend higher than flat-rolled, it’s the nature of the industry. There’s a higher inventory investment and such a lower inventory term in my sector. There’s more engineering expenses affiliated with it. So it adds nicely to the Olympic portfolio. But in conclusion we do anticipate being able to maintain these types of margins.

Sal Tharani – Goldman Sachs

And this jumbo laser you are buying, what is the cost?

Michael Siegal

That cost range between 2.5 and 2.7 it was the first piece of equipment that I acquired not under my own ownership. There was very thorough bidding prices by Olympic and then looking at the return on that investment in the payback period. It is the – it’ll be largest capacity six access laser in North America. So knowing that that will be the case until somebody replicates that equipment well that’s another example of how we’re going to try to optimize that from margin enhancement. But $2.7 million was that investment.

Sal Tharani – Goldman Sachs

All right. Thank you very much.

Operator

Thank you. Our next question in queue comes from Lloyd O’Carroll with Davenport Company. Your line is open.

Lloyd O’Carroll – Davenport Company

Okay. Two questions. First, the straight numbers direct versus total tonnage in Q1?

Rick Marabito

Hi, Lloyd. It’s Rick.

Lloyd O’Carroll – Davenport Company

Yeah.

Rick Marabito

The direct versus total tonnage was – let me find it here. Direct was 314,000 and the total was rounded to 18,000.

Lloyd O’Carroll – Davenport Company

Okay. Another service center reported that they had seen strong volume in February and building ahead softened some in March and April. Are you seeing that kind of pattern or what is your near-term pattern over the last one, two, three months?

David Wolfort

Lloyd, this is David. We anticipated a quick start to 2012 much like 2011. That quick start really did not occur, but we’ve seen consistent demand. We haven’t seen a falloff. Some unevenness in the marketplace, but we wouldn’t characterize it as a month-over-month falloff, as you suggested by whomever it was. We’ve seen good consistency. March was a good month for us and we’re seeing that same consistency as we move into Q2.

Lloyd O’Carroll – Davenport Company

Okay. Appreciate it.

Operator

Okay. Thank you. (Operator Instructions)The next question comes from Aldo Mazzaferro with Macquarie. Your line is open.

Aldo Mazzaferro – Macquarie

Hey, good morning, gentlemen. How are you? A question I had on the laser – it’s a great investment, I know it has a high margin product mix. Would you be able to characterize at all the margins that you might expect at full run rates compared to your average margins? Say either in flat-rolled or the gross margin in CTI? Is it somewhere a little under CTI maybe a little better than the flat-rolled? How would you describe it?

David Wolfort

Aldo, let me field this in terms of generalities. This is our 30th laser. From an overall perspective, from Olympic Steel and CTI – CT&I has done suggested here it is their newest and biggest, it’s up and running. And on our value-added component of business, we see very similar margins on our laser work. The Chicago Tube and Iron side, the similarity gets – they get a little bit more granular, those are six access lasers there’s a lot more work being done on those and we get a little bit of a premium from cost. There’s a lot more work being done on those lasers.

Aldo Mazzaferro – Macquarie

Great. And Dave, I was also wondering how the temper mill margins might compare to the CTI margins. If you could be that granular, I don’t know.

David Wolfort

Well, I mean, they’re not value added. There’s a laser at the end of that, Aldo and – but there’s volume there. So remember, these lasers, they’re terrific. It is a very – a variation of how many tons you get off of depending on which size they are so forth and so on. And the temper mill, these are very different animals. That’s a big volume business. We however, our customers and our downstream processing demand, the critical flatness and the critical surface conditions that these three temperables provide for us, this latest rendition for us here in Gary, Indiana had come up beyond faster and then our internal budget nominal, as I suggested a nominal loss here at the end of first quarter. And the margins are traditional, the margins are traditional in our Service Center business. So if you look back at us pre-Chicago Tube & Iron, that’s pretty much what you see.

Aldo Mazzaferro – Macquarie

Okay. And, Dave, could you generally describe what you’re seeing in lead times from domestic mills? And I heard you say delivery was better than you expected. Is that indication that the mills possibly are as not as busy as they are saying or how do you see lead times and deliveries working out?

David Wolfort

Well, I think this mill, Aldo, I think this mill has its own set of more positive and negative issues, needless to say. The ones that we rely on our well-run, the integrated mills lead times are longer. The electric furnace lead times are somewhat shorter. Those shorter lead-times from our perspective give people an opportunity to buy from them where they are going to be a little bit higher priced needless to say because of the short lead times. I think the integrated mills are very well run today. The traditional ones that we do business with very well run and they manage their order book very well. And so we’re seeing good consistency throughout the first half we would assume in that side of the equation.

Aldo Mazzaferro – Macquarie

Great and thanks. And just a final one for Rick. Rick, I heard you mention a tonnage number, you said 20,300. What was that? The stainless component of flat-rolled?

Michael Siegal

No, that was on the pipes and tubes side, the total tonnage for the first quarter was 20,300.

Aldo Mazzaferro – Macquarie

Would you ever provide the mix of stainless in that flat-rolled number?

Michael Siegal

No, we don’t provide that.

Aldo Mazzaferro – Macquarie

Okay. Thanks.

Michael Siegal

Thanks, Aldo.

Operator

Okay, thank you. The next question comes from Charles Bradford with Bradford Research, your line is open.

Charles Bradford – Bradford Research

Hi, good morning.

Michael Siegal

Hi, Chuck.

Charles Bradford – Bradford Research

Hi, a couple of days ago, there was an announcement about a strike at one of the, I think, smaller Caterpillar plants in Illinois. But sometimes, a particular plant can make a part that’s critical to other operations. Are you hearing much about this? Or is this significant?

Michael Siegal

Chuck, other than what we read in the paper, Caterpillar is a big customer of ours, we have seen no disruption there, and we have had no calls regarding – that’s a fresh labor dispute two days ago, and we have seen nothing other than what we read in the paper that Caterpillar says there’s no disruption.

Charles Bradford – Bradford Research

Okay. And then you made some references earlier about maybe some pipes disruptions, in some of their restarted operations. I assume that you’re referring to RG? Is there anything going on there, because we are not getting very much information, other than some rumors spread by some disgruntled people. Are they making progress, are they affecting price?

Michael Siegal

Chuck, I didn’t point out anybody in specific, there is some additional capacity I talked about in this come on in the marketplace, again, a little bit on that unevenness that has led to a little bit of a break down, a discipline breakdown in some regional spots, nothing that I think is – that reaches in terms of RG, put communications from them, we don’t rely on them heavily, and our hands our full with Olympic Steel in Chicago Tube & Iron, so I can’t imagine RG Steels. So we appreciate the info.

Charles Bradford – Bradford Research

Thank you very much.

David Wolfort

Thanks, Jeff.

Charles Bradford – Bradford Research

Thank you. Next question in queue comes from Sal Tharani with Goldman Sachs. Your line is open.

Sal Tharani – Goldman Sachs

Thanks. Hey, Mike. I understand that you said that the lead times at integrators are longer than EFs but you have to pay a little higher for the EF steel.

Michael Siegal

David just commented on that. Yes.

David Wolfort

All right. Well, I didn’t say we were paying. I’m saying that the shorter lead times, Sal, the shorter lead times have allowed some of the electric furnace mills to capitalize on immediate needs at what would be current pricing or what we would deem as maybe a premium price.

Sal Tharani – Goldman Sachs

Got you. And also, there has been low announcements for the sort of downtime in the second quarter by some of the integrated mills. I was just wondering if you – I know you’re going to lower your inventory but are you seeing any tightness or sort of give more stability in this supply-demand fundamentals?

David Wolfort

No, I have read the same articles that you’ve read and I’ve heard the same commentary. I don’t see any immediate disruption. All I know is what we hear from the supplier but we haven’t seen any of those actions.

Sal Tharani – Goldman Sachs

Okay, great. Thank you very much.

Operator

Thank you. And at the moment, I have no other questions in queue. (Operator Instructions) And we’re showing no further questions from the phone lines. I’d like to turn the program back to our presenters for any concluding remarks.

Michael Siegal

Thank you, operator. As a reminder, it is our policy not to provide forward-looking earnings estimates for the upcoming quarter over the year and not to endorse any analyst sales or earnings estimates. We anticipate releasing our second quarter 2012 earnings on or around August 9, 2012.

And that concludes our call, and thanks everybody for your further questions. We’ll speak to you soon. Bye-bye.

Operator

Ladies and gentlemen, thank you for joining today’s conference. This does conclude the program and you may now disconnect.

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