Olympic Steel Inc (ZEUS) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Olympic Steel second quarter earnings results conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Michael Siegal, please go ahead, sir.

Good morning.

And welcome to our call.

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

First I want to thanks all of you for your participation and for your interest in Olympic Steel.

Before we begin, let me remind you that forward-looking statements in this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

And please refer to Olympic Steel's SEC filings for further information.

As you hopefully have read this morning in our release, we are very pleased to report our highest ever-quarterly sales and earnings results.

Sales grew by 96.4% from last year's second quarter, to 222.8 million, and net income totalled 18.5 million, or $1.89 per basic share.

This marked our third consecutive quarter of substantial year-over-year tonnage growth, as our second quarter tons sold increased 23.4%, while first quarter tons increased 43.2%, and fourth quarter 2003 tons sold increased by 29.3%.

For the first half of 2004, our sales increased 79.5%, to 409.8 million and net income totalled 29.3 million or $3.01 per basic share.

We have almost doubled the market's growth rate as first half 2004 steel service center shipments were up 17.5%, over the first half of 2003, per the MSCI statistics while Olympic Steel's volume increased 33.2%.

We are most pleased with our execution in accelerating our asset turnover and managing debt this year.

Increased demand, coupled with are more than doubling of steel prices in the first half has created a tremendous strain on the working capital and liquidity requirements in the steel supply chain.

In this environment, we are very pleased to report that we reduced debt by 7.4 million, with an accounts receivable increase of 41 million and inventory increase of 40 million.

We accomplished the debt reduction by accelerating our cash turnover, while maintaining our prompt payment practices with all our suppliers.

We reduced our accounts receivable day sales outstanding by seven days, and inventory ship days on hand by six days, since January.

Net reduction would have been much more substantial but anticipating price increases in the third quarter we accelerated purchases in June to position ourselves to grow market share and satisfy the increased customer demand that we see going forward.

We are optimistic that the steel market will remain strong in the second half of the year, based upon our discussions with our customers and their robust first half performance and favorable outlook for the remainder of 2004, we expect demand to remain strong in the back half of the year.

We also expect steel prices to remain elevated, and even increase in the third quarter.

We expect to take advantage of this higher risk environment with the same disciplines on asset turnover and credit risk management as displayed through the first half of the year.

I will now turn it over to Rick Marabito to comment on some financial details.

Thank you and good morning everyone.

I would like to expand on a few financial items.

EBTDA totalled 55.2 million in the first half an increase of 34 million in the second quarter and 21.2 million in the first quarter.

Our second quarter operating expenses, as a percentage of sales, decreased to 17.4% from 21% last year.

Expense dollar increases are variable in nature and have increased in relation to the significant increases in sales and profits.

We have not added any significant fixed costs during the first half of 2004.

The $487,000 asset impairment charge that you see on first half income statement relates to a value reduction from a previously idle facility.

Sales agreement was executed for the property in the second quarter and the charge reduces the real estate to its sale value.

As Michael indicated, our focused efforts on cash management have resulted in a $38 million bank credit availability at the end of our second quarter.

Capital spending in the first half was only $1.1 million, while depreciation for the same period totalled 4.1 million.

Capital spending was primarily related to IT and communications systems and some laser processing equipment investments.

We plan to add additional laser processing capacity in the second half of the year.

We expect to finance these laser investments through leasing transactions.

And lastly, as indicated in our release, we just want you to be aware that we do have eight less scheduled ship days in the back half of the year.

Now I would like to turn the call over to David.

Thanks, Rick.

I will briefly touch on market overview of supply and demand.

What we view as Olympics advantage and a small comment on cash risk management and expense control.

On the supply side, the supply environment continues to be one of tight supply and escalating prices.

The supply of raw materials remains challenge to our vendors.

Across a number of fronts, which encompass transportation, labor issues, currency fluctuations and generally higher global demand.

Our strong supplier relationships and as Mike commented earlier, strict adherence to prompt vendor payment practices, and daily engagement with our trading partners in a rapidly changing environment, have provided us with access to steel resulting in a strong well-positioned regionally balanced currently aged inventory going into what looks like a very robust third quarter.

From a customer demand perspective, our North American consumption as we view it from west to east, outlook continues to be very favorable.

Even an historical slow month of July shows unprecedented vigor, with the inclusion of the automotive shutdown of the first two weeks of this month.

Olympics agricultural customer base has reported record sales and earnings in the first half of the year.

The agriculture market is expected to remain quite strong throughout the balance of '04.

Our material handling and construction equipment customers are also reporting very strong sales, and earnings with favorable outlooks through '05.

Every energy our energy generation customer's base has strong build schedules throughout the balance of this year, and again all the way through '05 and into the first quarter of '06.

We view our advantage as being well positioned to grow with these customers.

We participate heavily in the domestic markets that are surging today large manufacturers are of highly engineered equipment.

We also believe our field sales representation and daily communications with our customers regarding this rapidly changing market provide us with the ability to respond and participate in our customers' growth.

As always, we will conduct our relationships within our core values of respect, integrity and financial stability.

Let's turn and focus our focus on cash and risk management, and expense control.

Both Michael and Rick have outlined our success in managing our asset turnover, and debt reduction in the first half.

As market prices escalate again in the third quarter, the steel supply chain will be constrained by short-term credit needs and the elevated risks associated with increasing prices, short supply and high anxiety.

We will remain diligent in our focused management of credit risk, asset turnover, and liquidity, as we've mentioned before, in order to participate to the fullest extent in this dynamic marketplace.

We will also remain disciplined and sensitive to spending so we manage and control our fixed expense base.

In summary, we do not see any slowing of the hectic pace in the steel industry during the second half of this year.

The dynamics I've just described will present a challenging marketplace for many, and we believe these dynamics bode well for Olympic Steel.

That concludes my comments and we will now open the call up for your questions.

Thank you

Thank you.

[OPERATOR INSTRUCTIONS]

The first question comes from Amy Norphelis (ph).

Please state your company name followed by your question.

Now.

[OPERATOR INSTRUCTIONS]

OK.

Now we have Amy Norphelis (ph) again.

Amy please state your company name followed by your question.

Hi, Amy Norphelis, again of Pilot Advisors.

Hi, Amy got you this time.

Hi, great quarter, congratulations.

Thanks Amy.

Can you tell me what the balance sheet should look like by year end, or like the debt maybe, actually; what I'm --

Well it depends on where steel pricing is ultimately going, Amy.

You know, again, we did buy a lot of steel in June, which sort of took the balance sheet from the debt reduction we were anticipating, to where the inventory is higher than we would have expected it to be.

But we anticipated the price increases coming down the road in terms of scrap escalation and surcharge.

So it's a question of where does steel pricing ultimately go, relative to the values.

But we certainly, you know, if you say price is relatively something.

We expect the debt to be reduced, we expect -- you know, if we get 20% growth, just you know do the math, there will be more inventory, more receivables, but we still are focused on debt reduction.

So in theory -- your debt would have been lower had you not bought as much steel as you did?

That's correct, but the value of the steel has increased.

But we did buy a lot of steel in June in anticipation of a scrap surcharges that we clearly knew were coming.

OK.

OK, perfect.

Great.

Thanks, guys.

You bet.

Thank you.

The next question comes from Tom Call.

Please state your company name followed by your question.

Smith Barney.

How are you guys doing?

Good.

How about you?

Terrific job.

Congratulations again, on just continuing to impress and reward the shareholders.

A few questions.

Number one under the SG&A category, there was a very large increase in administrative and general expenses.

For last year, I believe they doubled.

I'm in my car so I don't remember exactly what the percentage was but it looked like an $11.5 million jump.

I'm assuming that's maybe paying bonuses to the employees to a great degree for their hard work and efforts to help generate the profitability that you've achieved.

Partly.

But could you explain that?

And also, that increase, is it a temporary increase where if things soften for you, you'd have a little bit of a cutback in administrative and general expenses on the downside?

Yes, Tom, this is Rick.

You're exactly right.

The increase is strictly amounts that are tied into two things.

Whether you look at the SG&A or the total operating expense.

One is the variable nature of the expenses that are increasing with the volume, and then specifically in the SG&A it's tied to the performance incentives, bonuses, those types of things, and profit sharing.

And 401(k) matches that we didn't have last year.

To answer your question, absolutely, those numbers will vary with performance, so if the performance you know were to go down, which we're not really expecting, but if the performance were to go down, those expenses would go down commensurately.

Would that bray bring your SG&A down to the around the 15% target?

Yes.

Yes OK terrific.

That's great news.

So, you got about $1.20 a share there.

What percentage of that would you say is -- I would assume, is it all variable, all of that the increase?

In the SG&A?

Under the administrative and general, and specifically about $11.5 million jump?

The vast majority of it is.

OK, great.

The receivables obviously have increased significantly because of the volume and the pricing and all that.

You're very comfortable with the receivable position?

Yes, we have reduced day sales outstanding by seven days since the beginning of the yea, Tom.

Yes, we've been very focused and diligent on the credit side of the equation.

OK and the Capex going forward, because things are so good, your, obviously, number one, focus continues to be debt reduction.

Do you have any plans to increase Capex at any point in time in the next couple of quarters?

Well, we've talked about the one area we will be investing in and it is expanding our Laser Processing Capabilities.

Those you won't see really hitting the Capex line per se.

Those, we like to lease that type of equipment and then looking out for the back half of the year, as we sit here today, we don't have any big capital expenditures planned.

That's terrific.

And in terms of -- I don't know if you talked about this, I might have missed it.

The margins were obviously the biggest ever in your history, a 31% gross profit margin.

Yes.

What percentage of that would you say is a one-time item because of inventory profits and what percentage would you say is based upon just the ability of you to do a good job and demand a higher premium?

We like the latter.

We like the latter of doing a good job but it really is a balance for us.

It is support of our supply agreed customers and then the ability to participate in the spot market by having availability and a well-balanced inventory across all of our regions.

So, we were appropriately inventoried for a very tight market place, which has allowed us to respond, so the tonnage is up dramatically in second quarter.

Of course, first quarter was strong and fourth quarter of last year was strong which often gets lost in the shuffle here.

But it is the ability to anticipate the market through our relationship with our not only our vendors but our customers, needless to say.

So, a good deal of this is, in the margins, is the ability to respond to the spot market while supporting our supply obligations.

There's no question that's summing there.

There's no way to know really how much it is.

There's no question that there's some, you know, escalation of pricing, margin that is in there.

However, you know, we continue to focus on the velocity of the turnover of our inventory and the aging side of our inventory to make sure that on the downside of this there's not a compression on the other way, Tom.

So, we're very pleased not only in terms of the margins that are there, but the way we're allocating the inventory and the velocity of the inventory turnover.

Yes, and let me just follow up and say to you that we have -- we are focused on turning the latest arriving material out the door first.

So, the profits that we are showing, Tom, are very, very real and they represent the highest cost material coming in the door going out at the transaction price.

Would you anticipate margins slightly lower, substantially lower, and increased or where would you expect them to be in the current quarter?

Can you comment on that?

Yes, the answer is, you know, it have to say at some point, the velocity, the escalation of the pricing of steel will slow down at some point.

At that particular point, you would see a slight erosion of margin but we're not sure when the pricing escalation from the sulphide is going to occur.

Well, as we commented on the supply side, the comments that we made -- the comments that I made on the supply side relative to logistics problems and logistics problems, currency issues, labor issues and global demand across the board for the raw materials and metallic does not look like the pricing of the raw materials that we buy are going to recede and therefore I would not anticipate our transaction prices to recede at least in this coming quarter.

OK.

Thank you very much for the information.

Have a great day, and continue doing great job.

Thanks, Tom.

Thank you.

The next question comes from David Goldberger.

Please state your company name followed by the question.

Hello this is David Goldberger from Fortress Investment Group.

Hello David.

Hey how you guys doing?

Just fine, David.

Congratulations on a great quarter.

Thank you very much.

At the start of the year and as the steel markets began to pick up, it seemed to begin in the ag and general industrial markets.

Now as the year is continued, this is clearly spread sort of across the board.

Can you give us some color on the levels of demand coming from each of these targeted end markets from agriculture to rail to construction and where you see these markets going?

Yes, probably the only place that we don't see the overall surges is in automotive.

The automotive remains very robust on a historical basis but it certainly isn't taking off relative to the other markets.

Right.

That's not a very big percentage of your business?

No, it's not.

And again, we're not in the light construction business and therefore that seems to be in the overall general economy, the one segment that has trailed the demand, doesn't impact us.

That does seem to be picking up in the relative go-forward basis.

From every other scenario of our customer groupings, in every product, David, everything still seems to be very optimistic and robust in their outlooks.

Oh that's exceptional.

And you know, with all this demand that's kind of been, I guess, I don't know whether it's just lagging from the downturn, it seems -- or frankly, coming from the industrial recovery, clearly the capital expenditures that you guys made over the past few years and through the downturn was money that was extremely well spent.

Can you give us kind of an indication as to the type of capacity that you guys have available to you, provided that the demand for steel is there?

I guess what I'm trying to get at is what kind of a tonnage number could you potentially be operating at, provided the demand for that steel product is there from your customers?

Dave, this is Dave Wolfort.

You know, part of that consideration is the ability to refine what we accept as an order.

OK.

And so our average order size has increased and we've been able to re-establish some of our old highs back in the '80s and the '90s on average order size.

So, with average order size, we've been able to also gain some great productivity.

So, we've also grown our total processing business, along with our, what we call, direct trading tons.

We are only limited in our capacity on a direct trading basis by credit availability, and as, Rick indicated, we have plenty of cushion there.

On the total processing basis we continue to grow that business, an initiative that we started back in third quarter of 2002, and that is moving along very strongly for us in the last couple of years and of course that continues to occupy a great deal of our equipment and as Rick indicated, we're bringing on some lasers to go further downstream.

The shorter answer is that we have the ability to process probably 20% or 30% more flat roll through our current facilities without the addition of any major piece of equipment.

Right, and that ties into what we have talked about earlier, why we don't have the immediacy of Capex needs here, because we spent a lot and invested in a lot of very good equipment and facilities in the '90s and, you know, went through the downturn.

So, we are positioned pretty well here going forward, and David's number is probably about right and obviously that all depends on products and geography and that type of thing.

But we do have the ability to expand our top line without having to add equipment in the short-term.

There's plenty of excess capacity in the marketplace to out-source process any if we need it.

So, the answer is we're very well positioned from a Capex standpoint to continue to grow substantially.

Excellent.

Thanks a lot guys, and congrats on a great quarter.

Thanks, David.

Thank you.

The next question comes from Justin Bergner.

Please state your company followed by your question.

Hello guys, its Justin Bergner from Impala Asset Management.

Hello Justin.

Hello.

I was curious if you could help me understand kind of the volume trends between the first and second quarter of 2004, in terms of tons sold.

Yes.

We had comparatively, Justin, this is Dave here.

We had less tons sold in the second quarter than we had in the first quarter.

In the first quarter was really year marked by an enormous March and a surge in demand, as customers tried to buy ahead of what have would appear to be the largest scrap surcharge than April and of course a recognition that the recovery was truly here.

And around late first quarter, a lot of our customers were realizing that some of their mill-direct deliveries where we share business were going to be greatly retarded and so we had a surge in business in March that was unprecedented.

That flattened out in May and June, again, as people were viewing surcharges and some of our competition became a little panicked about the degradation in the surcharges and moved product out in the marketplace at lower transaction prices in order to alleviate their inventory.

We recognize that this trend was going to continue on and we moderated the outflow of our inventory so we could remain responsive to our customer base.

So, with growth of 20-plus percent in second quarter, we still view that as a good performance.

Yes, we had two less shipping days in the second quarter than we did in the first, from a billing and shipping standpoint.

And the other factor that not only manifests itself in the second quarter but ongoing is, we have a lot of customers that are running up against their credit limits, you know, and we can certainly boost our sales if we didn't maintain the tight disciplines on the credit side.

We're not liberalizing what we consider to be good business disciplines, in order to boost the sales, but at double the price, lots of guys are getting there for steel and so that may constrain some of the growth going forward as well.

OK.

In terms of the credit side, you know, how quickly going forward do you think you can turn over your accounts receivable in your inventory, given the advances you've made over the last, you know, six months?

How much more?

Uh-huh.

Not a lot.

We're under 40 days now, you know, our terms to our customers are net 30.

You know, in a perfect world, everybody was at 30.

I mean the maximum strength there and I can tell you we are not going to get much more than six turns based on the irregularity of our supplier's ability to deliver to us on time.

So, we have may be a couple more days but not anything materially that's going to make a big difference.

Well, thanks very much.

Excellent quarter.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

The next question comes from Mark Parr.

Please state your company name followed by your question.

It's Key McDonald.

Hi, Michael.

Hi, Mark.

Hi, Dave.

Hi.

Hi, Rick.

How are you?

Hi, you go back.

I'm looking back at my earnings model, here going back to '94, '93.

Yes.

I think your previous peak gross profit per ton was about 115 bucks.

Yes.

And you know, on the first half you were $139 in the first quarter over 200 in the second quarter, and I guess you know, what evidence, what hard evidence can you -- what hard evidence can you give that this is a new cycle that is sustainable as opposed to signs you may be seeing that this is a cyclical peak that's going to roll back over, back to where it has been in the past?

Mark, this is David.

One of the telling changes has been the consolidation of the steel mills, and before the consolidation the degradation and the capitulation of LTV, and of course the bankruptcies of national and Bethlehem and we would argue some 30-some-odd other producers.

What we realized back in '01 and beyond is not only was availability eroding in terms of raw material, not raw material but steel production but the availability of short-term credit had eroded dramatically with those companies going Chapter 11 and/or going out of business.

The credit discipline that is exercised by all the steel mills today, U.S. steel, Newcore, ISG, Ipsco, so forth, and some of our Canadian partner; much stronger.

It's the same disciplines we have exercised for a long time.

Mike has always indicated that credit is a privilege.

With the lack of credit availability from a number of those entities going away, in old dollars we would have told you that related to about $6 to $800 million a month of evaporated short-term credit in today's dollars it's probably about $1.2 billion of short-term credit that is gone away.

And therefore people who were poorly financed, some of our smaller competitors who were poorly financed, and had the ability to turn material for small margins, have gone away and really only the stronger can survive with working capital requirements today.

So that's the evidence that's there.

The other side of the equation, Mark, so long as there remains a scrap shortage, however long that will be, what we've seen an elimination what have was called the secondary steel market, secondary steel which was a tremendous deterrent to the pricing in the marketplace because it was available and being represented by prime, as prime, on the sales side, you know, the secondary market is now being chewed up for scrap.

So the secondary guys just are not there putting a real deterrence on pricing in the marketplace.

So, all those scrap market short, the secondary market will remain basically invisible.

So, if I was going to summarize what you said, the three major changes are industry consolidation, tight credit conditions and lack of secondary material?

That's correct.

OK, terrific.

Hey, I just wanted to congratulate you.

I mean that's just it's a phenomenal operating performance and incredible recovery in a very short period of time.

I know there was a lot of work you guys did in the last three years to get ready for this and you're really taking advantage of it.

So, congratulations.

Well thanks for your continued support Mark, we appreciate it.

Thank you.

The next question comes from Josh Pictor (ph), please state your company name followed by your question.

Cactec (ph) Partners.

Welcome back.

Hello, Michael.

How are you?

Good Josh, how are you?

We're not sure what to do with all the money that Olympic has made for us it's almost unreal.

Can I just --

You could buy us dinner.

Well, I'm happy to do that.

I really, in an industry where nobody makes any money, it's amazing.

And if I had told any of my partners that we would go from 2 to 20, they probably would have given me a lot more money.

If I might, I know everybody's very positive and I become very pessimistic in these periods, because it seems that unreal things happened.

But maybe I could ask a couple technical questions.

When you guys do inventory management and you're purchasing out into this market, which, you know, is slightly inflated, tell me how you're doing it in the sense of how do you manage that for risk?

We're very concerned, and my question pertains to if the market turns over very quickly, how fast is that material going to move out the door?

Are there contracts on the material you're buying and therefore the risk to us as owners is very limited or it's actually quite large?

There are lots of different answers to that.

The answer is the velocity of the turnover of our existing inventory, which is roughly about six tons now, Josh.

So, if you said the whole world collapses overnight, there's only a 60-day risk.

That's number one, number two we're the first big buyer of cheaper steel when it occurs.

So, clearly if the market were to retired from a pricing standpoint, the first guy that would recognize it is Olympic Steel to take advantage of it and we would be obviously averaging down on a very, very quick turnover inventory.

So, our inventory values would drop substantially before the market would.

Do you have a contract -- for example, David had mentioned that when you buy material, the first thing that comes in the door is moving out the door and that's at the margin we're seeing now in the income statement.

Is that -- did I understand that correctly?

Yes.

You have it, Josh.

So you're getting 30% plus gross margins on material you're buying from the mill today.

Yes

And do you have contracts or is the inventory that you have at 60 days exposed, have you got a buyer for that as you're going into the market or are you still spot buying from the mill?

We buy according to, Josh, how the mill allows to us buy.

We are buying on a month-to-month basis.

When you take a look at those margins, remember that those margins are an average and so on the spot market we have some very high margins and on a contractual basis or supply agreed basis, we've been able to balance those things and we've been able to balance them with a real robust attitude toward being a merchant in the marketplace, especially on the spot considerations.

One other thing that we are acutely aware of, as Mike began this call, is risk management and we always take a look at risk management.

We take a look at the lead times at the mills, we take a look at where the European market is, where the Asian market is, we take a look at raw materials, we take a look at core supplies around the world particularly here we take a look at labor agreements and then we have the privilege of having been in this business for 30 years and we use our decoder ring to figure out exactly how much we want to bring in.

Have you ever seen a period like this though David?

Yes, 19, in the early '70s, early '70s, '73, '74.

Not as quite as constrained as this, Josh, because again, we have limited mill ownership around the world today, which is changing the structure dramatically.

OK.

And as you guys build out your expectations for yourselves, do you anticipate further price increases throughout the next three, four years?

You think this is a sustainable period?

No, I don't know that you could say that.

Obviously, trees don't grow to the sky.

However, we do recognize that the survivors in this marketplace, the steel mills that we described, US ISG, who has brought a new paradigm to the marketplace, new core who has always run very well on Ipsco also.

You know, we recognize that these people that these terrific vendors are much better run organizations; they're channeling their material appropriately.

So, the service center business is shrinking in terms of its un sanctioned level of distributorship as a number of these vendors pick channels, we're fortunate not to be channelized through products from all of them.

And again I think that one of the things that's helped steel is that the fixed cost equation is dramatically different and the variable cost that these steel mills is a greater proportion than it ever has been, and their ability to moderate supply relative to demand will allow stabilization in pricing.

Michael, why not sell more shares and payoff the debt while people are excited?

I don't have a good answer for that one.

I mean, why don't we finally clean up the balance sheet and have some flexibility in case the world changes?

You know what, Josh, good advice.

It is good advice but let Rick comment a little on the balance sheet because I'll tell you our balance sheet is very clean today.

And obviously, Josh, you're right and we look at all alternatives, always.

I mean and balance sheet management, I think we have shown through the last four years, that that's what really matters.

I mean, and we're very focused on that.

We consider all of our alternatives.

Your current debt to equity is what?

About 0.6 to 1.

I just tell you that I mean, from an ownership perspective, what's been the hardest part about Olympic metals was debt and that you never knew if the company would ultimately survive while prices are declining.

You finally get a wonderful moment where prices are going to the mountains.

You have got a whole bunch of people who know nothing about steel and how hard it is to run a business in the middle of Altoona, Pennsylvania, owning these companies and thinking steel price are going to go up 500% a year.

I would tell you, I would give them every share I got if it's meant that the debt of this company is going to be zero and Michael you can sit there and debate prices with me forever, with flexibility in the banks not being anywhere.

Just my advice, I'm just a dumb kid.

Anyway, I appreciate it.

I give you congratulations because I'm glad you're getting rich, I hope you sell some shares and make some money and much congratulations.

Thank you Josh.

Bye-bye.

Thank you.

The last question comes from Aldo Mazzaferro.

Please go ahead with your question.

Hey Michael.

Hello Aldo.

I notice your gross profit margin per ton was higher than the price in December 2001.

So is the surcharge.

But my question is trying to get your insight into what's going on in global markets and foreign markets?

You know the US pricing still, right now, is very much higher than the foreign markets, especially if you assume the $700 numbers.

And I'm just wondering what your thoughts are on pursuing imports and why do you think they're not coming in at maybe an even higher rate than they have been in.

Thanks for the softball.

You know, even I have talked about this.

I mean the reality is it goes back to the credit constrainment.

Imports do not come into this country sort of on an open credit basis.

Historically, all imports come into this country on two basic secured bases for the money.

One is either with credit insurance, which is basically been totally dried up since September 11.

The other is with letter of credit from the buying entity.

When you look at a boatload of steel today, a boatload of steel is going to be somewhere between $10 and $15 million.

That $10 and $15 million on a letter of credit is going to be tied up somewhere between 90 to a 180 days.

So, if you say a boatload is 15,000 tons, 12,000 to 15,000 tons, which for Olympic Steel is, you know, a couple days of business.

I mean if we wanted to say let's take one month's supply, we'd have to tie up somewhere between $50 and $60 million of credit waiting in anticipation for that one month of supply.

That basically takes us out of our ability to pay our bills to our domestic guys.

So, the credit constrainment is basically keeping imports from coming into this country in any substantial quantity and as was indicated by some of our competitors on their phone calls, I mean just because you buy a much cheaper boatload of steel doesn't mean it shows up.

You know, you've seen in the first half of the year where people have bought or thought they bought steel to come in and then those boats were diverted to China or someplace else.

So, if we have a commitment to our customers to deliver on time, we can't walk into them and tell I'm sorry our boat did not show up.

So, you could never put yourself at risk for a significant amount of quantity on imports even though it's cheaper.

So, you know, you do feed yourself in with a little bit of imports where it makes sense but in this marketplace, capital is everything and capital is very much still constrained.

Great.

So, that would have the effect then of keeping pricing here relatively high compared to where it might be.

I think it's very much is the game of who has got access to capital and who is using it effectively and you know that will separate men from boys for lack of a better expression.

Great.

And one final thing, Mike, have you noticed any change in the trend of your customers' margin, your industrial customers?

I know we're getting squeezed on steel.

How do you think they've been in terms of success in passing on steel prices?

Again I will just tell you by the results that we read from Pick (Ph), Ford, John Deere, GAAP, JLG, Ingersoll-Rand, I don't think that the steel pricing to date has any material effect on either their ability to sell their product in greater demand or the margins that they're making.

So, so far, regardless of what the statements are that they're making, their earnings are at all-time records as well.

So, to us it's -- they can complain about it, but the results speak for themselves and the results have been very, very exceptional.

Great.

Do you get involved in contract negotiations at all with some of your larger customers for next year?

And could you give us any insight as to what you think pricing might be on contracts next year?

There is a Aldo, David, -- there's somewhat of a renewed approach to take a limited amount of supply obligations.

Principally targeted around availability, and much less discussion around price.

So nailing down the availability is much more important for pricing that people are talking about through '05 is very similar to the pricing that we're seeing today, and also carries the asterisks of a floating surcharge.

OK, well, thanks very much and congratulations.

Thank you, Aldo.

Thank you.

We have one last question, gentlemen.

Would you like to take it?

Sure.

OK.

This question is a follow-up question from Tom Call please go ahead.

My question relates to the stock price.

In 1996, you had a stock price of $30, with an earnings of $1.50 for the year.

Can you compare the environment and what might have caused such a large price on such a relatively small level of earnings back then, and why we currently have a $20 stock price with almost you know $4, roughly, in earnings for this year?

Well, let me comment -- I can't tell you about what's going on presently, but you can probably draw your own assumptions.

There was back then a real big perception of a consolidation play in the service centers that was driving a lot of value into the marketplace.

You also had a lot more in that era you had institutional investor that still had steel as a separate category, and you had lots of competitive interest by steel analysts.

So from that standpoint, when institutional investor dropped steel and went to metals and mining, a lot less coverage became available to the steel service center sector.

But clearly the robustness and the expectation back when the share price was higher, back in that era, was not necessarily based upon the specific performance side of the equation, but more about the expectation of consolidation.

Why it's where it's at today, you know, I think the market is dynamic in the long - in the short-term.

It is very efficient in the long-term.

Thank you.

Thank you.

There are no further questions at this time.

Please continue.

Thank you.

As a reminder, just want to make sure everybody is aware, is Olympic Steel's policy not to provide forward-looking earnings estimate for the upcoming quarter or the rest of the year.

So we don't anticipate changing that policy and this will conclude our call, and thank you again for your interest in Olympic Steel.

Bye-bye.