Olympic Steel Inc (ZEUS) 2007 Q3 法說會逐字稿

Good day and welcome to the Olympic Steel Third Quarter 2007 Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to introduce Mr. 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 Chief Operating Officer, and Rick Marabito, our Chief Financial Officer. I want to thank all of you for your participation and interest in Olympic Steel. Let me remind you all that forward-looking statements on this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and please refer to our SEC filings for further information.

As stated in our earnings release, I am pleased with the 2007 financial performance in a market that has been characterized by weaker shipments, cautious buying, and declining pricing, especially in stainless steel. I'm especially pleased with our ability to gain market share, control our operating expenses, and improve our asset turnover and cash flow in this market.

For the third quarter, our sales totaled $256.1 million, which is 1.5% lower than last year's third quarter sales of $259.9. For the first nine months of 2007, our sales totaled $792.9 million, which is 5% higher than last year's sales of $754.9 million.

Our third quarter net income totaled $6 million or $0.56 per diluted share compared to net income of $10.9 million or $1.03 per diluted share in last year's third quarter. For the nine months our 2007 net income was $20.7 million or $1.93 per diluted share compared to $27.3 million or $2.57 per share for the 2006 period.

In terms of volume, we shipped 309,000 tons in the quarter compared to 313,000 tons in last year's third quarter, which equates to a 1.4% decline. This compares favorably to the 7.6% decline in third quarter industry steel shipments as reported by the metals service center industry's market activity report. For the first nine months, our tons sold totaled 957,000 tons compared to 994,000 in 2006. Again, our year-over-year tonnage decline of 3.8% is again better than the 7.9% drop seen in the industry wide shipments in the first nine months of 2007.

Further, our third quarter volume decline was entirely in the toll processing area, due to lower automotive processing demand in our Detroit and Georgia facilities. Our direct sales market share has grown in this very challenging demand department.

During the third quarter, we improved our inventory turnover rate by 12% to just under five turns and paid down $39 million or 61% of our outstanding debt during the third quarter. Our third quarter operating expenses remain constant year-over-year and Rick will provide more details on these costs in a few minutes.

Turning to the market, service center inventories were reduced for the 11th consecutive month in September and look to remain at their current lower levels for the balance of the year. Demand is not expected to increase in the near term as fourth quarter includes the normal seasonal slowness of December on the plant shutdowns and steel buying still remains cautious.

However, when demand is restored from its seasonal slowness, price increases may occur. This belief is further influenced by the continued low levels of carbon steel imports further supported by a weakening U.S. dollar and the continuance of certain duties announced by the government in the past month. Second cost increases for steel making materials, raw materials particularly and three industry inventories that may reach levels that are too low for current demand, resulting in service centers increasing their buying patterns and fourth the lower interest from the fad.

I'm also pleased to report that Olympic Steel's board of directors has approved a regular quarterly cash dividend, again of $0.04 per share. The dividend will be paid on December 17, 2007 to shareholders of record on December 3, 2007. This will be the second dividend at $0.04 per share since our board increased the quarterly dividend by a penny a share earlier this year.

I'll now turn the call over to Rick to comment on further financial results.

Thanks and good morning everyone. I'll comment on some of the financial numbers that Michael's not yet covered.

First, our third quarter EBITDA totaled $12.9 million compared to $20.8 million in the third quarter of '06. For the nine months, our EBITDA this year was $42.5 million compared to $53.8 last year.

As Michael indicated, our operating expenses remained constant at $39.7 million in the third quarter this year compared to $39.6 last. The year-to-date expense increases of $6 million is due to the inclusion of a full year of PS&W's expenses. As a reminder, PS&W was acquired in June of 2006 and then number two incremental costs associated with our new IT system project, which also started in July of 2006. So starting with this third quarter, we now have light comparisons on quarterly expenses, year-over-year. And then speaking of our IT system project it does remain on plan and on budget.

Interest expense for the third quarter of 2007 was $640,000 compared to $898,000 last year. For the first nine months of 2007, interest expense was $2.5 million compared to $1.4 million in 2006 and we would expect our fourth quarter interest costs to decline from third quarter as our debt continues to decline. Our nine-month effective tax rate for this year was 38% compared to 38.1% last year. The third quarter rate of 39.9% was slightly higher and that was in order to bring the rate for the year to the expected 38% level for the full year of '07.

Now turning to our balance sheet, we ended September with $109 million in accounts receivable and that is down about $12 million from the end of the second quarter. The lower receivable level was due to lower sales in the third quarter versus the second quarter. Our receivable days outstanding remaining very strong and consistent at 38.4 days and our inventory totaled $172 million at September 30 and that is a $25 million reduction from where we ended the second quarter. We turned our inventory an average of 4.7 times so far the first nine months of 2007 and our turnover rate for September was just shy of five times. So we accelerated our turnover during the third quarter on inventory.

Our working capital at September 30th totaled $194 million. That's a $34 million or 15% decrease during the third quarter and as a result of the working capital decrease, we were able to reduce our debt by $39 million during the quarter and we ended September with only $25 million borrowed and we had approximately $101 million of unused availability under our existing credit agreement.

In terms of our capital spending, we spent $8.3 million so far in the nine months of 2007 and then depending on the timing of payments, we may spend another $5 million or more during the fourth quarter and David will talk about some of the capital investments in detail in a few minutes. Our capital structure remains very strong and flexible with a debt to equity ratio of 0.1 to 1 and a trailing 12-month debt to EBITDA ratio of less than 0.5 times. And finally our shareholders equity per share increased to $24.15 at September 30th.

Now I'll turn the call over to David.

Thank you Rick and good morning again. Let me add a little bit of color to Rick's comments on the balance sheet. The strength of our balance sheet allows us to continue spending on the strategies that we've put forward in earlier conference calls. Number one with value added processing and additional equipment, our gross margin expansion and the location penetration and additional geographies are on the dockets here. Let me take a few minutes to go into more depth on each of these three pieces of the strategy.

First, we've been very active in adding value. We added processing capabilities in 2007. Some of the results since our last conference call in July include the following. The completion of a 54,000 square foot addition to our existing facility in Bettendorf, Iowa, which is on time and on budget; we should receive our certificate of occupancy this week and the new area provides for more production space to serve our customers from this facility, which already houses a temper mill and multiple laser processing lines along with oxygen burning and some shot blasting. This additional space equates to additional tonnage capacity in Iowa.

Next, we installed a new high definition plasma machine, which increased -- and increased our welding capabilities and relocated a paint line and our machining operations to our new Chambersburg facility during the third quarter and as a reminder we acquired an additional 150,000 square feet in Chambersburg in 2006. We now perform first stage plate processing in our original Chambersburg facility and the down stream value added welding, painting, and kitting from our second Chambersburg location.

Additionally during the quarter, we completed the integration of our two PS&W facilities into one in Siler City, North Carolina and again as a reminder, we acquired this facility on June 2nd of 2006. The facility consolidation has provided better productivity at a lower cost at this location. We also ordered new press brake and we are completing significant facility upgrades at PS&W during this current fourth quarter.

Our new structural (inaudible) cut the lifeline to be located in our Minneapolis coil facility is being built and is still on schedule to become operational in the first quarter of 2008. This equipment will serve customers with high quality sheet products as well as feed our downstream value added laser equipment and free up more processing time on our Iowa temper mill, which is currently running at capacity. This ducktails nicely with the expansion of the 54,000 expansion that I mentioned earlier in Iowa adding capacity.

We installed a new large bed laser in Cleveland during the quarter and now Cleveland now houses four big bed lasers. We've initiated value added processing capabilities in our Chicago location this last quarter. Our laser punch equipment in our Schaumburg facility became operational in the quarter.

Finally, we continue to successfully roll out a program to operate our own trucks following the success of operating our own trucks in the Pennsylvania facilities. We added transportation capabilities in our Cleveland location and in the third -- and in the third quarter we will begin running trucks -- end of third quarter and now we'll begin running trucks in our Minneapolis location in the fourth quarter. Adding transportation services in house is a critical piece of our value add strategy and it enhances our productivity and our customer service.

The second part of our plan is to expand our gross margin through value added services and our strategy is paying off nicely as we have steadily increased our gross margin per ton over the past few years. Even in a challenging pricing environment that Michael remarked on earlier, the marketplace for third quarter, we saw our gross margin per ton increase to $163 per ton.

We believe our focus on customer service and making investments in types of value added equipment that I just depicted and I just described are providing a steadily improving and sustainable gross margins for Olympic Steel. For example, our gross margin per ton in 2005 was $130 per ton. This increased to $158 a ton in 2006 and we now stand at $160 per ton for the first nine months of 2007.

Lastly, we continue to explore new locations for Olympic Steel. We are analyzing Greenfield opportunities close to major OEM customer activity and expect to initiate new processing locations in 2008.

In summary, we are pleased with our 2007 financial performance to date, the performance of the management team and our position in the market place. Our strong balance sheet and working capital management positions us very well going into 2008.

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

Thank you. (OPERATOR INSTRUCTIONS) And our first question comes from Nate Carruthers with Michelle Applebaum Research.

Hi guys, good morning.

Morning Nate.

Hi Nate.

Hey, can you give us an idea of how your daily shipments progressed in the July to October timeframe, I guess month by month?

Well...

Shipping rates, I guess?

Yes, that would be good.

Again, you've got amount of days that, you know each month has a different amount July generally would be a slower month because of the planned shut downs so that was probably of the quarters the slowest per shipment day. August was up from July and then I would tell you September was probably flat to August.

And what have you seen -- what did you see in October?

That's a little forward Nate so we prefer not to answer that question, but I would characterize it as not bad.

All right and then can you give us an idea of how your customer's outlook has changed since the last call, if at all?

Well Nate, Dave Wolfort here. Our customer's activity remains as Michael alluded pretty even. There is a tone of concern in the marketplace relative to credit. I think that permeates everybody's thinking and it certainly isn't any different for our customers. So there is a concern there relative to the credit climate. Obviously, it's exacerbated by subprime and so forth and the housing and of course, a number our customers who were involved in residential housing, elements of their business needless to say have slowed down. Although, OEM manufacturing quite candidly has been brisk and has more than counter balanced the slow down that we've seen in industries that do serve the residential. So in general I think we've been moving along at a pretty even pace. As Mike indicated earlier our tonnage growth is down nominally and up relative to the general service center environment so I think we've faired fairly well and our customers obviously are the reason that those numbers are supported.

All right, thank you very much guys.

Thanks Nate.

And moving on we will hear from Mark Parr with KeyBanc Capital Markets.

Hey good morning.

Hi, Mark.

Hey, I've got a couple of questions. Just looking -- first of all I want to congratulate you on the gross margin performance, the profit per ton, the increasing value add, I mean your performance is exceptional here and I think it should be congratulated.

Thank you.

I had some questions on the expense side of the equation. Last year in the third quarter, you had a bump up in warehousing and processing expenses. You went from 13.7 in the second quarter of '06 to 16.3 and I thought that that 16 million number in the third quarter had some unusual, relatively non-recurring types of issues, but it seems like here in the third quarter there is something similar although it's not quite the same magnitude. And I was wondering if you could give us some color on the sequential increase in warehouse and processing expenses in the third quarter.

Well the first part of your question, last year's third quarter was our first quarter with PS&W and the reason that, that's higher than this year's third quarter is you remember we did take a good chunk of operating expenses out of the PS&W operation as we moved through the year in 2006. I think we reduced about 30 or 40% of the headcount at PS&W. Sequentially, Mark, there shouldn't be -- there is really nothing unusual in warehouse second to third quarter, what I will tell you is that most of the value add equipment that David talks about the lasers, the plasma, we lease those. So the leased operating expense cost reside in warehouse in processing so sequentially as we're going kind of quarter to quarter as we're investing in some of those types of things they're not hitting the CapEx depreciation line.

Right.

Some incremental expenses are hitting warehouse and processing, but other than that there is nothing unusual sequentially.

Okay, are the -- can you -- then along those lines could you talk about the sequential change in operating lease expenses as a component of the warehouse line item.

Sure, I mean I don't all those numbers in front of me at the moment, but laser lines are about $1 million so a lease on a million dollar piece of equipment like that would be roughly $150,000 or so a year.

So these are not big numbers, yes.

Yes, but when we're adding five or six of them a year, they tend to add up and obviously they're phasing in at different points in time over the year, but...

And the offset to that is obviously the increase in the gross margin.

Right.

I hear you, okay. I'm just...

And if you want more detail, Rick can...

I mean I don't have all that in front of me now, but that's sort of a rough estimate.

Okay, great. I've got a couple more here if I could real quickly. First -- secondly on inventories, you guys did a great job bringing inventories down in the third quarter. Could you give us some color as far as the inventory reduction carbon versus stainless? On the carbon side flat rolled versus plate and if you've got any outlook for where you would look for your inventories to be at year-end, I'd really appreciate some color on that as well.

Well I think across the board Mark, all of our products are down. I mean, without breaking it out since we don't do that. I mean, I would tell you stainless inventory is down as well as the carbon inventory is down. So it's down across the board as you are aware. We're a pretty steady buyer of steel, we buy it every day. We're not looking for a big December buy because we think prices might be going up. So we're relatively steady in terms of our desires, but as you know in the last two weeks of December steel mills have a propensity to ship only service centers because they're the only guys who take steel, but we would expect our inventory to be marginally down at the end of the year.

Yes, Mark, David here, I'll put a little bit of color here without any real forward-looking statements. But I will tell you as we manage our inventory, obviously we manage it to market sentiment, and we recognize what we would characterize in 2007 as a traditional service center year where Q2 was going to be stronger than Q3 and obviously we've managed our inventory in that regard and in totality. We also recognized early on that nickel was going to be falling, not to the rate that it did fall, but we kept the inventory levels at the very manageable so we could in fact withstand any problems and duck the deep degradation and nickel surcharge drop.

Beyond all that I would tell you that as you look backwards at us and as we entered '04, as we entered '05, and then we entered with what we thought were pretty robust inventories. We entered '06 with a very -- with an inventory that was lower than we wanted to because the market place was depressed in '05 and then quickly caught up. I would tell you that we are -- that we have a lot of confidence in the management of our inventory today and feel as though that we are managing it better than we've ever managed it in years prior. Thus Rick's comments on the rotations up in the shadow of five times, we're very happy with that as we move forward.

Mark as we look at it, I mean we target sort of we want to be at five turns plus. So we're going to manage that and be relative to our direct sales forecast. We've seen a lot of degradation in the service center industry in total as we indicated earlier. Our entire degradation came from toll processing, not owned inventory. So our inventories are in very good shape relative to our increase in direct sales.

I absolutely agree with that. I think that's very well said. I've got another question. That your admin expenses came down a little bit sequentially in the third quarter, is that the kind of run rate we should look for in the fourth quarter?

Yes, it's pretty similar, yes.

All right, that's fine and then lastly if you could make, I hear anecdotally that you guys have accepted some shipments from SevaCorp I just wondered if you could make any comments about how your impression of the quality of the product on the ramp up's going down there?

We have no complaints. We're still buying.

What we've seen out of there, obviously what we've seen out of their markets is [cold world and the cold world product is very satisfactory.

Okay, terrific. All right, well congratulations. I look forward to this market turnaround if it ever happens.

Well eventually it has to. Thanks Mark.

See you guys.

Our next question comes from Matt Kellogg with Next Generation Equity Research.

Morning guys nice quarter. Just a couple of -- Mark got most of the nitty-gritty, I just had a couple of quick ones. Did you guys give cash flow in the quarter for the first nine months?

We have not released that information yet.

Okay.

Matt, we'll have that in the next week and obviously in our 10Q.

Okay, that's helpful. And then is PS&W, I mean have you guys -- is that a profitability yet?

Yes.

Okay. And then just wondering what sort of any thoughts you guys might have on a buy back? I mean I realize you guys want to put CapEx into the business, to grow the business and growth is priority numero uno, but at some point does given how your balance sheet is awfully bulletproof and given the sort of meager premium you guys teach about book value. Would that ever -- you never talked ...

Can you repeat that case we didn't hear that. No, I would tell that in our board meetings, we discuss all possibilities and we've laid out a plan and David's comment, which was lightly touched on. So I'll reiterate it is we have a fairly good use of capital in terms of our strategies to add additional locations and we would expect to execute on that in a more aggressive fashion that you've seen in the past. So the use of capital for the growth plans that we wish to undertake with new satellite facilities and a potential new temper mill facility somewhere in the future, we believe that to be a better use of capital than the buy back.

Okay, that's helpful. And then can you guys just talk a little bit about where you guys, what you guys are seeing for pricing in the market right now for some of the key products and any sort of announced price increases and how that's been taken so far.

On that, Dave Wolfort here, I would tell you that our view especially, obviously we're flat rolled. The flat roll marketplace is that the announced October increase was in fact absorbed.

Okay.

For the most part if not all of it. We anticipate, although this is not probably not -- anyhow, but what we anticipate is that it's a cost push environment out there for the steel mills and ultimately regardless of demand our expectations are that sometime in the not too distant future that there will be additional increases based on the raw material escalations at the steel mills. Not withstanding the fact that scrap just went down, but nevertheless it looks like a cost-push environment and we would expect that and so we see pricing has pretty much stabilized and they have absorbed the flat-rolled increase and the plate increase, which is being announced. Which has been announced for the latter part of this year, increase as of December 30th, looks to us like it will be absorbed in the marketplace as plate has a relatively robust consumption today.

Okay, great, that's helpful. That's all I got. Thanks guys, nice quarter.

Thank you.

Thank you.

Our next question comes from Timothy Hayes with Davenport and Company.

Good morning.

Hi.

Hey Tim.

Just couple questions on the -- your transportation and doing your transportation more in house. Can you quantify what kind of savings you may get if you do that throughout the entire company?

Well, we're not going to do it all in house, because there is a lot of [one-off] but as we increase the lane penetration back and forth, Cleveland to Chambersburg, back and forth, I don't know what the right percent. Dave you might want to comment, it's pretty substantial.

Tim, it is a substantial savings. We kicked this program off about a year ago in our Pennsylvania operations, which are Philadelphia and Chambersburg. It has been very successful for us, not only in terms of performance, but the quality of equipment that we run and of course the drivers are already employees of ours. Once upon a time we had the same, we owned trucks back some 15 years ago and left that and we're now revisiting that strategy and as Michael well says, it is substantial. Because our distribution costs in our view are not going down. So part of the strategy that we have and overall strategy, Tim, as you take a look as we've remarked and as Michael has put additional color on, with additional facilities. This is all part of a strategy that gets us closer to our OEM customers and allows us to serve those OEM customers with rapid delivery and little quicker turns that we use our own trucks in that regard. So there is, we think, some pretty substantial savings there. Maybe a little bit difficult to quantify it in totality but it is also a process that we are going to -- that we are going to continue to undertake as we bring value added services. So we'd look for substantial truck fleet ownership as we add these facilities.

Okay, and then the -- a second question. On your long-term goal for gross profit per ton, I know you've stated those in the past. Could you either remind what those -- what your goal is? Just kind of curious if that has changed over the last couple years.

Not really. Again, what we're looking for over time is sustainable $200 per ton gross margin. I mean, those are going to be impacted by a lot of different things. It's going to be impacted by how much toll processing we do. It's going to be impacted by whether surcharges are going up or down. It's going to impacted by how much toll processing we do. It's going to be impacted by whether surcharges are going up or down. It's going to impacted somewhat by the pricing of steel. It's going to -- but the reality is as we continue to invest in pieces parts business for outsource manufacturing, the gross margins there are substantial and we're going to continue to supply our capital in that arena, which creates the maximum return for us. So we're hoping to increase that penetration of the value added services, which will continue to help grow the gross margin regardless of the volatility of steel pricing.

Right and that $200 per ton is that a goal by 2010 or 2012?

Well, next quarter would be good. If it takes us longer it's not as good.

Sure.

I mean there is no -- look the marketplace dictates a lot of this so, yes when we stated this strategy in 2002, we put it out there at 2010. There's a couple of vagaries of both internal and external things that have occurred. We'd probably tell you probably won't get there until 11 or 12, but what we're seeing is incremental, literally almost quarter-to-quarter. I won't say there is not a quarter that doesn't go backwards, but certainly year-over-year we're seeing substantial gross margin growth. We want -- that path will continue.

All right, very good, thank you.

Thank you, Tim.

And our next question comes from Bob Richard with Longbow Research.

Good morning and thanks for taking my call.

Sure Bob.

Just a quick question, not to beat up the transportation issue too much, but how much of your costs is transportation? Are you able to share that? Are we in the high single digits there or?

I think if you look at it's 2.6.

Basically, Bob, if you look at our income statement the distribution line that's transportation out. So you can, I mean roughly double that, you've got transportation in, which is obviously part of costs of goods sold. So for the nine months we had $19 million of transportation out so it's a big spend.

I'm with you. Right now you're -- I appreciate you saying that the employees are yours and you're currently leasing these trucks I guess, with maybe a possibility of buying them in the future right?

No, we're leasing them because Bob, as we take a look at equipment like that, we think that there is a fairly narrow life to these pieces of equipment and we'd rather re-circulate these pieces of equipment for new pieces of equipment that are more efficient and always keeping safety in mind for ourselves.

Thanks and best of luck.

Thanks Bob.

Next question comes from Aldo Mazzaferro from Goldman Sachs.

Hey, good morning Michael.

Morning Aldo.

Hey nice job on getting through another inflection point in steel pricing, keeping the margins and the operating expenses very nicely in line.

Objective.

That's right. Say, I want to ask a little more about your value added strategy. Can you categorize a little bit about what the new locations you discussed for '08 might have in terms of processing equipment and then also separately whether you have considered value added across all business sectors or do you think it's maybe specifically into the machinery area or are there some areas that you would either tell us that you're focusing or maybe are focusing on excluding. Like maybe, does it extend as far as building materials and things like that? I'm just wondering if you could categorize that strategy a little more.

How much time do you have?

Aldo, David here you'll have to refresh me on the latter part of this question it just sort of ran on, but I will just tell you, as Mike says, as we look for margin enhancement we don't expect that without adding pieces of equipment. We really look to, for lack of a better expression, we use it here, we look to be lean manufacturing enabler for a lot of our large OEM customers and in saying such we're locating closer to those customers. We're taking the rubber off the road and we have to bring complimentary equipment that is more efficient than what they are currently running. So we're really looking for the front end and we've been successful in achieving the front end of their operations, it's taken the front end of their operations away. So beyond our temper passing, as you well know, we have increased our laser participation to somewhere at 25 lasers, somewhere in that neighborhood. We have additional shot blasting equipment. We have additional automatic welders and welding. We relocated a paint line. And so and of course we've enhanced our facilities with major machinery and all of this -- all of these pieces of equipment are contoured for specific locations, for specific customers needs and that's -- and ultimately there in that sort of context, Aldo, and that's what really fosters the growth of the margin as we add incremental services and add margin to those services that we bring to those OEM's. So it's getting closer to the OEM and complimenting the OEM's production by taking the front end of their business, bringing in new pieces of equipment that they may not want to put their capital toward and they generally don't and making it significantly more efficient. That's how that process works.

We have different models Aldo, depending on the equipment that's in the particular site. Rick has done a very good job in modeling these things out and the vague reason are you going lease a facility versus are you going to acquire land and build a building that has a certain amount of disproportionate balance to the return. If you say we're going to add a new facility someplace with a couple of lasers and it's got a very high return, if we're looking at a new temper mill facility, which is substantially more. The temper mill alone today is about $17 million without a building. The returns are still very high, but a different kind of facility altogether. Without knowing specifically what the unit is, I mean the model says that the return on capital is very substantial.

Great. Yes, I was kind of wondering if you were going to stick primarily to these OEM/machinery type products or whether you might go as far as kind of run of the mill building products or things that might get used in construction or things like that.

Well the answer is where we have customers who want to outsource and increase their returns on capital. It doesn't really matter what the unit is, because we own the steel anyway as David says.

Right.

The form that we own it in doesn't matter. We can take it into pieces parts through assembly if that's what the customer requires. So you can't say there is anybody who would be excluded, necessarily. We have some sectors that we like more than others, as you know. We have a couple that are not our favorites because they're just too tough in terms of their availability to allow you to get an appropriate return.

Right.

And capital in those markets don't make sense, but from our perspective there is lots of opportunity out there.

Mike, can I shift gears and ask you a little bit about the market. There's been some comments out of steel mills about the herd mentality among buyers and I know the demand is weak, but I also know that steel prices have been rising now for a couple for months and inventories are really low and I'm wondering if you could tell us, do you think steel prices continue to rise, say from here to the spring, without any demand increase?

Well again it's mathematical equation. I mean, there is very little imports. Certainly the markets that export will be and there is an export market that I think is increasing and when you looked at the export markets direct from the steel mills it's increasing and our customers are increasing their export penetration. There's seasonality to this, so there is no question with inventories falling for 11 months at the service centers. There is a point of inflection here. I would have told you it probably would have occurred already as most of us thought. It hasn't occurred yet, but it has to the math just works. Now, is it going to be in January, is it going, it's hard to believe that it's going to in December since most of the plants shut for two weeks, but certainly we look at a market that could be called substantially short from a supply standpoint in late January.

Right. So you...

Even with our current demands.

I'm sorry?

I said even at the current demand level with no increase and demand.

Yes, I mean you want to see import offerings, right, still. I know they're pretty rare, but what kind of prices are they asking for delivery?

Aldo, it's David. The answer is that with what nominal import offerings are being represented, they are world prices. They're not North American prices. They're world prices.

They're like a $100 higher than what you see in the mill here.

Yes, from $90 to $100 a ton more and obviously the vagaries of transportation and Michael's talked about, obviously there isn't any. Ocean going freight is much more expensive and the currency is down.

And the vessels are chartered longer going in a different direction.

Yes.

Those things are going to turn on a dime when it does turn. I mean, the Chinese and the Indians are chartering these vessels for three and four years now; there's been a lot of new vessels that are coming on stream I think that even if there was a switch in the current evaluation it would take a long time for imports to come back into this market.

Right. So it sounds like gross profit per ton then should turn higher the next few quarters would you say?

That's our objective.

All right and I had a final question for Rick. Rick, can you tell us what is embedded in your operating expenses for the IT project at this point, year-to-date?

Yes, we're -- we ran about 500,000 a quarter, I believe. You want just expensed, right?

Yes, I know there's been some influences on your SG&A, on your operating expense side from the JSW, which I assume continue and then you have the other side, the IT stuff I assume doesn't continue after some time.

It never seems like that goes down.

We're on time and on budget there, Aldo, Rick's looking for the number, but beyond the platform there is the integration of this and we have a concept for all that.

That's about right. We got about a half a million a quarter of incremental expense that's hitting the P&L.

Thank you.

Mainly an admin expense.

Okay, but just watching and waiting for that thundering heard to come back right.

Yes, we love a moving price yes.

Okay, take care, thank you.

Thanks Aldo.

We have one more question in the queue. (OPERATOR INSTRUCTIONS) Moving on we will hear from Mark Parr with KeyBanc Capital Markets.

Yes, thanks for letting me back on again. I've been just hearing anecdotally that one of the big three mills in North America has been talking pretty aggressively about moving prices up in both January and March and I guess I have two questions. A) Could you confirm that and B) is there more than one of the big three that's had those discussions thus far as far as you're aware?

That's the thundering herd that we referred to and Aldo talks about. That's the thundering herd and quite candidly, Mark, there is and has been some rumblings out there about moving prices up because as we referred to earlier the cost-push and so there is a delta as you well know.

Right.

Between North American pricing and Western European pricing, if not European pricing as a whole, we look at it at somewhere in approximate value of $90. There really wasn't any imports coming in. We see as Michael wells said, we see inventories at dominium levels. Ultimately, the steel mills, those running the steel mills are bright people today. They recognize the same trends and so there is discussions of both of those we hear in the marketplace.

Okay, so I'm not going to ask you to try to comment on orders of magnitude, but I had another question. There seems be emerging export opportunities at the mill level. Given some of the locations of your facilities, in Iowa and in Philadelphia, it seems like you might also be able to avail yourselves of export opportunities from a logistics standpoint. You know if it became available. Do you have any efforts to try to do this in '08?

Well we do it now. We currently export. We have an international operation. We have had an international operation since 1989.

Okay.

It's gone through a number of different geneses here, but the reality of it is we do ship quite a bit to the Caribbean and to Central and South America. We have some product going across the Atlantic too, not a lot, but we find these are one off quotes we're relatively successful with and they have a tendency not to be mill size. So you're talking about -- you're talking couple hundred tons to a couple of thousand ton shipments and we are active in that.

Okay, terrific and last can you -- in light of all the discussion on the stock market, as far as pricing moving up. Are you seeing any movement on the part of OEM's as far as contract pricing, acquiescing to hire numbers, again from a cost/push prospective into '08?

I would call it acquiescing.

How about grudgingly acceptance or grudging acceptance.

I would tell you Mark that there is probably a greater tendency today to be shorter on their commitments than longer on their commitments so the tendency is to be -- the tendency is not to be on annual commitment, but the tendency is to be quarterly. If you're not on a spot market then your monthly or quarterly and then maybe semi-annually, but certainly not annually today.

Okay, all right. Terrific, thanks again for all the color.

No, thank you, Mark.

We have another question. This comes from Debra Fine with Fine Capital.

Hi guys, congratulations on the good quarter.

Thanks Debra.

Mike, can you comment on whether you think Ryerson going -- being taken out will add more discipline to the market or do you think it will have no affect?

That's an interesting question. It's hard to say. I mean, when you look at the P&A acquisition by platinum equity, we didn't see a great deal of change in behavior from those entities. So platinum has some experience at least in the last two years. The market may be a little bit Ryerson's probably different than P&A. Can't tell you, they put one of their own people in as an operating sense. These guys are typical when you look at the P&A and dissect what they've done. They first started to strip the assets by eliminating the real estate and paying the dividends to themselves. We would probably anticipate that there would be some site locations that they eliminate and probably consolidate. I think that from a -- they are cash flow sensitive like all private equity guys. I can't tell you that, that's of the life old pool, I think Ryerson historically was difficult to understand, their inventory and their life old pool, Debra.

Yes.

It's hard to understand what they do have versus what they don't have. I think that as you look at the accounting standards going to international in the next couple of years, which seems to be on the table, with the elimination of WIFO, I think that's going to drive some different behavior in Ryerson as they are as a private equity, but in terms of their ability to perform, I would anticipate at a $6 billion level that they will continue to perform for the customers that they choose to serve. But I think that they have a lot of clean up to do and not exactly sure if that makes them more competitive or less competitive.

Is there any opportunity for you to take some of their customers?

Well we compete everyday.

Okay, and then I would just echo the fact that your stock is extremely cheap right now, just based on book.

Does that make you a buyer, oh sorry.

And you're under levered and I'm confused why the board wouldn't be more aggressive about doing a more significant recapitalization of the company.

Okay, now as I indicated again, Debra, we laid out a fairly extensive use of capital for them over the next 2.5 years. As I indicated earlier, we had broad discussions about everything and the best use of the capital as determined by the board was to use our capital to expand our locations.

Okay, thank you.

You're welcome.

(OPERATOR INSTRUCTIONS)

Okay, there are none. I guess this concludes our formal comments and I want to do a couple of things. Apparently, we had a little problem with the webcast at the start of this. I want to let everybody know that the webcast is now working. A full replay of the webcast will be available 90 minutes after the conclusion of the call and as a reminder; it is our policy not to provide forward-looking earnings estimates for the upcoming quarter or year and not to endorse any analyst sales or earnings estimates. We anticipate releasing our fourth quarter 2007 earnings in early February and this concludes our call and again thank you all for your interest in Olympic Steel.

Once again, this does conclude today's call. Thank you for joining us and have a great day.