Olympic Steel Inc (ZEUS) 2007 Q4 法說會逐字稿

Good day and welcome to the Olympic Steel Fourth-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, CEO and Chairman of Olympic Steel. 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 again all of you for your participation and interest in Olympic Steel and let me remind you that forward-looking statements on this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please refer to our SEC filings for further information.

We are excited about passing the $1 billion threshold in annual sales for the first time ever in 2007. We are also pleased with our 2007 financial performance in a steel year that I would characterize as extremely volatile. For most of 2007 we saw weaker shipments, cautious buying, and declining pricing, especially in stainless steel. I am especially pleased with our ability to grow our market share, strengthen our balance sheet, pay down debt, and invest in facility space, equipment and new technologies.

In a tough market, we were able to deliver and achieve our third most profitable year in the Company's history.

For the fourth quarter our sales totaled $236.1 million, which is 4.4% higher than last year's fourth quarter sales of 226.1. For the full year of 2007, our sales totaled a record 1 billion point -- I guess, how do you say that? -- $1.03 billion, which is 4.9% higher than last year's sales of $981 [million].

Our fourth quarter net income increased to $4.5 million or $0.42 per diluted share compared to net income of $3.8 million or $0.35 per diluted share in last year's fourth quarter. For the year our 2007 net income was $25.3 million or $2.35 per diluted share compared to $3 -- 31 million or $2.92 per share in 2006.

In terms of volume we shipped 291,000 tons in the fourth quarter compared to 272,000 tons in last year's fourth quarter which equates to a 7.1 increase. For the year, our tons sold totaled 1.25 million in 2007 compared to 1.27 million in 2006. The annual shipments decline at 1.4% compares favorably to the 6.8% drop seen in industry wide service center shipments in 2007, as reported by the Metals Service Center Institute Metals Activity report.

Our 2007 decline was entirely in the toll processing area, due to lower automotive processing demand in Detroit and Georgia operations. Our direct sales market share actually grew in a very challenging demand environment as our 2007 direct shipments increased by 3.1% over 2006.

During the fourth quarter we continued to improve our already strong balance sheet by reducing our debt by $16.7 million with a debt to equity ratio now of .06 to 1. At year-end, we increased our shareholders equity to $24.56 per share.

Turning to the market, steel prices are rapidly rising and it doesn't seem to want to find a ceiling due to a lack of inventory in supply chain, escalating global steel input and freight costs, solid global demand for steel, and a weak U.S. currency. As I stated in our release, we see these conditions remaining for the foreseeable future.

The rapid and steep escalation in prices -- again, as I said, which doesn't seem to want to find a ceiling -- combined with the banking and credit and cash flow challenges of the marketplace will place tremendous stress on many in the steel supply chain. Those who are not financially strong may not be able to weather the extraordinary pull on working capital that faces the industry as we enter into 2008.

Olympic Steel's strong balance sheet, $110 million of credit line availability, and proven working capital management principles provide us with the unique opportunity to fully participate in this steel market while simultaneously investing in more facilities, equipment and technology in 2008. Later in the call David will review our significant growth plans for 2008.

I'm also pleased to report that Olympic Steel's Board of Directors has approved a regular quarterly cash dividend of $0.04 per share to be paid on March 17, 2008, to shareholders of record on March 3rd, 2008.

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

Thanks and good morning, everyone. I will comment on some of the financial numbers that Michael has not yet covered. Our strategy to provide value-add solutions for our customers continues to manifest itself in higher gross margins.

We increased our margin per ton to $162 in 2007 from $159 per ton in 2006. This was achieved in the declining still price environment for most of the year.

EBITDA for the fourth quarter totaled $9.8 million compared to $8.8 million in the fourth quarter of 2006. For all of 2007, our EBITDA totaled $52.3 million compared to $62.6 million last year.

Looking at our operating expenses they totaled $40.9 million in the fourth quarter compared to $35.2 million last year. For the year, expenses were $158.4 million in 2007 compared to $146.5 million in 2006. The annual increase is due to the inclusion of a full year of our North Carolina fabrication operation, which was acquired in June 2006, and incremental costs associated with the new IT system which -- project -- which did not start until July 2006.

The increases in the fourth quarter expenses were primarily due to the 7% increase in shipments in some of the growth initiatives we made in facilities and equipment.

As for our IT system project it does remain on plan and on budget. In 2007 we incurred about $2 million of project expenses that ran through the income statement while another approximately $1.8 million was capitalized and sits on the balance sheet.

Interest expense for the fourth quarter of 2007 was $299,000 compared to $1.3 million last year. Interest expense for all of 2007 was $2.8 million versus $2.7 million in 2006. Our effective tax rate for 2007 was 37.6% compared to 37.2% last year. We expect our effective tax rate for 2008 to approximate 38%.

Now taking a look at our balance sheet, we ended the year with $88 million of accounts receivable which is down $21 million from the end of the third quarter. The low receivable level was mainly due to seasonally lower sales in the fourth quarter compared to the third quarter. Our receivable day sales outstanding remain very strong and consistent at 38 days in both 2007 and 2006.

Our inventory totaled $178.5 million at December 31st which is $6 million higher than where we ended the third quarter. We turned our inventory an average of 4.7 times in 2007 which was up slightly from 2006. As Michael talked about earlier, the impact of the escalating steel price environment will significantly increase our accounts receivable and our inventory going forward as we enter 2008.

We reduced our debt by $8.3 million during the fourth quarter and we ended the year with only $16.7 million borrowed and approximately, as Michael said, $110 million of unused availability under our credit agreement.

We spent $12.5 million in CapEx in 2007 and we have budgeted to spend significantly more in 2008 and David is going to talk about those spending plans in more detail in a few minutes. Our current quarterly dividend payment of $0.04 per share equates to an annual cash payment of $1.7 million based on our current shares outstanding. Our capital structure remains strong and flexible. Our debt to equity ratio, as Michael had said, is 0.6 to 1 and our trailing 12-month debt to EBITDA ratio is 0.3 times, while our shareholders equity per share did increase as Michael said to $24.56 at December 31st.

I will now turn the call over to David.

Thank you, Rick, and good morning to everyone. Thank you, Michael, also.

Our theme for 2008 steel market is flexibility built around our balance sheet strength as both Mike and Rick had indicated. While the credit crisis and dramatic escalation in steel prices that Mike referenced earlier will constrain many in the service center industry this year, we are positioned very well to take advantage of the investing opportunities this year 2008.

The strength of our balance sheet and our proven working capital management ability will allow us to participate fully in the buying and selling of steel in what we consider this high-stakes marketplace.

Concurrently, we are planning one of our largest capital spending years in recent Company history. This spending will be judiciously and strategically focused, directed towards value-added processing and additional equipment; gross margin expansion; and location penetration and additional geographies.

Let me quickly review our 2007 spending followed by our plans for 2008.

We were very active in adding value-added processing capabilities in 2007. Our investments in 2007 included the completion of our 54,000 square foot addition to our existing facility in Bettendorf, Iowa, which I'm proud to say we are on time and on budget. We began operating from the new space in November of '07. The new area provides more production space to serve our customers from this facility which already houses a temper mill, multiple laser lines. The additional space equates to additional tonnage capacity for this year.

Again, in 2007 was a year where we quickly wrapped up and equipped the 150,000 square foot building we purchased in Chambersburg, Pennsylvania in 2006, which is our fabrication shop -- the additional building if you will remember. We installed a new high definition plasma machine, welding and painting capabilities and relocated our machining operations from our original Chambersburg facility which we continue to maintain. We now perform first stage plate processing in our original Chambersburg facility as I just mentioned and the downstream value-added welding, painting and kitting from our second Chambersburg location.

We are also very proud of the job that our people did in transforming the fabrication operation we purchased in North Carolina into a premier, value-added facility for our customers in 2008. 2007 was a year of total re-engineering of this operation. From the hiring of a new management team to replacing old equipment with new and completing a significant facility upgrade during the fourth quarter.

We held a rededication of this facility and a customer open house in the fourth quarter of 2007. This facility is now providing the service excellence that our customers have come to expect from Olympic Steel.

Our new stretcher leveler (inaudible) to be located in Minneapolis coil facility is being built and is now on scheduled to become operational May of 2008. This equipment will serve customers with high-quality flat sheet products as well as feed our downstream laser equipment and free up more processing time on our Iowa temper mill which is currently running full.

We installed a new large bed laser in Cleveland through the fourth quarter and Cleveland now houses four big bed lasers.

Finally we continue to successfully roll out a program to operate our own trucks. Following the success of operating our own trucks in Pennsylvania, we added transportation capabilities from our Cleveland operation in the third quarter and from our Minneapolis operation in the fourth quarter. Adding in-house transportation services is a critical piece of our value-add strategy as it enhances our productivity and our customer service while enabling us to better control our costs.

As I said our growth and expansion plans for 2008 are substantial. These plans include the following -- completing the payments and installing the stretcher leveler in Minneapolis which will add tonnage capacity in the second half of 2008 and as I mentioned earlier will be operational in May; adding two or three new greenfield value-add locations in the Southeast and Midwest. We would hope to announce at least one of these new locations in the next month or two. Sites will be located within close proximity of certain key customers that require multiple JIT shipments per day of highly engineered parts. We continue our investment in our IT system development and implementation which, as Rick indicated, is progressing very well. We will add numerous pieces of value-add equipment such as lasers, plasma cutters, machining centers, shop blasters and automated equipment.

In 2008, we will also explore making an investment in a third temper mill site for our Company as our temper mill lines are currently running at capacity. We will also consider acquisition opportunities that may present -- may be presented which are in the context of our strategy.

In summary we are pleased with our 2007 financial performance, the performance of the management team and our position in the marketplace. Our strong balance sheet and working capital focus allow us to fully participate in the current escalating steel pricing market and tightening credit markets.

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

(OPERATOR INSTRUCTIONS) Charles Bradford. Bradford Research.

Good morning. Could you talk a bit about what you are seeing for second quarter pricing compared to the first quarter? You should be I guess placing orders about now.

We are seeing prices move up anywhere from another $35 to another $35 to $60 a ton. So we had an initial $30 a ton increase announced by AK. I think you are familiar with the fact that Newcor came out with a $60 rebuttal to that $30 and then AK came along and announced them going up -- added the extra $30 there.

So we are seeing anywhere from $35 to $60 a ton increase so far. That's just for April. Nothing for May or June, although now our (inaudible) has announced a new price book and there are some extras that are elevating on June 1st. So we see increased prices on flatroll.

Well what about plate?

Same thing.

Same thing.

Same thing.

Same thing. Okay. Thank you.

Nate Carruthers with Applebaum Research.

Good morning. I guess just a question on imports. Given the rapidly escalating prices that we are seeing in the U.S., have you seen any increase in the amount of foreign offerings and what is the current spread between domestic and foreign?

We see very few foreign offerings and the foreign offerings that we do see are even higher than the elevated domestic price.

All right. And then you said that your inventories increased on a dollar basis in the fourth quarter. Can you let us know if it increased or decreased on a tonnage basis and what are your expectations for first quarter? By the end of first quarter where do you see inventories?

Well you know, I would tell you the answer to your question, the tons are about flat. I mean, you know, within a margin of their, I mean not appreciably different in tons at the end of the fourth quarter. Again some of it is product mix issues as it relates to its stainless versus carbon and higher value-added versus basic carbon, but relatively flat on inventory. You know, again, our inventories are predicated on our sales forecast and we try and keep it in balance relative to certain days sales of expectation.

I would tell you that sitting here in mid-February that our expectation is that our tonnage at the end of the quarter would probably be similar to where it was in the fourth quarter, but certainly it would be higher dollar value.

All right. Thank you very much for the color.

Tim Hayes with Davenport & Co.

Good morning. Just two questions. On your '08 expansion and projects, what kind of CapEx are you budgeting for the year?

In terms of the budget we have about $40 million in there. Obviously depending on the timing and when the payments go out, there could be some play in that, but $40 million versus the 12.5 that we spent this year.

Which does not include acquisitions.

Right, certainly and the maintenance? What would you consider a maintenance CapEx?

Well we -- maintenance CapEx for us is just normal stuff to keep things going. It is in the 3 to 5 range. $3 to $5 million range.

And last question is -- certainly had some very good volume growth which was more than we expected. Looking at some of the costs though on a per ton basis, the warehousing and processing cost per ton seemed to be bubbling up. Could you give us some color on what may be going on there?

Yes, I will, I mean, Tim, what's happening is we are really shall we say morphing into two businesses, which is the old traditional service center business and sort of what we call fabrication is really sort of a manufacturing business. So as we ramp up more into the value-added processing with facilities like Chambersburg, particularly in our North Carolina operations, that in fact those cost structures are traditionally much higher than you would have in the traditional service center. What you also get from that is higher gross margin dollars.

So when we deliver pieces parts, it's a lot of expense without a lot of tonnage, but it is a lot of revenue in terms of the gross margin line. So as we were -- as David indicated migrating our Carolina facility from what we bought into what it is today, we were absorbing a lot of costs for the re-engineering of that and didn't get the appreciable accretion that we would like for '07. But we are seeing that significantly different for '08.

That makes sense. Thank you.

Aldo Mazzaferro with Goldman Sachs.

Based on the numbers, you missed my fourth quarter number pretty good, but I feel like raising the '08.

Thanks. It's a different market, there's no doubt.

I just had a question. The way volume in the market has been, fourth quarter being weak, I know you did gain market share, but do you think the sluggishness may have impeded your price realization a little bit by kind of delaying turnover and things like that?

I would tell you that in the fourth quarter there were still a lot of skeptics around the price increase. We were not one of them. So as we were out in front of raising our prices to replacement costs because we felt from a cash perspective we needed to do that to find these escalating prices, there's no question that we found some of our competitors not fully realizing the price that they might have gotten in the fourth quarter which caused some of the spot market erosion from a tonnage perspective. And December was a particularly weak shipment month.

But again I think that we were underpriced, but we were much more concerned about having material for our customers than getting the volume them out the door at a lower market price in the fourth quarter. So (inaudible) we have a responsibility to our major customers to make sure we don't run out of steel for them in 2008.

Right. Then if I could ask a new question to Rick. The way your cost of goods sold per ton seems to be creeping up in your average selling price per ton. I was thinking on a FIFO accounting basis, wouldn't you expect that to -- those trends to reverse a little bit as you go over the next few quarters where selling price would get ahead of the cost of goods sold on a trend basis?

Well on a trend basis, certainly, as the prices are escalating like they are in the market, absolutely you are going to have a bigger gross margin spread. You know we don't really manage our inventory on FIFO or LIFO. I mean, we identify average cost and we work on turning our inventory and matching it to the sale.

But absolutely as we enter the first quarter here, the market pricing versus the cost, we are going to have a bigger spread in the gross margin line.

One final question, Mike, on a kind of big picture basis, the steel prices are exceeding in some markets, already exceeding the '04 highs and U.S. is getting close. Obviously the U.S. market is much weaker demand-wise than it was in 2004, but how do you see the global environment compared to 2004?

There's no question, it's a different universe. This goes back to 2001 when America stopped and the rest of the world kept going. And so when you look at the global demand in China, India, the Black Sea, Europe and South America, there's a much more robust consumption market in literally every market other than North America than it was in 2004.

And so when you look and compare all of the different segments of the market of who is a net importer and who is a net exporter, I mean really almost every market is a net importer other than Asia. And as China pulls back and you saw the numbers of exports from China, net exports were only 2.4 million, I believe, in January from China. And the big question is, if everybody is a net importer and very few people are a net exporter, where is the steel going to come from?

There's some genuine concern that the overall global demand is outstripping the capability of the supply right now.

Right. Your comment on -- out to the foreseeable future, how far out is your crystal ball, Mike?

Well if my lawyer was in the room he would tell me my crystal ball goes to tomorrow. But the lawyer isn't in the room so you know, clearly, historically we have a pretty good sense of six months forward. You sort of know the quarter you are in and the next quarter out.

So there's no question as we get into the third quarter of this year, there's lots of macro factors, whether you can just go to the simple ones of the U.S. election and who the candidates are and their programs. I mean you've got situations that say things can change, but clearly for first quarter, second quarter, it looks like momentum is there for third quarter, but third quarter is always a soft shipment because of the days for holidays.

But clearly we don't see from a global perspective. When you look at a 65% increase coming out of the iron ore kinds of mining to China, it doesn't look like cost structures are going to come down.

Right and of course the things you mentioned on the inventory build being delayed by financial concerns and other things, that could extend the cycle too. Would you agree with that, you think?

Yes. I would tell you that from a traditional basis six months is probably a good forward look. It looks like with all of the tsunamis that are occurring, particularly with cash flow and working capital needs, this thing could extend -- could extend, but it's not really within our forecast into '09 with a rising purse environment.

Thanks for all the detail on the conference call. It's great. Thank you.

Bob Schenosky of Jefferies.

Thank you. Good morning. Mike, you noted a challenging environment for '08 relative to some of the weaker competitors. With prices being driven by supply factors, can you discuss specific areas related to demand strength and/or demand weakness?

Certainly anybody involved in the [food] -- I will let David comment a little bit on this. There's no question domestic automotive still remains very challenged in almost every way possible. Financially, engineering-wise, overall demand.

I mean that's -- so you've got the new domestics or transplants that will have probably a reasonably good year. There is no question that the consumers markets, big box store. There's some risk around those cheap products that those guys sell. When you look at John Deere's market and you look at what they claimed, there's no question that people that are engaged in the food industries, around the food industries are going to be very strong this year.

That is a global pull and alternative energy still remains very strong and the military still remains very strong. So there are some challenges around the traditional automotive appliance universes. There's some sort of nontraditional military build and alternative energy build and maybe even CGT.

There's no question oil -- that market should remain strong as the price of energy is high. So we are in -- those markets that we serve which are more towards the heavy industries look a lot better than the consumer-related industries.

How big can alt energy be free guys this year?

For alt? Bob, David here. It's pretty strong for us. Alternative energy is one and is a strong market as Mike indicated and as you just asked. Also the energy market, coal mining and agricultural are very strong.

So the mining industry, whether it is iron ore or whether it's coal for heating purposes or for coking purposes, very strong environments. And we participate in the machinery there. As Mike well says, the traditional marketplaces that you see being soft which are the old domestic car manufacturing, residential construction and appliance that applies to that, those continue to show some weakness.

Although we have seen -- we have seen the inventories of equipment that go to the manufacturer of residential construction, we have seen that those manufacturing -- those equipment manufacturers have in fact gone through their inventory or in back into a build position. Agriculture is very strong and ethanol is strong for us. Continues to be strong, wind towers and so forth.

So our marketplace is really not falling backwards at all. We are seeing a tremendous amount of strength.

David, how big would -- is potentially alt energy in '08 as a percent of the total? Ballpark.

I can't tell you what the percentage is. I can tell you that there is more demand for plate, especially with wind towers and, again, with mining equipment.

We don't have that handy, but we can certainly try and get back to you on that.

Thanks, Mike, and one follow-up if I could. With all the price increases that we're seeing going forward, strategically if you can discuss how you are going to be handling your buying patterns? Meaning are you going to match it with customer demand? Are you going to be buying ahead and building some or because of any potential risk in the second half could you potentially be running lean into the second half?

No. I think we have a very good management system that we don't want to break regardless of market. It has worked for us since 2002. It is really sort of a formula-driven, based upon last year, last month and forward projections. So regardless of the marketplace, we are much more concerned with working capital turnover and gambling on pricing.

Terrific. That's what I wanted to hear, Michael. Thank you.

I'm glad I answered it the way you wanted to hear it. We are not changing the way we do business.

Mark Parr with KeyBanc Capital Markets.

Good morning. Couple questions. First I would like to talk a little more about margin upside opportunities in '08. Could you compare what you're looking at in the context of what happened to your gross margins in '04?

Wow. We haven't done that.

I mean you had 600, 700 basis point improvements fairly rapidly emerge in '04. I just tried to think about what is different this time that could make that different?

Well, what's different this time Mark is -- there's a lot of things. One is global demand. Two lack of liquidity; three, the entry point of inventories build started out low -- and in '04 the price increases came around surcharges not increases. They weren't necessarily driven by this really tsunami of global commodity pricing.

So I think the mills are much more sophisticated in terms of how they handle their order book on an entry point in '08 than they were in '04. I think people just didn't realize how to raise prices as well as they do today.

And, clearly, you have a much more global ownership of steel mills. So the United States today I think is a much less significant market in world consumption than it was. Just look at the China steel difference in '04 (multiple speakers)

Yes is really remarkable in the last four years.

Both supply and demand.

You think that those differences that you mentioned could create similar margin upside for your business in '08, relative to '04?

The answer is, yes, it could. I mean but that -- yes it could. The difference now is at least in '04 you saw sort of a panic of demand. People weren't sure they could get steel. We are not in that environment yet.

So right now, the margins -- you are still seeing people that are very skeptical. I mean, it is really remarkable with the data that is out there that there are still so many people skeptical about price increases in the steel market. It's remarkable to me.

Have you seen a significant change in the nature of your business from contract versus spot basis? '08 versus '07? What does the contract mix look like, relative to '04?

I will attempt to answer that. Our contract business is less than it was in '04. The mills gave us plenty of advance notice of these increases starting August 20th and then November 5th and December 11th. So there was plenty of advance notices. We had the near-term experience of '04 so we think we are operating smarter than we did in '04 early on because of the near-term experience.

We supported a number of traditional contracts and did not enter into any new contracts in the back half of the year because we saw inventories dropping dramatically, I think 13 successive months. The statistics showed and we saw imports pulling off and we also were signaled by our strong suppliers that they weren't interested in contract support at the same levels as we saw in '03, going into '04. So that the proportion is slightly smaller.

So it doesn't really seem as if there's anything that would suggest that your -- that kind of the natural consequence of things would reduce margin upside. If anything you might even see things move up more aggressively. I think I'm hearing what you're saying.

But one thing, another thing, David, I'm curious about I read trade press that carry steels and liquidation and I am just wondering if that liquidation is having any positive or negative impacts near term or, say, toward the second half of '08. How can you talk about that?

It was in the press that I believe tomorrow is they are shutting some of the operations down. Can't really comment specifically about [Cary] except we've always been a believer that the Detroit Service Center market was a little slow in "professionalizing" and I think we like to say is the professional is replacing the big personality up there. And I think this is just another transition here, and so we think that there are better opportunities in that area. We have seen improvement in our automotive performance. We are a smaller -- we have a smaller automotive performance as you know and we've declared -- we've shut down the Olympic Laser processing and we shut down our minority venture. And we focused strictly on our -- what was a 1995 purchase and we are performing better and we think there is better opportunity for us with fewer participants. With Cary leaving, that makes it a fewer participants up there.

Also as Mike and Rick both indicated, the credit crunch is really going to take a toll this year. A big significant change between '04 and '08 is access to capital; and if you will remember in '04 we grew the business in terms of tons. And we also managed to lower our debt and there's no reason in the world why we wouldn't be able to do the same thing.

I mean that's just why I was bringing up the Cary thing because I at least -- I never saw a balance sheet there, but I would imagine that he was fairly heavily leveraged and he was not the kind of market participant that priced on replacement value.

You know what? We are so busy running Olympic (multiple speakers).

All right but at any rate we are both kind of saying the same thing and I just -- I'm really looking forward to seeing how the progress unfolds for '08. Good luck on making it happen in a solid disciplined way.

Thanks.

Thank you.

Nat Kellogg with Next Generation.

Nice quarter. Just a couple of quick things. I think most of my questions have been asked. You guys are talking about adding some more transport capabilities. I mean what percentage -- obviously, you want to keep the flex capabilities on an outsource basis. I mean what percentage of that sort of transport do you guys want to bring in-house versus leave sort of in that flex type of opportunity?

A lot of these questions are falling on the operational side (multiple speakers) getting a disproportionate amount of it, but let me answer that. Our strategy is to be closer to the customer. We think that the day of the long-term or the automatic (multiple speakers) over the road, the long haul, as Michael just corrected me, the long haul driver is a perishable commodity. Strategies of being able to afford long distance travel were based on $30 barrels of oil, not $100 barrels of oil.

So we are closer to the customer today. We want to continue to get closer to the customer and we want to continue to control our traffic and our distribution. We find that we have a better ambassador when we in fact are controlling the driver is an employee of Olympic and the agreement is maintained by Olympic. So we will continue to grow that participation as we get closer to the customer and give the customer the ability to be a lean manufacturer.

But we are not at 50% yet. I mean we are not even I don't even think we're at -- in answer to your specific I don't think we are even at 25% yet of -- .

But we will expand more. We can see this running up to be probably a 50-50 percentage somewhere down arrived back there's no real target of what's the right amount. It's really about being able to do small deliveries on a quick-turn basis.

No that is exactly it, so that is sort of helpful. Ideally maybe get half to half and now you are below 20.

Let me also clarify this for you, that every new facility that we do put up will have its own trucks because those facilities are close to the customers. And those customers are targeted and they are all part and we are in a partnership with them. Every new facility will have Olympic trucks.

Okay. You guys have talked about adding a new temper mill. Have you guys looked at -- is there an opportunity or have you guys -- I'm sure you have but I'm just sort of curious about what your thoughts are of trying to buy, acquire somebody that's got one that you feel is underutilized or what --? I mean, is that an opportunity out there and why wouldn't that work or might that be an opportunity?

Most of the people who have temper mills are usually bigger guys. It's not the small guys who have temper mills because temper mills are very expensive piece of equipment. So, yes, I mean we have relationships with all of our competitors in that regard so there's been any number of conversations over the years. But the people with the temper mills seem to be shut -- what we would say at the higher end of the spectrum and they are not letting go of their temper mills cheap.

So it really is the greenfield opportunity probably what is going to have to happen there? It's not like you might be able to like acquire one from a guy who's having some trouble there or whatever?

Not yet.

That's helpful. Then just obviously I mean if I look at the results, I mean, the volume is for me that's where I was pleasantly surprised you guys (inaudible). Do the guys have a sense of -- is it just because you happened have a better align with the customers that are in markets or you feel like you are being able to take some share from people or the fabrication side of the business is helping you when business -- I mean, why do you guys think that you have been able to grow volumes pretty amazingly in the fourth quarter?

Our answer to that is E. All of the above. We think we're taking market share because of our on-time and quality performance. We think we have good markets by not luck but by choice, as we have migrated away from big box store suppliers in the automotive and appliance universe, and moved into the heavy, highly engineered product lines. That's all true and, three, we think the fabrication gives us some unique capabilities as well. So I would tell you it is all of the above.

Then on the IT side. You guys are still set to have a go live trial run before the end of the year?

Yes.

And that is probably going to happen in what Q3?

Yes. Right now we are planning on a Q3 to start it.

There are some issues around the completion of what Sarbanes requires you to have done from a testing prospective. We don't expect this to come in quarter two. We have to do it in quarter three or we won't be able to apply to Sarbanes. So we are right on schedule for that. There is at this point -- lots of people working really hard to get sure that this is done, but it's -- it may even be a bigger conversion than we think from original plan, but, yes, Q3 would be the initiation of a first stage of the implementation of the new system.

Because correct me if I'm wrong because (inaudible) Michael, I think you said in the past you're going to try just on the stainless side of the business and then shut it down and then if it all goes smoothly launch it for Company wide for -- in '09?

(technical difficulty)

On the stainless side of the business, I realize it's not a huge business for you guys on a tonnage basis, but obviously on a revenue basis it is contributing and just obviously what's going on over the year with nickel prices, can you just give the a little sense of where you guys see this stainless business now and how it looks going forward. And I know there's been some talk about some sort of glut in the aerospace market and whatnot. I'm just sort of curious what you guys think about stainless going forward and how it performed for you in Q4?

Again, I'll comment again. Stainless, you know we enjoyed the surcharge ride in the early part of '07 and we understood the downfall that came along with it. So we reduced our inventory proportionately. We will continue to grow that marketplace. It was a good growth year for us last year. We are committed to the product line. It does complement some of the same marketplaces that we talked about. We have a nice presence in the ethanol marketplace. We have a nice presence in the energy marketplace. We are at where it is relevant and in food service where it's relevant.

So we continue to see growth there and again, as you well know, there is a tremendous amount of flexibility, I would characterize it with the surcharges. So we have seen up-and-down. We are managing that inventory with the same sort of vigor that we manage all our inventories.

And just going forward, obviously the price of increasing (inaudible) direct effect on stainless, but you guys are optimistic about your opportunities in stainless in '08, I would assume?

From a volume perspective the answer is yes. From a pricing perspective your guests is as good as ours (multiple speakers) go. It seems like it has flattened out, but it could go up or it could go down. We are not hedging as we play it pretty short.

Michael is 100% correct and but there is a big change looming, and the big change looming is [Tissan], is Tissan's operation coming to Alabama. I mean that's roughly one million tons of production that's due on somewhere in 2010, 2011. So that does change the landscape.

We have a nice relationship with them. We have a nice relationship with North American Stainless. So as we do with AK. So we are very happy with our position there.

That's all I got. Appreciate it and nice quarter.

Charles Bradford with Bradford Research.

I have another question for you in regard to supply of steel. It is pretty clear that [Serviceall] had some big problems. Heard a lot about the problems at [Arsor Middle] especially in Cleveland. Are they are other constraints or accidents that maybe we haven't heard so much about that have affected supply domestically?

I think you hear pretty much about everything that's out there globally. I don't think we hear about anymore than you do, but quite candidly there has been some lethargy in terms of delivery from virtually all of the producers. You nominated a couple. Newcor has been better at it, NorthStar is better at it, but there has been some problems with blast furnaces and there has been some problems weather-related that have retarded delivery. But other than that I don't think that there is anything that you really haven't heard of that we've heard of. There's nothing surreptitious out there.

Bob Richard. Longbow Research.

Good morning. I appreciate the slowdown in the contract business with its automotive exposure in Detroit and down in Georgia. Can you give us some color as to what your personal take is, Mike, on when we should see some turnaround? I mean 25% year-over-year decline in tolling business is pretty significant and I would imagine you have plenty of mill time to to handle that.

I wish I was that good, Bob. Domestic automotive has very real challenges. Do I see the consumer going out and buying the Chevrolets and Fords and the Chryslers? I mean they have lost such an appeal over time that there's no great anticipation that they are going to have a banner year against the new domestics or the transplants.

So, again, we've geared down ahead of the decline. It is all incremental business for us. If we get it, when it comes back I mean it's going to be a factor of the issue that Mark Parr brought up is is the guys in Detroit start going out of business, we may pick up some residual benefit from the lack of competitors in the market. But when domestic automotive picks up (technical difficulties) I have no idea. David?

Let me clarify something for you on the toll processing side. It's true that we did decline and a lot of it was with the current customers we are doing business with, but let me assure you that we are not resting on our laurels. We have a very active toll processing solicitation and professional representation; and where automotive and/or appliance may slow down we're picking up additional businesses and new businesses. So we are not sitting on our hands waiting for an industry to come back. That just doesn't work for us.

I appreciate that, Sir, and if I could maybe have you extrapolate, would we expect '08 tolling volumes to be more in line with '07? Or something a little more healthy than that?

Our expectations are to grow. (multiple speakers) Our expectations are to grow it and do what it takes to grow that piece of the business. By the same token, as you well said, as our direct tons continue to grow there's less of a need for toll processing and our direct tons did grow last year by over 3% and we expect to grow them again. So there's less of an emphasis on toll processing as we fill that equipment up with direct sales.

Thanks for the color and best of luck.

(OPERATOR INSTRUCTIONS). Sal Tharani with Goldman Sachs.

How are you seeing the lead times from the domestic guys?

Lead times are really sort of, really, I would tell you is almost passe. There are booking opportunities and there are programs. So it is almost use the verbage they don't like to hear which is 'allocation'. And so the order books are opened up and when they're opened on a month-to-month basis, if you have an arrangement with the supplier, you book your tons.

We have those arrangements. And so we really see it, them solving their order book on a month-to-month basis.

Are they still taking March orders or you think they are pretty much full?

March is done.

March is done. April is open. May has not yet opened.

Now in the price increases, just a quick question is that when a mill announces a second price increase for the same month, like I think AK did, they did 35 something and they match the Newcor number. What happens to the orders you have already placed on the previous (inaudible)? Do you have to -- when do they raise the price on existing orders you [shall place] for that month?

Well, that's the intention of these increases. It was the intention of March when Arsor Middle announced on January 8th a $50 increase and then on the 15th they came back with a subsequent $30 increase. When that affect was 80 to expect the 80 for March, regardless of what you book.

The same is true here in April as Newcor led with 60 of -- sorry AK led with 30, Newcor followed with 60, AK came back and added the additional 30. The expectation is that you'll pay the full 60, or you won't get the steel.

Okay. And any comments on Newcor's move to open a service center in Mexico? Do think this is the beginning of something new?

It's definitely the beginning of something new. I mean obviously we read the same release that you did. It doesn't indicate -- you know, it's a pretty big investment in the processing center. I'm not exactly -- they didn't indicate what markets they choose to serve on that. It's pretty broad in terms of the kinds of processes they are going to do without an indication of who is going to be for.

So is this a strategic plan of Newcor moving downstream? Yes, probably. I mean they bought the Harris Steel for the pipe and tubes. They like that distribution market. Clearly, they moved into Mexico with a distribution center. Will they move into the United States? Your guess is as good as mine.

Lastly, Mike, your comments on the credit squeeze which is going to keep some of the weaker balance sheet service centers off [pay] or they won't be able to accumulate too much inventories to combine with the concern in the market or in the (inaudible) market of economy.

Do you think it is fair to assume that we may not see a huge inventory bubble at the service centers in this environment versus what we have seen in the past, when prices start to rise? And we see this tremendous -- and obviously combined with the lack of imports?

Yes. The answer is yes to your question.

Mark Parr with KeyBanc Capital.

I just had a follow-up. I was wondering if you were hearing any indications from May pricing at this point, relative to April?

The answer is on the base price basis there has been -- there has only been one indication and that was Mr. Middle was quoted. I believe it was the 14th, it was a week ago today, saying that if iron ore contracts move up to 70%. And of course they are at a bargain at only 65%, he said he was anticipating raising prices by 10 to 15% here in the U.S. and in Europe.

So that was one. And then of course, there's a new published price, new book price from Arsor Middle with some extras increasing in June 1. So those are the two -- those are at least two indications.

There's still a significant gap between the U.S. domestic price and sort of the Black Sea global price, right.

I hear you. Yes. Absolutely.

So with global ownership when you have Russians and the Indians and Mr. Middle and even U.S. Steel as international steel producers, I can imagine why they want to have a cheap market in the United States.

So my guess is and our feeling is, that with the gap that is in the rest of the world, that the U.S. pricing will probably continue to move up until that gap gets pretty narrow.

That's very well said. Thank you very much.

There are no further questions at this time.

Okay, thanks. 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 of the analyst sales or earnings estimates. We anticipate releasing our first quarter 2008 earnings around April 30th. And this concludes our call and we really want to thank you for your support and interest in Olympic steel. Bye.

That will conclude today's conference call. We appreciate your participation. Have a good day.