Olympic Steel Inc (ZEUS) 2008 Q1 法說會逐字稿

Good day, and welcome to the Olympic Steel First Quarter 2008 Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, it is my pleasure to turn the call over to Mr. Michael Siegal. Please go ahead, sir.

Yes, good morning everyone, 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 for your interest in Olympic Steel. Let me remind everyone 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 Olympic Steel's SEC filings for further information.

We are pleased to report record earnings for the first quarter of 2008. Our first quarter sales totaled $275 million, up 16.5% from $236 million recorded in the fourth quarter, and up 6% from the $259 million of the first quarter 2007. Year-over-year, our volume increased by 1.2%, or 315,000 tons in total, and our average selling prices increased 4.7%.

In comparison to the fourth quarter of 2007, our shipments increased by 8% while prices increased by 7.6%. Our net income increased to a first quarter record of $13.2 million, or $1.21 per diluted share, compared to our net income of $4.5 million, or $0.42 per diluted share, and last year's fourth quarter at $5.3 million, or $0.49 per share for the first quarter 2007.

In addition to strong earnings, we increased our market share in the first quarter. Our total shipment volume inclusive of total processing increased to 1.2% while our direct shipments from inventory increased 2.4%. This compares favorably against the 4.8% decline in the first quarter service center shipments as reported by the Metals Service Center Institute.

We are confident that sticking to our plan of maintaining a strong balance sheet and capital structure, and our every day discipline in managing working capital, is providing us with financial performance benefits. Our position of strength also allows us to invest in our growing value-added capabilities and technologies, and positions us very well for the current market.

Carbon steel prices and working capital needs have risen to unprecedented levels. The price increases announced for the second quarter are even more dramatic causing even greater liquidity needs.

During the first quarter, we actually reduced our debt and slightly increased our inventory turns to 4.7 times. We enter the second quarter with significant borrowing capacity available under our credit facility and an appropriate inventory position, allowing us to fully participate in the steel market that has seen carbon hot roll pricing increase 102% from the beginning of the year to the pricing levels announced for June.

With steel pricing at an all-time high, our strong liquidity position allows us to execute on our capital investment plans. For 2008, we have a capital expenditure budget of about $40 million, which includes new satellite processing facilities like our recently announced processing facility in South Carolina. And our new Red Bud Stretcher Leveler Cut-to-Length line in Minneapolis is expected to begin production hopefully any day, but certainly in the second quarter.

Our outlook for the market is favorable. We see continuing strong global steel demand and rising supply costs sustaining the industry. While there are some overall concerns about domestic demand, specifically in light construction and the auto industries, areas in which we have very low sales concentrations, we are seeing pockets of strength from our customers we serve in the agricultural and heavy equipment, military, energy sectors, and particularly the stock market. We expect second quarter demand from our customer base to remain fairly steady.

Our favorable market outlook is further supported by a weak U.S. currency, which discourages steel imports while allowing some of our larger OEM customers the benefit of exporting their products. Service center inventories remain at historically low levels and rapidly rising energy transportation and steel making raw material costs all point to sustainability in the high prices in the steel market.

As steel prices continue to escalate rapidly and availability of short-term credit tightens through the second quarter, we will remain grounded in our management disciplines in our core values of integrity, respect, and financial stability. We are confident in our position.

We do have concerns that the credit crunch may limit others in the supply chain from financing their working capital levels as prices rise rapidly in the second quarter. We remain keenly aware of the credit and liquidity risks that exist in today's high risk market and we are monitoring customer payment terms and credit lines very closely.

We believe we are appropriately positioned in terms of inventory, value-added processing capabilities, and liquidity, to continue to perform well through the higher-priced and seasonably stronger second quarter.

I'm also pleased to report that Olympic Steel's Board of Directors has approved a regularly, quarterly cash dividend of $0.04 per share to be paid on June 16, 2008 to the shareholders of record of June 2, 2008.

I will now turn the call over to Rick Marabito to comment on some of the financial results in more detail.

Thanks, and good morning, everybody.

Starting with our income statement, our gross margin increased to $210 per ton in the first quarter of 2008. That's up from $152 a ton in the first quarter of '07, and the margin strength is really resulting from higher first quarter pricing and growth in our value-add business. EBITDA for the first quarter totaled $23.5 million and that's compared to $11.6 million last year.

Our operating expenses totaled $45 million in the first quarter, compared to $38 million last year, and the increase there is primarily due to higher performance-based compensation, higher transportation costs, and increased investments in value-add processing facilities and equipment.

Our interest expense for the quarter was $27,000 compared to $1 million last year. Our effective tax rate for the first quarter was 37.9% and that compares to 37.3% last year. And we would expect our effective tax rate for 2008 to remain in that 37% to 38% range.

Taking a look at our balance sheet, we continue to manage credit and receivables very well. We ended the quarter with $120.4 million of accounts receivable and that's up $32 million from the end of 2007. And the higher receivable level is due to stronger sales and pricing in the first quarter and our receivable days outstanding remain very strong. We're at 40 days in the first quarter of 2008.

Looking at the inventory, our inventory totaled $195 million at quarter end. That's up $16.5 million from December 31st. And we turned our inventory an average of 4.7 times in the first quarter, and that is slightly better than our turnover rate for the first quarter of 2007.

As Michael said, we actually reduced our debt during the quarter by $4 million, and we ended March with only $12.7 million in borrowings, and we finished the quarter out with about $114 million of availability under our credit agreement.

We spent $8.1 million in CapEx in the first quarter, and we do have a budget to spend about $40 million in 2008. And in a minute, David will talk about how we are spending that money, and he'll provide us with some details in our growth plans.

Our current quarterly dividend payment of $0.04 per share equates to an annual cash payment of about $1.7 million.

And, finally, our capital structure remains strong and flexible. Our debt-to-equity ratio is now down to 0.05-to-1, and our trailing 12 month debt-to-EBITDA ratio is 0.2 times. And our shareholders equity per share increased to $25.74 at March 31st.

Now I'll turn the call over to David.

Thank you Rick and Mike, and good morning.

As we discussed on our year-end conference call two months ago, our theme for 2008 is flexibility built around our balance sheet strength, flexibility to fully participate in a steel market that has reached pricing heights and credit constraints that are now more dramatic and rapid then we have projected several months ago, as Mike commented just a moment ago.

While the credit crunch in high steel prices constrain many in the service center industry this year, we are positioned very well to take advantage of investing opportunities in 2008. The strength of our balance sheet and our proven working capital management disciplines will allow us to participate fully in the buying and selling of steel in what we call a high stakes marketplace.

Concurrently, we are in the midst of one of the largest capital spending years in our recent company history. As Rick noted again just a moment ago, we budgeted a $40 million capital spending program for 2008. While this is quite a substantial amount, we are spending wisely and strategically on, one, new value-added processing equipment, which we talked about in the past; two, new systems and technology; and three, location, penetration and additional geographies.

Let me review our first quarter spending, followed by some of our future plans. Earlier in April, we announced our decision to expand in South Carolina. We plan on spending about $10 million to build and equip a new 100,000-square-foot facility situated on 35 acres in Sumter, South Carolina. We expect to be operating from this new facility in early 2009. In the meantime, we will utilize temporary lease space to begin servicing customers from that Sumter location.

We should be shipping our first products from the temporary facility by the end of this month, May. The new operation enhanced our processing and fabrication capabilities in the region as we plan to perform plasma cutting, heavy press brake work, and welding from our Sumter site.

We would also like to acknowledge and thank the State of South Carolina and Sumter County for their efforts and support in welcoming us to the area. We're exited about the opportunities to grow our business in the Southeast.

Again, during the second quarter, we also expect to announce the site of another new value-added facility in the Midwest. We plan on locating a satellite within close proximity to certain key customers that require multiple JIT shipments per day of highly-engineered parts.

In our Minneapolis operation, our new Stretcher Leveler Cut-to-Length line will be operational in the next couple of weeks, and we look forward to processing our first coil in the very near future. This was a $5.6 million investment, spread over two years, that was initiated about this time last year. The equipment will serve customers with high-quality flat sheet product as well as feed our downstream laser equipment.

The equipment will also free up capacity on Iowa temper mill, which is currently running full. The stretcher leveler will add tonnage in the second half of the year as production on the line ramps up. It will also allow us to reach new geographies from the Iowa temper mill.

We continue our investment in our company-wide IT system implementation, which is progressing very well. We're on schedule to begin implementation and utilization of portions of the system in the third quarter.

In addition to the startup facilities, we will also consider growth via acquisition opportunities that may be presented, which are in the context of our growth strategy.

In summary, we are pleased with our first quarter financial performance, the performance of the Olympic Steel employees, and our position in the marketplace.

As Michael well said and indicated, our strong balance sheet and liquidity position and our appropriately managed inventory provide us with the availability of steel and credit, two critical success factors in today's market. Most importantly to our customers, we have the access to the steel they need in a tightening and escalating environment, combined with our superior equipment, quality, and service.

We are investing in people, assets, and technology at a time when others in the supply chain are finding it difficult to simply finance their rising steel inventory needs. We are confident that our strong operational disciplines and the investments we are making in our future will allow us to benefit from the opportunities ahead.

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

Thank you. (OPERATOR INSTRUCTIONS.) Bob Richard, Longbow Research.

Good morning, and thanks for taking our call.

Sure, Bob.

If I could discuss cost real quickly. Freight out, if my math's correct, your cost came down appreciably, which is a good thing to see, especially in this increasing fuel and cost environment. Is that benefits from your trucking assets, or is that scale, or could you illuminate that a little bit?

I would tell you, Bob, it's predominantly because of the control of bringing ownership into some of the trucks that weren't here previously. So, I mean obviously we're seeing the same escalating costs on fuel everybody else is. But, yes, I would tell you that bringing a fleet of trucks into the house of Olympic Steel is showing benefits.

Great.

And then, warehouse and processing charges come down significantly also on a per ton basis. Is that mostly scaled-based volume? Is that what's driving that?

Yes, I mean -- Bob, it's Rick. That would be on a per ton basis. Obviously, our tonnage is up there. And aside from some of the normal compensation year-over-year increases, we've done a nice job in terms of controlling the warehouse and processing costs.

And my last point, Rick, is the SG&A was up, though, slightly quarter-over-quarter. Any insight on that?

That's mainly just, as I talked about in my comments, the effect of our higher earnings and the higher performance-based compensation that our employees are based upon. It resides in Admin.

Okay, guys. Thanks very much, and congratulations on your quarter.

Thanks, Bob.

Thanks, Bob.

Mark Parr, KeyBanc Capital Markets.

Wow.

Hey, good morning.

Hey, Mark.

Hey, great quarter.

Thank you.

Michael, I was wondering if you could give us some more color on your debt strategy. And you would think -- and I mean, we've had a conversation and had a conversation with others about the increasing value of strong financial condition, and you clearly have that.

I guess this is probably as good a time as any to think about maybe using some of that to build market share. You clearly built a little market share in the first quarter. I mean, could you talk a little bit about how you plan on deploying some of your capital availability over the next several quarters? Where do you think the best financial return could be derived from that?

Well, you asked a lot of different questions.

Let's talk debt. Your question first was, "What's our debt strategy?" Our debt strategy is to use debt for appropriate growth mark. It's not to be used for working capital requirements. I mean, with a good working capital discipline, we think that this industry allows itself to self-finance itself.

So, we look at debt as a tool to advance our growth more substantially than just the organic growth of every day business, and we are prepared to deploy that debt at the times in which those opportunities create themselves. So, we're going to have new satellite facilities.

From our hub centers today, we would expect, as David indicated, the one we've announced, at least one more. We are under investigation for a number of new site locations, as well, in a timely fashion to be brought on, so that we can manage them orderly with the appropriate people and with the appropriate customers that will support those new facilities. So, we're happy to use debt in those particular instances.

In terms of your other question which is, "Are we going to use it grow market share?" I think that the answer is, again, working capital turnover in inventory creates good opportunities for us. We feel a strong obligation to be a strong partner with our customers, and it's a very traumatic time for everyone. And so, we're spending a great deal of time in terms of trying to educate everybody on this marketplace.

And I think from the standpoint of what that brings to us, Mark, is certainly a seat at the table for great discussions on how to create a fervent and fluid supply chain that historically is one that is more confrontational than we would like. And we think that we're in a strong position to help create a very dynamic supply chain as we look forward.

Okay. I appreciate that color.

I had a couple of other, little more housekeeping questions, if I could.

Sure.

Could you give us some sense of what your tons and inventory were at the end of March compared to the end of December?

Appropriate in both markets.

Can you give us any color on how many days of inventory or how many tons?

Mark, it's Rick.

I mean, obviously we don't like to disclose our tonnage position. What I would tell you is we turned our inventory 4.7 times in the first quarter. You can look at kind of what we've done the last three to four to five quarters. I mean, we're always right around five turns, and that's pretty much where we're going to be.

And we're comfortable that we have the ability, in a growing market share, to continue to have that kind of inventory penetration.

Okay.

Any color you could share on the flat-rolled stainless side that would help us try to figure out -- there was a tremendous amount of inventory destocking going on in that market in the second half of last year. I mean, how's that market looking right now?

Hi, Mark, David here.

I think that market continues to reflect the volatility of nickel and chrome on the LME, and we don't see any differentials. It's literally up and down month to month. We are aware of it. We're focused on it. We continue to serve our stainless steel trade, but there is volatility surrounding nickel surcharges as, again, the commodity volatility continues to reflect in the transaction price.

I mean, do you think from a customer perspective on the stainless side, do you think that destocking is basically completed at this point?

Well, I can only talk to Olympic Steel. From Olympic Steel's perspective, we're in good shape. I can't really speak for the rest of the industry mark. I don't know what other positions our contemporaries have, but there is depot stock that the mills have and, of course, the mills continue to produce product.

And in one month, if you continue to produce product and your surcharge is lower than the preceding month, you're going to be putting out material that's less expensive, and it's going to impact whatever inventory was received the month before, all the obvious issues.

So, we're very aware of it. We're tuned into it. We were tuned into it on the ride up last year and we're tuned into it in terms of the adjustments literally for the last three quarters and probably four quarters here.

Okay, if I can just ask one last question. Michael, this credit availability situation is something that's probably going to get worse before it gets better. Could you give us some sense, to your perspective, I mean, what inning are we in as far as this credit availability issue is concerned?

Fourth, fifth.

Okay, terrific. Yes, well, congratulations on all the great results and thanks for the color.

Thank you.

Tim Hayes, Davenport & Company.

Hey, good morning.

Hi, Tim.

Hi, a couple questions. On your CapEx for 2008, just want to run through a few more numbers on that. The IT spending, how much will that be this year?

We've been running a couple million dollars a year. We'll probably be around $3 million to $4 million this year.

Okay. So, if I added up some of the items that you laid out, of that $40 million of CapEx for '08, does any of that sort of reserve for acquisitions in that $40 million?

No, that's not acquisition.

Right.

That's pure expansion. It's equipment, it's the satellites David talked about in South Carolina. It's those types of things.

And the new facility in the Midwest, is that going to be a similar size to the one in South Carolina?

Yes, that's pretty typical, Tim. Dave here. That's pretty typical of what a profile of a satellite service center will look like for us.

And my next question, on the distribution costs, since you brought in the trucking in-house, do you expect to see some sort of knock-on benefits into Q2? Are you bringing in more trucking in-house, or did you bring in that trucking in-house, say, middle of Q1 and, therefore, we should see some more benefit as we head into Q2?

Again, Tim, it's David. We started bringing in in-house trucking a year ago, and we're graduating it into literally all of our facilities. Some of our facilities are fully serviced by our trucks. Others are nominally serviced by our trucks, but we continue to add our own ownership and control of not only the truck asset but, of course, the employee. And we see benefits beyond just distribution expense there.

Yes. And to answer your question, whatever benefit we get is marginal with the rising costs. So, it's hard to say, Tim, that, in fact, as we bring more trucking in-house that we will see continual benefits--.

--Right--.

--In an environment that we can't control fuel costs. So, I don't know what offsets.

So, we don't anticipate material changes from the distribution in-house trucking to materially change the cost of trucking, but we get -- if does happen, all the better. We're doing it for a lot of reasons including controlling the cost, but I can't say that you're going to see any change in the climate--.

--Right--.

--Because we did it.

Right. At the end of the day, Michael's right. I mean, our costs on distribution are going up. We're just not seeing them go up maybe as much as the market or inflationary rate of distribution of fuel.

Right, okay.

And then, my final question. On your mix of contract versus spot business, any change there in Q1 in terms of how much you're doing under spot, versus how much gets reset quarterly, versus how much is reset, say, semi-annually?

Well, the answer is, Tim, that regardless of what it is, there's a much more robust spot market today. And so, while we don't have a change in our philosophy of what we want the mix to be -- but, clearly, there's some outages in the spot market, and we have steel and others don't.

So, I would tell you that the mix in the quarter is probably more heavily weighted towards spot than it has been, but that's because of the opportunity initiative the market rather than a philosophy change on Olympic's part.

Is spot much higher than, say, half your business right now?

No.

Okay, thank you.

(OPERATOR INSTRUCTIONS.) Aldo Mazzaferro, Goldman Sachs.

Hi, Mike and David and Rick.

Hey.

Hi.

Hi, Aldo.

Hey.

Say, Mike, can you tell us a little bit about your press break investment? I'm interested in what markets that puts you into.

Well, it's just the continual downstream application with the same markets. Again, as David talks about, Aldo, we want to choose customers who make highly-engineered heavy products. So, it goes from the plate to the pieces part, to the burnout, to the bending, to then the welding, and then to the full-sub assembly.

So, given the opportunity to continue to outsource manufacturing by our customers, we want to provide all of those services that allows him to accelerate his ability to become an assembler.

Okay.

So, it's just sort of the next stage evolution of things that we're already doing--.

--Right--.

--In some locations, but we're adding it into more locations as the opportunity presents itself.

Great.

And then, you said also that the Red Bud line in Minneapolis would free up capacity on the Iowa temper. Is that because the Red Bud, even though you don't call it a temper line, that does the same thing and prepares the steel for laser welding?

Well, the stretcher-leveler construct which is basically it's creating elongation into the steel through the machine. It should accomplish the same as a temper mill with much lower costs and much lower productivity on those lines.

Right.

So, generally, as you add these satellite facilities, you're not really cannibalizing much volume from your existing facilities?

No, that's correct, Aldo. As a matter of fact, we continue to grow both aspects of our business which is the traditional service inter-business which you might view as a rectangular cutting, whether it's on a temper mill, a traditional cut-to-length line or the new stretcher-leveler slitting and so forth.

And then, the other componentry is our value addition business, which we've talked about, and that is oxygen, plasma, laser cutting. Then, as you asked Michael just a moment ago, once it's cut, then we're bending it in a number of facilities. And beyond that, we're welding it, and we have robotic welding that goes in that; shot blasting and painting in some particular instances.

Right, nice.

If I could change topics, just on the issue of contract pricing. I understand ArcelorMittal is trying to impose a surcharge, and I know that you guys get involved as a middleman or a processing line on some of the contract situations. Do you have a feeling for how widespread these attempts are, and what the prospects are, you think, for them succeeding?

Well, Aldo, this is David. I won't comment on the success of somebody else's business. I will tell you that the majority, not all, but the majority of producers, whether it's integrated or electric furnace, who have contracts have added a surcharge to those contracts. Not all, but a majority.

As to their success, I think that that's relegated to each individual concern.

So, would you say those surcharges include the ultimate high-end contract buyer like the auto guys?

We have seen reports, and we have seen some letters that have gone out that does affect people who are supplying automotive and supplying very large OEMs that previously thought they had a firm price contract for the year. That firm contract price now, for the most part, has a scrap surcharge associated with it, whether it's flat roll or plate. I can't speak of any other product, though.

Right.

And from my understanding, a lot of these contracts are really well below the spot price, right?

Well, I think a lot of these contracts, Aldo, were authored in October and some as late as November of '07 where people were subscribing to a firm price.

Now, remember, as Michael well commented earlier in his discussion here just a moment ago, pricing has gone up 102%--.

--Right--.

--Since the beginning of the year. That doesn't include the October increase because that was '07.

So, I think one can conclude that if the prices have gone up 102% in the spot market, obviously the contractual market, which was indicating price in October and November, is substantially lower.

Yes, even I can figure that one out.

Well, I'm just helping you.

One final question, and one I get along and I'm just wondering what your take on this is. What signs do you watch for to see that this incredible price boom we're seeing in steel comes to an end? What are the signs you're going to be watching for?

Aldo, I'll answer it just quickly. And one of the big movers we're looking at, obviously, is the value of the dollar.

Right.

The value of the dollar impacts, obviously, our general industry's ability to export product whether it's finished or steel. And we all know that. And it also affects the degradation of the dollar over the last seven, eight years, also affects foreign supplies' ability to import it here.

So, all of those things, and we all understand that affects the pricing. And so, we're watching that very closely. That's the first part. And then, of course, that affects the commodity pricing, and we're watching that, too.

Great.

Yes. I mean, it's just supply and demand, Aldo, as well. I mean, you go back to Econ 101 in college and, clearly, global demand for steel is rising rapidly and global supply is strained by raw materials around the world.

And whether that is coal, coat, port facilities, ocean-going vessels, there's so many factors that are involved in the pricing today that there's no one trigger point that says, "Boy, if the dollar does strengthen, that's the end of steel pricing." Clearly, I agree with David completely that the currency valuation is probably the most significant issue at the moment for all commodities, but you can't say that alone is going to change the dynamic when basic demand is outstripping supply.

Right. Well, Mike, congratulations, and David and Rick, on everything. Tremendous, tremendous. Thanks.

Thank you.

Thanks for your support.

Thank you. Nat Kellogg, Next Generation.

Morning, guys. Nice quarter.

Hey, Nat.

Just a question, could you guys talk -- and I missed the very beginning, so you may have mentioned it. But, just could you guys talk a little bit about if you saw any demand for carbon plate from the MRAP program that seems to have picked up pretty much at the beginning of this year?

Are we seeing it? Yes.

And does that -- I mean, it came in in-line where you expected, or has that been ahead of forecast at all?

Well, Nat, David here. There's a tendency to look at the MRAP program exclusive to U.S. needs, and it's not exclusive to U.S. needs. A lot of the manufacturers of mine-resistant vehicles are producing them for all the NATO countries. And so, there's a much greater demand than just the U.S. demand, so a lot of these manufacturers are manufacturing, obviously, for other NATO countries.

It's an unfortunate need today, but it is. And of course, obviously, as we rearm friendly military countries, NATO countries, we're pulling more armor product, and that's putting strain on more quench and temper products throughout the world and particularly here in North America.

Okay.

And then, also, you guys have talked a little about sort of supply issues and some types of grades of steel are in relatively short supply these days. And I was just wondering if you could give us a couple of examples or any particular types or products in the marketplace that you guys are seeing that are particular hard to come by these days.

Well, anything that has an alloy content, that is a slow production at the steel mill, is becoming tight supplied. So, the basic mill quantity, how fast can I push it through my mill facility, seems to be a pervasive attitude today.

So, your basic carbon steels are I wouldn't say readily available, but available. But, as you move into things are heat-locked quantities, that take a lot of alloy content or even a small amount of alloy content, the mills don't want to slow the process down if they don't have to.

So, I would tell you, Nat, anything with an alloy content is clearly in tighter supply.

Okay, that's great.

And then, one thing that -- and I've heard a couple of other people mention, but do you guys see any fluctuation in the businesses just because of -- or did it affect you guys at all having Easter fall in Q1 versus Q2?

No.

It wasn't a material issue having one less of shipment and whatnot.

No.

Okay.

And then, just lastly, I know somebody asked this question on the last conference call, and just I'm sort of curious. Well, you guys sort of talk about the demand environment today and the supply environment today versus sort of 2004, which is the last time we saw the big increases in steel prices. And I'm just curious if you guys thought of sort of the similarities and maybe even differences you're seeing.

Between this market and 2004?

Yes.

All right. Well, one, you have a credit crunch today where you had credit availability, probably the biggest issue. So, when people needed rising capital requirements for higher steel pricing, you can go to the bank, get a waiver, get more money. Today, that's very difficult. That's probably the biggest issue.

You've got four more years of compounded world global demand, a significant difference than it was. You've had more consolidation by the steel producer in four years which gives you less options, when your current supplier is not necessarily providing you what you need and want. So, you have little, fewer options to go to, to seek solutions.

And clearly, this raw material pull, scraps at $600 a ton, let's not get -- or maybe $700 a ton on the latest report I saw, you've got a global phenomenon where, in '04, it really was the United States coming out of recession, and people had very low inventories coming into a big demand market. You don't have the same strength of demand in the U.S. market today than you did in '04. That's the anomaly.

Right.

But, really, I think the biggest issue for us is the value of the dollar and the lack of credit, is probably the two biggest factors.

Okay, great. Well, that's all I got. Congratulations on a nice quarter, guys, and thanks for taking my questions.

Thank you.

Charles Bradford, Bradford Research.

Good morning.

Hey.

I understand the Feds, about a week ago, rated a lot of steel users looking for substandard or mislabeled Chinese steel. Are you seeing any of this, and could this be a way of keeping Chinese steel out of the U.S.?

Well, Chuck--.

--So, go ahead--.

--Right--.

--Rumors are rumors are rumors. We're not aware of any circumstance of that occurring.

Yes. We've read the same reports, Chuck, and I think they've been relative to tube, heavy-gage tube, a 500-grade structural tubing, not relative to flat products.

Of course, if there is a question mark, obviously, as to the integrity of the structural tubing, and there has been some question marks in the past, at least that's been readily available for all of us to read, obviously it's going to create further pull on heavy-gage tubular manufacturing here in the U.S. to substitute for the product that's on the ground, that isn't appropriate today, and it's going to cause greater demand. That we do see.

The licensed data for steel that came out yesterday, which obviously is short one day in the month of April, was up a little bit from March. But, with all the stories about foreign prices being higher than domestic prices, why are people still buying as much as they are? Is there something else there that maybe we're missing? Is there a quality issue, or what could be keeping the import so high?

Lack of availability from the domestic producers. The mills today are very discriminative. They're not selling everything to everybody. I think credit constraints, I think people are frustrated and are looking for different solutions.

But, again, we were locked in a board of directors meeting, so you've got data that we don't have at the moment, Chuck. But, what products are the import licensing coming in at? If it's bill, it's blooms and slabs, then it's not that -- the symbols maybe don't have the raw material for the melt, and they're looking for -- if you look at some of the flat pricing, $1,000 a ton slab, they're bringing in more $1,000 a ton slabs, that's not necessarily harmful. They just don't have enough slab for the rolling mill.

So, I mean, you're asking data without discrimination and breakdown, so it's hard to comment.

It's 2.4 metric tons for April.

And what--?

--And it's a lot of steel coming this way.

Yes.

And Chuck, I think you know that we've continue to see service center inventories drop. We've continue to see end user inventories retard also. That seems to be almost counterintuitive.

But, regardless, as the price continues to escalade, there's a greater reluctance to build an inventory. And then, that of course is exacerbated by some of the announcements here in the last week where there are some maintenance shutdowns coming here at a number of North American facilities which are going to continue to exacerbate the supply program.

And in some instances, some of the producers, which I'm not going to comment specifically who they are, have some pretty high delinquency rates, and so they're not going to be able to catch up.

And again, when you start to retard production and there's no inventory in the system, the only backstop there really is, is to find it elsewhere in the world. Now, there's no bargains in the world. There's steel available, but you're going to pay for it and you're going to pay for the transportation, but there's no bargains.

There's nothing that we know of in the world that is priced at this level, and the level in the U.S. appears, to us, to be the lowest level of steel in the world.

Thank you very much.

Thank you.

Thank you.

Mark Parr, KeyBanc Capital Markets.

Mark?

Hey, thanks very much.

Michael, I normally ask this question and you normally don't answer it, but I thought I'd ask it anyway.

Okay. Well, maybe you'll get lucky this time.

Well, I'm going to try.

Looking back to '04 -- and I think you did a great job of characterizing the differences. And by any stretch or by any analysis, if you look at '08 versus '04, I mean, the market's tighter, prices are higher. And as a result, you would -- and the movement in prices is greater. I mean, this is the kind of a scenario where you would expect margins to be able to move fairly aggressively in the near-term.

And if you look back to '04, you had a couple of quarters where your gross margins were close to 30%. And I'm wondering how you feel about the potential for similar occurrences here in the '08 timeframe?

Well, Mark, I feel really good, but that has nothing to do with my margins. So, I--.

--Well, your margins are always too low for you. I know that, Michael.

Thank you very much.

There's no question that a rising tide lifts all boats, and people who have continuous inventory are going to have inventory gains. To the extent of that inventory gains is as much as the market will bear with a great sensitivity to our customer's need to survive.

So, you don't want to be euphoric about the potential of what you could or could not make without a great deal of respect and humility that says it's going to be, we think, tremendously traumatic for a number of our customers.

And so, we're here to aid and assist with knowledge and steel without gouging, but also understanding that we have a responsibility to the shareholders.

Do you think -- and again, taking away the inventory gains, which we could have a discussion about what that might or might not be. But, just having a high level intellectual discussion, do you think the structural profitability of your business going forward is enhanced just because of the tight global supply situation, the weak dollar, just all the things that you had talked about before?

Yes. Again, Mark, we've been in good markets, and we've been in bad markets. And David and myself have been in this market for over 30 years, so we've seen pretty much every market condition over that period of time.

What we've learned is that the fundamentals that are driving our success right now have been wrought with lots of mistakes along that 30-year career. And when we decided to focus our strategies in 2002 and 2003, on an avenue of focusing on our core competencies and strengths, we're not being distracted by a short-term market anomaly. So, we view this as an anomaly.

What you've seen from 2004 to 2007 was an increasing gross margin irrespective of steel pricing. So, embedded into whatever inventory gains we may or may not make, we still expect to stick to our strategy that allows us to perform better for the customers of choice, increase our gross margin and increase our market share. And this particular market is one in which will change as well.

Oh, yes, they all will. All right. Well, look, I appreciate that additional color, and thanks again for not answering my question fully.

I feel good. I thought I answered it well.

Okay, guys. Thanks.

Okay.

(OPERATOR INSTRUCTIONS.) Bob Richard, Longbow Research.

Thanks again, guys.

Hey, Mike, to your comments on prime scrap, there seems to be momentum there.

Yes.

Do you think there'd be traction for any further flat roll price increases this summer?

Why not? I mean, the answer is yes, there can be. There's no reason to -- we don't see anything in the market conditions at present that would change the current momentum.

Fair enough. Thanks again.

Okay.

And gentlemen, it appears we have no further questions at this time.

Thank you.

In conclusion, let me remind everybody that it's not our policy to provide forward-looking earnings estimates for the upcoming quarter or year, and not to endorse any analysts' sales or earnings estimates. We anticipate releasing our second quarter 2008 earnings on July 31st or about.

And this concludes our call, and thank you again for your interest and concern and support in Olympic Steel. Bye-bye.

Ladies and gentlemen, this does conclude today's conference. We do appreciate your participation. Have a wonderful day. You may now disconnect.