Olympic Steel Inc (ZEUS) 2009 Q4 法說會逐字稿

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Good day and welcome to the Olympic Steel, Inc.

fourth quarter 2009 earnings results conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr.

Michael Siegal.

Please go ahead, sir.

Thank you.

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 your interest in Olympic Steel.

And before we begin our discussion, I want to remind you all that during this call we will provide forward-looking statements that we do not undertake to update or that may not reflect the actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

Important assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those set forth in the forward-looking statements can be found in our filings with the Securities and Exchange Commission, including our 2009 Annual Report on Form 10-K, which was filed today.

And earlier today, we reported our financial results for the fourth quarter and the full year of 2009.

While 2009 was a very challenging year for the steel industry and Olympic Steel, it was also a year of balance sheet strengthening and positioning Olympic Steel for 2010.

Let me review some of the details from our earnings release.

Our fourth quarter sales totaled $138.5 million, which was down 45.4% from the $253.6 million recorded in the fourth quarter of 2008.

The sales decrease was due to significantly lower year-over-year customer demand and lower selling prices.

Our fourth quarter tons sold totaled 194,000 tons, a 15.1% decline from the 229,000 tons shipped in the fourth quarter one year ago.

Fourth quarter shipments did, however, increase sequentially by 7% over the 181,000 tons we shipped in the third quarter of 2009.

Our fourth quarter net loss totaled $2.6 million or $0.24 per diluted share, compared to the net income of $776,000 or $0.07 per diluted share for the fourth quarter of 2008.

Our sales totaled $523.4 million for the full year of 2009, which is 57.4% lower than the $1.23 billion of sales recorded in 2008.

Our 2009 shipping volume declined 38.1% to 721,000 tons, compared to 1.17 million tons shipped in 2008.

Our net loss totaled $61.2 million in 2009 or $5.62 per diluted share, compared to a net income of $67.7 million or $6.21 per diluted share for 2008.

Our 2009 results included pretax inventory, lower of cost or market adjustments of $81.1 million recorded in the first and second quarters.

In 2009, we executed on our core disciplines of cash flow and balance sheet management, and we entered 2010 with an exceptionally strong balance sheet, no debt and appropriately costed inventory that is again turning at our preferred five times historical rates.

We avoided material bad debt losses in 2009, and remained diligent in our credit and collection practices.

We began 2010 with a significantly lower cost base and an experienced management team that provides Olympic Steel with a foundation for continued success and growth in the recovering markets.

Our strong balance sheet puts us in our unique position to grow Olympic Steel while market prices and valuations for assets and businesses remain depressed.

We expect to grow our market share by exploring new geographic locations in 2010, either by acquisition or green field investments, and increasing our product portfolios in both the stainless and aluminum products.

Our fourth quarter sales volume was better than the third quarter.

And steel demand and pricing are both on the rise since year end.

We expect these trends to continue, and look for our first quarter 2010 sales and earnings to be better in the year over year and over the fourth quarter.

We optimistically enter 2010 from a position of strength and an improving marketplace.

Today we also reported that Olympic Steel's Board of Directors has approved a regular quarterly cash dividend of $0.02 per share to be paid on March 15, 2010, to shareholders of record on March 1, 2010.

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

Rick?

Thanks.

And good morning, everyone.

And first off, we are filing our 10-K today.

That should be available after the close of business.

So, if you're looking for it, you won't find it until about 4:30.

As Michael described, our attention to balance sheet management resulted in Olympic Steel having no debt outstanding at year end.

Today we do have some borrowings outstanding, as working capital requirements are ramping up due to volume of pricing increases.

Offsetting those working capital borrowings, however, we do expect to receive an income tax refund by mid year of about $35 million.

In the fourth quarter of 2009, our operating expenses totaled $30.7 million, a $5.8 million or 15.8% decline compared to the fourth quarter of 2008.

For the year, expenses were reduced by $68.8 million or 36.7%.

Expenses were managed aggressively as we quickly responded to the economic downturn with bold actions in late 2008 and early 2009.

As a result, our cost reductions mirrored the declines that Michael talked about in our tons sold in 2009.

Taking a look at our capital spending, in 2009 the totaled about $11.9 million.

That compares to depreciation expense of $11.7 million for the year.

So we're about cash neutral on CapEx and depreciation.

For 2010, we are projecting to spend in the range of $10 million to $14 million for CapEx, which includes our ongoing and successful IT implementation.

In 2009, we capitalized $2.5 million, and we expensed $2.2 million related to the system implementation.

An income tax benefit of $38.3 million or 38.5% of pretax was recorded in 2009, the majority of which can be carried back to prior years, resulting in the estimated $35 million cash refund that I spoke of earlier.

We expect a similar tax rate in 2010 to be in the range of 38% to 39%.

Some other financial metrics and highlights include a very strong performance in the accounts receivable and the credit area.

Our 2009 bad debt write-offs totaled only 0.14% of sales.

And we maintained a very strong DSO in 2009 of 38 days.

We aggressively managed our inventory turnover rate back to five times in the fourth quarter.

And today we are turning in excess of five times.

Our 2009 sales to the automotive industry totaled 11.6% of sales.

That's higher, if you'll recall, than some of the prior quarters.

And that was due to auto production and shipments increasing in the second half of the year.

At year end, we had approximately $73 million of formula availability under our bank line of credit.

Our shareholders' equity at year end totaled $23.85 per share.

And during the year, the full year of 2009, we paid dividends totaling $0.11 per share.

Now I'll turn the call over to David.

Thank you, Rick, and good morning.

Looking back on 2009, needless to say, it was a very difficult year for all in the steel industry, including Olympic Steel.

However, it was also a year where we made some significant achievements and positioned the Company well for the future.

It was a year to focus on what we could control.

And we are proud of our healthy balance sheet, which has helped Olympic Steel position itself advantageously during the recovery and well into economic expansion.

During 2009, we acted quickly and boldly, as Rick noted, and made some noteworthy accomplishments.

Let me highlight some of those.

First, we right-sized our inventory in terms of cost and turnover.

We are back to turning our inventory five-plus times, as both Mike and Rick indicated, and have an appropriately costed inventory.

To put the inventory right-sizing in perspective, during 2009, we reduced our inventory by $144 million or 56%.

From its peak in 2008, our inventory was reduced by $204 million or 65%.

We next -- next, from a credit and collection perspective, we were diligent in maintaining a consistent DSO of 38 days in the toughest credit and banking environment of our lifetimes.

We also avoided big bad debt losses that were encouraged by depressed sales environment.

We remain diligent with credit, and have full-time presence in the field analyzing customer viability and credit worthiness.

We remain vigilant in monitoring the state of liquidity of customers' ability to fund the working capital growth required to participate in 2010 recovery as sales volume and steel pricing are on the rise.

Next, Rick elaborated on our elimination of debt and our cash position.

We look forward to putting our money to work on growth initiatives beyond the $10 million to $14 million capital expenditures budgeted as discussed.

We believe that there will be opportunities to acquire service centers and fabricators as the economic recovery takes shape.

We expect smaller service centers to struggle to keep pace with expanding working capital requirements, customers' credit restraints and limited bank availability.

We believe this environment presents us with the opportunities for market share growth and favorably priced investments.

We are also pleased with the progress implementing our new business operating systems throughout Olympic.

And we have now successfully implemented the program in five locations, and are scheduled to go live in our Detroit location next.

As part of the project, we are adding applications for fabrications portions of our business.

We expect to retire Legacy systems and the costs associated with them in the latter part of 2010 and early '11 as the system rollout continues.

In terms of 2009 capital deployment and operations, we completed a new lead-certified building in Winder, Georgia.

We closed our leased facility in Philadelphia and absorbed the business in our other plants.

We relocated a satellite operation that we had housed in Baraga, Michigan.

And we moved that to Moses Lake, Washington, to accommodate a customer and improve our service capabilities.

We successfully negotiated Collective Bargaining Agreements in Detroit and Minneapolis.

And we added new equipment in Milford, Connecticut and in Bettendorf, Iowa locations.

Another important achievement in 2009 was the successful addition of aluminum to our product offerings.

We brought experienced sales and management personnel into the Company to grow our market participation in not only aluminum products, but also in stainless steel.

We are also introducing and exploring new value-added propositions such as our Zeus Metal Works, which is now producing and marketing finished steel products.

Finally, we are being awarded new business and greater market share as customers turn to Olympic Steel for a strong, financially stable and experienced supplier.

This flight to quality by certain well-know OEM customers is resulting in a consolidation of their supply base to meet their service and cost reduction needs.

Olympic Steel fits the criteria well.

And we are excited about the opportunities to grow our market share and fabrication capabilities with these OEMs as they begin their recovery during the production process.

In summary, 2009 was a year to strengthen our balance sheet.

Two thousand and ten will be a year of focusing on our income statement and a return to profitable growth.

We are positioned well, and have built a Company with strong foundation and an experienced management team.

The economic recovery is now underway.

And we believe we are midway through the necessary progression of recovery.

We expect all of our facilities to fully participate in an economic expansion as the recovery continues.

We are confident in our future and our ability to successfully perform for our shareholders, our customers and the employees of Olympic Steel.

This concludes our formal comments.

And we will now open the call to your questions.

Thank you.

(Operator Instructions.) We'll go first to Michelle Applebaum at SMI.

Hi.

Good morning.

Good morning.

Wanted to ask you a question.

In terms of the margins in the quarter, since most of your costs of goods sold is material costs, I was just wondering -- you seem to have had a different trend than some of the other companies that have reported results.

I know you can't adjust your results to FIFO, because you're already on FIFO.

But I'm just wondering why the contrast?

Michelle, this is Rick.

Hey, Rick.

I can't really speak to the contrast to some of the other companies.

I can kind of tell you what our trend is.

And you're right, we refer to FIFO, but we're actually on an actual cost-specific basis of inventory.

But third to fourth quarter, our margins did recede.

A couple of things there.

Number one is, as you know, we had some pricing changes -- market pricing changes in terms of some strength in the third quarter and then weakening in the fourth quarter until December.

But, more importantly, you know we took some lower cost market charges in 2009.

Those were taken at the very end of the first quarter and at the end of the second quarter.

During the third quarter and fourth quarter, we had those behind us.

So part of the issue in terms of looking at year and looking at quarter, quarter-to-quarter and three-month periods in a very volatile market like last year, with accounting adjustments in them in terms of lower cost or market, you don't get a real good and true flow.

So, what I would tell you is it's a combination of what happened with market pricing in terms of strengthening in the third quarter -- beginning of the third quarter, and then dropping.

And then, it had to do with the LCM charges at the end of the second quarter.

And again, compared to some of our competitors, that's hard to say.

We've got -- several of the public ones are on LIFO.

Well, one of them is on FIFO.

And they reported significantly up margins in their steel -- in their flat roll business.

So that kind of surprised me.

How does the lower cost of market charge at the end of the second quarter play out in terms of impacting margins in the fourth?

In the fourth it doesn't.

In the third it does.

It helps the third.

So at the end of the second quarter, we took a charge to reduce the costs of our inventory to what was then deemed to be market, at the very end of the second quarter.

Okay, so it helped the third quarter.

I'm sorry about that.

Yeah.

Yeah.

Okay, yeah.

I knew that.

I didn't make that connection here.

Okay, so the fourth quarter looks worse because the third quarter looked better.

Partly, yes.

Partly because of the lower cost of market charge at the end of the second quarter, and the fact that, as you know, we're taking inventories down.

So for every couple tons of inventory we are selling, we weren't replacing them at the same rate as we continued to reduce inventory during the third quarter.

Michael, no one's been louder about the insanity of the volatility than I have the last nine months or so.

And can you give us some insight in terms of how the trend went during the months October through December in terms of margin and what you were looking like at the end of the quarter?

Michelle, this is David.

Let me field -- let me field that for you.

We had a -- at the tail end of the third quarter, the marketplace, as Rick started to elaborate on, was strengthening, as the marketplace had strengthened literally from middle of June up through September.

And we saw margins strengthen in September, the latter part of third quarter, and then the early part of fourth quarter.

As the marketplace moved toward the end of October, and as it cascaded into November, we saw the marketplace weaken.

There was an adjustment on pricing that then lasted, quite frankly, about three to four weeks, so the tail-end last week of October through Thanksgiving.

And then, as we exited the week somewhere around November 20th or thereabouts, we saw a renewed strengthening in the marketplace -- a renewed strengthening in the marketplace.

And we started to see margins move up again in December.

However, volume was challenged in the latter part of the month because of the holiday schedule.

But that recovery has continued into the first part of 2010, as Michael indicated very early on.

Excuse me, I don't mean to interrupt.

You're giving me the pricing trend.

I meant the margin trend.

Yep.

No, I said -- I said that.

That was the margin trend, also?

Yeah.

Yeah, it's the same.

It's the same, Michelle.

I think that in effect, people -- as we saw some hesitation in the market pricing in October and November, people were waiting for that huge December buy that never came.

And so, as people moved their inventories down in November in anticipation of this big December buy, which very -- which most note did not participate in, or very few, for that matter.

The traditional December buy was not there as the mills started to move the price up.

That would then reflect the marketplace improving its margins as there was this expectation of prices falling, when, in fact, they were starting to move up.

So we're starting to see the impact of the mill announcements as early as December and moving, obviously, into January, and we expect February as well.

Can you say that you -- whether or not you expect to be profitable in the March quarter?

We always expect to be profitable.

And sometimes we're disappointed.

Okay.

One more question -- in terms of the outlook, do you think that these prices and the price increases and the further price increases we're seeing, including -- I don't know if you saw the $200 to $300 a ton the Japanese are doing for second quarter.

Do you think these price increases are sustainable?

And if so, for how long?

Well, I think the current ones are going to be implemented.

I don't know if we see the trend continuing along the same escalation.

But these are cost-driven as well as China demand-driven.

And at this moment, it appears that costs have moved up.

And there's lots of volatility in the world, which leads to uncertainty, which leads to more potential price increases.

So I would tell that we'll see the acceleration of price increases slow down.

But we're anticipating the mills are pretty resolute on getting as much money for the product and recovering as much cost as they can.

Okay, great.

Thanks a lot.

We'll move next to Charles Bradford with Affiliated Research Group.

Hello.

Good morning.

Good morning.

Good morning, Chuck.

Good morning.

Hi.

You guys have a pretty good view of -- certainly, of the coil market -- the hot roll coil and the plate.

And over the last few years, there seems to have been a divergence from the historical norms where these products were pretty similar.

They seem to be back more in line.

Is this now the new norm?

Or is there some reason why plate prices -- cut-to-length plate, anyway -- would be a lot higher than coil prices?

Well, Chuck, this is David.

I think you're referring to some of the ebb and flow of the marketplace.

What we generally see is a much more fluid flat roll marketplace and a plate marketplace that has a tendency to plateau rather than going up or going down.

In today's environment with scrap prices continuing to escalate, and for those electric furnace mills that utilize scrap almost exclusively, it's really a competition of how much revenue they're going to get for the product, whether it's plate or flat roll.

And they both have to -- they both have to measure equally, for lack of a better expression.

So we see plate having moved up.

And we see plate lead times having moved out.

We see that because of a number of different catalysts.

But one certainly is the fact that inventories were down dramatically, especially relative to OEM manufacturing, which was really depressed last year, and is moving up -- is -- OEM demand is increasing much stronger than we would have expected.

Now remember, it's coming off of a very low number.

So that strength relative to where it was two years ago is certainly depressed.

But relative to where it was last year shows a pretty strong up-tick and a really strong demand for plate products.

And that has -- that has led to the competition for the raw materials, in our expectations, versus flat roll.

So we see them both moving up in concert.

Is there a significant difference in what you're seeing between the flat rolled and the plate as far as the suppliers delivering on time?

We've heard a lot of stores about some of the large producers just not doing terribly well with on-time deliveries.

Are you seeing much of a difference?

Well -- go ahead, David.

Go ahead.

Right.

I think when you look at what it takes to be an integrated mill versus a mini mill, obviously the integrated mill position is a much more difficult one to anticipate an on-time production schedule, as well as the fact that it wasn't just the end-users and the service centers who were lowering their inventories.

A lot of the integrated mills lowered their raw material inventories on the ground, which then put them in a material short position as the market demand started to pick up, when then extends their lead times.

And so, I would just tell you that I think the mini mills have the ability to react quicker.

They can get scrap faster.

And the integrateds just have just a more difficult process, Chuck.

I don't think it's anything more than that.

Okay.

We've heard a lot of stories about the integrateds losing pretty large numbers of people because of the way they shut down, whereas the mini mills shut down a little bit here and there, not whole facilities, and were thus able to ramp up a lot quicker.

Well --

It's a combination of lower inventories.

Yeah, lower inventories and less -- significant people taking retirement who have experience.

And when you bring an integrated mill back up, things don't come on very easily.

You -- this is sophisticated integrated equipment.

And all the computers have got to work.

All the temperatures have got to work.

It's much more difficult for the integrateds.

And we have empathy for them, I can tell you that.

Have conditions gotten better?

Because one of the arguments that people have been making about the restarts is that a lot of it was to enable the blast furnace guys to catch up.

I think the answer to that, Chuck, is yes, they are getting better.

There was a lot of capacity that was off line, obviously specifically to -- specific to individual producers.

There has been stronger demand.

We noted that very early on -- Mike did in his early -- in his opening comments.

The mills -- there are some delinquencies, as you referred to.

However, they are improving.

There are -- there is more capacity that's come on line.

That capacity is improving.

Deliveries are improving.

And we would say that the trend line is very positive.

And then one last question -- have you guys been offered any deals by ThyssenKrupp as they bring their new facility up, I guess late second quarter?

There's nobody here who's going to answer that, Chuck.

We welcome any opportunity they want to present to us.

Yeah.

I thought I'd try anyway.

Thank you.

Thank you.

Thank you very much.

We'll go next to Richard Garchitorena with Credit Suisse.

Good morning, everybody.

Good morning.

Good morning.

So just a couple of questions for me.

You mentioned the inventory turns are now over five times.

Can you break out among the different product groups how that is working out?

Richard, we don't -- this is Rick.

We don't -- we don't break out our turns or our inventory by product.

But what I can tell you, in total we talked about last quarter that our flat roll products were turning faster than our plate.

So we were longest in plate.

And that was solely due to -- the drop in volume was largest with some of our large plate users.

So I tell you, as we move into this year, we're in pretty good shape across the board in terms of all of our products.

And as you look at it group by group, plate is probably still a little bit longer than flat roll.

But we're obviously gaining on it, and I'd tell you in pretty good shape across the board in terms of turns.

Okay, great.

And on the quarter, on Q4, was the drop in margins potentially partly related to product mix at all?

I know you're not going to say specifically.

But was that a factor at all?

Or--?

I don't think we had a significant difference in product mix fourth quarter to third quarter.

I really think the biggest -- the bigger impact is what I talked about where we had an adjustment at the end of the second quarter due to lower cost for market, and then just how the market played out end of third quarter, beginning of fourth quarter.

Okay.

And then, just generally on demand, can you just sort of give us an update on what you're seeing so far in Q1 - January, February among the end markets, as well as the different products as well?

Well, Richard, this is David.

We probably can't answer it specifically, because we don't like to do that.

Yeah.

But in general terms, we have -- we are seeing sequential improvement.

And we are very pleased with the participatory level of shipments that we are experiencing.

As Rick suggested in his comments, fourth quarter was stronger than third quarter in terms of shipments.

We expect first quarter to be stronger than fourth quarter.

And we are fully convinced that we are midway through a recovery, and probably have the balance of this year, or maybe a little short side of that before we go into the infancy of an expanding economy, either at the tail end of this year or next year.

So we don't expect it to be linear.

But it is improving.

Again, we like the trend line.

Thanks.

We'll go next to Sal Tharani with Goldman Sachs.

Good morning, guys.

Hi.

Good morning, Sal.

What are you seeing on the import offer front?

Any activity over there?

David Wolfort.

Yes, Sal.

It's David again.

We are.

We were seeing offerings at the tail end of last year.

And we continue to see additional offerings as the dollar strengthens, obviously, and as the economy strengthens.

So we are -- we are seeing both.

It's not a huge surge.

But there are certainly more offerings.

And they are from a broader array of suppliers, some of the usual suspects that we see, but there is a -- there is a renewed offerings.

Not huge, but they're there.

Are the prices really attractive compared to what we are seeing in the *******34:20******** in the US now?

Well, I don't think that anybody would take advantage of an offering if they weren't attractive, Sal.

So I think it's an issue of timing and your conviction to how well you think -- where you think the market is going or where you thought the market was going in early first quarter.

So if you believed that the market was going to move up, you may have bought a little bit earlier.

And that offering may be appropriate by the time it -- by the time it arrives.

So I think it's a little bit of a timing issue.

Okay.

And also, clearly we are seeing an up-tick in utilization rate.

Shipment numbers out of service centers have been moving up.

And you guys had a positive commentary that sequentially things are getting better.

I was just wondering if the prices where we are reaching right now, and it looks like the weather is getting worse, so probably another *********35:15********** perhaps, followed by another steel price increase.

Who is the incremental buyer here?

Are these -- are the buyers throughout this year have been the ones who really needed it?

Or there was some modest restocking, also, of the end user who was living hand-to-mouth maybe or buying a little bit extra.

Do you think they will continue to do that?

Or what's your view on that?

Well, my view on that, Sal, is that there is very, very modest restocking.

I don't really think there's a lot of restocking going on.

I think it's modest at best.

I think that there is some real demand out there.

I think many of our customers extinguished, as Michael said earlier, not only their raw materials, but their finished goods.

And so, as any demand has come back, it has put some pressure on the supply side.

So we are actually seeing manufacturing increase and finished product being sold by our customers.

Great.

That's good color.

Thank you very much.

And next we'll move to Luke Folta with Longbow Research.

Good morning, guys.

Hi, Luke.

Good morning, Luke.

Hi.

First question was just on acquisitions.

Can you just comment on what you're seeing?

Are you seeing an increase in opportunities and of buyers willing to sell -- or excuse me, sellers willing to sell?

And also, can you maybe comment on the -- maybe the scale of some of the opportunities you might be looking at?

Luke --

Well, scale is -- scale is pretty much all sizes.

I think that you would say that there's people that are willing to have pre-substantive discussions.

Then it's just a question of what valuation do you want to -- it's really the valuation scheme more than anything else, Luke.

I think everybody's willing to listen.

And everybody has a clear understanding that there is a multiple to be paid.

And then it's a question of arguing whether -- what's normalized.

And should we be looking forward and anticipating forward?

So I would tell you that the discussions are active.

It's pretty much all sizes.

And it's just -- it's like anything else.

It's just a matter of price in terms of who believes what multiple off of what number.

But yeah, I would tell you that it's fairly active out there.

So in this -- in the current environment, what do you guys think of as a reasonable multiple to use on normalized earnings?

Well, if you look at the historical numbers of deals that got done, it's anywhere from -- on the high side it's 8.

On the low side, it's somewhere around 3.

Okay, if you say what's somebody going to sell for?

What's somebody going to buy for?

It's somewhere probably between 4 and 6, 4 and 7.

But the reality is 4 or 7 times 1.

I mean, the multiple is not that important to you to determine what the E is.

And so, if you agree on the E, then you can come up with the rest of it fairly easily.

Okay.

And just finally, the -- you had mentioned that you're looking to add some more aluminum and stainless to your mix.

What do you think of as a longer-term target of how much sales or shipments you look for on the non-ferrous side?

Thank you.

Well, Luke, this is David.

We won't give you the exact number, because we have a very aggressive outlook on specialty metals.

We have been doing stainless since 1987.

We've hired over the last year plus some very talented people in the industry, some that we've looked to hire for a very long period of time.

And they're now on board at Olympic Steel.

And they bring a fresh perspective and, I think, an elongated view of what were nominal expectations earlier.

They've also brought in experience that has allowed us to bring aluminum on, as we commented.

We brought that on mid year last year.

That continues to grow.

And there are various other aspects of the specialty metals business that we want to bring on board.

The summary is that we see it over time as a very significant part of our business.

All the other silos of business will continue to expand.

That business will continue to expand, also.

And we view it, again -- I'll be redundant -- as a significant player over the next half a dozen years.

Thanks a lot, guys.

Next we'll go to Mark Parr with KeyBanc Capital Markets.

Hey, thanks very much.

Good morning.

Good morning, Mark.

Good morning, Mark.

Hi.

A couple of comments, and I'm just trying to get a little more color around current business conditions.

There was a fairly wide spread between gross profit margins in the third quarter and in the fourth quarter.

And I'm wondering, as we look into profitability going into 2010, which -- you think the third quarter or the fourth quarter is more representative of normalized profitability as you enter the year?

Mark --

Well, perhaps neither.

I mean, the third quarter had the LCM impact of the second quarter.

Certainly, the fourth quarter, I think, were reduced relative to a normalized market, I do think.

I don't know that either one of them is normalized, Mark.

Okay.

Rick, what do you think?

Yeah.

I mean, I was going to say you know we talked about, Mark -- before these big swings in '08 and '09, we had talked about getting to a normalized margin, which we had hit a couple years back of about $165 a ton due to the elongation of our value-add business and moving further downstream.

So what I would tell you is, we've made some good progress the last two years in terms of while some of it is hidden, based on what happened in the marketplace in '09.

But we made some good progress.

And we continue to grow that piece of the business.

David talked about our entry into aluminum and the expansion of the specialty metals business.

So our view is, a normalized margin when you're looking at per ton is north of $165 a ton.

So third quarter was right around that number.

But it was -- as we said, it was the impact of the LCM the prior quarter.

Fourth quarter was depressed a little bit.

And so as the market recovers and we get into whatever you want to call a normal market, we would expect our gross margin per ton to be north of the $165.

Okay.

All right.

I was thinking about it from a percentage standpoint.

But I understand where you're coming from.

It just seems -- and, David, you had mentioned this -- I'll use your words, progression of recovery.

And you said that you're halfway along the process in the -- given what's happened to steel prices, and more recently, plate prices in the last several months, and given the -- call it -- Michael, as you mentioned, just the normal sorts of start-up issues that integrated mills are going to go through and the fact that the EAF flat roll guides are pretty close to full capacity, so there's not a lot of incremental volume that they have to give, you would think that there could -- that this pricing -- it certainly adds credibility to this pricing upside that we're seeing.

And given the lack of alternatives -- now, maybe the import situation is another new onset we need to be considering.

Because it hasn't really been there all that aggressively over the last year or so.

But is this the kind of environment here in the first half of 2010 where margins for the service center sector could expand to above normalized levels, given the paucity of supply and the pickup in demand?

Mark --

Well, there's a possibility.

I think as we move towards the tail end of the quarter, the answer is -- we must continue to announce price increases, and the answer is certainly.

Okay.

With the low level of inventories, the spot market has -- will have a tendency to be very robust, if the demand continues to occur.

So we're not seeing a tremendous amount of inventories.

When you look at the spot market, Mark, a lot of the spot market is service centers selling to other service centers.

And if a service center is short of inventory and has to go to the other service center, historically you would say that you're going to get a lot bigger margin from that service center needing the steel.

So given the level of inventories, given the level of what we think the demand is improving by, there is a relative good opportunity for margin expansion for service centers who sell to other service centers.

All right.

And then, David, just to get back on your comments regarding the import availability with the -- you're saying you see a little more.

Could you talk order of magnitude you mean?

How big of an impact is the import market having, say in the February and March time frame as opposed to December, January?

I mean, how much more of an impact are they having on the supply side?

I think very little, Mark, for that time period.

I think that you'll see them -- I think you'll start to see some foreign product arriving in April and May.

I think there was very little product that has come in in February, if any at all, at least maybe down in the Houston area, which we really participate in a very nominal way.

But we would expect to see more again as we get into second quarter.

And, of course, those offers were made in the latter part of December, and at latest were consummated in the first week of January or thereabouts.

And then, as the market continues to strengthen, and in your own words, Mark, as we see some capacity -- the capacity utilization not being overwhelmed, but not being excessive, then people are going to have to find alternatives to supply.

So if the EAF guys are full, as you just described, then we're going to have to find some alternatives.

But it's -- again, it's a progression.

So we see -- we see some renewed strength in foreign -- in foreign shipments.

It's not overwhelming, but there is a presence.

And we'll see more of that presence, I think, as we get deeper into the year, and specifically into mid to latter part of second quarter.

Okay.

Thanks very much for that.

I appreciate all the color.

You're welcome.

We'll go next to Nat Kellogg at Hudson Securities.

Morning, guys.

Thanks for taking my question.

Just a couple of quick ones.

Rick, just to start, I go back to '06 and '07, and especially like the latter half of '07, and I think you guys were running at $165 of gross profit per ton.

And I feel like it -- and correct me if I'm wrong -- I thought that sort of you guys at that point had sort of talked about getting close to $200 in gross profit a ton over time with adding tempered metals and more value-added processing and what not.

Okay, and so I just -- obviously, in '08 and '09 it's -- forget about trying to figure out what the underlying improvement was, because of what was going on in the market.

But I'm just wondering if you could sort of talk about maybe where you guys are in that process and how close you think you've gotten to sort of getting there in a more normalized market, sort of ex, obviously, the price changes?

Well, I think as I spoke earlier, we're marching our way towards that.

I think some of the investments we've made over the last two years are certainly items that are going to move the margin north.

I think the outlook for some of the things we're looking to do in our capital expenditures over the last couple of years and moving forward will continue to do that.

So we're very confident that the things we're doing, the items we're investing in, the customers we're growing with will march us right to that $200 a ton.

You know, it's very difficult in markets like we've been in the last couple years, as you said, to really say what is your -- what is a normalized gross margin?

I don't know if such a thing actually exists.

But we're confident that we are on track with what we laid out as our strategy and our goals to move the margins north.

Okay.

Okay, that's helpful.

And then, just on the move to stainless and aluminum, you guys talked about a different -- a couple of different things.

But just, is this more because you guys see an opportunity in the market that's interesting to you because there's some growth there?

Or is this more because of what's gone on over the last 12 months -- there's some people who've become available that makes this business more attractive to you guys?

I think it's E, all of the above, Nat.

We like the market.

We like flat roll.

This is David.

And this is another dimension -- another product group that we can add to the flat roll -- to our flat roll penetration.

Many of our customers use all of those products.

And so, as we entered the stainless business a couple of decades ago, and we've had some very nice growth over time and we are -- we have now committed ourselves, or were committed over a year ago to even strengthening that.

Those same consumers -- a lot of the consumers who use some of our cold roll products also were buyers of aluminum.

And with the expertise that we've brought on board, it just gives us another dimension to supply the customer and be more supportive of their manufacturing process.

Okay.

And then, just a last one -- you guys give a little bit color about sort of auto as a percentage of sales.

And I know you guys don't break it all out.

But could you give maybe a little more color on any other sort of key end markets that were particularly good for you guys in the quarter and maybe where you see them going forward?

That would be great, and then I'll hop back in the queue.

Well, our -- the large construction marketplace started to recuperate in the back half -- in the tail end of fourth quarter.

So our large OEMs who were really nearly closed, if not closed a great deal of 2009, have come back significantly relative to being down very heavily -- heavy proportion.

So we see that.

And we see our ag business as coming up.

And then we see a lot of the fabricated support that goes to supply both the OEM and the ag business have strengthened.

So we referenced, I think 11% plus on the automotive side of the equation, and that strengthened.

Again, some of this is, as I noted early on, is that we are getting a lot of OEMs who are now what we call flight to quality because of the strength of our balance sheet and their need to assess their supply side as to how sustainable it is in the future.

And a lot of these OEMs had some very poor experiences all through 2009 with under-capitalized suppliers.

And so, we've seen that flight to us.

And we've been the benefactor of receiving that business.

So we've seen a strengthening across all of those businesses.

Okay.

That's very helpful.

I appreciated the color, guys.

And I'll hop back in the queue.

Thank you.

Next we'll go to Yvonne Varano at Jefferies.

Good morning.

Hi.

I know you gave the numbers in regard to the inventory reduction on a dollar basis.

But can you talk about it a little on a tonnage basis?

And it looks like you've started to build inventory up a little bit.

What are your plans going forward for your inventory *********51:55*********?

Well, you're right, Yvonne.

The tons are moving commensurately with the dollars here as we're taking it up a bit.

But the important thing is, we got our inventory back to that five-turn level early in the fourth quarter.

We've maintained that.

Our inventory's actually turning a little bit better than five turns right now.

And the issue is what David talked about.

We're starting to see a lot of our customers who were really dormant for several quarters start to come back to life.

So we gave you some color in terms of first quarter versus fourth quarter in terms of sales volume, that our expectation is first quarter volume's going to be higher.

With that, we'll need to commensurately take up the inventory.

We gave some color on the debt as well.

Part of the reason we've got a small amount borrowed right now is because prices are moving up, and the volumes are moving up.

So that's -- we look to stay, though, within our disciplines of five turns.

Can you comment, too, maybe on the industry inventories?

Because we all know that they're very low here.

But I would think that most don't expect them to return to prior levels.

I would tell you that the credit market will probably keep inventories lean for a very long time.

I think that we -- there's a tendency to underestimate from an inventory perspective and from an overall service center perspective of who's going to have availability to excess credit relative to how do you build the four profitability columns?

The guys are already underwater on their loan agreement.

It's going to be very difficult, Yvonne.

And I think that's going to be a governor on the inventory rebuilds -- the lack of credit.

Do you think that is already your customer base?

Or is it because your customer base is the larger OEMs that they're not going to have that issue?

Well, I think that --

Yeah?

Go ahead.

I think it -- we've got lots of customers.

So we've got several thousand customers.

Obviously, the large OEMs, I think, from a credit and access to capital structure for the most part are in good shape.

I think it's the smaller customers.

And, yes, I do think that that is going to be a continued area of focus for the broad economy and for service centers and Olympic Steel in remaining diligent in that.

Because I think they are going to have a tough time getting access to steel because of the credit initiatives -- or credit issues.

And just separately, I know you're building in stainless and aluminum a little bit.

What markets specifically are you targeting?

Well, we do a lot of business in the food service end of the equation.

We do some in lighting, some in smaller appliances, veterinary care and some agricultural applications.

And then, as David said, a lot of it also is just going to our existing customer base.

They're just -- they're heavy carbon users, but they do use stainless and aluminum.

So a chunk of those sales is just going to existing customers as well in the industries that we have today.

Okay, thanks.

And next we'll go to Tim Hayes with Davenport & Company.

Good morning.

Good morning.

Good morning, Tim.

Good morning.

Just a couple questions.

Again, back to the long-term target for gross profit per ton of about $200 per ton, what kind of volume level might you need to get to that?

Would it -- would we have to get back north of the 1.2 million tons we saw a few years ago?

Or could you get to that target if we only had tons at say 900,000?

No, Tim.

This is Rick.

I think the absolute tons are really not the issue.

The issue is the mix within those absolute tons.

So, as you know, in 2009 we talked about some of our highest value-add customers being off more than what the market was off.

And we talked a lot about that in the first and second quarters.

So I think even at current shipping levels, we can certainly migrate towards our gross margin goals, as long as the mix is moving in the way we want the mix to move.

And the way we want the mix to move is to continue to ratchet up and do more things with the steel for our existing customers and for new customers.

So the answer to your question is we can absolutely get there on less tons than we had before.

Okay, thanks.

And then, of the -- of your total steel purchases, what's the mix that you buy from mini mills versus integrateds?

And -- well, I'll listen for that answer first on that.

Well, we don't break that out.

We don't break that out.

But I can tell you, Tim, that we participate with all the players.

Regardless of the fact that our tons shipped were depressed in 2009, the real numbers are very significant numbers of tonnage of flat roll shipped.

And, therefore, we need to participate with all the players.

And integrated mills are an integral part of our participation, as are EAF mills, mini mills.

And a lot of that is dictated by logistics.

And so, the cost of logistics also indicates how much participation we're going to have with each player as strength of our participation in the market is our regionality and how close we are to customers.

And so, we're really participating with all flat roll and plate producers, with the exception of the West Coast players.

Okay.

And then, of that -- of the mix between the two, how much of that changed?

And can that change quickly, say quarter to quarter?

Or is that -- or is that a more stable mix that only changes gradually over years?

It's a stable mix, Tim.

You know, consistency's a big part of our game.

So, whether it's consistency of being supplied or consistency of our supply to customers, our customers have come to rely on a supply chain, again, that is predictive.

And part of that is the consistency of who the supplier is.

Okay, thank you.

And we'll move next to Bob Richard of Southridge Investments.

Hi.

Thanks for taking our call.

A lot of good questions have been answered.

I'll just close with taking into consideration your shelf registration, would you consider a rather significant investment in specialty -- in your specialty business as likely as in your carbon business?

Well, I think, Bob, we'd look at all opportunities in terms of growing our business.

Obviously, as you look at our mix, we're highly tilted towards carbon.

So that would be most of the things we're looking at.

But, certainly, we want to grow our specialty metals business.

We've put some investments in people, and we're growing that right now.

And we'd look at -- we'd look at both stainless and carbon.

But based on our mix, carbon's going to predominantly be most of the stuff that we're seeing and looking at.

Okay.

Thanks very much.

You're welcome.

And at this time, we have no further questions.

I'll turn the conference back over to management for any closing remarks.

Thank you.

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's sales or earnings estimates.

We anticipate releasing our first quarter 2010 earnings on or around April 29, 2010.

This concludes our call.

And we thank you again for your interest in Olympic Steel.

And that does conclude today's conference.

Again, thank you for your participation.