Olympic Steel Inc (ZEUS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Olympic Steel second-quarter earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Michael Siegal, Chairman and Chief Executive Officer. Please go ahead.

Thank you, Allie. Good morning and welcome to our call. On the call with me this morning is David Wolfort, our President and Chief Operating Officer; Rick Marabito, our Chief Financial Officer; and I have asked Don McNeeley, the President of our recently acquired Chicago Tube and Iron subsidiary, to be on the call with us. I want to thank everyone for your participation and for your continued interest in Olympic Steel.

Before we begin our discussion I want to remind you that during this call we will provide forward-looking statements that we do not undertake to update or that may not reflect 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 2011 second-quarter Form 10-Q which will be filed later today.

Earlier today we reported our financial results for the second quarter and the first half ended June 30, 2011. We are pleased to announce strong 2011 sales and earnings performance. We have completed our third most profitable first-half in the history of Olympic Steel behind 2004 and 2008.

Net sales for the second quarter of 2011 increased 41% to $299 million -- we couldn't find $1 million more to make it $300 million -- from $212.8 million for the second quarter of 2010. Our shipments in the second quarter of 2011 increased 13% to 285,000 from 252,000 in the second quarter of 2010, but were about 10% less than our very strong first-quarter volume of 317,000 tons.

Second-quarter 2011 net income increased 144% to $7.9 million or $0.73 per diluted share, compared to net income of $3.3 million or $0.30 per diluted share for last year's second quarter. Our second-quarter results include $941,000 of nonrecurring pre-tax transaction expenses related to the Company's acquisition of Chicago Tube and Iron, which closed in the third quarter on July 1 and this equals to $0.05 of earnings per share.

Net sales in the first half of 2011 increased 56% to $593.4 million from $380.7 million for the first six months of 2010. Tons sold in the first half of 2011 increased 27% to 603,000 from 474,000 in 2010. First-half 2011 net income more than tripled to $18.3 million or $1.67 per diluted share compared to net income of $5 million or $0.45 per diluted share for the last year's first half.

We have realized consistent gains in market share over the past 18 months. Our first-half 2011 shipments increased year over year by 27%, exceeding the pace of the market increase in total steel shipments of 19% as reported by the Metals Service Center Institute in their June 2011 Metals Activity Report. Our market demand strength has been seen in the heavy equipment, agricultural equipment and automotive sectors.

Our strong balance sheet and new five-year $335 million credit facility provide us with a strong foundation for continued growth and value creation. We've been making investments during the economic downturn in new products, geographies, equipment and people to service our growing customer demands.

We continued to successfully start-up new locations in Gary, Indiana; Monterrey, Mexico and Kansas, City Missouri. We most recently added two locations in Roseville, Minnesota and Streetsboro, Ohio which are expected to propel market share penetration in the future as these locations become fully operational and add to the top-line growth and bottom-line profitability.

In the first half of 2011 we estimate the cost of these new location start-ups had a total negative impact on earnings of about $500,000. And David will review our progress in more detail later in the call.

In addition to meaningful internal expansion and CapEx programs over the past several years, we've stated that our growth strategy also includes actively exploring strategic acquisition opportunities. Our patience in the acquisition area paid off with our July 1, 2011 acquisition of Chicago Tube and Iron.

CTI accelerates our market share growth and is expected to be immediately accretive to our earnings. Our financial results will include results of CTI beginning in the third quarter. Olympic Steel's current profile including CTI now approximates $1.4 billion in annualized sales, 1,600 employees, 4 million square feet of facilities and 30 locations throughout the United States and Mexico.

As part of the acquisition it was important that CTI's management team, including Don McNeeley, remain in place. Don continues in his role as President of CTI's subsidiary and was recently appointed as an additional Board member to Olympic Steel. He is a 35-year steel industry and CTI veteran with vast knowledge, networks and visibility in the steel market.

Don is a former Chairman of the Metals Service Center Institute and is an adjunct professor at Northwestern University where he teaches in the graduate engineering program. We are thrilled to have Don and his team with Olympic Steel. I will now turn the call over to Don who will share more details about CTI. Don.

Well, thank you, Michael, and good morning to everyone. It is my honor to be a member of the OSI family and, further, it's my pleasure this morning to provide you with a brief overview of who we are and what we do.

CT&I, Chicago Tube and Iron, was founded in 1914 and has a 97-year history of consecutive profitability. CT&I is one of the largest service centers in the United States with nine locations throughout the Midwest and North Carolina. Our 2011 annual revenues are projected to be approximately $225 million and our sales peak in 2008 was $261 million. Thus we are clearly moving forward to recover the revenue attrition that affected our industry and our economy in 2009.

Chicago Tube and Iron is a leading distributor of steel tubing, pipe, bar, valves and fittings, and we also fabricate and provide engineering services and pressure parts for the utility industries.

The primary industries that we serve include construction equipment, agricultural equipment, power generation, transportation, food processing and defense along with others. We process, fabricate and distribute over 30,000 items of inventory from over 1 million square feet of facility space.

Our metal products include carbon, stainless steel and aluminum and services include bending, sawing, laser cutting, beveling, welding and fabricating. About 15% of our business will be considered high-value added where engineering and CAD services are also provided to customers.

We are indeed very excited about CT&I's strategic fit with Olympic Steel. Given our complementary product lines we are confident that combined we have new capabilities and opportunities to better serve our customers and also grow our market share.

We embrace the industry trend of customers seeking purchasing efficiencies through more one-stop shopping opportunities and believe the expanded product offering of flat rolled plate, tubing, bar, pipe will provide a compelling value proposition for our customers.

OSI and CT&I have successfully partnered in the past on several major accounts and we also know that going forward we will be able to better serve our customers together. Chicago Tube and Iron and Olympic Steel's products and services offer an ideal complement as while there is no product or value added overlap whatsoever, there is a beneficial overlap of key customers and prospects. This in turn translates into synergistic sales opportunities. Rick Marabito, I now turn the call back to you.

Thank you, Don, and good morning, everybody. Before I get into some of the financial details I'd like to review some of the upcoming dates and some of the details surrounding the CTI acquisition.

As Michael already indicated, the acquisition closed on July 1, which is obviously the first day of the third quarter, so none of the results from our second quarter or our first half include CT&I. The only exception is the callout that Michael made of acquisition-related fees and costs that were expensed in the second quarter which had the $0.05 impact on lowering second-quarter and first-half EPS.

As a reminder, the base purchase price for CT&I was $150 million, plus a $2.8 million closing cash payment that was made. We also assumed $6 million of CTI's existing IRB debt and we have a working capital purchase price adjustment yet to go, which we do not anticipate will be significant. We also received about $12 million of CT&I's cash on hand at the closing.

So historically over the steel cycle CT&I has earned normalized EBITDA margins of approximately 10% of their sales. We plan to file a Form 8-Ka no later than mid-September and that will include CT&I's historical 2010 annual and first-quarter 2011 historical financial statements. The 8-Ka will also include pro forma financial statements which are required by the SEC.

Since the transaction just closed a month ago we do not yet have purchase accounting completed. So such information will not be included in the 10-Q for the second quarter which will be filed later today. And in accordance with our policy, we will not provide any additional forward-looking earnings estimates or any separate financial information about CT&I at this time.

Next I'd like to cover some of the key aspects of our amended loan agreement that was put in place to help fund the acquisition. So on July 1, concurrent with the closing of the CT&I acquisition, we amended and restated our existing $125 million asset-based loan agreement with Bank of America as our agent.

So the new agreement, again agented by Bank of America, is a five-year $335 million package. It includes a $265 million revolving credit facility and $70 million term loan facility. The new loan agreement contains an accordion feature also which allows us to upsize the agreement by $75 million.

The term loan is repayable in monthly installments of $729,000 which commenced August 1 of 2011. The new facility actually contains more favorable interest rates than the former agreement by about 50 basis points on the revolver. And we are currently running at about $100 million of availability under the new facility.

Finally let me highlight some additional financial items from our second quarter and our first half. As a percentage of net sales gross margin totaled 20.2% in the second quarter compared to 21.5% in the first quarter of 2811 and 20.4% in the second quarter of 2010.

Internally we measure our gross margins on a per ton basis and our second-quarter margins increased to $212 per ton compared to first-quarter 2011 margins of $200 a ton and $172 a ton in Q2 of 2010. Second-quarter margins did decrease sequentially as prices fell throughout the quarter.

Operating expenses in the second quarter of 2011 totaled $46.5 million compared to $46.1 million in the first quarter and $37.8 million in the second quarter of 2010. As a percentage of sales operating expenses actually declined to 15.5% from 15.7% in the first quarter and 17.7% last year. And again, the operating expenses in the G&A line included the $941,000 of expenses for the transaction we previously highlighted.

EBITDA, which is defined as our operating income before depreciation expense right off the face of our income statement, totaled $17.4 million in the second quarter and $38.2 million for the first half of 2011.

Capital spending so far in 2011 has totaled $16.4 million. As Michael indicated earlier, we continue to strategically invest in a recovering market with the majority of our spending related to our temper mill project in Gary, Indiana and processing equipment to outfit our new for cell of the in Mount Sterling, Kentucky.

During the first half of 2011 we also capitalized $429,000 and expensed $273,000 related to our IT system implementations. We do expect our capital spending in 2011 to stay within our previous guidance range of approximately $35 million to $40 million depending -- and that will depend on the timing of payments to complete the new temper mill and the cut to length equipment. And that capital spending expectation would also be inclusive of CTI's capital spending in the second half.

Our effective income tax rate for the second quarter was 39.2% bringing the year-to-date rate to 38.2% compared to last year's rate of 37%. The second-quarter rate increase was primarily related to changes in certain state tax laws that recently took place that now disallow deductions for prior year state tax losses.

Looking at our inventory turnover, at the end of the second quarter of 2011 it was strong at 5.3 times. We expect our inventory turns in the second half to be under five turns as CT&I strategically turns their inventory slower in the power generation business and in valve seals.

Our 2011 first-quarter receivable, DSO, days sales outstanding, totaled 42 days which is comparable with the first quarter of 2010. CTI's DSOs are typically under 40 days, so we may be able to reduce our consolidated DSO slightly going forward.

Our debt at the end of the second quarter totaled $91 million; this was before borrowing for the CT&I acquisition. At the end of July our debt totaled $224 million and our availability was $104 million.

Shareholder's equity to close the quarter was $25.68 a share and we paid quarterly dividend of $0.02 per share in both the first and second quarters, each. Today we also reported that Olympic Steel's Board of Directors approved a regular quarterly cash dividend of $0.02 per share to be paid on September 15 to shareholders of record on September 1 of 2011. And now I will turn the call over to David.

Thank you, and welcome, Don, thank you, Rick, and good morning to all. We are pleased with our market share growth and the profitability achieved in the first half of 2011, as both Michael and Rick have commented.

We have accomplished a great deal in 2011 including the transformational acquisition of CT&I and we look forward to successfully concluding our new location start-ups, some of which are making contributions, profitable contributions already, and the others will be incremental contributors to our results in 2012 and beyond.

Our market outlook remains favorable, even though we experienced a lull in second-quarter shipping activity as we work through the normal summer seasonal slowdown. Market prices peaked in April and have been sliding throughout the quarter. We believe we are now at or close to the bottom of the market.

While the bias of most steel makers has been negative about the third quarter, we believe the market has reached its bottom. Service center inventories continue to drop as MSCI metal activity report for June showed a sequential inventory retreat of 4.2% and is at historically low levels.

Second half demand is expected to rise from auto sales, June's total steel imports declined 10% sequentially and we suspect that total imports are likely to post another decline in June, as has been noted in some of the publications as late as today.

Adding to reduced imports and reduced inventory, producers are pulling ahead maintenance shutdowns earlier than originally planned. Catalysts for an improving steel market are aligning nicely. Inventory is low and imports are shrinking; raw material costs are moving up and scrap is holding steady.

We see a resolve to the US political wrestling an improvement in the GDP. These market dynamics should create the proper climate for producers to elevate pricing as they approach their breakeven point. We may start to see producers looking to move transaction prices up as early as next month as frail inventory levels will cause the spot market to rise.

We are also bullish on the longer-term view for steel and believe we will have a strong market over the next five-year cycle. We feel that we are well positioned to take advantage of the expected global market acceleration related to infrastructure and mining equipment builds.

The rewards of our recent investments will be realized as the market returns to its accelerated growth again. As we have previously stated, our strategy has been to invest heavily during the market downturn when facilities, equipment and people are available and at lower asset valuations aside from our acquisition of CT&I.

As Mike, Don and Rick have commented, we view the CT&I acquisition as the economics of excellence. To that point we have been quite busy in 2011. In addition to the transformational acquisition of CT&I we have successfully executed the following initiatives.

Mount Sterling, Kentucky facility -- the second half of 2010 we added a new Olympic facility in Mount Sterling, Kentucky which is about 30 miles east of Lexington, Kentucky. We purchased 14 acres of land and an existing 100,000 square-foot building. Since then we've been busy upgrading the building and equipping the facility to perform plate burning, machining, forming and shot blasting.

We became operational at the end of first quarter, have already reached profitability in the second quarter of 2011. The Mount Sterling site reinforces our strategy of being closer to where our customers assemble their products and we will be looking to expand our footprint in this area as we have quickly filled our existing space.

Now turning to our Gary temper mill. In November of 2010 we announced a 177,000 square-foot location in Gary, Indiana to house our new Butech cut to length line and a four-high temper mill supplied by I2S and multiple pieces of plate burning equipment to augment our existing flat rolled and plate offerings.

Since then construction of equipment and upgrading of the building has progressed on time and on budget for completion around the year end 2011. And we are pouring foundations in Gary and the mill housings have been received at I2S this past week.

Once operational in 2012 the equipment will be capable of processing approximately 150,000 new tons of high-quality tempered sheet for Olympic Steel and significantly reduce our inbound and outbound freight costs while better servicing customers from our existing two temper mills in Cleveland, Ohio and Bettendorf, Iowa.

Our Cleveland and Iowa temper mills have been significant drivers in Olympic's historical growth and we believe our new Gary temper mill investment will be the catalyst for Olympic Steel's next big growth spurt. We also have an option to purchase a second like kind piece of equipment at favorable terms and intend to make that decision sometime in 2012.

Let me turn to our international presence in Monterrey, Mexico. During April of 2011 we entered into a lease agreement for approximately [50,000] square feet of warehouse space in Monterrey, Mexico to augment our sales presence there with the ability to stock and distribute metals for our Mexican customers. We're almost set to begin shipping in Monterey.

Turning back to the US and Kansas City, Missouri -- in April of this year we entered into a lease-to-buy agreement for approximately 43,000 square-foot space in Kansas City. This new location is part of our temper mill expansion strategy as we plan to push our market penetration further west of our Bettendorf, Iowa location. We are now shipping product out of our Kansas City location in this third quarter.

In Roseville, Minnesota in July, just this past month we leased 56,000 square feet of additional warehouse storage space in Roseville, Minnesota and we now have plate on the floor there this quarter. We will feed our two Minneapolis processing facilities with coil and plate stored, new location to optimize our processing space, reduce logistics and handling costs and increase our profile of value added equipment in Minneapolis. The logistics savings are expected to fully offset the cost of the facility once it is fully utilized by the end of this year.

And just this past week in Streetsboro, Ohio we concluded a lease-to-buy transaction for 66,000 square feet of space in Northeastern Ohio. This new facility will be Integrity Stainless' first owned physical facility and will also house the offices of our leadership team of our specialty metals group.

As we have remarked, our purchase of CT&I has been transformational. We recently at the top of this week announced some management promotions; allow me to go through that. Earlier this week we made the announcements regarding management promotions at Olympic Steel. We recognize the need to expand individual responsibilities and streamline our reporting while acknowledging the strength of our leadership team that will be instrumental in the next step of our transformation and help define the future of Olympic Steel.

We are pleased to announce that Andrew Greiff has been promoted to the newly formed position of President of Specialty Metals, and he oversees the sales and distribution of our stainless and aluminum products and will now be responsible for managing our Chicago and new Streetsboro facility. Andy has been with Olympic Steel since 2009 previously serving as Vice President of Specialty Metals. Prior to joining us he owned and operated International Metals Group.

Ray Walker has been promoted to the newly formed position of Senior Vice President of Eastern Region. Ray has been employed with Olympic Steel for 25 years, most recently serving as the Company's Vice President of Eastern Region. Ray is overseeing our largest expansion project, the temper mill start-up in Gary. He is experienced in this regard and was instrumental in leading the start-up of our existing two temper mills in Cleveland and Iowa during the 1990s.

Michael Cedoz has been promoted to the newly formed position of Vice President of Automotive. Mike has been employed with the Company since 2003, most recently serving as General Manager of the Company's Detroit division.

And Terry Rohde who has served as our General Manager in our Chicago division since 2008 has been promoted to General Manager of our new Gary, Indiana facility and will now focus 100% of his efforts on the successful start-up and management of this facility.

Sean Heenan who has served as a Regional Sales Manager for us since 2007 will succeed Terry Rohde as General Manager of the Chicago division and will now report to Andy Greiff of Specialty Metals.

We have many initiatives in various stages of completion and look forward to their favorable impact on our sales and earnings results in 2012 and beyond. We are confident in our strategies and in our people and leadership to provide revenue growth and real value creation for our shareholders in a recovering economic environment in North America. This concludes our formal comments and we will now open the call to your questions.

(Operator Instructions). Edward Marshall, Sidoti & Company.

Good morning, guys. Thanks for the details on CTI as far as the margins are concerned. I missed it -- the 10% EBITDA margins that you gave, was that at the peak or is that currently?

We talked about that being over the steel cycle. So if you look over the last five years that would be the average.

That would be the average, okay. And then you mentioned also about $225 million for the full year of 2011. Can you give us an indication as to what they did in the first six months?

No, we're not -- we're really not going to give much more than the $225 million other than (multiple speakers). Yes. You'll see their first-quarter information when we file. But suffice to say, Chicago Tube and Iron is performing very strong as is Olympic.

Yes. And you mentioned it was accretive in the first -- accretive. Did you mean the first full year or for 2011?

We expect it to be immediately accretive out of the chute starting in the third quarter.

Okay. And then you had some (inaudible) commentary regarding volumes -- expected volumes coming forward as well as pricing. Do you have any comment for July? I mean, we're through July now; can you talk about what kind of trends you saw in July and is it supporting or is it more of the same? Is it summer seasonality? What can you help us with there?

Ed, you know, we saw a very slow start to July around the 4th of July holiday and then we saw momentum pick up in second, third and fourth week of July. So we saw a renewed strength and slightly more strength than we would normally anticipate for that period.

From a volume perspective, from a volume perspective.

Right. When I look June of '11 versus June of '10 and I back into pricing, it looks like pricing was up slightly year over year. But what happened with the margin? I mean it got squeezed just slightly from first quarter as well as year over year. What would be the impact there, what are we dealing with?

Well, I would just say you're dealing with an environment where the psychology is worse than the reality and you've got lots of guys that believe in a falling price environment we should liquidate inventory as fast as possible, which puts some pressure on the margin as people start to lower their inventory levels on the belief that they can replace it at a lower price level. There is certainly competition out there in the spot market that's squeezing some of the margins.

Okay. Thank you, guys.

Thank you.

Luke Folta, Jefferies.

Good morning, gentlemen.

Good morning.

Hey, congratulations on the acquisition and the results so far -- on the progress on the expansion so far. You guys have certainly been busy.

Okay, yes.

Two questions. Just regarding CTI and how their performance is expected to be in 2011, I know you don't want to give up much more than revenues, but can you give us a sense of where EBITDA margins are currently versus the 10% mid-cycle level?

Hey, Luke, it's Rick. We're really not going to comment anymore on CTI's earnings or performance until mid-September when we've got some historical info on the pro formas.

But they are performing well according to a historical basis and very consistent and a little more -- or a little less cyclical than we are historically and they're performing according to historical basis of relatively good performance.

Okay. And with all these expansion project you have along with the CTI acquisition, when I think about shipments in the next cycle I think you did roughly an annualized peak of around 1.2 million tons excluding tolling in the last cycle. Can you give us a sense of where you think that might reach when we get into a more normalized demand environment?

Well, Luke, we've exhausted our capacity and that's why we're bringing on Gary, Indiana. So with that in mind, we have recovered from 2009 and '10 even quicker than we anticipated. We had a very strong first quarter, as Rick remarked, second-quarter tonnage was down slightly, revenues were up. And we see some consistency, as I remarked earlier.

And so we are -- we fatigue some of these larger production facilities and that's why we've brought on additional facilities in order to complement our growth and also position ourselves for the reentry of our traditional customers.

So we have remarked quarter over quarter that we have been the beneficiaries of what we called flight to quality, a number of large OEMs coming to us as some of our traditional business had suffered. That traditional business is rebounding and we want to make sure we're in a position to absorb all of that and so we see ourselves going beyond those higher levels.

Really, for us, Luke, the only market that we've seen softness is the other service centers as they are liquidating inventory. So the spot market service center business is going down a little bit, but almost every other market we serve has been relatively strong.

I guess I was trying to get at over the next few years, once all these new projects come online, what sort of shipment level can we expect once demand starts to fully normalize?

The Gary Mill will give you 150,000 to 180,000 additional tons, that's pretty easy. Some of these other facilities that we mentioned which are already online, Mount Sterling, and profitable and full and we're looking to expand that. But that's value added, that you'll see on the revenue side, that's not -- that doesn't add significantly to the tonnage as temper mills do.

And then as I concluded my remarks about temper mills -- the temper mill expansion in Gary, Indiana, we have a decision to make in 2012 whether to bring on a fourth temper mill which would be another 150,000 to 180,000 tons. If you look the way we've operated we had that same opportunity in 1995 when we put on the first temper mill in Cleveland, we had an option on a second temper mill, we executed that. Our bent is to try and be successful enough to add that fourth temper mill.

So we're looking at 1.5 million tons relatively quick without CT&I. And then obviously as David indicated, the objective is to drive this to over 2 million tons, Luke.

Okay, that's great. Okay, and also can you talk about your current inventory position? I know you had said the other service centers are de-stocking and you guys are probably taking advantage of some of that trend or will be shortly. Can you give us a sense of how you're positioned in the second half?

It's our job to take advantage of all of these opportunities, Luke.

The 5.3 inventory turns gives you a good invitation, Luke, that our inventories are in very good shape. Again, depending on our bent of where we see the cycle starting to move up, we will probably, as you saw at year end, a higher inventory level on the snapshot of December 31. You're seeing a relatively strong inventory position relative to sales at the end of June 30. My guess is we will be in a position to start increasing our inventory as we start to see the recovery on the sales side.

Okay. Are you relatively happy with the average cost of that inventory at this point?

Never, it's always too high. No, at 5.3 turns we're doing pretty well on the cycle, Luke.

Okay. And just lastly, housekeeping questions. I think I heard you give a debt number, but can you talk about where your cash and debt position is currently or at the end of the second quarter and also give us a sense of where you think interest expense could be in the second half on a run rate basis?

Sure, so the debt at the end of the second quarter, which is a bit irrelevant because it's before the acquisition, was $91 million. But as you look at where we rounded out, I gave our July month end number, it was $224 million.

In terms of a cash position, we had $100 million of availability there. And then in terms of interest rates, Luke, we're about 50 basis points lower on the revolver. So our revolver borrowings are LIBOR plus 2 to 2.50 is the range. The term loan is 50 basis point higher; the term loan is $70 million of that $224 million.

Okay. All right, guys, thanks a lot.

You're welcome.

Mark Parr, Key Bank.

Hey, thanks for much, good morning.

Hey, good morning.

Dave, I had a question for you. You had some really nice color in terms of how you were seeing the potential inflection on carbon pricing. And Michael, you and Dave I think had both made some comments about how call it the non-transactional business, more of the in-demand related business levels were pretty strong. Just wondering if you thought how you would handicap HRC pricing in the fourth quarter relative to the third quarter, if you can look at 90-day versus 90-day opportunities?

Mark, I think it's up. As we commented earlier, and thank you for the question, obviously these cycles are coming faster, that is the obvious. We saw the market peak around April, we saw slow progression, but you had steady progression downward through June into July. Our belief is that this is the bottom; we're very close to the bottom.

And we believe that that bottom is breakeven for production or close to breakeven for production and that's not tolerable for the producers, hence, you see some maintenance being pulled ahead and so forth. And so the answer to the question is that we see fourth-quarter pricing being higher than third-quarter pricing and we see the mills coming out here shortly. I would suspect and to encourage them to come out with some upward pricing movement.

Yes, I mean we've heard a few little rumors and tidbits here. I guess there's a furnace down in Cleveland right now and there's some more -- some other things in the works. So I imagine you're talking about the same thing that we're hearing.

It's been publicized that Middle's furnace maintenance has pulled ahead. You have some maintenance issues with the old IPSCO [SSMB] on plate, US steel had some blast furnaces down, of course Sparrows Point struggling. So we see production being responsibly managed in a marketplace where the pricing has declined. And again, our expectations, to your earlier question, is that fourth quarter will be up over third quarter.

Okay, that's terrific. If I could ask just a couple of housekeeping questions for Rick. In terms of the transaction costs associated with the Chicago Tube and Iron, is there anything incremental for the third quarter we should be looking for?

Yes, there will be some incremental costs that hit in the third quarter, Mark. Not sure they'll be of the size of the second quarter. And then of course not hitting expense, but all the closing fees on the new bank deal will be -- hit the balance sheet and then amortized over five years and that will happen in the third quarter. But in terms of the nonrecurring things that hit the income statement, yes, there will be more in the third quarter.

Okay, and then that was -- my next question was on the interest expense. I mean, can you give us some color on second-half tax rate and expected interest expense?

Well, the interest expense, I gave you guys sort of the numbers of the borrowing, so you've got our total borrowing and you've got our rate. So I think you guys can do the math on that one. And then in terms of the tax rate, obviously we've got a little more tax work to do in terms of the integration with CT&I, but I am not expecting the tax rate to vary much differently than what you've seen here in the first half.

That should (multiple speakers) be 37-39, yes.

Okay, all right, terrific. And in regulations on the acquisition and good luck in the third quarter.

Thanks.

Thanks, Mark.

Sal Tharani, Goldman Sachs.

Good morning.

Hi, Sal.

Hi. Hey, Mike, I was doing some math here, I mean I look at your historical margin average since the '90s, it looks like about 5% EBITDA for you. And according to my math you bought a company which is twice the EBITDA margin at the same multiple as you are trading now. So I think it looks like a good acquisition and certainly, as you said, it should be accretive from the very beginning.

Yes, that is true, we couldn't agree more.

I want to understand this comment on the pricing which obviously looks like it's bottom because the prices are reaching the cost of even the lowest cost producers. But do you think there's enough discipline out there? We have a more fragmented industry now, there are more players on the flat rolled side.

And some of these guys on just one or two furnaces -- so I'm not sure if they will be -- it looks like a deja vu which was before 2004 that smaller companies with one or two furnaces were reluctant to shut down the furnaces because that means they've got to shut down half of the company or the full company. Do you think that that will prevail, that that consolidation impacts us still?

I think the price will go up, Sal. I don't think that whether you're running two furnaces and you're a small producer or whether you're a global producer, I think the anticipation is you're going to make money. And at these particular levels our belief is, as you stated earlier, I don't think there's significant money to be earned and therefore the price has to go up. So I do think that that is the governor, that will drive the price of steel.

And in anticipation of your anticipation of the price going up, are you building some inventory at the moment?

We're buying every day, absolutely.

Okay, great. Thank you very much.

Tim Hayes, Davenport & Company.

Good morning.

Good morning.

On the -- the volume declined sequentially from Q1 to Q2. Was that all due to service center customers or was there more to it, like say the fab customers or a certain end market that contributed to the decline?

Well, a lot of it was service center. We did see automotive start to taper off as the second quarter progressed, Tim. And then I think as Michael and David I think both commented, as the prices started falling the psyche in the marketplace was the price is going to go lower on the next buy. So I think you see the end result which is very low inventories in the entire supply chain. So I think it's a combination of all those things.

Okay, thank you.

(Operator Instructions). Charles Bradford, Bradford Research.

Good morning. Could you talk a bit about the restarts and the new capacity that's coming on and what impact you're seeing from those players?

Chuck, it's David. Obviously you have Severstal on and [Thyssen], RG -- really from our perspective there's not much of a ripple in the water here with the issues down at Sparrows Point. There are some challenges out there because, as Rick and Mike have both commented, we saw volume go down as these producers are bringing on more capacity. I am sure that that helped influence some of the pricing going down.

But regardless of all of that, it's reached a point of inflection. From our perspective it's at its lowest rate. And whether you brought on capacity or not you need to move the numbers up. So there has been some decay as some of those new producers came on, but I think they're rectifying that as we speak.

You had talked about Chicago Tube not competing in products and not competing or -- but having overlap as far as customers. What about suppliers? Do you get enough larger at some of the suppliers that you'll be better off from a customer basis?

Chuck, at our level, at the level of $1 million plus I think that we're as an efficient buyer as anyone in the marketplace, including those that supply our new acquisition, Chicago Tube and Iron. Certainly as we look at some of the product that's moved through CT&I we view that as -- some of the product I say -- we view that as flat rolled that's been transformed to tube so that elongates that marketplace. And we certainly think that with their depth of experience, CT&I led by Don McNeeley, we certainly think that our expertise can only complement their supply-side.

Yes, because they certainly have a pretty first-rate reputation in the industry.

They are --.

They deserve it.

Yes, they're terrific.

Thank you very much.

Thank you, Chuck.

Aldo Mazzaferro, Mazzaferro Research.

I think Chuck just asked my question, Mike. I was really wondering whether your experience on flat roll and your position on flat roll would help the supply chain of say something like tubing made from flat roll. I think you just answered, yes.

Let me turn that -- hey, Don, you're on the call. Would you like to comment, Don, about what you think it means to you?

I want to clarify something that Charles said earlier and then get to Aldo's question. There is an overlap of customers, we do see potential synergies with an overlap of customers. In terms of supply, historically our leading economic indicator was HRC. We track the cost of HRC coming through the channel and we are learning some insights of the flat roll industry that I think will benefit our ability to leverage our purchases.

We've already had a couple of opportunities in steel mills that we sell that we've been able to leverage the relationship that Olympic already has established. So simplifying the new intelligence that we're gathering from our new mother company is certainly going to position us better to leverage our purchases in a more economical fashion going forward.

Okay, Aldo -- does that answer your question, Aldo?

It absolutely does, thanks. And can I ask one more for Rick? I don't know if you want to tell us, Rick, what the depreciation is on CTI?

Well, Aldo, we're in the midst of doing purchase accounting right now. So one of the exercises is to revalue at market value all the fixed assets. So I don't have that information yet.

But in your comment that the EBITDA margin might be around 10% on a normalized basis, can you say how much the DA portion of the EBITDA was?

You know what, I do not have that right in front of me. I don't want to put Don on the spot. Don, do you know approximately what your annual depreciation has been running? And if not we'll follow up with you, Aldo. But I don't know, Don, if you have an idea roughly what your annual depreciation is?

Off the top of my head I'm going to put it in that $3 million to $4 million range. I know that's a big spread, but somewhere in that sweet spot, Rick, is where we'd be.

Aldo, we'll take that off-line, we'll get it for you.

All right, great. Congratulations on the deal, I think it looks fantastic.

Thank you.

I'm showing no further questions at this time. And I would like to turn the conference back over to management for any closing remarks.

Yes, thank you. Let me just -- let me also before I conclude just welcome the entire family of CTI. David called it transformational, I would just call it -- it's a thrill and a privilege to have the opportunity to look at a 97-year-old well-managed company as CTI. So we welcome the entire family of CTI.

So as a reminder, it is not -- it is our policy not to provide forward-looking earnings estimates for the upcoming quarter or year, and not to endorse any analyst sales or earnings estimates. We anticipate releasing our third-quarter 2011 earnings on or around November 4, 2011. And this concludes the call and we thank you for your continued interest in Olympic Steel.

Ladies and gentlemen, this does conclude today's conference. You may now disconnect and have a wonderful day.