Olympic Steel Inc (ZEUS) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Olympic Steel Inc., third 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 CEO. Please go ahead.

Good morning, and welcome to our call. On the call with me this morning is David Wolfort, President and Chief Operating Officer and Rick Marabito, our Chief Financial Officer. I want to thank everyone for your participation and for your interest in Olympic Steel.

Before we begin our discussion, I again want to remind everyone 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 and assumptions or changes and 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 SEC including our 2011 third quarter Form 10-Q, which will be filed early next week.

Earlier today, we reported our financial results for the third quarter and the nine months ended September 30, 2011. We are pleased to announce strong overall 2011 sales and earnings performance. We've recorded our highest ever sales level for a third quarter and our second highest sales level for the first nine months in 2011.

Net sales for the third quarter of 2011 totaled $348.5 million, an increase by 67% from $209.2 million for the third quarter of 2010. Sales also increased by $49.5 million or 17% over the second quarter of 2011. Third quarter 2011, net income totaled $6.1 million, or $0.56 per diluted share, compared to a net loss of $1.2 million, or $0.11 per diluted share in last year's third quarter.

Our 2011 financial results include the results of CTI, Chicago Tube and Iron for a full quarter as we acquired the company on July 1, 2011. CTI's third quarter sales totaled $61.4 million.

Our third quarter 2011 results also include the impact of two items worth highlighting. Cost of goods sold includes a cost of $1 million related to a Chicago Tube and Iron purchase price accounting adjustment to write up the value of certain inventory, the fair value at July 1, 2011. The inventory adjustment had a negative impact of $0.06 per share on the third quarter 2011 EPS.

Additionally, our third quarter 2011 consolidated effective tax rate was 12.2% as a result of changes in unrecognized tax benefits during the quarter. The income tax benefit had a net positive impact of $0.17 per share on the third quarter, the combined net EPS impact of the cost of goods sold and income tax items was a positive $0.11 per share. Rick will provide more detail on those two items later in the call. So, save your questions for later.

Net sales for the first nine months of 2011 totaled $941.9 million, our second highest ever nine-month revenue total. Net sales increased 60% from $589.8 million for the first nine months of 2010. For the first nine months of 2011, net income increased by $20.7 million, or 555%, to $24.4 million, or $2.23 per diluted share, compared to net income of $3.7 million, or $0.34 per diluted share, for last year's first nine months.

Our 2011 year-to-date results include $919,000 of operating expenses incurred during the second quarter related to the CTI acquisition, which equates to about $0.05 a share of earnings. We are thrilled with our CTI acquisition, as it accelerates our market share growth and was immediately accretive to our third quarter earnings. We also continue to successfully execute on our previously announced strategic investments in new products, geographies, and equipment to service our growing customer demands.

Through the first nine months of 2011, our capital spending has totaled $25 million including new equipment, successful information system infrastructure rollouts and facility start-ups in Gary, Indiana; Mount Sterling, Kentucky; Monterrey, Mexico; Kansas City, Missouri; Roseville, Minnesota; and Streetsboro, Ohio.

We confidently look forward to our new Gary temper mill facility opening on time and on budget, actually at the end of 2011, but ramping up in early 2012, with [$150,000] incremental tons of capacity once at full operational capacity. We are already planning for another expansion in Mount Sterling, in Kentucky, as our one-year-old facility there is now operating at full capacity. In the first nine months of 2011, we estimate that these new location start-ups had a drag on earnings of about $600,000 as we get each one up and running to its capacities.

Our strong balance sheet remains in excellent shape, we -- with our new five-year $335 million credit facility, providing the foundation for continued growth and value creation. Today we also reported that Olympic Steel's Board of Directors approved a regularly, quarterly cash dividend of $0.02 per share to be paid on December 15, 2011 to shareholders of record on December 1, 2011.

And so, I'll turn the call now over to Rick.

Thank you, Michael. Good morning, everyone. And before I get into the normal financial highlights, I want to take a few minutes to just talk about some of the details surrounding the CTI acquisition. So, as Michael already indicated, the acquisition closed on July 1. So our third quarter results include a full period of CTI's results.

The total purchase price for CTI, inclusive of a post-closing working capital adjustment, was $159.9 million. We also assumed $5.9 million of existing CTI, IRB debt and that was offset by $11.1 million of CTI cash that we received at closing. And as a reminder, the acquisition was financed through our upsized and amended $335 million credit facility, which I did outline in detail on the last call. So I'm not going to do that again today.

We incurred, as Michael said, $919,000, or about $0.05 earnings per share on deal related expenses. Those had already flown through the income statement in the second quarter.

During the third quarter, we completed the preliminary allocation of CTI's purchase price and that resulted in goodwill of $39 million and other intangible assets of $37 million.

Next looking at, CTI's inventory. CTI values the majority of its inventory on LIFO. In accordance with accounting standards, the book LIFO reserve was eliminated and reset to zero on the July 1 purchase date. We did not record any LIFO adjustment in our third quarter of 2011, because our second half LIFO estimate anticipates the prices in quantities will be below the July 1, 2011 levels.

So as a result, we have no LIFO reserve at September 30, in essence CTI LIFO inventory is stated at FIFO at September 30, 2011. And just to give you an idea, about 13% of our consolidated Olympic Steel inventory would now be stated on LIFO.

As part of purchase price accounting, accounting standards also required us to write-up certain portions of CTI inventory to its fair market value or its sell price and then subsequently expense that write-up to cost of goods sold over one turn of inventory.

So, as a result, our third gross margins were negatively impacted by the $1 million that Michael just spoke of, which equates to $0.06 of EPS. Fourth quarter margins will be impacted by only $136,000. That was predominantly a one-time flow through in the third quarter.

Turning to segment reporting, starting with our third quarter Form 10-Q, which I think will be filed by Monday. So you'll be able to see it Monday. Our business results will be reported in two segments, a flat product segment and a tubular and pipe product segment.

CTI's net sales for the quarter were $61.4 million, or 17.6% of consolidated Olympic net sales for the quarter. CTI's third quarter operating income was $3.6 million and CTI's EBITDA number was $4.9 million for the third quarter and that $3.6 million of operating income and $4.9 million of EBITDA, both consider the $1 million inventory cost of goods sold adjustment that I just described.

So, we're very pleased with CTI's accretive contribution to our third quarter results. And as I said, please refer to the 10-Q footnotes and MD&A for more information and I'll be happy to answer any questions after you review it.

Next let me highlight some additional financial items for our third quarter and first nine months. As a percentage of net sales, consolidated gross margin totaled 19.4% in the third quarter, compared to 20.2% in the second quarter of 2011 and 17.9% in the third quarter of 2010.

CTI's gross profit percentage was 16% -- I'm sorry 26.8% for the quarter, as tubular and pipe product gross margins are higher than our traditional flat product gross margins. And as I mentioned earlier, GAAP purchase price accounting rules resulted in the $1 million cost of good charge that rolled through cost of goods sold and gross margin. That had an unfavorable impact on our total consolidated gross margins about 0.3 percentage point.

Operating expenses in the third quarter of 2011 totaled $58.2 million, compared to $46.5 million in the second quarter and $38.7 million in the third quarter of 2010. As a percentage of sales, operating expenses in the third quarter actually declined 16.7%, and that 16.7% includes 2.3% for distribution costs. So we declined to 16.7% versus 18.5% last year.

EBITDA, defined as operating income before depreciation and amortization expenses right off the face of our income statement totaled $14.0 million in the third quarter and $52.2 million for the nine months of 2011.

Capital spending through nine months of 2011 is totaled $24.6 million. Again, the majority of that spending related to our temper mill project in Gary, Indiana and processing equipment for our Mount Sterling, Kentucky operation. We still expect our capital spending in 2011 to be about $35 million. A lot of that will depend on the final timing of payments to complete the new temper mill project.

Our effective tax rate for the third quarter was 12.2% and that brought our year-to-date rate to 33.3%, compared to last year's rate of 37.9%. So, the lower third quarter rate was due to some favorable changes in unrecognized tax benefits during the third quarter that are required to be recognized under accounting standard ASC 740. The non-recurring benefit had a favorable impact of about $0.17 per share, as Michael already commented. We would expect our full-year 2011 income tax provision to be about 34%, and we would also expect in 2012, our tax rates to return to our historical 38% to 39% range.

Inventory turnover at the end of the third quarter of 2011 was slightly above 4 times for us. We did intentionally add inventory, prior to the third quarter price increases. We do expect our turns to be more in a normal range of 5 turns by year end. CTI, strategically turns inventory slower in the power generation business and valve sales business resulting in normal turnover rate of about 3.5 times to 4 times on CTI inventory.

Our 2011 third quarter receivable DSOs totaled 42 days. That is comparable with the second quarter. CTI's DSOs are typically under -- slightly under 40 days, so we may be able to shave a little bit off our consolidated DSO going forward.

Our debt, at the end of the third quarter, totaled $248.2 million and our availability stood at $82.7 million. And obviously, the debt balance is up, because it includes the $160 million we borrowed to effectuate the CTI purchase.

And then finally, shareholders' equity per share increased to $26.23 at the end of the third quarter.

Now, I will turn the call over to David.

Thank you, Rick. And good morning to all. Again echoing what both Mike and Rick just talked about. We are pleased with our market share growth and the profitability we have achieved in the first nine months of 2011. We've accomplished a great deal so far this year, 2011, and we had a busy third quarter.

We completed the transformational acquisition of Chicago Tube and Iron on day one of the third quarter and we welcome the 97-year-old company of excellence into the Olympic Steel family. We also continue to invest in our future, spending over $8 million during the quarter on our strategic capital initiatives. As Rick indicated, most of our capital spend this year has been on the new temper mill cut-to-length line in Gary, Indiana and our continued growth in Kentucky.

We also have other meaningful expansion projects at various stages of completion. And before commenting on these, let me review the market first. I characterize the third quarter as a normal service center quarter with a typical summer seasonal slowdown. Our tons sold, excluding Chicago Tube and Iron, were 266,000 tons in the third quarter, compared to 285,000 tons in the second quarter.

So, our sequential volume was down by less than 7% and for the nine months, our tons sold totaled 869,000 tons or a gain of 22% over 2010. The tons sold metric is not really relevant for pipe and tubing sales. So, we're not including Chicago Tube and Iron's volume in our tons sold report.

Demand has remained sound through October, and we continue to see strength in our customers in the automotive, heavy industrial and agricultural equipment segments. We're optimistic about demand, even though we expect the fourth quarter to follow normal seasonal patterns with a slowdown in business occurring around Thanksgiving holiday and again during the last two weeks of December.

Market prices had peaked in April, and then slid through mid-August when mill price increase announcements were made. The necessity of the August price increase was short-lived as prices came under pressure again by mid-September and prices have been revisiting the lows of August.

While pricing is again approaching the steel mills breakeven point, buyers remain very cautious and are only buying what they need. With steel mill lead time short and concerns revolving around pricing, there is no need for service centers or other large buyers to build inventory. Indeed we expect our inventory will be lower at year-end than where we ended our third quarter.

We do remain bullish on the longer-term view for steel and believe we will be -- and a strong market over the next five years cycle. We also believe that Olympic Steel is well positioned to take advantage of the expected market acceleration related to global infrastructure and the related equipment builds. Our strategy has been to invest in greenfield initiatives during the market downturn of the past few years, when facilities, equipment and people were available at favorable pricing.

I want to now spend a moment of time to talk about some of the exciting developments around our bigger initiatives. We mentioned Kentucky a couple of times. Our Mount Sterling, Kentucky facility, as I previously highlighted, we bought this facility in Mount Sterling, Kentucky in the second half of last year and have been outfitting it with equipment over the past 12 months. The operation has been extremely successful and profitable. In fact, we already need to expand the footprint there, as our existing space is filled. In order to meet our customers growing needs, we expect to purchase another building by year-end in the same industrial park.

Let me talk a little bit about our Gary, temper mill project. Needless to say, we're very excited about our new temper mill operation in Gary, Indiana. We have already moved our management team there and the final equipment installation is being completed this month, November. We anxiously await running our first coil over the new mill and projected operations by year end, as Michael indicated earlier.

We are already shipping plate product from this facility and at full capacity, the temper mill equipment will be capable of processing approximately 150,000 tons of new business, high-quality tempered sheets. And we'll significantly reduce our inbound and outbound freight cost, while better servicing customers from our existing two temper mills in Cleveland, Ohio and Bettendorf, Iowa.

We also look forward to early 2012 when we will complete our marketing studies and justification in order to make our next big decision on our option to purchase another like-kind piece of equipment at favorable terms. If we exercise that option, we will also be deciding on a location for what would be Olympic Steel's fourth temper mill cut-to-length line facility.

Let me talk a little bit about Olympic Steel and Chicago Tube and Iron and the commercial integration that we've experienced so far. In addition to all the new facility growth during the third quarter, we kicked off a significant commercial integration effort to grow our tubing and flat product sales to existing and new customers, utilizing the combined strengths relationships and product offerings of Olympic and Chicago Tube and Iron.

For example, the new Kentucky facility that I just talked about will also allow us to begin stocking tube and pipe products from Chicago Tube and Iron for servicing, existing and new customers in that region. We have similar initiatives underway in Roseville, Minnesota, Fond du Lac, Wisconsin, and Dover, Ohio.

We think this will be a great opportunity to leverage organic growth in the next few years through our existing facilities and relationships without the need for additional capital investment. 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.

If we move forward with our option to order another temper mill, it would be the capstone of what would be a total of three-year spend of $75 million in strategic capital expenditure programs that adds multiple Olympic facilities in new geography, adds value-added processing equipment and adds in excess of 300,000 tons of new tempered sheet capacity to provide the foundation for growth and value creation for years to come.

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

(Operator Instructions) Luke Folta, Jefferies.

Hey, good morning, guys.

Hi, Luke.

First question on the new temper mill at Gary. You're talking about being able to start ramping shipments from that mill in the first quarter of next year. Can you give us a sense of when you think -- how long do you think it will take for you to have positive contribution for an earnings standpoint there?

Well, Luke. We're going to start the mill up before the end of the year, as both Mike and I commented. We are shipping plate out of that facility right now and we would expect by probably March to be at pretty good order of production.

So second quarter, Luke.

Okay.

Maybe -- it again depends on the startup.

Okay. In the second potential temper mill project, I think we'd spoken in the past about the various regions in which that might end up. Is it safe to assume somewhere in the southeast, Mike, is kind of where the focus might be on that project?

That's where the focus is.

Okay, okay. And then also, just given -- I mean, you may have answered my question in your comments already on this, but I mean, do you guys see any reason outside of the fact that mills metal spreads are compressed and this is typically the time of year when the mills start to go for pricing for the first half of next year. Do you see any other reasons -- fundamental reasons why prices should be increasing here, along with these announcements we've seen, just over past couple of days?

Luke, is the question do -- can we -- do we understand why prices are going up, is that what your question is?

I guess, the question is have you seen any change in your business, whether it be demand picking up or lead times getting a little tighter, or longer, or availability getting a little tighter that would suggest that the need for -- or the rationale for increasing prices at the mill level?

I think the confluence of all of those issues are in play here. Quite frankly, we've seen a continued and steady growth as we commented. We see our OEMs are busy. We do see lead times moving out. That's a combination of facilities shortening their production, and a variety of different issues that go around that. There, of course, as we remarked, the service centers are playing the game hand to mouth, as one would expect, concerned about the price of scrap.

And then, of course, the play that we saw in mid-September and beyond was really the strengthening of the dollar and now again revisiting the dollars ratio to the euro. It's going back to where it was pre-mid-September. So again, that starts to loosen things up a little bit.

As well as the fact, Luke, if you remember it from last year, prices bottomed somewhere in October. And when you look at the forecast for steel consumption in 2012, it clearly is up by almost every indication, by at least 5%. So, when you're looking at an overall consumption moving into next year at an increased level from this year, we're much more optimistic about the outlook for '12, sitting here today in '11 than we were sitting here at '10 looking at '11.

So, the steel mills are looking at this year 2011, sort of, as a same indication with even a greater consumption of next year and there is no reason for them to abdicate tonnage and pricing for December when, in fact, they think it's going to recover regardless of what they do.

Okay. All right. Thanks for the color their guys. And just lastly, regarding what you're hearing from some of your OEM customers for the first quarter '12, for the first half of -- have they kind of given you any specific indication of what their needs might be and can you just comment on how you think about those trends?

Luke, again, I think, Michael gave you a great answer, but I will tell you that our OEMs are busy. And they are busier than they were in first quarter. But are they as busy as they were in the second quarter, it's probably a fractional differential, but they're all busier, substantially busier than they were in 2010 and they'll be busier in '11 than they were -- busier in '12 than they were in '11.

All right. Thanks a lot, guys.

Sal Tharani, Goldman Sachs.

Thank you. How are you guys?

Hi, Sal.

Couple of quick questions. First, Rick, on 10-Q, would you also provide the gross margin for each of these divisions?

The 10-Q, what you'll see in our segment footnote is you'll have, for the Olympic side, you'll have the tons sold sales average pricing, gross profit, operating expenses and operating income. And then you'll have for consolidated, you won't have tons sold for the reasons that David highlighted and that is, when you blend in CTI, we don't think it's meaningful. So you will have a consolidated gross margin and then you will have gross margin by segment.

Okay. So we can back it out CTI, if we want to.

Yes.

Thanks. And also any further acquisition-related expectations for the next quarter, are you all set with that?

Yes, for the right price, we're ready to do any deal, Sal.

Okay. I -- in CTI, do you have any more expenses in the fourth quarter or you are all done with all the charges you were supposed to take?

Yes, we should be pretty clean in the fourth quarter.

Okay. Now just a couple of questions. One is, the Gary temper mill, a 150,000 ton. Mike, is this all new or is there some of it you are already supplying from your existing temper mill and it will be -- not be a 150,000 ton, once it's fully ramped up?

No. Net-net, because whatever we take off of Cleveland and Iowa, we expect to backfill in those two locations, Sal. So while, it will be not specifically a 150,000 new ton at Gary, Indiana, it will be 150,000 new tons in total.

Okay, great.

We'll go further east and further west off the other two mills.

Okay. And there's no pulling in there, just you're buying and selling as in your normal operations, is that correct?

That's our expectation.

Okay. And I was looking at the calculation on CTI numbers which you provided, it looks like, without CTI, the operating margin was 2%, CTI's operating margin 7.5%. I understand on the steel or the flat-rolled business it is very volatile with prices going up and down. How should we look at CTI, sort of, is it a seasonal business? Aside from the growth you are going to expect, but in just -- in the normal same-store sales, is the margin and the revenue of $60 plus million, is that the run rate we should expect going forward on a quarterly basis?

I was going to say two things, number one, about your seasonality question. Pipe and tube business, specifically CTI, is less cyclical than what you might be normally seeing from Olympic. Second of all, the sales rate of $61.4 million, I mean we -- they had a very strong third quarter and we had previously said that they would be, at least at a $225 million run rate. So I would be comfortable using the third quarter as a proxy going forward.

And how about the margins. Is there a fluctuation based on steel prices or margins are pretty consistently same?

Their margins are pretty consistent.

Okay, great. Thank you very much. I appreciate that.

Thanks, Sal.

Edward Marshall, Sidoti & Company.

Hey, guys. Traditionally, I see you guys as opportunistic on inventory purchases. As pricing is sitting at the August lows and you comment saying that you're more optimistic on '12 than you were say about '11 and 2010, and yet you're saying you're bringing inventories going down into 4Q. Kind of how do I think about -- how that maybe corrects itself as you slide into 2012, assuming you have pretty optimistic views for 2012. Do you expect pricing is going to come down a little bit more or what are you seeing there?

I think that the -- Ed, David here. I think that the August lows have been revisited as I commented earlier. So, last conference call, in August, we championed a call for pricing increases because it's breakeven. We didn't think that was sustainable for the steel mills and in fact while they didn't beck into our call, they certainly had a pricing increase on August 10 and that pricing increase did stick until actually the dollar strengthened in mid-September and then it started to weaken. And as I said earlier, we revisited that low of August. That same dynamic still exists here today and we're at that low of August and our expectations are that prices at some junction in time here in the near future will start to move up.

Okay. And you're not building inventory in front of that?

We're not building inventory in front of that Ed, because the lead times are shot as we remarked and we also are in a position of needing to restock a couple of new facilities. And so we want to make sure that we get that inventory correct in those new facilities.

I see. Did you give year-over-year sales volume -- sales and volume growth for CTI. And if not, is it possible you could provide that?

We have not provided that. What's available for CTI is -- and first I'll tell you they're up significantly. But if you go to the 8-K that was filed in September, that will be the extent of the historical financial statements, information that you provide for CTI, Ed.

Okay. And as I look at the margin statistics and I think, Sal went over them and if you strip out the additional million, I think, that income line is even higher. But, Mike, I guess, my question is, there's also, I'm assuming amortization of the assets there. What is that running on a quarterly basis for the write up of assets?

Yes. The amortization is $222,000 a quarter.

Okay. And then finally the debt burden in the quarter, the interest rates are expected slightly higher. Did you have a full quarter of debt burden or is there timing with that?

No. It was all -- the purchase price took effect on July 1, that's when we borrowed and acquired CTI. So there's a full quarter.

Okay. So it's was a little high there. Okay. Good. Thanks, guys.

Thank you.

You're welcome.

Richard Garchitorena, Credit Suisse.

Thanks. Good morning, guys.

Hi.

First question, I was wondering if you can give us some color on what you're seeing at the various products, now you have basically plates, flat rolled and pipe and tubes from CTI. Any differences in terms of near-term demand and what do you expect going forward?

By product, you want, or by (multiple speakers).

Yes. Just generally because obviously there has been different end markets tied to the various products?

Well, Richard, as we've outlined before, other than the seasonal slowdown that we saw in the summer, which we remarked on, we also see that same traditional, seasonal slowdown at Thanksgiving in the last two weeks of December.

What we've seen is good slow growth. It's not the aspirational growth that everybody is looking for, but we're seeing good, slow growth. There's some real high spots in some of the larger OEMs that we have significant market share with, in all products the demand is stronger. Michael remarked on that, earlier, I think, when he answered Luke Folta's question in greater detail.

But, our expectations of '12 are more steel consumed than in '11. '11's revised upwards, it was revised upward from April by the AISI, and we expect even greater steel consumption in '12. Our OEMs are all signaling as we've answered earlier questions, that they are busier.

Okay. Great.

So all products, look like they're going to have a relatively stronger year. And like everybody, who probably answers this question, Richard, all of us expect a unfair share of market growth. So, we as Olympic would expect an unfair share as well.

Great. Thanks. And my other question is, in terms of imports, do you see additional imports coming in the next couple of months. Are you buying more imports today than, say, two months ago or --?

No. No and no.

Great. Okay, thanks.

Tim Hayes, Davenport & Company.

Good morning.

Good morning.

One housekeeping item. The sales or the shipments in Q3, how much of the 266,000 tons was direct?

In terms of the tonnage? Because we never break the sales dollars out.

Yes. Just the tonnage, yes.

Yes. So, of the 266,000 tons, 249,000 tons were direct. And 17,000 tons were [tolled].

And then looking at '12. We've had a couple other service centers [that at least went through] -- an expectation for sales growth in 2012, maybe if you could provide the same thing for on the flat rolled, you're -- now your newly formed flat rolled segment, do you have a feel or some thoughts on what volume growth would be in '12. And if so what would be your organic versus -- I should say, underlying versus all the expansions that you're doing. If you could separate -- I mean, you're doing so much expansion versus what would be sort of an underlying from the general economy. That's what would be helpful?

Yes. That's going to be a tough question to answer. Let me do the best I can. Obviously, the geographic penetration should give us more than the normal opportunity for growth. We look at the 5% overall consumption, we look over Olympic Steel's last few years of market share growth relative to the MSCI data. So we would expect to continue to outpace the growth of the overall consumption by taking more market share via the new locations and the new opportunities.

In addition to that, we see some growth opportunities as David indicated on the synergistic commercial opportunity of using our products at CTI customers and vice versa. So, I would tell you that we certainly are looking at more than 5%. And I can't tell you how much (inaudible) but certainly more than the 5% of the overall consumption.

Okay. And then just to clarify, on getting historical data piecing together the CTI part, I guess we'll just piece together quarters as the Qs come out or will there be a separate filing that would give us a quarterly detail on CTI, say, from July 1 of 2010?

No, you won't get confirmation from July 10. So basically, as I said, the historical stuff you can look in the 8-K. And then going forward, you'll have segment information. Likely, what we'll do going forward on segment information is publish some of that in the actual earnings release table. So you'll have more information and then the segment information that's contained in the 10-Q.

So that will be the extent of the information.

Okay, thank you. Look forward to that detail.

Thank you.

Mark Parr, KeyBanc.

Hey, thanks. Good morning.

Hi, Mark.

Hey, congrats. Good quarter.

Yes, thanks. Good, feel good, but it was.

Couple of questions. So, you're talking -- you've had some pretty, I would say, consistent across the board commentary as far as demand recovery momentum. I don't know, if you think about specific end markets, is there any differentiation that you can share with us in terms of which areas may be growing more rapidly than others and which areas you feel better as far as the growth outlook in 2012?

Mark, David. We're really focused on obviously the markets that we cadre to and the markets that we cadre to are pretty upbeat including automotive, which has a tendency to be little bit more cyclical. The OEM side of the equation Mark, highly engineered discrete products all the colors that you come to appreciate over time, yellow and green and red and so forth; they're all doing very well. Even construction-related products as they pertain to aerial lifts and work platforms reinvigorating rental pools have been robust and they continue. We continue to earn more of that share of market. So we have a very upbeat look really across the board.

Okay. That's helpful. One thing. On the CTI integration process. Michael, I don't know if you shared much on that or Dave what your thoughts are. I mean will there be -- is there going to be a process here where you'll able to capture some synergies over the next 12 months or so?

The answer to that is, Mark, yes, we have a commercial integration team that we put in place in conjunction with the leadership of Chicago Tube and Iron, that's Dr. Don McNeeley. The only change that we made there are those 400 employees that we asked Don McNeeley to report to Mike Siegal as opposed to reporting to Bob Haigh. And then from a synergistic standpoint, as we commented earlier, we have a lot of businesses that we have some common participation with, as Michael noted earlier, we'll take our product in and then vice versa, they'll take their product in.

Beyond that, I commented on a number of our locations where we'll be adding tube and pipe in support of current customers that were doing flat-rolled business with that Chicago Tube and Iron has not participated with. And so we have a pretty good head start on that, Mark and we are very enthusiastic about it.

Yes, Mark. And so, real synergy is the opportunity on the growth side of the businesses. We do not anticipate significant expense synergy other than, sort of, future projects that might have been on the table like a new building that CTI was contemplating of spending $10 million to $20 million on a number of facilities for their growth initiatives may get tabled as we look at our neutral locations and say, you know what, you don't have to build a new building, we're already there, just put the inventory into our facilities and vice versa.

So, I think some of the future capital projects that may have been on the table, may get eliminated and/or determined. We don't think there is synergy per se and we're going to close any of -- either of our facilities. But it all is going to be on the topline.

Okay. Is CTI going to be transferred over to your Oracle system?

We have no plans to do that in the near term.

All right. Just one last question, if I could, and I appreciate the color on the end markets and on the synergies. In the latter part of September, we saw pretty material downdraft in some of the steel alloy materials, nickel in particular, which is a major component in stainless. And I was wondering if you could perhaps comment on how that may or may not have affected stainless volumes in the latter part of the third quarter and how you would see the stainless market unfolding here for Q4?

Yes, I think you hit a hot button Mark, no question about it. When the dollar strengthened, obviously the commodities weakened and it affected those elements, particularly nickels and chrome and so forth and we saw degradation of pricing in stainless steel. We were already tuned into that. Our specialty metals people are already busy in months prior to that leaning out inventory because they didn't like the tenure of where commodity pricing was going and the volatility as it moved into the tail end of the year.

So I think that marketplace is going to be stressed until the commodity market stabilizes. There also has been some changes in the way that they calculate nickel surcharges and so forth and there is some deeper discounting as you get to the base price of stainless. All of that is added to the turmoil for that product. There is no less demand for that product, but there certainly is a lot of concern relative to the dynamics of the pricing of that product, and we are in touch with that, we've lowered our inventory dramatically. Yet, our specialty metals business has increased significantly and we have some very high expectations for next year.

We are bringing on our Streetsboro operation, which is in conjunction with Integrity Stainless, which he bought in February of 2010. That business under Olympic Steel this year has grown fivefold. And we'll have its first facility with [slitters] and so forth and we are redeploying some assets. But the specifics of the pricing of stainless, Mark, you've hit it right on the head and it's going to be volatile.

Okay. I appreciate that. Good luck with the fourth quarter.

Thanks.

Thanks.

Aldo Mazzaferro, Macquarie.

Hey good morning, gentlemen.

Hi, Aldo.

Mike and Dave, do you really think that prices in the US can hold here if iron ore doesn't recover and if scrap drops $30 or $40?

I do. why not. (multiple speakers) they don't have too to give it away if the dynamics of the market are such, Aldo that the determination is -- as we saw some of the indications from some of our suppliers that they're not anticipating a strong fourth quarter, they may just win the game against the volume buyer and hold on. I mean, the answer is it's possible. They just need the price to recover and they need that cost structure to go down and they may not give it away, yes.

Okay. So, you think -- do you think we'll see more shutdowns then for the fourth quarter?

I don't know about shutdowns, but we certainly see more maintenance and slowdown.

Okay. And just to clarify, you commented earlier you thought that 5% growth in consumption, is that final demand consumption you are talking about or is that the your apparent demand that would be impacted by inventory change or by imports?

No, I think that's real consumption now without any inventory dynamic.

Really? So --

As we look at some of the econometric stuff that we got. The answer is we would anticipate real steel consumption going up 5% next year.

That's a big number compared to what the GDP forecast is. I mean, I'm not saying that I disagree with it, I'm just saying that the -- it could imply that the GDP forecasts are very low?

Well, GDP is impacted by consumer spending. Capital still not flowing through the system for the general consumer. Housing is still under a great deal of pressure. So -- and there's factors around an election, and currency, and so the industrial sector, I think Aldo is stronger than the GDP.

Yes. That's very, very helpful. And then, hey, just a quick question for Rick. Why did you decide to take the volume statement off the press release?

Yes, because as we were commenting when you look at volume from the tube and pipe sector, obviously, because it's hallow, it's got a lot less weight to it, and we thought by consolidating the tonnage sold for CTI in Olympic, you would get very skewed information as you compared it to history. So, as I said, you'll get the information, Aldo, it'll be in the segment footnotes. And going forward, we're going to -- we'll break out that information in the tables in the earnings release. But consolidated, it doesn't really make sense.

Yes. Okay. Well, thanks. And next quarter, given the economic situation, I think the numbers are speaking for themselves right now. Looking good.

Thank you.

Thanks.

(Operator Instructions) Sal Tharani, Golman Sachs.

Thanks. Hi, Rick. What would be the number of employees by the end of this year once you are fully running the Gary plant? Or what is it right now?

We're 1,400 plus. I don't have the exact number.

Okay. And there'll some more addition for the Gary plant, is that correct?

1,600 (multiple speakers).

We're closer to 1,700 on the combined Olympic and CTI. We will probably be adding another 50 employees during the first quarter, as we ramp up these facilities.

Okay, great. Mike, the demand you mentioned 5% up next year seems reasonable, because we are at such a low level, [1990] level, could that happen?

Yes.

But also capacity is also rising by about 5% next year. If you look at year-over-year, some of it has already started to ramp up, and if you average it out. I was just wondering if you think we can get that kind of pricing momentum, I'm sure pricing will go up, it always happens in the early part of the year, but would that be that kind of acceleration of, sort of, going to all the way to $900, obviously we don't have to raw material support also at the moment, do you -- are you planning such, kind of, pricing pressures next in your, sort of, base case scenario?

No, not really. Again, as we've always focused -- we focus on the margin regardless of what the price is, but I would anticipate that the economy in the United States is not going to terribly strong, as Aldo, indicated on the GDP numbers. I do think that we're going to see low currency valuation on the US dollar. And I think currency has a bigger factor on anything else at this particular moment, Sal.

So everybody is a China expert and so if China [expert] going to be 8%, 12%, 15%. So China still drives a great deal of the pricing momentum, the currency issues are significant. So I would tell you that on the supply demand, a question that you're asking, yes, I don't see the fact that there's going to be a lot -- there's going to be more demand. That supply isn't going to be a relative neutral and therefore pricing is still going to be competitive, but it's going to be driven by other factors and the basic supply demand.

Okay. The other thing is that last year -- you mentioned about last year dynamics that prices bottomed in October, it appears that prices are bottoming here. But we also saw last year towards the end of the year, the vertical lead time started to widen very significantly, sort of, sometime in late November, December, particularly. And I was wondering if that starts to happen, would you change your policy of not buying an inventory and still having a low inventory at the end of the year?

We're very flexible, Sal. It's getting kind of [time], buddy. I mean, at least to the dynamic shifting will ship.

That's what I suspected. Thank you very much.

You're right.

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

Thank you. Let me just make some comment here, before I thank everybody. At Olympic Steel, we speak for ourselves and we really speak for anyone else, but we've all listened to our contemporaries. Have a relatively strong third quarter and a relatively robust year.

We are offended at Olympic Steel. When we hear the media and our government continually talk about how no one is investing capital and growth, how no one is hiring employees, we are very proud of the fact that we continue to invest in North America and specifically the United States. We are proud of the fact that we are continuing to add employment in this country with good pay and good benefit and we remain offended, all right, that nobody seems to recognize the fact that this industry in total, and this service center sector on itself is a very dynamic and growing universe, irrespective of the GDP.

So I wanted to say that we are proud of the fact that we create jobs in the United States and that we hope that others would start to take notice, our elected officials and the people in the media specifically. And we really thank all of our support that we get from our -- from the people who cover Olympic Steel.

So having said that, it is our policy not to provide forward-looking earnings estimates for the upcoming quarter or year and not to endorse any of your sales or earnings estimates, but we anticipate releasing our fourth quarter 2011 earnings on or around February 23rd of 2012. And this concludes our call and thank you for your interest in Olympic Steel.

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

Thank you.