Olympic Steel Inc (ZEUS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Olympic Steel Incorporated fourth quarter and year-end earnings release conference call. At this time, all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes.

I'd now like to turn the conference over to your host for today, Mr. Michael Siegal. Sir, you may begin.

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 and Treasurer. I want to thank all of you for your participation and for your interest in Olympic Steel.

Before we begin our discussion, I want to remind everyone that during this call, we will provide forward-looking statements and that we do not undertake to update nor 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 Form 10-K, which we anticipate filing later today.

Earlier today we reported our financial results for the fourth quarter and the year ended December 31, 2011. We are pleased to announce strong overall 2011 sales and earnings performance. We recorded our highest ever fourth quarter and annual sales levels in 2011. Our 2011 financial results and record sales benefited from our overall flat-rolled performance in the July 1, 2011 acquisition of Chicago Tube and Iron.

Net sales for the fourth quarter of 2011 totaled $319.9 million, an increase by 49% from $215.2 million for the fourth quarter of 2010. Fourth quarter 2011 net income totaled $600,000 or $0.05 per diluted share, compared to a net loss of $1.6 million or $0.15 per diluted share in last year's fourth quarter.

Net sales for the year totaled $1.26 billion, which as I indicated earlier, is a record annual revenue total for Olympic Steel. Net sales increased 57% from $805 million from 2010. The tons sold metric is not really relevant for pipe and tubing sales, so we are not including CTI's volume in our tons sold reporting.

Total flat-rolled tons sold increased by 16.3% in 2011 to 1.1 million from 969,000 in 2010. This outpaced industry shipments by more than 2% according to the Metals Service Center Institute. For 2011 net income increased by $22.9 million to $25 million or $2.22 per diluted share, compared to net income of $2.1 million or $0.20 per diluted share for 2010. Our 2010 fourth quarter financial results included two nonrecurring items that reduced earnings per share by $0.06.

Fourth quarter 2011 results included an asset impairment charge of $1 million related to a building investment in a former joint venture company that was closed in 2006. The asset impairment charge reduced fourth quarter and full year 2011 earnings per share by $0.05. Additionally, fourth quarter 2011 cost of goods sold included a $1.2 million purchase price accounting adjustment to write up the value of certain CTI inventory to fair value at the July 1, 2011 acquisition date. The inventory adjustment negatively impacted fourth quarter and full year 2011 earnings by a penny a share in fourth quarter and $0.07 for the year respectively. Rick will provide more detail on these two items later in the call.

2011 was a year of significant growth for Olympic Steel. Our CTI acquisition was immediately accretive to our earnings and accelerated our market share and distribution locations and product expansions into pipe, valves, tubes and fittings. We also executed exceptionally well on our previously announced strategic investments. Our 2011 capital spending totaled $39.5 million and included new processing equipment, successful information system infrastructure rollouts and facility startups.

Our largest and most exciting project of 2011 was the successful startup of our third temper mill located in Gary, Indiana. The temper mill became operational in December 2011 and adds about 150,000 tons of incremental capacity. Now, as we like to say, open for business in the Chicago market. We also opened our first physical facility outside of the United States in 2011 in Monterrey, Mexico and that serves our growing customer base there. Our other new facilities acquired in 2011 include a second operation in Mount Sterling, Kentucky; Kansas City, Missouri; Roseville, Minnesota; and Streetsboro, Ohio.

Coming out of the recession, we are aggressively expanding our geographic footprint and enhancing our service capabilities for customers and adding to our product portfolio. We are proud of our accomplishments, quite frankly. And our balance sheet remains strong with our new five-year $335 million credit facility that was put into place on July 1, 2011 that provides us with the strong foundation for continued growth and the value creation.

Also, we previously announced earlier that Olympic Steel's Board of Directors approved a regular quarterly cash dividend, $0.02 per share to be paid on March 15, 2012 to shareholders of record on March 1, 2012 and I'll now turn the call over to Rick.

Thank you Michael and good morning everyone. Before highlighting some of our financial statistics for the fourth quarter and the year, let me summarize and go into a little more detail on the nonrecurring items that we incurred in 2011. So first, the fourth quarter joint venture investment impairment charge totaled $1 million. It is highlighted as a separate line item on our income statement and it's shown below operating income. The charge resulted in a $0.05 negative impact on fourth quarter and full year EPS. And the impairment relates to the write-down of idled real estate to its current appraised value. The real estate is owned by our OLP joint venture company, which ceased operating back in 2006.

Next as part of purchase price accounting, accounting standards required us to write up certain CTI inventory to its fair market value, as defined as its selling price and then subsequently expense that write-up to cost of goods sold over one turn of inventory. As a result, our third quarter gross margins were negatively impacted by approximately $1 million or $0.06 of EPS and then the fourth quarter gross margins were impacted by the remaining $136,000 or a $0.01 per share impact on EPS.

The third item is acquisition-related expenses included in our operating expenses back from the second quarter of 2011, so those approximated $0.9 million and had a $0.05 negative impact on our 2011 annual EPS.

And then finally our 2011 consolidated effective income tax rate was unusually low this year at 33.4% as a result of a change in unrecognized tax benefits recorded in the third quarter. The tax benefit was associated with an expiring statute of limitations. This benefit was booked directly to the tax provision line and it had a favorable impact of approximately $0.17 per share in the third quarter.

So in summary, these 2011 charges resulted in the following EPS impacts by quarter; so second quarter negative impact of $0.05 per share; third quarter a favorable net impact of $0.10 per share. That's when the tax favorable adjustment went through. Fourth quarter had a negative impact of $0.05 per share. So the full year, all four items netted to no impact on our 2011 full year EPS, but I thought it was worthwhile going through those as we did have some unusual items this year and they did impact quarter to quarter.

In addition to the nonrecurring items, our 2011 pretax income also contained startup operating losses for those locations that Michael just highlighted and they totaled about $1.2 million related to those new facilities for the full year and of the $1.2 million, about $775,000 of startup costs and expenses and losses were incurred in the fourth quarter.

Next I wanted to remind everybody that the majority of our tubing inventory is valued on LIFO and that equates to about 16% of our consolidated Olympic Steel inventory now being stated on LIFO. We did not however, record any LIFO adjustment in the second half of 2011, since the acquisition of CTI, because prices and quantities of our LIFO inventory were below the July 1, 2011 acquired inventory levels. So as a result, we have no book LIFO reserve at December 31, 2011 on our balance sheet. In essence, our LIFO inventory is stated at FIFO at December 31, 2011.

And then I also wanted to remind everyone that commencing with the July 1, 2011 acquisition of CTI, our business results are now reported in two segments, so we have a flat product segment, which is primarily the traditional Olympic Steel of old and then a tubular and pipe product segment. So for more information on segments and the breakout, you can please refer to our segment information that we provide in our earnings release and in our Form 10-K, MD&A and footnotes. And as Michael said, our 10-K, we're anticipating filing at the end of the day today.

Now let me highlight some additional financial items from the fourth quarter and the full year. As a percentage of sales, consolidated gross margin totaled 19.4% in the fourth quarter, which was identical to our margins in the third quarter and was up from the 17.9% gross margins in the fourth quarter of 2010.

Pipe and tube gross profit totaled 29.9% in the fourth quarter, as our tubular and pipe product gross margins are higher than traditional flat product margins. Our annual consolidated gross margin for 2011 was 20.1% in 2011 and that compares to 19.2% in 2010. As a percentage of sales, operating expenses declined to 16.6% this year and that includes a component of 2.3% for distribution costs. So 16.6% this year versus 18.5% last year.

EBITDA, which is defined as our operating income before depreciation and amortization expense, right off the face of our income statement, totaled $8.4 million in the fourth quarter and we totaled $60.5 million for the full year in 2011.

Our capital spending in 2011 totaled $39.5 million. The majority of that spending related to our temper mill project in Gary, Indiana and purchasing of the second facility and equipping of our first facility in Mount Sterling, Kentucky. We expect our capital spending in 2012 to be in the $30 million to $37 million range and that range is dependent upon the timing of the spending as well as some of the choices that we make on lease financing.

Our effective income tax rate for 2011 was 33.4%. The lower than normal rate was due to the favorable change in the unrecognized tax benefits during the third quarter that I just highlighted a few minutes ago. We would expect our full year 2012 income tax provision to return to the historical 38% to 39% range.

Our flat roll inventory turnover rate for 2011 totaled 4.5 times. Pipe and tubing inventories strategically turned slightly lower in the power generation business and valve sales, resulting in a normal turnover rate of about 3.5 to 4 times for our pipe and tube inventory. Our 2011 flat rolled receivable DSO totaled 42 days. Pipe and tube DSOs are under 40 days, so as we move forward, we should be able to reduce our consolidated DSO slightly from the 41, 42 days that we've been the last few years.

Our debt at the end of the year totaled $244.2 million and availability was $81.9 million. And the majority of the debt balance relates to the $149 million of net cash borrowed to effectuate the CTI purchase on July 1st. And finally, our shareholders' equity per share increased to $26.28 at year end.

And I will now turn the call over to David.

Thank you Rick and good morning to everyone. We accomplished a great deal in 2011 and we're proud of our achievements last year. We completed the transformational acquisition of Chicago Tube and Iron on July 1st of 2011, as both Michael and Rick have remarked and we welcomed a 97-year-old company of excellence into the Olympic Steel family.

We also invested significantly in our future, spending over $39 million in 2011 on our strategic capital plan. Most of our capital spending last year related to the new temper mill cut-to-length line in Gary, Indiana and our rapid growth in Kentucky, as Rick outlined previously.

We also have other meaningful expansion projects at various stages of completion. I will elaborate more on our strategic growth in a few minutes, but let me first provide some commentary on the market.

Demand has remained sound into February and we continue to see strength from our customers in the automotive, heavy industrial and agricultural equipment segments. We are optimistic about 2012 demand and expect to see year-over-year growth from our existing customers, combined with continued growth in our market share. We remain optimistic about 2012 revenues, even with the current near-term pricing pressures dampening the industry's outlook. It is well publicized by now that recent declines in scrap pricing, higher service center inventory levels, increased domestic steel making capacity and the potential for 2012's rising imports in the United States, are all putting pressure on steel prices in what is normally the seasonal time of price increases.

So 2012 is starting off as a nontraditional year in terms of seasonal pricing strength. At Olympic, we purposefully increased our inventory to higher levels than normal to start the current year as we favorably purchase material in advance of rising year-end steel price environment.

We do remain bullish on the long-term view for steel and we are confident that our aggressive initiatives of the past two years will pay dividends in future sales and earnings growth. We also believe that Olympic Steel is well positioned to take advantage of the expected market acceleration related to global infrastructure and supporting 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.

Let me now spend a few moments highlighting the excitement around some of our bigger initiatives, however, let me remark that all of this growth does have some associated cost in terms of expenses that Rick took us through and in terms of some margin compression in fourth quarter. That margin compression was specific to specialty metals, which was subjected to a drop in nickel surcharges in last quarter and also our growing contract business had an associated drop in the trailing indexes that are associated with the pricing of this growing marketplace for us, the contract business.

In addition to that, our new market penetration was a little bit more competitive than our traditional older established markets. As you can well imagine, nobody put out the welcome mat for a new competitor in an area, but we have risen to that challenge.

Let me talk about some of these growth initiatives. We have many initiatives in various stages of completion and we look forward to their favorable contribution to our sales and earnings results in 2012 and beyond. Over the three-year period of 2010 through 2012, we estimate spending approximately $90 million on strategic capital expenditure programs that adds multiple Olympic facilities in new geographies, adds value-added processing equipment and 150,000 tons of new tempered sheet capacity. This program will provide a foundation for growth and value creation for years to come.

Our most transformational and significant move was the acquisition of Chicago Tube and Iron on July 1st of 2011. This 97-year-old, nine location, $250 million of annual revenue, highly accretive acquisition places Olympic Steel in new product markets with high margins and great opportunities for increased sales from new and existing customers. Our integration teams have been working successfully and the combined companies have been received, as we had expected and very favorable. We are now a major player in pipe and tube and would expect to move into new geographies and markets under the CTI banner.

Our new Gary, Indiana temper mill is truly an exciting growth opportunity for all of us. It not only gives us additional tempered material in the important Chicago market, but also frees capacity on our other two temper mills in Iowa and Cleveland for further reach of our material and significantly reduces our inbound and outbound freight costs while better servicing customers. This nearly $30 million project provides over 150,000 tons of capacity and was successfully concluded under budget and on time.

Since our startup in December, we have already begun to see accelerated activity in this region and this is our third temper mill, as we just mentioned, and it has come alive quicker than our two previous temper mills and is cash flow neutral and we expect it to be a positive contributor in Q2 of '12.

We also initiated our first physical facility outside the borders of the United States, as Michael mentioned earlier, when we opened our new facility in Monterrey, Mexico in 2011. This facility is the outgrowth of our sales efforts that have been in Mexico for many years.

Integrity Stainless, our 2010 acquisition, will begin to add processing capabilities in its new facility in Streetsboro, Ohio in the second quarter of 2012. The addition of a physical location in Streetsboro, with the control of our own internal processing capabilities in stainless and aluminum will propel our combined growth in the food and food service markets.

New physical facilities were also added in Kansas City; in Roseville, Minnesota; and a second facility to existing locations added in Moses Lake, Washington and in Mount Sterling, Kentucky. These locations also have processing equipment associated with their startup and will add both increased market penetration and service improvements for our customers.

We have added sales offices in Miami, Florida and Houston, Texas, both with the idea to increase our penetration in Central America, Caribbean and Mexico. Our commitment to fabrication and to lean enabling for our customers continues. Almost all of our facilities now have downstream value added capabilities. Our three temper mills feed into these processes and with the additional capacity of the Gary temper mill, we will see the need for further investments in products and services and equipment to support the ever-growing outsourcing demand of our customer base.

This year also saw well deserved promotions of senior management. New and inside sales managers in Chicago, Cleveland, Georgia, Minneapolis, Iowa, and Detroit have made us younger and more aggressive. Ray Walker was promoted to regional senior vice president; Andrew Greiff was named President of our Specialty Metals Group; Mike Cedoz was promoted to Regional Vice President for Automotive, all in 2011. Dr. Don McNealy, in addition to being President of Chicago Tube and Iron, was added to our Board of Directors in 2011. His strategic thinking and experience in education and governance are a welcome benefit.

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

(Operator Instructions) Nate Carruthers, Steel Market.

Can you break out your tons sold for just the fourth quarter for me? And then I have a few others as well.

Nate, our fourth quarter tons sold, and as you know and we've commented, the tons sold reporting is for the flat-rolled group, so there's no tons included in terms of the tube and pipe group. So, in fourth quarter of 2011, our tons sold were 257,000 and in 2010 they were 254,000.

How much of that was direct tons?

We were 243,000 direct versus 231,000 direct last year.

You said that the startup costs in the fourth quarter were $775,000, correct?

Yes.

And are those going to continue into 1Q and how do you see those moving forward?

Yes, as David outlined, we've got various operations of various size coming onboard. The biggest of our operations obviously is the Gary facility. We are through, as David commented, most of the startup costs, so a big chunk of the fourth quarter startup costs that I highlighted in the $775,000 were related to Gary. So we would see that tapering off. It is tapering off in the first quarter and as David said, we're in a cash flow neutral position.

Some of our other facilities however, at different stages of ramp-up, so we commented about Streetsboro. Streetsboro should be up and running in second quarter so I would anticipate in first quarter we're going to have similar type expenses in Streetsboro, probably a little bit more than we had in fourth quarter. So in summary what I would tell you is we'll have like or slightly less operating expense drag on new facilities and then certainly as we get into second quarter we would see those starting to dwindle.

Is that in the warehouse and processing line mostly?

Well it's a combination of yes, there's some in warehouse and processing as we hire. There is some in administrative costs in terms of getting the facilities set up with IT equipment, legal expense, admin expense, depreciation as we open the new facility and install the equipment. So those would be the bigger items in terms of the operating expenses.

Can you just kind of remind us of your spots, the contract mix and if there's a big change between sheet and plate?

I would say we have a growing emphasis for more contract business. Historically we were probably more 60-40. We see that growing two-thirds, one-third. So that's when David comments about some of the drag of the trailing indexes that a lot of the contracts are tied to. And I'm not sure, Nate, what your specific question is about plate.

I was just asking if there's a meaningful variance between sheet versus plate?

No. The heavy, highly engineered products seem to be having more momentum, a lot of the flat-rolled products, but that's just endemic of the specific demand at the moment.

Martin Englert, Jefferies & Company.

Question about the SG&A; it looks like the percentage versus revenues stepped up quarter-over-quarter, the absolute dollar amount was roughly flat to slightly higher at about $53.8 million. What can we kind of expect going forward; should this drop back down to where it was at 14.5%-15.5% of sales or is it going to remain roughly around that 53?

I think, Martin, you've got tied into the conversation we just had, I would expect first quarter to be pretty similar. We had a couple of things as you're looking at the operating expenses as a percentage of sales, so we had some of those startup costs that I just went through and I won't go through those again. And you've also had some pricing pressures as David and Michael outlined earlier on the call in terms of fourth quarter that obviously impact the percentage, not so much the true dollars. So, as we look at first quarter, I would tell you our anticipation is that we would have startup costs, as I outlined and our operating expenses as a percentage would be pretty similar to slightly less than what we saw in fourth quarter.

I know you mentioned that a large portion of the startup costs were related to the ramp-up of the Gary temper facility; can you provide any more detail as how much -- was that 75% of the startup costs or 60%?

It was over half.

As far as the demand, you mentioned that overall the heavy equipment and automotive looks relatively good, is expected to grow year-over-year. Any signs of weakness because of the economic weakness and slowdown over in Europe and Asia as well, as far as the export demand for that equipment?

The short answer is no. As a matter of fact, as I mentioned earlier in my comments, we have seen greater demand from our OEM base, starting in Q1 versus Q4. We have not seen any less participation, even on the export side on these highly engineered products. Greater demand for that product, even though the value of the dollar is high.

Ed Marshall, Sidoti & Company.

My focus is going to be on the CTI. You've had it now for six months. It looks like the quarter would have had a reported loss without it in the core business, which I guess is not unusual for your fourth quarter seasonality in the flat rolled. But, obviously supports why you went after this particular business, but now you've had it for six months, how do you see this shaping up; do you find that it's performing better than you thought it would? Just kind of can you add some additional comments surrounding the CTI acquisition?

Let me comment first, Ed, maybe David wants to comment afterwards. But yes, it is performing every bit to our expectation and better. I think that, as David indicated, this was an exceedingly well managed organization with historic profitability. I think the combinations as David talked about of our integration teams introducing one, CTI to Olympic customers and vice versa, Olympic customers to CTI has been very well received. I think as we look at placing inventories in locations we have some real cost opportunities to eliminate some freight factors as we go forward. So both from a growth standpoint and a cost reduction standpoint, I think it is actually operating better than we would have anticipated.

Just echoing what Michael said, we were fortunate enough to be able to acquire Chicago Tube and Iron and our view of this was it was a company that had "economies of excellence" and so when you have the highest of expectations, you are rarely surprised or disappointed. In CT&I's case, led by Don McNealy, we were surprised how strong this company has allowed us to further penetrate a marketplace.

What's unique about this uniting of these two companies and the acquisition of CT&I is that we didn't justify that purchase with any synergies to our Board. There were no synergies. We thought that company was so well run that they were going to be and they are, a great business partner for Olympic Steel.

What we thought afterwards was that we would put a commercial integration team together, which we did and we thought that we could prosper exponentially by investing in equipment, as Michael outlined, and also in penetrating new marketplaces. And we have been pleasantly surprised at the welcome mat that has been put out there for us and the success that we've seen. So it is every bit and more than we had anticipated.

What kind of synergies, if I may, have you identified in that acquisition again that now you've seen it for six months? And when you speak of synergies, are you talking about revenue synergies because of cross-selling of the product lines or are you talking more -- and you did mention cost synergies so I'm assuming there is some of those as well.

Well, number one, Ed, you're 100% right and that is revenue synergies in the combined entities, even though we only have half a year of their sales in our 2011 success. We see in excess of $100 million of new businesses over a time period; it's just a matter of how fast we can absorb this new participation.

Secondly, on a cost basis we, in many cases, were selling some of the same large OEMs and we are able to reallocate some of our resources in terms of inventory and capture some freight savings and then free up some space in some facilities for more opportunities of growth.

If I may, can you quantify some of the costs? I'm sensing that you don't want to do that at this time.

No, we do not.

And then you mentioned some discussion on volume for 2012 and what you thought for pricing as well. Would you talk about the order of magnitude for both? I mean, demand is going to be up, you're seeing some pricing pressures, but could you kind of give us any sense of direction of what you mean?

Well, let me just speak to the demand side of the equation, because I mentioned that earlier, Ed, and we've seen continued growth. We had strong growth, as Rick and Mike and I outlined for you throughout the year and we see further growth in '12. Remember that the biggest part of our capital expenditures, which was $39 million, was our third temper mill and as I remarked earlier, it's coming on quicker than the two previous temper mills. It's cash flow neutral and it has an annualized capacity at full strength of 150,000 tons. We won't achieve the 150,000 tons in '12 but we'll achieve a significant part of that growth because we are already at cash flow neutral and the tonnage moving through there is growing on a daily basis and the success rate is terrific.

The rest of the investments on downstream are second facilities to some areas where we have some terrific growth and we've outlined that in previous quarters; Mount Sterling, Kentucky; Moses Lake, Washington are all big successes, all profitable and we're serving businesses that are continuing to recover at double-digit rates off of the recession of late 2008 and 2009.

So if I can sum up what I think you're saying about the Gary facility, that's underutilized right now as they're starting to fill out the capacity, shifting capacity around. I get the sense that operating expense incurred, the startup costs that you have incurred in the fourth quarter and will continue to incur say through 2012, will minimize as you start to fill out that capacity. Do you assume by the end of the year you'll be close to a run rate capacity of coming close to filling that or is there going to be still some decrement there?

No, I think you're right. I think we'll continue to push as fast as we can, but again, it's coming up faster and the short answer is yes, we'll see it at its reasonable capacity, certainly toward the end of the year, incrementally growing quarter-over-quarter.

Ed, the other aspect of it is you've got a people issue here too, so obviously when you start a facility you bring on one shift. You don't bring on a second shift, so some of this does require a certain amount of training. So as David indicated, we've seen a very fast ramp-up, faster than the other two temper mills. We are now beginning to prepare to start to train for a second shift already into the second quarter, so if we run two full shifts by, you know, the third quarter, we'll be thrilled.

Excellent. Guys, this is great news. Thanks again.

Sandeep SM, Goldman Sachs.

We have recently seen some shift by the E&P companies from natural gas to oil fired; can you just give a mix of CTI, what kind of exposure do you have for each of these sectors?

They really don't have a big exposure to the OCTG market at all. I wouldn't say nothing, but it's really de minimis to their overall performance. We would be looking at, Sandeep, as we move forward and look at the growth opportunities with CTI that's an area of exploration, but it really is not impacted at the present time.

So what kind of growth would you see in that sector in 2012 for CTI?

Well Sandeep, CTI has been a steady player in the marketplace. We see a fairly significant amount of growth, but as I related just a moment ago, a lot of those synergies come from our efforts, our commercial efforts to remove some of the product from their existing nine warehouses and put some of that product in our existing 26 warehouses and then picking up the opportunity to grow that market share.

Quite frankly, Chicago Tube and Iron has fulfilled most of their facilities. We have a brand new laser coming on-stream in their Romeoville plant, a jumbo Adige laser, which is a big capital expenditure and we will expand that market penetration in the existing markets that we're in now.

Without putting too much pressure on Don, who's listening to this, we certainly would anticipate at least a 10% growth on the CTI side of the equation.

What is your expectations regarding imports? We have seen the US prices come off a bit and you have seen global prices, depends on where we look at, but Europe at least has moved up a bit, so do you expect imports to keep coming in for next couple of months or do you expect that to slow down in the coming months?

No Sandeep, I think you've written about it, I think most have commented on it. There's the highest price, the steel marketplace is here in the US. The dollar's strong; other currencies obviously are weaker and so we see more imports now and more offers now than we saw last year. The concern would be for the buyer, whether he can absorb or she can absorb the vagaries of the transportation and the vagaries of the marketplace. Right now we do see more offerings than we saw last year. But quite frankly, there's more demand too.

When I think about the flat products side, can we expect another double digit volume growth in 2012 or do we think that it will maybe delay it a bit?

I'll tell you, that's strong but we're gearing toward that. And I don't want to specifically give you a percentage of growth in flat rolled that we're going to have in 2012, but I would tell you, as I commented earlier, 2011 saw growth of 16% and 2012 is stronger than '11. So we're moving in a very positive direction and of course we're bringing Gary on, along with other facilities as we've answered previous questions, so you've got a significantly more tonnage moving through our facilities. So without getting specific on percentages, very close to what you're insinuating.

Sandeep, we have a lot of new capacity that we didn't have. It's our expectation that it'll run very strong.

Aldo Mazzaferro, Macquarie.

If we were going to look specifically at the Gary temper mill and try to gauge the market demand there, what sectors should we most be looking at for that specific piece of equipment?

Same sectors we always serve, Aldo. I mean, this was a capacity gain for us, literally in servicing our customers and our customers actually asking us to do more. We really were constrained, without doing outsourcing on our temper mill capacity. So I would tell you that we're servicing the agricultural, the mining industries and obviously the heavy machinery industries. There's no new market for this; this is just meeting the customer demand that we have that we couldn't fulfill with internal processing.

A separate question; you guys quantified your startup costs and I'm wondering, David you had mentioned earlier that there was also some penalties you incurred in entering new markets, which I would assume on the top line. That's not included in those startup costs, I would assume and if not, can you give us a feeling of what magnitude those might have been?

Well Aldo, my remarks are commercial remarks. That's the compression on the margin that we saw in some of these new geographies, as you would expect, competitors to protect their turf. And so as we said, we penetrated some of these new marketplaces. Our traditional markup was under a little bit of pressure versus a normal established marketplace, where we're a known entity.

We can't quantify them, in other words.

Could you describe a little more about what exactly you're doing in Mexico in terms of customers down there and processes and services that you're putting out?

I can, Aldo. First of all, we went down with one of our good customers from the Midwest and we are sharing a facility with that good customer and again, as Michael indicated, relative to the temper mill, the same applies to our Monterrey, Mexico facility. We are literally catering to the same customers that we are catering to in North America, although they have a Mexican presence and we're giving them that opportunity to avail themselves of just in time delivery and lean manufacturing and we're servicing them in the same ways we do up north. So very easy for us to migrate down there with one of our strong customers.

Can you say what sector that customer is in? Is it machinery again?

Yes, construction equipment and mining equipment.

Tim Hayes, Davenport & Company.

Two questions; on your contract business that historically was 60% going to about two-thirds, just remind me what is the average lag to reset pricing on those contracts?

Yes, a month to three months.

Any status update on the option to put in a fourth temper mill in the southeast?

The answer is, we have to absorb what we've undertaken. I would tell you, we obviously had a very significant amount of capital investment and we will, irrespective of the fourth temper mill. Obviously we'd like to see some of the gestation and profitability come to us from the investments, but the fourth temper mill is under active exploration, but there's nothing to announce.

Mark Parr; KeyBanc Capital.

This is Jason Brocious in for Mark. I was just wondering, the 29.9 gross margins you gave for CTI, does that include the inventory markup impact?

Yes.

You guys had talked in the past that OCTG might be a viable strategy for CTI in the future. Is that something you're still looking into?

Yes.

What would the timeframe be on that and what would be involved in switching from the commercial boiler stuff to an OCTG focus?

I don't know that we would lose the one focus for the other but let's just say from an additive perspective, Jason, OCTG is a difficult market to enter without being acquisitive. So, I would just tell you that as others have commented, the acquisition marketplace is looking, I would tell you active and robust.

And Jason, let me add that we are very happy with Chicago Tube and Iron's current business and their business model, so we wouldn't switch any of that; it would all be accretive, as Michael just indicated.

I know that going after the large OEMs has been a focus over the last few years. Is there a percentage of sales that you could give us as far as what the big guys like Caterpillar make up today versus four or five years ago?

The answer is, there's no small contracts, shall we say. As we migrate into almost two-thirds of the business to contract, it's pretty much all for the larger customers.

I show no further questions in the queue. I'd like to turn the conference back to Mr. Michael Siegal for closing remarks.

Thank you. We continue to operate for our shareholders and stakeholders around a set of explicit core values and with a focus toward our mission. We're proud of the accomplishments of 2011, a year that brought significant and transformational growth for us. We purchased five shuttered industrial buildings in various geographies in North America, brought them back to life.

We purchased new equipment and hired and trained new and existing individuals at high paying, benefit providing jobs. Just what they talk about in Washington, amazingly. We supported our communities and our employees. I hope that you get a sense of the excitement and really the possibility that exists at Olympic Steel as we invest in the America's future. We have expanded aggressively, coming out of the recession and we are just beginning to see the possibilities as these opportunities present themselves.

And as a reminder, it is not our policy to provide forward-looking earnings estimates for the upcoming quarter or the year or to endorse any analysts' sales or earnings estimates. So we anticipate releasing our first quarter 2012 earnings on or around May 3rd of 2012. So this concludes our call and we really thank all of you for your participation and support for Olympic Steel. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.